þ Annual Report Pursuant to Section ANNUAL REPORT PURSUANT TO SECTION 13 orOR 15(d) of
the Securities Exchange Act ofOF THE SECURITIES EXCHANGE ACT OF 1934
the Securities Exchange Act ofOF THE SECURITIES EXCHANGE ACT OF 1934
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Common Stock (par value $1.00 per share) | New York Stock Exchange | |
Rights to Purchase Series A Participating Cumulative Preferred Stock | New York Stock Exchange | |
U.S. 99.2% of our total revenues in .8% of our total revenues in Segment Major Market(s) West Coast Southwest Southeast West Coast: Homes delivered Percentage of total homes delivered Average selling price Total revenues (in millions) (a) Southwest: Homes delivered Percentage of total homes delivered Average selling price Total revenues (in millions) (a) Central: Homes delivered Percentage of total homes delivered Average selling price Total revenues (in millions) (a) Southeast: Homes delivered Percentage of total homes delivered Average selling price Total revenues (in millions) (a) Total: Homes delivered Average selling price Total revenues (in millions) (a) KBnxt gaining a detailed understanding of consumer location and managing our working capital and reducing our operating risks by acquiring primarily developed and entitled land at reasonable prices in preferred markets with perceived high growth potential using our knowledge of consumer preferences to design, offer, construct and deliver in general, commencing construction of a home only after a purchase contract has been building a backlog of net orders and minimizing the cycle time from initial construction to delivery of homes to customers; establishing an even flow of production of high-quality homes at the lowest possible cost; and offering customers affordable base prices and the opportunity to customize their homes through choice of location within a community, elevation and floor plans, and KBnxt. . Our promotional marketing efforts are management teams in each of our divisions. Though we centralize certain functions (such as promotional marketing, legal, However, depending on the circumstances, our initial option or earnest money deposit may or may not be refundable to us if we abandon the related land option contract or other similar contract and do not complete the acquisition of the underlying land. In addition, if we abandon a land option contract or other similar contract, we usually cannot recover the pre-acquisition costs we incurred after we entered into the contract, including those related to our due diligence and other evaluation activities and/or partial development of the subject land, if any. West Coast Southwest Central Southeast Total West Coast Southwest Central Southeast Total production. close within a quarter. Homes delivered 2011 First Second Third Fourth Total 2010 First Second Third Fourth Total Net orders 2011 First Second Third Fourth Total 2010 First Second Third Fourth Total Cancellation rates 2011 First Second Third Fourth Total 2010 First Second Third Fourth Total Ending backlog — homes 2011 First Second Third Fourth 2010 First Second Third Fourth Ending backlog — value, in thousands 2011 First Second Third Fourth 2010 First Second Third Fourth marketing strategy or for other reasons. Although our purchasing strategies have helped us in negotiating favorable prices for raw materials, in 2012, we encountered higher prices for lumber, drywall, concrete and other materials, and labor due to increased residential construction activity, and we expect to see additional cost increases if and as the present housing recovery progresses, as discussed further below under “Competition, Seasonality, Delivery Mix and Other Factors.” Until the first quarter of 2012, our preferred mortgage lender was MetLife Home Loans, a division of MetLife Bank, N.A. loan applications from our homebuyers on May 1, 2012. skilled trade labor, primarily on the basis of preexisting relationships, contract price and volume and consistency of available work. During issuances of equity or senior notes or other debt through public offerings, private placements or other arrangements to raise new capital for land acquisition, land development and other business purposes and/or to effect repurchases of our outstanding senior notes or other debt. Our ability to engage in such financial transactions, however, may be constrained by economic or capital markets or bank lending conditions, investor interest and/or our current leverage ratios, and we can provide no assurance of the success or costs of any such transactions. limit consumers’ ability to qualify for homes. sales. on our consolidated financial statements, including our ability to achieve or maintain profitability. short- and long-term interest rates; employment levels and job and personal income growth; housing demand from population growth, household formation and other demographic changes, among other factors; consumer confidence generally and the confidence of potential homebuyers in particular; private party and government federal and state personal income tax rates and provisions, including provisions for the deduction of homebuyer interest in our current or new product designs and new home community locations, and general consumer interest in purchasing a home compared to choosing other housing alternatives; and real estate taxes. 2013. If we do, there could be a material adverse effect on our consolidated financial statements. decrease, and the impact on our performance and our consolidated financial statements could be material. financing. throughout the housing downturn, we may incur additional costs and it will take a longer period of time for us to recover our costs, including the costs we incurred in statements. statements, and the effect could be material. individual’s or household’s federal, and in some cases state, taxable income subject to various limitations. For instance, under the American Taxpayer Relief Act of 2012, which was signed into law in January 2013, the federal government enacted higher income tax rates and limits on the value of tax deductions for certain high-income individuals and households. If the federal government or a state government changes or further changes its income tax laws, as some The impact of such requirements, individually or collectively, could be adverse and material to the implementation of our strategic growth initiatives and our consolidated financial statements. operate, which can affect the balance of land held for future development in our inventory. our delivering fewer homes; our selling homes at lower prices; our offering or increasing sales incentives, discounts or price concessions for our homes; our experiencing lower our selling fewer homes or experiencing a higher number of impairments in the value of our inventory and other assets; difficulty in acquiring desirable land difficulty in our acquiring raw materials and skilled management and trade labor at acceptable prices; delays in the development of land and/or the construction of our homes; and/or difficulty in securing external financing, performance bonds or statements.Item 1. BUSINESS United StatesU.S. and has been building homes for more than 50 years. We construct and sell homes through our operating divisions under the name KB Home. Unless the context indicates otherwise, the terms “the Company,” “we,” “our” and “us” used in this report refer to KB Home, a Delaware corporation, and its predecessors and subsidiaries.United States. which are divided into four geographically defined segments for reporting purposes, offer a variety of new homes designed primarily for first-time, move-up and active adult homebuyers, including attached and detached single-family residential homes, townhomes and condominiums. We offer homes in development communities, at urban in-fill locations and as part of mixed-use projects. In this report, we use the term “home” to refer to a single-family residence, whether it is a single-family home or other type of residential property, and we use the term “community” to refer to a single development in which homes are constructed as part of an integrated plan.5,8126,282 homes at an average selling price of $224,600$246,500 during the year ended November 30, 2011,2012, compared to 7,3465,812 homes delivered at an average selling price of $214,500$224,600 during the year ended November 30, 2010.2011. Our homebuilding operations represent most of our business, accounting for 99.2% and 99.5%99.3% of our total revenues in 20112012 and 2010, respectively.title and insurance services to our homebuyers. Thishomebuyers in the same markets where we build homes and provides title services in the majority of our markets located within our Central and Southeast homebuilding reporting segments. In addition, since the third quarter of 2011, this segment also provided mortgage banking serviceshas earned revenues pursuant to our homebuyers indirectly through KBA Mortgage, LLC (“KBA Mortgage”), a former unconsolidated joint venturethe terms of a subsidiary of ours and a subsidiary of Bank of America, N.A., from the venture’s formation in 2005 until June 30, 2011, when it ceased offering mortgage banking services. Effective June 27, 2011, we entered into a marketing services agreement with MetLife Home Loans, a division of MetLife Bank, N.A. Under the agreement, MetLife Home Loans’ personnel, located on site at several of our new home communities, can offer financing options and residential consumerpreferred mortgage lender that offers mortgage banking services, including mortgage loan productsoriginations, to our homebuyers and originate residential consumer mortgage loans for homebuyers who elect to use MetLife Home Loans. Our homebuyers may also elect to use other providers of mortgage banking services.. Our financial services operations accounted for .8% and .5%.7% of our total revenues in 20112012 and 2010, respectively.2011,2012, we generated total revenues of $1.32$1.56 billion and a net loss of $178.8$59.0 million, compared to total revenues of $1.59$1.32 billion and a net loss of $69.4$178.8 million in 2010. Our financial results for 2011 and 2010 reflect challenging operating conditions that have persisted in the homebuilding industry to varying degrees during the housing downturn that generally began in mid-2006..http://kbhome.com.www.kbhome.com. In addition, community location and information is available at (888) KB-HOMES.nine10 states and 3233 major markets presented below. We also operate in various submarkets within these major markets. For reporting purposes, we organize our homebuilding operations into four segments — West Coast, Southwest, Central and Southeast. State(s) California Fresno, Los Angeles, Madera, Oakland, Orange County, Riverside, Sacramento, San Bernardino, San Diego, San Jose, Santa Rosa-Petaluma, Stockton, Ventura and Yuba City Arizona Phoenix and Tucson Nevada Las Vegas and Reno New Mexico Albuquerque Central Colorado Denver Texas Austin, Dallas/Fort Worth, Houston and San Antonio Florida Daytona Beach, Fort Myers, Jacksonville, Lakeland, Orlando, Sarasota and Tampa Maryland Washington, D.C. North Carolina Raleigh Virginia Washington, D.C. November November��30, 2012, 2011 2010 and 2009: Years Ended November 30, 2011 2010 2009 1,757 2,023 2,453 30 % 27 % 29 % $ 335,500 $ 346,300 $ 315,100 $ 589.4 $ 700.7 $ 812.2 843 1,150 1,202 15 % 16 % 14 % $ 165,800 $ 158,200 $ 172,000 $ 139.9 $ 187.7 $ 218.1 2,155 2,663 2,771 37 % 36 % 33 % $ 171,500 $ 163,700 $ 155,500 $ 369.7 $ 436.4 $ 434.4 1,057 1,510 2,062 18 % 21 % 24 % $ 195,500 $ 170,200 $ 168,600 $ 206.6 $ 257.0 $ 351.7 5,812 7,346 8,488 $ 224,600 $ 214,500 $ 207,100 $ 1,305.6 $ 1,581.8 $ 1,816.4 Years Ended November 30, 2012 2011 2010 West Coast: Homes delivered 1,945 1,757 2,023 Percentage of total homes delivered 31 % 30 % 27 % Average selling price $ 388,300 $ 335,500 $ 346,300 Total revenues (in millions) (a) $ 755.3 $ 589.4 $ 700.7 Southwest: Homes delivered 683 843 1,150 Percentage of total homes delivered 11 % 15 % 16 % Average selling price $ 193,900 $ 165,800 $ 158,200 Total revenues (in millions) (a) $ 132.4 $ 139.9 $ 187.7 Central: Homes delivered 2,566 2,155 2,663 Percentage of total homes delivered 41 % 37 % 36 % Average selling price $ 170,100 $ 171,500 $ 163,700 Total revenues (in millions) (a) $ 436.4 $ 369.7 $ 436.4 Southeast: Homes delivered 1,088 1,057 1,510 Percentage of total homes delivered 17 % 18 % 21 % Average selling price $ 206,200 $ 195,500 $ 170,200 Total revenues (in millions) (a) $ 224.3 $ 206.6 $ 257.0 Total: Homes delivered 6,282 5,812 7,346 Average selling price $ 246,500 $ 224,600 $ 214,500 Total revenues (in millions) (a) $ 1,548.4 $ 1,305.6 $ 1,581.8 (a) Total revenues include revenues from housing and land sales. developed land.the land developed. Over the last five years, we have reduced the number of homebuilding joint ventures in which we participate. Our unconsolidated joint ventures delivered no homes in 2012, one home in 2011, and 102 homes in 2010 and 141 homes in 2009.Strategy.To varying degrees since mid-2006, housing markets across the United States, including those we serve, have experienced a prolonged downturn compared to the period from 2000 through 2005 due to a persistent oversupply2008, a generally poor domestic economic and employment environment as well as turbulence in financial and credit markets worldwide have worsened these conditions, resulting in declining home sales activity and falling home prices in many areas. Although housing affordability has been at historically high levels in the past few years due to lower selling prices and relatively low residential consumer mortgage interest rates, the negative supply and demand dynamics during the housing downturn have severely constrained our net orders, revenues and our ability to generate profits.We believe housing markets will likely remain volatile and generally weak in 2012, and that our business and the homebuilding industry will experience uneven results before a sustained recovery takes hold. At this time, we cannot predict when such a recovery might occur. Based on this view, we intend to continue to execute on three primary and integrated strategic goals:achieving and maintaining profitability at the scale of prevailing market conditions;generating cash and maintaining a strong balance sheet; andpositioning our business to capitalize on future growth opportunities.In pursuing these goals during the period from mid-2006 through 2009, we reduced our overhead, inventory and community count levels to better align our operations with diminished home sales activity compared to the peak levels reached in the period from 2000 through 2005. (In this report, we use the term “community count” to refer to the number of new home communities that are open for sales.) Consequently, we exited or reduced our investments in underperforming markets, disposed of land and interests in land, unwound our participation in certain unconsolidated joint ventures, and experienced a sharp decline in our backlog and homes delivered compared to our peak period performance primarily due to decreased demand and because we had fewer communities from which we sold homes. During this period, we also focused on improving our operating efficiencies, shifting resources and investing selectively in preferred markets with perceived strong growth prospects, and redesigning and re-engineering our product offerings to meet consumer demand for more affordable and energy efficient homes and to lower our direct construction costs compared to our previous product.In late 2009 and continuing through 2011, building on our financial position and the earlier operational re-positioning we had implemented, and seeing a number of attractive opportunities becoming available, we launched a targeted land acquisition initiative. Under this initiative, we concentrated on acquiring ownership or control of well-priced developed land parcels that met our investment and marketing standards in preferred locations in or near our existing markets, particularly in California and Texas. This tactical shift was designed to help us achieve and maintain profitability — currently, our highest priority — by increasing our future revenues through a larger inventory base in healthier markets from which to sell our higher-margin new product. It was also designed to help us maintain a three-to-five year supply of developed or developable land. While the inventory and community count reductions and other land portfolio and operational adjustments we made between 2006 and 2009 resulted in fewer homes delivered in 2011 on a year-over-year basis, we anticipate that our land investment activities in 2010 and 2011 and recent and planned new home community openings will improve such comparisons in 2012. As a result, we believe that our land acquisition initiative in combination with the other actions1997, we have taken in pursuingoperated our primary strategic goals during the housing downturn have established a solid foundation for us to eventually achieve sustainable growth and profitability as and to the extent housing markets improve.While market conditions in 2012 will determine the degree to which we acquire or dispose of land assets in managing our inventory, the pace with which we open new home communities for sales, and the manner in which we pursue and refine our execution on our primary integrated strategic goals, we intend to continue to operate in accordance withhomebuilding business following the principles of our corean operational business model that we call KBnxt.Operational Business Model. Ourprovides the core framework under which we have established our main operational objectives and near-term strategic goals. We believe the principles of KBnxt operational business model, first implemented in 1997, seeksset us apart from other large-production homebuilders and provide the foundation for our long-term growth.We believe our KBnxt operational business model sets us apart from other homebuilders. The key principles of our KBnxt operational business model include:include the following:producthome design and interior/exterior design option preferences through regular surveys and research;and disposing of land and interests in land that no longer meet our investment or marketing standards;the products that homebuyers desire;signed;interiorchoices for design options.Through its disciplines and standards,options at our KB Home Studios.operational business model provides a framework under which we seek to build and maintain a leading positionbe integral to our success in our existing markets; opportunistically expand our business into attractive new areas or preferred markets within or near our existing operations; exit investments that no longer meet our return or marketing standards; calibrate our product designs to consumer preferences; and achieve lower costs and economies of scale in acquiring and developing land, purchasing building materials, subcontracting trade labor, and providing home design and product options to customers. Due to market conditions during the housing downturn, however,homebuilding industry, there have been instances in which wewhere market conditions have foundmade it necessary, in our view, to temporarily deviate from certain of its principles. For example, at times we have been unable to maintain an even flow production of homes in certain respectsa particular area because of slow sales activity. Also, in specific targeted communities with strong demand, we have started construction on a small number of homes before a corresponding purchase contract was signed to more quickly meet the delivery expectations of homebuyers and generate revenues. These and other market-driven circumstances may arise in the future and lead us to make specific short-term shifts from the principles of our KBnxt operational business model, and such instances may arise in 2012.Our expansion into a new area or market and our withdrawal from an existing market depend on our assessment of the area’s or market’s viability and our ability to develop and/or sustain operations at a level that meets our investment standards. Similar considerations apply to potential asset acquisitions or dispositions in our existing markets.Objectives.Objectives. Guided by the principles of our KBnxt, operational business model, our main areas of operational objectives currently include:focus are as follows: our operations. We seek to maintain ownershipa long-term growth platform of new home communities through land and land development investments that enable us to own or control over a forecasted three-to-five year supply of developed or developable land and concentrating on healthierin preferred locations in or near our existingserved markets. We believemanage this approach enables usgrowth platform through an ongoing allocation of resources to capitalize on the different rates atidentified opportunities, which we expect housing markets to stabilizemay involve withdrawing and recoverreallocating resources from the housing downturn. In addition, keepingunderperforming markets. We also will expand and contract our land inventory at what we believe is a prudentgeographic footprint and manageable level andcorresponding resource commitments over time in line with our futurehousing market conditions, particularly prevailing and expected levels of home sales expectations maximizes the useactivity.our working capital, enhances our liquidity and helps us maintain a balance sheet that supports strategic investments for future growth.Providingcustomer satisfaction by providing the best combination of value, quality and choice in homes and design options foralong with attentive service to our core customers — first-time, move-up and active adult homebuyers. By promoting value and choice through an affordable base price and product customization through options, including many environmentally conscious options,In addition to our focus on operating from new home communities in attractive locations, we believe we stand out from other homebuilders and sellers of existingresale homes (including lender-ownedthrough our distinct Built to Order™ approach to homebuying and our longstanding commitment to sustainability. With Built to Order, we offer customers affordable base prices and the opportunity to significantly customize the floor plans and design options for their new homes. With our homes, acquired through foreclosures or short sales),we also offer several standard features and can generate higher revenues.•Enhancing the affordability of our homes by designing and engineering our homes with flexible layouts, reducing cycle times (i.e., the time between the sale of a home and its delivery to a homebuyer), and lowering our direct construction costs. By making our homes more affordable for our value-conscious core homebuyers while lowering our production costs, we believe we can compete effectively with sellers of existing homes(including lender-owned homes acquired through foreclosures or short sales), which we see as our primary competition, generate revenues and drive sustainable earnings over the long term.Generating high levels of customer satisfactionoptions that are among the most energy- and producing high-quality homes as a complement to providing the bestwater-efficient commercially available. These features and options provide increased value and choice for homebuyers. We believe achieving high customer satisfaction levels is key to our long-termhomebuyers by helping to lower the relative cost of homeownership over time.delivering quality homes is criticaloverhead costs with our growth platform, sales activity expectations and business needs, and by streamlining and constantly improving, to the extent possible, our home construction process. In addition to even flow high customer satisfaction.Achieving and maintaining profitability by continuingat the scale of prevailing market conditions, our highest priority in 2012;align our operational cost structure (including overhead) withcapitalize on future growth opportunities.expected sizescope, scale and growthposition of our business generatingboth geographically and preservingoperationally, compared to the peak pre-housing downturn years of the prior decade, to adapt to changing housing market dynamics and volatile home sales activity. Several housing markets experienced challenging conditions during the housing downturn, which was deepened and extended by the negative impacts of the 2007-2009 economic recession and subsequent slow recovery, including high unemployment; sluggish economic growth; weak consumer confidence; elevated residential consumer mortgage loan delinquencies, defaults and foreclosures; turbulent financial and credit markets and tight mortgage lending standards and practices. These factors, to varying degrees, still affect housing markets. Given the difficult homebuilding environment, we, among other things, shifted resources from underperforming areas to markets offering perceived higher growth prospects, particularly land-constrained locations in coastal areas of California and in Texas, to maintain a solid growth platform; implemented measures to generate and conserve cash through reduced spending and maximizingasset sales, strengthen our balance sheet, improve our operating efficiencies and lower our overhead costs; and redesigned and re-engineered our products.performanceoutset of the housing downturn and have positioned us to operate profitably to the extent there is continued progress in the present housing recovery. We generated net income in the second half of 2012 and our full-year deliveries and revenues were each higher than in 2011. In addition, our backlog at November 30, 2012, in terms of both homes and potential future housing revenues, was significantly higher than our backlog at November 30, 2011. We expect our community count to increase in 2013 largely as a result of a land acquisition initiative we began in late 2009 and accelerated in 2012, and the investments in land and land development we plan to make in 2013. We use the term “community count” to refer to the number of new home communities we have open for sales in a given period, and for this report our community count reflects as of a given period or date the number of our invested capital.new home communities with at least one home left to sell.Marketing Strategy. During 2011,continuedexpanded our primary integrated strategic goals to focustarget both profitability and growing our promotionalbusiness and, among other things, implemented the following initiatives:efforts on first-time, move-up and active adult homebuyers. These homebuyers historically have beenstandards, in higher-performing, choice locations that feature higher household incomes within our core customershomebuyer demographic. These consumers are more likely to choose larger home sizes and it is among these groupspurchase more design options, key drivers for our home selling prices and housing gross profit margins. This investment orientation, which we began in late 2009, yielded improved results in 2012, contributing to our higher revenues and average selling prices. During 2012, we invested approximately $565 million in land and land development.we seehas one or more homes left to sell at the greatest potentialend of a quarter to be a “new home community open for sales.”home sales. Also, beginningdevelopment. In 2012, we identified 21 communities for activation, primarily in 2010,Florida and Arizona, representinghave made a regional shiftoperate to further strengthen our local field management teams and talent where appropriate, while leveraging our existing infrastructure and carefully managing overhead costs, to help ensure the effective and efficient execution of our strategic initiatives. In 2012, we expanded our management teams in our overall market positioning and operational platform to emphasize healthier markets inNorthern California, Southern California and Texas. As a result,Central Texas to provide heightened attention to key submarkets within those regions.have focusedintend to continue and may expand on our recent community countstrategic growth effortsinitiatives, subject to conditions in preferred locations within key strategic markets in those states. In this report, depending on the context, we describe the positioning and structure of our operations in housing markets, across the country as our marketing strategy.overall economy and the capital, credit and financial markets.directed atcentered on differentiating the KB Home brand in the minds of our core homebuyer demographic from resale homes and from new homes sold through foreclosures, short sales and by other homebuilders. These efforts increasingly involve using interactive Internet-based applications, social media channels and resources and other technologies. We believe that our Built to OrderTM message and approach generate a high perceived value for our products and our company among consumers and are unique among large-production homebuilders. In marketing our Built to Order emphasizes thatapproach, we emphasize how we partner with our homebuyers to create a home built to their individual preferences in design, layout, square footage and homesitelot location, and give them the ability to personalizesignificantly customize their home with features and amenitiesdesign options that meetsuit their needs and interests. In essence, Built to Order serves as the consumer face of core elements of our KBnxt operational business model and is designed to ensure that our promotional marketing strategy and advertising campaigns are closely aligned with our overall operational focus. For greater consistency with our promotional marketing messages and in the execution of our Built to Order approach, salesthe selling of our homes areis carried out by in-house teams of sales representatives and other personnel who work personally with each homebuyer to create a home that meets the homebuyer’s preferences and budget.an integrala key component of the Built to Order experience we offer to our homebuyers and help increase the revenues we generate from home sales. These showrooms, which are generally located close to our new home communities open for sales, allow our homebuyers to select from thousandsa wide variety of product and design options and amenities, including several environmentally conscious options that are available for purchase as part of the original construction of their homes. The coordinated efforts of our sales representatives and KB Home Studio consultants are intended to provide high levels ofgenerate higher customer satisfaction and lead to enhanced customer retention and referrals.My Home. My Earth.SustainabilityTM. We have made a dedicated effort to further differentiate ourselves from other homebuilders and sellers of existingresale homes through our ongoing commitment to become a leading national company in environmental sustainability. Under this commitment, we:organized under ourMy Home. My Earth.initiative, stemsand the related initiatives we have implemented stem in part from growing sensitivities and regulatory attention to the potential impact that the construction and use of our homes can have on the environment, including on global average temperatures and associated climate change, and from our homebuyers’ interest in reducing this impact and in the most cost-effective way possible. This commitment also stems from our strategic goal to maintain a strong balance sheet by minimizing expenses, waste and inefficiencies in our operations. Under ourMy Home. My Earth.programs:•we became the first national homebuilder to commit to installing exclusively ENERGY STAR® appliances in all of our homes built in 2008 and beyond;we engineer and continually refine our products to reduce the amount of building materials necessary to construct them, and have developed or adopted production methods that help minimize our use of materials and the generation of construction-related debris;we became the first national homebuilder to commit to building homes that are designed to meet the U.S. Environmental Protection Agency’s (“EPA”) ENERGY STAR guidelines in all of our new home communities opened in 2009 and beyond;•in 2010, we became the first homebuilder in the country to construct homes to meet the EPA’s WaterSense® specifications. The ENERGY STAR and WaterSense programs require that our homes meet high standards for energy and water efficiency and performance, respectively, compared to standard new or typical existing homes;•in 2010, we became a partner in the EPA’s WasteWise® program and have voluntarily undertaken to reduce the amount of solid construction waste sent to landfills;in 2011, we made solar power systems a standard feature of homes in nearly all of our communities across Southern California;•in 2011, we introduced our EPG™, or Energy Performance Guide™, which is provided with every new home we deliver and informs prospective buyers about the relative energy efficiency of our new homes compared to a typical new or resale home;•in 2011, we announced our planned nationwide rollout of our next-generation of energy efficient home designs, a net-zero energy home we have named ZeroHouse 2.0™, and began offering these home designs as options in select communities; andsince 2007, we have published an annual sustainability report on our website. The report outlines our accomplishments and objectives as we work towards our goal of minimizing the impact our operations and homes can have on the environment, while continuing to make the dream of homeownership attainable for our homebuyers.In many instances, we have been able to implement ourMy Home. My Earth.programs at minimal or no additional cost to us or to our homebuyers, while giving our homebuyers the opportunity to lower their home ownership costs over the long term. Along with the standard home designs and amenities we offer pursuant to ourMy Home. My Earth. programs, we also offer our homebuyers several options through our KB Home Studios that can help them to further lowerlowering their consumption of energy and water resources and to reduce their utility bills. More information about our sustainability commitment can be found in our annual sustainability reports, which we have published on our website since 2008. To date, we are the only national homebuilder to publish a comprehensive annual sustainability report. As we see environmental issues related to housing becoming increasingly important to consumers and government authorities at all levels, we intend to continue to research, evaluate and utilize new or improved products and construction and business practices consistent with the goals of ourMy Home. My Earth.programs. commitment. In addition to making good business sense, we believe ourMy Home. My Earth.programs sustainability initiatives can help put us in a better position, compared to resales and homebuilders with less-developed programs, to comply with evolving local, state and federal rules and regulations intended to protect natural resources and to address climate change and similar environmental concerns.our KBnxt operational business model’sKBnxt’s effectiveness and help ensure its consistent execution, our employees are continuously trained on KBnxt principles and are evaluated based on their achievement of relevant KBnxt operational objectives. We also believe that our business requires in-depth knowledge of local markets in order to acquire land in preferred locations and on favorable terms, to engage subcontractors, to plandevelop communities that meet local demand, to anticipate consumer tastes in specific markets, and to assess local regulatory environments. Accordingly, we operate our business through divisions with trained personnel who have local market expertise. We have experienced materials purchasing, purchasing administration, product development, architecture and accounting) to benefit from economies of scale, our local management exercises considerable autonomy in identifying land acquisition opportunities, developing and implementing product and sales strategies, and controlling costs.sale.deliveries. Historically, the completion time of our community development process has ranged from six to 24 months in our West Coast segment, towith a somewhat shorter duration in our other homebuilding segments. The duration of the community development process varies based on, among other things, the extent of government approvals required, the overall size of a particular community, necessary site preparation activities, the type of product(s) that will be offered, weather conditions, promotional marketing results, consumer demand and local and general economic and housing market conditions.1,0002,200 to 13,000 square feet. In our communities, we typically offer from three to 15 home designs for homebuyers to choose from.design choices. We also generally build one to fourthree model homes at each community so that prospective buyers can preview various home designs.products available. Depending on the community, we may offer premium lots containing more square footage, better views and/or location benefits.As of November 30, West Coast Southwest Central Southeast Total 2012 46 17 91 37 191 2011 72 25 93 44 234 time.time, and in implementing our strategic growth initiatives, we may acquire a greater proportion of undeveloped or unentitled land in the future. and assess the viability of our current inventory, based on the results of periodic surveys of both new and resale homebuyers in particular markets, prevailing local economic conditions, the supply and type of homes available for sale, and other research activities. Local, in-house land acquisition specialists conduct site selection analysis in targetedanalyze specific geographic areas to identify desirable land acquisition targets or to evaluate whether to dispose of an existing land interest. We also use studies performed by third-party specialists. Using this internal and external data, some of the factors we consider in evaluating land acquisition targets and assessing the viability of our current inventory are consumer preferences; general economic conditions; local housing market conditions, with an emphasis onprevailing and expected home sales activity and the selling prices and pricing trends of comparable new and resale homes in the market; expected sales rates;subject submarket; proximity to metropolitan areas and employment centers; population, household formation and employment and commercial growth patterns; household income levels; availability of developable land parcels at reasonable cost, including estimated costs of completing land development;development and selling homes; our operational scale and experience in the subject submarket; and environmental compliance matters.purchasesacquisitions and land development activities to minimize, or to defer the timing of, expenditures, which enhances our returns associated with new landland-related investments. While we use a variety of techniques to accomplish this, we typically use agreementscontracts that give us an option or similar right to purchaseacquire land at a future date, usually at a predetermined price and for a small initial option or earnest money deposit payment. These agreementscontracts may also permit us to partially develop the underlying land prior to our purchase.acquisition. We refer to land subject to such option or similar rights as being “controlled.” Our decision to exercise a particular land option or similar right is based on the results of due diligence and continued market viability analysesanalysis we conduct after entering into an agreement.a contract. In some cases, our decision to exercise a land option or similar right 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. Depending on the circumstances, our initial deposit payment for a land option right may or may not be refundable to us if we abandon the land option contract and do not purchase the underlying land. to acquiring land under option agreements, we may acquire land under contracts that condition our purchaseacquisition obligation on our satisfaction with the feasibility of developing the subject land and selling homes on the land by a certain future date, consistent with our investment return and marketing standards. Our land option contracts and other similar contracts may also allow us to phase our land purchasesacquisitions and/or land development over a period of time and/or upon the satisfaction of certain conditions. We may also acquire land with seller financing that is non-recourse to us, or by working in conjunction with third-party land developers. The use of these land option contracts and other similar contracts generally allows us to reduce the market risks associated with direct land ownership and development, and to reduce our capital and financial commitments, including interest and other carrying costs.purchase or dispose of any land interest,acquisition, our senior corporate and regional management evaluatesevaluate the asset based on the results of our local specialists’ due diligence, third-party data and a set of defined financial measures, including, but not limited to, housing gross profit margin analyses and specific discounted, after-tax cash flow internal rate of return requirements. The criteria guiding our land acquisition and disposition decisions have resulted in our maintaining inventory in areas that we believe generally offer better returns for lower risk and lower our upfront investment in inventory.In recent years, in light of difficult market conditions, we have sold some of our land and interests in land and have abandoned a portion of our rights to acquire land under land option contracts and other similar contracts. We determined that these properties no longer met our investment or marketing standards. Although we shifted our strategic focus in late 2009 to acquiring land assets in preferred locations in which to open new home communities and increase our revenues, if market conditions remain challenging, we may sell more of our land and interests in land, and we may abandon or try to sell more of our rights to acquire land under land option contracts or other similar contracts. period of time due to building permit moratorium or regulatory restrictions, that hinder our ability to move forward with the developmentor are portions of the community. It also includes largelarger land parcels that we plan to build out over several years and/or parcels that have not yet been entitled and, therefore, have an extended development timeline. Land we are holding for future development also includes land where we have deferred development activity based on our belief that we can generate greater returns and/or maximize the economic performance of a community by delaying improvements for a period of time to allow earlier phases of a long-term, multi-phase community or a neighboring community to generate sales momentum or for market conditions to improve. We resume development activity when we believe our investment in this inventory will be optimized.20112012 and 2010.2011. The table does not include approximately 326 acres owned as of November 30, 2012 and November 30, 2011 and approximately 316 acres owned and 64 acres under option as of November 30, 2010 that isare not currently expected to be approved for subdivision into lots. Homes Under
Construction and Land
Under Development Land Held for Future
Development Land Under
Option Total Land
Owned or
Under Option 2011 2010 2011 2010 2011 2010 2011 2010 3,424 4,467 4,102 3,862 1,491 1,396 9,017 9,725 1,013 1,904 8,219 3,292 33 3,864 9,265 9,060 7,681 7,649 1,837 1,097 3,215 2,227 12,733 10,973 1,123 1,542 5,567 6,414 2,465 1,826 9,155 9,782 13,241 15,562 19,725 14,665 7,204 9,313 40,170 39,540 2012 2011 2012 2011 2012 2011 2012 2011 West Coast 2,899 3,424 3,936 4,102 3,613 1,491 10,448 9,017 Southwest 1,275 1,013 7,743 8,219 534 33 9,552 9,265 Central 7,859 7,681 2,055 1,837 4,612 3,215 14,526 12,733 Southeast 1,922 1,123 4,934 5,567 3,370 2,465 10,226 9,155 Total 13,955 13,241 18,668 19,725 12,129 7,204 44,752 40,170 2011, 22%2012, 23% of the inventory lots we owned or controlled were located in our West Coast homebuilding reporting segment, 23%21% were in our Southwest homebuilding reporting segment, 32%33% were in our Central homebuilding reporting segment and 23% were in our Southeast homebuilding reporting segment.20112012 and 20102011 (in thousands): Homes Under
Construction and Land
Under Development Land Held for
Future
Development Land Under
Option Total Land
Owned or
Under Option 2011 2010 2011 2010 2011 2010 2011 2010 $ 508,731 $ 509,346 $ 344,702 $ 289,041 $ 62,370 $ 30,766 $ 915,803 $ 829,153 66,770 86,101 163,413 142,566 307 3,716 230,490 232,383 265,946 259,492 23,086 14,636 2,834 10,469 291,866 284,597 87,144 155,102 195,542 185,124 10,784 10,362 293,470 350,588 $ 928,591 $ 1,010,041 $ 726,743 $ 631,367 $ 76,295 $ 55,313 $ 1,731,629 $ 1,696,721 2012 2011 2012 2011 2012 2011 2012 2011 West Coast $ 471,650 $ 508,731 $ 337,229 $ 344,702 $ 33,718 $ 62,370 $ 842,597 $ 915,803 Southwest 63,456 66,770 156,159 163,413 1,830 307 221,445 230,490 Central 292,475 265,946 21,806 23,086 5,443 2,834 319,724 291,866 Southeast 154,992 87,144 153,661 195,542 14,152 10,784 322,805 293,470 Total $ 982,573 $ 928,591 $ 668,855 $ 726,743 $ 55,143 $ 76,295 $ 1,706,571 $ 1,731,629 Sale. Deliveries. Following the purchaseacquisition of land and, if necessary, the development of the land into finished lots, we typically begin constructing model homes and marketing homes for sale and constructing model homes.sale. The time required for construction of our homes depends on the weather, time of year, local labor supply, availability of materialslocal trade labor and suppliesbuilding materials and other factors. To minimize the costs and risks of unsold completed or partially completed homes in production, (which we refer to as “standing inventory”), we generally begin construction of a home only when we have a signed purchase contract with a homebuyer. However, cancellations of home purchase contracts prior to the delivery of the underlying homes, the construction of attached products with some unsold units or specific strategic considerations, may cause us to have standing inventory.During the housing downturn, we have experienced more volatilitywill result in our cancellation rates thanhaving unsold homes in the years immediately before the downturn began. Also, in the first half of 2010, we strategically deviated from our KBnxt operational business model and, in some communities, built or partially built homes before they were sold to help meet increased demand motivated by the April 30, 2010 expiration of a federal homebuyer tax credit (the “Tax Credit”). As a result, at times during 2010, we had slightly more standing inventory than we have had historically. In 2011, we made a dedicated effort to reduce the amount of standing inventory from the previous year. Market conditions and strategic considerations will determine our standing inventory levels in 2012.developed programs forestablished national and regional purchasing ofprograms for certain building materials, appliances, fixtures and other items to take advantage of economies of scale and to reduce costs through improvedgarner better pricing and more reliable supply and, where available, participate in manufacturers’ or suppliers’ rebate programs. At all stages of production, our administrative and on-site supervisory personnel coordinate the activities of subcontractors to meet our production schedules and oversee that the work subcontractors perform meets quality and cost standards. or upgrades for their homes. Most of our home purchase contracts stipulate that if a homebuyer cancels a contract with us, we have the right to retain the homebuyer’s deposits. However, we generally permit our homebuyers to cancel their obligations and obtain refunds of all or a portion of their deposits in the event mortgage financing cannot be obtained within a certain period of time, as specified in their contract. Since 2008, tightened residential consumer mortgage lending standards have led to higherWe define our cancellation rates than those experienced before then, and we expect these standards to continue to haverate in a negative impact ongiven period as the total number of contracts for new homes canceled divided by the total new (gross) orders for homes during the same period. For further discussion of our cancellation rates and the factors affecting our standing inventory levels in 2012.“Backlog”cancellation rates, see below under “Item 1A. Risk Factors” and “Part II — Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.”delivered.delivered to a homebuyer. Ending backlog represents the number of homes in backlog from the previous period plus the number of net orders (new orders for homes less cancellations) generated during the current period minus the number of homes delivered during the current period. TheOur backlog at any given time will be affected by cancellations.cancellations and by our community count. The number of homes delivered has historically increased from the first to the fourth quarter in any year.Establishing an adequate backlog to optimize the execution of our KBnxt operational business model has been challenging during the housing downturn. In 2011, we opened 123 new home communities for sales and took strategic and proactive steps to increase our backlog, which helped us to establish a sales pace that led us to close the year with the highest year-end backlog we have had since 2008.20112012 consisted of 2,1562,577 homes, an increase of 61%20% from the 1,3362,156 homes in backlog at November 30, 2010. The higher backlog level at November 30, 2011 reflected a 39% increase in net orders in the latter half of 2011 compared to the year-earlier period.. Our backlog at November 30, 20112012 represented potential future housing revenues of approximately $459.0$618.6 million, a 74%35% increase from potential future housing revenues of approximately $263.8$459.0 million at November 30, 2010,2011, resulting from the higher number of homes in backlog and a higher overall average selling price. Our backlog ratio, defined as homes delivered in the quarter as a percentage of backlog at the beginning of the quarter, was 75% for thewill vary from quarter ended November 30, 2011to quarter, depending on what portion of our backlog is under construction, and 88% for the quarter ended November 30, 2010. The year-over-year decline in this ratio was partly due to tightened residential consumer mortgage lending standardshow many unsold homes we may sell and slower processing and closing of residential consumer mortgage loans for our homebuyers by the providers of such loans.20112012 increased to 6,6326,703 from 6,556 in 2010,6,632 for the year ended November 30, 2011, representing the first increase in fullsecond consecutive year that full-year net orders have increased from the previous year. The value of the net orders we generated for the year ended November 30, 2012 increased 15% to $1.73 billion from $1.51 billionin two years.the prior year. Our average cancellation rate based on gross ordersfor the year was 29%31% in 2011,2012, compared to an averagea cancellation rate of 28%29% in 2010.2011. Our cancellation rate based on gross orders was 34%35% in the fourth quarter of 2011,2012, compared to 37%34% in the fourth quarter of 2010.2011.(based on gross orders) by homebuilding reporting segment and with respect to our unconsolidated joint ventures for each quarter during the years ended November 30, 20112012 and 2010,2011, and our ending backlog at the end of each quarter within those years: West Coast Southwest Central Southeast Total Unconsolidated
Joint Ventures 224 158 363 204 949 1 353 183 475 254 1,265 — 524 232 611 236 1,603 — 656 270 706 363 1,995 — 1,757 843 2,155 1,057 5,812 1 340 216 529 241 1,326 21 500 359 550 373 1,782 34 600 337 855 528 2,320 24 583 238 729 368 1,918 23 2,023 1,150 2,663 1,510 7,346 102 404 206 448 244 1,302 — 542 270 838 348 1,998 — 581 259 677 321 1,838 — 490 172 517 315 1,494 — 2,017 907 2,480 1,228 6,632 — 429 313 715 456 1,913 19 608 351 796 489 2,244 27 335 186 556 237 1,314 16 331 157 370 227 1,085 4 1,703 1,007 2,437 1,409 6,556 66 West Coast Southwest Central Southeast Total Unconsolidated
Joint Ventures 15 % 18 % 39 % 33 % 29 % — % 22 18 29 24 25 — 27 20 34 30 29 — 28 27 41 33 34 — 24 % 21 % 35 % 30 % 29 % — % 17 % 14 % 29 % 21 % 22 % 21 % 15 16 31 26 24 — 23 26 37 40 33 — 23 26 49 35 37 33 19 % 19 % 36 % 29 % 28 % 10 % 383 187 778 341 1,689 — 572 274 1,141 435 2,422 — 629 301 1,207 520 2,657 — 463 203 1,018 472 2,156 — 612 379 1,105 617 2,713 35 720 371 1,351 733 3,175 28 455 220 1,052 442 2,169 20 203 139 693 301 1,336 1 $ 126,258 $ 27,970 $ 132,164 $ 67,242 $ 353,634 $ — 172,147 43,572 199,350 86,475 501,544 — 211,360 51,262 199,503 97,205 559,330 — 161,987 37,071 168,512 91,380 458,950 — $ 193,938 $ 59,439 $ 172,068 $ 98,305 $ 523,750 $ 13,825 241,383 60,278 224,212 122,365 648,238 11,760 165,546 34,490 171,577 83,703 455,316 7,480 74,816 21,306 113,155 54,517 263,794 511 West Coast Southwest Central Southeast Total Homes delivered 2012 First 309 170 487 184 1,150 Second 330 157 536 267 1,290 Third 541 186 700 293 1,720 Fourth 765 170 843 344 2,122 Total 1,945 683 2,566 1,088 6,282 2011 First 224 158 363 204 949 Second 353 183 475 254 1,265 Third 524 232 611 236 1,603 Fourth 656 270 706 363 1,995 Total 1,757 843 2,155 1,057 5,812 Net orders 2012 First 289 140 547 221 1,197 Second 600 229 900 320 2,049 Third 658 154 765 323 1,900 Fourth 619 140 485 313 1,557 Total 2,166 663 2,697 1,177 6,703 2011 First 404 206 448 244 1,302 Second 542 270 838 348 1,998 Third 581 259 677 321 1,838 Fourth 490 172 517 315 1,494 Total 2,017 907 2,480 1,228 6,632 West Coast Southwest Central Southeast Total Cancellation rates 2012 First 34 % 24 % 39 % 37 % 36 % Second 24 17 28 28 26 Third 23 16 35 27 29 Fourth 25 21 47 31 35 Total 26 % 19 % 37 % 30 % 31 % 2011 First 15 % 18 % 39 % 33 % 29 % Second 22 18 29 24 25 Third 27 20 34 30 29 Fourth 28 27 41 33 34 Total 24 % 21 % 35 % 30 % 29 % Ending backlog — homes 2012 First 443 173 1,078 509 2,203 Second 713 245 1,442 562 2,962 Third 830 213 1,507 592 3,142 Fourth 684 183 1,149 561 2,577 2011 First 383 187 778 341 1,689 Second 572 274 1,141 435 2,422 Third 629 301 1,207 520 2,657 Fourth 463 203 1,018 472 2,156 Ending backlog — value, in thousands 2012 First $ 150,638 $ 32,139 $ 177,998 $ 99,176 $ 459,951 Second 301,652 43,518 237,558 110,680 693,408 Third 327,528 40,727 251,900 124,589 744,744 Fourth 248,790 40,206 204,473 125,157 618,626 2011 First $ 126,258 $ 27,970 $ 132,164 $ 67,242 $ 353,634 Second 172,147 43,572 199,350 86,475 501,544 Third 211,360 51,262 199,503 97,205 559,330 Fourth 161,987 37,071 168,512 91,380 458,950 We currentlyenough land sufficient to meet our forecasted production goals for the next three to five years. Depending on marketAs discussed above under “Strategy,” in 2013 we intend to acquire additional land subject to conditions in the housing markets, the overall economy and our marketing strategy,the capital, credit and financial markets. However, we may in 2012 continuealso decide to acquire land assets and/or sell certain land or land interests. In 2011, we invested approximately $478 million in land and land development, andinterests as part of our land sales generated $.3 million of revenues and $.1 million of income, including $.1 million of pretax, noncash impairment charges. In 2010, we invested approximately $560 million in land and land development, and our land sales generated $6.3 million of revenues and $.3 million of losses, including $.3 million of pretax, noncash impairment charges. Our land option contract abandonments resulted in pretax, noncash charges of $3.1 million in 2011 and $10.1 million in 2010.pre-made, standardized materials that are commercially available on competitive terms from a variety of sources. In addition, our centralized and/or regionalizednational and regional purchasing ofprograms for certain buildingfixtures allowsother items allow us to benefit from large quantity purchase discounts and, where available, manufacturer or supplier rebates. When possible, we arrange for bulk purchases of these products at favorable prices from manufacturers and suppliers.From its formation in 2005 untilWe do not directly offer mortgage banking services or originate residential consumer mortgage loans (“mortgage loans”) for our customers. Prior to late June 30, 2011, KBA Mortgage, had representatives on site at our new home communities whoLLC (“KBA Mortgage”), a former unconsolidated mortgage banking joint venture of a subsidiary of ours and a subsidiary of Bank of America, N.A., provided mortgage banking services to a significant proportion of our homebuyers through the former unconsolidated joint venture.homebuyers. KBA Mortgage ceased offering mortgage banking services after June 30, 2011. KBA Mortgage originated residential consumer mortgage loans for 67%our customers who obtained mortgage financing during the period the unconsolidated joint venture operated in 2011. In 2010, KBA Mortgage originated such loans for 82% of our customers who obtained mortgage financing during that year.Under our2011, we have had a marketing services agreement which became effective on June 27, 2011, MetLife Home Loans’ personnel, located on site at several of our new home communities, can offer (i) financing options andwith a preferred mortgage lender that offers mortgage banking services, including mortgage loan productsoriginations, to our homebuyers, (ii) to prequalify homebuyers for residential consumer mortgage loans, and (iii) to commence the loan origination process for homebuyers who elect to use MetLife Home Loans. MetLife Home Loansthe lender. The mortgage banking services are described further below under “Part II — Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Financial Services Segment.” Our preferred mortgage lender and its respective parent company MetLife Bank, N.A., are not affiliates of ours or any of our subsidiaries. We do not have any ownership, joint venture or other interests in or with MetLife Home Loansour preferred mortgage lender or MetLife Bank, N.A.its respective parent company or with respect to the revenues or income that may be generated from MetLife Home Loansour preferred mortgage lender providing mortgage banking services to, or originating residential consumer mortgage loans for, our homebuyers. recently, which announced in January 2012 that it will cease offeringwas ceasing to offer forward mortgage banking services as part of its business. While we are evaluating various options,In March 2012, Nationstar Mortgage LLC (“Nationstar”) became our strategic intention is to reestablish apreferred mortgage banking joint venture or marketing relationship with a financial institution or otherlender. Nationstar began accepting new mortgage banking services provider, but we can offer no assurance that we will be able to do so.employees, compared to approximately 1,300 at December 31, 2010.employees. None of our employees are represented by a collective bargaining agreement.We believe our KBnxt operational business model, particularly the aspects that involve gaining a deeper understanding of customer interests and needs and offering a wide range of choices to homebuyers, provides us with long-term competitive advantages. weplumbers; and acquiring attractive developable land. We compete withfor homebuyers, skilled trade workers and management talent and desirable land against numerous homebuilders, ranging from regional and national firms to small local buildersenterprises. As to homebuyers, we primarily compete with other homebuilders on the basis of selling price, community location, availability of financing options, design, reputation, quality and amenities.amenities, including within larger residential development projects containing separate sections designed, planned and developed by such other homebuilders. In addition, we compete withfor homebuyers against housing alternatives other than new homes, including resale homes, foreclosedapartments, single-family rentals and short sale homes, apartments andother rental housing. In certain markets and at times when housing demand is high, we also compete with other buildershomebuilders and commercial and remodeling contractors to hire subcontractors.2011, operating conditionsthe housing downturn, many skilled workers left construction for other industries, and in markets where there was increased residential construction activity in 2012, the smaller workforce and higher demand for trade labor created shortages of certain skilled workers, driving up costs and/or extending land development and home construction schedules. This elevated residential construction activity also caused notable increases in the cost of certain building materials, such as lumber, drywall and concrete, reflecting in part a smaller supplier base and lower production capacity than existed before the housing downturn. In 2012, we also saw higher prices for desirable land amid heightened competition with homebuilders and other developers and investors, particularly in the land-constrained areas we are strategically targeting. We expect these upward trends in construction labor, building materials and land costs to continue, and possibly intensify, in 2013 if and as the present housing recovery progresses and there is greater competition for these resources.housing markets acrossof our second and part of our third quarters) than at other times of the United States remained difficult, reflectingyear. With our Built to Order approach and typicalimpactfall months (corresponding to part of our third and our fourth quarters). On a relative basis, the winter and early spring months within our first and part of our second quarters usually produce the fewest net orders, homes delivered and revenues, and the sequential difference from our fourth quarter to our first quarter can be significant. During the housing downturn and in 2012, these seasonal trends were somewhat less pronounced, and our overall net orders, homes delivered and revenues were generally lower than before the weak economy.housing downturn. We believecurrently expect the heightened competitiontraditional seasonality cycle and its impact on our results to become more prominent if and as the present housing recovery progresses and the housing markets and homebuilding industry return to a more normal operating environment.homebuyers stemmingsales in those submarkets; and the products we sell from those communities during the period. While there are some similarities, there are differences within and between our served markets and submarkets in terms of the quantity, size and nature of the new home communities we operate and the products we offer to consumers. These differences reflect, among other things, local homebuyer preferences; household demographics (e.g., large families or working professionals; income levels); and geographic context (e.g., urban or suburban; availability of reasonably-priced finished lots; development constraints; residential density), and the shifts that can occur in these factors over time. These structural factors in each market and submarket will affect the costs we incur and the time it takes to locate, acquire rights to and develop land, open new home communities for sales and market and build homes; the size of our homes; our selling prices (including the contribution from homebuyers’ purchases of design options); and the pace at which we sell homes and close out communities. Therefore, our results in any given period will fluctuate compared to other periods based on the proportion of homes delivered from areas with higher or lower selling prices and on the corresponding land and overhead costs incurred to generate those deliveries, as well as from our overall community count. In 2012, we targeted opening more of our new home communities for sales in higher-performing, choice locations — predominately in land-constrained areas that feature higher household incomes — where customers are more likely to choose larger home sizes and purchase more design options, key drivers for our home selling prices and housing gross profit margins. Due in part to this strategic focus, in the second, third and fourth quarters of 2012, we posted favorable year-over-year results in revenues as we delivered more homes from these conditionssubmarkets. At the same time, we had modest year-over-year growth in net orders in each period due largely to sequential declines in our overall community count, as we closed out older communities more quickly than we were able to develop and open new communities in our strategically-targeted areas. In 2013, we plan to continue our approach of opening new home communities for sales in locations with the above-described demand characteristics, and we anticipate that we will continue and may intensifyhave more new home communities open for sales than we did in 2012.financing, and borrowings under an unsecured revolving credit facility with various financial institutions (the “Credit Facility”). In 2010, however, anticipating that we would not need to borrow any funds under the Credit Facility before its scheduled maturity in November 2010, we voluntarily terminated the Credit Facility effective March 31, 2010 to eliminate the costs of maintaining it.financing. Depending on market conditions in 2012,2013, we may obtain project financing, or secure external financing with community or other inventory assets that we own or control. We may also undertakearrange or engage in equity or debt capital markets, bank loan, credit facility, project debt or other financial transactions. These transactions may include repurchases from time to enter into atime of our outstanding senior notes or other debt through tender offers, exchange offers, private exchanges, open market purchases or other means, and may include potential new credit facility.purchaseacquire property that requires us to incur environmental clean-up costs after conducting appropriate due diligence, including, but not limited to, using detailed investigations performed by environmental consultants. In such instances, we take steps prior to acquisition of the land to gain reasonable assurance as to the precise scope of work required and the costs associated with removal, site restoration and/or monitoring. To the extent contamination or other environmental issues have occurred in the past, we will attempt to recover restoration costs from third parties, such as the generators of hazardous waste, land sellers or others in the prior future consolidated financial statements. We have not been notified by any governmental agency of any claim that any of the properties owned or formerly owned by us are identified by the EPA as being a “Superfund” clean-up site requiring remediation, which could have a material effect on our future consolidated financial statements. Costs associated with the use of environmental consultants are not material to our consolidated financial statements.http://kbhome.com,at www.investor.kbhome.com, as soon as reasonably practicable after the report is electronically filed with, or furnished to, the SEC. We will also provide these reports in electronic or paper format free of charge upon request made to our investor relations department at investorrelations@kbhome.com or at our principal executive offices. We intend for our investor relations website to be the primary location where investors and the general public can obtain announcements regarding and can learn more about our financial and operational performance, business plans and prospects, and our board of directors, our senior executive management team, and our corporate governance policies, including our articles of incorporation, by-laws, corporate governance principles, board committee charters, and ethics policy. We webcast and archive quarterly earnings calls and other investor events in which we participate or host, and post related materials, on our investor relations website. Interested persons can register on our investor relations website to receive prompt notifications of new SEC filings, press releases and other information posted there. However, the content available on or through our primary website at www.kbhome.com or our investor relations website, including our sustainability reports, is not incorporated by reference in this report or in any other filing we make with the SEC. Our references in our SEC filings or otherwise to materials posted on or to any content available on or through our websites are intended to be inactive textual or oral references only. Our SEC filings are also available to the public over the Internet at the SEC’s website at http://sec.gov.www.sec.gov. The public may also read and copy any document we file at the SEC’s public reference room located at 100 F Street N.E., Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further information on the operation of the public reference room.Item 1A. RISK FACTORS that we make in registration statements, periodic reports and other filings with the SEC and from time to time in our news releases, annual reports and other written reports or communications, (ii) that we post on or make available through our primary website at www.kbhome.com or our investor relations website at www.investor.kbhome.com, and (iii) that our personnel and representatives make orally from time to time.homebuilding industry is experiencingrecent improvement in housing market conditions following a prolonged and severe housing downturn that may not continue, and any slowing or reversal of the present housing recovery generally, or in our served markets, or for an indefinite period andthe homebuilding industry may materially and adversely affect our business and consolidated financial statements.Since mid-2006, manyour servedweak demand and excess supply during the housing downturn. In these markets, and the United States homebuilding industry as a whole have experienced low demand for new homes and an oversupplythere were generally more sales of new and existingresale homes, higher selling prices and fewer homes available for sale. As a result,sale, in each case as compared to the period from 2000 through 2005,prior year. There were also more overall housing starts and construction permits authorized in the U.S., reflecting increased residential construction activity. These trends have been driven in large part by record-low interest rates for mortgage loans that, in combination with relatively low home selling prices, have made homeownership more affordable compared to historical levels and to rental housing costs, which have been rising over the past few years.have generally experienced fewer home salesfor the most part reported higher orders and greater volatilitydeliveries and better financial results in 2012 than in 2011, a year in which a record-low number of new homes were sold in the cancellations of home purchase contracts by homebuyers, higher inventories of unsold homes andcountry. However, the increased use of discounts, incentives, price concessions and other marketing efforts by sellers of new and existing homesimproved conditions did not (and may not) extend to close sales, putting downward pressure on home selling prices, revenues and profitability. These negative supply and demand trends have been exacerbated since 2008 by a number of housing markets we serve, and some markets have been stronger than others. We expect that such unevenness will continue in 2013 and beyond whether or not the present housing recovery progresses, and that prevailing conditions in various housing markets will fluctuate, perhaps significantly and unfavorably in future periods. In addition, while some of the many negative factors includingthat contributed to the housing downturn may have moderated in 2012, several remain, and they could return and/or intensify to inhibit any future improvement in housing market conditions in 2013. These negative factors include (a) a severe and persistent downturn inweak general economic and employment conditionsgrowth that, among other things, has further temperedrestrains consumer incomes, consumer confidence and demand and confidence for buying new homes; (b) sustained elevated levels of residential consumer mortgage loan delinquencies, defaults and foreclosures that could add to a “shadow inventory” of lender-owned homes that may be sold in competition with new and other resale homes at low “distressed” prices or that generate short sales activity at such price levels; (c) a significant number of homeowners whose outstanding principal balance on their mortgage loan exceeds the market value of their home, which underminessales of lender-owned homes; (c)be able to afford; (d) volatility and uncertainty in domestic and international financial, credit and consumer lending markets worldwide, including from voluntaryamid slow growth or recessionary conditions in various regions around the world; and involuntary delays by financial institutions in finalizing residential consumer mortgage loan foreclosures(e) tight lending standards and increasing demands from investorspractices for lenders and other mortgage banking services providers, residential consumer mortgage loan brokers and other institutions, or their agents, to repurchase the residential consumer mortgage loans or securities backed by residential consumer mortgage loans that they originated, issued or administer; (d) generally tighter lending standardsresidential consumer mortgage loans,financing to purchase a home, including higherincreased minimum credit score requirements, credit risk/mortgage loan insurance premiums and/or other fees and required down payment amounts, and more stringent standards forconservative appraisals, higher loan-to-value ratios and extensive buyer income and asset documentation;documentation requirements. Additional headwinds may come from the efforts and (e)proposals of lawmakers to reduce the termination, expiration or scaling backdebt of the federal government programs and incentives supportive of homeownershipthrough tax increases and/or home purchases. It is uncertain when,spending cuts, and financial markets’ and businesses’ reactions to what extent,those efforts and proposals, which could impair economic growth. Given these housing industry trends and factors, might reverse or improve.Reflecting this difficult operating environment, we, like many other homebuilders, have experienced to varying degrees since the housing downturn began, declines in net orders, decreases in the average selling price of new homes we have sold and delivered, and reduced revenues and margins relative to the period from 2000 through 2005, and we have generated operating losses. Though we increased both our net orders and overall average selling price in the second half of our 2011 fiscal year compared to the same period in 2010, and housing affordability is currently at historically high levels overall, we can provide no assurancesassurance that the present housing recovery will continue or gain further momentum, whether overall or in our served markets.industryindustry’s sales, deliveries, revenues and profitability remain well below, and may not return to, the peak levels reached shortly before the housing downturn began. If, on an overall basis or in our business will improve substantiallyserved markets, the present housing recovery stalls or does not continue at the same pace, or any or all of the negative factors described above persist or worsen, particularly if there is limited economic growth or a decline, low growth or decreases in 2012. If economic conditions, employment personal income growth and consumer confidence were to remain weakincomes, and/or continued tight mortgage lending standards and residential consumer mortgage loan foreclosures, delinquencies, short sales and sales of lender-owned homes rise in future periods,practices, there would likely be a corresponding adverse effect on our business and our consolidated financial statements, including, but not limited to, the number of homes we deliver, our average selling prices, the amount of revenues we generate and our ability to achieveoperate profitably, and the effect may be material.maintain profitability.Furtheradditional tightening of residential consumer mortgage lending standards and practices or mortgage financing requirements or further volatility in financial, credit and consumer lending markets could adversely affect the availability of residential consumer mortgage loans for some potential purchasers of our homes and thereby reduce our sales. residential consumer mortgage lending and mortgage finance industries have experienced significant instability due to, among other things, relatively high rates of delinquencies, defaults and foreclosures on residential consumer mortgage loans and a resultingcorresponding decline in their market value and the market value of securities backed by such loans.loans, although there was some modest improvement in these areas in 2012. The delinquencies, defaults and foreclosures have been driven in part by persistent poor economic and employment conditions, which have negatively affected borrowers’ incomes, and by a decline in the values of many existing homes in various markets below the principal balance of the residential consumer mortgage loans secured by such homes. A number of providers, purchasers and insurers of residential consumer mortgage loans and residential consumer mortgage-backedmortgage loan-backed securities have gone out of business or exited the market, and lenders, investors, regulators and others have questioned the oversight and the adequacy of lending standards for several residential consumerwith most mortgage loan programs made available to borrowers in recent years, includingloans currently being originated under programs offered or supported by government agencies or government-sponsored enterprises — principally, the Federal Housing Administration (“FHA”), the Veterans Administration (“VA”) and the federal government sponsored enterprises —, the Federal National Mortgage Association (also known as “Fannie Mae”) and the Federal Home Loan Mortgage Corporation (also known as “Freddie Mac”). Compared to prior periods, this instability and increased government role in the mortgage financing market has led to reduced investor demand for residential consumer mortgage loans and residential consumer mortgage-backed securities, tightened credit requirements, reduced the liquidity and availability of residential consumer mortgage loan products (particularly subprime and nonconforming loans), heightened income and asset documentation requirements,tighter lending standards and increased down payment requirements and credit risk/mortgage loan insurance premiums related to home purchases. Further, in 2011, the maximum limitspractices for conforming Fannie Mae and Freddie Mac residential consumer mortgage loans, dropped when temporary increases that were enacted in 2008 expired, reducing the availability to homebuyers of Fannie Mae- and Freddie Mac-backed financing in relatively high cost areas, including some of our served markets in California. In addition, new increases in Fannie Mae and Freddie Mac lender fees were mandated by Congress to offsetas described above. As a temporary reduction in federal payroll taxes. There have also been enhanced regulatory and legislative actions, and a few government programs focused on modifying the principal balances, interest rates and/or payment terms of existing residential consumer mortgage loans and preventing residential consumer mortgage loan foreclosures, which have achieved mixed results and may have hindered the resumption of a more stable residential consumer mortgage lending environment.The reduction in the availability of residential consumer mortgage loan products and providers, the decrease in 2011 in Fannie Mae and Freddie Mac conforming residential consumer mortgage loan limits, and the tightening residential consumer mortgage loan qualifications and down payment requirements have maderesult, it is generally more difficult for some categories of borrowers to finance the purchase of our homes, or the purchase of existing homes from potential move-up buyers who may wish to purchaseincluding our homes. Overall, these factors have slowed any general improvement in the housing market,market’s recovery, caused volatility in and they have resulted in volatile home purchasegenerally elevated cancellation rates for us and other homebuilders, and reduced demand for homes, including ourThese reductions in demand hadIf these factors continue, or if mortgage lending standards and practices further tighten, we expect that there would be a materiallymaterial adverse effect on our business and our consolidated financial statements, in 2011 that is expectedparticularly since we depend on third-party lenders (including our preferred mortgage lender Nationstar) to continue in 2012.Potentially exacerbatingprovide mortgage loans to our homebuyers.foregoing trends, inimplementation of regulations under the 2010 the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) was signed into law and. Among other things, the Dodd-Frank Act established several new standards and requirements (including risk retention obligations) relating to the origination, securitizing and servicing of, and consumer disclosures for, residential consumer mortgage loans. In addition, United StatesU.S. and international banking regulators have proposed or enacted higher capital standards and requirements for financial institutions. These standards and requirements, as and when implemented, are expected to further reduce the availability of and/or increase the costs to borrowers to obtain suchmortgage loans. Federal regulators and legislatorslawmakers are also discussingconsidering steps that may significantly reduce the ability or authority of the FHA, Fannie Mae and Freddie Mac to purchase or insure residential consumer mortgage loans (withunder the decrease in 2011 in Fannie Mae- and Freddie Mac-conforming residential consumerprograms that many lenders use to originate mortgage loan limits having been one such step). In the last few years, the FHA, Fannie Mae and Freddie Mac have purchased or insured substantially all new residential consumer mortgage loans originated by lenders and other mortgage banking services providers. Alsoloans. Further, since 2010, and as noted above, investors in residential consumer mortgage-backed securities, as well as the FHA, Fannie Mae and Freddie Mac, have increasingly demanded that lenders and other mortgage banking services providers, brokers and other institutions, or their agents, repurchasehave been under intense regulatory scrutiny and the loans underlying the securities based on alleged breachestargets of several civil actions by investors and government agencies regarding mortgage loan underwriting standards practices and/or of representations and warranties made in connection with transferring the loans. These “put-back” demands are expected to continueselling mortgage loans into 2012private or Fannie Mae- or Freddie Mac-backed securitized pools. If such scrutiny and to the extent successful, could causecivil actions result in lenders and other mortgage banking services providers and brokers having to adjust their operations and/or pay significant amounts in damages or fines, they may further curtail or cease their residential consumer mortgage loan origination activities due to reduced liquidity. Concerns aboutliquidity or to mitigate perceived risks.soundnessFederal Reserve announced that it would purchase each month billions of dollars of longer-term Treasury securities and mortgage loan-backed securities of Fannie Mae, Freddie Mac and the residential consumerGovernment National Mortgage Association (or “Ginnie Mae,” which guarantees securities composed of FHA- and VA-qualified mortgage loans) until it determines that there is sufficient improvement in U.S. employment levels. It expects that this action will maintain downward pressure on longer-term interest rates, support mortgage markets and help to make broader financial conditions more accommodative. While the Federal Reserve’s action has helped to lower mortgage loan interest rates, it is unclear whether the program will be successful in keeping such interest rates low or in meeting the Federal Reserve’s policy goals, or for how long it will be in place. Even if the program does keep mortgage loan interest rates at low levels, many potential homebuyers may still be unable to obtain mortgage loans to purchase homes, including our homes, if mortgage lending standards and practices remain tight or tighten further, or if lenders curtail or cease mortgage finance industries have also been heightenedloan origination activity due to allegedly widespread errors byregulatory requirements and/or liquidity or risk concerns.and other mortgage banking services providers or brokers, or their agents, in the processing of residential consumermay not complete mortgage loan foreclosuresoriginations for our homebuyers in a timely manner or at all, which can lead to cancellations and saleslower our backlog of foreclosednet orders, or to significant delays in delivering homes leading to voluntary or involuntary delays and higher costs to finalize foreclosures and foreclosedour recognizing revenues from those home sales, and greater court and regulatory scrutiny. In addition to having a potential negative impact on the origination of new residential consumer mortgage loans, these disruptions in residential consumer mortgage loan foreclosures and lender-owned home sales can make it more difficult for us to accurately assess the supply of and prevailing prices for unsold homes and/or the overall health of particular housing markets.new operatingregulatory restrictions or regulatory reforms related to or arising from compliance with the Dodd-Frank Act or other regulations, residential consumer mortgage loan put-back demands or internal or external reviews of the industry’s residential consumer mortgage loan foreclosure processes,laws, or other factors or business decisions, these lenders refuse or are unable to make loan products availableprovide mortgage loans to our homebuyers, the number of homes we deliver and our consolidated financial statements may be materially and adversely affected. For instance, strictertight mortgage lending standards and practices for mortgage loans have in recent periods led to significant delays in closing home salesdelivering homes and/or have caused some potential homebuyers to cancel their home purchase contracts with us. We can provide no assurance that the trend of tighter residential consumerthese tight mortgage lending standardsconditions will slowrelax or reverse in the foreseeable future.comparedin the first half of 2012, as we ended a preferred mortgage lender relationship with a provider that had decided to prior periods, these riskscease offering forward mortgage banking services and were transitioning to Nationstar as our preferred mortgage lender, we experienced significant disruptions to our business associated with such tighter residential consumerdue to the inability or unwillingness of several independent third-party lenders to complete in a timely fashion or at all the mortgage lending standards have been heightened somewhat byloan originations they had started for our homebuyers. As a result, in our first quarter and for part of the unwindingsecond quarter of 2012, we had an elevated level of cancellations and delayed closings, which negatively affected our net orders and revenues. Nationstar began accepting new mortgage loan applications from our homebuyers on May 1, 2012, and is providing more consistent execution and completion of mortgage loan originations for our homebuyers who choose to use Nationstar. Based on the number of homes delivered in 2011the month of our former unconsolidated mortgage banking joint venture with a subsidiary of Bank of America, N.A., which had provided residential consumer mortgage loans to a significant proportionNovember 2012, approximately 58% of our homebuyers from its formationused Nationstar to finance the purchase of their home. Compared to most of the first half of 2012, Nationstar’s performance as our preferred lender has helped to provide more stability in 2005. In June 2011,the conversion of our backlog into home deliveries and revenues. Although we entered into a marketing services agreementexpect continued improvement in this area as our relationship with MetLife Home Loans, a division of MetLife Bank, N.A., under which MetLife Home LoansNationstar as our preferred mortgage lender further matures and Nationstar becomes more closely integrated with our operations, we can offer residential consumerprovide no assurance as to Nationstar’s ability or willingness to provide mortgage loans and other mortgage banking services to our homebuyers. Althoughhomebuyers in future periods (whether due to the factors discussed above or otherwise), or as to its performance in doing so, or that Nationstar will remain our preferred mortgage lender. If Nationstar’s performance declines or Nationstar decides to end, or we believedecide to terminate, our agreement with MetLife Home Loans has helped provide our homebuyers with access to reliable mortgage banking services to purchase a home, MetLife Home Loans is not closely integrated with our operations as our former unconsolidated mortgage banking joint venture had been, and a lower percentage of our homebuyers have obtained a residential consumerrelationship, we may experience mortgage loan from MetLife Home Loans as comparedfunding issues similar to those we experienced in the percentage that obtained financing fromfirst half of 2012 (as described in Note 6. Inventory Impairments and Land Option Contract Abandonments in the Notes to Consolidated Financial Statements in this report), which would likely have a material adverse impact on our former unconsolidated mortgage banking joint venture before its business operations were unwound. As a result, we have relatively less visibility with respect to the progress with whichand our homebuyers obtain financing for home purchases. This may continue in 2012, as MetLife Bank, N.A. recently announced that it will cease offering forward mortgage banking services as part of its business. While we are evaluating various options, ourconsolidated financial statements. Our strategic intention is to reestablish a mortgage banking joint venture or marketingrelationship with a financial institutionlender or other mortgage banking services provider, but we can provide no assurance that we will be able to do so.in responding to the adverse conditions in the homebuilding industry have had limited success,may not generate improved financial and operational performance, and the continued implementation of these and other strategies may not be successful.Many of ourinitiatives to generate cash and improve our operating efficiencyactions we have taken during the housing downturn have involved lowering overhead through workforce reductions, for which we incurred significant costs,strengthened our overall business and reducingthat our community count through strategic wind downs, reduced or reallocated investments or market exits, curbs in development and sales of land interests. These strategic steps have resulted incurrent primary strategies, as described above under “Item 1. Business — Strategy,” will enable us to grow our generating to varying degrees fewer net orders, homes delivered and revenues compared to periods before the housing downturn began, and have contributed to the net losses we have recognized in recent years.In an effort to generate higher revenuesbusiness and achieve and maintain profitability beginningat the scale of prevailing market conditions for 2013. However, these strategies may prove to be unsuitable for some or all of our served markets in late 20082013, and continuing through 2011, we rolled out new, value-engineered product designs, reduced our selling, general and administrative expenses, and redeployed and invested capital and other resources into land acquisitions and development in preferred locations within key strategic markets with perceived higher future growth prospects, largely in California and Texas. In addition, in 2011, we opened 123 new home communities for sales, expanding the number of locations from which we can sell homes.We believe these integrated strategic steps helped us increase our net orders in the latter half of 2011 by 39% compared to the prior-year period, and increase the number of homes in our backlog at November 30, 2011 by 61% compared to our backlog at November 30, 2010. However, there can beprovide no assuranceguarantee that these trendsstrategies will continue in 2012be successfully or at all,productively implemented or, even if they are implemented as designed, that wethey will successfully increase our sales from our new home communities at satisfactory margins, expand the number of our new home communities open for sales, continue to attract homebuyers with our current or new product designs and/or new home community locations, improve our operational efficiency through effective overhead reductions and/or other measures, invest our capitalgenerate growth and other resources productively and/or further grow our inventory base with desirable land assets at a reasonable cost,earnings, or that we will achieve in 2013 or beyond positive operational or financial results or results in any particular metric or measure equal to or better than our 2012 performance, or perform in any period as well as other homebuilders. In particular, our strategic effort to broaden our performing asset base by activating certain inventory that was previously held for future development may not generate positive results as many of these assets are located in submarkets that have only recently begun to stabilize. We also cannot provide any assurance that we will be able to maintain profitabilitythese strategies in 2012. A lack2013 and, due to unexpectedly favorable or unfavorable market conditions or other factors, we may determine that we need to adjust, refine or abandon all or portions of success intheseforegoing areas wouldfailure of any adjustments or alternative strategies that we may pursue or implement, to be successful will likely have an adverse effect both on our ability to grow and increase the value of our business and on our consolidated financial statements, includingas well as on our overall liquidity, and earnings results, and the effect could be material.In addition, notwithstandingsalespresent strategies we have experienced volatilityand our long-term performance depends on the availability of finished and partially finished lots and undeveloped land that meet our investment return and marketing standards.net orders and in cancellations of home purchase contracts by buyers throughout the housing downturn, including in 2011. We believe that our volatile net order and cancellation levels have largely reflected weak homebuyer confidence due to sustained home selling price declines, increased offerings of sales incentives by other parties in the marketplace for both new and existing homes, tightened residential consumer mortgage lending standards, a greater interest in housing alternatives such as apartments and rental housing among certain consumers, and generally poor economic and employment conditions, all of which have prompted homebuyers to forgo or delay home purchases. Additional volatility arose with the expiration of the Tax Credit, which likely pulled demand forward to the first two quarters of 2010 and led to a drop in net orders and customer traffic in the periods that followed, including the first half of 2011. The relatively tight consumer mortgage lending environmentability and the inabilitycosts to obtain building permits, the amount of some homebuyersenvironmental impact fees, property tax rates and other regulatory requirements. Should suitable lots or land become less available, the number of homes that we may be able to build and sell their existing homes have also led to lower demand for new homes and to volatility in home purchase contract cancellations for uscould be reduced, and the homebuilding industry. Manycost of these factors are beyond our control. It is uncertain how long and to what degree these factors, and the volatility in net orders and home purchase contract cancellations we have experienced, will continue. To the extent these factors continue, and to the extent that they depress our average selling prices, we expect that they will have a negative effect on our business andattractive land could increase, perhaps substantially, which could adversely impact our consolidated financial statements including, but not limited to, our housing gross profit margins, and our ability to maintain ownership or control of a sufficient supply of developed or developable land inventory. The availability of suitable land could also affect the success of our current strategies, and if we decide to reduce our acquisition of new land in 2013 due to a lack of available assets that meet our standards, our ability to increase our community count, to grow our revenues and housing gross profit margins, and to achieve or maintain profitability, would likely be constrained and could have a material adverse effect on our consolidated financial statements.could be material.the availability and pricing of mortgage financing for homebuyers;United StatesU.S. and global financial system and credit market stability; residential consumer mortgage loan programs (including changes in FHA, Fannie Mae- and Freddie Mac-conforming residential consumerMac-residential consumer mortgage loan interest payments, real estate taxes and other expenses;the supply of and prices for available new or existingresale homes (including lender-owned homes acquired through foreclosures or short sales)homes) and other housing alternatives, such as apartments, single-family rentals and other rental housing;regions or localitiessubmarkets in which we operate. In recent years, unfavorable changes in many of these factors negatively affected all of our served markets, and although some housing markets are showing signs of stability, we expect the widespread nature of the housing downturn to continue to varying degrees into 2012. Continued weakness in the economy, employment levels and consumer confidence would likely exacerbate the unfavorable trends the housing market has experienced since mid-2006.such(such as earthquakes, hurricanes, tornadoes, floods, droughts firesand fires), and other environmental conditions can delay the delivery of our homes and/or increase our costs. Civil unrest or acts of terrorism can also have a negative effect on our business.andduring the impact of the termination, expiration or scaling back of homebuyer tax credits, including the Tax Credit, and other government programs and incentives supportive of homeownership and/or home purchases,housing downturn, we have experienced volatility in our net orders and in home purchase contract cancellationscancellation rates in recent years, and if the present housing recovery slows or reverses, we may experience similar or increased volatility in 2012.Therematerials. Increased costs or shortages ormaterials that can, among other disruptions in the supply of building materials or skilled labor such as carpenters, roofers, electricians and plumbers, couldthings, cause increases in land development and home construction costs and development and construction delays. Also, in 2012, a smaller pool of skilled trade labor due to the housing downturn led to shortages in some markets that experienced increased residential construction activity, and such shortages could occur in 2013 if and as the present housing recovery progresses. Shortages or upward price fluctuations in lumber, drywall, concrete and other commoditiesbuilding materials, and labor, whether due to a small supplier base or supplier capacity constraints, increased residential construction activity, international demand, the occurrence of or rebuilding after natural disasters or other reasons, can also have an adverse effect on our business. We generally are unable to pass on increases in land development and home construction costs to homebuyers who have already entered into home purchase contracts, as the purchase contracts generally fix the price of the home at the time the contract is signed, and may be signed well in advance of when home construction commences. Further, weWe also may not be able to pass onraise our selling prices to cover such increases in land development and home construction costs because of market conditions.conditions, including competition for homebuyers with other homebuilders and resale homes. Sustained increases in land development and home construction costs due to competition for materials and skilledhigher trade labor and higher commodity prices (including prices for metalsrates or elevated lumber, drywall, concrete and other building material inputs),materials prices may, among other things, may decrease our margins.Changes in globalhousing gross profit margins, while shortages of skilled trade labor or regional environmental conditions and governmental actions in response to such changes may adversely affect us by increasing the costs of or restricting our planned or future residential development activities.There is growing concern from members of the scientific community and the general public that an increase in global average temperaturesbuilding materials due to emissions of greenhouse gases and other human activities have or will cause significant changes in weather patterns and increase the frequency and severity of natural disasters. An increased frequency or duration of extreme weather conditions and environmental events could limit, delay and/or increase the costs to build new homes and reduce the value of our land and housing inventory in locations that become less desirable to consumers or blocked to development. Projected climate change, if it occurs, may exacerbate the scarcity of water and other natural resources in affected regions, which could limit, prevent or increase the costs of residential development in certain areas. In addition, government mandates, standards or regulations intended to mitigate or reduce greenhouse gas emissions or projected climate change impacts could result in prohibitions or severe restrictions on land development in certain areas, increased energy, transportation and raw material costs that make building materials less available or more expensive, or cause us to incur compliance expenses and other financial obligations to meet permitting or development- or construction-related requirements that we will be unable to fully recover (due to market conditionscompetition or other factors),factors may delay deliveries and reduce our margins.recognition of revenues. As a result, climate change impacts, and laws and construction standards, and/these negative items, individually or the manner in which they are interpreted or implemented, to address potential climate change impacts, could increase our costs andtogether, can have a long-termmaterial and adverse impact on our business and our consolidated financial statements. This is a particular concern with respect to our key West Coast homebuilding reporting segment, as California has instituted some of the most extensive and stringent environmental laws and residential building construction standards in the country.decrease. or skilled labor could require us to increase our home selling prices in an effort to maintain satisfactory housing gross profit margins. In 2010 and 2011, worldwide demand for certain commodities and monetary policy actions led to price increases and price volatility for raw materials that are used in land development and home construction, including lumber and metals. These pricingAdditionally, increased residential construction activity in 2012 in combination with a relatively small supplier base boosted prices for lumber, drywall, concrete and other raw materials, and these trends are expected to continue into 2012in 2013 if and in combinationas the present housing recovery progresses. These pricing trends, taken together with United StatesU.S. and international central bank and governmental policies and programs designed to boost economic growth, may lead to a general increase in inflation. However, if the current challenging and highly competitive conditions in the housing market persist, we may not be able to increase and may need to decrease, our home selling prices to help stimulatecover cost inflation due to market conditions, and may need to hold or reduce our selling prices in order to compete for home sales. If determined necessary, our lowering of home selling prices, in addition to impacting our housing gross profit margins, may also reduce the value of our land inventory, including the assets we have purchased in 2010 and 2011 pursuant to our strategic land acquisition initiative,recent years, and make it more difficult for us to fully recover the full cost of previously purchased land with our home selling prices or, if we choose, in disposing of land assets.land. In addition, depressed land values may cause us to abandon and forfeit deposits on land option contracts and other similar contracts if we cannot satisfactorily renegotiate the purchase price of the subject land. We may incur noncash charges against our earnings for inventory impairments if the value of our owned inventory is reduced or for land option contract abandonments if we choose not to exercise land option contracts or other similar contracts, and these charges may be substantial as has occurredwe experienced in certain periods during the housing downturn. Inflation may also increase interest rates for residential consumer mortgage loans and thereby reduce demand for our homes and lead to lower revenues, as well as increase the interest rates for our external financing and thereby increase our interest expense. even before we begin to build homes in a community. Depending on the stage of development a land parcel is in when acquired, such costs may include costs of preparing land; finishing and entitling lots; installing roads, sewers, water systems and other utilities; taxes and other costs related to ownership of the land on which we plan to build homes; and promotional marketing and overhead expenses to prepare for the opening of a new home community for sales. In addition, local municipalities may impose requirements resulting in additional costs. If the rate at which we sell and deliver homes slows or falls, or if we delay the opening of new home communities for sales due to adjustments in our marketing strategy or other reasons, each of which has occurred2010acquiring and 2011 to purchase assets pursuant to our strategicdeveloping land acquisition initiative.in recent years. Furthermore, due to market conditions during the housing downturn, we have abandoned some land option contracts and other similar contracts to purchase land, resulting in the forfeiture of non-refundable deposits and unrecoverable pre-acquisition costs.The value of If the land andpresent housing inventoryrecovery slows or reverses in 2013, we own or control may fall significantly.The value of the inventory we currently own or control depends on market conditions, including estimates of future demand for, and the revenues that can be generated from, this inventory. The market value of our inventory can vary considerably because there is often a significant amount of time between our acquiring control or taking ownership of land and the delivery of homes on that land. The housing downturn, which has generally depressed home sales and selling prices, has caused the fair value ofdecide to abandon certain of our owned or controlled inventory to fall, in some cases well below the estimated fair value at the time we acquired ownership or control. As a result of our periodic assessments of fair value, we have written down the carrying value of certain of our inventory, including inventory that we have previously written down, and recorded corresponding noncash charges against our earnings to reflect the impaired value. We have also taken noncash charges in connection with abandoning our interests in certain land controlled under land option contracts and other similar contracts, that no longer met our investment or marketing standards. Ifand sell certain land at a loss, and the housing downturn continues, wecosts of doing so may needbe adverse and material to take additional charges against our earnings for inventory impairments or land option contract abandonments, or both. Any such noncash charges would have an adverse effect on our consolidated financial statements, including our ability to achieve or maintain profitability, and the effect may be material.informationat a given point in time reflects the number of homes for which we have entered intounder a home purchase contract with a homebuyer, butthat have not yet been delivered the home.to a homebuyer. Our home purchase contracts typically require only a small deposit, and in some circumstances, the deposit is refundable prior to closing. If the prices for new homes decline, competitors increase their use of sales incentives, lenders and others increase their efforts to sell resale homes, they have acquired through foreclosures and short sales,trade labor or building materials shortages delay our home construction cycle times, mortgage loan interest rates increase, the availability of residential consumer mortgage financing further diminishes or there is continued weakness or a further downturn in local or regional economies or the national economy and in consumer confidence, customers may terminatecancel their existing home purchase contracts with us because they have been unable to finalize their mortgage financing for the purchase, desire to move into a home earlier than we can deliver it, or in order to attempt to negotiate for a lower price or explore other options or for other reasons they are unable or unwilling to complete the purchase. In recent years, we have experienced volatile home purchase contract cancellations,cancellation rates, in part due to these reasons and as discussed above, in part due to the expirationmortgage loan funding issues arising from the 2012 transition of the Tax Credit.our preferred mortgage lending relationship. To the extent they continue, volatile home purchase contract cancellationscancellation rates resulting from these conditions, or otherwise, could have ana material adverse effect on our business and our consolidated financial statements.Our long-term success depends on the availability of finished lots and undeveloped land that meet our land investment criteria.The availability of finished and partially finished lots and undeveloped land assets that meet our investment and marketing standards depends on a number of factors outside of our control, including land availability in general, climate conditions, competition with other homebuilders and land buyers for desirable property, credit market conditions, legal or government agency processes (particularly for land assets that are part of bankruptcy estates or are held by financial institutions taken over by government agencies), inflation in land prices, zoning, allowable housing density, our ability and the costs to obtain building permits, the amount of environmental impact fees, property tax rates and other regulatory requirements. Should suitable lots or land become less available, the number of homes that we may be able to build and sell could be reduced, and the cost of attractive land could increase, perhaps substantially, which could adversely impact our consolidated financial statements including, but not limited to, our margins, and our ability to maintain ownership or control of a sufficient supply of developed or developable land inventory. The availability of suitable land assets could also affect the success of our strategic land acquisition initiative,and if we decide to reduce our acquisition of new land in 2012 due to a lack of available assets that meet our standards, our ability to increase the number of our new home communities open for sales, to grow our revenues and margins, and to achieve or maintain profitability would likely be constrained.Home prices and sales activity in the particular markets and regions in which we do business affect our consolidated financial statements because our business is concentrated in these markets.Home selling prices and sales activity in some of our key served markets have declined from time to time for market-specific reasons, including adverse weather, high levels of foreclosures, short sales and sales of lender-owned homes, and lack of affordability or economic contraction due to, among other things, the departure or decline of key industries and employers. If home selling prices or sales activity decline in one or more of our key served markets, including California, Florida, Nevada or Texas, our costs may not decline at all or at the same rate and, as a result, our consolidated financial statements may be materially and adversely affected. Compared to prior periods, adverse conditions in California and Texas would have a particularly significant effect on our consolidated financial statements as the majority of our investments in land acquisition and development in 2010 and 2011 were made in California and Texas, and we expect to continue to target most of our inventory-related investments and new home community openings in those two states in 2012.residential consumer mortgage loan products, including products requiring no or low down payments, and interest-only and adjustable-rate residential consumer mortgage loans, made purchasing a home more affordable for a number of customers and more available to customers with lower credit scores. Increases in interest rates and/or decreases in the availability of residential consumer mortgage loan financing or of certain residential consumer mortgage loan products or programs may as discussed above, lead to fewer residential consumer mortgage loans being provided, higher credit risk/mortgage loan insurance premiums and/or other fees, increased down payment and extensive buyer income and asset documentation requirements, or borrower costs, loan origination processing, or a combination of the foregoing, and, as a result, reduce demand for our homes and increase our home purchase contract cancellation rates.As a result of residential consumer mortgage lending and mortgage finance industries since 2008, the federal government has taken on a significant role in supporting residential consumer mortgage lending through its conservatorship of Fannie Mae and Freddie Mac, both of which purchase or insure residential consumer mortgage loans and residential consumer mortgage-backedmortgage loan-backed securities, and its insurance of residential consumer mortgage loans through the FHA and the VA. FHA backing of residential consumer mortgage loans has been particularly important to the residential consumer mortgage finance industry and to our business. The availability and affordability of residential consumer mortgage loans, including interest rates for such loans, could be adversely affected by a scaling back or termination of the federal government’s mortgage-relatedmortgage loan-related programs or policies. For example, in October 2010, theThe FHA, instituted higher credit risk/mortgage loanfor instance, intends to increase its annual insurance premiums in 2013, and could, among other actions, extend the period that such premiums are charged to helpborrowers, further increase such premiums or other fees and/or raise its standards on the loans it will insure in order to address the significant cash reserve deficit (relative to its low cash reserves and imposed new minimum credit scores and higher down payment requirementsprojected losses from delinquent loans) it reported in November 2012. These steps, whether individually or collectively taken, could prevent some homebuyers from qualifying for borrowers with lower credit scores for the residential consumer mortgage loans it insures. In October 2011, the maximum limit for conforming Fannie Mae- and Freddie Mac-residential consumer mortgage loans dropped when temporary increases that were enacted in 2008 expired, reducing the availability to homebuyers of Fannie Mae- and Freddie Mac-backed financing in relatively high cost areas,purchase homes, including some of our served markets in California.homes. In addition, due togiven growing federal budget deficits, the United StatesU.S. Treasury may not be able to continue, or may be required by future legislation or regulation to cease, supporting the residential consumer mortgage-relatedmortgage loan-related activities of Fannie Mae, Freddie Mac, the FHA and the VA at present levels.residential consumer mortgage loan financing hasloans have been an important factor in marketing and selling many of our homes, any limitations or restrictions in the availability of, or higher consumer costs for, such government-backed financing could reduce our home salesnet orders and adversely affect our consolidated financial statements. residential consumer mortgage loan interest costs and real estate taxes, generally are deductible expenses for the purpose of calculating anpolicy makerslawmakers have proposed, by eliminating, limiting or substantially reducing these income tax benefits, the after-tax cost of owning a home could increase substantially. ThisAny additional increases in personal income tax rates and/or additional tax deduction limits or restrictions enacted at the federal or state levels, could adversely impact demand for and/or selling prices of new homes, including our homes, as could increases in personal income tax rates.Moreover, in early 2010, our home sales increased in part because of the Tax Credit. The expiration of the Tax Credit adversely affected our net orders, home purchase contract cancellation rates, customer traffic levels and revenues in subsequent periods of 2010 and the first halfeffect on our consolidated financial statements could be material.matters.matters, as well as governmental taxes, fees and levies on the acquisition and development of land parcels. These regulations often provide broad discretion to government authorities that oversee these matters, which can result in unanticipated delays or increases in the cost of a specified development project or a number of projects in particular markets. We may also experience periodic delays due to a building permit moratorium or regulatory restrictions in any of the locations in which we operate.environment, and in 2008 we entered into a consent decree with the EPA and certain states concerning our storm water pollution prevention practices.environment. As noted abovediscussed below with respect to potential climate change impacts, these laws and regulations, and/or evolving interpretations thereof, and the EPA consent decree may cause delays in our land development and in our construction and delivery of new homes, may cause us to incur substantial compliance and other costs, and can prohibit or restrict homebuilding activity in certain regions or areas.“Environmental“Item 1. Business — Environmental Compliance Matters,” environmental laws may also impose liability for the costs of removal or remediation of hazardous or toxic substances whether or not the developer or owner of the property knew of, or was responsible for, the presence of those substances. The presence of those substances on our properties may prevent us from selling our homes and we may also be liable, under applicable laws and regulations or lawsuits brought by private parties, for hazardous or toxic substances on properties and lotsland that we have sold in the past.The homebuilding industry is highly competitive. Homebuilders compete not only for homebuyers, but also for land assets, financing, building materials,skilled management talent and trade labor. We competeOther Factors,” we face significant competition in eachseveral areas of our served markets withbusiness from other local, regionalhomebuilders and national homebuilders, including within larger subdivisions containing sections designed, planned and developed by such homebuilders. Other homebuilders may also have long-standing relationships with local labor, materials suppliers or land sellersparticipants in certain areas, which may provide an advantage in their respective regions or local markets. We also compete with otherthe overall housing alternatives, such as existing home sales (including lender-owned homes acquired through foreclosure or short sales), apartments and rental housing. Theindustry. These competitive conditions in the homebuilding industry can result in:margins;home purchase contract cancellations by buyers;assets that meetmeets our investment return criteria,or marketing standards, and in selling our interests in land assets that no longer meet such criteriastandards on favorable terms;lettersletter of credit facilities on favorable terms.adversely affecthave a material adverse effect on our business and consolidated financial statements by decreasing our revenues, impairing our ability to successfully executeimplement our land acquisition and land asset managementcurrent strategies, increasing our costs and/or diminishing growth in our local or regional homebuilding businesses. InDuring the housing downturn in particular, actions taken by our new home and housing alternative competitors are reducingreduced the effectiveness of our efforts to achieve stability or increases inhome sales,deliveries, revenues and housing gross profit margins, and to achieve and maintain profitability.Our ability to attract and retain talent is critical to the success of our business and a failure to do so may materially adversely affect our performance.Our officers and employees are an important resource, and we see attracting and retaining a dedicated and talented team to execute our KBnxt operational business model as crucial to our ability to achieve and maintain an advantage over other homebuilders. We face intense competition for qualified personnel, particularly at senior management levels, from other homebuilders, from other companies in the housing and real estate industries, and from companies in various other industries with respect to certain roles or functions. Moreover, the prolonged housing downturn and the decline in the market value of our common stock during the housing downturn have made it relatively more difficult for us to attract and retain talent compared to the 2000 to 2005 period. If we are unable to continue to retain and attract qualified employees, or if we are required or believe it is appropriate to reduce our overhead expenses through significant personnel reductions, our performance, our ability to achieve and maintain a competitive advantage and our consolidated financial statements could be materially and adversely affected.We have,As further described in Note 13. Commitments and Contingencies in the Notes to Consolidated Financial Statements in this report, we maintain, and require the majority of our subcontractors to maintain, general liability insurance (including construction defect and bodily injury coverage) and workers’ compensation insurance. These insurance policies protect us against a portion of our risk of loss from claims related to our homebuilding activities, subject to certain self-insured retentions, deductibles and other coverage limits. ThroughIn Arizona, California, Colorado and Nevada, our subcontractors' general liability insurance primarily takes the form of a wrap-up policy, where eligible subcontractors are enrolled as insureds on each project. We self-insure a portion of our overall risk through the use of a captive insurance subsidiary, we record expenses and liabilities based on the estimated costs required to cover our self-insured retention and deductible amounts under oursubsidiary. We also maintain certain other insurance policies, and on the estimated costs of potential claims and claim adjustment expenses above our coverage limits or that are not covered by our policies. These estimated costs are based on an analysis of our historical claims and include an estimate of construction defect claims incurred but not yet reported. Because of the uncertainties inherent to these matters, we cannot provide assurance that our various insurance coverage, our subcontractor arrangements and our liabilities will be adequate to address all our warranty and construction defect claims in the future, or that any potential inadequacies will not have an adverse effect on our consolidated financial statements. Additionally, the coverage offered by and the availability of general liability insurance for construction defects are currently limited and costly. There can be no assurance that coverage will not be further restricted, increasing our risks and financial exposure to claims, and/or become more costly.Weresults. We typically do not commence constructionresults that can have a material impact on a home before a home purchase contract has been signed with a homebuyer.our results and our consolidated financial statements. Historically, a significant percentage of our home purchase contracts are entered into in the spring and early summer months, and we deliver a corresponding significant percentage of our homes in the late summer and fall and winter months. Construction of our homes typically requires approximately three to four months and weather delays that often occur in late winter and early spring may extend this period. As a result, of these combined factors, we historically have experienced uneven quarterly results, with lower revenues and operating income generally during the first and second quarters of theour fiscal year. During the housing downturn however,and in 2012, these seasonal trends were somewhat less pronounced, and our sales have not consistently followed such a seasonal pattern. Moreover, our normal selling patterns were disrupted to a significant extent in 2011 and 2010 by the Tax Credit. The increased demand motivated by the Tax Credit in early 2010 resulted in our delivering more homes in the third quarter of 2010 and experiencing loweroverall net orders, homes delivered and higher home purchase contract cancellations inrevenues were generally lower than before the housing downturn. We currently expect the traditional seasonality cycle and its impact on our 2010 fiscal thirdresults to become more prominent if and fourth quartersas the present housing recovery progresses and our 2011 fiscal first and second quarters, in each case comparedthe homebuilding industry returns to a more typical seasonal pattern. With the current difficult market conditions expected to continue into 2012,normal operating environment, but we can make no assurances thatas to the degree to which our historical seasonal patterns will returnoccur in 2013 and beyond, if at all.nearfinancial and credit markets made external sources of liquidity less available and more costly to us. In 2012, relatively favorable housing and credit market conditions enabled us to refinance and measurably extend the maturity of certain of our senior notes due in 2014 and 2015 through the issuance of new senior notes, albeit at somewhat higher interest rates than the refinanced debt, and to raise unrestricted cash for general business purposes. We can provide no assurances, however, that we will be able to access external credit or equity markets in 2013 at favorable terms or at all.onethree of our outstanding senior notes, to engage in mergers, consolidations, and sales of assets. Due to financial and credit market conditions, we may also need to include additional covenants, obligations or restrictions in our indenture or with respect to a specific issuance of securities or to our currently outstanding securities. If we fail to comply with these covenants, obligations or restrictions, the holders of our senior notes could cause our debt to become due and payable prior to maturity or could demand that we compensate them for waiving instances of noncompliance.noncompliance, and, if they are successful in doing so, the impact on our consolidated financial statements would be material and adverse. In addition, a default under any series of our senior notes could cause a default with respect to our other senior notes and result in the acceleration of the maturity of all such defaulted indebtedness and other debt obligations, as well as penalties or additional fees.The housing downturn and the continuation of the disruptions in the credit markets could limit our ability to access capital and increase our costs of capital or stockholder dilution.Wefees, which would have historically funded our homebuilding and financial services operations with internally generated cash flows and external sources of debt and equity financing. However, during the housing downturn, we have relied primarily on the positive operating cash flow we have generated to meet our working capital needs and repay outstanding indebtedness. While we generated positive operating cash flow to varying degrees in recent years, principally through the receipt of federal income tax refunds, and from home and land sales and our efforts to reduce our overhead and operating expenses, the persistent weakness in the housing markets and the disruption in the credit markets worldwide since 2008 have reduced the availability and increased the costs to us of other sources of liquidity.Market conditions may significantly limit our ability to replace or refinance indebtedness, particularly given the ratings of our senior notes by the three principal nationally recognized registered credit rating agencies, as discussed further below. The terms of potential future issuances of indebtedness by us may be more restrictive than the terms governing our current indebtedness, and the issuance, interest and debt service expenses are likely to be higher. Moreover, due to the deterioration and volatility in the financial and credit markets and the uncertainties that exist in the general economy and for homebuilders in particular, we cannot be certain that we would be able to replace existing financing or secure additional sources of financing, if necessary, on terms satisfactory to us or at all. In addition, the significant decline in our stock price since 2006, the ongoing volatility in the stock markets, the reduction in our stockholders’ equity relative to our debt, and our unrestricted cash balance could also impede our access to the equity markets or increase the amount of dilution our stockholders would experience should we seek or need to raise capital through the issuance of equity.While we believe we can meet our forecasted capital requirements from our cash resources, expected future cash flow and the sources of financing that we anticipate will be available to us, we can provide no assurance that we will be able to do so, or do so without incurring substantially higher costs, particularly if current difficult housing or credit market or economic conditions continue or deteriorate further. The effects of these conditionsa material adverse impact on our business, liquidity and consolidated financial statements could be material and adverse to us.NOLs”NOL”), and we may generate additional NOLsNOL in 2012.2013. Under federal tax laws, we can use our NOLsNOL (and certain related tax credits) to reduce our future taxable income for up to 20 years, after which they expire for such purposes. Until they expire, we can carry forward our NOLsNOL (and certain related tax credits) that we do not use in any particular year to reduce our taxable income in future years, and we have recorded a valuation allowance against our net deferred tax assets representingthat include the NOLsNOL (and certain related tax credits) that we have generated but have not yet realized. At November 30, 2011,2012, we had net deferred tax assets, net of deferred tax liabilities, totaling $848.9$880.1 million against which we have provided a full valuation allowance of $847.8 million.allowance. Our ability to realize our net deferred tax assets is based on the extent to which we generate sustained profits and we cannot provide any assurances as to when and to what extent we will generate sufficient future taxable income to realize our net deferred tax assets, whether in whole or in part.NOLs,NOL, built-in losses and tax credits would be reduced or eliminated if we experience an “ownership change,” as determined under Internal Revenue Code Section 382 (“Section 382”). A Section 382 ownership change occurs if a stockholder or a group of stockholders who are deemed to own at least 5% of our common stock increase their ownership by more than 50 percentage points over their lowest ownership percentage within a rolling three-year period. If an ownership change were to occur, Section 382 would impose an annual limit on the amount of NOLsNOL we could use to reduce our taxable income equal to the product of the total value of our outstanding equity immediately prior to the ownership change (reduced by certain items specified in Section 382) and the federal long-term tax-exempt interest rate in effect for the month of the ownership change. A number of complex rules apply in calculating this annual limit.NOLsNOL expiring unused. This would significantly impair the value of our NOLsNOL and, as a result, have a material negative impact on our consolidated financial statements.We have a substantial amount of indebtedness in relation to our tangible net worth and unrestricted cash balance, which may restrict our ability to meet our operational and strategic goals.As of November 30, 2011, we had total outstanding debt of $1.58 billion, total stockholders’ equity of $442.7 million, and an unrestricted cash balance of $415.1 million. The amount of our debt overall and relative to our total stockholders’ equity and unrestricted cash balance could have important consequences. For example, it could:limit our ability to obtain future financing for working capital, capital expenditures, acquisitions, debt service requirements or other business needs;limit our ability to renew or, if necessary or desirable, expand the capacity of any letter of credit facilities, to obtain a new credit facility, and to obtain performance bonds in the ordinary course of our business;require us to dedicate a substantial portion of our cash flow from operations to the collateralization or payment of our debt and reduce our ability to use our cash flow for other purposes;impact our flexibility in planning for, or reacting to, changes in our business;place us at a competitive disadvantage because we have more debt or debt-related restrictions than some of our competitors; andmake us more vulnerable in the event of continued weakness or a further downturn in our business or in general economic or housing market conditions.Our ability to meet our debt service and other obligations will depend on our future performance. Our business is substantially affected by changes in economic cycles. Our revenues, earnings and cash flows vary with the level of general economic activity and competition in the markets in which we operate. Our business could also be affected by financial, political, regulatory, environmental and other factors, many of which are beyond our control. A higher interest rate on our debt could adversely affect our consolidated financial statements.Our business may not generate sufficient cash flow from operations and external financing at reasonable cost may not be available to us in an amount sufficient to meet our debt service obligations, fulfill the financial or operational obligations we may have under certain unconsolidated joint venture transactions, support our letter of credit facilities (including our cash-collateralized letter of credit facilities with various financial institutions (the “LOC Facilities”)), or to fund our other liquidity or operational needs. Further, if a change of control were to occur as defined in the instrument governing our $265.0 million of 9.1% senior notes due 2017 (the “$265 Million Senior Notes”), we would be required to offer to purchase these notes (but not our other outstanding senior notes) at 101% of their principal amount, together with all accrued and unpaid interest, if any. If we are unable to generate sufficient cash flow from operations or have external financing available to us, we may, given our unrestricted cash balance, need to refinance all or a portion of our debt obligations on or before maturity, which we may not be able to do on favorable terms or at all, or raise capital through equity issuances that would dilute existing stockholders’ interests.Our ability to obtain external financing could be adversely affected by a negative change in our credit rating by a third-party rating agency.Our ability to access external sources of financing on favorable terms is a key factor in our ability to fund our operations and to grow our business. As of the date of this report, our credit rating by Fitch Ratings is B+, with a negative outlook, our credit rating by Moody’s Investor Services is B2, with a stable outlook, and our credit rating by Standard and Poor’s Financial Services is B+, with a negative outlook. Downgrades of our credit rating by any of these principal nationally recognized registered credit rating agencies may make it more difficult and costly for us to access external financing.We may have difficulty in continuing to obtain the additional financing required to operate and develop our business.Our homebuilding operations require significant amounts of cash and/or the availability of external financing. While we terminated the Credit Facility in 2010, we established the LOC Facilities in order to support certain aspects of our operations in the ordinary course of our business, including our acquisition of land assets and our development of communities. We anticipate that we will need to maintain these facilities in 2012, and, if necessary or desirable, we may in the future seek to expand their capacities or enter into additional such facilities, or enter into a new credit facility. It is not possible to predict the future terms or availability of additional external capital or for maintaining or, if necessary or desirable, expanding the capacity of the LOC Facilities or entering into additional such facilities, or entering into a new credit facility. Moreover, our outstanding senior notes contain provisions that may restrict the amount and nature of debt we may incur in the future. As the financial and credit markets worldwide have been experiencing and may continue to experience extreme volatility and disruption, there can be no assurance that we can at reasonable cost actually borrow additional funds, raise additional capital through other means, or successfully maintain or, if necessary or desirable, expand the capacity of the LOC Facilities or enter into additional such facilities or enter into a new credit facility, each of which depends, among other factors, on conditions in the capital markets and our perceived credit worthiness, as discussed above. If conditions in the capital markets continue to be volatile or worsen, it could reduce our ability to generate sales and may hinder our future growth and consolidated financial statements. Potential federal and state regulations limiting the investment activities of financial institutions, including regulations that have been or may be issued under the Dodd-Frank Act, could also impact our ability to obtain additional financing and to maintain or, if necessary or desirable, expand the LOC Facilities or enter into additional such facilities or enter into a new credit facility, in each case on acceptable terms or at all.
Our consolidated financial statements could be materially and adversely affected if we are unable to obtain performance bonds.
bonds and/or letters of credit.
| Item 1B. | UNRESOLVED STAFF COMMENTS |
| Item 2. | PROPERTIES |
| Item 3. | LEGAL PROCEEDINGS |
et.et al. v. KB HOME Nevada Inc.Inc. In 2007, Las Vegas Development Associates, LLC (“LVDA”) agreed to purchase from KB Nevada approximately 83 acres of land located near Las Vegas, Nevada. LVDA subsequently assigned its rights to Essex Real Estate Partners, LLC (“Essex”). KB Nevada and Essex entered into a development agreement relating to certain major infrastructure improvements. LVDA’s and Essex’s complaint, initially filed in 2008, allegesalleged that KB Nevada breached the development agreement, and also allegesalleged that KB Nevada fraudulently induced them to enter into the purchase and development agreements. LVDA’s and Essex’s lenders subsequently filed related actions that were consolidated into the LVDA/Essex matter. The consolidated plaintiffs seeksought rescission of the agreements or a rescissory measure of damages or, in the alternative, compensatory damages of $55$55 million plus unspecified punitive damages and other damages, and related loan interest charges in excess of $41 million (the “Claimed Damages”). KB Nevada denieshas denied the allegations, and believes it has meritorious defenses to the consolidated plaintiffs’ claims. At a November 19, 2012 hearing, the court denied all of the consolidated plaintiffs’ motions for summary judgment on their claims. In addition, the court granted several of KB Nevada's motions for summary judgment, eliminating, among other of the consolidated plaintiffs’ claims, all claims for fraud, negligent misrepresentation, and punitive damages. With the court’s decisions, the only remaining claims against KB Nevada are for contract damages and rescission. While the ultimate outcome is uncertain — we believe it is reasonably possible that the loss in this matter could range from zero to the amount of the Claimed Damages and(now excluding any punitive damages per the court’s action) plus prejudgment interest, which could be material to our consolidated financial statements — KB Nevada believes it will be successful in defending against the consolidated plaintiffs’ remaining claims and that the consolidated plaintiffs will not be awarded recissionrescission or damages. TheA non-jury trial, is currentlyoriginally set for September 2012.2012 and then continued until January 2013, has now been further continued to October 15, 2013.2011, 2012, it was not reasonably possible that an additional material loss had been incurred in an amount in excess of the estimated amounts already recognized on our consolidated financial statements. We evaluate our accruals for litigation and regulatory proceedings at least quarterly and, as appropriate, adjust them to reflect (i) the facts and circumstances known to us at the time, including information regarding negotiations, settlements, rulings and other relevant events and developments; (ii) the advice and analyses of counsel; and (iii) the assumptions and judgment of management. Similar factors and considerations are used in establishing new accruals for proceedings as to which losses have become probable and reasonably estimable at the time an evaluation is made. Based on our experience, we believe that the amounts that may be claimed or alleged against us in these proceedings are not a meaningful indicator of our potential liability. The outcome of any of these proceedings, including the defense and other litigation-related costs and expenses we may incur, however, is inherently uncertain and could differ significantly from the estimate reflected in a related accrual, if made. Therefore, it is possible that the ultimate outcome of any proceeding, if in excess of a related accrual or if no accrual had been made, could be material to our consolidated financial statements.Item 4. REMOVED AND RESERVEDMINE SAFETY DISCLOSURES
Name Present Position Other Positions and Other Business Experience within the Last Five Years (a) Jeffrey T. Mezger President and Chief Jeff J. Kaminski Executive Vice President and Senior Vice President, Chief Financial Officer and Strategy Board member, Federal-Mogul Corporation (a global supplier of component parts and systems to the automotive, heavy-duty, industrial and transport markets) Senior Vice President, Global Purchasing and Strategy Board Member, Federal-Mogul Corporation Albert Z. Praw Executive Vice President, Chief Executive Officer, Landstone Communities, LLC Brian J. Woram Executive Vice President, General Counsel and Secretary Senior Vice President and Chief Legal Officer, H&R Block, Inc. (a provider of tax, banking and business and consulting services) Senior Vice President, Chief Legal Officer and Chief Compliance Officer, Centex Corporation (a homebuilder and provider of mortgage banking services) William R. Hollinger Senior Vice President and Thomas F. Norton Senior Vice President, Human Resources Chief Human Resources Officer, BJ’s Restaurants, Inc. (an owner and operator of national full service restaurants) Tom Silk Senior Vice President, Vice President of Marketing for Hydration and Juice Senior Director, Global Brand Management, Activision Blizzard, Inc. (a game publisher of interactive entertainment software) First Quarter Second Quarter Third Quarter Fourth Quarter 2012. Homebuilding: Revenues Operating loss Total assets Mortgages and notes payable Financial services: Revenues Operating income Total assets Consolidated: Revenues Operating loss Loss from continuing operations Income from discontinued operations, net of income taxes (a) Net loss Total assets Mortgages and notes payable Stockholders’ equity Basic and diluted earnings (loss) per share: Continuing operations Discontinued operations Basic loss per share Cash dividends declared per common share 2011: Age Year
Assumed
Present
Position Years
at
KB
Home From – To 56
Executive Officer (b) 2006 18 50
Chief Financial Officer 2010 1 2008-
2010 2005-
2008 63
Real Estate and Business Development 2011 15 (c)
(a real estate development company) 2006-
2011 51 2010 1 2009-
2010 2005-
2009 53
Chief Accounting Officer 2007 24 41 2009 3 2006-
2009 43
Marketing and Communications 2011 —
Brands, PepsiCo Beverages Americas (a beverage marketing and distribution company) 2009-
2011 2006-
2009Name Age Present Position From – To Jeffrey T. Mezger 57 President and Chief Executive Officer (b) 2006 19 Jeff J. Kaminski 51 Executive Vice President and Chief Financial Officer 2010 2 Senior Vice President, Chief Financial Officer and Strategy Board member, Federal-Mogul Corporation (a global supplier of component parts and systems to the automotive, heavy-duty, industrial and transport markets) 2008-2010 Senior Vice President, Global Purchasing and Strategy Board Member, Federal-Mogul Corporation 2005-2008 Albert Z. Praw 64 Executive Vice President, Real Estate and Business Development 2011 16 (c) Chief Executive Officer, Landstone Communities, LLC (a real estate development company) 2006-2011 Brian J. Woram 52 Executive Vice President, General Counsel and Secretary 2010 2 Senior Vice President and Chief Legal Officer, H&R Block, Inc. (a provider of tax, banking and business and consulting services) 2009-2010 Senior Vice President, Chief Legal Officer and Chief Compliance Officer, Centex Corporation (a homebuilder and provider of mortgage banking services) 2005-2009 William R. Hollinger 54 Senior Vice President and Chief Accounting Officer 2007 25 Thomas F. Norton 42 Senior Vice President, Human Resources 2009 4 Chief Human Resources Officer, BJ’s Restaurants, Inc. (an owner and operator of national full service restaurants) 2006-2009 Tom Silk 44 Senior Vice President, Marketing and Communications 2011 1 Vice President of Marketing for Hydration and Juice Brands, PepsiCo Beverages Americas (a beverage marketing and distribution company) 2009-2011 Senior Director, Global Brand Management, Activision Blizzard, Inc. (a game publisher of interactive entertainment software) 2006-2009 (a) All positions described were with us, unless otherwise indicated. (b) Mr. Mezger has served as a director since 2006. (c) Mr. Praw was employed by us from 1989-1992 and from 1994-2006. He was elected to his present position in October 2011. Item 5. REGISTRANT’SREGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES2011,2012, there were 726735 holders of record of our common stock. Our common stock is traded on the New York Stock Exchange under the ticker symbol “KBH.” The following table presents, for the periods indicated, the price ranges of our common stock, and cash dividends declared and paid per share: Year Ended November 30, 2011 Year Ended November 30, 2010 High Low Dividends
Declared Dividends
Paid High Low Dividends
Declared Dividends
Paid $ 16.11 $ 11.41 $ .0625 $ .0625 $ 17.30 $ 12.54 $ .0625 $ .0625 13.67 10.86 .0625 .0625 20.13 14.07 .0625 .0625 12.27 5.09 .0625 .0625 14.41 9.43 .0625 .0625 8.00 5.02 .0625 .0625 13.16 10.28 .0625 .0625 Year Ended November 30, 2012 Year Ended November 30, 2011 High Low High Low First Quarter $ 12.91 $ 6.17 $ .0625 $ .0625 $ 16.11 $ 11.41 $ .0625 $ .0625 Second Quarter 13.12 6.77 .0250 .0250 13.67 10.86 .0625 .0625 Third Quarter 11.25 6.46 .0250 .0250 12.27 5.09 .0625 .0625 Fourth Quarter 17.30 10.89 .0250 .0250 8.00 5.02 .0625 .0625 2011.
2011,2012, the closing price of KB Home common stock on the New York Stock Exchange was $7.35$14.36 per share. The performance of our common stock depicted in the graphs above represents past performance only and is not indicative of future performance. Total return assumes $100 invested at market close on November 30, 20062007 in KB Home common stock, the S&P 500 Index, the S&P Homebuilding Index and the Dow Jones Home Construction Index including reinvestment of dividends.Item 6. SELECTED FINANCIAL DATA OperationsOperations” and our Consolidated Financial Statements and the Notes thereto.thereto, which are included in “Item 8. Financial Statements and Supplementary Data.” Both are included later in this report. Years Ended November 30, 2011 2010 2009 2008 2007 $ 1,305,562 $ 1,581,763 $ 1,816,415 $ 3,023,169 $ 6,400,591 (103,074 ) (16,045 ) (236,520 ) (860,643 ) (1,358,335 ) 2,480,369 3,080,306 3,402,565 3,992,148 5,661,564 1,583,571 1,775,529 1,820,370 1,941,537 2,161,794 $ 10,304 $ 8,233 $ 8,435 $ 10,767 $ 15,935 6,792 5,114 5,184 6,278 11,139 32,173 29,443 33,424 52,152 44,392 $ 1,315,866 $ 1,589,996 $ 1,824,850 $ 3,033,936 $ 6,416,526 (96,282 ) (10,931 ) (231,336 ) (854,365 ) (1,347,196 ) (178,768 ) (69,368 ) (101,784 ) (976,131 ) (1,414,770 ) — — — — 485,356 (178,768 ) (69,368 ) (101,784 ) (976,131 ) (929,414 ) 2,512,542 3,109,749 3,435,989 4,044,300 5,705,956 1,583,571 1,775,529 1,820,370 1,941,537 2,161,794 442,657 631,878 707,224 830,605 1,850,687 $ (2.32 ) $ (.90 ) $ (1.33 ) $ (12.59 ) $ (18.33 ) — — — — 6.29 $ (2.32 ) $ (.90 ) $ (1.33 ) $ (12.59 ) $ (12.04 ) $ .25 $ .25 $ .25 $ .8125 $ 1.00 Years Ended November 30, 2012 2011 2010 2009 2008 Statement of Operations Data: Revenues: Homebuilding $ 1,548,432 $ 1,305,562 $ 1,581,763 $ 1,816,415 $ 3,023,169 Financial services 11,683 10,304 8,233 8,435 10,767 Total revenues $ 1,560,115 $ 1,315,866 $ 1,589,996 $ 1,824,850 $ 3,033,936 Operating income (loss): Homebuilding $ (20,256 ) $ (103,074 ) $ (16,045 ) $ (236,520 ) $ (860,643 ) Financial services 8,692 6,792 5,114 5,184 6,278 Operating loss $ (11,564 ) $ (96,282 ) $ (10,931 ) $ (231,336 ) $ (854,365 ) Pretax loss $ (79,053 ) $ (181,168 ) $ (76,368 ) $ (311,184 ) $ (967,931 ) Net loss $ (58,953 ) $ (178,768 ) $ (69,368 ) $ (101,784 ) $ (976,131 ) Basic and diluted loss per share $ (.76 ) $ (2.32 ) $ (.90 ) $ (1.33 ) $ (12.59 ) Cash dividends declared per common share $ .1375 $ .2500 $ .2500 $ .2500 $ .8125 Balance Sheet Data: Assets: Homebuilding $ 2,557,243 $ 2,480,369 $ 3,080,306 $ 3,402,565 $ 3,992,148 Financial services 4,455 32,173 29,443 33,424 52,152 Total assets $ 2,561,698 $ 2,512,542 $ 3,109,749 $ 3,435,989 $ 4,044,300 Mortgages and notes payable $ 1,722,815 $ 1,583,571 $ 1,775,529 $ 1,820,370 $ 1,941,537 Stockholders’ equity $ 376,806 $ 442,657 $ 631,878 $ 707,224 $ 830,605 Homebuilding Data: Net orders 6,703 6,632 6,556 8,341 8,274 Unit backlog 2,577 2,156 1,336 2,126 2,269 Homes delivered 6,282 5,812 7,346 8,488 12,438 (a)Discontinued operations consist only of our former French operations, which were sold in 2007. Income from discontinued operations, net of income taxes, in 2007 includes a gain of $438.1 million realized on the sale.
| Item 7. |
Revenues: Homebuilding Financial services Total Pretax income (loss): Homebuilding Financial services Total pretax loss Income tax benefit Net loss Basic and diluted loss per share 2011. Included in our total revenues were financial services revenues of $7.4 million of favorable warranty adjustments. Our housing gross profit margin, excluding inventory impairment and land option contract abandonment charges, was Revenues: Housing Land Total Costs and expenses: Construction and land costs Housing Land Total Selling, general and administrative expenses Loss on loan guaranty Total Operating loss Homes delivered Average selling price Housing gross margin Selling, general and administrative expenses as a percentage of housing revenues Operating loss as a percentage of homebuilding revenues delivered fewer homes in 2011 compared to 2010, with decreases ranging from 13% in our West Coast homebuilding reporting segment to 30% in our Southeast homebuilding reporting segment. 2012. Land sale revenues totaled $30.8 million loss on loan guaranty recorded in 2011 related to our investment in a residential development joint venture located near Las Vegas, Nevada that underwent a bankruptcy reorganization in that year as discussed in Note 9. Investments in Unconsolidated Joint Ventures in the Notes to Consolidated Financial Statements in this report. Our housing gross profits for 2012 increased by $55.4 million from $175.5 million for the year-earlier period. Housing gross profits for 2012 included $26.5 million of insurance recoveries related to repair costs and costs to handle claims with respect to previously delivered homes, including homes affected by allegedly defective drywall manufactured in China, and favorable net warranty adjustments of $8.6 million that reflected trends in our overall warranty claims experience. The impact of these items was mostly offset by inventory impairment and land option contract abandonment charges of $28.5 million. Our 2012 housing gross profit margin improved by 1.5 percentage points to 14.9% from 13.4% in 2011. Our housing gross profit margin, excluding inventory impairment and land option contract abandonment charges, was 16.8% in 2012 and 15.4% in 2011. Our housing gross profit margin was 2012. Our land sales generated income of contracts related to certain assets. Due to the nature or location of the projects, land held for future development that we activate as part of our strategic growth initiatives may have a somewhat greater likelihood of being impaired than other of our active inventory. debt issuance costs written off in connection with our voluntary reduction of the aggregate commitment under Housing revenues Housing construction and land costs Housing gross margin Add: Inventory impairment and land option contract abandonment charges Housing gross margin, excluding inventory impairment and land option contract abandonment charges Housing gross margin as a percentage of housing revenues Housing gross margin, excluding inventory impairment and land option contract abandonment charges, as a percentage of housing revenues Mortgages and notes payable Stockholders’ equity Total capital Ratio of debt to capital Mortgages and notes payable Less: Cash and cash equivalents and restricted cash Net debt Stockholders’ equity Total capital Ratio of net debt to total capital West Coast: Revenues Construction and land costs Selling, general and administrative expenses Operating income (loss) Other, net Pretax income (loss) Southwest: Revenues Construction and land costs Selling, general and administrative expenses Loss on loan guaranty Operating income (loss) Other, net Pretax loss Central: Revenues Construction and land costs Selling, general and administrative expenses Operating income (loss) Other, net Pretax loss Southeast: Revenues Construction and land costs Selling, general and administrative expenses Operating loss Other, net Pretax loss Years Ended November 30, 2011 West Coast Southwest Central Southeast Total 2010 West Coast Southwest Central Southeast Total 2009 West Coast Southwest Central Southeast Total our operations. Revenues Expenses Equity in income/gain on wind down of unconsolidated joint venture Pretax income Total originations (a): Loans Principal Percentage of homebuyers using KBA Mortgage Loans sold to third parties (a): Loans Principal agreements. 2010. income tax benefit from an additional carryback of our 2009 at November 30, 2012. Our net deferred tax assets totaled accounts. Shelf Registration Statement.We have an automatically effective universal shelf registration statement on file with the SEC, which was filed on September 20, 2011 (the “2011 Shelf Registration”). The 2011 Shelf Registration registers the offering of debt and equity securities that we may issue from time to time in amounts to be determined. In 2012, we issued the $350 Million 8.00% Senior Notes and the $350 Million 7.50% Senior Notes under the 2011 Shelf Registration. private exchanges, open market purchases or other means, and may include potential new issuances of equity or senior notes or other debt through public offerings, private placements or other 2011. joint ventures have obtained loans from third-party lenders that are secured by the underlying property and related project assets. distribution. contracts. 2011. Contractual obligations: Long-term debt Interest Operating lease obligations Inventory-related obligations (a) Total (b) do not consist of completed unsold homes. However, thousands): 2013 relative to the pace and performance in recent quarters. parcels. anticipated Inventories as of November 30, 2011 held for future development.2010 and 20092010 (in thousands, except per share amounts): Years Ended November 30, 2011 2010 2009 $ 1,305,562 $ 1,581,763 $ 1,816,415 10,304 8,233 8,435 $ 1,315,866 $ 1,589,996 $ 1,824,850 $ (207,246 ) $ (88,511 ) $ (330,383 ) 26,078 12,143 19,199 (181,168 ) (76,368 ) (311,184 ) 2,400 7,000 209,400 $ (178,768 ) $ (69,368 ) $ (101,784 ) $ (2.32 ) $ (.90 ) $ (1.33 ) Despite Years Ended November 30, Variance 2012 2011 2010 2012 vs 2011 2011 vs 2010 Revenues: Homebuilding $ 1,548,432 $ 1,305,562 $ 1,581,763 19 % (17 )% Financial services 11,683 10,304 8,233 13 25 Total $ 1,560,115 $ 1,315,866 $ 1,589,996 19 % (17 )% Pretax income (loss): Homebuilding $ (89,936 ) $ (207,246 ) $ (88,511 ) 57 % (134 )% Financial services 10,883 26,078 12,143 (58 ) 115 Total pretax loss (79,053 ) (181,168 ) (76,368 ) 56 (137 ) Income tax benefit 20,100 2,400 7,000 738 (66 ) Net loss $ (58,953 ) $ (178,768 ) $ (69,368 ) 67 % (158 )% Basic and diluted loss per share $ (.76 ) $ (2.32 ) $ (.90 ) 67 % (158 )% and lowparticularly compared to rising rental costs, reflecting record-low interest rates for residential consumer mortgage loans housing market conditions remained challenging in 2011, largelyand relatively low home selling prices due to the significant reductions that occurred during the housing downturn. Demand is also emerging with growth in household formations amid a persistent oversupplygradually improving economic and employment environment. The number of homes available for sale has fallen in several markets with the upturn in demand, including from investors purchasing homes to convert into rental properties. Also affecting supply are a reduction in the number of lender-owned and significantly restrained consumer demand for housing. The oversupply ofother distressed homes available for sale, which has persisted sincea reluctance of some current homeowners to sell at existing price levels, including homeowners who have mortgage loan balances that exceed such levels, and the impact of diminished new home construction activity during the housing downturn begandownturn.mid-2006, was amplified by an increase2011 were the lowest on record — and we believe the favorable trends that emerged in 2012 will need to strengthen and continue for some time before the already sizeable inventorymajority of lender-owned homes acquired through foreclosures or short sales —housing markets return to a trend that is expectedmore historically typical state. Moreover, to varying degrees, many housing markets continue to face significant challenges. These include uncertain economic conditions, tepid job and possibly accelerate, in 2012. Meanwhile, consumer demand was tempered by several factors, including turbulent macroeconomic conditions, the reduction in or unwinding of government programs and incentives supportive of homeownership and/or home purchases, generally poor and uncertain employment conditions, low consumer confidence levels,wage growth, tight residential consumer mortgage lending standards, and reduced credit availability for residential consumer mortgage loans. These negative market conditions were compounded by intense competition for home sales among homebuildersloans, continued elevated levels of mortgage loan delinquencies and sellers of resale homes, including lender-owned homes acquired through foreclosuresdefaults, and increased construction labor and building materials costs. If these challenges do not abate, or short sales. Although we have seen signs of stability in certain markets for new home sales, we believe a fullif they deepen, they could slow or stop the present housing recovery can occur only if there is broad, sustainable employmentand negatively affect our performance. Therefore, although we are encouraged by the healthier housing market environment, and believe that it could be the beginning of a new upward business cycle for homebuilding, and are planning to make additional investments in land and land development and other strategic growth initiatives in 2013 to further expand our business, our future performance and improved consumer confidence.Over the past five years,success of the strategies we have usedimplement (and adjust or refine as necessary or appropriate) will significantly depend on prevailing economic and credit and financial market conditions.principlesscope, scale and position of our KBnxt operational business model as a framework for adapting our operations to the conditions created by the housing downturn. We have focused our effortsboth geographically and operationally, and executed on three primary and integrated strategic goals: achievegoals, with achieving and maintainmaintaining profitability at the scale of prevailing market conditions; generate cash and maintain a strong balance sheet; and positionconditions our business to capitalize on future growth opportunities. Underhighest priority. Within this strategic framework, we have improved and refined our product offeringsproducts; moved to compete with resale homes and to meet the affordability demands and energy efficiency concerns of our core customers — first-time, move-up and active adult homebuyers; alignedalign our overhead to relevant market activity levels through a dedicated effort to control costs while maintaining a solid growth platform; improved our operating efficiencies; shifted resources from underperforming areasareas; and made opportunistic investments in our business; and acquired new land interests meeting our investment and marketing standardsbusiness in preferred locations within key markets with perceived strong growth prospects. We expect to continue to refineWith these initiatives during 2012.For the year ended November 30, 2011, we delivered fewer homes, experienced decreases in our revenues and our housing gross margin on a year-over-year basis, and posted a net loss — largely reflecting prevailing market conditions. However,strategic actions, we believe we made meaningful progress towardstrengthened our overall business and felt we entered 2012 well-positioned for profitability if and as housing market conditions improved.produced improvements during the year in certain key operational and financial metrics. For instance, in each of the last threequarters of 2011, we generated sequential improvement in the number of homes we delivered, our revenues, and our selling, general and administrative expenses as a percentage of housing revenues. We also substantially reduced our selling, general and administrative expenses and increased our net orders compared to the previous year, ending 2011 with the highest year-end backlog that we have had since 2008. In addition, we investedgrowth. As further described above under “Part I — Item 1. Business — Strategy,” this encompassed implementing four main strategic growth initiatives: (1) aggressively investing in land and land development mainly in higher-performing, choice locations. In 2012, we invested approximately $565 million in land and land development in such preferred markets within California and Texas, to support future growth in ourlocations; (2) increasing revenues per new home communities, deliveries and revenues. While the scope and timing of a sustained housing market recovery remains uncertain, we believe that our efforts throughout 2011 to expand the number of new home communitiescommunity open for sales through an intense focus on sales performance; (3) activating certain inventory in relatively healthy housingstabilizing markets that was previously held for future development; and (4) bringing additional resources to execute ontargeted markets where we operate.three strategic goals have positioned us operationally and financially to advancegrowth initiatives, we believe we further strengthened our business in 2012 by implementing an operational transition to Nationstar as our preferred mortgage lender. Since May 1, when it began accepting applications under our preferred relationship, Nationstar’s performance as our preferred lender has helped to provide more stability in the conversion of our backlog into home deliveries and revenues. We also extended our senior debt maturity schedule through the issuance of the $350 Million 8.00% Senior Notes and the $350 Million 7.50% Senior Notes in the first and third quarters, respectively, to capitalizefund the related simultaneous applicable tender offers for certain of our senior notes due in 2014 and 2015 that were initially made on opportunitiesJanuary 19, 2012 (the “January 2012 Tender Offers”) and on July 11, 2012 (the “July 2012 Tender Offers”).marketsmarket conditions, we were able to generate positive year-over-year results in 2012 in several areas of our business, as they arise.Our totaldiscussed below.$1.32$1.56 billion for the year ended November 30, 2011 decreased 17%2012 increased 19% from $1.59$1.32 billion in 2010, which had declined 13% from $1.82 billion2011. The year-over-year increase in 2009. Revenues decreased in 2011 and 2010total revenues was primarily due to lower housing and land sale revenues. The year-over-year decreasesan increase in housing revenues to $1.55 billion from $1.31 billionin 2011, and 2010 reflected fewer homes delivered, partly offset by a higher overall average selling price. We delivered 21% fewer homesreflecting an increase in 2011 compared to 2010, primarily due to a relatively low number of homes in backlog at the beginning of 2011. Our backlog entering 2011 reflected softness in net orders in the third and fourth quarters of 2010 due to generally weak housing market conditions and depressed demand and sales activity following a temporary surge in demand in the first two quarters of 2010 that was motivated by the expiration of the Tax Credit. To a lesser extent, the number of homes delivered and an increase in our backlog at the beginning of 2011 was also negatively affected by strategic community count reductions we had made in underperforming markets in prior years to align our operations with prevailing housing market activity. However, in light of our more recent investments in land and land development and new home community openings to support future growth, we ended 2011 with an overall community count that was 12% higher than the prior year. Homes delivered decreased 13% in 2010 from 2009 mainly due to our strategically lower overall community count compared to the previous year.Our overall average selling price increased 5%of those homes. We had no land sale revenues in 2011 and 4% in 20102012, compared to the corresponding prior years, primarily due to changes in community and product mix, as we delivered more homes from markets that supported larger home sizes and higher selling prices. The year-over-year increase in our 2011 overall average selling price reflected increases of 5% in both our Southwest and Central homebuilding reporting segments and 15% in our Southeast homebuilding reporting segment, partially offset by a 3% decrease in our West Coast homebuilding reporting segment.Landtotal land sale revenues totaled $.3of 2011 compared to $6.3 million in 2010 and $58.3 million in 2009, reflecting a reduced volume of land sales activity.$10.32011, $8.22012 and $10.3 million in 2010 and $8.4 million in 2009.2011. The year-over-year increase in financial services revenues in 2011 was largely due to revenues associated withreflected higher marketing services fees as a result of our having a marketing services agreement with MetLife Home Loansin place for all of 2012, compared to only a portion of 2011, and higher title services revenues. The revenues associated with our marketing services agreement represent the fair market value of the services we provided◦ ◦ connection with2012 also reflected a $30.8 million loss on loan guaranty recorded in 2011 related to our investment in a residential development joint venture located near Las Vegas, Nevada that underwent a bankruptcy reorganization in that year as discussed in Note 9. Investments in Unconsolidated Joint Ventures in the agreement.Notes to Consolidated Financial servicesStatements in this report. As a percentage of homebuilding revenues, decreasedour operating loss was 1.3% in 2010 from 2009, reflecting fewer homes2012, compared to 7.9% in 2011.◦ our homebuilding operations.◦ $178.8$59.0 million, or $2.32$.76 per diluted share, in 2011,2012, compared to $69.4a net loss of $178.8 million, or $.90$2.32 per diluted share, in 2010.2011. Our 20112012 net loss included pretax, noncashinsurance recoveries and favorable net warranty adjustments, which were partly offset by inventory impairment and land option contract abandonment charges and the court decision charge, all as noted above. The net loss in 2012 also included an income tax benefit of $20.1 million, reflecting the resolution of federal and state tax audits. In 2011, our net loss included inventory impairment and land option contract abandonment charges of $25.8 million, for inventory impairments and land option contract abandonments, mainly in our Southwest homebuilding reporting segment, and a pretax, noncash joint venture impairment charge of $53.7 million and a loss on loan guaranty of $30.8$30.8 million, both related to our investment in South Edge, LLC (“South Edge”). South Edge was athe residential development joint venture located near Las Vegas, Nevada in which KB Nevada participated along with other unrelated homebuilders and a third-party property development firm. South Edge underwent a bankruptcy reorganization in 2011.noted above. Our net loss for 2011 also included a gain of $19.8 million associated with the wind down of KBA Mortgage, which ceased offering mortgage banking services in late June 2011, an after-tax valuation allowance chargelegal expense recoveries of $76.7$8.3 million, against net deferred tax assets to fully reserve the tax benefits from our net loss for the year,a favorable warranty adjustment of $7.4 million, and an income tax benefit of $2.4 million.We posted a net loss of $69.4 or $.90 per diluted share,.2010, which narrowed from our net loss of $101.8 million, or $1.33 per diluted share, in 2009. In 2010, our net loss included pretax, noncash charges of$19.9 million for inventory impairmentsland and land option contract abandonments, an after-tax valuation allowance chargedevelopment in 2012, our inventory balance of $26.6 million against net deferred tax assets to fully reservetax benefits generated from our net loss for the year, and an income tax benefit of $7.0 million, primarily associated with an increase in the carryback of our 2009 NOLs to offset earnings we generated in 2004 and 2005. The majority of the inventory impairments and land option contract abandonments in 2010 were recognized in our Central and Southeast homebuilding reporting segments.In 2009, our net loss of $101.8 million, or $1.33 per diluted share, was largely due to pretax, noncash charges of $206.7 million for inventory and joint venture impairments and land option contract abandonments. These chargesongoing weakness in housing market conditions, which depressed asset values. The majority of these charges were associated with our West Coast and Southeast homebuilding reporting segments. The net loss in 2009 also included an income tax benefit of $209.4 million, which primarily resulted from federal tax legislation enacted in the fourth quarter of 2009 that allowed us to carry back our 2009 NOLs to offset earnings we generated in 2004 and 2005. As a result, we received a federal tax refund of $190.7 million in the first quarter of 2010.Our housing gross margin was 13.4% in 2011, 17.4% in 2010 and 6.5% in 2009. The year-over-year decrease in 2011 reflected reduced operating leverage from the lower volume of homes delivered; comparatively fewer homes delivered from higher-margin communities, largely as a result of higher-margin communities that were closed out in the prior year; and a shift in product mix. The improvement in our housing gross margin in 2010 compared to 2009 primarily reflected improved operating efficiencies; an increase in thehigher number of homes delivered from our new, value-engineered products, which are designed to be built with lower direct construction costs; a decrease in inventory impairment and land option contract abandonment charges; and the impact of inventory impairment charges incurred in prior years, which lowered our land cost basis with respect to the relevant communities. Our housing gross margin, excluding inventory impairment and land option contract abandonment charges (a calculationof is described belowour land investments during 2012 resulted in our having 4,925 more lots controlled under “Non-GAAP Financial Measures”), was 15.4% in 2011, compared to 18.6% in 2010 and 15.5% in 2009.Our backlogland option contracts or other similar contracts, which required a lower upfront investment, at November 30, 2011 was comprised of 2,156 homes, representing potential future housing revenues of approximately $459.0 million, compared to a backlog at November 30, 2010 of 1,336 homes, representing potential future housing revenues of approximately $263.8 million. The number of homes in backlog rose 61% year over year, primarily due to a 39% increase in net orders in the latter half of 2011, compared to the year-earlier period. The favorable year-over-year net order comparison in the latter half of 2011 partly reflected activity from recently opened new home communities as well as depressed net orders in the corresponding period of 2010 stemming in part from reduced demand and sales activity following the expiration of the Tax Credit. The potential future housing revenues in backlog at November 30, 2011 increased 74% year over year, reflecting the higher number of homes in backlog and a higher overall average selling price. Our backlog levels were up year over year in each of our homebuilding reporting segments2012 than we had at November 30, 2011. Net orders from our homebuilding operations roseOverall, we had a higher percentage of lots controlled under land option contracts or other similar contracts at the end of the year— 27% in 2012 compared to 6,632 in 2011 from 6,556 in 2010, representing the first increase in full year net orders in two years. Leveraging the land and land development investments we have made under our land acquisition initiative, we opened 123 new home communities for sales18% in 2011. We anticipate delivering homes and realizing revenuesended our 2012 fiscal year with a land inventory portfolio comprised of net orders generated in these newly opened communities in the coming quarters. Our cancellation rate as a percentage of gross orders was 29% in 2011 and 28% in 2010.Our cash, cash equivalents and restricted cash totaled $479.5 million40,170 lots owned or controlled at November 30, 2011, down from $1.02 billion2011.2010, mainly due to $251.9 million in payments made in2012 was $1.72 billion, up from $1.58 billion at November 30, 2011. Our debt balance at the 2011 fourth quarter in connection withend of our 2012 fiscal year reflected the bankruptcy reorganizationissuance during the year of the $350 Million 8.00% Senior Notes and the resolution$350 Million 7.50% Senior Notes, which was largely offset by the total purchase of other matters surrounding South Edge, the repayment of the remaining $100.0$584.9 million in aggregate principal amount of our $350.0 millioncertain of 6 3/8%our senior notes due 2011 (the “$350 Million Senior Notes”) at their August 15, 2011 maturity,in 2014 and 2015 pursuant to the repayment of $89.5 million of mortgages and land contracts due to land sellers and other loans. Of the cash, cash equivalents and restricted cash totals reported at November 30, 2011 and 2010, $415.1 million and $904.4 million, respectively, were unrestricted.applicable tender offers noted above. Our debt balance at November 30, 2011 was $1.58 billion, down from $1.78 billion at November 30, 2010, reflecting the debt repayments made in 2011. At November 30, 2011, our ratio of debt to total capital was 78.2%, compared to 73.8%82.1% at November 30, 2010.2012, compared to 78.2% at November 30, 2011. Our ratio of net debt to total capital (a calculation that is described below under “Non-GAAP Financial Measures”) was 71.4%75.4% at November 30, 20112012 and 54.5%71.4% at November 30, 2010.2011.Our inventory balance. Net orders from our homebuilding operations increased 1% in 2012, despite an 18% year-over-year decrease in our community count at the end of $1.73the year. Compared to the prior year, net orders in 2012 increased 7% and 9% in our West Coast and Central homebuilding reporting segments, respectively, and decreased 27% and 4% in our Southwest and Southeast homebuilding reporting segments, respectively. The year-over-year decreases reflected our strategic repositioning from certain underperforming locations in the affected segments, and a significant downsizing of our business in Arizona and Charlotte, North Carolina in 2011 and into 2012. The value of the net orders we generated in 2012 increased 15% to $1.73 billion from $1.51 billion in 2011, also reflecting the impact of our strategic repositioning initiatives. Three of our four homebuilding reporting segments generated year-over-year increases in net order value, with our West Coast homebuilding reporting segment up 23% to $859.3 million, our Central homebuilding reporting segment up 16% to $484.6 million, and our Southeast homebuilding reporting segment up 5% to $254.2 million. The number of homes in our ending backlog rose 20% year over year, primarily due to a higher number of homes in backlog at the Years Ended November 30, 2012 2011 Net orders 6,703 6,632 Net order value $ 1,733,146 $ 1,511,654 Cancellation rate 31 % 29 % Ending backlog — homes 2,577 2,156 Ending backlog — value $ 618,626 $ 458,950 Ending community count 191 234 2%31% in 2012, which was slightly higher than the $1.70 billion balance at November 30, 2010. This increase primarily reflected29% in 2011, due in part to the mortgage loan funding issues we encountered in 2012 before we transitioned to Nationstar as our investmentspreferred mortgage lender, as further described in landNote 6. Inventory Impairments and land development and new homecommunity openingsLand Option Contract Abandonments in 2011. Reflecting these investments, we ended our 2011 fiscal year with a land inventory portfolio comprisedthe Notes to Consolidated Financial Statements in this report.2011,2012, our homebuilding reporting segments consisted of ongoing operations located in the following states: West Coast — California; Southwest — Arizona, Nevada and Nevada;New Mexico; Central — Colorado and Texas; and Southeast — Florida, Maryland, North Carolina and Virginia. Years Ended November 30, 2011 2010 2009 $ 1,305,299 $ 1,575,487 $ 1,758,157 263 6,276 58,258 1,305,562 1,581,763 1,816,415 (1,129,785 ) (1,301,677 ) (1,643,757 ) (200 ) (6,611 ) (106,154 ) (1,129,985 ) (1,308,288 ) (1,749,911 ) (247,886 ) (289,520 ) (303,024 ) (30,765 ) — — (1,408,636 ) (1,597,808 ) (2,052,935 ) $ (103,074 ) $ (16,045 ) $ (236,520 ) 5,812 7,346 8,488 $ 224,600 $ 214,500 $ 207,100 13.4 % 17.4 % 6.5 % 19.0 % 18.4 % 17.2 % (7.9 )% (1.0 )% (13.0 )% Years Ended November 30, 2012 2011 2010 Revenues: Housing $ 1,548,432 $ 1,305,299 $ 1,575,487 Land — 263 6,276 Total 1,548,432 1,305,562 1,581,763 Costs and expenses: Construction and land costs Housing (1,317,529 ) (1,129,785 ) (1,301,677 ) Land — (200 ) (6,611 ) Total (1,317,529 ) (1,129,985 ) (1,308,288 ) Selling, general and administrative expenses (251,159 ) (247,886 ) (289,520 ) Loss on loan guaranty — (30,765 ) — Total (1,568,688 ) (1,408,636 ) (1,597,808 ) Operating loss $ (20,256 ) $ (103,074 ) $ (16,045 ) Homes delivered 6,282 5,812 7,346 Average selling price $ 246,500 $ 224,600 $ 214,500 Housing gross profit margin as a percentage of housing revenues 14.9 % 13.4 % 17.4 % Selling, general and administrative expenses as a percentage of housing revenues 16.2 % 19.0 % 18.4 % Operating loss as a percentage of homebuilding revenues (1.3 )% (7.9 )% (1.0 )% $1.31$1.55 billion in 2012, increasing 19% from $1.31 billion in 2011, decreasing 17% from $1.58 billion in 2010, which had decreased 13%17% from $1.82$1.58 billion in 2009.2010. The year-over-year decreasesincrease in homebuilding revenues in 2012 was due to higher housing revenues, while the year-over-year decrease in 2011 and 2010 reflected lower housing and land sale revenues.decreasedwere $1.55 billion in 2012, compared to $1.31$1.31 billion in 2011 compared to $1.58and $1.58 billion in 2010 and $1.76 billion in 2009.2010. Housing revenues declined 17%rose 19% in 20112012 from the previous year, due to a 21% decreasereflecting an 8% increase in the number of homes delivered partly offset byand a 5%10% increase in the overall average selling price.price of those homes. In 2010,2011, housing revenues fell 10%declined 17% from 20092010 due to a 13%21% decrease in homes delivered, partly offset by a 4%5% increase in the overall average selling price. delivered in 2010. The decrease in the number of homes delivered was partly due to our relatively low backlog level at the beginning of 2011, which was down 37% on a year-over-year basis. The lower beginning backlog reflected softness in net orders in the third and fourth quarters of 2010 due to generally weak housing market conditions, depressed demand and sales activity following a temporary surge in demand in the first two quarters of 2010 that was motivated by the expiration of the Tax Credit,a federal homebuyer tax credit (the “Tax Credit”), and, to a lesser extent, the implementation of our strategic community count reductions we made in select underperforming markets in prior periods to align our operations with prevailing housing market activity.repositioning initiatives. Each of our homebuilding reporting segmentsIn 2010, we delivered 7,346 homes, down from 8,488 homes in 2009. The year-over-year decline in the total number of homes delivered in 2010 was principally due to strategic community count reductions we made in 2010 and in prior periods and weak demand for new homes.our homes delivered increased to $224,600$246,500 in 2012 primarily due to changes in community and product mix, as we delivered more homes from markets with economic and consumer demand dynamics that supported larger home sizes and higher selling prices. Our higher overall average selling price of homes delivered in 2012 reflected year-over-year increases of 16%, 17% and 5% in our West Coast, Southwest and Southeast homebuilding reporting segments, respectively. In our Central homebuilding reporting segment, the average selling price of homes delivered in 2012 remained essentially even with 2011.roseincreased in three of our four homebuilding reporting segments. Year over year, average selling prices in 2011 increased 5% in both our Southwest and Central homebuilding reporting segments and 15% in our Southeast homebuilding reporting segment. In our West Coast homebuilding reporting segment, the 2011 average selling price of homes delivered decreased 3% in 2011 from the prior year. The increase in our overall average selling price in 2011 was mainly due to changes in the proportion of homes delivered from communities with higher-priced homes, and a shift in product mix to larger homes.Our 2010 overall average selling price rose to $214,500 from $207,1002009, reflecting higher average selling prices in three of our four homebuilding reporting segments. Year over year, average selling prices increased 10%, 5% and 1% in our West Coast, Central and Southeast homebuilding reporting segments, respectively. In our Southwest homebuilding reporting segment, the average selling price in 2010 decreased 8% from 2009. The increase in our overall average selling price in 2010 was primarily due to changes in our community and product mix, as we delivered more homes from markets that supported larger homes and higher selling prices.$.3$6.3and $6.3 million in 2010 and $58.3 million in 2009.2010. 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 marketing strategy, the strength and number of competing developers entering particular markets at given points in time, the availability of land at reasonable prices, and prevailing market conditions. Land sale revenues were less significant in 2011 and 2010 compared to 2009 because we sold a greater volume of land in 2009, rather than hold it for future development, as the prolonged housing downturn persisted and the land no longer fit our marketing strategy.$103.1$20.3 million in 2012, $103.1 million in 2011 $16.0and $16.0 million in 2010 and $236.5 million in 2009.2010. Our homebuilding operating loss as a percentage of homebuilding revenues was 1.3% in 2012, 7.9% in 2011, and 1.0% in 2010,2010.13.0%administrative expenses. The improvement in 2009.2012 also reflected the in 2011 reflected lower housing gross profits compared to 2010 and a $30.8 millionthe loss on loan guaranty, partly offset by reduced selling, general and administrative expenses. The decrease in housing gross profits in 2011 resulted from fewer homes delivered and a lower housing gross profit margin.marginprofits included $25.8 million of inventory impairment and land option contract abandonment charges, which were partly offset by $7.4 million of favorable warranty adjustments that were made based on downward trends in our overall warranty claims experience on homes previously delivered. In 2010, our housing gross profits included $19.6 million of inventory impairment and land option contract abandonment charges. Our housing gross profit margin, excluding inventory impairment and land option contract abandonment charges, was 15.4% in 2011, compared to 18.6% in 2010. ThisThe year-over-year decrease in our housing gross profit margin in 2011 reflected reduced operating leverage from the lower volume of homes delivered; comparatively fewer homes delivered from higher-margin communities in 2011, largely as a result of higher-margin communities that were closed out in the prior year;2010; and a shift in product mix.In 2010, the year-over-year decreaseour operating loss was primarily due to higher gross profits compared to 2009, reflecting the impact of a higher gross margin, partly offset by fewer homes delivered. Our housing gross margin improved to 17.4% in 2010 from 6.5% in 2009. In 2010, our housing gross margin included $19.9 million of inventory impairment and land option contract abandonment charges, compared to $157.6 million of similar charges in 2009. Our housing gross margin, excluding inventory impairment and land option contract abandonment charges, increased to 18.6% in 2010 from 15.5% in 2009. The year-over-year improvement in our housing gross margin, excluding inventory impairment and land option contract abandonment charges, reflected an increase in homes delivered from our new, value-engineered products,which are designed to be built with lower direct construction costs, and improved operating efficiencies. Value-engineering encompasses measures such as simplifying the location and installation of internal plumbing and electrical systems, using prefabricated wall panels, flooring systems, roof trusses and other building components, and generally employing construction techniques that minimize costs and maximize efficiencies. It alsoincludes working continuously with our trade partners and materials suppliers to reduce direct construction costs and construction cycle times. Our housing gross margin in 2010 was also favorably impacted by an increase in homes delivered from communities newly opened during the year that had a lower land cost basis compared to many of our older communities, an increase in homes delivered from markets that supported higher selling prices, and the impact of inventory impairment charges incurred in prior years, which lowered our land cost basis with respect to the relevant communities.$.1compared toand losses of $.3$.3 million in 2010 and $47.9 million in 2009.2010. The land sale results in 2011 2010 and 20092010 included impairment charges of $.1 million $.3 million and $10.5$.3 million, respectively, related to planned future land sales.We evaluateland and housingowned inventory for recoverability in accordance with Accounting Standards Codification Topic No. 360, “Property, Plant, and Equipment” (“ASC 360”), wheneveris assessed to determine if indicators of potential impairment exist. Based on our evaluations, we recognized pretax, noncash charges for inventory impairments of $22.7$28.1 million in 2012, $22.7 million in 2011 $9.8and $9.8 million in 20102010. The inventory impairment charges in all three years reflected challenging economic and $120.8 millionhousing market conditions in 2009.certain of our served markets. In addition, the inventory impairment charges we recognized in 2012 were partly due to changes to our operational or selling strategy for certain communities in an effort to accelerate our return on investment. In 2011, the inventory impairment charges included an $18.1 million adjustment to the fair value of real estate collateral that we recorded upon the foreclosure oftook back on a note receivable. The inventory impairment chargesDeterioration in all three years reflected declining asset values in certain markets due to the challenging economic and housing market conditions. Further deterioration in housing market supply and demand factors in the overall housing market or in an individual market, or changes to our operational or selling strategy at certain communities may lead to additional inventory impairment charges, or cause us to reevaluate our marketing strategy concerning certain assets that could result in future charges associated with land sales or the abandonment of land option contracts.$3.1$.4 million in 2012, $3.1 million in 2011 $10.1and $10.1 million in 2010 and $47.3 million in 2009.2010. Inventory impairment and land option contract abandonment charges are included in construction and land costs in our consolidated statements of operations.$247.9$251.2 million in 2012, up from $247.9 million in 2011, down from $289.5 million in 2010, which had decreased from $303.0$289.5 million in 2009.2010. The year-over-year increase in 2012 was largely due to the above-mentioned court decision charge and costs associated with the year-over-year increase in the volume of homes delivered, partly offset by cost-saving initiatives. In addition, selling, general and administrative expenses for 2011 included the favorable impact of legal expense recoveries of $8.3 million. In 2011, the year-over-year decrease in each periodselling, general and administrative expenses also reflected ongoing actions we have taken to streamline our organizational structure and reduce overhead costs. Such actions have included consolidating certain homebuilding operations, strategically exiting or winding down activity in underperforming markets,costs, including personnel- and reducing our workforce in order to adjust the size of our operations in line with market conditions. A portion of these cost reductions were related to lower salarypayroll-related costs, and other payroll-related expenses stemming from year-over-year decreases in our personnel count. Our selling, general and administrative expenses also decreased in 2011 and 2010 due to the lower volume of homes delivered. As a percentage of housing revenues, to which these expenses are most closely correlated, selling, general and administrative expenses were 16.2% in 2012, 19.0% in 2011 and 18.4% in 2010 and 17.2%2010. The percentage greatly improved in 2009. The percentages2012 compared to 2011, primarily due to the 19% year-over-year increase in housing revenues. In 2011, the percentage increased in 2011 andfrom 2010 as the year-over-year decreasesdecrease in our housing revenues werewas larger than the corresponding reductionsreduction in our expenses.The$30.8$30.8 million recognized in 2011 related to South Edgethe Nevada joint venture noted above under “Operating Loss” and reflected the consummation of a consensual plan of reorganization of the venture, known as South Edge, that was confirmed by a bankruptcy court in November 2011 (the “South Edge Plan”) and included, among other things, the elimination of a limited several repayment guaranty (the “Springing Guaranty”) that we had provided to the administrative agent for the lenders to South Edge (the “Administrative Agent”). In connection with the South Edge Plan and the resolution of other matters surrounding South Edge, we made payments of $251.9 million in the fourth quarter.$.9$.5 million in 2012, $.9 million in 2011 $2.1and $2.1 million in 2010 and $7.5 million in 2009.2010. Generally, increases and decreases in interest income are attributable to changes in the interest-bearing average balances of short-term investments and mortgages receivable, as well as fluctuations in interest rates. Mortgages receivable are primarily related to land sales. In 2011, the year-over-year decline in interest income reflected a decrease in the average balance of cash and cash equivalents we maintained and lower interest rates. The year-over-year decrease in interest income in 2010 was mainly due to lower interest rates.$49.2$69.8 million in 2012, $49.2 million in 2011 $68.3and $68.3 million in 20102010. Interest expense for 2012 included a $10.3 million loss on the early extinguishment of debt as a result of completing the applicable January 2012 and $51.8 million in 2009.July 2012 Tender Offers. Interest expense for 2011 included a $3.6 million gain on the early extinguishment of secured debt. In 2010, interest expense included $1.8 million ofthe Credit Facilityour unsecured revolving credit facility with various financial institutions (the “Credit Facility”) and our subsequent voluntary termination of the Credit Facility. In 2009, interest expense included a loss on early redemption of debt of $1.0 million. This amount represented a $3.7 million loss associated with our early redemption of $250.0 million in aggregate principal amount of the $350 Million Senior Notes, partly offset by a gain of $2.7 million associated with our early extinguishment of mortgages and land contracts due to land sellers and other loans. The percentage of interest capitalized was 51% in 2012, 54% in 2011 and 45% in 2010 and 57% in 2009.2010. The percentage of interest capitalized in 2011 rose from 2010 due to an increase in the amount of inventory qualifying for interest capitalization. The percentage for 2010 decreased from 2009 due to a decrease ingenerally fluctuates based on the amount of inventory qualifying for interest capitalization. Gross interest incurred during 2012 increased by $20.7 million to $132.7 million from $112.0 million in 2011 as a result of the $10.3 million loss on the early extinguishment of debt in 2012, compared to the $3.6 million gain on the early extinguishment of secured debt in 2011, a higher average debt level in 2012 and the higher interest rates on the senior notes we issued in 2012 compared to the interest rates on the senior notes we purchased under the applicable January 2012 and July 2012 Tender Offers. Gross interest incurred during 2011 decreased by $10.2$10.2 million to $112.0, from $122.2 million from $122.2 million in 2010, as a result of a lower average debt level in 2011 and the $3.6 million gain on the early extinguishment of secured debt included in 2011, compared to the write off of $1.8 million of debt issuance costs included in 2010. Gross interest incurred during 2010 increased by $2.6 million from $119.6 million in 2009, primarily due to the write-off of debt issuance costs and a higher overall average interest rate for borrowings in 2010.$.2$31.8 million in 2012, $.2 million in 2011 $122.2and $122.2 million in 2010 and $60.8 million2010. The year-over-year increase in 2009.2012 was primarily due to land sales completed by our unconsolidated joint venture in Maryland. The marked year-over-year decrease in unconsolidated joint venture revenues in 2011 was primarily reflecteddue to substantially fewer homes delivered by, and no land sales from, our unconsolidated joint ventures during 2011. In 2010, combined revenues from2011, reflecting the significant reduction in our participation in unconsolidated joint ventures increased from 2009 largely due toover the sale of land from an unconsolidated joint venture in our Southeast homebuilding reporting segment.past several years. Activities performed by our unconsolidated joint ventures generally include acquiring, developing and selling land, and, in some cases, constructing and delivering homes. Our unconsolidated joint ventures delivered no homes in 2012, one home in 2011 and 102 homes in 2010 and 141 homes in 2009, reflecting in part the lower number of unconsolidated joint venture investments that delivered homes in each year.2010. Our unconsolidated joint ventures generated combined income of $8.3 million in 2012, compared to combined losses of $4.3$4.3 million in 2011 $17.2and $17.2 million in 2010 and $102.9 million in 2009.2010. Our equity in loss of unconsolidated joint ventures totaled $55.8$.4 million in 2012, $55.8 million in 2011 $6.3and $6.3 million in 2010 and $49.6 million2010. The year-over-year change in 2009. In 2011, our equity in loss of unconsolidated joint ventures includedin 2012 and 2011 was mainly due to a charge of $53.7$53.7 million incurred in 2011 to write off our remaining investment in South Edge, as discussed below under “Off-Balance Sheet Arrangements.” In 2009, our equity in loss of unconsolidated joint ventures included a charge of $38.5 million to recognize the impairment of certain unconsolidated joint ventures primarily in our West Coast, Southwest and Southeast homebuilding reporting segments. There were no such charges in 2012 or 2010. Years Ended November 30, 2011 2010 2009 $ 1,305,299 $ 1,575,487 $ 1,758,157 (1,129,785 ) (1,301,677 ) (1,643,757 ) 175,514 273,810 114,400 25,740 19,577 157,641 $ 201,254 $ 293,387 $ 272,041 13.4 % 17.4 % 6.5 % 15.4 % 18.6 % 15.5 % Years Ended November 30, 2012 2011 2010 Housing revenues $ 1,548,432 $ 1,305,299 $ 1,575,487 Housing construction and land costs (1,317,529 ) (1,129,785 ) (1,301,677 ) Housing gross profits 230,903 175,514 273,810 Add: Inventory impairment and land option contract abandonment charges 28,533 25,740 19,577 Housing gross profits, excluding inventory impairment and land option contract abandonment charges $ 259,436 $ 201,254 $ 293,387 Housing gross profit margin as a percentage of housing revenues 14.9 % 13.4 % 17.4 % Housing gross profit margin, excluding inventory impairment and land option contract abandonment charges, as a percentage of housing revenues 16.8 % 15.4 % 18.6 % pretax, noncash inventory impairment and land option contract abandonment charges (as applicable) associated with housing operations recorded during a given period, by housing revenues. The most directly comparable GAAP financial measure is housing gross profit margin. We believe housing gross profit margin, excluding inventory impairment and land option contract abandonment charges, is a relevant and useful financial measure to investors in evaluating our performance as it measures the gross profit we generated specifically on the homes delivered during a given period and enhances the comparability of housing gross profit margin between periods. This financial measure assists us in making strategic decisions regarding product mix, product pricing and construction pace. We also believe investors will find housing gross profit margin, excluding inventory impairment and land option contract abandonment charges, relevant and useful because it represents a profitability measure that may be compared to a prior period without regard to variability of pretax, noncash charges for inventory impairments or land option contract abandonments. November 30, 2011 2010 $ 1,583,571 $ 1,775,529 442,657 631,878 $ 2,026,228 $ 2,407,407 78.2 % 73.8 % $ 1,583,571 $ 1,775,529 (479,531 ) (1,019,878 ) 1,104,040 755,651 442,657 631,878 $ 1,546,697 $ 1,387,529 71.4 % 54.5 % November 30, 2012 2011 Mortgages and notes payable $ 1,722,815 $ 1,583,571 Stockholders’ equity 376,806 442,657 Total capital $ 2,099,621 $ 2,026,228 Ratio of debt to total capital 82.1 % 78.2 % Mortgages and notes payable $ 1,722,815 $ 1,583,571 Less: Cash and cash equivalents and restricted cash (567,127 ) (479,531 ) Net debt 1,155,688 1,104,040 Stockholders’ equity 376,806 442,657 Total capital $ 1,532,494 $ 1,546,697 Ratio of net debt to total capital 75.4 % 71.4 % (in(dollars in thousands): Years Ended November 30, 2011 2010 2009 $ 589,387 $ 700,645 $ 812,207 (488,883 ) (545,983 ) (792,182 ) (56,616 ) (64,459 ) (79,659 ) 43,888 90,203 (59,634 ) (24,249 ) (29,953 ) (28,808 ) $ 19,639 $ 60,250 $ (88,442 ) $ 139,872 $ 187,736 $ 218,096 (129,468 ) (141,883 ) (210,268 ) (29,402 ) (45,463 ) (35,485 ) (30,765 ) — — (49,763 ) 390 (27,657 ) (58,502 ) (16,192 ) (20,915 ) $ (108,265 ) $ (15,802 ) $ (48,572 ) $ 369,705 $ 436,404 $ 434,400 (316,408 ) (364,736 ) (391,274 ) (59,709 ) (62,550 ) (62,645 ) (6,412 ) 9,118 (19,519 ) (6,512 ) (10,890 ) (9,863 ) $ (12,924 ) $ (1,772 ) $ (29,382 ) $ 206,598 $ 256,978 $ 351,712 (189,221 ) (245,416 ) (346,728 ) (39,347 ) (36,055 ) (40,092 ) (21,970 ) (24,493 ) (35,108 ) (16,013 ) (18,308 ) (43,306 ) $ (37,983 ) $ (42,801 ) $ (78,414 ) Years Ended November 30, Variance 2012 2011 2010 2012 vs 2011 2011 vs 2010 West Coast: Revenues $ 755,259 $ 589,387 $ 700,645 28 % (16 )% Construction and land costs (658,586 ) (488,883 ) (545,983 ) (35 ) 10 Selling, general and administrative expenses (74,386 ) (56,616 ) (64,459 ) (31 ) 12 Operating income 22,287 43,888 90,203 (49 ) (51 ) Other, net (32,754 ) (24,249 ) (29,953 ) (35 ) 19 Pretax income (loss) $ (10,467 ) $ 19,639 $ 60,250 (153 )% (67 )% Southwest: Revenues $ 132,438 $ 139,872 $ 187,736 (5 )% (25 )% Construction and land costs (106,382 ) (129,468 ) (141,883 ) 18 9 Selling, general and administrative expenses (17,989 ) (29,402 ) (45,463 ) 39 35 Loss on loan guaranty — (30,765 ) — 100 (100 ) Operating income (loss) 8,067 (49,763 ) 390 116 (12,860 ) Other, net (18,261 ) (58,502 ) (16,192 ) 69 (261 ) Pretax loss $ (10,194 ) $ (108,265 ) $ (15,802 ) 91 % (585 )% Central: Revenues $ 436,407 $ 369,705 $ 436,404 18 % (15 )% Construction and land costs (371,875 ) (316,408 ) (364,736 ) (18 ) 13 Selling, general and administrative expenses (56,579 ) (59,709 ) (62,550 ) 5 5 Operating income (loss) 7,953 (6,412 ) 9,118 224 (170 ) Other, net (6,504 ) (6,512 ) (10,890 ) — 40 Pretax income (loss) $ 1,449 $ (12,924 ) $ (1,772 ) 111 % (629 )% Southeast: Revenues $ 224,328 $ 206,598 $ 256,978 9 % (20 )% Construction and land costs (177,502 ) (189,221 ) (245,416 ) 6 23 Selling, general and administrative expenses (34,694 ) (39,347 ) (36,055 ) 12 (9 ) Operating income (loss) 12,132 (21,970 ) (24,493 ) 155 10 Other, net (13,315 ) (16,013 ) (18,308 ) 17 13 Pretax loss $ (1,183 ) $ (37,983 ) $ (42,801 ) 97 % 11 % Housing
Revenues Percentage
of
Total
Housing
Revenues Homes
Delivered Percentage
of
Total
Homes
Delivered Average
Selling
Price (in thousands) $ 589,387 45 % 1,757 30 % $ 335,500 139,762 11 843 15 165,800 369,552 28 2,155 37 171,500 206,598 16 1,057 18 195,500 $ 1,305,299 100 % 5,812 100 % $ 224,600 $ 700,645 44 % 2,023 27 % $ 346,300 181,917 12 1,150 16 158,200 435,947 28 2,663 36 163,700 256,978 16 1,510 21 170,200 $ 1,575,487 100 % 7,346 100 % $ 214,500 $ 772,886 44 % 2,453 29 % $ 315,100 206,747 12 1,202 14 172,000 430,799 24 2,771 33 155,500 347,725 20 2,062 24 168,600 $ 1,758,157 100 % 8,488 100 % $ 207,100 Years Ended November 30, (in thousands) 2012 West Coast $ 755,259 49 % 1,945 31 % $ 388,300 Southwest 132,438 9 683 11 193,900 Central 436,407 28 2,566 41 170,100 Southeast 224,328 14 1,088 17 206,200 Total $ 1,548,432 100 % 6,282 100 % $ 246,500 2011 West Coast $ 589,387 45 % 1,757 30 % $ 335,500 Southwest 139,762 11 843 15 165,800 Central 369,552 28 2,155 37 171,500 Southeast 206,598 16 1,057 18 195,500 Total $ 1,305,299 100 % 5,812 100 % $ 224,600 2010 West Coast $ 700,645 44 % 2,023 27 % $ 346,300 Southwest 181,917 12 1,150 16 158,200 Central 435,947 28 2,663 36 163,700 Southeast 256,978 16 1,510 21 170,200 Total $ 1,575,487 100 % 7,346 100 % $ 214,500 segment producedsegment’s total revenues of $589.4 million in 2012, 2011 and $700.7 million in 2010 all of which were generated entirely from housing operations. Housing revenues in 2012 increased 28% from 2011 declined due to an 11% increase in the number of homes delivered and a 16% increase in the average selling price. Homes delivered increased in 2012 from 20102011 largely due to a higher backlog level at the beginning of 2012 compared to the prior year. The average selling price rose in 2012 primarily due to a greater proportion of homes delivered from higher-priced communities, reflecting our strategic repositioning initiatives discussed above and a change in product mix to larger home sizes. In 2011, the 16% year-over-year decrease in housing revenues reflected a 13% decrease in the number of homes delivered and a 3% decline in the average selling price. Homes delivered decreased to 1,757 in 2011 from 2,023 homes in 2010, largely due to the factors described above under “Homebuilding.”backlog level at the beginninghousing gross profits and higher selling, general and administrative expenses. The housing gross profit margin decreased to 12.8% in 2012 from 17.1% in 2011, primarily due to higher inventory-related charges, a shift in product mix of 2011,homes delivered and a lower proportion of deliveries from higher-margin communities, partially offset by favorable warranty adjustments. Inventory impairment charges totaled $19.2 million in 2012, compared to inventory impairment and land option contract abandonment charges of $3.3 million in 2011. These charges represented 3% of segment total revenues in 2012 and less than 1% in 2011. Inventory impairment charges were higher in 2012 due to challenging economic and housing market conditions in certain of our served markets and changes to our operational or selling strategy for certain communities in an effort to accelerate our return on investment. The year-over-year increase in selling, general and administrative expenses in 2012 primarily reflected the prior year, reflecting$8.8 million court decision charge, as discussed in Note 14. Legal Matters in the after effectsNotes to Consolidated Financial Statements in this report, an increase in the number of homes delivered in 2012, and the impact of the expiration of the Tax Credit and generally weak housing market conditions. The average selling price declined to $335,500gain recognized in 2011 from $346,300 in 2010.This segment posted pretax incomeon the sale of $19.6 million in 2011 and $60.3 million in 2010. a multi-level residential building that we had operated as a rental property.decreasedecline was primarily due to comparatively fewer homes delivered from higher-margin communities, largely as a result of our closing out of certain higher-margin communities that were closed out in the prior year, and reduced leverage from the lower volume of homes delivered in 2011, partially offset by favorable warranty adjustments. Pretax, noncash charges for inventory impairmentsInventory impairment and land option contract abandonmentsabandonment charges totaled $3.3$3.3 million in 2011 and $4.6$4.6 million in 2010. These charges represented less than 1% of segment total revenues in both 2011 and 2010. Selling,The decrease in selling, general and administrative expenses decreased by $7.9 million, or 12%, to $56.6 million in 2011 from $64.5 million in 2010,was primarily due to athe impact of the gain on the sale of athe multi-level residential building we had operated as a rental property,mentioned above, partly offset by increased legal expenses in 2011.2010, revenues from this segment decreased 14% to $700.7 million from $812.2 million in 2009 due to lower housing and land sale revenues. Housing revenues decreased by 9% in 2010 from $772.9 million in 2009 as a result of an 18% decrease in homes delivered, partially offset by a 10% increase in the average selling price. We delivered 2,023 homes at an average selling price of $346,300 in 2010 and 2,453 homes at an average selling price of $315,100 in 2009. The increase in the average selling price in 2010 was mainly due to a shift in product mix to larger homes, somewhat improved operating conditions, and an increase in homes delivered from certain markets within this segment that supported higher selling prices. There were no land sale revenues from this segment in 2010. Land sale revenues totaled $39.3 million in 2009.This segment generated pretax income of $60.3 million in 2010, compared to a pretax loss of $88.4 million in 2009. Pretax results improved in 2010 compared to 2009 primarily due to a reduction in pretax, noncash charges for inventory impairments and land option contract abandonments and lower selling, general and administrative expenses. Pretax, noncash charges for inventory impairments and land option contract abandonments decreased to $4.6 million in 2010 from $77.6 million in 2009, and were less than 1% of segment total revenues in 2010, compared to 10% of segment total revenues in 2009. The gross margin improved to 22.1% in 2010 from 2.5% in 2009, reflecting an increase in the average selling price, a decrease in direct construction costs and lower inventory-related impairment and abandonment charges in 2010. Selling, general and administrative expenses of $64.5 million in 2010 decreased by $15.2 million, or 19%, from $79.7 million in 2009, primarily due to cost reduction initiatives and the lower number of homes delivered. Other, net expenses included no joint venture impairment charges in 2010 and $7.2 million of such charges in 2009.Southwest. Total revenues from2012, our Southwest homebuilding reporting segment decreased 26% to $139.9 million insegment’s total revenues were generated solely from housing operations. In 2011 from $187.7 million inand 2010, reflecting lower housing andthis segment’s total revenues also included land sale revenues.revenues of $.1 million and $5.8 million, respectively. Housing revenues declined 23% to $139.8 million in 20112012 decreased 5% from $181.9 million in 2010the previous year due to a 27%19% decrease in the number of homes delivered, partiallypartly offset by a 5%17% increase in the average selling price. WeHomes delivered 843 homesdecreased in 2011 compared to 1,150 homes delivered in 2010, reflecting lower backlog levels at the beginning of 20112012 due to generally weak housing market demandthe significant downsizing of our business in Arizona during 2011 and the after effects of the expiration of the Tax Credit.into 2012 as discussed above. The average selling price increased in 2012 mainly due to a change in community and product mix of $165,800homes delivered. The 23% year-over-year decline in housing revenues in 2011 reflected a 27% decrease in the number of homes delivered, partly offset by a 5% increase in the average selling price. Homes delivered decreased in 2011 due to the factors described above under “Homebuilding.” The average selling price increased from $158,200 in 20102011 mainly due to a shift in community and product mix.segment generatedsegment’s pretax results improved significantly in 2012 compared to 2011 largely due to the impact of the South Edge-related joint venture impairment charge of $53.7 million and loss on loan guaranty of $30.8 million recorded in 2011. The housing gross profit margin increased to 19.7% in 2012 from 7.4% in 2011, primarily due to a decrease in inventory-related charges, and favorable warranty adjustments. Inventory impairment charges totaled $2.1 million in 2012, compared to inventory impairment and land sale revenuesoption contract abandonment charges of $.1$19.0 million in 2011, which included an $18.1 million adjustment to the fair value of real estate collateral that we took back on a note receivable. These inventory-related charges represented 2% of segment total revenues in 2012 and $5.8 million14% in 2010.2011. Selling, general and administrative expenses decreased in 2012 compared to 2011, mainly due to overhead cost reductions and the lower volume of homes delivered. Other, net expenses in 2011 included the South Edge-related joint venture impairment charge. There was no such charge in 2012.Pretax losses$108.3 millionthe South Edge-related charges recorded in 2011 as mentioned above. The housing gross profit margin decreased to 7.4% in 2011 from $15.8 million in 2010, largely due to the $53.7 million noncash joint venture impairment charge we incurred in writing off our remaining investment in South Edge and a $30.8 million loss on loan guaranty also related to South Edge. The gross margin decreased to 7.4% in 2011 from 24.4% in 2010, primarily reflecting pretax, noncashhigher inventory impairment and land option contract abandonment charges and reduced operating leverage from the lower volume of homes delivered in 2011, partially offset by favorable warranty adjustments. TheseInventory impairment and land option contract abandonment charges totaled $19.0increased to $19.0 million in 2011 compared to $1.0$1.0 million of such charges in the year-earlier period, primarily due to an $18.1 millionthe above-noted adjustment to the fair value of real estate collateral that we recorded upon the foreclosure of a note receivable in 2011. Inventory impairment and land option contract abandonmentcollateral. These inventory-related charges represented 14% of segment total revenues in 2011 and less than 1% of segment total revenues in 2010. Selling, general and administrative expenses decreased by $16.1 million, or 35%, to $29.4 millionon a year-over-year basis in 2011 from $45.5 million in 2010, as a result of ongoing overhead cost reductions, lower legal expenses and the lower volume of homes delivered. Other, net expenses in 2011 included the $53.7 millionSouth Edge-related joint venture impairment charge. There werecharge discussed above. In 2010, there was no such charges in 2010.In 2010,charge.this segment decreased 14% to $187.7housing operations; total revenues in 2011 and 2010 also included land sale revenues of $.2 million from $218.1and $.5 million, in 2009, mainly due to lower housing revenues.respectively. Housing revenues decreased 12%rose 18% in 2012 compared to $181.9 million in 2010 from $206.7 million in 2009, reflectingthe previous year as a 4% decreaseresult of a 19% increase in the number of homes delivered, and an 8% declinepartly offset by a 1% decrease in the average selling price. WeHomes delivered 1,150increased in 2012 largely due to the higher number of homes in 2010, compared to 1,202 homes delivered in 2009, principally due to our operating strategically fewer communities in this segment year over year. Thebacklog at the start of 2012, while the average selling price decreased to $158,200 in 2010 from $172,000 in 2009 due to downward pricing pressures from intense competition and our continued rollout of new product at lower price points compared to our previous product. Land sale revenues totaled $5.8 million in 2010 compared to $11.4 million in 2009.Pretax losses from this segment narrowed to $15.8 million in 2010 from $48.6 million in 2009, largelydeclined primarily due to a decreasechange in pretax, noncash charges for inventory impairments. These charges decreased to $1.0 million in 2010community and represented less than 1% of segment total revenues.product mix. In 2009, pretax, noncash inventory impairment charges totaled $28.8 million and represented 13% of segment total revenues. The gross margin improved to 24.4% in 2010 from 3.6% in 2009, reflecting a decrease in direct construction costs and the reduction in inventory impairment charges. Selling, general and administrative expenses increased by $10.0 million, or 28%, to $45.5 million in 2010 from $35.5 million in 2009, mainly due to a charge associated with the writedown of a note receivable, and higher legal and advertising expenses. Other, net expenses included no joint venture impairment charges in 2010 and $5.4 million of such charges in 2009.Central. Total revenues from our Central homebuilding reporting segment decreased 15% to $369.7 million in 2011, from $436.4 million in 2010, due to a decline in housing revenues. Housing revenues decreased 15% compared to$369.5 million in 2011 from $435.9 million in 2010 as a result of a decreased to 2,155declined in 2011 from 2,663 in 2010, reflectingdue to the lower backlog level at the start of 2011 due largely to the generally weak housing market conditions,year, reflecting the after effects of the expiration of the Tax Credit, and the strategic community count reductions we made in prior periods to align our operations in this segment with prevailing housing market activity.factors described above under “Homebuilding.” The average selling price rose to $171,500 in 2011 from $163,700 incompared to 2010 primarily due to a shift in community and product mix to larger homes. Thisgenerated land sale revenues of $.2 millionimproved in 2012 mainly due to higher housing gross profits, reflecting the increase in homes delivered and a higher housing gross profit margin, and reduced selling, general and administrative expenses. The housing gross profit margin increased to 14.8% in 2012 from 14.4% in 2011, and $.5 million in 2010.Pretax losses from this segment totaled $12.9 million in 2011 and $1.8 million in 2010. The pretax loss for 2011 included $1.4 million of pretax, noncashprimarily due to favorable warranty adjustments, which were largely offset by inventory impairment and land option contract abandonment charges, compared to $6.9 million of pretax, noncashcharges. Inventory impairment and land option contract abandonment charges in this segment totaled of $59.7 milliondecreased by 5% in 2011 decreased by $2.9 million, or 5%, from $62.6 million in 2010.In 2010, this segment generated total revenues of $436.4 million, up slightly from $434.4 million in 2009, reflecting higher housing revenues. Housing revenues rose 1% to $435.9 million in 2010 from $430.8 million in 2009, mainly due to a 5% increase in the average selling price, partly offset by a 4% decline in the numberlower volume of homes delivered. Homes delivered decreased to 2,663 in 2010 from 2,771 in 2009. The average selling price rose to $163,700 in 2010 from $155,500 in 2009, primarily due to favorable changes in community and product mix, with a greater number of homes delivered from locations supporting higher selling prices, and somewhat improved operating conditions in certain markets within this segment. Land sale revenues totaled $.5 million in 2010 and $3.6 million in 2009.This segment posted pretax losses of $1.8 million in 2010 and $29.4 million in 2009. These pretax results improved in 2010 compared to 2009 largely due to lower pretax, noncash inventory-related charges. The pretax loss in 2010 included $6.9 million of pretax, noncash land option contract abandonment charges, compared to $23.9 million of pretax, noncash inventory impairment charges in 2009. As a percentage of segment total revenues, these pretax, noncash charges were 2% in 2010 and 5% in 2009. The gross margin improved to 16.4% in 2010 from 9.9% in 2009, mainly due to an increase in the average selling price, a decrease in direct construction costs and lower inventory-related charges. Selling, general and administrative expenses totaled $62.6 million in both 2010 and 2009.segment generatedsegment’s total revenues of $206.6 million in 2012, 2011 down 20% from $257.0 million in 2010. Revenues in each yearand 2010 were generated solely from housing operations. In 2011,2012, housing revenues decreasedincreased 9% from the previous year due to a 5% increase in the average selling price and a 3% increase in the number of homes delivered. We delivered more homes in 2012 compared to 2011 largely due to this segment having more homes in backlog at the beginning of 2012 compared to 2011. In 2011, housing revenues decreased 20% from the previous year due to a 30% decrease in the number of homes delivered, partly offset by a 15% increase in the average selling price. We delivered 1,057fewer homes in 2011 compared to 1,510 homes in 2010 largely due to the lower backlog levels at the beginning of 2011, mainly due to depressed net order activity following the expiration of the Tax Credit, and the strategic community count reductions we made in prior periods to align our operations in this segment with prevailing housing market activity.factors described above under “Homebuilding.” The average selling price rose to $195,500 in 2011 from $170,200 incompared to 2010 reflectingdue to a change in product mix to larger homes and a higher number of homes delivered from markets that supported higher selling prices in 2011.Thisposted pretax losses of $38.0 millionin 2012 reflected an increase in housing gross profits and a decrease in selling, general and administrative expenses. The housing gross profit margin improved to 20.9% in 2012 from 8.4% in 2011, mainly due to $26.5 million of insurance recoveries recorded in 2012 as described above under “Homebuilding,” partly offset by unfavorable warranty adjustments. In 2012, this segment had $5.8 million of inventory impairment and $42.8land option contract abandonment charges, compared to $2.1 million in 2010. the year-earlier period. As a percentage of segment total revenues, these charges were 3% in 2012 and 1% in 2011.and a decreasepartly offset by an increase in selling, general and administrative expenses. The housing gross profit margin improved to 8.4% in 2011 from 4.5% in 2010, largely due to the reduction in pretax, noncash charges for inventory impairments and land option contract abandonments and the increase in the average selling price. In 2011, pretax, noncash charges for inventory impairmentsimpairment and land option contract abandonmentsabandonment charges totaled $2.1$2.1 million, compared to $7.5$7.5 million in 2010. As a percentage of segment total revenues, these charges were 1% in 2011 and 3% in 2010. Selling, general and administrative expenses increased by $3.3 million, or 9%, to $39.4 million in 2011 from $36.1 million in 2010.In 2010, this segment generated total revenues of $257.0 million, down 27% from $351.7 million in 2009, primarily due to lower housing revenues. Housing revenues declined 26% to $257.0 million in 2010 from $347.7 million in 2009 due to a 27% decrease in homes delivered, partly offset by a 1% increase in the average selling price. We delivered 1,510 homes in 2010increased 9% compared to 2,062 homes in 2009, reflecting our operating a strategically lowernumber of communities in this segment. The average selling price rose to $170,200 in 2010 from $168,600 in 2009, principally due to a change in community and product mix. There were no land sale revenues in 2010. Land sale revenues totaled $4.0 million in 2009.This segment posted pretax losses of $42.8 million in 2010 and $78.4 million in 2009. The pretax loss narrowed on a year-over-year basis, primarily due to the decline in total pretax, noncash charges for inventory impairments and land option contract abandonments, which decreased to $7.5 million in 2010 from $37.8 million in 2009. As a percentage of segment total revenues, these charges were 3% in 2010 and 11% in 2009. The gross margin improved to 4.5% in 2010 from 1.4% in 2009, largely due to the reduction in pretax, noncash charges for inventory impairments and land option contract abandonments and the slight increase in the average selling price. Selling, general and administrative expenses decreased by $4.0 million, or 10%, to $36.1 million in 2010 from $40.1 million in 2009 as a result of our efforts to reduce overhead in this segment in line with prevailing market conditions. Other, net expenses included no joint venture impairment charges in 2010 and $25.9 million of such charges in 2009.title and insurance services to our homebuyers. Untilhomebuyersin the same markets as our homebuilding reporting segmentsand provides title services in the majority of our markets located within our Central and Southeast homebuilding reporting segments.In addition, since the third quarter of 2011, this segment has earned revenues pursuant to the terms of a marketing services agreement with a preferred mortgage lender that offers mortgage banking services, including mortgage loan originations, to our homebuyerswho elect to use the lender. Our homebuyers are under no obligation to use our preferred mortgage lender and may select any lender of their choice to obtain mortgage financing for the purchase of a home. Prior to late June 2011, this segment also provided mortgage banking services to a significant proportion of our homebuyers indirectly through KBA Mortgage, a former unconsolidated joint venture of a subsidiary of ours and a subsidiary of Bank of America, N.A., with each partner having had a 50% ownership interest in the venture. The Bank of America, N.A. subsidiary partner operated KBA Mortgage. We accounted for KBA Mortgage as an unconsolidated joint venture in the financial services reporting segment of our consolidated financial statements. Our financial services reporting segment conducts operations insame markets as our homebuilding reporting segments.During the firstsecond quarter of 2011, the Bank of America, N.A. subsidiary partner in KBA Mortgage approached us about exiting the unconsolidated joint venture due to the desire of Bank of America, N.A. to cease participating in joint venture structures in its business. As2012, we had a result, KBA Mortgage ceased offeringpreferred mortgage banking services after June 30, 2011, and the unconsolidated joint venture’s business operations were subsequently unwound. After June 30, 2011, Bank of America, N.A. processed and closed only the residential consumer mortgage loans that KBA Mortgage had originated for our homebuyers on or before June 26, 2011. KBA Mortgage originated residential consumer mortgage loans for 67% of our customers who obtained mortgage financing during the period the former unconsolidated joint venture operated in 2011. In 2010, KBA Mortgage originated such loans for 82% of our customers who obtained mortgage financing during that year; in 2009, the percentage was 84%.We entered into a marketing services agreementlender relationship with MetLife Home Loans, a division of MetLife Bank, N.A., effective June 27, 2011. Under the agreement,this relationship, MetLife Home Loans’ personnel, located on site at several of our new home communities, cancould offer (i) financing options and mortgage loan products to our homebuyers, (ii) to prequalify homebuyers for residential consumer mortgage loans, and (iii) to commence the mortgage loan origination process for our homebuyers who electelecting to use MetLife Home Loans. We makemade available to our homebuyers marketing materials and other information regarding MetLife Home Loans’ financing options and mortgage loan products, available to our homebuyers and arewere compensated solely for the fair market value of these services. MetLife Home Loans and its parent company, MetLife Bank, N.A., arewere not affiliates of oursus or any of our subsidiaries. Our homebuyers are underWe had no obligation to use MetLife Home Loans and may select any provider of their choice to obtain mortgage financing for the purchase of a home. We do not have any ownership, joint venture or other interests in or with MetLife Home Loans or MetLife Bank, N.A. or with respect to the revenues or income that may behave been generated from MetLife Home Loans providingLoans’ provision of mortgage banking services to, or originating residential consumerorigination of mortgage loans for, our homebuyers. recently announced’s announcement in January 2012 that it willwould cease offering forward mortgage banking services as part of its business. Whilebusiness, we are evaluatingevaluated various options and, in March 2012, we entered into an agreement with Nationstar, a subsidiary of Nationstar Mortgage Holdings Inc., under which Nationstar became our new preferred mortgage lender, offering mortgage banking services to our homebuyers at our new home communities. The terms of our relationship with Nationstar are substantially similar to the terms of our prior relationship with MetLife Home Loans, as are the mortgage banking services offered by Nationstar. Nationstar began accepting new mortgage loan applications from our homebuyers on May 1, 2012.isremains to reestablishestablish a long-term mortgage banking joint venture or marketing relationshipthat is more closely integrated with a financial institution or other mortgage banking services provider, but we can provide no assurance that we will be able to do so. Years Ended November 30, 2011 2010 2009 $ 10,304 $ 8,233 $ 8,435 (3,512 ) (3,119 ) (3,251 ) 19,286 7,029 14,015 $ 26,078 $ 12,143 $ 19,199 1,633 5,706 7,170 $ 315,899 $ 1,092,508 $ 1,317,904 67 % 82 % 84 % 1,862 5,850 6,967 $ 370,599 $ 1,092,739 $ 1,275,688 Years Ended November 30, 2012 2011 2010 Revenues $ 11,683 $ 10,304 $ 8,233 Expenses (2,991 ) (3,512 ) (3,119 ) Equity in income/gain on wind down of unconsolidated joint venture 2,191 19,286 7,029 Pretax income $ 10,883 $ 26,078 $ 12,143 Total originations (a): Loans — 1,633 5,706 Principal $ — $ 315,899 $ 1,092,508 Percentage of homebuyers using KBA Mortgage — 67 % 82 % Mortgage loans sold to third parties (a): Loans — 1,862 5,850 Principal $ — $ 370,599 $ 1,092,739 (a) Loan originations and sales occurred within KBA Mortgage, which ceased offering mortgage banking services after June 30, 2011. operations generatesegment generates revenues primarily from insurance commissions, title services, marketing services fees and interest income. Financial services revenues totaled $10.3$11.7 million in 2012, $10.3 million in 2011 $8.2and $8.2 million in 2010 and $8.4 million in 2009.2010. The year-over-year increase in financial services revenues in 2012 reflected higher marketing services fees resulting from having a marketing services agreement in place for all of 2012, compared to only a portion of 2011, resulted mainly fromand higher title services revenues. In 2011, the year-over-year increase was due to revenues associated with ourthe marketing services agreement with MetLife Home Loans,we entered into during the year, and higher revenues from title services.services revenues.and insurance commissions totaling $9.5 million in 2012, $9.2 million in 2011 and $8.2 million in 2010, and $8.4 million in 2009, and a nominal amount of interest income in each year, which was earned primarily from money market deposits. In 2012 and 2011, financial services revenues also included $2.2 million and $1.1 million, respectively, of revenues from marketing services fees. These fees are associated with the marketing services agreementagreements in effect during each year and represent the fair value of the services we provided in connection with the agreement.$3.5$3.0 million in 2012, $3.5 million in 2011 $3.1and $3.1 million in 2010 and $3.2 million in 2009.2010.$19.3$2.2 million in 2012, $19.3 million in 2011 $7.0and $7.0 million in 2010 and $14.0 million in 2009 related to our 50% interest in KBA Mortgage. The amountamounts for 2012 and 2011 included a gaingains of $2.1 million and $19.8 million, recorded in the fourth quarterrespectively, recognized in connection with the wind down of KBA Mortgage. We received the cash associated with the gain in early December 2011. Excluding the gain on the wind down of KBA Mortgage in 2011,these gains, our equity in income of the former unconsolidated(i.e., KBA Mortgage) wastotaled $.5 million in 2011, compared to equity in income of the former unconsolidated mortgage banking joint venture of $7.0 million in 2010 as a result of KBA Mortgage ceasing operations in late June 2011. KBA Mortgage originated 1,633 loans in 2011 and 5,706 loans in 2010 and 7,170 loans in 2009. The year-over-year decrease in unconsolidated joint venture income in 2010 was mainly due to a decline in the number of loans originated by KBA Mortgage, reflecting in large part the lower volume of homes we delivered.Our marketing services agreement with MetLife Home Loans did not result in any income for us based on an equity interest, as we are compensated solely for the fair market value of the services we provide.$2.4$20.1 million in 2012, $2.4 million in 2011 $7.0and $7.0 million in 2010,2010. The income tax benefit in 2012 primarily reflected the resolution of federal and $209.4state tax audits, which resulted in an income tax benefit of $20.1 million in 2009. and the realization of $1.2 million of deferred tax assets. The income tax benefit in 2011 reflected the reversal of a $2.6 million liability for unrecognized tax benefits due to the status of federal and state tax audits. The income tax benefit in 2010 reflected the recognition of a $5.4$5.4 million federalNOLsNOL to offset earnings we generated in 2004 and 2005, and the reversal of a $1.6 million liability for unrecognized tax benefits due to the status of federal and state tax audits. The income tax benefit in 2009 resulted primarily from the recognition of a $190.7 million federal income tax benefit based on the carryback of our 2009 NOLs to offset earnings we generated in 2004 and 2005, and the reversal of a $16.3 million liability for unrecognized federal and state tax benefits due to the status of federal and state tax audits. allowance, carrybackallowances, carrybacks of our NOLs,NOL, and changes in our unrecognized tax benefits, our effective tax rates in 2012, 2011 2010 and 20092010 are not meaningful items as our income tax amounts are not directly correlated to the amount of our pretax losses for those periods.NOLsNOL we have posted, we have generated substantial deferred tax assets and established a corresponding valuation allowance against certain of those deferred tax assets. In accordance with Accounting Standards Codification Topic No. 740, “Income Taxes” (“ASC 740”), we evaluate our deferred tax assets quarterly to determine if adjustments to the valuation allowancesallowance are required. ASC 740 requires that companies assess whether a valuation allowancesallowance should be established based on the consideration of all available evidence using a “more likely than not” standard with respect to whether deferred tax assets will be realized. During 2012 and 2011, we recorded a valuation allowanceallowances of $76.7$32.3 million and $76.7 million, respectively, against net deferred tax assets generated primarily from the losspretax losses for the year.those years. During 2010, we recorded a net increase of $21.1$21.1 million to the valuation allowance against net deferred tax assets, reflecting a $26.6 million valuation allowance recorded against the net deferred tax assets generated from the pretax loss for the year that was partially offset by the $5.4$5.4 million federal income tax benefit from the additional carryback of our 2009 NOLs.During 2009, we recognized a net decrease of $128.8 million in the valuation allowance, reflecting the net impact of a $67.5 million increase in the valuation allowance recorded during the first nine months of 2009 that was more than offset by a decrease in the valuation allowance of $196.3 million, primarily due to the benefit derived from the carryback of our 2009 NOLs. The decrease in the valuation allowance was reflected as a noncash income tax benefit of $130.7 million and a noncash charge of $1.9 million to accumulated other comprehensive loss. The majority of the tax benefits associated with ourNOL.can be carried forward for 20 years and applied to offset future taxable income.$1.1 both November 30, 2011 and 2010.2011. The deferred tax asset valuation allowance increased to $847.8$880.1 million at November 30, 2012 from $847.8 million at November 30, 2011, reflecting the net impact of the $32.3 million valuation allowance recorded in 2012. The deferred tax asset valuation allowance at November 30, 2011 increased from $771.1$771.1 million at November 30, 2010, reflecting the net impact of the $76.7$76.7 million valuation allowance recorded in 2011.NOLs,NOL, built-in losses and tax credits would be reduced or potentially eliminated if we experienced an “ownership change” under Section 382. Based on our analysis performed as of November 30, 2011,2012, we do not believe that we have experienced an ownership change as defined by Section 382, and, therefore, the NOLs,NOL, built-in losses and tax credits we have generated should not be subject to a Section 382 limitation as of this reporting date.Overview.We historically have funded our homebuilding and financial services activities with internally generated cash flows and external sources of debt and equity financing.During the period from mid-2006 through 2009, amid the housing downturn, we focused on generating cash by exiting or reducing our investments in certain underperforming markets, selling land positions and interests, and improving the financial performance of our homebuilding operations. The cash generated from these efforts improved our liquidity, enabled us to reduce our debt levels and strengthened our consolidated financial position. continue to manage our use of cash in the operation of our business.business to support the execution of our primary strategic goals. In addition, in order to positionsupport our operations to capitalize on future growth opportunities,strategic repositioning initiatives, from late 2009 and continuing through 2011,2012, we have also made strategic acquisitionsused our unrestricted cash balance to acquire land and to invest in land development in higher-performing, choice locations — many of attractive land assets that met our investmentwhich are in California and marketing standards, and invested inTexas. Our land and land development to maintain a solid growth platforminvestments totaled approximately $565 million in our targeted markets. We invested2012, approximately $478 million in land and land development in 2011 and approximately $560 million in 2010. Our investment in land and land development in the future will depend significantly on market conditions and available opportunities that meet our investment return and marketing standards. November 30, Variance 2012 2011 Lots/$ % Number of lots owned or controlled under land option contracts or other similar contracts 44,752 40,170 4,582 11 % Carrying value of inventory owned or controlled under land option contracts or other similar contracts $ 1,706,571 $ 1,731,629 $ (25,058 ) (1 )% 20112012 fiscal year with $479.5$567.1 million of cash and cash equivalents and restricted cash, compared to $1.02 billion$479.5 million at November 30, 2010.2011. Our balance of unrestricted cash and cash equivalents was $524.8 million at November 30, 2012 and $415.1 million at November 30, 2011. The year-over-year decreaseincrease in our totalunrestricted cash balance reflected in part our raising approximately $91 million of unrestricted cash equivalents and restricted cash was mainly due to payments of $251.9 million made inthrough the fourth quarter of 2011 in connection with the South Edge Plan and the resolution of other matters surrounding South Edge, the repayment of the remaining $100.0 million in aggregate principal amountissuance of the $350 Million 7.50% Senior Notes at theirAugust 15, 2011 maturity, and the repayment of $89.5 million of mortgages and land contracts due to land sellers and other loans.Notes. The majority of our cash and cash equivalents at November 30, 20112012 and 20102011 were invested in money market accounts and U.S. government securities. At November 30, 2011, we had $1.58 billion ofOur mortgages and notes payable outstanding compared to $1.78 billion outstandingconsisted of the following (in thousands): November 30, Variance 2012 2011 $ Mortgages and land contracts due to land sellers and other loans (6% to 7% at November 30, 2012 and 2011) $ 52,311 $ 24,984 $ 27,327 Senior notes due February 1, 2014 at 5 3/4% 75,911 249,647 (173,736 ) Senior notes due January 15, 2015 at 5 7/8% 101,999 299,273 (197,274 ) Senior notes due June 15, 2015 at 6 1/4% 236,826 449,795 (212,969 ) Senior notes due September 15, 2017 at 9.10% 261,430 260,865 565 Senior notes due June 15, 2018 at 7 1/4% 299,129 299,007 122 Senior notes due March 15, 2020 at 8.00% 345,209 — 345,209 Senior notes due September 15, 2022 at 7.50% 350,000 — 350,000 Total $ 1,722,815 $ 1,583,571 $ 139,244 2010, reflecting2012 reflected the repaymentissuance of the remaining $100.0$350 Million 8.00% Senior Notes in the first quarter of 2012, which was largely offset by the purchase of $56.3 million in aggregate principal amount of the $250.0 million of 5 3/4% senior notes due 2014 (the “$250 Million 5 3/4% Senior Notes”), $130.0 million in aggregate principal amount of the $300.0 million of 5 7/8% senior notes due 2015 (the “$300 Million 5 7/8% Senior Notes”), and $153.7 million in aggregate principal amount of the $450.0 million of 6 1/4% senior notes due 2015 (the “$450 Million 6 1/4% Senior Notes”) pursuant to the applicable January 2012 Tender Offers. Our debt balance at November 30, 2012 also reflected the issuance of the $350 Million 7.50% Senior Notes at their August 15, 2011 maturity,in the third quarter of 2012, which was largely offset by the purchase of $117.7 million in aggregate principal amount of the $250 Million 5 3/4% Senior Notes, $67.8 million in aggregate principal amount of the $300 Million 5 7/8% Senior Notes, and $59.4 million in aggregate principal amount of the $450 Million 6 1/4% Senior Notes pursuant to the applicable July 2012 Tender Offers. The remaining net proceeds from these debt issuances were used for general corporate purposes. The terms of the $350 Million 8.00% Senior Notes and the repayment$350 Million 7.50% Senior Notes are described in Note 12. Mortgages and Notes Payable in the Notes to Consolidated Financial Statements in this report. The above-described transactions effectively extended the maturity of $89.5$584.9 million of mortgages and land contracts due to land sellers and other loans during 2011.our outstanding senior debt by more than five years. Our next scheduled debt maturity is in 2014, when the remaining $76.0 million in aggregate principal amount of our $250 Million 5 3/4% Senior Notes becomes due.78.2%82.1% at November 30, 2011,2012, compared to 73.8%78.2% at November 30, 2010.2011. The increase in our financial leverage primarily reflected the increase in our mortgages and notes payable balance stemming largely from the issuance of the $350 Million 7.50% Senior Notes and the decrease in our stockholders’ equity, as a result ofwhich resulted from the net losses and asset impairment and land option contract abandonment charges we incurred in 2011.during 2012. Our ratio of net debt to total capital at November 30, 20112012 was 71.4%75.4%, compared to 54.5%71.4% at November 30, 2010.At November 30, 2009, we maintained the Credit Facility with a syndicate of lenders that was scheduled to mature in November 2010. Anticipating that we would not need to borrow under the Credit Facility before its scheduled maturity and to trim the costs associated with maintaining it, effective December 28, 2009, we voluntarily reduced the aggregate commitment under the Credit Facility from $650.0 million to $200.0 million, and effective March 31, 2010, we voluntarily terminated the Credit Facility.Following2011. voluntary termination of the Credit Facility, we entered into the LOC Facilities with various financial institutions to obtain letters of credit in the ordinary course of operating our business. As of November 30, 20112012 and 2010,2011, we had $63.8$41.9 million and $87.5$63.8 million, respectively, of letters of credit outstanding under theour LOC Facilities. TheOur LOC Facilities require us to deposit and maintain cash with the issuing financial institutions as collateral for our letters of credit outstanding. The amount of cash maintained for theour LOC Facilities totaled $64.5$42.4 million at November 30, 20112012 and $88.7$64.5 million at November 30, 2010,2011, and these amounts were included in restricted cash on our consolidated balance sheets as of those dates. We may maintain, revise or, if necessary or desirable, enter into additional or expanded letter of credit facilities, or other similar facility arrangements orenter into a newrevolving credit facility, with the same or other financial institutions.Under the terms of the Credit Facility, we were required, among other things, to maintain a minimum consolidated tangible net worth and certain financial statement ratios, and were subject to limitations on acquisitions, inventories and indebtedness. As a result of the Credit Facility’s termination, these restrictions and requirements are no longer in effect.In addition to the cash deposits maintained for the LOC Facilities, restricted cash on our consolidated balance sheet at November 30, 2010 included $26.8 million of cash in an escrow account required as collateral for a surety bond. As of November 30, 2011, the surety provider no longer required cash collateral on this bond.ourthe $265 Million 9.10% Senior Notes, the $350 Million 8.00% Senior Notes, and the $350 Million 7.50% Senior Notes contain certain limitations related to mergers, consolidations, and sales of assets. Under the terms of the indenture, we must cause any subsidiary of ours that is or becomes a “significant subsidiary,” as defined under Rule 1-02(w)1-02 of Regulation S-X (as in effect on June 1, 1996), to provide a guarantee with respect to our senior notes (the “Guarantor Subsidiaries”). In addition, we may cause other subsidiaries of ours to provide such a guarantee 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 21. Supplemental Guarantor Information in the Notes to Consolidated Financial Statements in this report.2011, 2012, we were in compliance with the applicable terms of all of our covenants under our senior notes, the indenture, and mortgages and land contracts due to land sellers and other loans. Our ability to secure future debt financing may depend in part on our ability to remain in such compliance.As discussed further below under “Off-Balance Sheet Arrangements,” during the fourth quarter of 2011, we made payments of $251.9 million in connection with the South Edge Plan and the resolution of other matters surrounding South Edge, which included, among other things, the elimination of a Springing Guaranty we had provided to the Administrative Agent.By maintaining a disciplined approach to land and land development investments, we ended our 2011 fiscal year with a balance of cash and cash equivalents and restricted cash of $479.5 million after making the South Edge-related payments, paying down debt and funding our 2011 operating needs. We will continue to evaluate our future cash requirements and financing opportunities available in the capital and bank loan markets. Depending on economic, housing and capital market conditions and resource allocation priorities, we plan to use a portion of our unrestricted cash and cash equivalents in 2012 to acquire additional land assets and open new home communities to support our primary strategic goal of achieving and maintaining profitability. Our land acquisition and new home community opening plans for 2012 are further discussed below under “Outlook.”2011,2012, we had outstanding mortgages and land contracts due to land sellers and other loans payable in connection with such financing of $25.0$52.3 million, secured primarily by the underlying property, which had a carrying value of $62.3 million.$94.1 million.Operating,The following table presents a summary of net cash provided by (used in) our operating, investing and financing activities used net cash of $490.4 million in 2011 and $269.5 million in 2010. These(in thousands): Years Ended November 30, 2012 2011 2010 Net cash provided by (used in): Operating activities $ 34,617 $ (347,545 ) $ (133,964 ) Investing activities (760 ) 13,098 (16,089 ) Financing activities 73,757 (155,909 ) (119,478 ) Net increase (decrease) in cash and cash equivalents $ 107,614 $ (490,356 ) $ (269,531 ) $36.4$34.6 million in 2009.Operating Activities. Operating activities2012 and used net cash of $347.6$347.5 million in 2011 and $133.9$134.0 million in 2010, and provided net cash of $349.9 million in 2009.2010. The year-over-year change in net operating cash flows in 2012 was primarily due to the lower net loss incurred in 2012 and the substantial payments we made in 2011 in connection with the South Edge Plan and in resolving other matters surrounding the underlying joint venture. In 2011, the year-over-year change in net operating cash flows was largely reflected the $190.7 milliondue to a sizeable federal income tax refund we received during 2010 as2010; there was no such refund received in 2011.2010, the year-over-year change in net operating2012, cash was primarily due to an increaseprovided by a net decrease in inventories reflecting ourof $30.3 million (excluding $53.6 million of inventories acquired through seller financing, inventory impairment and land acquisition initiative.Our usesoption contract abandonment charges of $28.5 million and a decrease of $19.8 million in consolidated inventories not owned) and a decrease in receivables of $25.0 million. Partially offsetting the cash for operating activities in 2011 includedprovided was a net loss of $178.8$59.0 million, a net decrease in accounts payable, accrued expenses and other liabilities of $253.5$2.1 million, and other operating uses of $12.5 million.$12.3$12.3 million (excluding the real estate collateral in our Southwest homebuilding reporting segment that we recorded upon the foreclosure oftook back on a $40.0$40.0 million note receivable, inventory impairment and land option contract abandonment charges of $25.8 million, and an increase of $8.4$8.4 million in consolidated inventories not owned), a net increase in receivables of $2.2$2.2 million and other operating uses of $2.3 million.$2.3 million. The net decrease in accounts payable, accrued expenses and other liabilities was largely due to payments we made in connection with the South Edge Plan and in resolving other matters surrounding South Edge.In 2010, ourthe underlying joint venture.$199.2$199.2 million, a net increase in inventories of $129.3$129.3 million (excluding inventory impairments and land option contract abandonments, $55.2$55.2 million of inventories acquired through seller financing and a decrease of $41.6$41.6 million in consolidated inventories not owned) in conjunction with our land acquisition initiative,, a net loss of $69.4$69.4 million, and other operating uses of $1.7 million.$1.7 million. Partially offsetting the cash used was a decrease in receivables of $211.3$211.3 million, mainly due to the $190.7 million federal income tax refund we received during the first quarter as a result of the carryback of our 2009 NOLsNOL to offset earnings we generated in 2004 and 2005.Operating2009 was provided by a net decrease2012 and $16.1 million in inventories of $433.1 million (excluding inventory impairments2010 and land option contract abandonments, $16.2 million of inventories acquired through seller financing, a decrease of $45.3 million in consolidated inventories not owned, and an increase of $97.6 million in inventories in connection with the consolidation of certain previously unconsolidated joint ventures), other operating sources of $8.3 million and various noncash items added to the net loss for the year. The cash provided in 2009 was partly offset by a decrease in accounts payable, accrued expenses and other liabilities of $252.6 million and a net loss of $101.8 million.Investing Activities. Investing activities provided net cash of $13.1$13.1 million in 2011, and used net cash of $16.1 million in 2010 and $21.3 million in 2009.2011. The year-over-year change in net investing cash flows in 2012 and 2011 was primarilymainly due to proceeds of $80.6 million we received in 2011 from the sale of a multi-level residential building we had operated as a rental property in our West Coast homebuilding reporting segment.segment, partly offset by investments in unconsolidated joint ventures that year.$15.7$15.7 million was used for investments in unconsolidated joint ventures and $.4$.4 million was used for net purchases of property and equipment. Thedecreasechange in cash used for investing activities in 2010 was primarily due to a reduction in our investments and participation in unconsolidated joint ventures compared to the prior year. In 2009, $19.9 million of cash was used for investments in unconsolidated joint ventures and $1.4 million of cash was used for net purchases of property and equipment.Financing Activities. Net cash used for financing activities totaled $155.9 million in 2011, $119.5 million in 2010 and $292.2 million in 2009. The year-over-year increase in 2011 was largely due to the repayment of debt, partly offset by a decrease in restricted cash. We usedlarger amountdecrease of $22.1 million in our restricted cash balance and $.6 million of cash for financing activities in 2009 than in 2010 primarily dueprovided from the issuance of common stock under employee stock plans. The cash provided was partially offset by $592.6 million used to our repayment of $200.0purchase $340.0 million in aggregate principal amount of 8 5certain of our senior notes due 2014 and 2015 pursuant to the applicable January 2012 Tender Offers and $244.9 million in aggregate principal amount of certain of our senior notes due 2014 and 2015 pursuant to the applicable July 2012 Tender Offers, including expenses associated with the applicable tender offers and with the issuance of the $350 Million 8.00% Senior Notes and the $350 Million 7.50% Senior Notes. Uses of cash in 2012 also included payments on mortgages and land contracts due to land sellers and other loans of /$26.3 million8, the payment of senior note issuance costs of % senior subordinated notes at their scheduled maturity$12.4 million, dividend payments on our common stock of $10.6 million, and stock repurchases of $1.8 million in December 2008.connection with the satisfaction of employee withholding taxes on vested restricted stock.$100.0$100.0 million in aggregate principal amount of the $350$350.0 million of 6 3/8% senior notes due 2011 (the “$350 Million 6 3/8% Senior NotesNotes”) at their August 15, 2011 maturity, and for net payments on mortgages and land contracts due to land sellers and other loans of $89.5$89.5 million, primarily related to the repayment of debt secured by the multi-level residential building we sold during the year. Uses of cash in 2011 also included dividend payments on our common stock of $19.2 million.$19.2 million. The cash used was partially offset by a $51.0$51.0 million decrease in our restricted cash balance, of which $26.8 million related to cash collateral no longer required on a surety bond, and $1.8$1.8 million of cash provided from the issuance of common stock under employee stock plans.$101.2$101.2 million, dividend payments on our common stock of $19.2$19.2 million, an increase in the restricted cash balance of $1.2$1.2 million, and stock repurchases of common stock of $.4$.4 million in connection with the satisfaction of employee withholding taxes on vested restricted stock. The cash used was partially offset by $1.9$1.9 million provided from the issuance of common stock under employee stock plans and $.6$.6 million from excess tax benefits associated with the exercise of stock options. $.0625 $.0625per share of common stock during both 2011 and 2010. The declaration and payment of future cash dividends on our common stock are at the discretion of our board of directors, and depend upon, among other things, our expected future earnings, cash flows, capital requirements, debt structure and any adjustments thereto, operational and financial investment strategy and general financial condition, as well as general business conditions.In 2009, cash was used for the repayment of $250.0 million in aggregate principal amount of the $350 Million Senior Notes and the $200.0 million in aggregate principal amount of 8 5/8% senior subordinated notes due December 15, 2008 at their maturity, payments of $79.0 million on mortgages and land contracts due to land sellers and other loans, dividend payments on our common stock of $19.1 million, payment of senior notes issuance costs of $4.3 million, and repurchases of common stock of $.6 million in connection with the satisfaction of employee withholding taxes on vested restricted stock. These uses of cash were partly offset by $259.7 million of cash provided from the issuance of the $265 Million Senior Notes, $3.1 million of cash provided from the issuance of common stock under employee stock plans and $1.1 million of cash provided from a reduction in the balance of cash deposited in an interest reserve account we established in connection with the Credit Facility (which was restricted cash).2011,2012, we were authorized to repurchase four million4,000,000 shares of our common stock under a board-approved share repurchase program. We did not repurchase any shares of our common stock under this program in 2011.2012, 2011 or 2010. We have not repurchased common shares pursuant to a common stock repurchase plan for the past several years and any resumption of such stock repurchases will be at the discretion of our board of directors.assets and land, to develop acquired land, to construct homes, to finance our financial services operations, and to meet any other needs in the ordinary course of our business. Our intent is to manage our business to a cash neutral position for 2012, as further described below under “Outlook.” Although our land acquisition and land development activities in 2012for 2013 will remainbe subject to market conditions and available opportunities, we are analyzing potential asset acquisitions and arewill likely to use a portion of our unrestricted cash resources to purchase assetsacquire and/or develop land that meetmeets our investment return and marketing standards. In 2012,2013, we may also use or redeploy our unrestricted cash and cash equivalentsresources to support other business purposes that are aligned with our primary strategic goals, including our growth initiatives. In addition, we may also arrange or engage in other financial transactions, including capital markets, bank loan, or credit facility, or project debt or other financingfinancial transactions. These transactions may include repurchases from time to time of our outstanding senior notes or other debt through tender offers, exchange offers,arrangements.arrangements to raise new capital to support our current land acquisition and land development investment targets, and for other business purposes and/or to effect repurchases of our outstanding senior notes or other debt. Our ability to engage in such financial transactions, however, may be constrained by economic, capital, credit and/or capital markets or bank lendingfinancial market conditions, investor interest and/or our current leverage ratios, and we can provide no assurance of the success or costs of any such financial transactions.On January 19, 2012, we announced the commencement of cash tender offers for up to $250 million in aggregate principal amount of our 5 3/4% senior notes due 2014 and of our 5 7/8% senior notes due 2015 and 6 1/4% senior notes due 2015. The tender offers are being made pursuant to an Offer to Purchase dated January 19, 2012 and a related Letter of Transmittal, which set forth a more detailed description of the tender offers. Upon the terms and subject to the conditions described in the Offer to Purchase, the Letter of Transmittal and any amendments or supplements to the foregoing, we are offering to purchase for cash up to $100 million in aggregate principal amount (the “Maximum 2014 Amount”) of the 5 3/4% senior notes due 2014 (the “2014 Note Tender Offer”), and up to $250 million in aggregate principal amount, less any amount accepted in the 2014 Note Tender Offer, (the “Maximum 2015 Amount” and together with the Maximum 2014 Amount, the “Maximum Tender Amounts”) of the 5 7/8% senior notes due 2015 and 6 1/4% senior notes due 2015 (the “2015 Note Tender Offers”). We reserve the right to increase or waive either or both of the Maximum Tender Amounts subject to compliance with applicable law. These tender offers will expire at 11:59 p.m., New York City time, on February 15, 2012, unless extended or earlier terminated. Our obligation to accept for purchase and to pay for each series validly tendered in the applicable tender offer is subject to the satisfaction or waiver of a number of conditions, including our completion of a proposed offer and sale of unsecured senior debt securities on terms reasonably satisfactory to us. We intend to offer the unsecured senior debt securities under our 2011 Shelf Registration.We enter into these unconsolidated joint venturesThese investments are designed primarily to reduce or share market and development risks and to increase the number of ourlots owned and controlled homesites.by us. In some instances, participating in unconsolidated joint ventures has enabled us to acquire and develop land that we might not otherwise have had access to due to a project’s size, financing needs, duration of development or other circumstances. While we consider our participation in unconsolidated joint ventures as potentially beneficial to our homebuilding activities, we do not view such participation as essential and have unwound our participation in a number of these unconsolidated joint ventures in the past few years.purchaseacquire portions of the land held by the unconsolidated joint ventures in which we currently participate. When an unconsolidated joint venture sells land to our homebuilding operations, we defer recognition of our share of such unconsolidated joint ventureventure’s earnings until a home sale is closed and title passes to a homebuyer, at which time we account for those earnings as a reduction of the cost of purchasing the land from the unconsolidated joint venture.$396.9$389.8 million at November 30, 20112012 and $789.4$396.9 million at November 30, 2010. The decrease primarily relates to South Edge. Due to a bankruptcy-court approved disposition of the land previously owned by South Edge, pursuant to the South Edge Plan, to Inspirada Builders, LLC in the fourth quarter of 2011, South Edge had no assets or liabilities at November 30, 2011. Inspirada Builders, LLC is an unconsolidated joint venture formed in connection with the South Edge Plan in which a wholly owned subsidiary of ours is a member. Our investmentinvestments in unconsolidated joint ventures totaled $127.9$123.7 million at November 30, 20112012 and $105.6$127.9 million at November 30, 2010.arrangements. To finance their respective land acquisition arrangements, development activities, certain of our unconsolidated None Of our unconsolidated joint ventures at November 30, 2010, only South Edge had outstanding debt, which was secured by a lien on South Edge’s assets, with a principal balance of $327.9 million.equitycapital to an unconsolidated joint venture to enable it to fund its completion obligations. Our potential responsibility under our completion guarantees, if triggered, is highly dependent on the facts of a particular case. A carve-out guaranty generally refers to the payment of losses a lender suffers due to certain bad acts or omissions by an unconsolidated joint venture or its partners, such as fraud or misappropriation, or due to environmental liabilities arising with respect to the relevant project. We doAs none of our unconsolidated joint ventures had outstanding debt at November 30, 2012 or 2011, we did not believe that we currently have exposure with respect to any of ourrelated completion or carve-out guarantees.In addition to completion and carve-out guarantees we provided the Springing Guaranty to the Administrative Agent in connection with secured loans made to South Edge. On February 3, 2011, a bankruptcy court entered an order for relief on a Chapter 11 involuntary bankruptcy petition (the “Petition”) filed against South Edge and appointed a Chapter 11 trustee for South Edge. Although we believed that there were potential offsets or defenses to prevent or minimize the enforcementas of the Springing Guaranty, as a result of the February 3, 2011 order for relief on the Petition, we considered it probable, based on the terms of the Springing Guaranty, that we became responsible to pay certain amounts to the Administrative Agent related to the Springing Guaranty. Therefore, beginning in the first quarter of 2011, our consolidated financial statements reflected a net payment obligation, representing our estimate of the probable amount that we would pay to the Administrative Agent (on behalf of the South Edge lenders) related to the Springing Guaranty and to pay for certain fees, expenses and charges and for certain allowed general unsecured claims in the South Edge bankruptcy case. This estimate was evaluated at the end of each subsequent quarterly period and updated to reflect our belief of our probable net payment obligation at the time. In connection with the South Edge Plan and the resolution of other matters surrounding South Edge, we made payments of $251.9 million in the fourth quarter of 2011, including a payment to the Administrative Agent, which satisfied the respective liens of the Administrative Agent and most of the South Edge lenders on the land South Edge owned. those dates.a result of consummating the South Edge Plan and (a) taking into account accruals we had previously established through inventory impairments with respect to our estimated losses related to our share of the land previously owned by South Edge anticipated to be acquired in connection with the South Edge Plan and (b) factoring in an offset for the estimated fair value of such South Edge land (as discussed below), we recognized a loss on loan guaranty charge of $30.8 million in our consolidated statements of operations for the year ended November 30, 2011. This charge was in addition to the joint venture impairment charge of $53.7 million that we recognized in 2011 to write off our remaining investment in South Edge.Based on the terms of the South Edge Plan, the land previously owned by South Edge, including our share that consists of approximately 600 developable acres, was acquired by Inspirada Builders, LLC. We estimated the fair value of our share of the land to be $75.2 million at November 30, 2011. We calculated this estimated fair value using a present value methodology and assumed that we would develop the land, build and sell homes on most of the land, and sell the remainder of the developed land. This fair value estimate at November 30, 2011 reflected our expectations of the price we would receive for our share of the land in the land’s then-current state in an orderly (not a forced) transaction under then-prevailing market conditions. Our fair value estimate was corroborated by a third-party appraisal conducted in the fourth quarter of 2011.Our fair value estimate reflected judgments and key assumptions concerning (a) housing market supply and demand conditions, including estimates of average selling prices; (b) estimates of potential future home sales and cancellation rates; (c) anticipated entitlements and development plans for the land; (d) anticipated land development, construction and overhead costs to be incurred; and (e) a risk-free rate of return and an expected risk premium, in each case in relation to an expected 15-year life for the project. These key assumptions and other factors applied to our fair value estimation arefurther discussed in Note 9. Investments in Unconsolidated Joint Ventures in the Notes to Consolidated Financial Statements in this report. Due to the judgment and assumptions appliedreport, our investments in the fair value estimation process atunconsolidated joint ventures as of November 30, 2012 and 2011 itincluded our investments of $71.0 million and $75.5 million, respectively, in Inspirada Builders, LLC, an unconsolidated joint venture that was formed in 2011 in connection with the South Edge Plan, and in which a wholly owned subsidiary of ours is possible that actual results could differ substantially from those estimated.We believe that we will realize the value of our sharea member. As part of the terms of the South Edge Plan, land previously owned by the South Edge andjoint venture, including our share that consists of approximately 600 developable acres, was acquired by Inspirada Builders, LLC in November 2011. We anticipate that we will acquire our share of the land from Inspirada Builders, LLC through a future distribution of the land.and 2010 were determined under the provisions of ASC 810 to be unconsolidated joint ventures and were accounted for under the equity method, either because they were not VIEs and we did not have a controlling financial interest or, if they were VIEs, we were not the primary beneficiary of the VIEs.procureacquire rights to land parcels for the construction of homes. The use of suchthese land option contracts and other similar contracts generally allows us to reduce the market risks associated with direct land ownership and development, and to reduce our capital and financial commitments, including interest and other carrying costs. Under such contracts, we typically pay a specified option deposit or earnest money deposit in consideration for the right to purchase land in the future, usually at a predetermined price. Under the requirements of ASC 810, certain of these contracts may create a variable interest for us, with the land seller being identified as a VIE.We also consider whether we have the obligation to absorb losses of the VIE or the right to receive benefits from the VIE. As a result of our analyses, we determined that as of November 30, 20112012 and 20102011 we were not the primary beneficiary of any VIEs from which we are purchasinghave acquired rights to land under land option contracts and other similar contracts.AsNovember 30, 2011, we had cash deposits totaling $8.1 million associated withour interests in land option contracts and other similar contracts that we determined(in thousands): November 30, 2012 November 30, 2011 Aggregate Purchase Price Unconsolidated VIEs $ 8,463 $ 327,196 $ 8,097 $ 122,125 Other land option contracts and other similar contracts 17,219 298,139 12,830 222,940 $ 25,682 $ 625,335 $ 20,927 $ 345,065 be unconsolidated VIEs, having an aggregate purchase price of $122.1 million, and hadthe cash deposits totaling $12.8 million associated withpresented in the table above, our exposure to loss related to our land option contracts and other similar contracts that we determined were not VIEs, having an aggregate purchase pricewith third parties and unconsolidated entities consisted of $223.0 million. Aspre-acquisition costs of$25.4 million at November 30, 2010, we had2012 and $31.5 million at November 30, 2011. These pre-acquisition costs and cash deposits totaling $2.6were included in inventories on our consolidated balance sheets. We also had outstanding letters of credit of $.5 million associated with at November 30, 2012 and $1.7 millioncontracts that we determined to be unconsolidated VIEs, having an aggregate purchase price of $86.1 million, and had cash deposits totaling $12.2 million associated with land option contracts and other similar contracts that we determined were not VIEs having an aggregate purchase price of $274.3 million.2011 and $15.5 million at November 30, 2010.20112012 (in millions): Payments due by Period Total 2012 2013-2014 2015-2016 Thereafter $ 1,583.6 $ 25.0 $ 249.6 $ 749.1 $ 559.9 467.8 106.0 200.0 109.2 52.6 20.2 7.0 10.7 2.5 — 33.9 18.8 6.6 1.1 7.4 $ 2,105.5 $ 156.8 $ 466.9 $ 861.9 $ 619.9 Payments due by Period Total 2013 2014-2015 2016-2017 Thereafter Contractual obligations: Long-term debt $ 1,722.8 $ 37.9 $ 429.2 $ 261.4 $ 994.3 Interest 751.6 125.3 230.5 195.2 200.6 Operating lease obligations 14.3 5.9 8.1 .3 — Inventory-related obligations (a) 11.7 1.8 3.8 1.4 4.7 Total (b) $ 2,500.4 $ 170.9 $ 671.6 $ 458.3 $ 1,199.6 (a) Represents liabilities related to inventory not owned and liabilities for fixed or determinable amounts associated with debt of a tax increment financing entity (TIFE)(“TIFE”). As homes are delivered, the obligation to pay the remaining TIFE assessments associated with each lot is transferred to the homebuyer. As such, the TIFE debt will be paid by us only to the extent we do not deliver the applicable homes before the debt matures.(b) Total contractual obligations exclude our accrual for uncertain tax positions recorded for financial reporting purposes as of November 30, 20112012 because we are unable to make a reasonable estimate of cash settlements with the respective taxing authorities for all periods presented. We anticipate these potential cash settlement requirements for 20122013 to range from $1.0$.2 million to $1.5$1.1 million.At November 30, 2010, we had $414.3 million of performance bonds and $87.5 million of letters of credit outstanding. If any such performance bonds or letters of credit are called, we would be obligated to reimburse the issuer of the performance bond or letter of credit. We do not believe that a material amount of any currently outstanding performance bonds or letters of credit will be called. Performance bonds do not have stated expiration dates. Rather, we are released from the performance bonds as the underlying performance 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 obligation isobligations are completed.360 360”) when sales are closed and title passes to the buyer. Sales are closed when all of the following conditions are met: a sale is consummated, a sufficient down payment is received, the earnings process is complete and the collection of any remaining receivables is reasonably assured.housinghousing and land inventories are stated at cost, unless the carrying amountvalue is determined not to be recoverable, in which case the affected inventories are written down to fair value in accordance with ASC 360. Fair value is determined based on estimated future net cash flows discounted for inherent risks associated with the real estate assets, or other order cancellations or strategic considerations may result in our having a relatively small amount ofsome inventory of unsold completed or partially completed homes. we have suspended development activity has been suspended or has not yet begun, but is expected to occur in the future. These assets held for future development are located in various submarkets where conditions do not presently support further investment or development, or are subject to a period of time due to building permit moratorium or regulatory restrictions, that hinder our ability to move forward with the developmentor are portions of the community. It also includes largelarger land parcels that we plan to build out over several years and/or parcels that have not yet been entitled and, therefore, have an extended development timeline. Land we are holding for future developmententitled. We may also includes land where we have deferredsuspend development activity based on our belief thatif we can generatebelieve it will result in greater returns and/or maximize the economic performance of a community by delaying improvements for a period of time to allow earlier phases of a long-term, multi-phase community or a neighboring community to generate sales momentum or for market conditions to improve.community. We resume development activity when we believe our investment in this inventory will be optimized.optimized, and we have activated assets previously held for future development in certain markets as part of our strategic growth initiatives. Interest is not capitalized on land held for future development. As discussed in Note 5. Inventories in the Notes to Consolidated Financial Statements in this report, for those communities for which development activity has been suspended, applicable interest is expensed as incurred.improvementsdevelopment and other common costs are generally allocated on a relative fair value basis to homes within a parcelcommunity or community.land parcel. Land acquisition and land development costs include related interest and real estate taxes.marginsprofits in a particular reporting period. To reduce the potential for such distortion, we have set forth procedures that collectively comprise a “critical accounting policy.” These procedures, which we have applied on a consistent basis, include assessing, updating and revising project budgets on a monthly basis, obtaining commitments from subcontractors and vendors for future costs to be incurred, reviewing the adequacy of warranty accruals and historical warranty claims experience, and utilizing the most current information available to estimate construction and land costs to be charged to expense. The variances between budgeted and actual costs have historically not had abeen material impact onto our consolidated financial statements. We believe that our policies provide for reasonably dependable estimates to be used in the calculation and reporting of construction and land costs.eacheach community or land parcel or community in our owned inventory is assessed to determine if indicators of potential impairment exist. Impairment indicators are assessed separately for each community or land parcel or community on a quarterly basis and include, but are not limited to: significant decreases in sales rates,net orders, average selling prices, volume of homes delivered, gross profit margins on homes delivered or projected gross profit margins on homes in backlog or future housing sales; significant increases in budgeted land development and home construction costs or cancellation rates; or projected losses on expected future land sales. If indicators of potential impairment exist for a community or land parcel, or community, the identified asset is evaluated for recoverability in accordance with ASC 360. We evaluated 138, 118281 land parcels or communities for recoverability during the years ended November 30, 2011, 2010option contract abandonment charges included in construction and 2009, respectively. Someland costs in our consolidated statements of the land parcels or communities evaluated during the years ended November 30, 2011, 2010 and 2009 may have been evaluatedoperations (dollars in more than one quarterly period. Years Ended November 30, 2012 2011 2010 Inventory impairments: Number of communities or land parcels evaluated for recoverability (a) 135 138 118 Number of communities or land parcels impaired (b) 14 12 8 Pre-impairment carrying value of communities or land parcels impaired $ 67,958 $ 56,752 $ 21,385 Inventory impairment charges (b) (28,107 ) (22,730 ) (9,815 ) Post-impairment fair value $ 39,851 $ 34,022 $ 11,570 Land option contract abandonment charges: Number of lots abandoned 446 830 1,007 Land option contract abandonment charges $ 426 $ 3,061 $ 10,110 (a) (b) or community, 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 anthe asset is located as well as factors known to us at the time the cash flows are calculated. TheWith the undiscounted future net cash flows, we also consider recent trends in our sales,orders, backlog, cancellation rates and cancellation rates. Also taken into account arevolume of homes delivered, as well as our future expectations related to the following: product offerings; market supply and demand, including estimatesconcerningestimated average selling prices; salesprices and cancellation rates;related price appreciation; and anticipated land development, home construction and overhead costs to be incurred. incurred and related cost inflation. 2011, 2012, these expectations reflected our experience that, although there were at times measurable quarterly fluctuations in our year-over-year and sequential net orders, backlog levels and housing gross profit margin, these were primarily due to certain period-specific and/or company-specific factors that we believed would be largely mitigated by various strategic actions and/or by observed market trends. These factors included mortgage loan funding issues arising from a change in the nature of our relationships with mortgage lenders; the before and after effects of the Tax Credit that expired in 2010; and a lower community count as a result of our strategic repositioning efforts. We believe the impact of these factors was moderated by our operational transition to our new preferred mortgage lender; our strategic growth initiatives; and our continued ability to generate a consistent or higher average selling price as a result of the demand from our homebuyers for larger home sizes and more design options. By comparison, market conditions for our assets in inventory where impairment indicators were identified have been generally stable in 20102011 and 2011,2012, with no significant deterioration or improvementsustained deterioration identified as to revenue and cost drivers excluding the temporary, though significantthat would prevent or otherwise impact of the expiration of the Tax Credit. In our inventory assessments during 2011 and 2010, we determined that the declines in our sales and backlog levels that we experienced in the latter half of 2010 and in the first half of 2011 did not reflect a sustained change in market conditions preventing recoverability. Rather, we considered that they reflected the after effects of the Tax Credit. Strategic community count reductions we made in select markets in prior periods to align our operations with market activity levels also contributed to the declines in sales and backlog levels. Based on this experience, and taking into account the year-over-year increase in net orders in the latter half of 2011 and the number of new home communities open for sales, and signs of stability and improvement in certainmany markets for new home sales, our inventory assessments as of November 30, 20112012 considered an expected steady, if slightly improved, overall improved sales pace and average selling price performance for 2012.improvementother changes in conditions or other significant changes. Therefore, our inventoryconditions. These assessments, at the time made, generally anticipate sales rates,net orders, average selling prices, volume of homes delivered and costs to generally continue at or near then-current levels through the affected asset’s estimated remaining life. ForInventory assessments for our land held for future development our inventory assessments also incorporate highlyconsider then-current market conditions as well as subjective forecasts for future performance, includingregarding the timing and costs of land development and home construction and related cost inflation; the productproduct(s) to be offered,offered; and the sales ratesnet orders, volume of homes delivered, and selling prices and related price appreciation of the productoffered product(s) when thean associated community is anticipated to open for sales, and the projected costs to develop and construct the community.sales. We evaluate various factors to develop ourthese forecasts, including the availability of and demand for homes and finished lots within the relevant marketplace; historical, current and expected future sales trends;trends for the marketplace; and third-party data, if available. Based on these factors, we formulate reasonable assumptions for future performance based on our judgment. These various estimates, trends, expectations and expectationsassumptions used in each of our inventory assessments are specific to each community or land parcel or communitybased on what we believe are reasonable forecasts for performance and may vary among communities or land parcels or communities.Aand may vary over time. is considered impaired when its carrying value is greater than the undiscounted future net cash flows the asset is expected to generate. ImpairedThese real estate assets are written down to fair value, which is primarily based on the estimated future net cash flows discounted for inherent risk associated with each such asset.Inputs used in the estimated discounted future net cash flows are specific to each affected community or land parcel and are based on our expectations for each such asset as of the applicable measurement date, including, among others, expectations related to average selling prices and delivery rates. The discount rates used in our estimated discounted cash flows ranged from 17% to 20% during 2012, 2011 and 2010 and ranged from 12% to 21% during 2009. These2010. The discount rates and related discounted cash flowswe use are impacted by the following: the risk-free rate of return; expected risk premium based on estimated land development, home construction and delivery timelines; market risk from potential future price erosion; cost uncertainty due to land development or home construction cost increases; and other risks specific to the asset or conditions in the market in which the asset is located at the time the assessment iswas made. These factors are specific to each land parcel or community and may vary among land parcels or communities.Based on the results of our evaluations, we recognized pretax, noncash inventory impairment charges of $22.7 million in 2011 associated with 12 land parcels or communities with a post-impairment fair value of $34.0 million. These charges included an $18.1 million adjustment to the fair value of real estate collateral in our Southwest homebuilding reporting segment that we recorded upon the foreclosure of a note receivable in 2011. In 2010, we recognized $9.8 million of pretax, noncash inventory impairment charges associated with eight land parcels or communities with a post-impairment fair value of $11.6 million. In 2009, we recognized pretax, noncash inventory impairment charges of $120.8 million associated with 61 land parcels or communities with a post-impairment fair value of $129.0 million. The inventory impairments we recorded during 2011, 2010 and 2009 reflected declining asset values in certain markets due to unfavorable economic and competitive conditions. In some cases, we have recognized impairment charges for particular land parcels or communities in multiple years.2011,2012, the aggregate carrying value of our inventory that had been impacted by pretax, noncash inventory impairment charges was $338.5$307.2 million, representing 5346 communities and various other land parcels or communities.parcels. As of November 30, 2010,2011, the aggregate carrying value of our inventory that had been impacted by pretax, noncash inventory impairment charges was $418.5$338.5 million, representing 7253 communities and various other land parcels or communities.other factors:others: current and/orsales rates,net orders, average selling prices and home delivery volume; estimated land development and home construction costs; and projected profitability on expected future housing or land sales. 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 pretax, noncash land option contract abandonment charges of $3.1 million corresponding to 830 lots in 2011, $10.1 million corresponding to 1,007 lots in 2010, and $47.3 million corresponding to 1,362 lots in 2009. Inventory impairment and land option contract abandonment charges are included in construction and land costs in our consolidated statements of operations. or community in our inventory depends on various factors, such as the total number of lots remaining; the expected timeline to acquire and entitle land and develop lots to build homes; the anticipated future salesnet order and cancellation rates; and the expected timeline to build and deliver homes sold. While it is difficult to determine a precise timeframe for any particular inventory asset, we estimate our inventory assets’ remaining operating lives under current and expected future market conditions to range generally from one year to in excess of 10 years. Based on current market conditions and expected delivery timelines, we expect to realize, on an overall basis, the majority of our current inventory balance in three towithin five years. The following table presents our inventory balance as of November 30, 2011,2012, based on our current estimated timeframe as to theof delivery offor the last home within an applicable community or land parcel or community (in millions): 0-2 years 3-5 years 6-10 years Greater than
10 years Total $ 643.7 $ 533.6 $ 330.2 $ 224.1 $ 1,731.6 0-2 years 3-5 years 6-10 years Total Inventories as of November 30, 2012 $ 731.5 $ 357.6 $ 453.1 $ 164.4 $ 1,706.6 with the majoritythough mostly in our West Coast and Southwest homebuilding reporting segments. The inventory balance in the greater than 10 years category as of November 30, 2012 was mainly located in our West Coast, Southwest, and Southeast homebuilding reporting segments. The inventory balances in the six to 10 years and greater than 10 years categories, which collectively represented 32%36% of our total inventory at November 30, 2011,2012, were primarily comprised of inventory located in various submarkets where conditions do not justify further investment at this time; inventory subject to building permit moratorium or regulatory restrictions; large land parcels that we plan to build out over several years and/or parcels that have not yet been entitled and therefore, have an extended development timeline; and inventory that is part of a long-term, multi-phase community.As of this reporting date, wefair value calculations,projections of future cash flows, or if there are material changes in any of the other items we consider in assessing recoverability, we may recognize pretax, noncash charges in future periods for inventory impairments or land option contract abandonments, or both, related to our current inventory assets. Any such pretax, noncash charges could be material to our consolidated financial statements.defines fair value, provides a framework for measuring the fair value of assets and liabilities under GAAP, and establishes a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The fair value hierarchy can be summarized as follows:Level 1 Fair value determined based on quoted prices in active markets for identical assets or liabilities.
| Level 2 | Fair value determined using significant observable inputs, such as quoted prices for similar assets or liabilities or quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability, or inputs that are derived principally from or corroborated by observable market data, by correlation or other means. |
| Level 3 | Fair value determined using significant unobservable inputs, such as pricing models, discounted cash flows, or similar techniques. |
estimated.
Factors that affect our warranty liability include the number of homes delivered, historical and anticipated rates of warranty claims, and cost per claim.
Nevada, our subcontractors' general liability insurance primarily takes the form of a wrap-up policy, where eligible subcontractors are enrolled as insureds on each project.We self-insure a portion of our overall risk through the use of a captive insurance subsidiary. We also maintain certain other insurance policies. We record expenses and liabilities based on the estimated costs required to cover our self-insured retention and deductible amounts under our insurance policies, and on the estimated costs of potential claims and claim adjustment expenses that are above our coverage limits or that are not covered by our insurance policies. These estimated costs are based on an analysis of our historical claims and include an estimate of construction defect claims incurred but not yet reported. Our estimated liabilities for such items were $94.9$93.3 million at November 30, 2012 and $94.9 million at November 30, 2011 and $95.7 million at November 30, 2010.. These amounts are included in accrued expenses and other liabilities in our consolidated balance sheets. Our expenses associated with self-insurance totaled $7.2$8.7 million in 2011, $7.42012, $7.2 million in 20102011 and $9.8$7.4 million in 2009.2010. These expenses were largely offset by contributions from subcontractors participating in the wrap-up policy.
amounts.
interest and penalties, is reflected as a component of accrued expenses and other liabilities in our consolidated balance sheets. Judgment is required in evaluating uncertain tax positions. We evaluate our uncertain tax positions quarterly based on various factors, including changes in facts or circumstances, tax laws or the status of audits by tax authorities. Changes in the recognition or measurement of uncertain tax positions could have a material impact on our consolidated results of operationsfinancial statements in the period in which we make the change.
In January 2010, the FASB issued Accounting Standards Update No. 2010-06, “Improving Disclosures About Fair Value Measurements” (“ASU 2010-06”), which provides amendments to Accounting Standards Codification Subtopic No. 820-10, “Fair Value Measurements and Disclosures — Overall.” ASU 2010-06 requires additional disclosures and clarifications of existing disclosures for recurring and nonrecurring fair value measurements. The revised guidance was effective for us in the second quarter of 2010, except for the Level 3 activity disclosures, which are effective for fiscal years beginning after December 15, 2010. The adoption of this guidance concerns disclosure only and will not have an impact on our consolidated financial position or results of operations.
At November 30, 2011,
potential future housing revenues of approximately $263.8 million. The 61% year-over-year2012, a
We believe our higher backlog will facilitate evenflow production, improve the predictability of our deliveries and increase our housing gross margin going forward, largely through realizing overhead and cost-to-build efficiencies.
Our homebuilding operations generated 1,494 net orders in the fourth quarter of 2011, up 38% from 1,085 net orders generated in the corresponding quarter of 2010. Net orders rose in each of our four homebuilding reporting segments, with increases ranging from 10%and/or obtaining external financial resources, as further described below.
During 2011, we and the homebuilding industry continued to face difficult market conditions that have persistedserved housing markets, albeit to varying degrees, sincewere a substantial contributor to our improved performance in 2012, and we anticipate that the housing downturn beganpositive trends we saw over the course of the year will continue in 2006. We believe it is likely that market conditions will remain challenging2013. To take advantage of this environment, in 2012. Although turbulent macroeconomic conditions, weak growth in employment and low consumer confidence are currently hindering a broader housing market recovery, we are seeing some signs of stability for new home sales in markets that are located close to active employment centers, that feature a relative balance of housing supply and demand, and that offer historically high affordability levels, particularly in parts of California and Texas. In the short term, we are managing our business to these market realities, while positioning our operations to capitalize on potential future growth in demand and to establish a foundation for long-term business success.
Moving into 2012, we will continueexpanded on our primary strategic goals to focus ontarget both profitability and growth and implemented the integratedfollowing four main strategic actions we have taken in the past few years to adapt our business to changing housing market dynamics. These include following the strategic framework provided by the principles of our KBnxt operational business model; increasing the number of our new home communities open for sales; making targeted inventory investments in preferred markets; driving additional operational efficiencies and overhead cost reductions; maintaining a strong balance sheet; and remaining attentive to market conditions and the needs of our core customers. We believe that our year-over-year growth in net orders and backlog in the latter half of 2011, and the sequential improvement we posted in the most recent three consecutive quarters in the number of homes delivered, revenues, and in selling, general and administrative expenses as a percentage of housing revenues, demonstrate that our strategic actions are working and that we are making tangible progress towards our top priority of achieving and maintaining profitability.
Presently, we are focused on owning or controlling well-priced finished or partially finished lots in select locations that meet our investment and marketing standards and on leveraging our geographically diverse operational platform through opening new home communities for sales. We invested approximately $478 millioninitiatives: (1) aggressively investing in land and land development in 2011, and expect thathigher-performing, choice locations, reinforcing our total land and land development investment forstrategic repositioning during the housing downturn; (2) optimizing our 2012 fiscal year will be in the range of $400 million to $600 million, depending in large part on market conditions and our financial condition as the year progresses. We opened 123assets by increasing revenues per new home communitiescommunity open for sales through an intense focus on sales performance; (3) broadening our performing asset base by activating certain inventory in 2011,stabilizing markets that was previously held for future development; and (4) bringing additional resources to targeted markets where we operate to further strengthen our total community count, netlocal field management teams and talent.
Substantially all of the new home communities we opened for sales in 2011 and the communities we expect to open for sales in 2012, feature our value-engineered product. With the improved operating efficiencies we have implemented and our anticipated overall improved sales and evenflow production pace, we expect these communities to generate revenues at a lower cost basis than our older communities, helping us to reach our top strategic priority of achieving and maintaining profitability. In addition, we have seen our homebuyer profile at several of the new home communities we have opened for sales this year shift to higher income first-time and move-up consumers who demand and can afford larger home sizes and more options and upgrades, which has resulted in our generating increased revenues from homes delivered from these new home communities relative to our older communities.
Despite the progress we have made over the past several quarters and some signs of stability in certain markets for new homes, our ability to generate positive results from our strategic initiatives, including achieving and maintaining profitability and increasing the number of homes delivered, remains constrained by several factors. These include, among other things, the current unbalanced supply and demand conditions in many housing markets, which are unlikely to abate soon given the present economic and employment environment; by low levels of consumer confidence; by the cautiousness of qualified homebuyers in making home purchase decisions, which we believe is, among other things, moderating the pace of sales at our new home communities; by tight residential consumer mortgage lending standards; and by the reduction in or unwinding of government programs and incentives supportive of homeownership and/or home purchases, including as to applicable limits, fees and standards for government-insured residential consumer mortgage loans. The pace and the extent to which we acquire new land interests, invest in land development and open new home communities for sales will depend in large part on housing market and business conditions, including actual and expected sales rates, and the availability of desirable land assets at reasonable prices. It will also depend on how we use or redeploy our unrestricted cash and cash equivalents, and our ability to engage in capital markets, bank loan or credit facility or project or other financing transactions, which can be affected by our financial condition as well as several economic, policy and/or political factors outside of our control.
We had a balance of cash and cash equivalents and restricted cash of $479.5 million at November 30, 2011, after making the South Edge-related payments, paying down debt and funding our 2011 operating needs. We will continue to evaluate our future cash requirements and financing opportunities available in the capital and lending markets, as discussed in this report.
We continue to believe that a meaningful improvement in housing market conditions will require a sustained decrease in unsold homes, selling price stabilization, reduced mortgage delinquency and foreclosure rates, and a significantly improved economic climate, particularly with respect to job growth and consumer and credit market confidence that support a decision to buy a home. We cannot predict when or the extent to which these events may occur. Moreover, if conditions in our served markets decline further, we may need to take additional pretax, noncash charges for inventory and joint venture impairments and land option contract abandonments, and we may decide that we need to reduce, slow or even abandon our present strategic growth plans for those markets. Our results could also be adversely affected if general economic conditions do not notably improve or actually decline, if job losses increase or weak employment levels persist, if residential consumer mortgage delinquencies, short sales and foreclosures, and sales of lender-owned homes increase, if residential consumer mortgage lending becomes less available or more expensive for our homebuyers, if competition for home sales intensifies, or if consumer confidence weakens, any one or all of which could further delay a recovery in housing markets or result in further deterioration in operating conditions. Despite these difficulties and risks, we believe that we are favorably positioned financiallysituated to accomplish our top profitability and operationally to succeed in advancing our primary strategicgrowth goals, particularly in view of the longer-term demographic and population-growthpopulation growth trends that we expect will once againcontinue to drive future demand for homeownership.
homeownership in our served markets. In particular, we believe we are well-positioned in California, which accounted for nearly half of our 2012 revenues and where we are the largest homebuilder based on new home sales. California, with its large population base, diverse business ecosystem and desirable climate and lifestyle, is experiencing significant demand for housing and has a relatively limited supply of homes available for sale, and we believe we can use our competitive strengths and long history in the state to capitalize on these trends.
prices, expenses, expense ratios, 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 and possible future actions, which may be provided by us, 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.
| Item 7A. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
| As of November 30, 2012 for the Years Ended November 30, | Fair Value at November 30, 2012 | ||||||||||||||||||||||||||||||
| 2013 | 2014 | 2015 | 2016 | 2017 | Thereafter | Total | |||||||||||||||||||||||||
| Long-term debt | |||||||||||||||||||||||||||||||
| Fixed Rate | $ | — | $ | 75,911 | $ | 338,825 | $ | — | $ | 261,430 | $ | 994,338 | $ | 1,670,504 | $ | 1,831,596 | |||||||||||||||
| Weighted Average Interest Rate | — | % | 5.8 | % | 6.1 | % | — | % | 9.1 | % | 7.6 | % | 7.5 | % | |||||||||||||||||
| As of November 30, 2011 for the Years Ended November 30, | Fair Value at November 30, 2011 | ||||||||||||||||||||||||||||||
| 2012 | 2013 | 2014 | 2015 | 2016 | Thereafter | Total | |||||||||||||||||||||||||
| Long-term debt | |||||||||||||||||||||||||||||||
| Fixed Rate | $ | — | $ | — | $ | 249,647 | $ | 749,068 | $ | — | $ | 559,872 | $ | 1,558,587 | $ | 1,391,269 | |||||||||||||||
| Weighted Average Interest Rate | — | % | — | % | 5.8 | % | 6.1 | % | — | % | 8.1 | % | 6.8 | % | |||||||||||||||||
| As of November 30, 2010 for the Years Ended November 30, | Fair Value at November 30, 2010 | |||||||||||||||||||||||||||||||
| 2011 | 2012 | 2013 | 2014 | 2015 | Thereafter | Total | ||||||||||||||||||||||||||
Long-term debt | ||||||||||||||||||||||||||||||||
Fixed Rate | $ | 99,916 | $ | — | $ | — | $ | 249,498 | $ | 748,813 | $ | 559,245 | $ | 1,657,472 | $ | 1,638,700 | ||||||||||||||||
Weighted Average Interest Rate | 6.4 | % | — | % | — | % | 5.8 | % | 6.1 | % | 8.1 | % | 6.7 | % | ||||||||||||||||||
| Item 8. | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA |
Total revenues Homebuilding: Revenues Construction and land costs Selling, general and administrative expenses Loss on loan guaranty Operating loss Interest income Interest expense Equity in loss of unconsolidated joint ventures Homebuilding pretax loss Financial services: Revenues Expenses Equity in income/gain on wind down of unconsolidated joint venture Financial services pretax income Total pretax loss Income tax benefit Net loss Basic and diluted loss per share Basic and diluted average shares outstanding Assets Homebuilding: Cash and cash equivalents Restricted cash Receivables Inventories Investments in unconsolidated joint ventures Other assets Financial services Total assets Liabilities and stockholders’ equity Homebuilding: Accounts payable Accrued expenses and other liabilities Mortgages and notes payable Financial services Stockholders’ equity: Preferred stock — $1.00 par value; authorized, 10,000,000 shares; none issued Common stock — $1.00 par value; authorized, 290,000,000 shares at November 30, 2011 and 2010; 115,170,693 and 115,148,586 shares issued at November 30, 2011 and 2010, respectively Paid-in capital Retained earnings Accumulated other comprehensive loss Grantor stock ownership trust, at cost: 10,884,151 and 11,082,723 shares at November 30, 2011 and 2010, respectively Treasury stock, at cost: 27,214,174 and 27,095,467 shares at November 30, 2011 and 2010, respectively Total stockholders’ equity Total liabilities and stockholders’ equity Balance at November 30, 2008 Comprehensive loss: Net loss Postretirement benefits adjustment Total comprehensive loss Dividends on common stock Employee stock options and other Restricted stock awards Restricted stock amortization Stock-based compensation Grantor stock ownership trust Treasury stock Balance at November 30, 2009 Comprehensive loss: Net loss Postretirement benefits adjustment Total comprehensive loss Dividends on common stock Employee stock options and other Restricted stock awards Restricted stock amortization Stock-based compensation Cash-settled stock appreciation rights exchange Grantor stock ownership trust Treasury stock Balance at November 30, 2010 Comprehensive loss: Net loss Postretirement benefits adjustment Total comprehensive loss Dividends on common stock Employee stock options and other Restricted stock amortization Forfeited restricted stock Stock-based compensation Grantor stock ownership trust Balance at November 30, 2011 Cash flows from operating activities: Net loss Adjustments to reconcile net loss to net cash provided (used) by operating activities: Equity in (income) loss/(gain) on wind down of unconsolidated joint ventures Distributions of earnings from unconsolidated joint ventures Loss on loan guaranty Gain on sale of operating property Amortization of discounts and issuance costs Depreciation and amortization Loss (gain) on early extinguishment of debt/loss on voluntary termination of revolving credit facility Tax benefits from stock-based compensation Stock-based compensation Inventory impairments and land option contract abandonments Changes in assets and liabilities: Receivables Inventories Accounts payable, accrued expenses and other liabilities Other, net Net cash provided (used) by operating activities Cash flows from investing activities: Investments in unconsolidated joint ventures Proceeds from sale of operating property Purchases of property and equipment, net Net cash provided (used) by investing activities Cash flows from financing activities: Change in restricted cash Proceeds from issuance of senior notes Payment of senior notes issuance costs Repayment of senior and senior subordinated notes Payments on mortgages and land contracts due to land sellers and other loans Issuance of common stock under employee stock plans Excess tax benefit associated with exercise of stock options Payments of cash dividends Repurchases of common stock Net cash used by financing activities Net increase (decrease) in cash and cash equivalents Cash and cash equivalents at beginning of year Cash and cash equivalents at end of year 2010. significantly impacted by estimates value. 2010. Numerator: Net loss Denominator: Basic and diluted average shares outstanding Basic and diluted loss per share In May 2011, the FASB issued ASU 2011-04, which changes the wording used to describe the requirements in GAAP for measuring fair value and for disclosing information about fair value measurements in order to improve consistency in the application and description of fair value between GAAP and As of November 30, New Mexico Revenues: West Coast Southwest Central Southeast Total homebuilding revenues Financial services Total revenues Pretax income (loss): West Coast Southwest Central Southeast Corporate and other (a) Total homebuilding loss Financial services Total pretax loss Equity in income (loss) of unconsolidated joint ventures: West Coast Southwest Central Southeast Total Inventory impairments: West Coast Southwest Central Southeast Total Land option contract abandonments: West Coast Southwest Central Southeast Total Joint venture impairments: West Coast Southwest Southeast Total 6465666768107 Years Ended November 30, 2011 2010 2009 $ 1,315,866 $ 1,589,996 $ 1,824,850 $ 1,305,562 $ 1,581,763 $ 1,816,415 (1,129,985 ) (1,308,288 ) (1,749,911 ) (247,886 ) (289,520 ) (303,024 ) (30,765 ) — — (103,074 ) (16,045 ) (236,520 ) 871 2,098 7,515 (49,204 ) (68,307 ) (51,763 ) (55,839 ) (6,257 ) (49,615 ) (207,246 ) (88,511 ) (330,383 ) 10,304 8,233 8,435 (3,512 ) (3,119 ) (3,251 ) 19,286 7,029 14,015 26,078 12,143 19,199 (181,168 ) (76,368 ) (311,184 ) 2,400 7,000 209,400 $ (178,768 ) $ (69,368 ) $ (101,784 ) $ (2.32 ) $ (.90 ) $ (1.33 ) 77,043 76,889 76,660 Years Ended November 30, 2012 2011 2010 Total revenues $ 1,560,115 $ 1,315,866 $ 1,589,996 Homebuilding: Revenues $ 1,548,432 $ 1,305,562 $ 1,581,763 Construction and land costs (1,317,529 ) (1,129,985 ) (1,308,288 ) Selling, general and administrative expenses (251,159 ) (247,886 ) (289,520 ) Loss on loan guaranty — (30,765 ) — Operating loss (20,256 ) (103,074 ) (16,045 ) Interest income 518 871 2,098 Interest expense (69,804 ) (49,204 ) (68,307 ) Equity in loss of unconsolidated joint ventures (394 ) (55,839 ) (6,257 ) Homebuilding pretax loss (89,936 ) (207,246 ) (88,511 ) Financial services: Revenues 11,683 10,304 8,233 Expenses (2,991 ) (3,512 ) (3,119 ) Equity in income/gain on wind down of unconsolidated joint venture 2,191 19,286 7,029 Financial services pretax income 10,883 26,078 12,143 Total pretax loss (79,053 ) (181,168 ) (76,368 ) Income tax benefit 20,100 2,400 7,000 Net loss $ (58,953 ) $ (178,768 ) $ (69,368 ) Basic and diluted loss per share $ (.76 ) $ (2.32 ) $ (.90 ) Basic and diluted average shares outstanding 77,106 77,043 76,889 November 30, 2011 2010 $ 415,050 $ 904,401 64,481 115,477 66,179 108,048 1,731,629 1,696,721 127,926 105,583 75,104 150,076 2,480,369 3,080,306 32,173 29,443 $ 2,512,542 $ 3,109,749 $ 104,414 $ 233,217 374,406 466,505 1,583,571 1,775,529 2,062,391 2,475,251 7,494 2,620 — — 115,171 115,149 884,190 873,519 519,844 717,852 (26,152 ) (22,657 ) (118,059 ) (120,442 ) (932,337 ) (931,543 ) 442,657 631,878 $ 2,512,542 $ 3,109,749 November 30, 2012 2011 Assets Homebuilding: Cash and cash equivalents $ 524,765 $ 415,050 Restricted cash 42,362 64,481 Receivables 64,821 66,179 Inventories 1,706,571 1,731,629 Investments in unconsolidated joint ventures 123,674 127,926 Other assets 95,050 75,104 2,557,243 2,480,369 Financial services 4,455 32,173 Total assets $ 2,561,698 $ 2,512,542 Liabilities and stockholders’ equity Homebuilding: Accounts payable $ 118,544 $ 104,414 Accrued expenses and other liabilities 340,345 374,406 Mortgages and notes payable 1,722,815 1,583,571 2,181,704 2,062,391 Financial services 3,188 7,494 Stockholders’ equity: Preferred stock — $1.00 par value; authorized, 10,000,000 shares; none issued — — Common stock — $1.00 par value; authorized, 290,000,000 shares at November 30, 2012 and 2011; 115,178,187 and 115,170,693 shares issued at November 30, 2012 and 2011, respectively 115,178 115,171 Paid-in capital 888,579 884,190 Retained earnings 450,292 519,844 Accumulated other comprehensive loss (27,958 ) (26,152 ) Grantor stock ownership trust, at cost: 10,615,934 and 10,884,151 shares at November 30, 2012 and 2011, respectively (115,149 ) (118,059 ) Treasury stock, at cost: 27,340,468 and 27,214,174 shares at November 30, 2012 and 2011, respectively (934,136 ) (932,337 ) Total stockholders’ equity 376,806 442,657 Total liabilities and stockholders’ equity $ 2,561,698 $ 2,512,542 Years Ended November 30, 2011, 2010 and 2009 Number of Shares Common
Stock Paid-in
Capital Retained
Earnings Accumulated
Other
Comprehensive
Loss Grantor
Stock
Ownership
Trust Treasury
Stock Total
Stockholders’
Equity Common
Stock Grantor
Stock
Ownership
Trust Treasury
Stock 115,120 (11,901 ) (25,512 ) $ 115,120 $ 865,123 $ 927,324 $ (17,402 ) $ (129,326 ) $ (930,234 ) $ 830,605 — — — — — (101,784 ) — — — (101,784 ) — — — — — — (4,842 ) — — (4,842 ) — — — — — — — — — (106,626 ) — — — — — (19,097 ) — — — (19,097 ) — — — — (4,093 ) — — — — (4,093 ) — — — — (4,846 ) — — 4,846 — — — — — — 1,390 — — — — 1,390 — — — — 2,587 — — — — 2,587 — 672 — — 611 — — 2,463 — 3,074 — — (1,535 ) — — — — — (616 ) (616 ) 115,120 (11,229 ) (27,047 ) 115,120 860,772 806,443 (22,244 ) (122,017 ) (930,850 ) 707,224 — — — — — (69,368 ) — — — (69,368 ) — — — — — — (413 ) — — (413 ) — — — — — — — — — (69,781 ) — — — — — (19,223 ) — — — (19,223 ) 29 — — 29 2,074 — — — — 2,103 — — — — (307 ) — — 307 — — — — — — 2,297 — — — — 2,297 — — — — 5,777 — — — — 5,777 — — — — 2,348 — — — — 2,348 — 146 — — 215 — — 1,268 — 1,483 — — (48 ) — 343 — — — (693 ) (350 ) 115,149 (11,083 ) (27,095 ) 115,149 873,519 717,852 (22,657 ) (120,442 ) (931,543 ) 631,878 — — — — — (178,768 ) — — — (178,768 ) — — — — — — (3,495 ) — — (3,495 ) — — — — — — — — — (182,263 ) — — — — — (19,240 ) — — — (19,240 ) 22 — — 22 2,410 — — — — 2,432 — — — — 2,154 — — — — 2,154 — — (119 ) — 794 — — — (794 ) — — — — — 5,900 — — — — 5,900 — 199 — — (587 ) — — 2,383 — 1,796 115,171 (10,884 ) (27,214 ) $ 115,171 $ 884,190 $ 519,844 $ (26,152 ) $ (118,059 ) $ (932,337 ) $ 442,657 Years Ended November 30, 2012, 2011, and 2010 Number of Shares Balance at November 30, 2009 115,120 (11,229 ) (27,047 ) $ 115,120 $ 860,772 $ 806,443 $ (22,244 ) $ (122,017 ) $ (930,850 ) $ 707,224 Comprehensive loss: Net loss — — — — — (69,368 ) — — — (69,368 ) Postretirement benefits adjustment — — — — — — (413 ) — — (413 ) Total comprehensive loss — — — — — — — — — (69,781 ) Dividends on common stock — — — — — (19,223 ) — — — (19,223 ) Employee stock options and other 29 — — 29 2,074 — — — — 2,103 Restricted stock awards — — — — (307 ) — — 307 — — Restricted stock amortization — — — — 2,297 — — — — 2,297 Stock-based compensation — — — — 5,777 — — — — 5,777 Cash-settled stock appreciation rights exchange — — — — 2,348 — — — — 2,348 Grantor stock ownership trust — 146 — — 215 — — 1,268 — 1,483 Stock repurchases — — (48 ) — 343 — — — (693 ) (350 ) Balance at November 30, 2010 115,149 (11,083 ) (27,095 ) 115,149 873,519 717,852 (22,657 ) (120,442 ) (931,543 ) 631,878 Comprehensive loss: Net loss — — — — — (178,768 ) — — — (178,768 ) Postretirement benefits adjustment — — — — — — (3,495 ) — — (3,495 ) Total comprehensive loss — — — — — — — — — (182,263 ) Dividends on common stock — — — — — (19,240 ) — — — (19,240 ) Employee stock options and other 22 — — 22 2,410 — — — — 2,432 Restricted stock amortization — — — — 2,154 — — — — 2,154 Forfeited restricted stock — — (119 ) — 794 — — — (794 ) — Stock-based compensation — — — — 5,900 — — — — 5,900 Grantor stock ownership trust — 199 — — (587 ) — — 2,383 — 1,796 Balance at November 30, 2011 115,171 (10,884 ) (27,214 ) 115,171 884,190 519,844 (26,152 ) (118,059 ) (932,337 ) 442,657 Comprehensive loss: Net loss — — — — — (58,953 ) — — — (58,953 ) Postretirement benefits adjustment — — — — — — (1,806 ) — — (1,806 ) Total comprehensive loss — — — — — — — — — (60,759 ) Dividends on common stock — — — — — (10,599 ) — — — (10,599 ) Employee stock options and other 7 — — 7 97 — — — — 104 Restricted stock awards — 208 — — (2,253 ) — — 2,253 — — Restricted stock amortization — — — — 1,708 — — — — 1,708 Stock-based compensation — — — — 5,005 — — — — 5,005 Grantor stock ownership trust — 60 — — (168 ) — — 657 — 489 Stock repurchases — — (126 ) — — — — — (1,799 ) (1,799 ) Balance at November 30, 2012 115,178 (10,616 ) (27,340 ) $ 115,178 $ 888,579 $ 450,292 $ (27,958 ) $ (115,149 ) $ (934,136 ) $ 376,806 Years Ended November 30, 2011 2010 2009 $ (178,768 ) $ (69,368 ) $ (101,784 ) 36,553 (772 ) 35,600 8,703 20,410 7,662 30,765 — — (8,825 ) — — 2,150 2,149 1,586 2,031 3,289 5,235 (3,612 ) 1,802 976 — (583 ) 4,093 8,054 8,074 3,977 25,791 19,925 168,149 (2,220 ) 211,318 35,667 (12,345 ) (129,334 ) 433,075 (253,547 ) (199,205 ) (252,620 ) (2,275 ) (1,669 ) 8,296 (347,545 ) (133,964 ) 349,912 (67,260 ) (15,669 ) (19,922 ) 80,600 — — (242 ) (420 ) (1,375 ) 13,098 (16,089 ) (21,297 ) 50,996 (1,185 ) 1,112 — — 259,737 — — (4,294 ) (100,000 ) — (453,105 ) (89,461 ) (101,154 ) (78,983 ) 1,796 1,851 3,074 — 583 — (19,240 ) (19,223 ) (19,097 ) — (350 ) (616 ) (155,909 ) (119,478 ) (292,172 ) (490,356 ) (269,531 ) 36,443 908,430 1,177,961 1,141,518 $ 418,074 $ 908,430 $ 1,177,961 Years Ended November 30, 2012 2011 2010 Cash flows from operating activities: Net loss $ (58,953 ) $ (178,768 ) $ (69,368 ) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Equity in (income) loss/(gain) on wind down of unconsolidated joint ventures (1,797 ) 36,553 (772 ) Distributions of earnings from unconsolidated joint ventures 3,316 8,703 20,410 Loss on loan guaranty — 30,765 — Gain on sale of operating property — (8,825 ) — Amortization of discounts and issuance costs 3,016 2,150 2,149 Depreciation and amortization 1,622 2,031 3,289 Provision for deferred income taxes 1,152 — — Loss (gain) on early extinguishment of debt/loss on voluntary termination of revolving credit facility 10,278 (3,612 ) 1,802 Tax benefits from stock-based compensation — — (583 ) Stock-based compensation 6,713 8,054 8,074 Inventory impairments and land option contract abandonments 28,533 25,791 19,925 Changes in assets and liabilities: Receivables 24,994 (2,220 ) 211,318 Inventories 30,347 (12,345 ) (129,334 ) Accounts payable, accrued expenses and other liabilities (2,143 ) (253,547 ) (199,205 ) Other, net (12,461 ) (2,275 ) (1,669 ) Net cash provided by (used in) operating activities 34,617 (347,545 ) (133,964 ) Cash flows from investing activities: Return of investments in (contributions to) unconsolidated joint ventures 989 (67,260 ) (15,669 ) Proceeds from sale of operating property — 80,600 — Purchases of property and equipment, net (1,749 ) (242 ) (420 ) Net cash provided by (used in) investing activities (760 ) 13,098 (16,089 ) Cash flows from financing activities: Change in restricted cash 22,119 50,996 (1,185 ) Proceeds from issuance of senior notes 694,831 — — Payment of senior notes issuance costs (12,445 ) — — Repayment of senior notes (592,645 ) (100,000 ) — Payments on mortgages and land contracts due to land sellers and other loans (26,298 ) (89,461 ) (101,154 ) Issuance of common stock under employee stock plans 593 1,796 1,851 Excess tax benefit associated with exercise of stock options — — 583 Payments of cash dividends (10,599 ) (19,240 ) (19,223 ) Stock repurchases (1,799 ) — (350 ) Net cash provided by (used in) financing activities 73,757 (155,909 ) (119,478 ) Net increase (decrease) in cash and cash equivalents 107,614 (490,356 ) (269,531 ) Cash and cash equivalents at beginning of year 418,074 908,430 1,177,961 Cash and cash equivalents at end of year $ 525,688 $ 418,074 $ 908,430 Note 1. Summary of Significant Accounting Policies Note 1. Summary of Significant Accounting PoliciesOperations. Operations.KB Home is a builder of single-family residential homes, townhomes and condominiums. The CompanyWe had ongoing operations in Arizona, California, Colorado, Florida, Maryland, Nevada, New Mexico, North Carolina, Texas and Virginia as of November 30, 2011. The Company offers2012. We offer title and insurance services to itsour homebuyers through itsour financial services subsidiary, KB Home Mortgage Company (“KBHMC”). From 2005 until June 30, 2011, the Companywe also offered mortgage banking services to itsour homebuyers indirectly through KBA Mortgage, a former unconsolidated joint venture of a subsidiary of the Companyours and a subsidiary of Bank of America, N.A., with each partner having a 50% interest in the venture. KBA Mortgage ceased offering mortgage banking services after June 30, 2011. KBA Mortgage was accounted for as an unconsolidated joint venture within the Company’sour financial services reporting segment.theour accounts of the Company and all significant subsidiaries and joint ventures in which a controlling interest is held, as well as certain VIEs required to be consolidated pursuant to ASC 810. All intercompany transactions have been eliminated. Investments in unconsolidated joint ventures in which the Company haswe have less than a controlling interest are accounted for using the equity method. The Company considersWe consider all highly liquid short-term investments purchased with an original maturity of three months or less to be cash equivalents. The Company’sOur cash equivalents totaled $212.8$396.3 million at November 30, 2012 and $212.8 million at November 30, 2011 and $797.2 million at November 30, 2010.. The majority of the Company’sour cash and cash equivalents were invested in money market accounts and United States government securities.accounts.$64.5$42.4 million at November 30, 2012 and $64.5 million at November 30, 2011 consisted of cash deposited with various financial institutions that was required as collateral for theour LOC Facilities. Restricted cash of $115.5 million at November 30, 2010 consisted of $88.7 million of cash collateral for the LOC Facilities and $26.8 million of cash in an escrow account required as collateral for a surety bond.Operating Properties and Depreciation.Property and equipment are recorded at cost and are depreciated over their estimated useful lives, which generally range from two to 10 years, using the straight-line method. Operating properties are recorded at cost and are depreciated over their estimated useful lives of 39 years, using the straight-line method. Repair and maintenance costs are charged to earnings as incurred. Property and equipment and operating properties are included in other assets on the consolidated balance sheets. Property and equipment totaled $7.8$7.9 million, net of accumulated depreciation of $18.0$18.5 million, at November 30, 2011,2012, and $9.6$7.8 million, net of accumulated depreciation of $27.1$18.0 million, at November 30, 2010.2011. Depreciation expense totaled $2.0$1.6 million in 2011, $3.32012, $2.0 million in 20102011 and $5.2$3.3 million in 2009.warrantiesthe limited warranty on our homes and amenities.amenities within a community. Land acquisition, land improvementsdevelopment and other common costs are generally allocated on a relative fair value basis to the homes within a community or land parcel or community.parcel. Land acquisition and land development costs include related interest and real estate taxes.Housingamountvalue is determined not to be recoverable, in which case the affected inventories are written down to fair value in accordance with ASC 360. ASC 360 requires that real estate assets, such as our housing and land inventories, be tested for recoverability whenever events or changes in circumstances indicate that their carrying amountsvalue may not be recoverable. Recoverability of assets is measured by comparing the carrying amountvalue of an asset to the undiscounted future net cash flows expected to be generated by the asset. These impairment evaluations for impairment areoffor the amounts and timing of future revenues, costs and expenses, and other factors. If the carrying value of real estate assets are considered to be impaired,is not recoverable, the impairment to be recognized is measured by the amount by which the carrying value of the assetsaffected asset exceeds theits estimated fair value of the assets.mayis not be recoverable. Fair value is determined based on estimated future net cash flows discounted for inherent risks associated with the real estate assets, or other valuation techniques.The Company’sthe Company useswe use quoted market prices in active markets to determine fair value. Revenues from the Company’sOur financial services segment are generatedgenerates revenues primarily from interest income,insurance commissions, title services, insurance commissions and, in 2011, marketing services fees. Interest income is accrued as earned.fees and interest income. Insurance commissions are recognized when policies are issued. Title services revenues are recognized asrecorded when closing services are rendered and title insurance policies are issued, both of which generally occur simultaneously at the time each home is closed. Insurance commissions are recognized when policies are issued, while marketingMarketing services fees are recognized when earned and interest income is accrued as earned. The Company providesWe provide a limited warranty on all of itsour homes. The Company estimatesWe estimate the costs that may be incurred under each limited warranty and recordsrecord 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 the Company’sour warranty liability include the number of homes delivered, historical and anticipated rates of warranty claims, and cost per claim. The Company’s primary assumption in estimating the amounts it accrues for warranty costs is that historical claims experience is a strong indicator of future claims experience. The CompanyWe periodically assessesassess the adequacy of its recordedour accrued warranty liabilities liabilityand adjustsadjust the amountsamount as necessary based on itsour assessment. The Company self-insuresWe self-insure a portion of itsour overall risk through the use of a captive insurance subsidiary. The Company recordsWe also maintain certain other insurance policies. We record expenses and liabilities based on the estimated costs required to cover itsour self-insured retention and deductible amounts under itsour insurance policies, and on the estimated costs of potential claims and claim adjustment expenses that are above itsour coverage limits or that are not covered by itsour insurance policies. These estimated costs are based on an analysis of the Company’sour historical claims and include an estimate of construction defect claims incurred but not yet reported.The Company engagesthe Company’sour historical claim and expense data, as well as industry data, to estimate itsour unpaid claims, claim adjustment expenses and incurred but not reported claims liabilities for the risks that the Company iswe are assuming under the self-insured portion of its general liability insurance.our self-insurance. Projection of losses related to these liabilities requires actuarial assumptions that are subject to variability due to uncertainties regarding construction defect claims relative to the Company’sour markets and the types of product it builds,we build, claim settlement patterns, insurance industry practices and legal or regulatory interpretations, among other factors. Because of the degree of judgment required and the potential for variability in the underlying assumptions used in determining these estimated liability amounts, actual future costs could differ from the Company’sour estimated amounts. The Company expensesWe expense advertising costs as incurred. The CompanyWe incurred advertising costs of $32.4$24.6 million in 2012, $32.4 million in 2011 $25.9and $25.9 million in 2010 and $16.5 million in 2009.2010.Fees. Fees. Legal fees associated with litigation and similar proceedings that are not expected to provide a benefit in future periods are generally expensed as incurred. Legal fees associated with assetland acquisition and development and other activities that are expected to provide a benefit in future periods are capitalized as incurred in the Company’sour consolidated balance sheets. The CompanyWe expensed legal fees of $16.9$12.6 million in 2011, $33.72012, $16.9 million in 20102011 and $25.7$33.7 million in 2009.the Company’sour board of directors, the Company haswe have provided compensation benefits to certain of itsour employees in the form of stock options, restricted stock, PSUs, phantom shares and SARs.The Company measuresrecognizesrecognize compensation expense associated with itsour grant of equity-based awards in accordance with ASC 718, which requires that companies measure and recognize compensation expense at an amount equal to the fair value of share-based payments granted under compensation arrangements over the vesting period. The Company estimatesWe estimate the fair value of stock options and SARs granted using the Black-Scholes option-pricing model with assumptions based primarily on historical data. ASC 718 also requires the tax benefit resulting from tax deductions in excess of the compensation expense recognized for those options to be reported in the statement of cash flows as an operating cash outflow and a financing cash inflow.the Company assesseswe assess whether a valuation allowance should be established based on the consideration of all available evidence using a “more likely than not” standard with respect to whether deferred taxthe Company’sour consolidated financial statements and/or tax returns. Differences between anticipated and actual outcomes of these future tax consequences could have a material impact on the Company’sour consolidated financial statements.20112012 and 20102011 were comprised solely of adjustments recorded directly to accumulated other comprehensive loss in accordance with Accounting Standards Codification Topic No. 715, “Compensation — Retirement Benefits” (“ASC 715”). ASC 715 requires an employer to recognize the funded status of defined postretirement benefit plans as an asset or liability on the balance sheet and requires any unrecognized prior service costs and actuarial gains/losses to be recognized in accumulated other comprehensive income (loss). Years Ended November 30, 2011 2010 2009 $ (178,768 ) $ (69,368 ) $ (101,784 ) 77,043 76,889 76,660 $ (2.32 ) $ (.90 ) $ (1.33 ) Years Ended November 30, 2012 2011 2010 Numerator: Net loss $ (58,953 ) $ (178,768 ) $ (69,368 ) Denominator: Basic and diluted average shares outstanding 77,106 77,043 76,889 Basic and diluted loss per share $ (.76 ) $ (2.32 ) $ (.90 ) 2010 and 20092010 because the effect of their inclusion would be antidilutive, or would decrease the reported loss per share.Pronouncements. In January 2010, the FASB issued ASU 2010-06, which provides amendments to Accounting Standards Codification Subtopic No. 820-10, “Fair Value Measurements and Disclosures — Overall.” ASU 2010-06 requires additional disclosures and clarifications of existing disclosures for recurring and nonrecurring fair value measurements. The revised guidance was effective for the Company in the second quarter of 2010, except for the Level 3 activity disclosures, which are effective for fiscal years beginning after December 15, 2010. The adoption of this guidance concerns disclosure only and will not have an impact on the Company’s consolidated financial position or results of operations.Pronouncements. IFRS.International Financial Reporting Standards. ASU 2011-04 clarifies how the concepts of highest and best use and valuation premise in a fair value measurement are relevant only when measuring the fair value of nonfinancial assets and are not relevant when measuring the fair value of financial assets or liabilities. In addition, the guidance expanded the disclosures for the unobservable inputs for Level 3 fair value measurements, requiring quantitative information to be disclosed related to (1) the valuation processes used, (2) the sensitivity of therecurring fair value measurementmeasurements to changes in unobservable inputs and the interrelationships between those unobservable inputs, and (3) use of a nonfinancial asset in a way that differs from the asset’s highest and best use. The revised guidance iswas effective for interim and annual periods beginning after December 15, 2011 and early application by public entities is prohibited. The Company is currently evaluating the potential impact2011. Our adoption of adopting this guidance as of March 1, 2012 did not have a material impact on itsour consolidated financial position andor results of operations.the Company’sour consolidated financial position or results of operations.20112012 presentation.Note 2. Segment Information Note 2. Segment Information2011, the Company2012, we had identified five reporting segments, comprised of four homebuilding reporting segments and one financial services reporting segment, within itsour consolidated operations in accordance with Accounting Standards Codification Topic No. 280, “Segment Reporting.” As of November 30, 2011, the Company’s2012, our homebuilding reporting segments conducted ongoing operations in the following states:NevadaThe Company’sThe Company’sThe Company evaluatesWe evaluate segment performance primarily based on segment pretax results.The Company’stitle and insurance services to the Company’s homebuyers. Until late June 2011, this segment also provided mortgage banking services to a significant proportionof the Company’sour homebuyers indirectly through KBA Mortgage, a former unconsolidated joint venture of a subsidiary of the Company and a subsidiary of Bank of America, N.A., with each partner having had a 50% ownership interest in the venture. The Bank of America, N.A. subsidiary partner operated KBA Mortgage. The Company accounted for KBA Mortgage as an unconsolidated joint venture in the financial services reporting segment of its consolidated financial statements. The Company’s financial services reporting segment conducts operations the Company’sour homebuilding reporting segments.Duringsegmentsfirstmajority of our markets located within our Central and Southeast homebuilding reporting segments.In addition, since the third quarter of 2011, the Bank of America, N.A. subsidiary partner in KBA Mortgage approached the Company about exiting the unconsolidated joint venture duethis segment has earned revenues pursuant to the desireterms of Bank of America, N.A. to cease participating in joint venture structures in its business. As a result, KBA Mortgage ceased offering mortgage banking services after June 30, 2011, and the unconsolidated joint venture’s business operations were subsequently unwound. After June 30, 2011, Bank of America, N.A. processed and closed only the residential consumer mortgage loans that KBA Mortgage had originated for the Company’s homebuyers on or before June 26, 2011.The Company entered into a marketing services agreement with MetLife Home Loans, a division of MetLife Bank, N.A., effective June 27, 2011. Under the agreement, MetLife Home Loans’ personnel, located on site at several of the Company’s new home communities, can offer (i) financing options andpreferred mortgage lender that offers mortgage banking services, including mortgage loan productsoriginations, to the Company’sour homebuyers (ii) to prequalify homebuyers for residential consumer mortgage loans, and (iii) to commence the loan origination process for homebuyers MetLife Home Loans. The Company makes marketing materials and other information regarding MetLife Home Loans’ financing options and mortgage loan products available to its homebuyers and is compensated solely for the fair market value of these services. MetLife Home Loans and its parent company, MetLife Bank, N.A., are not affiliates of the Company or any of its subsidiaries. The Company’slender. Our homebuyers are under no obligation to use MetLife Home Loansour preferred mortgage lender and may select any providerlender of their choice to obtain mortgage financing for the purchase of a home. The Company does not have any ownership, joint venture or We make available to our homebuyers marketing materials and other interests in or with MetLife Home Loans or MetLife Bank, N.A. or with respectinformation regarding our preferred mortgage lender’s financing options and mortgage loan products, and are compensated solely for the fair market value of these services. Prior to the revenues or income that may be generated from MetLife Home Loans providinglate June 2011, this segment provided mortgage banking services to or originating residential consumer mortgage loans for, the Company’s homebuyers.MetLife Bank, N.A. recently announced that it will cease offering forward mortgage banking services as part of its business. While the Company is evaluating various options, its strategic intention is to reestablish our homebuyers indirectly throughmortgage bankingformer unconsolidated joint venture or marketing relationshipof a subsidiary of ours and a subsidiary of Bank of America, N.A., with each partner having had a financial institution or other mortgage banking services provider, but50% interest in the Company can provide no assurance that it will be able to do so.The Company’sventure.the Company’sour consolidated financial statements as described in Note 1. Summary of Significant Accounting Policies.Policies in this report. Operational results of each segment are not necessarily indicative of the results that would have occurred had the segment been an independent, stand-alone entity during the periods presented, nor are they indicative of the results to be expected in future periods.the Company’sour reporting segments (in thousands): Years Ended November 30, 2011 2010 2009 $ 589,387 $ 700,645 $ 812,207 139,872 187,736 218,096 369,705 436,404 434,400 206,598 256,978 351,712 1,305,562 1,581,763 1,816,415 10,304 8,233 8,435 $ 1,315,866 $ 1,589,996 $ 1,824,850 $ 19,639 $ 60,250 $ (88,442 ) (108,265 ) (15,802 ) (48,572 ) (12,924 ) (1,772 ) (29,382 ) (37,983 ) (42,801 ) (78,414 ) (67,713 ) (88,386 ) (85,573 ) (207,246 ) (88,511 ) (330,383 ) 26,078 12,143 19,199 $ (181,168 ) $ (76,368 ) $ (311,184 ) $ 68 $ 1,476 $ (7,761 ) (55,902 ) (8,631 ) (15,509 ) — — 506 (5 ) 898 (26,851 ) $ (55,839 ) $ (6,257 ) $ (49,615 ) $ 2,598 $ 3,828 $ 44,895 18,715 962 28,833 51 348 23,891 1,366 4,677 23,229 $ 22,730 $ 9,815 $ 120,848 $ 704 $ 797 $ 32,679 296 — — 1,310 6,511 — 751 2,802 14,622 $ 3,061 $ 10,110 $ 47,301 $ — $ — $ 7,190 53,727 — 5,426 — — 25,915 $ 53,727 $ — $ 38,531 Years Ended November 30, 2012 2011 2010 Revenues: West Coast $ 755,259 $ 589,387 $ 700,645 Southwest 132,438 139,872 187,736 Central 436,407 369,705 436,404 Southeast 224,328 206,598 256,978 Total homebuilding revenues 1,548,432 1,305,562 1,581,763 Financial services 11,683 10,304 8,233 Total $ 1,560,115 $ 1,315,866 $ 1,589,996 Years Ended November 30, 2012 2011 2010 Pretax income (loss): West Coast $ (10,467 ) $ 19,639 $ 60,250 Southwest (10,194 ) (108,265 ) (15,802 ) Central 1,449 (12,924 ) (1,772 ) Southeast (1,183 ) (37,983 ) (42,801 ) Corporate and other (a) (69,541 ) (67,713 ) (88,386 ) Total homebuilding pretax loss (89,936 ) (207,246 ) (88,511 ) Financial services 10,883 26,078 12,143 Total $ (79,053 ) $ (181,168 ) $ (76,368 ) Equity in income (loss) of unconsolidated joint ventures: West Coast $ (174 ) $ 68 $ 1,476 Southwest (811 ) (55,902 ) (8,631 ) Central — — — Southeast 591 (5 ) 898 Total $ (394 ) $ (55,839 ) $ (6,257 ) Inventory impairments: West Coast $ 19,235 $ 2,598 $ 3,828 Southwest 2,135 18,715 962 Central 1,267 51 348 Southeast 5,470 1,366 4,677 Total $ 28,107 $ 22,730 $ 9,815 Land option contract abandonments: West Coast $ — $ 704 $ 797 Southwest — 296 — Central 133 1,310 6,511 Southeast 293 751 2,802 Total $ 426 $ 3,061 $ 10,110 Joint venture impairments: West Coast $ — $ — $ — Southwest — 53,727 — Central — — — Southeast — — — Total $ — $ 53,727 $ — (a) Corporate and other includes corporate general and administrative expenses.
Assets: West Coast Southwest Central Southeast Corporate and other Total homebuilding assets Financial services Total assets Investments in unconsolidated joint ventures: West Coast Southwest Southeast Total November 30, 2011 2010 $ 995,888 $ 965,323 338,586 376,234 336,553 328,938 317,308 372,611 492,034 1,037,200 2,480,369 3,080,306 32,173 29,443 $ 2,512,542 $ 3,109,749 $ 38,405 $ 37,830 80,194 59,191 9,327 8,562 $ 127,926 $ 105,583
| November 30, | |||||||
| 2012 | 2011 | ||||||
| Assets: | |||||||
| West Coast | $ | 930,450 | $ | 995,888 | |||
| Southwest | 319,863 | 338,586 | |||||
| Central | 369,294 | 336,553 | |||||
| Southeast | 341,460 | 317,308 | |||||
| Corporate and other | 596,176 | 492,034 | |||||
| Total homebuilding assets | 2,557,243 | 2,480,369 | |||||
| Financial services | 4,455 | 32,173 | |||||
| Total assets | $ | 2,561,698 | $ | 2,512,542 | |||
| Investments in unconsolidated joint ventures: | |||||||
| West Coast | $ | 38,372 | $ | 38,405 | |||
| Southwest | 75,920 | 80,194 | |||||
| Central | — | — | |||||
| Southeast | 9,382 | 9,327 | |||||
| Total | $ | 123,674 | $ | 127,926 | |||
Note 3. Financial Services
| Note 3. | Financial Services |
| Years Ended November 30, | ||||||||||||
| 2011 | 2010 | 2009 | ||||||||||
Revenues | ||||||||||||
Insurance commissions | $ | 7,188 | $ | 7,235 | $ | 7,220 | ||||||
Title services | 1,983 | 992 | 1,184 | |||||||||
Marketing services fees | 1,125 | — | — | |||||||||
Interest income | 8 | 6 | 31 | |||||||||
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Total | 10,304 | 8,233 | 8,435 | |||||||||
Expenses | ||||||||||||
General and administrative | (3,512 | ) | (3,119 | ) | (3,251 | ) | ||||||
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Operating income | 6,792 | 5,114 | 5,184 | |||||||||
Equity in income/gain on wind down of unconsolidated joint venture | 19,286 | 7,029 | 14,015 | |||||||||
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Pretax income | $ | 26,078 | $ | 12,143 | $ | 19,199 | ||||||
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| November 30, | ||||||||
| 2011 | 2010 | |||||||
Assets | ||||||||
Cash and cash equivalents | $ | 3,024 | $ | 4,029 | ||||
Receivables | 25,495 | 1,607 | ||||||
Investment in unconsolidated joint venture | 3,639 | 23,777 | ||||||
Other assets | 15 | 30 | ||||||
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Total assets | $ | 32,173 | $ | 29,443 | ||||
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Liabilities | ||||||||
Accounts payable and accrued expenses | $ | 7,494 | $ | 2,620 | ||||
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Total liabilities | $ | 7,494 | $ | 2,620 | ||||
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| Years Ended November 30, | |||||||||||
| 2012 | 2011 | 2010 | |||||||||
| Revenues | |||||||||||
| Insurance commissions | $ | 7,140 | $ | 7,188 | $ | 7,235 | |||||
| Title services | 2,362 | 1,983 | 992 | ||||||||
| Marketing services fees | 2,175 | 1,125 | — | ||||||||
| Interest income | 6 | 8 | 6 | ||||||||
| Total | 11,683 | 10,304 | 8,233 | ||||||||
| Expenses | |||||||||||
| General and administrative | (2,991 | ) | (3,512 | ) | (3,119 | ) | |||||
| Operating income | 8,692 | 6,792 | 5,114 | ||||||||
| Equity in income/gain on wind down of unconsolidated joint venture | 2,191 | 19,286 | 7,029 | ||||||||
| Pretax income | $ | 10,883 | $ | 26,078 | $ | 12,143 | |||||
| November 30, | |||||||
| 2012 | 2011 | ||||||
| Assets | |||||||
| Cash and cash equivalents | $ | 923 | $ | 3,024 | |||
| Receivables | 1,859 | 25,495 | |||||
| Investment in unconsolidated joint venture | 1,630 | 3,639 | |||||
| Other assets | 43 | 15 | |||||
| Total assets | $ | 4,455 | $ | 32,173 | |||
| Liabilities | |||||||
| Accounts payable and accrued expenses | $ | 3,188 | $ | 7,494 | |||
| Total liabilities | $ | 3,188 | $ | 7,494 | |||
In the third quarter of 2012, we recognized an additional gain of
$2.1 million in connection with the wind down of KBA Mortgage.investor or an applicable insurer, or due to a delinquency or other matters arising in connection with the loan.
| Note 4. | Receivables |
Mortgages$64.8 million at November 30, 2012 and notes receivable totaled $.3$66.2 million at November 30, 2011 and $40.5 million at November 30, 2010. Mortgages and notes receivable are primarily related to land sales. Interest rates on mortgages and notes receivable were 3% at November 30, 2011 and ranged from 3% to 8% at November 30, 2010. Included in mortgages and notes receivable at November 30, 2010 was a note receivable of $40.0 million on which the Company foreclosed on the underlying real estate collateral in the second quarter of 2011.
Other receivables of $65.9 million at November 30, 2011 and $67.5 million at November 30, 2010 included amounts due from municipalities and utility companies, federal and state income taxes receivable and escrow deposits. OtherAt November 30, 2011, receivables also included mortgages and notes receivable. Receivables were net of allowances for doubtful accounts of $23.7$21.3 million in 20112012 and $31.2$23.7 million in 2010.
Note 5. Inventories2011
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| Note 5. | Inventories |
| November 30, | ||||||||
| 2011 | 2010 | |||||||
Homes under construction | $ | 417,304 | $ | 363,719 | ||||
Land under development | 587,582 | 701,636 | ||||||
Land held for future development | 726,743 | 631,367 | ||||||
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Total | $ | 1,731,629 | $ | 1,696,721 | ||||
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| November 30, | |||||||
| 2012 | 2011 | ||||||
| Homes under construction | $ | 454,108 | $ | 417,304 | |||
| Land under development | 567,470 | 572,660 | |||||
| Land held for future development | 684,993 | 741,665 | |||||
| Total | $ | 1,706,571 | $ | 1,731,629 | |||
| Years Ended November 30, | ||||||||||||
| 2011 | 2010 | 2009 | ||||||||||
Capitalized interest at beginning of year | $ | 249,966 | $ | 291,279 | $ | 361,619 | ||||||
Capitalized interest related to consolidation of previously unconsolidated joint ventures | — | 9,914 | — | |||||||||
Interest incurred (a) | 112,037 | 122,230 | 119,602 | |||||||||
Interest expensed (a) | (49,204 | ) | (68,307 | ) | (51,763 | ) | ||||||
Interest amortized to construction and land costs | (79,338 | ) | (105,150 | ) | (138,179 | ) | ||||||
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Capitalized interest at end of year (b) | $ | 233,461 | $ | 249,966 | $ | 291,279 | ||||||
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| Years Ended November 30, | |||||||||||
| 2012 | 2011 | 2010 | |||||||||
| Capitalized interest at beginning of year | $ | 233,461 | $ | 249,966 | $ | 291,279 | |||||
| Capitalized interest related to consolidation of previously unconsolidated joint ventures | — | — | 9,914 | ||||||||
| Interest incurred (a) | 132,657 | 112,037 | 122,230 | ||||||||
| Interest expensed (a) | (69,804 | ) | (49,204 | ) | (68,307 | ) | |||||
| Interest amortized to construction and land costs | (78,630 | ) | (79,338 | ) | (105,150 | ) | |||||
| Capitalized interest at end of year (b) | $ | 217,684 | $ | 233,461 | $ | 249,966 | |||||
| (a) | Amounts for the year ended November 30, 2012 include a $10.3 million loss on the early extinguishment of debt. Amounts for the year ended November 30, 2011 include a |
