KB HOME

Unless the context indicates otherwise, the terms “we,” “our,” and “us” used in this report refer to KB Home, a Delaware corporation, and its subsidiaries.

production-type contracts. The core principle of ASU 2014-09 is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In August 2015,The guidance provides a principles-based, five-step model to be applied to contracts with customers in determining the FASB issued Accounting Standards Update No. 2015-14, “Revenue from Contractstiming and amount of revenue to recognize: (1) identify the contract(s) with Customers (Topic 606): Deferral ofa customer; (2) identify the Effective Date,” which delayedperformance obligations in the effective date of contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations in the contract, if applicable; and (5) recognize revenue when (or as) the entity satisfies a performance obligation.

ASU 2014-09 by one year. In 2016 and 2017, the FASB issued accounting standards updates that amended several aspects of ASU 2014-09. ASU 2014-09, as amended, isits related amendments (collectively, “ASC 606”) are effective for us for annual and interim periods beginning December 1, 2018 (with early adoption permitted beginning in our 2018 fiscal year) and allows for full retrospective or modified retrospective methods of adoption.2018. We expectintend to adopt ASU 2014-09ASC 606 under the modified retrospective method in our 2019 first quarter. Weapplied to contracts that are currently evaluatingnot complete as of the potential impactdate of adopting this guidance on our consolidated financial statements and disclosures, and have been involved in industry specific discussions with the FASB on the treatmentadoption. As a result, we expect to record a cumulative adjustment to beginning retained earnings as of certain items.December 1, 2018. We do not believeexpect the adoption of ASU 2014-09 willASC 606 to have a material impact on our recognition of homebuilding revenues in our consolidated financial statements. The primary impacts to our consolidated financial statements are expected to be the amount orfollowing:

We are in the process of quantifying the above-mentioned items. While individual financial statement line items may be affected, we currently believe the adoption of ASC 606 will not have a material impact on our consolidated net income. We are also continuing to evaluate the impact that adopting this guidance may have on other aspects of our business.

In February 2016, the FASB issued Accounting Standards Update No. 2016-02, “Leases (Topic 842)” (“ASU 2016-02”). ASU 2016-02 will require lessees to recognize on the balance sheet the assets and liabilities for the rights and obligations created by those leases. Under ASU 2016-02,this guidance, a lessee will be required to recognize assets and liabilities for leases with lease terms of more than 12 months. Lessor accounting remains substantially similar to current GAAP. In addition, disclosures of leasing activities are to be expanded to include qualitative along with specific quantitative information. ASU 2016-02 will beis effective for us beginning December 1, 2019 (with early adoption permitted), and mandates a modified retrospective

In March 2016,February 2018, the FASB issued Accounting Standards Update No. 2016-09, “Compensation2018-02, “Income Statement — Stock CompensationReporting Comprehensive Income (Topic 718)220): Improvements to Employee Share-Based Payment Accounting”Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income” (“ASU 2016-09”2018-02”)., which allows a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act (“TCJA”), and requires certain disclosures about stranded tax effects. ASU 2016-09 simplifies several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. ASU 2016-09 will be2018-02 is effective for us beginning December 1, 20172019 (with early adoption permitted)., and shall be applied either in the period of adoption or retrospectively to each period (or periods) in which the effect of the change in the corporate income tax rate in the TCJA is recognized. We are currently evaluating the potential impact of adopting this guidance on our consolidated financial statements.

In August 2016,June 2018, the FASB issued Accounting Standards Update No. 2016-15, “Statement2018-07, “Compensation — Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting” (“ASU 2018-07”), which expands the scope of Cash Flows (Topic 230): Classification of Certain Cash ReceiptsTopic 718 to include all share-based payment transactions for acquiring goods and Cash Payments” (“services from nonemployees. ASU 2016-15”). ASU 2016-15 provides guidance on how certain cash receipts2018-07 specifies that Topic 718 applies to all share-based payment transactions in which the grantor acquires goods and cash payments areservices to be presented and classifiedused or consumed in its own operations by issuing share-based payment awards. ASU 2018-07 also clarifies that Topic 718 does not apply to share-based payments used to effectively provide (1) financing to the statementissuer or (2) awards granted in conjunction with selling goods or services to customers as part of cash flows.a contract accounted for under ASC 606. ASU 2016-15 will be 2018-07 is

effective for us beginning after December 1, 2018 (with2019, with early adoption permitted).permitted, but no earlier than our adoption of ASC 606. We are currently evaluating the potential impact of adopting this guidance on our consolidated financial statements.

Our homebuilding reporting segments are engaged in the acquisition and development of land primarily for residential purposes and offer a wide variety of homes that are designed to appeal to first-time, first move-up and active adult homebuyers. Our homebuilding operations generate most of their revenues from the delivery of completed homes to homebuyers. They also earn revenues from the sale of land.

Our homebuilding reporting segments were identified based primarily on similarities in economic and geographic characteristics, product types, regulatory environments, methods used to sell and construct homes and land acquisition characteristics. Management evaluates segment performance primarily based on segment pretax results.

In the 2016, fourth quarter, a subsidiary of ours and a subsidiary of Stearns Lending, entered into an agreement to formLLC (“Stearns”) formed KBHS Home Loans, LLC (“KBHS”), an unconsolidated mortgage banking joint venture to offer mortgage banking services, including mortgage loan originations, to our homebuyers. We and Stearns Lending each have a 50.0% ownership interest in KBHS, with Stearns Lending providing management oversight of KBHS’ operations. KBHS was operational in all of our served markets as of June 2017. OurThe financial services reporting segment is separately reported in our consolidated financial statements.

Corporate and other is a non-operating segment that develops and oversees the implementation of company-wide strategic initiatives and provides support to our reporting segments by centralizing certain administrative functions. Corporate management is responsible for, among other things, evaluating and selecting the geographic markets in which we operate, consistent with our overall business strategy; allocating capital resources to markets for land acquisition and development activities; making major personnel decisions related to employee compensation and benefits; and monitoring the financial and operational performance of our divisions. Corporate and other includes general and administrative expenses related to operating our corporate headquarters. A portion of the expenses incurred by Corporate and other is allocated to our homebuilding reporting segments.

Our reporting segments follow the same accounting policies used for our consolidated financial statements. The results of each reporting segment are not necessarily indicative of the results that would have occurred had the segment been an independent, stand-alone entity during the periods presented, nor are they indicative of the results to be expected in future periods.

The following tables present financial information relating to our homebuilding reporting segments (in thousands):

(a)    Land held for sale totaled $56.1$22.6 million at AugustMay 31, 20172018 and $63.4$21.8 million at November 30, 2016.2017.

Interest is capitalized to inventories while the related communities or land are being actively developed and until homes are completed or the land is available for immediate sale. Capitalized interest is amortized to construction and land costs as the related inventories are delivered to homebuyers or land buyers (as applicable). Interest and real estate taxes are not capitalized on land held for future development or sale.

Each community or land parcel in our owned inventory is assessed on a quarterly basis to determine if indicators of potential impairment exist. We record an inventory impairment charge on a community or land parcel that is active or held for future development when indicators of potential impairment exist and the carrying value of the real estate asset is greater than the undiscounted future net cash flows the asset is expected to generate. These real estate assets are written down to fair value, which is primarily determined based on the estimated future net cash flows discounted for inherent risk associated with each such asset, or other valuation techniques. We record an inventory impairment charge on land held for sale when the carrying value of a land parcel is greater than its fair value. These real estate assets are written down to fair value, less associated costs to sell. The estimated fair values of such assets are generally based on bona fide letters of intent from outside parties, executed sales contracts, broker quotes or similar information.

We evaluated 4942 and 43 communities or land parcels for recoverability during the ninesix months ended AugustMay 31, 20172018 and 2016,2017, respectively. The carrying value of thethose communities or land parcels evaluated during the ninesix months ended AugustMay 31, 2018 and 2017 and 2016 was $436.7$284.1 million and $350.0$381.1 million, respectively. Some of the communities or land parcels evaluated during the nine months ended August 31, 2017 and 2016 were evaluated in more than one quarterly period. Communities or land parcels evaluated for recoverability in more than one quarterly period were counted only once for each nine-month period.

Based on the results of our evaluations, we recognized inventory impairment charges of $7.1$6.0 million for the three months ended AugustMay 31, 20172018 and $14.6$10.7 million for the ninesix months ended AugustMay 31, 2017.2018. For the three months and ninesix months ended AugustMay 31, 2016,2017, we recognized inventory impairment charges of $2.6$4.3 million and $13.9$7.5 million, respectively. The inventory impairment charges for the three monthsthree-month and nine monthssix-month periods ended AugustMay 31, 20172018 and 20162017 reflected our decisions to make changes in our operational strategies aimed at more quickly monetizing our investment in thosecertain communities or land parcels. The inventory impairment charges for the three months and nine months ended August 31, 2017 included one community in California where we decided to accelerate the overall pace for selling and delivering homes, primarily through lowering selling prices. In addition, the inventory impairment charges for these three-month and nine-month periods included two communities and six communities, respectively, where we decided to accelerateby accelerating the overall pace for selling, building and delivering homes on land previously held for future development. The inventory impairment charges for the three months and nine months ended August 31, 2016 included two communities in California where we decided to accelerate the overall pace for selling, building and delivering homes, primarily through lowering selling prices. The inventory impairment charges for the nine months ended August 31, 2016 also included $5.4 million associated with the sales of two land parcels in the Metro Washington, D.C. market as part of the wind down of our operations in that market, and $5.2 million associated with one community in California and one in Florida where we decided to accelerate the overall timing for selling, building and delivering homes on land that was previously held for future development. The charges for the nine months ended August 31, 2016 also reflected the sales of our last remaining land parcels in the Rio Grande Valley area of Texas, which closed in the 2016 second quarter.

The following table summarizes ranges for significant quantitative unobservable inputs we utilized in our fair value measurements with respect to the impaired communities written down to fair value during the periods presented:

As of AugustMay 31, 2018, the aggregate carrying value of our inventory that had been impacted by inventory impairment charges was $169.8 million, representing 18 communities and various other land parcels. As of November 30, 2017, the aggregate carrying value of our inventory that had been impacted by inventory impairment charges was $209.1$177.8 million, representing 26 communities and various other land parcels. As of November 30, 2016, the aggregate carrying value of our inventory that had been impacted by inventory impairment charges was $215.3 million, representing 2824 communities and various other land parcels.

Due to the judgment and assumptions applied in our inventory impairment and land option contract abandonment assessment processes, particularly as to land held for future development, or sale, it is possible that actual results could differ substantially from those estimated.

We have investments in unconsolidated joint ventures that conduct land acquisition, land development and/or other homebuilding activities in various markets where our homebuilding operations are located. We and our unconsolidated joint venture partners make initial and/or ongoing capital contributions to these unconsolidated joint ventures, typically on a pro rata basis, according to our respective equity interests. The obligations to make capital contributions are governed by each such unconsolidated joint venture’s respective operating agreement and related governing documents.

We typically have obtained rights to acquire 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 venture’s earnings (losses) until a home sale is closed and title passes to a homebuyer, at which time we account for those earnings (losses) as a reduction (increase) to the cost of purchasing the land from the unconsolidated joint venture. We defer recognition of our share of such unconsolidated joint venture losses only to the extent profits are to be generated from the sale of the home to a homebuyer.

We share in the earnings (losses) of these unconsolidated joint ventures generally in accordance with our respective equity interests. In some instances, we recognize earnings (losses) related to our investment in an unconsolidated joint venture that differ from our equity interest in the unconsolidated joint venture. This typically arises from our deferral of the unconsolidated joint venture’s earnings (losses) from land sales to us, or other items.

The following table presents combined condensed information from the statements of operations of our unconsolidated joint ventures (in thousands):

The following table presents combined condensed balance sheet information for our unconsolidated joint ventures (in thousands):

The following table presents additional information relating to our investments in unconsolidated joint ventures (dollars in thousands):

We and our partners in the unconsolidated joint ventures that have the above-noted construction loan agreements provide certain guarantees and indemnities to the applicable lender, including a guaranty to complete the construction of improvements for the applicable project; a guaranty against losses the lender suffers due to certain bad acts or failures to act by the unconsolidated joint venture or its partners; an indemnity of the lender from environmental issues; and in one case, a guaranty of interest payments on the outstanding balance of the secured debt under the construction loan agreement. In each instance, our actual responsibility under the foregoing guaranty and indemnity obligations is limited to our pro rata interest in the unconsolidated joint venture. We do not have a guaranty or any other obligation to repay or to support the value of the collateral underlying the outstanding secured debt of these unconsolidated joint ventures. However, various financial and

non-financial covenants apply with respect to the outstanding secured debt and the related guaranty and indemnity obligations, and a failure to comply with such covenants could result in a default and cause an applicable lender to seek to enforce such guaranty and indemnity obligations, if and as may be applicable. As of AugustMay 31, 2017,2018, we were in compliance with the applicable terms of our relevant covenants with respect to the construction loan agreements. We do not believe that our existing exposure under our guaranty and indemnity obligations related to the outstanding secured debt of these unconsolidated joint ventures is material to our consolidated financial statements.

Of the unconsolidated joint venture lots controlled under land option and other similar contracts at AugustMay 31, 2017,2018, we are committed to purchase 9056 lots from one of our unconsolidated joint ventures in quarterly takedowns over the next threetwo years for an aggregate purchase price of approximately $39.9$25.3 million under agreements that we entered into with the unconsolidated joint venture in 2016.

Our deferred tax assets of $707.7$522.9 million as of AugustMay 31, 20172018, after the above-described accounting re-measurement, and $763.8$657.2 million as of November 30, 20162017 were partly offset by valuation allowances of $24.6$26.9 million and $24.8$23.6 million, respectively. As part of our analysis of the TCJA’s income tax effects described above, we increased our deferred tax asset valuation allowance by $3.3 million during the six months ended May 31, 2018. The deferred tax asset valuation allowances as of AugustMay 31, 20172018 and November 30, 20162017 were primarily related to certain state net operating losses (“NOLs”) that had not met the “more likely than not” realization standard at those dates. In the three months ended August 31, 2017, we reversed $.2 million of our deferred tax asset valuation allowance due to the utilization of additional state NOLs recognized with the filing of our 2016 state tax returns. Based on our evaluation of our deferred tax assets as of AugustMay 31, 2017,2018, we determined that most of our deferred tax assets would be realized. Therefore, other than the $3.3 million discussed above, no other adjustments to our deferred tax valuation allowance were needed for the ninesix months ended AugustMay 31, 2017.

We will continue to evaluate both the positive and negative evidence on a quarterly basis in determining the need for a valuation allowance with respect to our deferred tax assets. The accounting for deferred tax assets is based upon estimates of future results. Changes in positive and negative evidence, including differences between estimated and actual results, could result in changes in the valuation of our deferred tax assets that could have a material impact on our consolidated financial statements. Changes in existing federal and state tax laws and corporate income tax rates could also affect our actual tax expense,results and the realization of our deferred tax assets over time and/or the value of our deferred tax assets on our consolidated balance sheets.time.

The carrying amounts of our senior notes listed above are net of debt issuance costs and discounts, which totaled $16.8$12.6 million at AugustMay 31, 20172018 and $21.8$15.4 million at November 30, 2016.2017.

The indenture governing theour senior notes does not contain any financial covenants. Subject to specified exceptions, the indenture contains certain restrictive covenants that, among other things, limit our ability to incur secured indebtedness, or engage in sale-leaseback transactions involving property or assets above a certain specified value. In addition, theour senior notes, (withwith the exception of theour 7 1/4% senior notes due 2018)2018 (“7 1/4% Senior Notes due 2018”), contain certain limitations related to mergers, consolidations, and sales of assets.

Principal payments on senior notes, mortgages and land contracts due to land sellers and other loans are due as follows: 2017 – $179.0 million; 2018 – $310.1$300.0 million; 2019 – $630.0$666.4 million; 2020 – $350.0 million; 2021 – $0; 2022 – $800.0 million; and thereafter – $1.05 billion.$250.0 million.

Fair value measurements of assets and liabilities are categorized based on the following hierarchy:

Fair value measurements are used for inventories on a nonrecurring basis when events and circumstances indicate that their carrying value is not recoverable. The following table presents the fair value hierarchy, pre-impairment value, inventory impairment charges and fair value for our assets measured at fair value on a nonrecurring basis for the ninesix months ended AugustMay 31, 20172018 and the year ended November 30, 20162017 (in thousands): 

The following table presents the fair value hierarchy, carrying values and estimated fair values of our financial instruments, except those for which the carrying values approximate fair values (in thousands):

The fair values of our senior notes and convertible senior notes are generally estimated based on quoted market prices for these instruments. The carrying values reported for cash and cash equivalents, and mortgages and land contracts due to land sellers and other loans approximate fair values. The carrying value of corporate-owned life insurance is based on the cash surrender value of the policies and, accordingly, approximates fair value.

Commitments and contingencies include typical obligations of homebuilders for the completion of contracts and those incurred in the ordinary course of business.

We estimate the costs that may be incurred under each limited warranty and record a liability in the amount of such costs at the time the revenue associated with the sale of each home is recognized. Our primary assumption in estimating the amounts we accrue for warranty costs is that historical claims experience is a strong indicator of future claims experience. Factors that affect our warranty liability include the number of homes delivered, historical and anticipated rates of warranty claims,

The changes in our warranty liability were as follows (in thousands):