10-K 1 kbh-11302014x10k.htm 10-K KBH- 11.30.2014 -10K
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
ý    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended November 30, 2014
or
¨    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                 to                 .
Commission File No. 001-09195
KB HOME
(Exact name of registrant as specified in its charter)
Delaware
95-3666267
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
10990 Wilshire Boulevard, Los Angeles, California 90024
(Address of principal executive offices) (Zip Code)
Registrant’s telephone number, including area code: (310) 231-4000
Securities Registered Pursuant to Section 12(b) of the Act:
Title of each class
Name of each exchange
on which registered
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
Securities Registered Pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  ý    No  ¨
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes  ¨    No  ý
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ý    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ý    No  ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ý
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer  ý        Accelerated filer  ¨    Non-accelerated filer  ¨     Smaller reporting company  ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  ý
The aggregate market value of voting stock held by non-affiliates of the registrant on May 31, 2014 was $1,685,794,111, including 10,501,844 shares held by the registrant’s grantor stock ownership trust and excluding 13,066,515 shares held in treasury.
There were 91,953,911 shares of the registrant’s common stock, par value $1.00 per share, outstanding on December 31, 2014. The registrant’s grantor stock ownership trust held an additional 10,335,461 shares of the registrant’s common stock on that date.
Documents Incorporated by Reference
Portions of the registrant’s definitive Proxy Statement for the 2015 Annual Meeting of Stockholders (incorporated into Part III).




KB HOME
FORM 10-K
FOR THE YEAR ENDED NOVEMBER 30, 2014
TABLE OF CONTENTS
 
 
 
Page
Number
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
 
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
 
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
 
Item 15.



PART I

Item 1.
BUSINESS
General
KB Home is one of the largest and most recognized homebuilding companies in the U.S. and has been building homes for nearly 60 years. We construct and sell homes through our operating divisions under the name 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 predecessors and subsidiaries.
Beginning in 1957 and continuing until 1986, our business was conducted by various subsidiaries of Kaufman and Broad, Inc. (“KBI”) and its predecessors. In 1986, KBI transferred all of its homebuilding and mortgage banking operations to us. Shortly after the transfer, we completed an initial public offering of 8% of our common stock and began operating under the name Kaufman and Broad Home Corporation. In 1989, we were spun-off from KBI and became an independent public company. In 2001, we changed our name to KB Home.
Our homebuilding operations 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.
Through our four homebuilding reporting segments, we delivered 7,215 homes at an average selling price of $328,400 during the year ended November 30, 2014, compared to 7,145 homes delivered at an average selling price of $291,700 during the year ended November 30, 2013. Our homebuilding operations represent most of our business, accounting for 99.5% of our total revenues in 2014 and 99.4% of our total revenues in 2013.
Our financial services reporting segment offers property and casualty insurance and, in certain instances, earthquake, flood and personal property insurance to our homebuyers in the same markets as our homebuilding reporting segments, and provides title services in the majority of our markets located within our Central and Southeast homebuilding reporting segments. In addition, since July 2014, this segment has offered mortgage banking services, including residential consumer mortgage loan (“mortgage loan”) originations, to our homebuyers indirectly through Home Community Mortgage, LLC (“HCM”). HCM is an unconsolidated joint venture we formed in January 2013 with Nationstar Mortgage LLC (“Nationstar”). Beginning early in 2012 and continuing until HCM’s operational launch, Nationstar was our preferred mortgage lender, offering mortgage banking services, including mortgage loan originations, to our homebuyers, and our financial services reporting segment earned revenues from the performance of certain marketing services under an agreement with Nationstar. Our financial services operations accounted for .5% of our total revenues in 2014 and .6% of our total revenues in 2013.
For the year ended November 30, 2014, we generated total revenues of $2.40 billion and net income of $918.3 million, compared to total revenues of $2.10 billion and net income of $40.0 million for the year ended November 30, 2013.
Our principal executive offices are located at 10990 Wilshire Boulevard, Los Angeles, California 90024. The telephone number of our corporate headquarters is (310) 231-4000 and our primary website address is www.kbhome.com. In addition, community location and information is available at (888) KB-HOMES.
Markets
Reflecting the geographic reach of our homebuilding business, as of the date of this report, our ongoing principal operations are in the 10 states and 40 major markets presented below. We also operate in various submarkets within these major markets. From time to time, we refer to these markets and submarkets collectively as our “served markets.” For reporting purposes, we organize our homebuilding operations into four segments — West Coast, Southwest, Central and Southeast.

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Segment    
 
State(s)
 
Major Market(s)
West Coast
 
California
 
Contra Costa County, Fresno, Los Angeles, Madera, Oakland, Orange County, Riverside, Sacramento, San Bernardino, San Diego, San Francisco, San Jose, Santa Rosa-Petaluma, Stockton, Vallejo, Ventura and Yuba City
Southwest
 
Arizona
 
Phoenix and Tucson
 
 
Nevada
 
Las Vegas
Central
 
Colorado
 
Denver
 
 
New Mexico
 
Albuquerque
 
 
Texas
 
Austin, Dallas, Fort Worth, Houston and San Antonio
Southeast
 
Florida
 
Daytona Beach, Jacksonville, Lakeland, Orlando, Palm Coast, Punta Gorda, Sarasota, Sebastian-Vero Beach and Tampa
 
 
Maryland
 
Baltimore and Rockville
 
 
North Carolina
 
Raleigh
 
 
Virginia
 
Washington, D.C.

Segment Operating Information. The following table presents certain operating information for our homebuilding reporting segments for the years ended November 30, 2014, 2013 and 2012 (dollars in millions, except average selling price):
 
Years Ended November 30,
 
2014
 
2013
 
2012
West Coast:
 
 
 
 
 
Homes delivered
1,913

 
2,179

 
1,945

Percentage of total homes delivered
27
%
 
31
%
 
31
%
Average selling price
$
569,700

 
$
467,800

 
$
388,300

Total revenues (a)
$
1,089.9

 
$
1,020.2

 
$
755.3

Southwest:
 
 
 
 
 
Homes delivered
736

 
738

 
683

Percentage of total homes delivered
10
%
 
10
%
 
11
%
Average selling price
$
271,100

 
$
237,500

 
$
193,900

Total revenues
$
199.5

 
$
175.3

 
$
132.4

Central:
 
 
 
 
 
Homes delivered
3,098

 
2,841

 
2,566

Percentage of total homes delivered
43
%
 
40
%
 
41
%
Average selling price
$
223,800

 
$
198,900

 
$
170,100

Total revenues (a)
$
698.4

 
$
565.1

 
$
436.4

Southeast:
 
 
 
 
 
Homes delivered
1,468

 
1,387

 
1,088

Percentage of total homes delivered
20
%
 
19
%
 
17
%
Average selling price
$
263,600

 
$
233,900

 
$
206,200

Total revenues (a)
$
401.9

 
$
324.4

 
$
224.3

Total:
 
 
 
 
 
Homes delivered
7,215

 
7,145

 
6,282

Average selling price
$
328,400

 
$
291,700

 
$
246,500

Total revenues (a)
$
2,389.6

 
$
2,085.0

 
$
1,548.4

(a)
Total revenues include revenues from housing and land sales.

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Unconsolidated Joint Ventures. The above table does not include homes delivered or revenues from unconsolidated joint ventures in which we participate. These unconsolidated joint ventures acquire and develop land in various markets where our homebuilding operations are located and, in some cases, build and deliver homes on the land developed.
Strategy
Since 1997, we have followed the principles of an operational business model that we call KBnxt. KBnxt provides the core framework under which we have established the primary operational and strategic goals for our homebuilding business. We believe the principles of KBnxt set us apart from other high-production homebuilders and provide the foundation for our long-term growth.
KBnxt. With KBnxt, we seek to generate improved operating efficiencies and return on investment through a disciplined, fact-based and process-driven approach to homebuilding that is founded on a constant and systematic assessment of consumer preferences and market opportunities. The key principles of KBnxt include the following:
gaining a detailed understanding of consumer location and home design and interior/exterior design option preferences through regular surveys and research. In this report and elsewhere, we refer to our home designs and design options as our “products;”
managing our working capital and reducing our operating risks by acquiring primarily developed and entitled land at reasonable prices in identified preferred markets and submarkets that meet our investment return standards and market positioning (or “marketing”) strategy;
using our knowledge of consumer preferences to design, offer, construct and deliver products that meet the needs and interests of the largest demographic of homebuyers in our served markets. Historically, this demographic has been comprised of first-time and move-up homebuyers;
in general, commencing construction of a home only after a purchase contract has been signed with a buyer and preliminary credit approval or other evidence of the buyer’s financial ability to purchase the home has been obtained;
building a backlog of orders and minimizing the cycle time from the start of construction to the delivery of homes to buyers;
establishing an even flow production of high-quality homes at the lowest possible cost; and
offering customers a distinct homebuying experience designed to offer the best combination of value and choice through affordable sales prices plus the opportunity to customize their homes as they desire with choices of lot location within a community, various house elevations and floor plans (“product premiums”) and numerous interior and exterior design options and upgrades available at our design studios.
While we consider KBnxt to be integral to our success in the homebuilding industry, there can be market-driven circumstances where we believe it is necessary or appropriate to temporarily deviate from certain of its principles. These deviations may include starting construction on a small number of homes in a community before corresponding purchase contracts are signed with buyers to more quickly meet customer delivery expectations and generate revenues; or acquiring undeveloped or unentitled land parcels that otherwise fit within our marketing strategy and meet our investment return standards. Other circumstances may arise in the future that lead us to make specific short-term shifts from the principles of KBnxt.
Strategic and Operational Focus. Guided by KBnxt, over the last few years we have broadly transformed the scope, scale and orientation of our business both geographically and operationally amid significant and at times rapid changes in the housing market environment. We have done this by focusing primarily on three integrated strategic goals:
achieving and maintaining profitability at the scale of prevailing market conditions;
generating cash and strengthening our balance sheet; and
positioning our business to capitalize on future growth opportunities.
Within this strategic framework, from mid-2006 to 2011, we navigated a severe and prolonged housing downturn that was exacerbated by a deep global economic recession by shifting resources from underperforming areas to markets and submarkets we identified as having stronger long-term prospects; implementing measures to bolster our balance sheet, including opportunistic capital markets transactions and continuous efforts to improve our operating efficiencies and lower our overhead costs; and redesigning and re-engineering our products. Though we experienced declines in net orders and revenues, and generated losses,

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we believe the steps we took during the housing downturn helped us maintain a solid operational platform positioned for future growth.
As a housing recovery began to take shape in 2012, we moved quickly with the increased demand for housing and improving economic conditions to take advantage of opportunities to expand our business and to restore profitability. We initiated an aggressive land acquisition and land development investment strategy to position more of our new home communities in attractive, land-constrained locations featuring higher-income buyers, and we further refined our product offerings to meet these buyers’ preferences both for larger homes and to include more design options and upgrades with the construction of their homes. With the housing recovery’s continued, though uneven, progress from 2012 through the date of this report, we have undertaken steps to accelerate our growth by investing approximately $3.17 billion in land and land development, leveraging the strengths of our operational platform and KBnxt principles, and re-orienting our top strategic priorities to focus on increasing our community count in preferred submarkets, enhancing profitability per home delivered and generating higher revenues. We use the term “community count” to refer to the number of communities open for sales with at least five homes/lots left to sell. From these strategic actions and additional growth initiatives that are discussed further below under “Part II — Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations,” we have produced significant improvement in our financial results since 2012, and have been profitable for each of the last two fiscal years.
We believe we can sustain our positive growth trajectory in 2015 by continuing to execute on our top strategic priorities of the last few years, as well as by evolving our strategic priorities to also focus on enhancing our asset efficiency and increasing returns. We also intend to pursue the following interrelated operational objectives, subject to conditions in the housing markets, the overall economy and the capital, credit and financial markets:
Generating Returns on Targeted Land Investment: Maintaining ownership or control of a forecasted three-to-five year base supply of developed or developable land subject to our investment return and marketing standards while accelerating our land development activities, predominantly in attractive growth markets. We invested approximately $1.47 billion in land and land development in 2014 and approximately $1.14 billion in 2013. This substantial investment contributed to year-over-year increases in our community count, revenues, average selling prices and housing gross profits in 2014. While we intend to selectively acquire or control additional land parcels that meet our investment return and marketing standards in 2015, given our present land pipeline, we expect our investment in land and land development will moderate on an overall basis compared to the prior year, and that a higher proportion of our investment will be dedicated to land development in order to advance the conversion of our owned land into new home communities open for sales and, in turn, generate additional net orders, homes delivered, revenues and cash. With this investment orientation, we anticipate that our community count in 2015 will be higher than in 2014, depending on sales absorption rates and the timing of community close-outs.
Our land development activities include activating land previously held for future development in markets as and where conditions support such action. In 2013, we identified 20 communities for activation, primarily in California and Texas, representing approximately 1,700 lots, and delivered 363 homes from these communities in 2014. In 2014, we identified 21 communities for activation, primarily in Arizona, California and Florida, representing approximately 2,300 lots. We expect to deliver homes and to realize the associated revenues from these activated assets beginning in 2015. In addition to activating land previously held for future development, we will continue to evaluate opportunities to monetize our investment in such assets through land sales to help support our top-line growth.
Net Order Value Growth: In tandem with our community count expansion and land investment and activation initiatives, optimizing our land assets by increasing revenues per community open for sales through an intense focus on balancing sales pace and selling prices. In addition, through KBnxt, we have opportunities to generate incremental earnings from the higher home selling prices that accompany sales of lot and product premiums and design studio options and upgrades. In 2014, our KBnxt-based sales strategies helped to grow the year-over-year value of our net orders by 20%, following a 24% year-over-year rise in 2013. Our net order value for a given period represents the potential future housing revenues associated with net orders, including various lot and product premiums, and homebuyer spending on design studio options and upgrades for homes in backlog during the same period.
Organizational and Production Efficiency: Continuously working to expand our housing gross profit margins by aligning our management resources, personnel levels and overhead costs with our growth platform, community count and home delivery expectations and business needs, and by streamlining and constantly improving, to the extent possible, our home construction process and operational activities. In addition to even flow production scheduling, our home construction process includes developing and refining a standardized set of value-engineered home designs in ways that allow us to meet the needs of our primary customer base in a variety of different markets, shorten cycle times and lower direct construction costs. It also includes taking advantage of economies of scale in contracting for building materials and subcontracted trade labor, and leveraging our organizational infrastructure in our served markets.

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Promotional Marketing Strategy. Our promotional marketing efforts are centered on differentiating the KB Home brand from resale homes and from new homes sold by other homebuilders. These efforts increasingly involve interactive Internet-based applications, social media outlets and other evolving communication technologies. In marketing our distinct homebuying experience, we emphasize how we partner with our homebuyers to create a home built to their individual preferences in design, floor plan, elevation, square footage and lot location, and give them the ability to significantly customize their home to suit their needs and interests. At each of our operating divisions, we have in-house teams of sales representatives, design consultants and other personnel who work with each homebuyer to create a home that meets the homebuyer’s preferences and budget.
Our design studios are a key component of our distinct homebuying experience and help increase the revenues we generate from home sales. These showrooms, which are generally centrally located within our served markets and increasingly utilize electronic displays and virtual design tools, allow our homebuyers to customize their home by selecting from a wide variety of design options and upgrades that are available at no cost or for purchase as part of the original construction of their home. The coordinated efforts of our sales representatives and design studio consultants are intended to generate higher customer satisfaction and lead to enhanced customer retention and referrals. In 2014, we began the process of updating the look and layout of our design studios to better showcase the option choices available to our homebuyers.  As of the date of this report, most of our design studios had been upgraded. We plan to continue updating our design studios in 2015.
Sustainability. We have made a dedicated effort to further differentiate ourselves from other homebuilders and resale homes through our ongoing commitment to become a leading national company in environmental sustainability. Under this commitment, we:
refine our products and construction process to limit the materials needed to build our homes, and continuously look at ways to reduce construction and office waste;
build all of our new homes to the U.S. Environmental Protection Agency’s (“EPA”) ENERGY STAR® Version 3 standards;
build an increasing percentage of our homes to meet the EPA’s Watersense® specifications for water use efficiency;
build our homes with Watersense labeled fixtures;
seek out and utilize innovative technologies and systems to further improve the energy and water efficiency of our homes;
engage in campaigns and other educational efforts, sometimes together with other companies, organizations and groups, to increase consumer awareness of the importance and impact of sustainability in selecting a home and the products within a home;
developed an Energy Performance Guide®, or EPG®, that informs our homebuyers of the relative energy efficiency and the related estimated monthly energy costs and potential energy cost savings of each of our homes as designed, compared to typical new and existing homes; and
created and are adding more net-zero energy and zero freshwater design options, under a program called Double ZeroHouse™ 3.0, that are available in select markets.
This commitment and 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 homes can have on the environment, including on the consumption of energy and water resources. They also reflect our efforts to balance these concerns with our homebuyers’ interest in affordable homes and in lowering their utility bills and total cost of homeownership on a long-term basis. More information about our sustainability commitment can be found in our annual sustainability reports, which we have published on our website since 2008. 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 our commitment. In addition to making good business sense, we believe our sustainability initiatives can help put us in a better position, compared to resale homes 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.
Customer Service
Our goal is for our customers to be 100% satisfied with their new homes. Our on-site construction supervisors perform regular pre-closing quality checks and our sales representatives maintain regular contact with our homebuyers during the home construction process in an effort to ensure our homes meet our standards and our homebuyers’ expectations. We believe our prompt and courteous responses to homebuyers’ needs throughout the homebuying process help reduce post-closing repair costs, enhance our

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reputation for quality and service, and help encourage repeat and referral business from homebuyers and the real estate community. We also have employees who are responsible for responding to homebuyers’ post-closing needs, including warranty claims.
We provide a limited warranty on all of our homes. The specific terms and conditions of our limited warranty program vary depending upon the markets in which we do business. We generally provide a structural warranty of 10 years, a warranty on electrical, heating, cooling, plumbing and certain other building systems each varying from two to five years based on geographic market and state law, and a warranty of one year for other components of the home.
Local Expertise
To help ensure consistent execution within our organization, our employees are continuously trained on KBnxt principles and are evaluated, in part, based on their achievement of relevant operational objectives. We believe that our business benefits from having in-depth knowledge of local markets that enables us to acquire land in preferred locations consistent with our investment return and marketing standards, to engage subcontractors, to develop new home communities and offer products 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 experienced management teams and trained personnel who have local market expertise. Though we centralize certain functions (such as promotional marketing, legal, 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 land, implementing product, marketing and sales strategies, and controlling costs.
Community Development and Land Inventory Management
Our community development process generally consists of four phases: land acquisition, land development, home construction and delivery of completed homes. Historically, our community development process has ranged from six to 24 months in our West Coast homebuilding reporting segment, with a somewhat shorter duration in our other homebuilding reporting segments. The community development process varies based on, among other things, the extent and speed of required government approvals and utility service activations, the overall size of a particular community, the scope of necessary site preparation activities, the type of product(s) that will be offered, weather conditions, promotional marketing results, the availability of subcontracted trade labor and building materials, consumer demand and local and general economic and housing market conditions.
Although they vary significantly in size and complexity, our communities typically consist of 30 to 250 lots ranging in size from 1,900 to 11,500 square feet. In our communities, we typically offer three to 15 home design choices. We also generally build one to three model homes at each community so that prospective buyers can preview various products available. Depending on the community, we may offer premium lots containing more square footage, better views and/or location benefits. Some of our communities consist of multiple-story structures that encompass several attached condominium-style units.
The following table summarizes our average community count by homebuilding reporting segment:
For the Years Ended November 30,
 
West Coast
 
Southwest
 
Central
 
Southeast
 
Total
2014
 
43

 
21

 
84

 
52

 
200

2013
 
41

 
18

 
82

 
41

 
182

Land Acquisition and Land Development. We continuously evaluate land acquisition opportunities against our investment return and marketing standards, balancing competing needs for financial strength, liquidity and land inventory for future growth. In many cases, we are able to leverage our long-standing business relationships and reputation with local land sellers, our financial resources and our steady operating history to secure opportunities ahead of other homebuilders, developers or investors. When we acquire land, we generally focus on land parcels containing fewer than 250 lots that are fully entitled for residential construction and are either physically developed to start home construction (referred to as “finished lots”) or partially finished. Acquiring finished or partially finished lots enables us to construct and deliver homes with minimal additional development work or expenditures. However, depending on market conditions and available opportunities, including opportunities to secure certain finished lots or property in land-constrained or very active submarkets, we may acquire undeveloped and/or unentitled land. We may also invest in projects that require us to repurpose and re-entitle property for residential use, such as in-fill developments. We expect that the overall balance of undeveloped, unentitled, entitled, partially finished and finished lots in our inventory will vary over time, and in implementing our strategic growth initiatives, we may acquire a greater proportion of undeveloped or unentitled land in the future if and as the availability of reasonably priced finished or partially finished lots diminishes. The community development process for undeveloped and/or unentitled land is typically much longer than the process for finished or partially finished lots, which extends the time by which we can realize a return on our investment in such land.

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Consistent with KBnxt, we target geographic areas for potential land acquisitions and community development 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 analyze 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 or potential land interest dispositions are consumer preferences; general economic conditions; prevailing and expected home sales activity and the selling prices and pricing trends of comparable new and resale homes in the subject submarket; proximity to metropolitan areas and employment centers; population, household formation, demographic, and employment and commercial growth patterns; household income levels; availability of developable land parcels at reasonable cost, including estimated costs of completing land development and selling homes; our operational scale and experience in the subject submarket; and regulatory and environmental compliance matters.
We generally structure our land acquisition and land development activities to minimize, or to defer the timing of, expenditures, which improves our returns associated with land-related investments. While we use a variety of techniques to accomplish this, we typically use contracts that give us an option or similar right to acquire land at a future date, usually at a pre-determined price and for a small initial option or earnest money deposit payment. These contracts may also permit us to partially develop the underlying land prior to our acquisition and/or condition our acquisition on our satisfaction with the feasibility of developing the subject land and selling homes on the land by a certain future date. 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 analysis we conduct after entering into such 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.
Our land option contracts and other similar contracts may also allow us to phase our land acquisitions 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 or other parties. 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.
Our land option contracts and other similar contracts generally do not contain provisions requiring our specific performance. 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. From time to time, in a few instances, we may have an obligation to complete or pay for the completion of a certain degree of land development even if we do not plan to build and deliver homes on the related property.
Before we commit to any land acquisition, our senior corporate and regional management evaluate 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 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.
Our inventories include land we are holding for future development, which is comprised of land where 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 building permit moratorium or regulatory restrictions, or are portions of larger land parcels that we plan to build out over several years and/or that have not yet been entitled. We may also suspend development activity if we believe it will result in greater returns and/or maximize the economic performance of a particular community by delaying improvements for a period of time to, for instance, 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 or, in some instances, to accelerate sales and/or our return on investment. As discussed above under “Strategy,” in recent years we have activated land previously held for future development as part of our strategic growth initiatives, and we will continue to look for additional opportunities in 2015 to activate or otherwise monetize such assets.
The following table presents the number of inventory lots we owned, in various stages of development, or controlled under land option contracts or other similar contracts by homebuilding reporting segment as of November 30, 2014 and 2013:

7


 
Homes Under
Construction and Land
Under Development
 
Land Held for Future
Development
 
Land Under
Option
 
Total Land
Owned or
Under Option
 
2014
 
2013
 
2014
 
2013
 
2014
 
2013
 
2014
 
2013
West Coast
5,467

 
4,414

 
3,157

 
3,348

 
4,210

 
4,850

 
12,834

 
12,612

Southwest
6,985

 
2,318

 
2,255

 
7,552

 
317

 
2,347

 
9,557

 
12,217

Central
13,692

 
10,873

 
1,339

 
1,451

 
4,098

 
10,482

 
19,129

 
22,806

Southeast
4,618

 
3,734

 
3,879

 
4,665

 
2,181

 
5,061

 
10,678

 
13,460

Total
30,762

 
21,339

 
10,630

 
17,016

 
10,806

 
22,740

 
52,198

 
61,095

Reflecting our geographic diversity and relatively balanced operational footprint, as of November 30, 2014, 25% of the inventory lots we owned or controlled were located in our West Coast homebuilding reporting segment, 18% were in our Southwest homebuilding reporting segment, 37% were in our Central homebuilding reporting segment and 20% were in our Southeast homebuilding reporting segment.
The following table presents the carrying value of inventory we owned, in various stages of development, or controlled under land option contracts or other similar contracts by homebuilding reporting segment as of November 30, 2014 and 2013 (in thousands):
 
Homes Under
Construction and Land
Under Development
 
Land Held for Future
Development
 
Land Under
Option
 
Total Land
Owned or
Under Option
 
2014
 
2013
 
2014
 
2013
 
2014
 
2013
 
2014
 
2013
West Coast
$
1,257,776

 
$
797,540

 
$
284,889

 
$
297,420

 
$
53,815

 
$
49,224

 
$
1,596,480

 
$
1,144,184

Southwest
398,436

 
141,153

 
138,367

 
157,924

 
1,902

 
5,162

 
538,705

 
304,239

Central
550,761

 
383,210

 
22,957

 
15,193

 
14,336

 
12,673

 
588,054

 
411,076

Southeast
359,482

 
265,708

 
121,468

 
158,992

 
14,198

 
14,378

 
495,148

 
439,078

Total
$
2,566,455

 
$
1,587,611

 
$
567,681

 
$
629,529

 
$
84,251

 
$
81,437

 
$
3,218,387

 
$
2,298,577

Home Construction and Deliveries. Following the acquisition of land and, if necessary, the development of the land into finished lots, we typically begin constructing model homes and marketing homes for sale. We have developed and refined a standardized set of value-engineered home designs to enhance our construction efficiency. The time required for construction of our homes also depends on conditions such as the weather, time of year, availability of subcontracted trade labor and building materials and other factors. To minimize the costs and risks of unsold homes in production, we generally begin construction of a home only when we have a signed purchase contract with a buyer and we have obtained preliminary credit approval or other evidence of the buyer’s financial ability to purchase the home. 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 will result in our having unsold homes in production.
We act as the general contractor for the majority of our communities, and engage general contractors in all other instances, and we, or such engaged general contractors, contract with experienced subcontractors to supply all trade labor and to procure some of the building materials required for all production activities. All subcontracted trade labor are exclusively employees or independent contractors of the subcontractors — none are our employees. Our contracts with our subcontractors require that they comply with all laws applicable to their work, including wage and safety laws, meet performance standards, and follow local building codes and permits. We have established national and regional purchasing programs for certain building materials, appliances, fixtures and other items to take advantage of economies of scale and garner better pricing and more reliable supply and, where available, participate in manufacturer or supplier rebate programs. At all stages of production where we act as general contractor, our administrative and on-site supervisory personnel oversee and coordinate the activities of subcontractors in an effort to meet our production schedules and quality standards.
Backlog
We sell our homes under standard purchase contracts, which generally require a homebuyer to pay a deposit at the time of signing. The amount of the deposit required varies among markets and communities. Homebuyers also may be required to pay additional deposits when they select design options and 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

8


cannot be obtained within a certain period of time, as specified in their contract. We define our cancellation rate for a given period as the total number of contracts for new homes canceled divided by the total new (gross) orders for homes during the same period. Our cancellation rate for the year ended November 30, 2014 was 31%, compared to a cancellation rate of 32% for the previous year. Our cancellation rates and the factors affecting our cancellation rates are further discussed below under “Item 1A. Risk Factors” and “Part II — Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
Our “backlog” consists of homes that are under a home purchase contract but have not yet been 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. Our backlog at any given time will be affected by cancellations and by our community count. The number of homes we deliver has historically increased from the first to the fourth quarter in any year.
Our backlog at November 30, 2014 consisted of 2,909 homes, up 14% from 2,557 homes in backlog at November 30, 2013, largely reflecting a year-over-year increase in our net orders. Our backlog at November 30, 2014 represented potential future housing revenues of approximately $914.0 million, a 34% increase from potential future housing revenues of approximately $682.5 million at November 30, 2013, primarily due to a higher overall average selling price. Our backlog conversion ratio, defined as homes delivered in a quarter as a percentage of backlog at the beginning of that quarter, will vary from quarter to quarter, depending on the number of homes in our backlog that are under construction, home construction pace, cancellations and the number of homes we sell and deliver within a quarter.
Our net orders for the year ended November 30, 2014 increased to 7,567 from 7,125 for the year ended November 30, 2013, marking the fourth 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, 2014 increased 20% to $2.58 billion from $2.16 billion for the prior year. Our net order value for a given period represents the potential future housing revenues associated with net orders, including various lot and product premiums, and homebuyer spending on design options and upgrades for homes in backlog during the same period. Our net order value may be further impacted by changes related to cancellations and change orders between periods.
The following tables present our homes delivered, net orders (number of net orders and value), cancellation rates and ending backlog (number of homes and value) by homebuilding reporting segment for each quarter during the years ended November 30, 2014 and 2013:
 
West Coast
 
Southwest
 
Central
 
Southeast
 
Total
Homes delivered
 
 
 
 
 
 
 
 
 
2014
 
 
 
 
 
 
 
 
 
First
346

 
161

 
595

 
340

 
1,442

Second
484

 
175

 
765

 
327

 
1,751

Third
458

 
185

 
807

 
343

 
1,793

Fourth
625

 
215

 
931

 
458

 
2,229

Total
1,913

 
736

 
3,098

 
1,468

 
7,215

2013
 
 
 
 
 
 
 
 
 
First
509

 
140

 
571

 
265

 
1,485

Second
594

 
211

 
637

 
355

 
1,797

Third
555

 
194

 
757

 
319

 
1,825

Fourth
521

 
193

 
876

 
448

 
2,038

Total
2,179

 
738

 
2,841

 
1,387

 
7,145

 
 
 
 
 
 
 
 
 
 

9


 
West Coast
 
Southwest
 
Central
 
Southeast
 
Total
Net orders
 
 
 
 
 
 
 
 
 
2014
 
 
 
 
 
 
 
 
 
First
506

 
181

 
757

 
321

 
1,765

Second
583

 
211

 
1,085

 
390

 
2,269

Third
529

 
198

 
745

 
355

 
1,827

Fourth
468

 
282

 
652

 
304

 
1,706

Total
2,086

 
872

 
3,239

 
1,370

 
7,567

2013
 
 
 
 
 
 
 
 
 
First
530

 
199

 
653

 
289

 
1,671

Second
587

 
189

 
968

 
418

 
2,162

Third
427

 
180

 
743

 
386

 
1,736

Fourth
371

 
188

 
663

 
334

 
1,556

Total
1,915

 
756

 
3,027

 
1,427

 
7,125

 
 
 
 
 
 
 
 
 
 
Net orders — value, in thousands
 
 
 
 
 
 
 
 
 
2014
 
 
 
 
 
 
 
 
 
First
$
299,283

 
$
48,388

 
$
168,973

 
$
83,528

 
$
600,172

Second
344,671

 
56,512

 
250,381

 
111,592

 
763,156

Third
305,840

 
50,692

 
178,657

 
94,059

 
629,248

Fourth
267,796

 
75,040

 
157,673

 
86,866

 
587,375

Total
$
1,217,590

 
$
230,632

 
$
755,684

 
$
376,045

 
$
2,579,951

2013
 
 
 
 
 
 
 
 
 
First
$
261,342

 
$
43,706

 
$
133,492

 
$
68,263

 
$
506,803

Second
292,769

 
49,246

 
198,621

 
99,002

 
639,638

Third
227,119

 
44,885

 
160,566

 
96,352

 
528,922

Fourth
194,888

 
53,248

 
144,255

 
89,311

 
481,702

Total
$
976,118

 
$
191,085

 
$
636,934

 
$
352,928

 
$
2,157,065

 
 
 
 
 
 
 
 
 
 
Cancellation rates
 
 
 
 
 
 
 
 
 
2014
 
 
 
 
 
 
 
 
 
First
21
%
 
27
%
 
37
%
 
29
%
 
30
%
Second
19

 
25

 
31

 
30

 
28

Third
19

 
24

 
38

 
32

 
31

Fourth
27

 
24

 
43

 
43

 
37

Total
21
%
 
25
%
 
37
%
 
34
%
 
31
%
2013
 
 
 
 
 
 
 
 
 
First
23
%
 
22
%
 
39
%
 
34
%
 
32
%
Second
20

 
23

 
32

 
22

 
27

Third
25

 
24

 
41

 
27

 
33

Fourth
29

 
25

 
44

 
31

 
36

Total
24
%
 
24
%
 
39
%
 
28
%
 
32
%
 
 
 
 
 
 
 
 
 
 

10


 
West Coast
 
Southwest
 
Central
 
Southeast
 
Total
Ending backlog — homes
 
 
 
 
 
 
 
 
2014
 
 
 
 
 
 
 
 
 
First
580

 
208

 
1,510

 
582

 
2,880

Second
679

 
244

 
1,830

 
645

 
3,398

Third
750

 
257

 
1,768

 
657

 
3,432

Fourth
593

 
324

 
1,489

 
503

 
2,909

2013
 
 
 
 
 
 
 
 
 
First
705

 
242

 
1,231

 
585

 
2,763

Second
698

 
220

 
1,562

 
648

 
3,128

Third
570

 
206

 
1,548

 
715

 
3,039

Fourth
420

 
201

 
1,335

 
601

 
2,557

 
 
 
 
 
 
 
 
 
 
Ending backlog — value, in thousands
 
 
 
 
 
 
2014
 
 
 
 
 
 
 
 
 
First
$
328,676

 
$
57,648

 
$
320,926

 
$
144,303

 
$
851,553

Second
389,402

 
67,060

 
405,850

 
163,565

 
1,025,877

Third
463,643

 
69,621

 
396,838

 
174,038

 
1,104,140

Fourth
355,651

 
82,140

 
334,007

 
142,227

 
914,025

2013
 
 
 
 
 
 
 
 
 
First
$
287,970

 
$
54,604

 
$
235,759

 
$
125,560

 
$
703,893

Second
337,878

 
48,524

 
296,949

 
143,262

 
826,613

Third
276,031

 
48,646

 
315,900

 
167,906

 
808,483

Fourth
206,308

 
50,858

 
279,424

 
145,899

 
682,489

Land and Raw Materials
Based on our current strategic plans, we strive to own or control land sufficient to meet our forecasted production goals for the next three to five years. As discussed above under “Strategy,” we intend to selectively acquire or control additional land parcels that meet our investment return and marketing standards in 2015. However, we may also decide to sell certain land interests as part of our marketing strategy or to monetize land previously held for future development, or for other reasons.
The principal raw materials used in the construction of our homes are concrete and forest products. We also use a variety of other construction materials in the homebuilding process, including drywall and plumbing and electrical items. We attempt to enhance the efficiency of our operations by using, where practical, standardized materials that are commercially available on competitive terms from a variety of sources. In addition, our national and regional purchasing programs for certain building materials, appliances, fixtures and other items allow us to benefit from large quantity purchase discounts and, where available, participate in manufacturer or supplier rebate programs. When possible, we arrange for bulk purchases of these products at favorable prices from manufacturers and suppliers. Although our purchasing strategies have helped us in negotiating favorable prices for raw materials, in 2013 and 2014, we encountered higher prices for lumber, drywall, concrete and other materials and for subcontracted trade labor, 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.”
Customer Financing
As further described below under “Part II — Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Financial Services Reporting Segment,” we offer mortgage banking services and originate mortgage loans for our customers indirectly through HCM. However, our homebuyers may obtain mortgage financing to purchase our homes from any lender or other provider of their choice. We have a 49.9% ownership interest and Nationstar has a 50.1% ownership interest in HCM, with Nationstar providing management oversight of HCM’s operations. HCM is accounted for as an unconsolidated joint venture within our financial services reporting segment.

11


Employees
We employ a trained staff of land acquisition specialists, architects, planners, engineers, construction supervisors, marketing and sales personnel, and finance and accounting personnel, supplemented as necessary by outside consultants, who guide the development of our communities from their conception through the delivery of completed homes.
At December 31, 2014 and 2013, we had approximately 1,590 and 1,430 full-time employees, respectively. None of our employees are represented by a collective bargaining agreement.
Competition, Seasonality, Delivery Mix and Other Factors
The homebuilding industry and housing market are highly competitive with respect to selling homes; engaging subcontracted trade labor, such as carpenters, roofers, electricians and plumbers; and acquiring attractive developable land. We compete for homebuyers, skilled trade workers, management talent and desirable land against numerous homebuilders, ranging from regional and national firms to small local enterprises. As to homebuyers, we primarily compete with other homebuilders on the basis of selling price, community location and amenities, availability of financing options, home designs, reputation, home construction cycle time, and the design options and upgrades that can be included in a home. In some cases, this competition occurs within larger residential development projects containing separate sections designed, planned and developed by other homebuilders. We also compete for homebuyers against housing alternatives other than new homes, including resale homes, apartments, single-family rentals and other rental housing. In certain markets and at times when housing demand is high, we also compete with other homebuilders and commercial and remodeling contractors to subcontract trade labor, primarily on the basis of pre-existing relationships, contract price and volume and consistency of available work. Since 2012, in markets experiencing increased residential construction activity due to improved housing market conditions, a relatively small workforce combined with higher demand for subcontracted trade labor has created shortages of certain skilled workers, driving up costs and/or extending land development and home construction schedules. This elevated residential construction activity has also contributed to measurable increases in the cost of certain building materials, such as lumber, drywall and concrete. In 2013 and 2014, 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 subcontracted trade labor, building materials and land costs to continue and possibly intensify in 2015 if and as the present housing recovery progresses and there is greater competition for these resources.
Our performance is affected by seasonal demand trends for housing. Traditionally, there has been more consumer demand for home purchases and we tend to generate more net orders in the spring and early summer months (corresponding to most of our second and part of our third quarters) than at other times of the year. With our distinct homebuying approach and typical home construction cycle times, this “selling season” demand results in our delivering more homes and generating higher revenues from late summer through the fall months (corresponding to part of our third and all of 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.
In addition to the overall volume of homes we sell and deliver, our results in a given period are significantly affected by the geographic mix of markets and submarkets in which we operate; the number and characteristics of the communities we have open for sales in those markets and 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 in terms of the quantity, size and nature of the 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); 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 of our served markets 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 upgrades); the pace at which we sell and deliver homes and close out communities; and our housing gross profits and housing gross profit margins. 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 2013 and 2014, we targeted opening more of our new home communities for sales in attractive, land-constrained markets featuring higher-income buyers who tend to purchase larger homes with more design options and upgrades, which are important contributors to our home selling prices and housing gross profits. Due in part to this focused approach, in 2013 and 2014, we posted favorable year-over-year results in revenues and housing gross profits, as we delivered more homes from these new home communities in preferred areas, and growth in net orders and net order value. In 2015, we plan to continue our approach of targeting the opening of new home communities for sales in locations with the above-described characteristics, and we anticipate that we will have more communities open for sales than we did in 2014.

12


Financing
Our operations have historically been funded by results of operations, public debt and equity financing. We also have the ability to borrow funds under our unsecured revolving credit facility with various banks (as amended, the “Credit Facility”). Depending on market conditions and available opportunities, we may obtain project financing, or secure external financing with community or other inventory assets that we own or control. By “project financing,” we mean loans from parties other than land sellers that are specifically obtained for, or secured by, particular communities or other inventory assets. We may also arrange or engage in capital markets, bank loan, project debt or other financial transactions and/or expand the capacity of the Credit Facility or our cash-collateralized letter of credit facilities with various financial institutions (the “LOC Facilities”) or enter into additional such facilities.
Environmental Compliance Matters
As part of our due diligence process for land acquisitions, we often use third-party environmental consultants to investigate potential environmental risks, and we require disclosures, representations and warranties from land sellers regarding environmental risks. Despite these efforts, there can be no assurance that we will avoid material liabilities relating to the existence or removal of toxic wastes, site restoration, monitoring or other environmental matters affecting properties currently or previously owned or controlled by us. No estimate of any potential liabilities can be made although we may, from time to time, acquire 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 our 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 chain of title and/or their insurers. Based on these practices, we anticipate that it is unlikely that environmental clean-up costs will have a material effect on our 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 (or similar state or local agency) as being a “Superfund” (or similar state or local) 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.
Access to Our Information
We file annual, quarterly and current reports, proxy statements and other information with the Securities and Exchange Commission (“SEC”). We make our public SEC filings available, at no cost, through our investor relations website at http://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 may from time to time choose to disclose or post important information about our business on or through our investor relations website, and/or through other electronic channels, including social media outlets and other evolving communication technologies. We webcast and archive quarterly earnings calls and from time to time certain 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 and/or through other electronic channels, including social media outlets and other evolving communication technologies, 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 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
The following important factors could adversely impact our business. These factors could cause our actual results to differ materially from the forward-looking and other statements that (a) 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, (b) we post on or make available through our primary website at www.kbhome.com or our investor relations website at http://

13


investor.kbhome.com and/or through other electronic channels, including social media outlets and other evolving communication technologies, and (c) our personnel and representatives make orally from time to time.
The generally favorable conditions of the present housing recovery may not continue, and any weakening or reversal of these conditions generally, or in our served markets or for the homebuilding industry, may materially and adversely affect our business and consolidated financial statements.
In 2014, the housing market continued to improve compared to the several difficult years of the housing downturn. The present recovery, which began to take shape in 2012, has been driven primarily by steady demand for homes, fairly low inventories of homes available for sale and generally healthy economic and demographic factors. Housing demand has been supported by population and household formation growth, as well as affordability largely due to relatively low mortgage loan interest rates, and positive consumer confidence. However, the performance of individual housing markets varied throughout the year, with home sales activity and selling price appreciation robust in certain markets and tempered in others due to, among other things, rising housing prices and/or inventory levels.
We expect that such unevenness in housing market conditions will continue in 2015 and beyond whether or not the present housing recovery progresses, and that prevailing conditions in various housing markets and submarkets will fluctuate. These fluctuations may be significant and unfavorable in 2015 and future periods, and may include a softening or sustained deterioration of home sales activity and/or selling prices, and could be more pronounced in our served markets. In addition, while some of the negative factors that contributed to the housing downturn may have subsided, several remain, and they could return and/or intensify to inhibit any future improvement in housing market conditions in 2015 and beyond. These negative factors include:
weak general economic, income and employment growth;
high consumer debt levels, including elevated student loan balances;
delinquencies, defaults and foreclosures on mortgage loans;
homeowners whose outstanding principal balance on their mortgage loan exceeds the market value of their home;
volatility and uncertainty in domestic and international financial, credit and consumer lending markets; and
tight lending standards and practices for mortgage loans that limit consumers’ ability to qualify for mortgage financing to purchase a home.
Additional headwinds may come from the efforts and proposals of lawmakers to reduce the debt of the federal government through tax increases and/or spending cuts, or the failure of lawmakers to timely agree on a budget or appropriation legislation to fund the operations of the federal government, and financial markets’ and businesses’ reactions to those efforts, proposals or failure, which could impair economic growth. Since these factors may persist or recur, we can provide no assurance that the present housing recovery will continue or gain further momentum, whether overall or in our served markets.
If, on an overall basis or in our served markets, the housing environment becomes more challenging; home sales or selling prices do not continue to advance at the same pace as in recent years or decline; any or all of the negative factors described above persist or worsen, particularly if there is limited economic growth or a decline, or low growth or decreases in employment and consumer incomes; housing affordability diminishes; and/or mortgage lending standards and practices remain tight or become more restrictive, 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, our housing gross profit margins and our ability to operate profitably, and the effect may be material. In addition, due to a combination of continued rising direct construction cost pressures, reduced operating leverage from staffing to meet projected future community count and sales growth during 2015, an anticipated shift in our home delivery mix towards lower margin communities and selling price compression from, among other things, pricing adjustments and/or greater use of sales incentives to meet stiffening competition and softening demand at higher price points in certain submarkets, we anticipate that our housing gross profit margin in the first quarter of 2015 will decline significantly on a year-over-year and a sequential basis.
Continued or additional tightening of mortgage lending standards and practices or mortgage financing requirements or volatility in financial, credit and consumer lending markets could adversely affect the availability of mortgage loans for potential purchasers of our homes and thereby reduce our net orders.
Although there has been some improvement amid a general lift in housing prices over the past three years, the mortgage lending and mortgage finance industries have experienced significant instability due to, among other things, relatively high rates of delinquencies, defaults and foreclosures on mortgage loans and fluctuations in their market value and the market value of

14


securities backed by such loans. As a result, it is generally more difficult for some categories of borrowers to finance the purchase of homes, causing volatility in and elevating cancellation rates for us and other homebuilders, and reducing demand for homes, including our homes. If these factors continue, or if mortgage lending standards and practices further tighten, we expect that there would be a material adverse effect on our business and our consolidated financial statements, particularly since we depend on lenders (including HCM) to provide mortgage loans to our homebuyers.
Further tightening of mortgage lending standards and practices and/or reduced credit availability for mortgages may also result from the implementation or enforcement of regulations under the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”). Among other things, the Dodd-Frank Act established several requirements relating to the origination, securitizing and servicing of, and consumer disclosures for, mortgage loans. In addition, U.S. and international banking regulators have enacted higher capital standards and requirements for financial institutions. These standards and requirements, as and when implemented or enforced, may further reduce the availability of and/or increase the costs to borrowers to obtain mortgage loans. If, due to standards or requirements related to the Dodd-Frank Act or other laws, or other factors or business decisions, mortgage lenders refuse or are unable to provide mortgage loans to our homebuyers, the number of homes we deliver and our consolidated financial statements may be materially and adversely affected. We can provide no assurance as to HCM’s ability or willingness to provide mortgage loans and other mortgage banking services to our homebuyers in future periods or as to its performance in doing so.
Federal regulators and lawmakers have also considered steps that may significantly reduce the ability or authority of the Federal Housing Administration (“FHA”), the Federal National Mortgage Association (also known as “Fannie Mae”) and Federal Home Loan Mortgage Corporation (also known as “Freddie Mac”) to purchase or insure mortgage loans under their respective programs. Further, lenders and other mortgage banking services providers, brokers and other institutions, and their agents, have been under intense regulatory scrutiny regarding mortgage loan underwriting practices and/or representations and warranties made in connection with selling mortgage loans into private or Fannie Mae- or Freddie Mac-backed securitized pools. If such scrutiny causes lenders and other mortgage banking services providers and brokers to adjust their operations and/or pay significant amounts in damages or fines, they may restrict or cease their mortgage loan origination activities due to reduced liquidity or to mitigate perceived risks. They may also take such steps based on the prospect of continued or additional scrutiny.
The mortgage banking operations of HCM are heavily regulated and subject to the rules and regulations promulgated by a number of governmental and quasi-governmental agencies. If Nationstar decides to end, or we decide to terminate, our relationship with respect to HCM or otherwise, or there is a finding that Nationstar or HCM materially violated any applicable rules or regulations and as a result is restricted from or unable to originate mortgage loans, our customers may experience significant mortgage loan funding issues, which could lower our net orders and revenues, and, in turn, have a material adverse impact on our business and our consolidated financial statements. In addition, while substantially all of the mortgage loans originated by HCM are sold within a short period of time in the secondary mortgage market on a servicing released, non-recourse basis, HCM remains potentially responsible for certain limited representations and warranties it makes in connection with such mortgage loan sales. Mortgage investors, including the FHA, Fannie Mae and Freddie Mac, could in the future seek to have HCM buy back mortgage loans or compensate them for losses incurred on mortgage loans HCM has sold based on claims that it breached its limited representations or warranties. HCM has established reserves for potential losses. However, there can be no assurance that HCM will not have significant liabilities with respect to such claims in the future, which could exceed its reserves, or that the impact of such claims will not be material to HCM’s financial condition or ability to operate, or cause us to recognize losses with respect to our equity interest in HCM, or cause our customers to seek mortgage loans from other lenders and/or experience mortgage loan funding issues that could delay our delivering homes to them and/or cause them to cancel their home purchase contracts with us.
Interest rate increases or changes in federal lending programs or regulations could lower demand for our homes.
A large percentage of our customers finance the purchase of their homes. Increases in interest rates, which the Federal Reserve may begin to implement in 2015, and/or decreases in the availability of mortgage financing or of certain mortgage loan products or programs may lead to fewer 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 a combination of the foregoing, and, as a result, reduce demand for our homes and increase our cancellation rates.
Due to the volatility and uncertainty in the credit markets and in the mortgage lending and mortgage finance industries, the federal government has taken on a significant role in supporting mortgage lending through its conservatorship of Fannie Mae and Freddie Mac, and its insurance of mortgage loans through the FHA and the Veterans Administration (“VA”). FHA backing of mortgage loans has been particularly important to the mortgage finance industry and to our business. The availability and affordability of mortgage loans, including interest rates and/or costs for such loans, could be adversely affected by a scaling back, tightening or termination of the federal government’s mortgage loan-related programs or policies. In addition, given growing federal budget deficits, the U.S. Treasury may not be able to continue, or may be required by future legislation or regulation to cease, supporting the mortgage loan-related activities of Fannie Mae, Freddie Mac, the FHA and the VA at present levels.

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Because Fannie Mae-, Freddie Mac-, FHA- and VA-backed mortgage loans 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 net orders, particularly in our coastal submarkets in California, and adversely affect our business and consolidated financial statements, and the effect could be material.
Third-party lenders may not complete mortgage loan originations for our homebuyers in a timely manner or at all, which can lead to cancellations and a lower backlog of orders, or to significant delays in our delivering homes and recognizing revenues from those homes.
Our homebuyers may obtain mortgage financing for their home purchases from any lender or other provider of their choice, including HCM. If, due to credit or consumer lending market conditions, reduced liquidity, increased risk retention or minimum capital level obligations and/or regulatory restrictions related to the Dodd-Frank Act or other laws, or other factors or business decisions, these lenders refuse or are unable to provide mortgage loans to our homebuyers, the number of homes we deliver, our business and consolidated financial statements may be materially and adversely affected.
Compared to other lenders, Nationstar, when it was our preferred mortgage lender, and subsequently HCM, which launched its operations in July 2014, have been providing more consistent execution and completion of mortgage loan originations for our homebuyers who chose to use them. Based on the number of homes delivered in 2014, approximately 62% of our homebuyers used HCM or Nationstar to finance the purchase of their home. Although we expect an increasing percentage of our homebuyers will choose to use HCM, many of our homebuyers will continue to seek mortgage loans from other lenders and potentially be subject to the performance of such lenders, as well as the general mortgage financing industry issues described above. We can provide no assurance as to other lenders’ ability or willingness to complete, in a timely fashion or at all, the mortgage loan originations they start for our homebuyers. Such inability or unwillingness may result in mortgage loan funding issues and/or cancellations, which would likely have an material adverse affect on our business and consolidated financial statements.
Our current strategies may not generate improved financial and operational performance, and the continued implementation of these and other strategies may not be successful.
We believe our current strategies and initiatives will enable us to profitably grow our business in 2015. However, our strategic and operational actions, including, but not limited to, our plans to open more new home communities for sales, increase the value of our net orders at our communities and improve our asset, organizational and production efficiencies and returns, may prove to be unsuitable for some or all of our served markets. We can provide no guarantee that our strategies, initiatives or actions will be successful, that they will generate growth or earnings or returns at any level or within any time frame, or that we will achieve in 2015 or beyond positive operational or financial results or results in any particular metric or measure equal to or better than our 2014 performance, or perform in any period as well as other homebuilders. In addition, we can provide no assurance that our new home community locations and products (or any refining of our products) will successfully attract consumers, command selling prices, or generate orders, revenues and/or housing gross profit margins at the levels we have experienced in the past or anticipate in future periods, at levels sufficient for us to be profitable or at levels higher than other homebuilders. We also cannot provide any assurance that we will be able to maintain these strategies, initiatives or actions in 2015 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 these strategies, initiatives or actions, although we cannot guarantee that any such changes will be successful. The failure of any one or more of our present strategies, initiatives or actions, or the failure of any adjustments or alternative strategies, initiatives or actions that we may pursue or implement, to be successful would likely have an adverse effect on our ability to grow and increase the value and profitability of our business, to meet our debt service and other obligations necessary to operate our business in the ordinary course, and on our consolidated financial statements, as well as on our overall liquidity, and the effect in each case could be material.
The success of our present strategies, growth initiatives and 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.
The availability of finished and partially finished lots and undeveloped land that meet our investment return and marketing standards depends on a number of factors outside of our control, including, among other things, land availability in general, geographical/topographical constraints, land sellers’ business relationships, competition for desirable property, legal or government agency or utility service company processes, our ability and the costs to obtain building permits and other regulatory requirements and prevailing conditions in the marketplace for land parcels. 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 continue to increase, which could adversely impact our housing gross profit margins, our consolidated financial statements and our ability to maintain ownership or control of a sufficient supply of land inventory. The availability of suitable land could also affect the success of our current strategies and growth initiatives, and if we decide to reduce our land acquisition activity in 2015 below our current plans due to

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a lack of available assets that meet our standards, our ability to increase our community count, to maintain or grow our revenues and housing gross profit, and to maintain or increase our profitability in 2015 and beyond, would likely be constrained and could have a material adverse effect on our business and consolidated financial statements.
The value of the land and housing inventory 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 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, particularly undeveloped and/or unentitled land. Based on our periodic assessments of inventory for recoverability, we have from time to time written down certain of our inventory to its estimated fair value. We have also recorded charges in connection with activating or selling certain land held for future development and with abandoning our interests in certain land controlled under land option contracts and other similar contracts that no longer met our investment return or marketing standards. In 2014, we recorded $37.6 million of inventory impairment charges and $1.8 million of land option contract abandonment charges. If, in 2015, the present housing environment weakens, if particular markets or submarkets experience challenging or unfavorable changes in prevailing conditions, or if we elect to revise our strategy relating to certain land positions, we may need to take additional charges against our earnings for inventory impairments or land option contract abandonments, or both, or in connection with land sales to reflect changes in fair value of land or land interests in our inventory, including assets we have previously written down. Any such charges could have a material adverse effect on our consolidated financial statements, including our ability to maintain or increase our profitability.
Our business is cyclical and is significantly affected by changes in general and local economic conditions.
Our operations and consolidated financial statements can be substantially affected by adverse changes in general economic or business conditions that are outside of our control, including changes in, among other factors:
short- and long-term interest rates;
employment levels and job and personal income growth;
consumer debt levels;
housing demand from population growth, household formation and other demographic changes;
availability and pricing of mortgage financing for homebuyers;
consumer confidence generally and the confidence of potential homebuyers in particular;
U.S. and global financial system and credit market stability;
mortgage loan programs (including changes in FHA, Fannie Mae- and Freddie Mac-conforming mortgage loan limits, credit risk/mortgage loan insurance premiums and/or other costs or fees, down payment requirements and underwriting standards), and federal and state regulation, oversight, guidance and legal action regarding lending, home value appraisal, foreclosure and short sale practices;
federal and state personal income tax rates and provisions, including provisions for the deduction of mortgage loan interest payments, real estate taxes and other expenses;
supply of and prices for available new or resale homes (including lender-owned homes) and other housing alternatives, such as apartments, single-family rentals and other rental housing;
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.
Adverse changes in these conditions may affect our business nationally or may be more prevalent or concentrated in particular served markets.
Inclement weather, natural disasters (such as earthquakes, hurricanes, tornadoes, floods, droughts and 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.

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The potential difficulties described above can cause demand and selling prices for our homes to fall or cause us to take longer and incur more costs to develop land and build our homes. We may not be able to recover these increased costs because of market conditions. The potential difficulties could also lead some buyers to cancel or refuse to honor their home purchase contracts altogether. Reflecting difficult conditions in certain of our served markets, we have experienced volatility in our net orders in recent years, and we may experience similar or increased volatility in 2015 and beyond. If we do, there could be a material adverse effect on our business and consolidated financial statements.
Home selling prices and sales activity in the particular markets and regions in which we do business materially affect our consolidated financial statements because our business is concentrated in these markets.
Home sales activity and selling prices in some of our key served markets have varied from time to time for market-specific and other 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 that could effectively price potential homebuyers out of purchasing homes, including our homes. If home sales activity or selling prices 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. Adverse conditions in California would have a particularly material effect on our consolidated financial statements as our average selling price in the state is higher than the average selling prices in states within our other homebuilding reporting segments; a large percentage of our housing revenues is generated from California; and a significant proportion of our investments in land and land development since late 2009 have been made, and in 2015 are expected to be made, in that state.
In recent years, many state, regional and local governments in our served markets, including California, Florida and Nevada, have struggled to balance their budgets due to a number of factors.  As a result, there have been significant cuts to government departments, subsidies, programs and public employee staffing levels, and taxes and fees have been raised.  Lawmakers’ efforts at all governmental levels to address these budget deficit issues and/or efforts to increase governmental revenues, could, among other things, cause businesses and residents to leave, or discourage businesses or households from coming to, affected served markets, which could, among other things, limit economic growth and cause significant delays in obtaining required inspections, permits or approvals with respect to residential development at our new home communities located in such markets, or result in higher costs for such permits or approvals.  These negative impacts could adversely affect our ability to generate orders and revenues and/or to maintain or increase our housing gross profit margins in such markets, and the impact could be material and adverse to our consolidated financial statements.
Supply shortages and other risks related to demand for building materials and/or subcontracted trade labor could increase costs and delay deliveries.
As discussed above under “Item 1. Business — Competition, Seasonality, Delivery Mix and Other Factors,” there is a high level of competition in the homebuilding industry and the housing market for subcontracted trade labor and building materials that can, among other things, cause increases in land development and home construction costs, and development and construction delays. Shortages or upward price fluctuations in lumber, drywall, concrete and other building materials, and subcontracted trade 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 may not be able to raise our selling prices to cover such increases in land development and home construction costs because of market conditions, including competition for homebuyers from other homebuilders and resale homes. Sustained increases in land development and home construction costs due to higher subcontracted trade labor rates or elevated lumber, drywall, concrete and other building materials prices and/or our limited ability to successfully contain these costs may, among other things, decrease our housing gross profit margins, while shortages of subcontracted trade labor or building materials due to competition or other factors may delay deliveries of homes and our recognition of revenues. As a result, these negative items, individually or together, could have a material and adverse impact on our consolidated financial statements.
Inflation may adversely affect us by increasing costs that we may not be able to recover, particularly if home selling prices decrease, and the impact on our performance and our consolidated financial statements could be material.
Inflation can have an adverse impact on our business and consolidated financial statements because increasing costs for land, subcontracted trade labor or building materials could require us to increase our home selling prices in an effort to maintain satisfactory housing gross profit margins. However, we may not be able to increase our home selling prices to cover inflation in direct construction and/or other costs 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 and/or using sales incentives, 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 recent years, and make it more difficult for us to fully recover the costs of our land and any related land development

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through our home selling prices or, if we choose, through land sales. 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 charges against our earnings for inventory impairments if the value of our owned inventory, including land we decide to sell, 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. Inflation may also increase interest rates for mortgage loans and thereby reduce demand for our homes and lead to lower revenues, as well as increase the interest rates we may need to accept to obtain external financing.
Reduced home sales may impair our ability to recoup development costs or force us to absorb additional costs.
We incur many costs 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 expenditures for developing land, finishing and entitling lots and installing roads, sewers, water systems and other utilities; taxes and other items related to ownership of the land on which we plan to build homes; constructing model homes; and promotional marketing and overhead expenses to prepare for the opening of a new home community for sales. Moreover, local municipalities may impose development-related requirements resulting in additional costs. If the rate at which we sell and deliver homes slows or falls, or if our opening of new home communities for sales is delayed due to adjustments in our marketing strategy, protracted governmental approval processes or utility service activations or other reasons, we may incur additional costs, which would adversely affect our housing gross profit margins, and it will take a longer period of time for us to recover our costs, including those we incurred in acquiring and developing land in recent years. We may also decide to abandon certain land option contracts and other similar contracts, and sell certain land at a loss, and the costs of doing so may be adverse and material to our consolidated financial statements.
Some homebuyers may cancel their home purchases because the required deposits are small and sometimes refundable.
Our backlog at a given point in time reflects the number of homes under a home purchase contract that have not yet been delivered to a homebuyer. Our home purchase contracts typically require only a small deposit, some or all of which 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, subcontracted trade labor or building materials shortages or protracted governmental approval processes or utility service activations delay our home construction cycle times, mortgage loan interest rates increase, the availability of mortgage financing further diminishes or there is continued weakness or a downturn in local or regional economies or the national economy and/or in consumer confidence, customers may cancel their existing home purchase contracts with us because they have been unable to finalize their mortgage financing for the purchase, they 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. Volatile cancellation rates resulting from these conditions, or otherwise, could have a material adverse effect on our business and our consolidated financial statements.
Tax law changes could make home ownership more expensive or less attractive.
Under current tax law and policy, significant expenses of owning a home, including mortgage loan interest costs and real estate taxes, generally are deductible expenses for the purpose of calculating an individual’s or household’s federal, and in some cases state, taxable income subject to various limitations. If the federal government or a state government changes its income tax laws by eliminating, limiting or substantially reducing these income tax benefits, the after-tax cost of owning a home could increase substantially. Any 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, and the effect on our consolidated financial statements could be adverse and material.
We are subject to substantial legal and regulatory requirements regarding the development of land, the homebuilding process and protection of the environment, which can cause us to suffer delays and incur costs associated with compliance and which can prohibit or restrict homebuilding activity in some regions or areas. 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.
Our homebuilding business is heavily regulated and subject to a significant amount of local, state and federal regulation concerning zoning, allowable housing density, natural and other resource protection, building designs, land development and home construction methods, worksite safety and similar 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, adjustments in the allowable scope, size or characteristics, and/or increases in the cost of a specified development project or a number of projects in particular markets. We may also experience delays due to a building

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permit moratorium or regulatory restrictions in any of the locations in which we operate, which can affect the balance of land held for future development in our inventory.
In addition, we are subject to a variety of local, state and federal statutes, ordinances, rules and regulations concerning the environment, including requirements to manage and/or mitigate storm water runoff, dust particles and other environmental impacts of our land development and home construction activities at our new home communities. These laws and regulations, and/or evolving interpretations thereof, may cause delays in our land development and in our construction and delivery of homes, may cause us to incur substantial compliance, litigation and other costs, and can prohibit or restrict homebuilding activity in certain regions or areas, any of which could also reduce the fair value of affected inventory and require us to record significant impairment charges. 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 land that we have sold in the past. Further, a significant portion of our business is conducted in California, one of the most highly regulated and litigious states in the country. Therefore, our potential exposure to losses and expenses due to new laws, regulations or litigation may be greater than other homebuilders with a less significant California presence. However, we have experienced, and may in the future experience, significant litigation losses and expenses in our other homebuilding reporting segments, and any such future losses and expenses could be material to our business and consolidated financial statements.
The homebuilding industry and housing market are very competitive, and competitive conditions could adversely affect our business or our consolidated financial statements.
We face significant competition in several areas of our business from other homebuilders and participants in the overall housing industry. These competitive conditions can result in:
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 housing gross profit margins, particularly if we cannot raise our selling prices to cover increased land acquisition and development, direct construction or overhead costs or inflation;
our selling fewer homes or experiencing a higher number of cancellations by homebuyers;
impairments in the value of our inventory and other assets;
difficulty in acquiring desirable land that meets our investment return or marketing standards, and in selling our interests in land that no longer meet such standards on favorable terms, or at all;
difficulty in our acquiring raw materials and skilled management and subcontracted 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 letter of credit facilities on favorable terms.
These competitive conditions may have a material adverse effect on our business and consolidated financial statements by decreasing our revenues, impairing our ability to successfully implement our current strategies, initiatives or actions, increasing our costs and/or diminishing growth in our local or regional homebuilding businesses. During the housing downturn in particular, actions taken by our new home and housing alternative competitors reduced the effectiveness of our efforts to achieve stability or increases in home selling prices, to generate higher deliveries of homes, revenues and housing gross profit margins, and to maintain or increase our profitability. We cannot provide any assurances that such conditions and their negative impacts will not occur in 2015 or beyond.
Homebuilding is subject to warranty and liability claims in the ordinary course of business that can be significant.
In the ordinary course of our homebuilding business, we are subject to home warranty and construction defect claims. We record warranty and other liabilities for the homes we deliver based primarily on historical experience in our served markets and our judgment of the risks associated with the types of homes we build. As described in Note 15. 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

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insurance. These insurance policies protect us against a portion of our risk of loss from claims related to our homebuilding activities, subject to certain self-insured retentions, deductibles and other coverage limits. We self-insure a portion of our overall risk through the use of a captive insurance subsidiary. We also maintain certain other insurance policies. Because of the uncertainties inherent to these matters, we cannot provide any assurance that our various insurance 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, and, in our case, have relatively high self-insured retentions that limit coverage significantly. 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 and to a material degree.
We, or our engaged general contractors, engage subcontractors to perform the actual construction of our homes, and in many cases, to obtain the necessary building materials. Our contracts with our subcontractors require that they comply with all laws applicable to their work, including labor laws, meet performance standards, and follow local building codes and permits. However, we may encounter improper construction practices or the installation of defective materials in our homes, among other things. When we discover these issues, we will evaluate and, if necessary, repair the homes in accordance with our new home limited warranty and as required by law. Although we will pursue recoveries from potentially responsible parties, we may be unable to recover the costs of warranty-related repairs from subcontractors, suppliers or insurers, which could have a material and adverse impact on our consolidated financial statements. In addition, warranty and construction defect issues can result in negative publicity in various media that could be detrimental to our reputation and adversely affect our efforts to sell homes. We can provide no assurance that in 2015 we will not face more warranty-related claims and/or incur higher costs to satisfy repair or other obligations related to our new home limited warranty and customer service activities, or not need to record charges to adjust our overall warranty liability, or experience negative publicity or be successful in obtaining any recoveries for warranty-related costs we incur from responsible parties, and that any of these items — if they occur, or with respect to recoveries of warranty-related costs, fail to occur — could, individually or collectively, have a material and adverse impact on our business and consolidated financial statements.
Because of the seasonal nature of our business, our quarterly operating results fluctuate.
As discussed above under “Item 1. Business - Competition, Seasonality, Delivery Mix and Other Factors,” we experience seasonal fluctuations in our quarterly operating results that can have a material impact on 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 months. As a result, we have experienced uneven quarterly results, with generally fewer homes delivered and lower revenues during the first and second quarters of our fiscal year. Though we expect to experience the traditional seasonality impacts on our results as the present housing recovery progresses, we can make no assurances as to the degree to which such historical seasonal patterns will occur in 2015 and beyond, if at all.
We may be restricted in accessing external capital, and to the extent we can access external capital, it may increase our costs of capital or result in stockholder dilution.
We have historically funded our homebuilding and financial services activities with internally generated cash flows and external sources of debt and equity financing. During the recent housing market downturn, our reduced stockholders’ equity and high ratio of debt to capital, in addition to volatility in the financial and credit markets, made external sources of liquidity less available and more costly to us. In the fourth quarter of 2014, largely as a result of the reversal of a substantial portion of our deferred tax asset valuation allowance, our stockholders’ equity and ratio of debt to capital have improved. However, we can provide no assurances that we will be able to generate cash flow from our operations or access external credit or equity markets in 2015 or beyond at favorable terms or at all, or that our stockholders’ equity and ratio of debt to capital will remain at, or further improve from, their respective 2014 year-end levels.
Market conditions in 2015 and beyond may significantly limit our ability to replace or refinance indebtedness, in part due to 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 could be higher. A higher interest rate on or more restrictive terms governing our debt could materially and adversely affect our business and consolidated financial statements. In addition, the relatively low market value of our common stock and volatility in the securities markets could impede our access to the equity markets or increase the amount of dilution our stockholders would experience should we seek to raise capital through the issuance of new equity or convertible securities.
While we believe we can meet our forecasted capital requirements from our cash resources, expected future cash flow, capital markets access and the external financing sources that we anticipate will be available to us, we can provide no assurance that we

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will be able to do so, or do so without incurring substantially higher costs or significantly diluting existing stockholders’ equity interests. The adverse effects of these conditions on our business, liquidity and consolidated financial statements could be material to us.
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, 2014, we had total outstanding debt of $2.58 billion, total stockholders’ equity of $1.60 billion, and an unrestricted cash balance of $356.4 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, inventory-related investments, debt service requirements or other business needs, including, but not limited to, supporting our strategic growth initiatives and operational actions;
limit our ability to maintain compliance with the financial covenants of the Credit Facility or to renew or, if necessary or desirable, expand the capacity of the Credit Facility;
limit our ability to renew or, if necessary or desirable, expand the capacity of any letter of credit facilities (including the LOC Facilities), and to obtain performance bonds in the ordinary course of our business;
limit our ability to pay dividends on shares of our common stock;
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, including investments in our business;
impact our flexibility in planning for, or reacting to, changes in our business;
limit our ability to implement our present strategies, particularly our land acquisition and development plans and asset activation initiatives, in part due to competition from other homebuilders, developers and investors with greater available liquidity or balance sheet strength;
place us at a competitive disadvantage because we have more debt or debt-related restrictions than some of our competitors; and
make us more vulnerable in the event of weakness or a 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. As of the date of this report, our next scheduled maturity of senior notes is on June 15, 2015 with respect to $199.9 million in aggregate principal amount of our 6 1/4% senior notes due 2015 (the “6 1/4% Senior Notes due 2015”).
Our business may not generate sufficient cash flow from operations and external financing at a 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 the LOC Facilities), or fund our other liquidity or operational needs. Further, as described in Note 13. Notes Payable in the Notes to Consolidated Financial Statements in this report, if a change of control were to occur as defined in the instrument governing our senior notes, or if a fundamental change under the terms of our 1.375% convertible senior notes due 2019 (the “1.375% Convertible Senior Notes due 2019”), which includes a change of control, occurs prior to their stated maturity date, we may be required to offer to purchase certain of our senior notes or all of the convertible senior notes, plus accrued interest and unpaid interest, if any. In such circumstances, if we are unable to generate sufficient cash flow from operations, we may, given our unrestricted cash balance, need to refinance and/or restructure with our lenders or other creditors all or a portion of our outstanding debt obligations on or before their maturity, which we may not be able to do on favorable terms or at all, or raise capital through equity or convertible security issuances that would dilute existing stockholders’ interests, and the impact of such circumstances on our liquidity and consolidated financial statements would be material and adverse.
Failure to comply with the restrictions and covenants imposed by the Credit Facility and the agreements governing our indebtedness could restrict future borrowing or cause any outstanding indebtedness to become immediately due and payable.
Under the terms of the Credit Facility, we are required, among other things, to maintain compliance with various covenants, including financial covenants relating to our tangible net worth, leverage, and interest coverage or liquidity. The Credit Facility is also governed by a borrowing base test and includes a limitation on investments in joint ventures and non-guarantor subsidiaries.

22


Among other things, these restrictions and covenants can influence our operating decisions of whether to enter into, or the manner in which we can structure certain transactions in order to maintain compliance. If we fail to comply with these restrictions and covenants, the participating financial institutions could terminate the Credit Facility, cause borrowings under the Credit Facility, if any, to become immediately due and payable and/or could demand that we compensate them for waiving instances of noncompliance. In addition, a default under the Credit Facility under certain circumstances or a default under any series of our senior notes or convertible senior notes could cause a default with respect to our other senior or convertible senior notes and result in the acceleration of the maturity of all of our senior or convertible senior notes and our inability to borrow under the Credit Facility, as well as incurring penalties and additional fees, all of which would have a material adverse impact on our liquidity and on our consolidated financial statements.  Moreover, we may need to curtail our investment activities and other uses of cash to maintain compliance with the restrictions and covenants under the Credit Facility.
The indenture governing our outstanding senior notes and convertible senior notes imposes restrictions on our business operations and activities. Though it does not contain any financial maintenance covenants, the indenture contains certain restrictive covenants that, among other things, limit our ability to incur secured indebtedness, to engage in sale-leaseback transactions involving property or assets above a specified value, and, in the case of five series of our outstanding senior notes and our convertible 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 any of these covenants, obligations or restrictions, the holders of our senior notes or convertible senior notes could cause such debt to become due and payable prior to maturity or could demand that we compensate them for waiving instances of noncompliance, and, if they are successful in doing so, the impact on our liquidity and consolidated financial statements would be material and adverse. In addition, a default under any series of our senior notes or convertible 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 and additional fees, which would have a material adverse impact on our liquidity and consolidated financial statements.
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 the capital markets and external financing sources 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 stable outlook, our credit rating by Moody’s Investor Services is B2, with a positive outlook, and our credit rating by Standard and Poor’s Financial Services is B, with a stable 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 the capital markets and external financing sources, and could have a material adverse effect on our liquidity and consolidated financial statements.
We may have difficulty in continuing to obtain the additional financing required to operate and develop our business.
Our homebuilding operations and our present strategies require significant amounts of cash and/or the availability of external financing. We have entered into the Credit Facility and the LOC Facilities, and issued common stock, senior notes and our convertible senior notes, in order to support certain aspects of our operations in the ordinary course of our business, including our acquisition of land, land development and other of our strategic growth initiatives. We anticipate that we will need to maintain the Credit Facility and the LOC Facilities in 2015, and, if necessary or desirable, we may seek to expand their capacities or enter into additional such facilities, or other similar facility arrangements with the same or other financial institutions. We may also issue additional senior notes and/or convertible senior notes or equity. 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 Credit Facility or the LOC Facilities or entering into additional such facilities. Moreover, our outstanding senior notes and convertible senior notes contain provisions that may restrict the amount and nature of debt we may incur in the future. As financial and credit markets have been experiencing and may continue to experience volatility, there can be no assurance that we can borrow additional funds, raise additional capital through other means, or successfully maintain or, if necessary or desirable, expand the capacity of the Credit Facility or the LOC Facilities or enter into additional such facilities in each case at reasonable cost or at all, 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 financial and credit markets continue to be volatile or worsen, whether generally, or for homebuilders or us in particular, it could reduce our ability to implement our strategies, initiatives and actions and profitably grow our business and materially and adversely impact our consolidated financial statements. Current and future 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 access the capital markets, to obtain additional external financing and/or maintain or, if necessary or desirable, expand the Credit Facility or the LOC Facilities or enter into additional such facilities, in each case on acceptable terms or at all.

23


We may not realize our deferred income tax assets. In addition, our net operating loss carryforwards could be substantially limited if we experience an ownership change as defined in the Internal Revenue Code.
At November 30, 2014, we had deferred tax assets, net of deferred tax liabilities, of $866.4 million, against which we had a valuation allowance of $41.2 million. While we have provided a valuation allowance against certain of our net deferred tax assets, the valuation allowance is subject to change as facts and circumstances change. The accounting for deferred income taxes is based upon estimates of our future results. A housing downturn or other adverse circumstances that negatively affect our future taxable income could require us to record a larger valuation allowance against our net deferred tax assets. Differences between estimated and actual results could have a material impact on our consolidated financial statements, and the impact may be adverse. 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.
Changes in tax laws could also affect our actual tax results, the valuation of our net deferred tax assets and our ability to realize our net deferred tax assets. Specifically, a decrease in enacted corporate income tax rates in our major jurisdictions, especially in the U.S. federal corporate income tax rate, would decrease the value of our deferred tax assets and result in a corresponding charge to income tax expense, which could be material, as well as reduce our utilization of our deferred tax assets.
In addition, notwithstanding the reversal of a substantial portion of our deferred tax asset valuation allowance at November 30, 2014, the benefits of our deferred tax assets, including our net operating losses (“NOL”), built-in losses and tax credits, would be reduced or potentially eliminated if we experienced an “ownership change,” 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 NOL 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.
While the complexity of Section 382’s provisions and the limited knowledge any public company has about the ownership of its publicly traded stock make it difficult to determine whether an ownership change has occurred, we currently believe that an ownership change has not occurred. However, and notwithstanding the reversal of a substantial portion of our deferred tax asset valuation allowance in the fourth quarter of 2014, if an ownership change were to occur, the annual limit Section 382 may impose could result in a material amount of our NOL expiring unused. This would significantly impair the value of our NOL and, as a result, have a material negative impact on our consolidated financial statements.
In 2009, our stockholders approved an amendment to our restated certificate of incorporation that is designed to block transfers of our common stock that could result in an ownership change, and a rights agreement pursuant to which we have issued certain stock purchase rights with terms designed to deter transfers of our common stock that could result in an ownership change. However, these measures cannot guarantee complete protection against an ownership change and it remains possible that one may occur.
Our cash flows, liquidity and consolidated financial statements could be materially and adversely affected if we are unable to obtain performance bonds and/or letters of credit.
In the course of developing our new home communities, we are often required to provide to various municipalities and other government agencies performance bonds and/or letters of credit to secure the completion of our projects and/or in support of obligations to build community improvements such as roads, sewers, water systems and other utilities, and to support similar development activities by certain of our unconsolidated joint ventures. We may also be required to provide performance bonds and/or letters of credit to secure our performance under various escrow agreements, financial guarantees and other arrangements. Our ability to obtain such bonds or letters of credit and the cost to do so depend on our credit rating, overall market capitalization, available capital, past operational and financial performance, management expertise and other factors, including prevailing surety market conditions, and the underwriting practices and resources of performance bond and/or letter of credit issuers. If we are unable to obtain performance bonds and/or letters of credit when required or the cost or operational restrictions or conditions imposed by issuers to obtain them increases significantly in 2015 or beyond, we may not be able to develop or we may be significantly delayed in developing a new home community or communities, be required to post cash collateral, decreasing our unrestricted cash balance, and/or we may incur significant additional expenses, and, as a result, our business and consolidated financial statements, cash flows and/or liquidity could be materially and adversely affected.

24


Our ability to attract and retain talent is critical to the success of our business and a failure to do so may materially and 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 decline in the market value of our common stock has made it difficult for us to attract and retain talent. If we are unable to continue to retain and attract qualified employees, or if we need to significantly increase compensation and benefits to do so (including as a result of complying with pending health care coverage requirements of the federal Patient Protection and Affordable Care Act and the Health Care Education Reconciliation Act of 2010), or, alternatively, if we are required or believe it is appropriate to reduce our overhead expenses through significant personnel reductions or adjustments to compensation and benefits, our performance, our ability to achieve and maintain a competitive advantage and our consolidated financial statements could be materially and adversely affected.
Information technology failures and data security breaches could harm our business.
We use information technology, digital telecommunications and other computer resources to carry out important operational and promotional marketing activities and to maintain our business records. Many of these resources are provided to us and/or maintained on our behalf by third-party service providers pursuant to agreements that specify to varying degrees certain security and service level standards. Although we and our service providers employ what we believe are adequate security, disaster recovery and other preventative and corrective measures, our ability to conduct our business may be impaired if these resources, including our primary website, are compromised, degraded, damaged or fail, whether due to a virus or other harmful circumstance, intentional penetration or disruption of our information technology resources by a third party, natural disaster, hardware or software corruption or failure or error or poor product or vendor/developer selection (including a failure of security controls incorporated into or applied to such hardware or software), telecommunications system failure, service provider error or failure, intentional or unintentional personnel actions (including the failure to follow our security protocols), or lost connectivity to our networked resources. A significant and extended disruption in the functioning of these resources, including our primary website, could damage our reputation and cause us to lose customers, orders, deliveries of homes and revenues, result in the unintended and/or unauthorized public disclosure or the misappropriation of proprietary, personal identifying and confidential information (including information about our buyers and business partners), and require us to incur significant expenses to address and remediate or otherwise resolve these kinds of issues, expenses that we may not be able to recover in whole or in any part from our service providers or responsible parties, or their or our insurers. The release of confidential information may also lead to litigation or other proceedings against us by affected individuals and/or business partners and/or by regulators, and the outcome of such proceedings, which could include penalties or fines and cause reputational harm, could have a material and adverse effect on our business and consolidated financial statements. In addition, the costs of maintaining adequate protection against such threats, based on considerations of their evolution, pervasiveness and frequency and/or government-mandated standards or obligations regarding protective efforts, could be material to our consolidated financial statements in a particular period or over various periods.
Item 1B.
UNRESOLVED STAFF COMMENTS
None.

25


Item 2.
PROPERTIES
We lease our corporate headquarters in Los Angeles, California. Our homebuilding division offices (except for our San Antonio, Texas office) and our design studios are located in leased space in the markets where we conduct business. We own the premises for our San Antonio office.
We believe that such properties, including the equipment located therein, are suitable and adequate to meet the needs of our businesses.
Item 3.
LEGAL PROCEEDINGS
Nevada Development Contract Litigation
KB HOME Nevada Inc., a wholly owned subsidiary of ours (“KB Nevada”), is a defendant in a case in the Eighth Judicial District Court in Clark County, Nevada entitled Las Vegas Development Associates, LLC, Essex Real Estate Partners, LLC, et al. v. KB HOME Nevada 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, alleged that KB Nevada breached the development agreement, and also alleged 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 sought rescission of the agreements or, in the alternative, compensatory damages of $55 million plus unspecified punitive damages and other damages, and interest charges in excess of $41 million (the “Claimed Damages”).  KB Nevada has denied the allegations, and believes it has meritorious defenses to the consolidated plaintiffs’ claims.  On March 15, 2013, the court entered orders denying the consolidated plaintiffs’ motions for summary judgment and granting the majority of KB Nevada’s motions for summary judgment, eliminating, among other of the consolidated plaintiffs’ claims, those 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. In August 2013, the court granted motions that further narrowed the scope of the Claimed Damages. While the ultimate outcome is uncertain — we believe it is reasonably possible that the loss in this matter could range from zero to approximately $55 million plus pre-judgment 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 rescission or damages.  The non-jury trial, originally set for September 2012, is presently scheduled for September 15, 2015.
Other Matters
In addition to the specific proceeding described above, we are involved in other litigation and regulatory proceedings incidental to our business that are in various procedural stages. We believe that the accruals we have recorded for probable and reasonably estimable losses with respect to these proceedings are adequate and that, as of November 30, 2014, it was not reasonably possible that an additional material loss had been incurred in an amount in excess of the estimated amounts already recognized in our consolidated financial statements. We evaluate our accruals for litigation and regulatory proceedings at least quarterly and, as appropriate, adjust them to reflect (a) the facts and circumstances known to us at the time, including information regarding negotiations, settlements, rulings and other relevant events and developments; (b) the advice and analyses of counsel; and (c) the assumptions and judgment of management. Similar factors and considerations are used in establishing new accruals for proceedings as to which losses have become probable and reasonably estimable at the time an evaluation is made. 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.
MINE SAFETY DISCLOSURES
Not applicable.

26


EXECUTIVE OFFICERS OF THE REGISTRANT
The following table presents certain information regarding our executive officers as of December 31, 2014:
Name
 
Age
 
Present Position
 
Year
Assumed
Present
Position
 
Years
at
KB
Home
 
Other Positions and Other
Business Experience within the
Last Five Years (a)
 
From – To
 
 
 
 
 
 
 
 
 
 
 
 
 
Jeffrey T. Mezger
 
59
 
President and Chief Executive Officer (b)
 
2006
 
21
 
 
 
 
Jeff J. Kaminski
 
53
 
Executive Vice President and Chief Financial Officer
 
2010
 
4
 
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
Albert Z. Praw
 
66
 
Executive Vice President, Real Estate and Business Development
 
2011
 
18 (c)
 
Chief Executive Officer, Landstone Communities, LLC (a real estate development company)
 
2006-2011
Brian J. Woram
 
54
 
Executive Vice President and General Counsel
 
2010
 
4
 
Senior Vice President and Chief Legal Officer, H&R Block, Inc. (a provider of tax, banking and business and consulting services)
 
2009-2010
William R. Hollinger
 
56
 
Senior Vice President and Chief Accounting Officer
 
2007
 
27
 
 
 
 
Thomas F. Norton
 
44
 
Senior Vice President, Human Resources
 
2009
 
6
 
 
 
 
(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.

There is no family relationship between any of our executive officers or between any of our executive officers and any of our directors.
PART II
Item 5.
MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
As of December 31, 2014, there were 655 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, 2014
 
Year Ended November 30, 2013
 
High
 
Low
 
Dividends
Declared
 
Dividends
Paid
 
High
 
Low
 
Dividends
Declared
 
Dividends
Paid
First Quarter
$
20.78

 
$
16.38

 
$
.0250

 
$
.0250

 
$
20.04

 
$
13.86

 
$
.0250

 
$
.0250

Second Quarter
20.72

 
15.40

 
.0250

 
.0250

 
25.14

 
18.21

 
.0250

 
.0250

Third Quarter
18.98

 
16.06

 
.0250

 
.0250

 
22.49

 
15.57

 
.0250

 
.0250

Fourth Quarter
18.10

 
13.75

 
.0250

 
.0250

 
18.98

 
15.48

 
.0250

 
.0250

The declaration and payment of cash dividends on shares of our common stock, whether at current levels or at all, are at the discretion of our board of directors, and depend upon, among other things, our expected future earnings, cash flows, capital requirements, debt structure and adjustments thereto, restrictions and covenants under the Credit Facility or other of our debt obligations, operational and financial investment strategy and general financial condition, as well as general business conditions.
The description of our equity compensation plans required by Item 201(d) of Regulation S-K is incorporated herein by reference to “Part III — Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters” of this report.
We did not repurchase any of our equity securities during the fourth quarter of 2014.

27


Stock Performance Graph
The graph below compares the five-year cumulative total return of KB Home common stock, the S&P 500 Index and the Dow Jones US Home Construction Index for the periods ended November 30.

Comparison of Five-Year Cumulative Total Return
Among KB Home, S&P 500 Index and
Dow Jones US Home Construction Index
 
2009
 
2010
 
2011
 
2012
 
2013
 
2014
KB Home
$
100

 
$
85

 
$
57

 
$
112

 
$
138

 
$
139

S&P 500 Index
100

 
110

 
119

 
138

 
179

 
210

Dow Jones US Home Construction Index
100

 
91

 
99

 
173

 
181

 
217

The above graph is based on the KB Home common stock and index prices calculated as of the last trading day before December 1 of the year-end periods presented. The closing price of KB Home common stock on the New York Stock Exchange was $17.57 per share on November 30, 2014 and $17.53 per share on November 30, 2013. 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, 2009 in KB Home common stock, the S&P 500 Index and the Dow Jones US Home Construction Index including reinvestment of dividends.

28


Item 6.
SELECTED FINANCIAL DATA
The data in this table should be read in conjunction with “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our Consolidated Financial Statements and the Notes thereto, which are included in “Item 8. Financial Statements and Supplementary Data.” Both items are included in this report.
KB HOME
SELECTED FINANCIAL INFORMATION
(Dollars In Thousands, Except Per Share Amounts)
 
Years Ended November 30,
 
2014
 
2013
 
2012
 
2011
 
2010
Statement of Operations Data:
 
 
 
 
 
 
 
 
 
Revenues:
 
 
 
 
 
 
 
 
 
Homebuilding
$
2,389,643

 
$
2,084,978

 
$
1,548,432

 
$
1,305,562

 
$
1,581,763

Financial services
11,306

 
12,152

 
11,683

 
10,304

 
8,233

Total
$
2,400,949

 
$
2,097,130

 
$
1,560,115

 
$
1,315,866

 
$
1,589,996

Operating income (loss):
 
 
 
 
 
 
 
 
 
Homebuilding
$
115,969

 
$
92,084

 
$
(20,256
)
 
$
(103,074
)
 
$
(16,045
)
Financial services
7,860

 
9,110

 
8,692

 
6,792

 
5,114

Total
$
123,829

 
$
101,194

 
$
(11,564
)
 
$
(96,282
)
 
$
(10,931
)
Pretax income (loss)
$
94,949

 
$
38,363

 
$
(79,053
)
 
$
(181,168
)
 
$
(76,368
)
Net income (loss) (a)
$
918,349

 
$
39,963

 
$
(58,953
)
 
$
(178,768
)
 
$
(69,368
)
Earnings (loss) per share:
 
 
 
 
 
 
 
 
 
Basic
$
10.26

 
$
.48

 
$
(.76
)
 
$
(2.32
)
 
$
(.90
)
Diluted
$
9.25

 
$
.46

 
$
(.76
)
 
$
(2.32
)
 
$
(.90
)
Cash dividends declared per common share
$
.1000

 
$
.1000

 
$
.1375

 
$
.2500

 
$
.2500

Balance Sheet Data:
 
 
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
 
 
Homebuilding
$
4,747,064

 
$
3,183,595

 
$
2,557,243

 
$
2,480,369

 
$
3,080,306

Financial services
10,486

 
10,040

 
4,455

 
32,173

 
29,443

Total
$
4,757,550

 
$
3,193,635

 
$
2,561,698

 
$
2,512,542

 
$
3,109,749

Notes payable
$
2,576,525

 
$
2,150,498

 
$
1,722,815

 
$
1,583,571

 
$
1,775,529

Stockholders’ equity
$
1,595,910

 
$
536,086

 
$
376,806

 
$
442,657

 
$
631,878

Homebuilding Data:
 
 
 
 
 
 
 
 
 
Net orders
7,567

 
7,125

 
6,703

 
6,632

 
6,556

Unit backlog
2,909

 
2,557

 
2,577

 
2,156

 
1,336

Homes delivered
7,215

 
7,145

 
6,282

 
5,812

 
7,346


(a)
Net income for the year ended November 30, 2014 included the impact of an $825.2 million deferred tax asset valuation allowance reversal in the 2014 fourth quarter.

29


Item 7.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Overview. Revenues are generated from our homebuilding and financial services operations. The following table presents a summary of our consolidated results of operations for the years ended November 30, 2014, 2013 and 2012 (dollars in thousands, except per share amounts):
 
Years Ended November 30,
 
Variance
 
2014
 
2013
 
2012
 
2014 vs 2013
 
2013 vs 2012
Revenues:
 
 
 
 
 
 
 
 
 
Homebuilding
$
2,389,643

 
$
2,084,978

 
$
1,548,432

 
15
 %
 
35
 %
Financial services
11,306

 
12,152

 
11,683

 
(7
)
 
4

Total
$
2,400,949

 
$
2,097,130

 
$
1,560,115

 
14
 %
 
34
 %
Pretax income (loss):
 
 
 
 
 
 
 
 
 
Homebuilding
$
86,403

 
$
28,179

 
$
(89,936
)
 
207
 %
 
(a)

Financial services
8,546

 
10,184

 
10,883

 
(16
)
 
(6
)%
Total pretax income (loss)
94,949

 
38,363

 
(79,053
)
 
148
 %
 
(a)

Income tax benefit
823,400

 
1,600

 
20,100

 
(a)

 
(92
)%
Net income (loss)
$
918,349

 
$
39,963

 
$
(58,953
)
 
(a)

 
(a)

Earnings (loss) per share:
 
 
 
 
 
 
 
 
 
Basic
$
10.26

 
$
.48

 
$
(.76
)
 
(a)

 
(a)

Diluted
$
9.25

 
$
.46

 
$
(.76
)
 
(a)

 
(a)

(a)    Percentage not meaningful.
We posted solidly profitable results in our 2014 fiscal year and made measurable progress on our growth goals, benefiting from both a generally positive economic environment and the ongoing execution of our core strategic initiatives, particularly our continued efforts to position more of our new home communities in attractive, land-constrained locations through a targeted land and land development investment program.
At the same time, a variety of challenges restrained our performance in some housing markets during the year and tempered our overall net orders, homes delivered and housing gross profit margins. These included relatively weak gains in consumer income levels amid rising home prices; tight mortgage lending standards; persistent cost increases for prime land assets, construction materials and subcontracted trade labor; and delays in opening new home communities for sales due in part to protracted governmental approval processes and utility service activations. Despite these challenges, we expanded our growth platform, generated operational momentum over the course of the year, and believe we have positioned ourselves to build on the following 2014 achievements:
Profitability. We generated pretax income of $94.9 million for 2014, up 148% over the prior year, and have produced pretax income for six consecutive quarters totaling $149.8 million.
Deferred Tax Asset Valuation Allowance. We reversed a substantial portion of our deferred tax asset valuation allowance at November 30, 2014, largely due to our consistent profitability. Among other things, the reversal nearly tripled our stockholders’ equity, significantly reduced our debt leverage ratio, and, going forward, enables us to potentially shelter, on a cash basis, more than $2 billion of future earnings from income taxes. The reversal also helped drive our net income to $918.3 million for the year.
Community Count Expansion. Our average community count of 214 for the 2014 fourth quarter increased 13% from the year-earlier quarter, and our average community count of 200 for the year ended November 30, 2014 rose 10% from 2013, reflecting our investments in land and land development in 2014 and 2013. Consistent with our strategic investment orientation, a higher proportion of our new home communities are located in submarkets that feature homebuyers with higher household incomes

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and stronger demand for larger home sizes with higher average selling prices, though we experienced some softening of demand in certain submarkets in the fourth quarter. Our expanded average community count in these locations contributed to our 2014 fiscal year net orders increasing 6% over the prior year and to a 20% year-over-year increase in the value of our net orders. Our net order value for a given period represents the potential future housing revenues associated with net orders, including various lot and product premiums, and homebuyer spending on design studio options and upgrades for homes in backlog during the same period.
Backlog and Future Growth. Our higher net orders in 2014 helped drive a 14% year-over-year expansion in our backlog to 2,909 homes at November 30, 2014. Our year-end backlog represented potential future housing revenues of $914.0 million, an increase of 34% from the prior year, reflecting the higher number of homes in backlog and the higher average selling price of those homes. Our homes in backlog and backlog value at November 30, 2014 reached their highest year-end levels since 2007.
We believe the year-over-year increases in our pretax and net income, community count in attractive submarkets, net orders and net order value and backlog levels in 2014 illustrate the success of our current integrated strategic approach to drive profitable growth and that our business overall will continue its positive growth trajectory in 2015.
Below is a summary of our financial and operational results for 2014.
Statement of Operations
Revenues. Total revenues of $2.40 billion for the year ended November 30, 2014 rose 14% from $2.10 billion for 2013, primarily due to an increase in housing revenues. Housing revenues grew 14% to $2.37 billion in 2014 from $2.08 billion in 2013, reflecting increases in both the number of homes delivered and the overall average selling price of those homes. In 2014, our total revenues included land sale revenues of $20.0 million compared to $.9 million in 2013. Also included in our total revenues were financial services revenues of $11.3 million in 2014 and $12.2 million in 2013.
Homes Delivered. We delivered 7,215 homes in 2014, up 1% from 7,145 homes delivered in 2013.
Average Selling Price. Our overall average selling price of homes delivered increased 13% to $328,400 in 2014 from $291,700 in 2013.
Homebuilding Operating Income. Our homebuilding operating income grew $23.9 million, or 26%, to $116.0 million in 2014, compared to $92.1 million in 2013. In 2014, our homebuilding operating income included $37.6 million of inventory impairment charges, of which $26.6 million related to planned future land sales, and $1.8 million of land option contract abandonment charges. In 2013, our homebuilding operating income included a net warranty charge of $32.0 million associated with water intrusion-related repairs of homes at certain of our communities in central and southwest Florida, and $3.6 million of inventory impairment and land option contract abandonment charges. As a percentage of homebuilding revenues, our operating income improved to 4.9% in 2014 from 4.4% in 2013.
Housing Gross Profits. Housing gross profits of $429.5 million in 2014 increased by $81.7 million, or 24%, from $347.8 million in 2013, reflecting the higher volume of homes delivered and a higher housing gross profit margin. Included in our housing gross profits were $12.8 million of inventory impairment and land option contract abandonment charges in 2014 and the above-mentioned inventory impairment and land option contract abandonment charges and net warranty charge in 2013. Our housing gross profit margin improved by 140 basis points to 18.1% in 2014 from 16.7% in 2013. Excluding the housing inventory- and warranty-related charges in 2014 and 2013, our adjusted housing gross profit margin improved by 30 basis points to 18.7% in 2014 from 18.4% in 2013. The calculation of adjusted housing gross profit margin, which we believe provides a clearer measure of the performance of our business, is described below under “Non-GAAP Financial Measures.”
Selling, General and Administrative Expenses. Our selling, general and administrative expenses increased to $288.0 million in 2014 from $255.8 million in 2013. Selling, general and administrative expenses for 2013 included the reversal of a previously established accrual of $8.2 million due to a favorable court decision. As a percentage of housing revenues, to which these expenses are most closely correlated, selling, general and administrative expenses improved slightly to 12.2% in 2014 compared to 12.3% in 2013.
Interest Expense. Interest expense of $30.8 million for 2014 decreased from $62.7 million for 2013, reflecting an increase in the amount of our inventory qualifying for interest capitalization in 2014. In addition, interest expense in 2013 included a $10.4 million loss on the early extinguishment of debt associated with the retirement of certain of our senior notes.

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Income Taxes. We recognized an income tax benefit of $823.4 million in 2014 and $1.6 million in 2013. The income tax benefit increased in 2014 primarily due to the reversal of $825.2 million of our deferred tax asset valuation allowance in the fourth quarter of 2014.
Net Income. We generated net income of $918.3 million, or $9.25 per diluted share, in 2014, compared to $40.0 million, or $.46 per diluted share, in 2013. Our net income for 2014 included the above-mentioned income tax benefit and a $3.2 million gain on the sale of our interest in an unconsolidated joint venture in Maryland, which were partly offset by the $39.4 million of inventory impairment and land option contract abandonment charges noted above. Our net income for 2013 included the above-described net warranty charge, a loss on the early extinguishment of debt, inventory impairment and land option contract abandonment charges, and the reversal of a previously established accrual. Our 2013 net income also included the above-mentioned income tax benefit.
Balance Sheet
Cash, Cash Equivalents and Restricted Cash. Our cash, cash equivalents and restricted cash totaled $383.6 million at November 30, 2014, compared to $572.0 million at November 30, 2013. Of our total cash, cash equivalents and restricted cash at November 30, 2014 and 2013, $356.4 million and $530.1 million, respectively, was unrestricted. The decrease in total cash, cash equivalents and restricted cash was primarily due to our investments in land and land development during 2014, partly offset by total net proceeds of $531.6 million from the concurrent underwritten public issuances of the 4.75% senior notes due 2019 (the “4.75% Senior Notes due 2019”) and 7,986,111 shares of our common stock, par value $1.00 per share, at an offering price of $18.00 per share (the “2014 Common Stock Offering”).
Inventories. Reflecting our investment in land and land development of $1.47 billion and the distributions of $90.1 million of land and land development we received in 2014 from our unconsolidated joint venture Inspirada Builders, LLC (“Inspirada”), our inventory balance of $3.22 billion at November 30, 2014 increased 40% from $2.30 billion at November 30, 2013.
Investments in Unconsolidated Joint Ventures. Our investments in unconsolidated joint ventures decreased to $79.4 million at November 30, 2014 from $130.2 million at November 30, 2013, primarily due to the distributions of land and land development we received from Inspirada and the above-noted sale of our interest in an unconsolidated joint venture in Maryland during 2014. These transactions were partly offset by capital contributions we made to several of our unconsolidated joint ventures during 2014.
Notes Payable. Our debt balance increased to $2.58 billion at November 30, 2014 from $2.15 billion at November 30, 2013, reflecting the underwritten public issuance of the 4.75% Senior Notes due 2019. Our ratio of debt to capital improved to 61.8% at November 30, 2014, compared to 80.0% at November 30, 2013. Our ratio of net debt to capital (a calculation that is described below under “Non-GAAP Financial Measures”) also improved to 57.9% at November 30, 2014 from 74.6% at November 30, 2013. These improvements were primarily due to the year-over-year increase in our stockholders’ equity at November 30, 2014.
Stockholders’ Equity. Our stockholders’ equity expanded to $1.60 billion at November 30, 2014 from $536.1 million at November 30, 2013, primarily due to the net income we generated in 2014, which included the income tax benefit from the reversal of a substantial portion of our deferred tax asset valuation allowance, and the 2014 Common Stock Offering.
Net Orders, Backlog and Community Count
The following table presents information concerning our net orders, cancellation rate, ending backlog, and community count for the years ended November 30, 2014 and 2013 (dollars in thousands):

32


 
 
Years Ended November 30,
 
 
2014
 
2013
Net orders
 
7,567

 
7,125

Net order value
 
$
2,579,951

 
$
2,157,065

Cancellation rate
 
31
%
 
32
%
Ending backlog — homes
 
2,909

 
2,557

Ending backlog — value
 
$
914,025

 
$
682,489

Ending community count
 
227

 
191

Average community count
 
200

 
182

Net Orders. Net orders from our homebuilding operations increased 6% to 7,567 in 2014 from 7,125 in 2013, reflecting our higher average community count and our continued emphasis on balancing home selling prices and the pace of net orders to optimize the performance of our communities.
The year-over-year growth in our overall net orders reflected increases of 9%, 15% and 7% in our West Coast, Southwest and Central homebuilding reporting segments, respectively, partly offset by a 4% decrease in our Southeast homebuilding reporting segment.
The overall value of the net orders we generated in 2014 increased 20% to $2.58 billion from $2.16 billion in 2013.
Each of our homebuilding reporting segments generated year-over-year growth in net order value in 2014, with our West Coast homebuilding reporting segment up 25% to $1.22 billion, our Southwest homebuilding reporting segment up 21% to $230.6 million, our Central homebuilding reporting segment up 19% to $755.7 million, and our Southeast homebuilding reporting segment up 7% to $376.0 million.
Our cancellation rate was 31% in 2014, compared to 32% in 2013.
Backlog. Our backlog at November 30, 2014 was comprised of 2,909 homes, representing potential future housing revenues of $914.0 million, and at November 30, 2013 was comprised of 2,557 homes, representing potential future housing revenues of $682.5 million. The number of homes in our ending backlog rose 14% year over year, reflecting the 6% year-over-year increase in our net orders in 2014. The potential future housing revenues in our backlog at November 30, 2014 grew 34% from the prior year due to the increased number of homes in our backlog and the higher average selling price of those homes. Substantially all of the homes in our backlog at November 30, 2014 are expected to be delivered during the year ending November 30, 2015.
Community Count. Overall, our average community count for the year ended November 30, 2014 increased 10% to 200 from 182 as of November 30, 2013, while our ending community count increased 19% from the year-earlier period. The year-over-year growth reflected our strategic community positioning efforts and increased land and land development activities, which resulted in our opening more new communities for sales in 2014 than in the prior year. In addition, our average community count increased on a year-over-year basis in each of our homebuilding reporting segments. With the substantial inventory-related investments we made in 2014 and the investments we are planning to make in 2015, we expect that our overall community count will continue to increase in 2015, depending on sales absorption rates and the timing of community close-outs.
HOMEBUILDING
For reporting purposes, we organize our homebuilding operations into four segments — West Coast, Southwest, Central and Southeast. Our homebuilding reporting segments consisted of ongoing operations located in the following states: West Coast — California; Southwest — Arizona and Nevada; Central — Colorado, New Mexico and Texas; and Southeast — Florida, Maryland, North Carolina and Virginia.
The following table presents a summary of certain financial and operational data for our homebuilding operations for the years ended November 30, 2014, 2013 and 2012 (dollars in thousands, except average selling price):

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Years Ended November 30,
 
2014
 
2013
 
2012
Revenues:
 
 
 
 
 
Housing
$
2,369,633

 
$
2,084,103

 
$
1,548,432

Land
20,010

 
875

 

Total
2,389,643

 
2,084,978

 
1,548,432

Costs and expenses:
 
 
 
 
 
Construction and land costs
 
 
 
 
 
Housing
(1,940,100
)
 
(1,736,320
)
 
(1,332,045
)
Land
(45,551
)
 
(766
)
 

Total
(1,985,651
)
 
(1,737,086
)
 
(1,332,045
)
Selling, general and administrative expenses
(288,023
)
 
(255,808
)
 
(236,643
)
Total
(2,273,674
)
 
(1,992,894
)
 
(1,568,688
)
Operating income (loss)
$
115,969

 
$
92,084

 
$
(20,256
)
Homes delivered
7,215

 
7,145

 
6,282

Average selling price
$
328,400

 
$
291,700

 
$
246,500

Housing gross profit margin as a percentage of housing revenues
18.1
%
 
16.7
%
 
14.0
 %
Adjusted housing gross profit margin as a percentage of housing revenues
18.7
%
 
18.4
%
 
13.5
 %
Selling, general and administrative expenses as a percentage of housing revenues
12.2
%
 
12.3
%
 
15.3
 %
Operating income (loss) as a percentage of homebuilding revenues
4.9
%
 
4.4
%
 
(1.3
)%
Revenues. Homebuilding revenues totaled $2.39 billion in 2014, up 15% from $2.08 billion in 2013, which had increased 35% from $1.55 billion in 2012. The year-over-year increases in our homebuilding revenues in 2014 and 2013 reflected growth in our housing revenues in each of those years. In addition, our homebuilding revenues in 2014 and 2013 included $20.0 million and $.9 million, respectively, of revenues from land sales. In 2012, our homebuilding revenues were generated entirely from housing operations.
The year-over-year growth in our housing revenues in 2014 reflected a 1% increase in the number of homes delivered and a 13% increase in the overall average selling price of those homes. In 2013, housing revenues rose 35% from 2012 due to a 14% increase in the number of homes delivered and an 18% increase in the overall average selling price. We delivered a total of 7,215 homes in 2014, up from 7,145 homes delivered in 2013. The year-over-year increase in the number of homes delivered in 2014 was mainly due to 6% growth in our net orders during the year. In 2013, our homes delivered rose 14% from 6,282 homes delivered in 2012 largely due to our higher backlog at the beginning of the year, which was up 20% on a year-over-year basis.
The overall average selling price of homes delivered increased to $328,400 in 2014, up $36,700, from $291,700 in 2013. The higher average selling price in 2014 reflected our continued positioning of our new home communities in land-constrained submarkets that typically feature homebuyers with higher household incomes; higher median home selling prices; stronger demand for larger home sizes and various lot and product premiums, and design studio options and upgrades; our continued actions to optimize revenues and profits; and generally favorable market conditions. Our overall average selling price has increased on a year-over-year basis for each of the last 18 quarters. Average selling prices for 2014 were higher across all of our homebuilding reporting segments compared to the year-earlier period, with increases ranging from 13% in each of our Central and Southeast homebuilding reporting segments to 22% in our West Coast homebuilding reporting segment. In 2013, our overall average selling price of homes delivered grew 18% from $246,500 in 2012 largely due to the same factors that drove the year-over-year increase in our overall average selling price in 2014. In 2013, each of our homebuilding reporting segments posted a double-digit year-over-year increase in average selling price, with increases ranging from 13% in our Southeast homebuilding reporting segment to 22% in our Southwest homebuilding reporting segment.
Our land sale revenues totaled $20.0 million in 2014 and $.9 million in 2013. We had no land sales in 2012. Generally, land sale revenues fluctuate with our decisions to maintain or decrease our land ownership position in certain markets based upon the

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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.
Operating Income (Loss). Our homebuilding business generated operating income of $116.0 million in 2014, an improvement from operating income of $92.1 million in 2013 and an operating loss of $20.3 million in 2012. Our homebuilding operating income as a percentage of homebuilding revenues was 4.9% in 2014 and 4.4% in 2013. In 2012, our homebuilding operating loss as a percentage of homebuilding revenues was 1.3%.
The following table presents a summary of charges and other items included in our operating income (loss) (in thousands):
 
 
Years Ended November 30,
 
 
2014
 
2013
 
2012
Inventory impairment and land option contract abandonment charges
 
$
(39,431
)
 
$
(3,581
)
 
$
(28,533
)
Warranty-related charges
 

 
(31,959
)
 
(2,576
)
Warranty adjustments
 

 

 
11,162

Insurance and legal expense recoveries
 

 

 
26,534

Court decision reversal (charge)
 

 
8,164

 
(8,764
)
Total
 
$
(39,431
)
 
$
(27,376
)
 
$
(2,177
)
The year-over-year increases in our operating income in each of 2014 and 2013 reflected higher housing gross profits, partly offset by higher selling, general and administrative expenses. In 2014, our housing gross profits of $429.5 million increased by $81.7 million, or 24%, from $347.8 million for the previous year due to the higher volume of homes delivered and a higher housing gross profit margin. Housing gross profits for 2014 included $12.8 million of inventory impairment and land option contract abandonment charges. Housing gross profits for 2013 included a net warranty charge of $32.0 million for water intrusion-related repairs of homes at certain of our communities in central and southwest Florida, as discussed in Note 15. Commitments and Contingencies in the Notes to Consolidated Financial Statements in this report, and $3.6 million of inventory impairment and land option contract abandonment charges. Our 2014 housing gross profit margin improved by 140 basis points to 18.1% from 16.7% in 2013. Our adjusted housing gross profit margin was 18.7% in 2014, up 30 basis points from 18.4% in 2013.
Our housing gross profits for 2013 increased by $131.4 million, or 61%, from $216.4 million for 2012, primarily due to the higher volume of homes delivered and a higher housing gross profit margin. Our housing gross profits in 2013 included the net warranty charge and inventory impairment and land option contract abandonment charges mentioned above. In 2012, our housing gross profits included $26.5 million of insurance recoveries related to repair costs and costs to handle claims with respect to previously delivered homes, 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 2013 housing gross profit margin improved by 270 basis points from 14.0% in 2012. Our adjusted housing gross profit margin in 2013 improved by 490 basis points from 13.5% in 2012.
Our land sales generated losses of $25.5 million in 2014 and income of $.1 million in 2013. We had no land sales in 2012. The land sale results in 2014 included impairment charges of $26.6 million related to planned future land sales.
As discussed in Note 7. Inventory Impairments and Land Option Contract Abandonments in the Notes to Consolidated Financial Statements in this report, we had inventory impairment charges of $37.6 million in 2014, $.4 million in 2013 and $28.1 million in 2012. In 2014, $26.6 million of these charges related to two properties where we decided to change our strategy and monetize our investment through land sales rather than build and sell homes on the parcels as previously intended. One of the properties was our last remaining land parcel in Atlanta, Georgia, a former market where we do not have ongoing operations; the sale of this parcel closed in the 2014 fourth quarter. The other property was an 80 acre land parcel located in the Coachella Valley area of southern California, an inland submarket that has not recovered as quickly as we had anticipated and where we no longer actively participate. In addition, this parcel was earmarked for a specific type of development that was not aligned with our core business and would have required significant additional investment dollars in land development and infrastructure over an extended period of time to build out. Taking these factors into account, we decided to sell the parcel to redeploy the cash to projects that are expected to generate higher returns in a shorter period.
The remainder, or $11.0 million, of the inventory impairment charges in 2014 related to six communities primarily located in inland California and Arizona. We had previously suspended development activity on a portion of these communities. However, based on our evaluation of the submarkets where these assets are located, we decided to monetize these land positions sooner by opening for sales more quickly and accelerating the overall timing and pace for building and delivering homes. The balance of the 2014 impairment charges were related to a few active communities located in particular areas that have somewhat softened.

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However, these were isolated, location-specific instances that we believe are not indicative of a significant deterioration of the related markets generally. In the two-year period prior to the 2014 fourth quarter, we activated more than 30 communities, of which only three had impairment charges at the time of their activation or in a subsequent period. To the extent we change our strategy on any given asset, it is possible that we may have additional impairments in the future.
Also as discussed in Note 7. Inventory Impairments and Land Option Contract Abandonments in the Notes to Consolidated Financial Statements in this report, we recognized abandonment charges associated with land option contracts and other similar contracts of $1.8 million in 2014, $3.2 million in 2013 and $.4 million in 2012. Inventory impairment and land option contract abandonment charges are included in construction and land costs in our consolidated statements of operations.
Selling, general and administrative expenses totaled $288.0 million in 2014, up from $255.8 million in 2013, which had increased from $236.6 million in 2012. The year-over-year increases in selling, general and administrative expenses in 2014 and 2013 were largely due to costs associated with the increased volume of homes delivered and higher housing revenues generated during those years. In 2013, the increase in costs was partly offset by the reversal of a previously established accrual of $8.2 million due to a favorable court decision. In 2012, we had recognized an unfavorable court decision charge of $8.8 million related to the same matter. As a percentage of housing revenues, to which these expenses are most closely correlated, selling, general and administrative expenses were 12.2% in 2014, 12.3% in 2013 and 15.3% in 2012. The percentage improved slightly in 2014 compared to 2013 mainly due to the 14% year-over-year increase in our housing revenues and our ongoing focus on containing our overhead costs to the extent possible. In 2013, the percentage improved from 2012 primarily due to the 35% increase in our housing revenues and the reversal, during 2013, of an accrual that had previously been established in 2012.
Interest Income. Interest income, which is generated from short-term investments, totaled $.4 million in 2014, $.8 million in 2013 and $.5 million in 2012. Generally, increases and decreases in interest income are attributable to changes in the interest-bearing average balances of short-term investments and fluctuations in interest rates.
Interest Expense. Interest expense results principally from borrowings to finance land purchases, housing inventory and other operating and capital needs. Our interest expense, net of amounts capitalized, totaled $30.8 million in 2014, $62.7 million in 2013 and $69.8 million in 2012. Interest expense for 2013 included a $10.4 million loss on the early extinguishment of debt as a result of the retirement of $215.1 million in aggregate principal amount of certain of our senior notes due 2014 and 2015 through a combination of purchases made pursuant to the applicable tender offers that were initially made on October 15, 2013 (the “October 2013 Tender Offers”) and redemptions. Interest expense for 2012 included a $10.3 million loss on the early extinguishment of debt as a result of completing the applicable tender offers that were initially made on January 19, 2012 (the “January 2012 Tender Offers”) and on July 11, 2012 (the “July 2012 Tender Offers”).
Gross interest incurred during 2014 increased by $22.4 million to $171.5 million from $149.1 million in 2013 primarily due to an increase in our average debt level. Gross interest incurred during 2013 increased by $16.4 million from $132.7 million in 2012 mainly due to an increase in our average debt level and the inclusion of the $10.4 million loss on the early extinguishment of debt in 2013. The percentage of interest capitalized was 82% in 2014, 62% in 2013 and 51% in 2012. The percentage of interest capitalized generally fluctuates based on the amount of our inventory qualifying for interest capitalization.
Equity in Income (Loss) of Unconsolidated Joint Ventures. Our unconsolidated joint ventures operate in various markets, typically where our homebuilding operations are located. These unconsolidated joint ventures posted combined revenues of $12.5 million in 2014, $17.4 million in 2013 and $31.8 million in 2012. All of the revenues in 2014, 2013 and 2012 were generated from land sales completed by two of our unconsolidated joint ventures. Activities performed by our unconsolidated joint ventures generally include acquiring, developing and selling land, and, in som