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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended November 30, 2020
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)
Delaware95-3666267
(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 Trading Symbol(s)Name of each exchange
on which registered
Common Stock (par value $1.00 per share)KBHNew York Stock Exchange
Rights to Purchase Series A Participating Cumulative Preferred StockNew 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  ☒    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  ☒
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  ☒    No  ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files).    Yes  ☒    No  ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filerAccelerated filer
Non-accelerated filer
Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant has filed a report on and attestation to its management's assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes    No  
The aggregate market value of the voting common stock held by non-affiliates of the registrant on May 31, 2020 was $3,236,693,083, including 7,317,336 shares held by the registrant’s grantor stock ownership trust and excluding 24,525,786 shares held in treasury.
There were 91,637,771 shares of the registrant’s common stock, par value $1.00 per share, outstanding on December 31, 2020. The registrant’s grantor stock ownership trust held an additional 7,124,317 shares of the registrant’s common stock on that date.
Documents Incorporated by Reference
Portions of the registrant’s definitive Proxy Statement for the 2021 Annual Meeting of Stockholders (incorporated into Part III).




KB HOME
FORM 10-K
FOR THE YEAR ENDED NOVEMBER 30, 2020
TABLE OF CONTENTS
 
  Page
Number
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
Information about our Executive Officers
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.
Item 16.



PART I

Item 1.BUSINESS
General
KB Home is one of the largest and most recognized homebuilding companies in the U.S. We have been building homes for over 60 years, with nearly 645,000 homes delivered since our founding in 1957. We build a variety of new homes designed primarily for first-time and first move-up, as well as second 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. Our homebuilding operations represent the majority of our business, accounting for 99.6% of our total revenues in 2020. Our financial services operations, which accounted for the remaining .4% of our total revenues in 2020, offer various insurance products to our homebuyers in the markets where we build homes and provide title services in certain of those markets. Our financial services operations also provide mortgage banking services, including residential consumer mortgage loan (“mortgage loan”) originations, to our homebuyers indirectly through KBHS Home Loans, LLC (“KBHS”), an unconsolidated joint venture we formed with Stearns Ventures, LLC (“Stearns”).
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. We also use the following terms in our business with the corresponding meanings: “home” is a single-family residence, whether it is a single-family home or other type of residential property; “homes delivered” are homes for which the sale has closed and title has passed to a customer; “community” is a single development in which new homes are constructed as part of an integrated plan; and “community count” is the number of communities we have open for sales with at least five homes/lots left to sell.
The following charts present homes delivered, homebuilding revenues, net income and diluted earnings per share for the years ended November 30, 2016, 2018 and 2020:

kbh-20201130_g1.jpgkbh-20201130_g2.jpg
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kbh-20201130_g3.jpgkbh-20201130_g4.jpg

Markets
Reflecting the geographic reach of our homebuilding business, we have ongoing operations in the eight states and 45 major markets presented below. We also operate in various submarkets within these major markets. We may 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.
SegmentStatesMajor Market(s)
West CoastCaliforniaContra Costa County, Elk Grove, Fresno, Los Angeles, Hollister, Madera, Modesto, Oakland, Orange County, Riverside, Sacramento, Salinas, San Bernardino, San Diego, San Francisco, San Jose, Santa Rosa-Petaluma, Stockton, Vallejo, Ventura and Yuba City
WashingtonOlympia and Seattle
SouthwestArizonaPhoenix and Tucson
NevadaLas Vegas
CentralColoradoDenver, Erie, Firestone and Loveland
TexasAustin, Dallas, Fort Worth, Houston and San Antonio
SoutheastFloridaFort Myers, Jacksonville, Lakeland, Melbourne, Orlando, Palm Coast, Sarasota and Tampa
North CarolinaCharlotte and Raleigh
Segment Operating Information. The following table presents certain operating information for our homebuilding reporting segments for the years ended November 30, 2020, 2019 and 2018 (dollars in millions, except average selling price):
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 Years Ended November 30,
 202020192018
West Coast:
Homes delivered2,869 3,214 3,152 
Percentage of total homes delivered27 %27 %28 %
Average selling price$609,400 $592,300 $661,500 
Homebuilding revenues (a)$1,748.6 $1,912.2 $2,085.3 
Southwest:
Homes delivered2,385 2,346 2,301 
Percentage of total homes delivered22 %20 %20 %
Average selling price$327,300 $322,000 $307,300 
Homebuilding revenues (a)$796.8 $764.8 $707.1 
Central:
Homes delivered3,932 4,291 4,113 
Percentage of total homes delivered37 %36 %36 %
Average selling price$303,400 $293,500 $297,400 
Homebuilding revenues (a)$1,192.9 $1,267.9 $1,239.3 
Southeast:
Homes delivered1,486 2,020 1,751 
Percentage of total homes delivered14 %17 %16 %
Average selling price$288,600 $293,200 $286,600 
Homebuilding revenues (a)$429.4 $592.8 $502.1 
Total:
Homes delivered10,672 11,871 11,317 
Average selling price$388,900 $380,000 $399,200 
Homebuilding revenues (a)$4,167.7 $4,537.7 $4,533.8 
(a)Homebuilding revenues include revenues from housing and, if applicable, land sales.
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.
Additional financial and operational information related to our homebuilding reporting segments, including revenues, operating income (loss), pretax income (loss), inventories and assets, is provided below under Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations and in Note 2 – Segment Information in the Notes to Consolidated Financial Statements in this report.
Business Strategy
Overview. Our core business strategy, which we refer to as KB Edge, is to expand our scale primarily within our current geographic footprint to achieve a top-five position in each of our served markets (based on homes delivered). KB Edge is a systematic, fact-based and process-driven approach to homebuilding that is grounded in gaining a detailed understanding of consumers’ location and product preferences and product price-to-value perceptions. In our business, we use the term “product” to mean and encompass a home’s floor plan design and interior/exterior style, amenities, functions and features.
KB Edge consists of the following key principles with respect to customers, land, products and operations:
Customers. With our Built-to-Order® homebuying process, we provide each of our homebuyers with a highly personalized experience where they can make a wide range of structural and design choices for their future new home, as discussed further below under “Customer Obsession.” We believe this highly interactive, “customer-first” experience that puts our homebuyers firmly in control of designing the home they want based on how they live and
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what they value, at an affordable price, gives us a meaningful and distinct competitive advantage over other homebuilders and resale and rental homes.
Land. We seek to manage our working capital and reduce our operating risks by primarily acquiring entitled land parcels within attractive submarkets identified by our market research activities. We typically focus on metropolitan areas with favorable long-term economic and population growth prospects that we believe have the potential to sustain a minimum of 800 homes delivered per year, and target land parcels that meet our investment return standards. Identified consumer preferences and home sales activity largely direct where our land acquisition teams search for available land. We focus on investments that provide a one- to two-year supply of land or lots per product line, per community, and individual assets that are generally between 50 to 200 lots in size. Our primary focus continues to be our existing geographic footprint, encompassing markets we identified for their long-term economic and demographic growth potential. We leverage the relationships we have with land owners, developers and brokers to find and acquire land parcels, and use our experience in working with municipalities to efficiently obtain development approvals.
Products. We offer our customers a base product with a standardized set of functions and features that is generally priced to be affordable for those with household incomes near the local area’s median level. With our Built-to-Order approach, our customers have the opportunity to select their lot location within a community, floor plan, elevation and structural options, and to personalize their homes with numerous interior design options and upgrades in our design studios. Our design studios, generally centrally located within our served markets, are a key component of our Built-to-Order process, and the mix of design options and upgrades they offer are primarily based on the preferences identified by our market survey and purchase frequency data, as discussed further below under “Customer Obsession.” We utilize a centralized internal architectural group that designs homes to meet or exceed customers’ price-to-value expectations while being as efficient as possible to construct. To enhance the simplicity and efficiency of our products and processes, our architectural group has developed a core series of high-frequency, flexible floor plans and elevations that we can offer across many of our served markets. Our standardized plans allow us to more effectively shift with local demand and developable land attributes, help us to better understand the cost to build our products and enable us to compare and implement best practices across divisions and communities. We also incorporate energy-efficient features into our product designs to help lower our homebuyers’ total cost of homeownership and reduce our homes’ impact on the environment, as further discussed below under “Sustainability.”
Operations. In addition to differentiating us from other high-production homebuilders, our Built-to-Order process helps drive low-cost production. We generally commence construction of a home only after we have a signed purchase contract with a homebuyer and have obtained preliminary credit approval or other evidence of the homebuyer’s financial ability to purchase the home, and seek to build a backlog of sold homes. By maintaining a substantial backlog, along with centralized scheduling and standardized reporting processes, we have established a disciplined and scalable operational platform that helps us sustain an even-flow production of pre-sold homes. This reduces our inventory risk, promotes construction efficiencies, enhances our relationships with independent subcontractors and other business partners, and provides us with greater visibility and predictability on future deliveries as we grow.
There may be market-driven circumstances where we believe it is necessary or appropriate to temporarily deviate from certain of the above principles. These deviations may include starting construction on a small number of homes in a community before corresponding purchase contracts are signed with homebuyers to more quickly meet customer delivery expectations and generate revenues; or acquiring land parcels in peripheral neighborhoods of a core metropolitan area that otherwise fit our growth strategy and meet our investment return standards. In addition, other circumstances could arise in the future that may lead us to make specific short-term shifts from these principles.
An underlying tenet of our business approach is to continue to improve our asset efficiency by, among other things:
Calibrating home sales rates and selling prices at each of our communities to enhance profitability;
Further controlling our direct construction costs within our communities;
Accelerating inventory turns;
Structuring land acquisitions to minimize upfront costs where possible, as further discussed below under “Community Development and Land Inventory Management”;
Reactivating communities that have been held for future development; and
Deploying excess cash flow from operations to help fuel additional revenue growth and/or reduce debt.
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The anticipated associated revenue and pretax income growth from this strategic approach should help drive the utilization of our deferred tax assets and allow us to realize substantial tax cash savings that can be productively deployed in our business and/or to enhance our capital structure.
Customer Obsession. Based on more than 60 years of experience, we believe the best homes start with the people who live in them. Our customer-centric approach comes from a deep-rooted operational philosophy and company culture animated by a paramount objective: to be the most customer-obsessed homebuilder in the world. Driven by this ambitious guidepost, our team seeks to provide a compelling, simple and personalized homebuying process distinguished by phenomenal customer service. We want our customers to know they have a real partner when buying a home with us, and to feel that once their home is built, they can see themselves in their new home. Our team members, supported through our training and development programs, are encouraged to make decisions intended to produce the best results for our customers and our organization. Our customer obsession mindset is built around the following key principles:
Find out what customers want and offer them choice to attain it. Design plays an important role in the homes we build for our customers. We ascertain homebuyer product design and location preferences through surveys we conduct of recent buyers of both new and resale homes across our served markets. We also obtain data from our own homebuyers’ selections and post-sale feedback. We use this information on what matters most to homebuyers when making purchase and trade-off decisions to develop and refine our products, as well as our land acquisition targets.
We also cultivate and leverage close supplier and business partner relationships to integrate into or offer with our products architectural elements (such as flex spaces that can serve multiple purposes, quiet zones or home offices), building materials, construction techniques, and structural and non-structural systems, components and devices that are aligned with the preferences identified in our surveys and other data sources, including with the design options and upgrades we offer. With our focus on affordability, we seek out innovative techniques, materials and items to help meet homebuyers’ priorities at attainable price points.
From our synthesis of the foregoing consumer research and related activities, we give our homebuyers a wide array of choice to craft the new home that fits their particular lifestyle and priorities, including their homesite, floor plan, elevation and structural options. Our homebuyers can visit our KB Home Design Studios, where they get both advice and the opportunity to select from a broad range of included features, design upgrades and options that will help personalize their home.
Create collaborative customer relationships. In our view, we are not just selling a house. We are in the business of delivering an exceptional, personalized experience that enables our customers to achieve perhaps the most meaningful purchase they will ever make and an important landmark in their life’s journey — their own home. From this perspective, we strive to form close relationships with our homebuyers. We endeavor to learn key details about what they want, their top priorities today and where they see themselves in the future, so we can co-create a home for their day-to-day lives. We support each person or family, whether it is their first time or they have already been homeowners, with a dedicated community team of construction supervisors, sales representatives, design consultants and other personnel. This team is available to guide each homebuyer through each major step of the design, construction and closing of their KB home and aims to make the process as easy and straightforward as possible.
Continue to listen to customers after the sale is done. To help learn and improve our customer experience, we schedule follow up visits with our customers 30 days after they move in, as well as three, six, 10 and 18 months later, to hear about their experience in their new home and to address any concerns they may have, including warranty claims. Information about our KB Home 10-year Limited Warranty program is provided in Note 17 – Commitments and Contingencies in the Notes to Consolidated Financial Statements in this report.
We believe our approach differentiates us in the homebuilding industry and, along with our company culture that sustains it, enhances customer satisfaction. We are proud of the high levels of satisfaction our homebuyers have reported to us and on outside surveys. In 2020, even with the challenges we faced associated with the outbreak of the 2019 coronavirus disease (“COVID-19”), we achieved the top rank for customer satisfaction among homebuilders in third-party surveys, which we believe reflects the effective dedication we have to our homebuyers.
Promotional Marketing Strategy. To emphasize the distinct combination of innovative designs, personalization, affordability and partnership we offer to our homebuyers and the importance we place on customer satisfaction, we have centered our external brand identity and messaging around Built on Relationships®. Built on Relationships also encapsulates the importance of customer, as discussed above, and other key relationships – with suppliers, trade contractors, land sellers and municipalities – to the success of our business. The key components we highlight as part of our brand identity include:
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Offering Innovative Designs. We believe we offer our homebuyers product designs that distinctively blend consumer-preferred elements, such as open floor plans, flexible living spaces and extra storage, as discussed above under “Customer Obsession;” quality construction standards; and superior energy efficiency, compared to other new homes and resale homes with which we compete.
A Personalized Home. We give our homebuyers considerable ability to personalize their new home from floor plans to design features to where they live in the community. At our KB Home Design Studio, our homebuyers are able to get both advice and the opportunity to select from a broad range of included features, design upgrades and options that will help personalize their home.
Affordable Today and a Lower Cost of Homeownership Tomorrow. We offer a variety of homes generally priced to be affordable for those with household incomes near the local area’s median level. Our ENERGY STAR® certified homes can provide long-term significant savings on utility bills compared to typical resale homes and to competitive new homes that are not ENERGY STAR certified.
A Partner Every Step of the Way. Our dedicated team of sales counselors, design studio consultants, construction superintendents and customer service representatives, as well as KBHS loan officers, work closely with our homebuyers throughout the homebuying process.
We typically sell our homes through our commissioned sales associate employees from sales offices located in or adjacent to furnished model homes in each community. With the outbreak of COVID-19 and the related responses by public health and governmental authorities to contain and combat its outbreak and spread (“COVID-19 control responses”), we adapted and progressively enhanced our electronic sales capabilities during 2020 to give our customers a variety of convenient ways to shop for and purchase a new KB home, including, among other things:
Offering virtual home tours for prospective homebuyers;
Providing access to interactive floor plans available at their desired community;
Enabling live chats with sales counselors;
Conducting virtual appointments and tours of the design studios with our studio professionals;
Continuing to have KBHS qualify homebuyers for mortgages who may be or are purchasing a home, and utilizing online tools and/or contactless methods to serve homebuyers where possible;
Organizing virtual events with the broker community to introduce new communities;
Presenting homebuyers with the ability to virtually see and walk through their home at various points during its construction and prior to closing; and/or
Arranging virtual or drive-through closings, where permitted.
In addition, as part of our commitment to sustainability, which is discussed further below, and providing our customers a simple path to homeownership, we continue to work towards the goal of paperless homebuying. Over the past few years, we have eliminated a significant amount of paper from our home purchase contract by reducing the number of forms required to complete the process and digitizing as many of the remaining forms as possible. We plan to make additional investments in our digital sales and marketing tools in 2021.
To the extent permitted in 2020, our communities have been open to walk-in traffic, following appropriate safety protocols and applicable public health guidelines.
We market our homes to prospective homebuyers and real estate brokers through a variety of media, and use data analytics to target our advertising and measure its effectiveness and efficiency in terms of generating leads and net orders. In recent years and in response to the growing number of millennial and Generation Z homebuyers, we have increased our emphasis on digital marketing, through search engine marketing, interactive Internet-based applications, email, social media outlets, our website and other evolving communication technologies. We also use print media, billboards, radio, magazine and newspaper advertising in our served markets, as necessary.
Homebuyer Profile. We focus on bracketing within a range around the median household income in a submarket in order to position our product and pricing to be attainable for the largest demand segments of that submarket. Across our portfolio, we offer an array of products, from smaller, higher density homes, with average selling prices typically suited for first-time homebuyers, to larger homes in premium locations with additional amenities, with higher average selling prices that generally
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attract a first or second move-up homebuyer. We also offer a variety of single-story floorplans that typically appeal to an active adult homebuyer age 55 and over, as well as multi-story floorplans that attract a wide range of homebuyers. For more than a decade, approximately 75% of our annual deliveries have been to first-time and first move-up homebuyers; in 2020, it was 78% of our deliveries, as shown in the following chart:
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Operational Structure. We operate our homebuilding business through divisions with experienced management teams who have in-depth local knowledge of their particular served markets, which helps us acquire land in preferred locations; develop communities with products that meet local demand; and understand local regulatory environments. Our division management teams exercise considerable autonomy in identifying land acquisition opportunities; developing land and communities; implementing product, marketing and sales strategies; and controlling costs. To help maintain consistent execution within the organization, our division management teams and other employees are continuously trained on KB Edge principles and are evaluated, in part, based on their achievement of relevant operational objectives.
Our corporate management and support personnel develop and oversee the implementation of company-wide strategic initiatives, our overall operational policies and internal control standards, and perform various centralized functions, including architecture; purchasing and national contracts; treasury and cash management; land acquisition approval; risk and litigation management; accounting and financial reporting; internal audit and compliance activities; information technology systems; marketing; and investor and media relations.
Community Development and Land Inventory Management
Developable land for the production of homes is a core resource for our business. Based on our current strategic plans, we seek to own or control land sufficient to meet our forecasted production goals for the next three to five years. In 2021, we intend to continue to invest in and develop land positions within attractive submarkets and selectively acquire or control additional land that meets our investment return standards. However, we may periodically sell certain land interests or monetize land previously held for future development.
Our community development process generally consists of four phases: land acquisition, land development into finished lots for a community (if necessary), home construction and delivery of completed homes to homebuyers. Historically, our community development process has typically ranged from 12 to 18 months in our West Coast homebuilding reporting segment, with a somewhat shorter duration in our other homebuilding reporting segments. The development process in our West Coast homebuilding reporting segment is typically longer than in our other segments due to the municipal and regulatory requirements that are generally more stringent in California. Our 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, time of year, promotional marketing results, the availability of construction resources, consumer demand, local and general economic and housing market conditions, and other factors.
Although they vary significantly in size and complexity, our single-family residential home communities typically consist of 50 to 200 lots per product line, with lots ranging in size from 1,900 to 9,000 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 homebuyers can preview the various products available. Depending on the community, we may offer premium lots
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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.
Land Acquisition and Land Development. We continuously evaluate land acquisition opportunities against our investment return standards, while balancing competing needs for financial strength, liquidity and land inventory for future growth. When we acquire land, we generally focus on parcels with lots that are entitled for residential construction and are either physically developed to start home construction (referred to as “finished lots”) or partially finished. However, depending on market conditions and available opportunities, we may acquire undeveloped and/or unentitled land. We may also invest in land that requires us to repurpose and re-entitle the property for residential use, such as urban 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 land with finished or partially finished lots diminishes.
We generally structure our land acquisition and land development activities to minimize, or defer the timing of, expenditures in order to reduce both the market risks associated with holding land and our working capital and financial commitments, including interest and other carrying costs. We typically use contracts that, in exchange for a small initial option payment or earnest money deposit, give us an option or similar right to acquire land at a future date, usually at a pre-determined price and pending our satisfaction with the feasibility of developing and selling homes on the land and/or an underlying land seller’s completion of certain obligations, such as securing entitlements, developing infrastructure or finishing lots. We refer to land subject to such option or similar contractual rights as being “controlled.” Our decision to exercise a particular land option or similar right is based on the results of our due diligence and continued market viability analysis after entering into such a contract. Information related to our land option contracts and other similar contracts is provided in Note 7 – Inventory Impairments and Land Option Contract Abandonments and Note 8 – Variable Interest Entities (“VIEs”) in the Notes to Consolidated Financial Statements in this report.
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, 2020 and 2019:
Homes Under ConstructionLand Under DevelopmentLand Under Option (a)Total Land
Owned or Under Option
 20202019202020192020201920202019
West Coast2,128 1,615 8,467 7,889 6,395 5,682 16,990 15,186 
Southwest1,265 1,186 6,975 6,039 4,050 3,966 12,290 11,191 
Central2,363 2,058 11,947 12,738 9,389 11,075 23,699 25,871 
Southeast976 788 5,926 5,726 7,157 6,148 14,059 12,662 
Total
6,732 5,647 33,315 32,392 26,991 26,871 67,038 64,910 
(a)Land under option as of November 30, 2020 and 2019 includes 10,254 and 9,212 lots, respectively, under land option contracts or other similar contracts where the associated deposits were refundable at our discretion.
The following charts present the percentage of inventory lots we owned or had under land option contracts or other similar contracts by homebuilding reporting segment and the percentage of total lots we owned and had under option as of November 30, 2020:
kbh-20201130_g6.jpgkbh-20201130_g7.jpg
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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. To minimize the costs and risks of unsold homes in production, we generally commence construction of a home only after we have a signed purchase contract with a homebuyer and have obtained preliminary credit approval or other evidence of the homebuyer’s financial ability to purchase the home. Other than model homes, our inventories typically do not consist of a significant number of completed unsold homes. 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 marketing or other strategic considerations will result in our having some unsold completed or partially completed homes in our inventory. Our cycle time from home sale to delivery is typically six to seven months.
We act as the general contractor for the majority of our communities, and engage outside general contractors in all other instances. We, or the outside general contractors we engage, contract with a variety of independent subcontractors, who are typically locally based, to perform all land development and home construction work through their own employees or subcontractors. We do not self-perform any land development or home construction work. These independent subcontractors also supply some of the building materials required for such production activities. Our contracts with these independent subcontractors require that they comply with all laws applicable to their work, including wage and safety laws, meet performance standards, follow local building codes and permits, and abide by our Ethics Policy referenced under Item 10 – Directors, Executive Officers and Corporate Governance in this report.
Raw Materials. Outside of land, the principal raw materials used in our production process are concrete and forest products. Other primary materials used in home construction include drywall, and plumbing and electrical items. We source all of our building materials from third parties. 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 outside sources. In addition, we have national and regional purchasing programs for certain building materials, appliances, fixtures and other items that allow us to benefit from large-quantity purchase discounts and, where available, participate in outside manufacturer or supplier rebate programs. When possible, we arrange for bulk purchases of these products at favorable prices from such manufacturers and suppliers.
Backlog
Our “backlog” consists of homes that are under a 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, homes delivered and our community count. Backlog value represents potential future housing revenues from homes in backlog. Our cancellation rates and the factors affecting such rates are further discussed below under both Item 1A – Risk Factors and Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations in this report.
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The following charts present our ending backlog (number of homes and value) by homebuilding reporting segment as of November 30, 2019 and 2020:
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Human Capital Resources
At December 31, 2020 and 2019, we had approximately 1,776 and 2,140 full-time employees, respectively. None of our employees are represented by a collective bargaining agreement.
To help drive consistent execution of our business strategy, including our customer obsession philosophy, and support their development, we provide training opportunities to our employees that align with their responsibilities over the arc of their career with us. We maintain a dedicated Internet-based learning platform with a broad portfolio of written, audio-visual and interactive enterprise-wide and discipline-specific policy and training materials. This platform includes a library of nearly 300 self-directed courses and virtual, instructor-led programs for employees at all levels of our organization. New employee orientations, functional role training and ethics training and certification, which is required annually for all employees, take place on this platform. During 2020, our team members completed more than 17,000 courses in total, an average of more than eight courses per employee. Included in this total were numerous courses and certifications associated with pandemic-related challenges such as virtual selling processes and protocols for safe business operations. Managers and supervisors are provided training to help their reports progress in their professional development.
We are committed to maintaining a work culture that treats all employees fairly and with respect, promotes inclusivity, provides equal opportunities for the professional growth of the diverse individuals who join us, and advancement based on merit. At December 31, 2020, females constituted approximately 42% of our workforce and 33% of our managerial employees. Also at December 31, 2020, ethnic and racial minorities constituted approximately 33% of our workforce and 21% of our managerial employees. We intend to continue using a combination of targeted recruiting, talent development and internal promotion strategies to expand the diversity of our employee base across all roles and functions.
In order to achieve our strategic goals, it is essential for us to attract, promote and retain qualified personnel, particularly the leaders who manage our autonomous, local divisions in our served markets and are responsible for partnering with all constituents. Our top division and regional leaders average nearly 11 years of tenure with us, and the local leaders responsible for land acquisition, entitlement, and development average approximately 10 years with us. In addition, our named executive officers who are responsible for setting our overall strategy average approximately 16 years with us and average more than two decades in homebuilding.
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To attract and retain top talent in our highly competitive industry, we have designed our compensation and benefits programs to provide a balanced and effective reward structure. Our short- and long-term incentive programs are aligned with key business objectives and are intended to motivate strong performance. Our employees are eligible for medical, dental and vision insurance, a savings/retirement plan, life and disability insurance, various wellness programs and tuition reimbursement, along with an array of voluntary benefits designed to meet individual needs. We engage nationally recognized outside compensation and benefits consulting firms to objectively evaluate our programs and benchmark them against peers and other similarly situated organizations.
To recognize and promote outstanding employees, we conduct a comprehensive talent and succession planning review process on an annual basis, focused on identifying top-performing, high-potential, and diverse team members for advancement to key field and corporate leadership roles. This review process is overseen by the management development and compensation committee of our board of directors, which also guides updates and refinements to our human capital growth strategies.
During 2020, to address the safety and health of our workforce due to the COVID-19 pandemic, we implemented the following, among other steps:
Temporarily closing our offices and establishing new safety protocols and procedures;
Maintaining regular communication regarding the impacts of the pandemic on our team members and operations;
Developing and distributing a playbook to guide the safe return to offices, communities, and work sites;
Providing paid time-off for those directly impacted by COVID-19, and instructing those who are infected to stay home;
Increasing cleaning protocols across all locations;
Establishing physical distancing procedures, modifying workspaces, and providing personal protective equipment and cleaning supplies for employees who need to be onsite; and
Creating and refining protocols to address actual and suspected COVID-19 cases and potential exposure of our team members, customers, and trade partners.
Competition, Seasonality, Delivery Mix and Other Factors
Competition. The homebuilding industry and housing market are highly competitive with respect to selling homes; contracting for construction services, such as carpentry, roofing, electrical and plumbing; and acquiring attractive developable land, though the intensity of competition can vary and fluctuate between and within individual markets and submarkets. We compete for homebuyers, construction resources 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 other homebuilders design, plan and develop. We also compete for homebuyers against housing alternatives to new homes, including resale homes, apartments, single-family rentals and other rental housing.
In markets experiencing extensive construction activity, including areas recovering from earthquakes, wildfires, hurricanes, flooding or other natural disasters, there can be severe craft and skilled trade shortages that limit independent subcontractors’ ability to supply construction services to us, which in turn tends to drive up our costs and/or extend our production schedules. Elevated construction activity, and reallocations of staff for public safety priorities after natural disasters or otherwise, has also contributed to measurable increases in the amount of time needed to obtain governmental approvals or utility service activations and, combined with tariffs imposed or increased by the U.S. and other governments, the cost of certain raw building materials, such as steel, Canadian lumber, drywall and concrete, or finished products. In 2020, we experienced building material cost pressures, particularly for lumber, and production capacity issues with some of our main product suppliers, reflecting increases in homebuilding and renovation activity and supply chain constraints over the course of the year largely associated with COVID-19 control responses. Since 2013, we also have seen higher prices for desirable land amid heightened competition with homebuilders and other developers and investors (both domestic and international), particularly in the land-constrained areas where we operate. We expect these upward cost trends to continue in 2021, if and as housing market activity grows and there is greater competition for these resources.
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Seasonality. 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 quarter and part of our third quarter) than at other times of the year. This “selling season” demand results in our typically delivering more homes and generating higher revenues from late summer through the fall months (corresponding to part of our third quarter and all of our fourth quarter). However, as illustrated in the table below, the outbreak of COVID-19 and the related COVID-19 control responses beginning in mid-March disrupted our usual seasonal patterns in 2020, with our second quarter net order activity measurably constrained followed by a significant rebound in our third and fourth quarters, resulting in a higher percentage of net orders in those quarters, compared to corresponding quarters in previous years. The pattern of our homes delivered and housing revenues in 2020 was affected by the above-mentioned impact on our net orders in the second quarter as well as a slowdown in our housing starts in that quarter.
First QuarterSecond QuarterThird QuarterFourth Quarter
Net Orders
202026 %13 %32 %29 %
201921 %32 %26 %21 %
201825 %32 %25 %18 %
Homes Delivered
202026 %23 %24 %27 %
201918 %23 %26 %33 %
201820 %24 %26 %30 %
Housing Revenues
202026 %22 %23 %29 %
201918 %23 %25 %34 %
201819 %24 %27 %30 %
Delivery Mix and Other Factors. 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 number, 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 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 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.
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 sustainability. We seek out innovative technologies and systems to further improve the energy and water efficiency of our homes. We also 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. Under our commitment to sustainability, we, among other things:
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Build energy- and water-efficient new homes to achieve a 20% improvement on average compared to homes built to code and even more compared to resale homes. We also seek to contribute to the reduction of greenhouse gas emissions over the long term. Overall, we have built nearly 150,000 ENERGY STAR certified new homes since 2000, more than any other homebuilder. These ENERGY STAR certified homes are estimated to have cumulatively saved our homeowners approximately $780 million in utility bills and reduced carbon emissions by approximately 5 billion pounds;
Provide a KB Home Energy Savings Comparison™, or ESC, that gives home shoppers an estimate of both monthly energy costs and monthly savings of our homes over a typical resale home;
Include in our product offerings advanced home automation technologies, components (e.g., smart appliances and smart power lighting) and systems that can increase convenience for our homebuyers;
Built more than 16,000 WaterSense® labeled and WaterSmart homes;
Installed 700,000 WaterSense labeled fixtures, saving homeowners roughly 1.5 billion gallons of water each year; and
Delivered more than 11,000 homes with solar-paneled power systems, producing an estimated total of 428 million kilowatt hours of electrical power and reducing carbon dioxide emissions by approximately 668 million pounds.
We have been building homes with solar-paneled power systems for nearly 15 years. We were one of the first national homebuilders to offer solar to new-home buyers. In 2011, we introduced our first all-solar community in California. In June 2020, we were the first national homebuilder to offer a complete roof-integrated solar-paneled system. Our solar-paneled systems can be financed with the home purchase or leased from a third-party provider.
For several years, we have been recognized by the U.S. Environmental Protection Agency for our sustainability achievements, and have earned awards under all of the agency’s programs aimed at homebuilders: ENERGY STAR, which sets energy efficiency standards; WaterSense, which establishes water efficiency standards; and Indoor airPLUS®, which focuses on indoor air quality. In 2020, we received the ENERGY STAR Partner of the Year — Sustained Excellence Award for the 10th consecutive year, and the WaterSense Sustained Excellence Award for water efficiency for the sixth consecutive year. We strive to utilize the latest building science and upgraded air filtration systems in the homes we deliver, making the impact of indoor environments on one’s health a key area of our sustainable building commitment.
More information about our sustainability commitment can be found in our annual sustainability reports, which we have published on our website since 2008. We intend to continue to research, evaluate and utilize new or improved products and construction and business practices consistent with our commitment and 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.
Government Regulations and Environmental Matters
Our operations are subject to myriad legal and regulatory requirements concerning land development (including governmental permits, taxes, assessments and fees), the homebuilding process, employment conditions and worksite health and safety. These requirements often provide broad discretion to government authorities, and they could be interpreted or revised in ways that delay or prohibit project development or home sales, and/or make these activities more costly. The costs to comply, or associated with any noncompliance, are, or can be, significant and variable from period to period.
Under applicable environmental laws (including those aimed at protecting against climate change impacts), we may be responsible for, among other things, removing or remediating hazardous or toxic substances even where we were not aware of their presence or on land we previously owned. In addition to incurring clean-up costs, the presence of harmful substances on or near our properties may prevent us from performing land development or selling homes. Also, we are subject to federal, state and local rules that can require us to undertake extensive measures to prevent or minimize discharges of stormwater and other materials from our communities, and to protect wetlands and other designated areas.
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. We also take steps prior to our acquisition of the land to gain reasonable assurance as to the precise scope of any remediation 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.
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However, 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, and no estimate of any potential liabilities can be made.
Available Information
Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, beneficial ownership reports on Forms 3, 4 and 5 and proxy statements, as well as all amendments to those reports are available free of charge through our investor relations website at investor.kbhome.com, as soon as reasonably practicable after such reports are electronically filed with, or furnished to, the Securities and Exchange Commission (“SEC”). They can also be found at the SEC’s website at www.sec.gov. 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, 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, such as Facebook® (Facebook.com/KBHome) and Twitter® (Twitter.com/KBHome), and other evolving communication technologies. The content available on or through our primary website at www.kbhome.com, our investor relations website, including our sustainability reports, or social media outlets and other evolving communication technologies is not incorporated by reference in this report or in any other filing we make with the SEC, and our references to such content are intended to be inactive textual or oral references only.
Item 1A.RISK FACTORS
Although we have operated through a number of varying economic cycles, there are several risks that could affect our ability to conduct our business, which we discuss below. If any of these risks materialize, they could, among other things, (a) materially and adversely impact our results of operations and consolidated financial statements; and (b) cause our results to differ materially from the forward-looking and other statements we make in our SEC filings; in our news releases and other public reports and communications, including those we post on or make available through our websites or other electronic channels; or orally through our personnel and representatives. These risks, and other factors outside of our control, could also create or increase volatility in our common stock’s market price.
Consumer Demand Risks. The following could negatively affect consumer demand for our products, thereby unfavorably impacting our net orders, homes delivered, average selling prices, revenues and/or profitability:
Soft or negative economic or housing market conditions. Adverse conditions in our served markets or nationally could be caused or worsened by factors outside of our control, including, for example, due to the imposition and/or continuation of federal, state and/or local orders (e.g., quarantines, “stay-at-home” and similar mandates) for individuals to substantially restrict daily activities and for businesses to significantly curtail or cease normal operations to address COVID-19 or other disease outbreaks or civil unrest, or a federal government shutdown or failure to approve additional COVID-19-related relief or stimulus measures, and financial markets’ and businesses’ reactions thereto. Among other impacts, a severe economic contraction may also trigger a rise in home purchase cancellations, as we experienced in our 2020 second quarter when we undertook proactive efforts to assure a backlog of qualified homebuyers amid the COVID-19 pandemic-induced economic downturn.
Reduced employment levels and job and wage growth. While employment levels have improved since the 2020 second quarter, these trends may weaken or reverse in 2021, particularly if there are sustained COVID-19 outbreaks. If they do, our core first-time and first move-up homebuyer segments could be particularly affected, impacting us more severely than homebuilders that target a different buyer demographic.
Lower population growth, household formations or other unfavorable demographic changes. These may be driven by, among other things, birth rate changes, economic factors or U.S. immigration policies.
Diminished consumer confidence, whether generally or as to purchasing a home. Consumers may be reluctant to purchase a home compared to housing alternatives (such as renting apartments or homes, or remaining in their existing home) due to location or lifestyle preferences, affordability perceptions (particularly in markets experiencing rapid home price appreciation), employment instability or otherwise. Consumers may also decide not to search for a new home when there are significant public health risks in doing so in their area, which we saw across our served markets in the 2020 second quarter with the outbreak of COVID-19.
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Rising home selling prices. Steady demand for housing since 2013 combined with declining home inventories, in part reflecting a low supply of new homes compared to historical levels, has helped drive above-average home price appreciation across most markets for the past several years. If home selling prices, including our homes’ selling prices, increase at a faster rate than consumer incomes, consumers, including and perhaps particularly those in our core first-time and first move-up homebuyer segments, may not be able to afford to purchase a home, including our homes.
Tightened availability or affordability of mortgage loans and homeowner insurance coverage. Most of our buyers need a mortgage loan to purchase their home. Their ability to obtain a mortgage loan is largely subject to prevailing interest rates, lenders’ credit standards and appraisals, and the availability of government-supported programs, such as those from the Federal Housing Administration, the Veterans Administration, Federal National Mortgage Association (also known as Fannie Mae) and the Federal Home Loan Mortgage Corporation (also known as Freddie Mac). If mortgage interest rates increase, credit standards are tightened, appraisals for our homes are lowered, or mortgage loan programs are curtailed, potential buyers of our homes may not be able to obtain necessary mortgage financing.
Insurance companies are increasingly drawing back from issuing, or are measurably raising premiums for, homeowner insurance policies in areas that have experienced, or are thought to be at risk of experiencing, significant wildfires, hurricanes, flooding or other natural disasters. If potential homebuyers are unable to obtain affordable homeowner insurance coverage, they may decide not to pursue purchasing a home or may cancel a home purchase contract with us.
Poor lender performance. We depend on third-party lenders, including our KBHS partner Stearns, to provide mortgage loans to our homebuyers, unlike homebuilders with a wholly-owned mortgage lender. These lenders may be unable or unwilling to complete, timely or at all, the loan originations they start for our homebuyers. Poorly performing lenders can significantly delay home closings, disrupting our production schedules and delivery forecasts, or cause home purchase contract cancellations. If KBHS performs poorly and our customers use another lender, the income from and value of our KBHS equity interest would decline.
On January 5, 2021, Guaranteed Rate, Inc. (“Guaranteed Rate”) announced that it had reached an agreement to acquire Stearns’ parent company and expected to close the transaction in the first calendar quarter of 2021. While the announcement indicated that Guaranteed Rate plans to use the acquisition to further scale its joint venture platform, we can offer no assurance that KBHS’ operations will continue in their current form, or at all, after Guaranteed Rate closes its acquisition of Stearns. Even if KBHS’ operations are maintained, its performance may be negatively affected by acquisition or post-acquisition integration activities and/or related management or other personnel changes, which, in turn, could result in one or more of the impacts described in the foregoing paragraph.
Adverse tax law changes. If federal or state laws are changed to eliminate or reduce the income tax benefits associated with homeownership, such as personal tax deductions for mortgage loan interest costs and real estate taxes, the after-tax cost of homeownership could measurably increase and diminish consumer interest in buying a home, as could increases in personal income tax rates, which the incoming presidential administration may consider.
Competition. We face significant competition for customers from other homebuilders, sellers of resale homes and other housing industry participants, including rental-housing operators. This competitive environment may, among other things, cause us to lower our home selling prices or offer incentives to attract or retain buyers.
Seasonality. As discussed under Item 1 – Business in this report, we historically have experienced fluctuations in our quarterly operating results with measurably more homes delivered and revenues generated in our third and fourth fiscal quarters. However, as was the case in 2020, this pattern may not continue in the future at all or to the same degree as in the past.
Supply Risks. The following could negatively affect our ability to increase our owned and controlled lot inventory, community count, operational scale and market share, and to grow our business, if at all:
Lack of available land. Securing sufficient developable land that meets our investment return standards is critical for us to meet our strategic goals and profitably expand our business’ scale. Land availability depends on several factors, including geographical/topographical/governmental constraints, sellers’ business relationships and reputation within the residential real estate community, and competition from other parties, some of which can bid more for land. We expect to continue to face fierce competition for desirable land in our served markets in 2021, pressuring its availability and increasing its cost.
Insufficient financial resources. Our business needs considerable cash to, among other things, acquire and develop land, build homes and provide customer service. We expect to meet our needs with existing cash, future operational cash flow, our unsecured revolving credit facility with various banks (“Credit Facility”) and unsecured letter of credit
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facility with certain financial institutions (“LOC Facility”), or outside sources, including loans that are specifically obtained for, or secured by, particular communities or other inventory assets, which we refer to as project financing. However, outside financing may be unavailable, costly and/or considerably dilute stockholders. For instance:
Tight capital or financial market conditions may hinder our ability to obtain external financing, or use or expand our Credit Facility and LOC Facility, on favorable terms or at all. Also, if a rating agency downgrades our credit rating or outlook, external financing may be difficult and costly for us to obtain.
Noncompliance with our Credit Facility and senior notes’ covenants may restrict our ability to borrow; accelerate repayment of our debt, which may not be feasible for us; or cause our lenders to impose significant fees or cease lending to us.
As described in Note 15 – Notes Payable in the Notes to Consolidated Financial Statements in this report, if a change of control or fundamental change occurs before our senior notes mature, we may need to offer to purchase certain of them. This may require us to refinance or restructure our debt, which we may be unable to do at all or on favorable terms.
Our debt and debt-to-capital levels could require us to dedicate substantial cash flow to debt service; inhibit our ability to respond to business changes or adjust our debt maturity schedule; curb execution on our current strategies; and/or make us more vulnerable in a downturn than our less-leveraged competitors. Our next senior note maturity is our $450.0 million in aggregate principal amount of 7.00% senior notes due December 15, 2021 (“7.00% Senior Notes due 2021”).
Decreased land inventory value. Our land inventory’s value depends on market conditions, including our estimates of applicable future demand and revenue generation. If conditions deteriorate during the typically significant amount of time between our acquiring ownership/control of land and delivering homes on that land; if we cannot sell land held for sale at its estimated fair value; or if we make strategic changes, we may need to record inventory-related charges. We may also record charges if we decide to sell land at a loss or activate or sell land held for future development.
In addition, our business could be negatively affected if our net orders, homes delivered or backlog-to-homes delivered conversion rate fall; if often-volatile building materials prices or subcontractor rates increase, which has been the trend over the past few years and was particularly the case with lumber in 2020; or if our community openings are delayed due to, among other things, prolonged development, our strategic adjustments, or protracted government approvals or utility service activations from staff or resource cuts or reallocations for public safety priorities (e.g., earthquakes, wildfires, flooding, hurricanes or other natural disasters).
Trade disputes and defective materials. The federal government has imposed new or increased import tariffs, and other countries have implemented retaliatory measures, raising the cost and reducing the supply of several home construction items. In addition, shortages or rising prices of building materials may ensue from manufacturing defects, resulting in recalls of materials. If such disputes continue or recalls occur, our costs and supply chain disruptions could increase further.
Poor subcontractor availability and performance. Independent subcontractors perform essentially all of our land development and home construction work. Though we schedule and oversee such activities at our community sites, we have no control over our subcontractors’ availability or work methods. If qualified subcontractors are not available (due to general shortages in a tight labor market, competition from other builders or otherwise), or do not timely perform, we may incur production delays and other inefficiencies, or higher costs for substitute services. Also, if our subcontractors’ work or materials quality does not meet our standards, we could face more home warranty and construction defect claims, and they or their insurers may not be able to cover the associated repair costs.
Responsibility for duties owed to subcontractors’ employees. Governmental agencies have at times sought to hold contractors like us responsible for subcontractors’ employment-related obligations to their workforces. For instance, under California law, regulators or others could assert that we are responsible for wages and benefits that our subcontractors fail to pay to their employees, or, in certain circumstances, it could be alleged that employees of our subcontractors should be deemed to be our employees. Further efforts to impose such external labor-related obligations on us could create substantial exposure for us in situations beyond our control.
Strategy Risks. Our strategies, and any related initiatives or actions, and any changes thereto, may not be successful in achieving our goals or generate any growth, earnings or returns, particularly in a highly volatile business environment precipitated by a health or economic crisis, akin to our experience in the 2020 second quarter with the outbreak of COVID-19, or by social instability or distress, such as the civil unrest that arose at the end of May 2020 related to efforts to institute law
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enforcement and other social and political reforms. We may not achieve positive operational or financial results, or results equal to or better than we did in any prior period or in comparison to other homebuilders. We may also incur higher costs to build our homes than other homebuilders due to our commitment to sustainability, as discussed above under “Sustainability.” Among other strategic risks, our business is presently concentrated in California, Florida, Nevada and Texas. Poor conditions in any of those markets could have a measurable negative impact on our results, and the impact could be larger for us than for other less-concentrated homebuilders. In addition, we may not be successful in generating positive results from our recent expansion into the Seattle, Washington market, our re-entry into the Charlotte, North Carolina market, or if we choose to enter into any other new markets, based on our relative inexperience with the local homebuilding and economic environment and the need to make a significant investment to achieve effective scale and profitable returns, which we may not be able to accomplish.
Adverse conditions in California would have particular significance to our business. We generate the highest proportion of our revenues from and make significant inventory investments in our California operations. However, we may be constrained or delayed in entitling land and selling and delivering homes in California, and incur higher development or construction costs, from water conservation or wildfire protection measures (including precautionary and event-induced electricity blackouts, temporary or extended local or regional evacuations, development moratoriums in high-risk areas, and community resiliency design requirements) that are intended to address severe drought and climatic conditions that have arisen in recent years. In addition, as large-scale wildfires and flooding due to such conditions in California, as well as hurricanes, heavy rains and other climate change-driven natural disasters in other of our served markets, become more frequent and intense, we may experience greater disruption to our land development and homebuilding activities, delaying orders and home deliveries, among other impacts.
Also, California’s highly regulated and litigious business environment has made the state an increasingly challenging and uncertain place for us to operate. This includes implementing regulations under the state’s Global Warming Solutions Act of 2006 (AB32) intended to lower greenhouse gas emissions. For instance, we have and will continue to incur higher construction costs because of a state law requirement that effectively requires that all new homes permitted to build in 2020 and beyond have solar power systems, and we may be unable to offset (through customer leases) or cover such costs through selling price increases due to competition and consumer affordability concerns. In addition, California and certain of its local governments are considering or have implemented restrictions on or disincentives with respect to the creation or size of new suburban and exurban residential communities generally in favor of higher-density, urban developments that can be attractive to some buyers, but in many cases are on smaller parcels with higher building costs and more complicated entitlement requirements and may be subject to affordable housing mandates, prevailing wage requirements, greater local opposition and/or additional site remediation work. State and local municipalities have also considered banning natural gas use in new homes, among other possible steps, as part of their approaches to reduce greenhouse gases. Depending on their scope, these efforts could significantly increase our land acquisition and development costs and, along with increasing competition from other homebuilders and investors for available developable land, limit our California operations’ growth, while making new homes less affordable to potential buyers in the state. Partially offsetting these trends, California’s governor and certain legislators have taken positions to promote new housing construction, including the adoption of the Housing Crisis Act of 2019 (SB 330) intended to expedite the approval process for housing development in order to address the housing shortage in California.
Warranty Risks. Our homebuilding business is subject to warranty and construction defect claims. Though we have insurance coverage to partially reduce our exposure, it is limited and costly, in part due to a shrinking provider market, and we have high self-insured retentions that are expected to increase. We self-insure some of our risk through a wholly-owned insurance subsidiary.
Due to our dependence on independent subcontractors to perform our homebuilding activities and inherent uncertainties, including obtaining recoveries from responsible subcontractors and/or their or our insurers, our recorded warranty and other liabilities may be inadequate to address future claims, which, among other things, could require us to record charges to increase such liabilities. We may also record charges to reflect our then-current claims experience, including the actual costs incurred. Home warranty and other construction defect issues may also generate negative publicity, including on social media and the Internet, that detracts from our reputation and efforts to sell homes.
Deferred Tax Asset Recovery and Tax Position Risks. Our realization of our deferred tax assets depends on our generating sufficient future taxable income, which may not occur. Also, our deferred tax assets’ value can increase or decrease with: (a) changes in the federal corporate income tax rate; (b) our undergoing a “change of ownership” under federal tax rules, which would significantly reduce and possibly eliminate their value; and (c) adjustments in statutory or taxing authority treatment of such assets. We have filed our tax returns based on certain positions we believe are appropriate, and we may owe additional taxes if taxing authorities disagree with those positions.
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Human Capital Risks. Our directors, officers and employees are important resources. If we cannot attract, retain and develop talent at reasonable pay and benefits levels or, alternatively, if we need to implement personnel or compensation reductions, our performance, profitability and ability to achieve our strategic goals could be significantly impaired. In addition, in many of our served markets, we need to have personnel with certain professional licenses, including building contractor and real estate brokerage licenses. Our home selling and construction activities may be severely disrupted or delayed if we do not have sufficient licensed individuals in our workforce.
Information Technology and Information Security Risks. We use information technology (“IT”) resources to carry out important operational activities and maintain our business records. Third parties maintain many of our IT resources, including disaster recovery and business continuity services, under agreements with evolving security and service level standards.
Our systems have faced a variety of phishing, denial-of-service and other attacks. We have administrative, physical and technical controls and processes in place to address and mitigate cybersecurity risks and help protect our IT resources, including employee education and training, as well as third-party assessments. We also rely on our service providers, Stearns and other mortgage lenders with whom we share some personal identifying and confidential information to secure our information and the homebuyer information they collect from us. Our IT security costs, including cybersecurity insurance, are significant and will likely rise in tandem with the sophistication and frequency of system attacks.
However, our, Stearns’ and our service providers’ measures may be inadequate and possibly have operational or security vulnerabilities that could go undetected for some period of time. If our IT resources are compromised by an intentional attack, natural or man-made disaster, electricity blackout, IT failure or systems misconfiguration, service provider error, mis-managed user access protocols, personnel action, or otherwise, we may be severely limited in conducting our business and achieving our strategic goals for an extended period, experience internal control failures or lose access to operational assets or funds. A substantial disruption, or security breach suffered by Stearns/KBHS or a service provider, could damage our reputation and result in the loss of customers or revenues, in sensitive personal information being publicly disclosed or misused and/or legal proceedings against us. We may incur significant expenses to resolve such issues.
For example, in December 2020, we were notified by SolarWinds Worldwide, LLC, which provides us with network management software, that a recent update to one of its products contained data collection malware that had also been distributed to thousands of its other clients, including federal, state and local government agencies, educational institutions and several private companies and governments around the world. We promptly removed and replaced the affected software product and have not identified any instance of internal data being communicated outside of our organization through the malware, or any other compromise of our IT systems. We are continuing to work with our cybersecurity vendors to monitor any impact or activity related to the malware and are tracking governmental notifications and directives as they are issued. While we believe we were not negatively affected by the malware, we have invested additional management time and resources in response to this outside vendor incident.
We have invested significant resources over the past few years to develop and implement a new custom enterprise resource planning system designed to improve the efficiency of our internal operational and administrative activities. There are inherent risks in undertaking this type of broad-based IT project and we have experienced complications and delays during the implementation process. We expect these will continue as we progress and expand the scope of the system in 2021 and that we will incur appreciable additional costs in doing so. In addition, the testing and use of the new system during this rollout could increase our exposure to the security risks and consequences discussed in the foregoing paragraph.
Legal and Compliance Risks. As discussed under Item 1 – Business, our operations are subject to myriad legal and regulatory requirements, which can delay our operational activities, raise our costs and/or prohibit or restrict homebuilding in some areas. For example, certain of our Texas operations are subject to rules mandating enhanced flood management practices stemming from recent large hurricanes and rainstorms. These requirements often provide broad discretion to government authorities, and they could be interpreted or revised in ways unfavorable to us. The costs to comply, or associated with any noncompliance, are, or can be, significant and variable from period to period. With respect to environmental laws, in addition to the risks and potential operational costs discussed above, we have been, and we may in the future be, involved in federal, state and local air and water quality agency investigations or proceedings for potential noncompliance with their rules, including rules governing discharges of materials into the air and waterways; stormwater discharges from community sites; and wetlands and listed species habitat protection. We could incur penalties and/or be restricted from developing or building at certain community locations during or as a result of such agencies’ investigations or findings.
Additionally, we are involved in legal, arbitral or regulatory proceedings or investigations incidental to our business, the outcome or settlement of which could result in material claims, losses, monetary damage awards, penalties, or other direct or indirect payments recorded against our earnings, or injunctions, consent decrees or other voluntary or involuntary restrictions or adjustments to our business operations or practices. Any adverse results could be beyond our expectations, insurance coverages
18


and/or accruals at particular points in time. Unfavorable outcomes, as well as unfavorable investor, analyst or news reports related to our industry, company, personnel or operations, may also generate negative publicity, including on social media and the Internet, damaging our reputation and resulting in the loss of customers or revenues.
To reduce the risks and expected significant costs of defending intra-corporate proceedings in multiple venues and to help ensure that such matters are considered within a well-established body of law, our By-laws provide that, subject to certain exceptions, Delaware state courts are the exclusive forum for specified internal corporate affairs actions. This may limit a stockholder’s ability to bring a claim in their favored forum. At the same time, if a court were to allow for an alternative forum, or we waive the provision’s application, for a particular matter, we may incur additional costs associated with resolving an otherwise relevant action in another jurisdiction(s).
The European Union and state governments, notably California and Nevada, have enacted or enhanced data privacy regulations, and other governments are considering establishing similar or stronger protections. These regulations impose certain obligations for securing, and potentially removing, specified personal information in our systems, and for apprising individuals of the information we have collected about them. We have incurred costs in an effort to comply with these data privacy risks and requirements, and our costs may increase significantly as risks become increasingly complex or if new or changing requirements are enacted, and based on how individuals exercise their rights. For example, in November 2020, California voters approved Proposition 24 (Consumer Personal Information Law and Agency Initiative), which will increase data privacy requirements for our business when its provisions take effect in 2023. Despite our efforts, any noncompliance could result in our incurring substantial penalties and reputational damage.
KBHS’ operations are heavily regulated. If Stearns, which oversees KBHS’ operations, or KBHS is found to have violated regulations, or mortgage investors demand KBHS repurchase mortgage loans it has sold to them, or cover their losses, for claimed contract breaches, KBHS could face significant liabilities, which, if they exceed its reserves, could result in our recognizing losses on our KBHS equity interest.
Our financial results may be materially affected by the adoption of new or amended financial accounting standards, including those relating to revenue recognition and lease accounting, and regulatory or outside auditor guidance or interpretations.
Pandemic Risks. An epidemic, pandemic or similar serious public health issue, and the measures undertaken by governmental authorities to address it, could significantly disrupt or prevent us from operating our business in the ordinary course for an extended period, and thereby, and/or along with any associated economic and/or social instability or distress, have a material adverse impact on our consolidated financial statements. We experienced significant impacts to our business during 2020, beginning in mid-March, due to the outbreak of COVID-19 and the COVID-19 control responses by international, federal, state and local public health and governmental authorities, including quarantines, “stay-at-home” orders and similar mandates.
In response to the initial COVID-19 control responses in our served markets, we temporarily closed our sales centers, model homes and design studios to the general public, shifted to an appointment-only personalized home sales process and prioritized our warranty service activities to respond to emergency repair requests, and otherwise on a by-exception basis, in each case as and where permitted and following recommended distancing and other health and safety protocols when meeting in person with a customer. We also leveraged our virtual sales tools to give customers the ability to shop for a new KB home from their mobile device or personal computer. In addition, we shifted our corporate and division office functions to work remotely. We limited our construction operations largely to authorized activities with increased safety measures and experienced a reduction in the availability, capacity and efficiency of municipal and private services necessary to the progress of developing land, building homes, completing mortgage loans and delivering homes to varying degrees depending on the scope of the restrictions local authorities established.
Although we gradually resumed nearly all of our operations with the relaxing of the early COVID-19 control responses beginning late in our 2020 second quarter and for the remainder of the fiscal year, the magnitude and duration of the business and economic impacts from the unprecedented public health effort to contain and combat the spread of COVID-19 have produced ongoing uncertainty about the overall operating environment going forward and made it more challenging for our management to estimate the future performance of our business and to develop strategies to generate growth. Moreover, we can provide no assurance as to whether the COVID-19 public health effort will be intensified to such an extent, particularly in response to any resurgence in infections, whether due to the spread of any variants of the virus or otherwise, combined with the seasonal flu, that we will not be able to conduct any business operations in certain of our served markets or at all for an indefinite period. Certain of our served markets have recently seen a dramatic increase in COVID-19 cases, and more stringent COVID-19 control responses have been re-instituted. Therefore, we could again experience in 2021 material disruptions in our operating environment, impairing our ability to sell and build homes in a typical manner, as occurred in our 2020 second
19


quarter, or at all, due to, among other things, increased costs or decreased supply of building materials; reduced availability of subcontractors, employees and other talent, including as a result of infections or medically necessary or recommended self-quarantining, which we have experienced in a few locations; or governmental mandates to direct production activities to support public health efforts. This could result in our recognizing charges in future periods, which may be material, for inventory impairments or land option contract abandonments, or both, related to our inventory assets.
Should the adverse impacts described above (or others that are currently unknown) occur, whether individually or collectively, we would expect to experience, among other things, decreases in our net orders, homes delivered, average selling prices, revenues and profitability, as we did during our 2020 second quarter, and such impacts could be material to our consolidated financial statements in 2021 and beyond. In addition, should the COVID-19 public health effort intensify to such an extent that we cannot operate in most or all of our served markets, we could generate few or no orders and deliver few, if any homes during the applicable period, which could be prolonged. Along with an increase in cancellations of home purchase contracts, if there are prolonged government restrictions on our business and our customers, and/or an extended economic recession, we could be unable to produce revenues and cash flows sufficient to conduct our business; meet the terms of our covenants and other requirements under the Credit Facility, our senior notes and the related indenture, and/or mortgages and land contracts due to land sellers and other loans; service our outstanding debt; or pay any dividends to our stockholders. Such a circumstance could, among other things, exhaust our available liquidity (and ability to access liquidity sources) and/or trigger an acceleration to pay a significant portion or all of our then-outstanding debt obligations, which we may be unable to do.
Other Risks. The risk factors described above are not our only salient risks. Political events, war, terrorism, weather or other natural/environmental disasters, and other risks that are currently unknown or seen as immaterial, could also have a material adverse impact on our business, consolidated financial statements and/or common stock’s market price.
Item 1B.UNRESOLVED STAFF COMMENTS
None.
Item 2.PROPERTIES
None.
Item 3.LEGAL PROCEEDINGS
Our legal proceedings are discussed in Note 18 – Legal Matters in the Notes to Consolidated Financial Statements in this report.
Item 4.MINE SAFETY DISCLOSURES
Not applicable.
Information about our Executive Officers
The following table presents certain information regarding our executive officers as of December 31, 2020:
NameAgePresent PositionYear
Assumed
Present
Position
Years
at
KB
Home
Other Positions and Other
Business Experience within the
Last Five Years
From – To
Jeffrey T. Mezger65
Chairman, President and Chief Executive Officer (a)
201627President and Chief Executive Officer (a)2006-2016
Jeff J. Kaminski59
Executive Vice President and Chief Financial Officer
201010
Matthew W. Mandino56Executive Vice President and Chief Operating Officer20189Regional President, Southwest2016-2018
Division President, Colorado2011-2016
Albert Z. Praw72Executive Vice President, Real Estate and Business Development201124
Brian J. Woram60
Executive Vice President and General Counsel
201010
(a)Mr. Mezger has served as a director since 2006. He was elected Chairman of our board of directors in August 2016.
There is no family relationship between any of our executive officers or between any of our executive officers and any of our directors.
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PART II
Item 5.MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Our common stock is traded on the New York Stock Exchange under the ticker symbol “KBH.” As of December 31, 2020, there were 562 holders of record of our common stock.
Information regarding the shares of our common stock that may be issued under our equity compensation plans is provided below under Item 12 – Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters in this report.
The following table summarizes our purchases of our own equity securities during the three months ended November 30, 2020:
PeriodTotal Number of Shares PurchasedAverage Price Paid per ShareTotal Number of Shares Purchased as Part of Publicly Announced Plans or ProgramsMaximum Number of Shares That May Yet be Purchased Under the Plans or Programs
September 1-30— $— — 2,193,947 
October 1-31— — — 2,193,947 
November 1-3087,284 37.62 — 2,193,947 
Total87,284 $37.62 — 
In May 2018, our board of directors authorized us to repurchase a total of up to 4,000,000 shares of our outstanding common stock.  This authorization reaffirmed and incorporated the then-current balance of 1,627,000 shares that remained under a prior board-approved share repurchase program. In 2018, we repurchased 1,806,053 shares of our common stock pursuant to this authorization, at a total cost of $35.0 million. As of November 30, 2020, we had 2,193,947 shares authorized for repurchase.
The shares purchased during the three months ended November 30, 2020 were previously issued shares delivered to us by employees to satisfy withholding taxes on the vesting of restricted stock awards. These transactions are not considered repurchases under the board of directors’ authorization.

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Stock Performance Graph
The following graph 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

kbh-20201130_g10.jpg
201520162017201820192020
KB Home$100 $113 $225 $152 $254 $262 
S&P 500 Index100 108 133 141 164 192 
Dow Jones US Home Construction Index100 88 158 113 164 201 
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 $35.20 per share on November 30, 2020 and $34.58 per share on November 30, 2019. The performance of our common stock as presented above reflects past performance only and is not indicative of future performance. Total return assumes $100 invested at market close on November 30, 2015 in KB Home common stock, the S&P 500 Index and the Dow Jones US Home Construction Index, including reinvestment of dividends.
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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 Item 8 – Financial Statements and Supplementary Data in this report.
KB HOME
SELECTED FINANCIAL DATA
(Dollars In Thousands, Except Per Share Amounts and Average Selling Price)
 Years Ended November 30,
 20202019201820172016
Statement of Operations Data:
Revenues:
Homebuilding$4,167,702 $4,537,658 $4,533,795 $4,356,265 $3,582,943 
Financial services15,472 15,089 13,207 12,264 11,703 
Total$4,183,174 $4,552,747 $4,547,002 $4,368,529 $3,594,646 
Operating income:
Homebuilding$316,472 $331,380 $345,721 $283,403 $152,401 
Financial services11,389 10,756 9,363 8,834 7,886 
Total$327,861 $342,136 $355,084 $292,237 $160,287 
Pretax income$364,043 $348,175 $367,965 $289,995 $149,315 
Net income (a)296,243 268,775 170,365 180,595 105,615 
Earnings per share:
Basic$3.26 $3.04 $1.93 $2.09 $1.23 
Diluted3.13 2.85 1.71 1.85 1.12 
Cash dividends declared per share.42 .23 .10 .10 .10 
Balance Sheet Data:
Assets:
Homebuilding$5,320,240 $4,977,086 $5,061,191 $5,029,158 $5,121,125 
Financial services36,202 38,396 12,380 12,357 10,499 
Total$5,356,442 $5,015,482 $5,073,571 $5,041,515 $5,131,624 
Notes payable$1,747,175 $1,748,747 $2,060,263 $2,324,845 $2,640,149 
Stockholders’ equity2,665,769 2,383,122 2,087,500 1,926,311 1,723,145 
Stockholders’ equity per share29.09 26.60 24.01 22.13 20.25 
Homebuilding Data:
Homes delivered10,672 11,871 11,317 10,909 9,829 
Average selling price$388,900 $380,000 $399,200 $397,400 $363,800 
Net orders13,404 12,841 11,014 10,900 10,283 
Ending backlog — homes7,810 5,078 4,108 4,411 4,420 
Average community count243 250 223 233 238 
(a)Net income for the year ended November 30, 2018 included a non-cash charge of $112.5 million to income tax expense related to the 2019 Tax Cuts and Jobs Act (“TCJA”).

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Item 7.MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Our discussion and analysis below is focused on our 2020 and 2019 financial results, including comparisons of our year-over-year performance between these years. Discussion and analysis of our 2018 fiscal year specifically, as well as the year-over-year comparison of our 2019 financial performance to 2018, are located under Part II, Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the fiscal year ended November 30, 2019, filed with the SEC on January 24, 2020, which is available on our investor relations website at investor.kbhome.com and the SEC’s website at www.sec.gov.
RESULTS OF OPERATIONS
Overview. Revenues are generated from our homebuilding and financial services operations. The following table presents a summary of our consolidated results of operations (dollars in thousands, except per share amounts):
 Years Ended November 30,Variance
 2020201920182020 vs 20192019 vs 2018
Revenues:
Homebuilding$4,167,702 $4,537,658 $4,533,795 (8)%— %
Financial services15,472 15,089 13,207 14 
Total$4,183,174 $4,552,747 $4,547,002 (8)%— %
Pretax income:
Homebuilding$331,500 $325,189 $351,301 %(7)%
Financial services32,543 22,986 16,664 42 38 
Total 364,043 348,175 367,965 (5)
Income tax expense(67,800)(79,400)(197,600)15 60 
Net income $296,243 $268,775 $170,365 10 %58 %
Earnings per share:
Basic$3.26 $3.04 $1.93 %58 %
Diluted$3.13 $2.85 $1.71 10 %67 %
During 2020, we, like many companies worldwide, experienced dramatic variability in market conditions that produced stark differences in our quarterly results over the course of the year. In part, our results reflect several strategic adjustments we made in response to the extreme fluctuations we experienced in our 2020 operating environment, both quarter-to-quarter and within quarters. These adjustments were precipitated by rapid changes in public health requirements and guidelines and reflected our efforts to address the significant challenges they presented while also striving to protect the safety of our employees, customers and business partners; meeting a strong and sustained upswing in consumer demand for our homes; managing our capital requirements; and aligning our workforce for our short- and long-term business needs. Although we continue to navigate an uncertain economic landscape, based on the substantial net orders we generated in the 2020 second half and our robust backlog at the end of the year, we are confident about our growth prospects in 2021 and beyond.
Following a particularly strong 2020 first quarter, in which we had the highest revenues, net orders, ending backlog and ending backlog value for any first quarter since 2007 and increased our net income by 99% year over year, the onset of the COVID-19 pandemic and the institution of COVID-19 control responses in our served markets, including quarantines, “stay-at-home” orders and similar mandates, during the second quarter severely impacted global and national economies (with the U.S. entering a recession), the housing market and our business. Amid extraordinary economic disruptions; a sudden rise in unemployment; significant stock market and secondary mortgage market volatility; uncertainty about how to effectively contain COVID-19’s spread; weakened consumer confidence; and our swift closing of our sales centers, model homes and design studios to the public and shift to virtual sales tools and appointment-only personalized home sales processes, where permitted, we saw a drastic decrease in demand for new homes (including homes ordered in the first quarter) and our order pace slowed significantly. Along with a considerable increase in home purchase cancellations, largely reflecting our proactive efforts to
24


assure a backlog of qualified homebuyers amid the pandemic-induced economic downturn, we experienced a sizable reduction in our 2020 second quarter net orders. Due to this reduction in net orders, we entered the third quarter with 14% fewer homes in backlog as compared to the previous year. Further, our construction activities were restricted in many jurisdictions, and completely shut down in some of them, and together with the reduced availability or capacity of some municipal and private services necessary to build and deliver homes, and supply chain disruptions, our cycle times became extended. This caused home delivery delays during most of the second quarter, which tempered our revenues for the period.
With the easing of restrictive public health orders to varying degrees in our served markets beginning in May 2020 and the associated ability to open our communities to walk-in traffic, following appropriate safety protocols and applicable public health guidelines, complemented by our enhanced virtual selling capabilities, as discussed under Item 1 – Business, our net orders began to rebound significantly. This positive momentum continued through the 2020 second half, largely fueled by the combination of historically low mortgage interest rates, a limited supply of resale inventory, an underproduction of new homes over the past decade, favorable demographic trends and consumers’ increasing desire to own a home. Reflecting this strong demand, our 2020 third and fourth quarter net orders rose to their respective highest levels since 2005. Though this sharp rise in net orders in the second half generated a substantial expansion in our backlog, as discussed below, our deliveries and revenues for our third and fourth quarters were moderated primarily by the negative effects of the COVID-19 pandemic in our 2020 second quarter.
During the 2020 second quarter and most of the third quarter, in prioritizing cash preservation and liquidity in light of lingering uncertainty surrounding the COVID-19 pandemic, we limited our investments in land and land development, resulting in a 24% decrease in those quarters combined as compared to the corresponding year-earlier periods. With the sustained strong housing demand over the 2020 second half, we intensified our investments, resulting in a 63% year-over-year increase in the fourth quarter, to measurably expand our lot pipeline and support community growth in the future. For 2020, we invested a total of $1.69 billion in land and land development, compared to $1.62 billion in 2019.
Although the trajectory and strength of the current housing recovery remains uncertain, and could be slowed or reversed by a number of factors, including a widespread resurgence in COVID-19 infections, whether due to the spread of any variants of the virus or otherwise, combined with the seasonal flu and others discussed above under Item 1A – Risk Factors, and our business, including our margins, could be negatively affected by labor and supply constraints and rising and volatile raw material prices, particularly for lumber, as was the case during 2020, we believe we are well-positioned to operate effectively and generate profitable growth in 2021.
Financial and Operational Highlights. Reflecting the above-described impact from the COVID-19 pandemic and related COVID-19 control responses, within our homebuilding operations, housing revenues of $4.15 billion for 2020 were down 8% from the prior year due to a 10% decrease in homes delivered, partly offset by a 2% increase in the overall average selling price of those homes. In 2020, homebuilding operating income decreased 4% year over year to $316.5 million, which included total inventory-related charges of $28.7 million and severance charges of $6.7 million. The severance charges were associated with workforce reductions made during the second quarter in light of the sharp reduction in business activity and highly uncertain outlook at the time, as discussed above. In 2019, homebuilding operating income included $17.3 million of inventory-related charges. As a percentage of homebuilding revenues, our homebuilding operating income for 2020 improved 30 basis points year over year to 7.6%. Excluding inventory-related charges for both periods and the above-mentioned severance charges in the 2020 period, our homebuilding operating income margin improved 70 basis points to 8.4% from 2019. Our housing gross profits for 2020 decreased 5% from 2019 mainly due to lower housing revenues, partly offset by a 60 basis point improvement in our housing gross profit margin to 18.9%.
The year-over-year increase in our housing gross profit margin in 2020 primarily reflected a mix shift of homes delivered, a favorable pricing environment that enabled us to increase selling prices in many of our communities, lower relative amortization of previously capitalized interest, and a slight decrease in sales incentives, partly offset by an increase in inventory-related charges.
Our selling, general and administrative expenses as a percentage of housing revenues increased 30 basis points from the prior year to 11.3%, primarily due to the above-mentioned severance charges and reduced operating leverage from lower housing revenues, partly offset by our targeted actions, including workforce reductions in the 2020 second quarter, to reduce overhead costs. Excluding the severance charges in 2020, our selling, general and administrative expenses as a percentage of housing revenues were 11.2%.
Our net income and diluted earnings per share for 2020 each rose 10% year over year. In 2019, our net income and diluted earnings per share included a $6.8 million loss on the early extinguishment of debt.
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Net Orders, Backlog and Community Count. The following table presents information about our net orders, cancellation rate, ending backlog, and community count for the years ended November 30, 2020 and 2019 (dollars in thousands):
Years Ended November 30,
20202019
Net orders13,404 12,841 
Net order value (a)$5,299,489 $4,890,153 
Cancellation rate (b)20 %19 %
Ending backlog — homes7,810 5,078 
Ending backlog — value$2,962,403 $1,813,707 
Ending community count236 251 
Average community count243 250 
(a)Net order value represents the potential future housing revenues associated with net orders generated during a period, as well as homebuyer selections of lot and product premiums and design studio options and upgrades for homes in backlog during the same period.
(b)Cancellation rate represents the total number of contracts for new homes cancelled during a period divided by the total (gross) orders for new homes generated during the same period.
Net Orders. In 2020, net orders from our homebuilding operations grew 4% from 2019, reflecting strong year-over-year increases of 31%, 27% and 42% in the first, third and fourth quarters, respectively, partly offset by a decrease of 57% in the second quarter due to the negative impact from the COVID-19 pandemic and related control responses. The year-over-year net order growth in the 2020 first, third and fourth quarters was largely driven by the factors described above with respect to our second half performance. We also believe our Built-to-Order model, which, as described above under Item 1 – Business, provides personalization and choice, was a key factor that contributed to our strong net orders during these periods. In 2020, the growth in our overall net orders compared to 2019 reflected a 7% increase in monthly net orders per community to 4.6, partly offset by a 3% decrease in our overall average community count, which is discussed below under “Community Count.”
The value of our 2020 net orders rose 8% from 2019 as a result of the growth in net orders and a 4% increase in the overall average selling price of those orders, with these factors driving net order value expansion in three of our four homebuilding reporting segments, ranging from 9% in our Southwest segment to 13% in our Central segment. Net order value in our Southeast segment declined 8% year over year due to a decrease in net orders, as the average selling price of those orders remained relatively flat.
Backlog. The number of homes in our backlog at November 30, 2020 increased 54% from the previous year, mainly due to the substantial increase in our net orders during the 2020 third and fourth quarters. The potential future housing revenues in our backlog at November 30, 2020 grew 63% year over year, reflecting the higher number of homes in our backlog and a 6% increase in the average selling price of those homes. The increases in the number of homes in backlog and our backlog value reflected strong growth in each of our four homebuilding reporting segments, with increases in backlog value ranging from 34% in our Southwest segment to 93% in our West Coast segment. Substantially all of the homes in our backlog at November 30, 2020 are expected to be delivered during the year ending November 30, 2021.
Community Count. Our average community count for 2020 declined 3% from the previous year, reflecting decreases of 12% in our Southwest and Southeast homebuilding reporting segments and 3% in our Central segment, partly offset by a 10% increase in our West Coast segment. Our ending community count for 2020 was down 6% from the prior year. The year-over-year decreases in both our average and ending community counts primarily reflected the close-out of communities earlier than planned due to our accelerated, demand-driven net order pace, our reduced investments in land and land development in the 2020 second and third quarters, and delays in community openings due in part to the negative impacts from the COVID-19 pandemic.

26


HOMEBUILDING
The following table presents a summary of certain financial and operational data for our homebuilding operations (dollars in thousands, except average selling price):
 Years Ended November 30,
 202020192018
Revenues:
Housing$4,150,793 $4,510,814 $4,517,244 
Land16,909 26,844 16,551 
Total4,167,702 4,537,658 4,533,795 
Costs and expenses:
Construction and land costs
Housing(3,365,509)(3,683,174)(3,728,917)
Land(14,942)(25,754)(15,003)
Total(3,380,451)(3,708,928)(3,743,920)
Selling, general and administrative expenses(470,779)(497,350)(444,154)
Total(3,851,230)(4,206,278)(4,188,074)
Operating income $316,472 $331,380 $345,721 
Homes delivered10,672 11,871 11,317 
Average selling price$388,900 $380,000 $399,200 
Housing gross profit margin as a percentage of housing revenues18.9 %18.3 %17.5 %
Housing gross profit margin excluding inventory-related charges as a percentage of housing revenues19.6 %18.7 %18.1 %
Adjusted housing gross profit margin as a percentage of housing revenues22.7 %22.2 %22.5 %
Selling, general and administrative expense as a percentage of housing revenues11.3 %11.0 %9.8 %
Operating income as a percentage of homebuilding revenues7.6 %7.3 %7.6 %
The following tables present information about our homes delivered, net orders, cancellation rates as a percentage of gross orders, net order value, average community count, and ending backlog (number of homes and value) by homebuilding reporting segment (dollars in thousands):
Years Ended November 30,
Homes DeliveredNet OrdersCancellation Rates
Segment202020192020201920202019
West Coast2,869 3,214 3,850 3,542 17 %19 %
Southwest2,385 2,346 2,668 2,658 19 13 
Central3,932 4,291 4,981 4,565 21 21 
Southeast1,486 2,020 1,905 2,076 25 23 
Total10,672 11,871 13,404 12,841 20 %19 %

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Years Ended November 30,
 Net Order ValueAverage Community Count
Segment20202019Variance20202019Variance
West Coast$2,302,785 $2,087,293 10 %74 67 10 %
Southwest914,770 842,335 36 41 (12)
Central1,534,747 1,362,580 13 89 92 (3)
Southeast547,187 597,945 (8)44 50 (12)
Total$5,299,489 $4,890,153 %243 250 (3)%
 
November 30,
 Backlog – HomesBacklog – Value
Segment20202019Variance20202019Variance
West Coast2,024 1,043 94 %$1,152,609 $598,299 93 %
Southwest1,521 1,238 23 523,705 389,597 34 
Central3,037 1,988 53 932,814 590,936 58 
Southeast1,228 809 52 353,275 234,875 50 
Total7,810 5,078 54 %$2,962,403 $1,813,707 63 %
As discussed above under Item 1 – Business, the composition of our homes delivered, net orders and backlog shifts with the mix of our active communities and the corresponding average selling prices of the homes ordered and/or delivered at these communities in any particular period, and it changes as new communities open and existing communities wind down or close out. In addition, with our Built-to-Order model, the selling prices of individual homes within a community may vary due to differing lot sizes and locations, home square footage, and option and upgrade selections. These intrinsic variations in our business limit the effective comparability of our homes delivered, net orders and backlog as well as their corresponding values between sequential and year-over-year periods, in addition to the effect of prevailing economic or housing market conditions in or across any particular periods.
Revenues. Homebuilding revenues of $4.17 billion in 2020 decreased from 2019, reflecting declines in both housing and land sale revenues largely caused by the negative impacts from the COVID-19 pandemic discussed above under “Overview.”
Housing revenues in 2020 decreased 8% from the previous year, as a 10% decrease in homes delivered was partly offset by a 2% increase in the overall average selling price of those homes. In 2020, homes delivered were tempered primarily by the negative impact of the COVID-19 pandemic and related COVID-19 control responses, including the substantial year-over-year decline in our 2020 second quarter net orders. The overall average selling price of our homes delivered rose in 2020 as compared to 2019, largely due to the favorable pricing environment in the 2020 second half that enabled us to increase prices in many of our communities.
Land sale revenues for 2020 decreased 37% from 2019. Generally, land sale revenues fluctuate with our decisions to maintain or decrease our land ownership position in certain markets based upon the volume of our holdings, our business strategy, the strength and number of developers and other land buyers in particular markets at given points in time, the availability of opportunities to sell land at acceptable prices and prevailing market conditions.
Operating Income. Our homebuilding operating income decreased 4% in 2020, as compared to the previous year, due to a decline in housing gross profits, partly offset by a decrease in selling, general and administrative expenses. In 2020, homebuilding operating income included total inventory-related charges of $28.7 million, as discussed in Note 7 – Inventory Impairments and Land Option Contract Abandonments in the Notes to Consolidated Financial Statements in this report, and severance charges of $6.7 million. The severance charges were associated with workforce reductions made during the 2020 second quarter and were estimated at implementation to yield annualized savings of approximately $40 million allocated between construction and land costs and selling, general and administrative expenses. In 2019, homebuilding operating income included $17.3 million of inventory-related charges. As a percentage of homebuilding revenues, our homebuilding operating income for 2020 improved 30 basis points year over year to 7.6%. Excluding inventory-related charges for both periods and the above-mentioned severance charges in 2020, our homebuilding operating income margin improved 70 basis points to 8.4% in 2020 from 7.7% in 2019.
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In 2020, housing gross profits decreased by $42.4 million, or 5%, to $785.3 million from $827.6 million in 2019. The year-over-year decrease in 2020 reflected the lower volume of homes delivered, partly offset by an increase in the housing gross profit margin. Housing gross profits for 2020 and 2019 included the respective inventory-related charges described above.
Our housing gross profit margin for 2020 increased 60 basis points from the previous year, mainly as a result of a shift in the mix of homes delivered and a favorable pricing environment (approximately 40 basis points); lower amortization of previously capitalized interest as a percentage of housing revenues (approximately 40 basis points); and a decrease in sales incentives, reflecting strong housing demand (approximately 10 basis points). These items were partly offset by an increase in inventory-related charges (approximately 30 basis points).
We incur interest principally from our borrowings to finance land acquisitions, land development, home construction and other operating and capital needs. The amount of interest incurred generally fluctuates based on the average amount of debt outstanding for the period and/or the interest rate on that debt. In 2020, interest incurred totaled $124.1 million, down 13% from $143.4 million in 2019, mainly due to our lower average debt level. All interest incurred during 2020 and 2019 was capitalized as the average amount of our inventory qualifying for interest capitalization was higher than our average debt level for each period. As a result, we had no interest expense for 2020 or 2019.
Interest amortized to construction and land costs associated with housing operations totaled $129.3 million in 2020 and $156.1 million in 2019. The year-over-year decrease in interest amortized in 2020 mainly reflected fewer homes delivered and the reduction in our interest incurred. As a percentage of housing revenues, the amortization of previously capitalized interest associated with housing operations was 3.1% for 2020 and 3.5% for 2019. Interest amortized to construction and land costs in 2020 and 2019 included $.4 million and $.7 million, respectively, of amortization of previously capitalized interest related to land sales that occurred during those years.
Excluding the amortization of previously capitalized interest associated with housing operations and the above-mentioned inventory-related charges in the applicable periods, our adjusted housing gross profit margin increased 50 basis points to 22.7% in 2020 from 22.2% in 2019. The calculation of adjusted housing gross profit margin, which we believe provides a clearer measure of the performance of our business, is described below under “Non-GAAP Financial Measures.”
Selling, general and administrative expenses for 2020 decreased 5% from the prior year, primarily reflecting the lower number of homes delivered and our targeted actions to reduce overhead costs, partly offset by the above-mentioned severance charges of $6.7 million we recorded in the 2020 second quarter. As a percentage of housing revenues, our selling, general and administrative expenses rose 30 basis points in 2020 as compared to 2019 primarily due to decreased operating leverage from lower housing revenues, partly offset by the lower expenses. Excluding the severance charges recorded in 2020, our selling, general and administrative expenses as a percentage of revenues rose 20 basis points year over year to 11.2%.
The following table presents the components of our selling, general and administrative expenses (dollars in thousands):
Years Ended November 30,
2020% of Housing Revenues2019% of Housing Revenues2018% of Housing Revenues
Marketing expenses (a)$116,590 2.8 %$129,733 2.9 %$91,027 2.0 %
Commission expenses (b)164,507 3.9 174,338 3.8 168,162 3.7 
General and administrative expenses189,682 4.6 193,279 4.3 184,965 4.1 
Total$470,779 11.3 %$497,350 11.0 %$444,154 9.8 %
(a)Marketing expenses in 2020 and 2019 reflect our adoption of Accounting Standards Codification Topic 606, “Revenue from Contracts with Customers” (“ASC 606”) effective December 1, 2018, as described in Note 1 – Summary of Significant Accounting Policies in the Notes to Consolidated Financial Statements in this report.
(b)Commission expenses include sales commissions on homes delivered paid to internal sales counselors and/or external real estate brokers.
Interest Income. Interest income, which is generated from short-term investments, totaled $2.6 million in 2020 and $2.2 million in 2019. 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.
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Equity in Income (Loss) of Unconsolidated Joint Ventures. Our equity in income of unconsolidated joint ventures totaled $12.5 million in 2020, compared to equity in loss of unconsolidated joint ventures of $1.5 million in 2019. The improved results primarily reflected 99 homes delivered from an unconsolidated joint venture in California in 2020, compared to no homes delivered from unconsolidated joint ventures in 2019. Further information regarding our investments in unconsolidated joint ventures is provided in Note 9 – Investments in Unconsolidated Joint Ventures in the Notes to Consolidated Financial Statements in this report.
Loss on Early Extinguishment of Debt. Our $6.8 million loss on early extinguishment of debt in 2019 was associated with our optional redemption of $350.0 million in aggregate principal amount of our 8.00% senior notes due 2020 (“8.00% Senior Notes due 2020”) prior to their maturity date.
Non-GAAP Financial Measures
This report contains information about our adjusted housing gross profit margin, adjusted income tax expense, adjusted net income, adjusted diluted earnings per share, adjusted effective tax rate, and ratio of net debt to capital, none of which are calculated in accordance with generally accepted accounting principles (“GAAP”). We believe these non-GAAP financial measures are relevant and useful to investors in understanding our operations and the leverage employed in our operations, and may be helpful in comparing us with other companies in the homebuilding industry to the extent they provide similar information. However, because they are not calculated in accordance with GAAP, these non-GAAP financial measures may not be completely comparable to other companies in the homebuilding industry and, thus, should not be considered in isolation or as an alternative to operating performance and/or financial measures prescribed by GAAP. Rather, these non-GAAP financial measures should be used to supplement their respective most directly comparable GAAP financial measures in order to provide a greater understanding of the factors and trends affecting our operations.
Adjusted Housing Gross Profit Margin. The following table reconciles our housing gross profit margin calculated in accordance with GAAP to the non-GAAP financial measure of our adjusted housing gross profit margin (dollars in thousands):
 Years Ended November 30,
 202020192018
Housing revenues$4,150,793 $4,510,814 $4,517,244 
Housing construction and land costs(3,365,509)(3,683,174)(3,728,917)
Housing gross profits785,284 827,640 788,327 
Add: Inventory-related charges (a)
28,669 17,291 28,994 
Housing gross profits excluding inventory-related charges
813,953 844,931 817,321 
Add: Amortization of previously capitalized interest (b)
129,330 156,114 197,936 
Adjusted housing gross profits
$943,283 $1,001,045 $1,015,257 
Housing gross profit margin as a percentage of housing revenues
18.9 %18.3 %17.5 %
Housing gross profit margin excluding inventory-related charges as a percentage of housing revenues
19.6 %18.7 %18.1 %
Adjusted housing gross profit margin as a percentage of housing revenues
22.7 %22.2 %22.5 %
(a)Represents inventory impairment and land option contract abandonment charges associated with housing operations.
(b)Represents the amortization of previously capitalized interest associated with housing operations.
Adjusted housing gross profit margin is a non-GAAP financial measure, which we calculate by dividing housing revenues less housing construction and land costs excluding (1) housing inventory impairment and land option contract abandonment charges (as applicable) recorded during a given period and (2) amortization of previously capitalized interest associated with housing operations, by housing revenues. The most directly comparable GAAP financial measure is housing gross profit margin. We believe adjusted housing gross profit margin is a relevant and useful financial measure to investors in evaluating our performance as it measures the gross profits we generated specifically on the homes delivered during a given period. This non-GAAP financial measure isolates the impact that the housing inventory impairment and land option contract abandonment charges, and the amortization of previously capitalized interest associated with housing operations, have on housing gross profit margins, and allows investors to make comparisons with our competitors that adjust housing gross profit margins in a similar
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manner. We also believe investors will find adjusted housing gross profit margin relevant and useful because it represents a profitability measure that may be compared to a prior period without regard to variability of housing inventory impairment and land option contract abandonment charges, and amortization of previously capitalized interest associated with housing operations. This financial measure assists us in making strategic decisions regarding community location and product mix, product pricing and construction pace.
Adjusted Income Tax Expense, Adjusted Net Income, Adjusted Diluted Earnings Per Share and Adjusted Effective Tax Rate. The following table reconciles our income tax expense, net income, diluted earnings per share and effective tax rate calculated in accordance with GAAP to the non-GAAP financial measures of adjusted income tax expense, adjusted net income, adjusted diluted earnings per share and adjusted effective tax rate, respectively (in thousands, except per share amounts):
Years ended November 30,
202020192018
As ReportedAs ReportedAs ReportedTCJA AdjustmentAs Adjusted
Total pretax income$364,043 $348,175 $367,965 $— $367,965 
Income tax expense (a)(67,800)(79,400)(197,600)112,500 (85,100)
Net income$296,243 $268,775 $170,365 $112,500 $282,865 
Diluted earnings per share$3.13 $2.85 $1.71 $2.82 
Weighted average shares outstanding — diluted94,086 93,838 101,059 101,059 
Effective tax rate (a)18.6 %22.8 %53.7 %23.1 %
(a)For the year ended November 30, 2020, income tax expense and the related effective tax rate reflected the favorable impacts of $18.7 million of federal energy tax credits we earned from building energy-efficient homes, $12.0 million of excess tax benefits related to stock-based compensation, partly offset by $5.7 million of non-deductible executive compensation expense under Internal Revenue Code 162(m). For the year ended November 30, 2019, income tax expense and the related effective tax rate reflected the favorable impacts of $5.3 million of excess tax benefits related to stock-based compensation, a $4.4 million deferred tax asset valuation allowance reversal and $4.3 million of federal energy tax credits we earned from building energy-efficient homes, partly offset by $5.3 million of non-deductible executive compensation expense and a $1.9 million non-cash charge due to the re-measurement of deferred tax assets based on a reduction in certain state income tax rates. For the year ended November 30, 2018, income tax expense and adjusted income tax expense, as well as the related effective tax rate and adjusted effective tax rate, included the favorable impacts of the reduction in the federal corporate income tax rate from 35% to 21%, effective January 1, 2018, $10.7 million of federal energy tax credits we earned from building energy-efficient homes, a $2.1 million net benefit from a reduction in our deferred tax asset valuation allowance, and $1.0 million of excess tax benefits from stock-based compensation as a result of our adoption of Accounting Standards Update No. 2016-09, “Compensation — Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting” (“ASU 2016-09”), effective December 1, 2017.
Our adjusted income tax expense, adjusted net income, adjusted diluted earnings per share and adjusted effective tax rate are non-GAAP financial measures, which we calculate by excluding a non-cash charge of $112.5 million recorded in 2018 from our reported income tax expense, net income, diluted earnings per share and effective tax rate, respectively. This charge was primarily due to our accounting re-measurement of our deferred tax assets based on the above-noted reduction in the federal corporate income tax rate under the TCJA. The most directly comparable GAAP financial measures are our income tax expense, net income, diluted earnings per share and effective tax rate. We believe that these non-GAAP measures are meaningful to investors as they allow for an evaluation of our operating results without the impact of the TCJA-related charge.
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Ratio of Net Debt to Capital. The following table reconciles our ratio of debt to capital calculated in accordance with GAAP to the non-GAAP financial measure of our ratio of net debt to capital (dollars in thousands):
 November 30,
 20202019
Notes payable$1,747,175 $1,748,747 
Stockholders’ equity2,665,769 2,383,122 
Total capital$4,412,944 $4,131,869 
Ratio of debt to capital39.6 %42.3 %
Notes payable$1,747,175 $1,748,747 
Less: Cash and cash equivalents(681,190)(453,814)
Net debt1,065,985 1,294,933 
Stockholders’ equity2,665,769 2,383,122 
Total capital$3,731,754 $3,678,055 
Ratio of net debt to capital28.6 %35.2 %
The ratio of net debt to capital is a non-GAAP financial measure, which we calculate by dividing notes payable, net of homebuilding cash and cash equivalents, by capital (notes payable, net of homebuilding cash and cash equivalents, plus stockholders’ equity). The most directly comparable GAAP financial measure is the ratio of debt to capital. We believe the ratio of net debt to capital is a relevant and useful financial measure to investors in understanding the degree of leverage employed in our operations.
HOMEBUILDING REPORTING SEGMENTS
Below is a discussion of the financial results of each of our homebuilding reporting segments. Further information regarding these segments, including their pretax income (loss), is included in Note 2 – Segment Information in the Notes to Consolidated Financial Statements in this report. The difference between each homebuilding reporting segment’s operating income (loss) and pretax income (loss) is generally due to the equity in income (loss) of unconsolidated joint ventures, which is also presented in Note 2 – Segment Information in the Notes to Consolidated Financial Statements in this report, and/or interest income and expense.
The financial results for each of our homebuilding reporting segments for the year ended November 30, 2020 were negatively affected by the impacts from the COVID-19 pandemic, as discussed above under “Overview.” In three of our four homebuilding reporting segments, we delivered fewer homes in 2020 compared to the previous year largely as a result of the significant decrease in our net orders in the 2020 second quarter.
West Coast. The following table presents financial information related to our West Coast homebuilding reporting segment for the years indicated (dollars in thousands, except average selling price):
 Years Ended November 30,Variance
 2020201920182020 vs 20192019 vs 2018
Revenues$1,748,582 $1,912,146 $2,085,328 (9) %(8) %
Construction and land costs(1,480,775)(1,591,896)(1,720,776)
Selling, general and administrative expenses(129,744)(141,324)(123,254)(15)
Operating income $138,063 $178,926 $241,298 (23) %(26)  %
Homes delivered2,869 3,214 3,152 (11)  % %
Average selling price$609,400 $592,300 $661,500  %(10)  %
Housing gross profit margin15.3 %16.8 %17.5 %(150)bps(70)bps
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This segment’s revenues in 2020 and 2019 were generated from both housing operations and land sales. Housing revenues of $1.75 billion in 2020 declined 8% from $1.90 billion in 2019, reflecting a lower number of homes delivered, partly offset by an increase in the average selling price of those homes. The year-over-year increase in the average selling price of homes delivered in 2020 was primarily due to product and geographic mix shifts of homes delivered and the favorable pricing environment in this segment. Land sale revenues were nominal in 2020 and totaled $8.6 million in 2019.
This segment’s operating income in 2020 decreased from the previous year, mainly reflecting lower housing gross profits, partly offset by lower selling, general and administrative expenses. Housing gross profits declined due to decreases in both housing revenues and the housing gross profit margin. The decrease in the housing gross profit margin was primarily due to a mix shift of homes delivered and an increase in inventory-related charges. Inventory-related charges impacting the housing gross profit margin totaled $21.9 million in 2020, compared to $15.6 million in 2019. Selling, general and administrative expenses as a percentage of housing revenues for 2020 were flat with the previous year as the favorable impacts of overhead cost reductions and lower legal fees were offset by reduced operating leverage as a result of lower housing revenues.
Southwest. The following table presents financial information related to our Southwest homebuilding reporting segment for the years indicated (dollars in thousands, except average selling price):
 Years Ended November 30,Variance
 2020201920182020 vs 20192019 vs 2018
Revenues$796,810 $764,816 $707,075   %  %
Construction and land costs(596,512)(585,880)(568,194)(2)(3)
Selling, general and administrative expenses(66,415)(67,223)(50,897)(32)
Operating income $133,883 $111,713 $87,984 20   %27   %
Homes delivered2,385 2,346 2,301   %  %
Average selling price$327,300 $322,000 $307,300   %  %
Housing gross profit margin25.4 %23.8 %19.6 %160 bps420 bps
In 2020 and 2019, this segment’s revenues were generated from both housing operations and land sales. Housing revenues for 2020 grew 3% year over year to $780.7 million, reflecting increases in both the number of homes delivered and the average selling price of those homes. The growth in the number of homes delivered was attributable to our Nevada operations. The higher average selling price was mainly due to shifts in the product and geographic mix of homes delivered, and the favorable pricing environment in this segment. Land sale revenues totaled $16.1 million in 2020 and $9.5 million in 2019.
This segment’s operating income increased $22.2 million from 2019 primarily due to higher housing and land sale gross profits. The year-over-year increase in housing gross profits reflected growth in housing revenues and an increase in the housing gross profit margin. The improvement in the housing gross profit margin was largely due to lower relative amortization of previously capitalized interest, a mix shift of homes delivered, a favorable pricing environment, and increased operating leverage due to higher housing revenues. Land sales generated profits of $2.0 million in 2020, compared to a loss of $.5 million in 2019. Selling, general and administrative expenses as a percentage of housing revenues for 2020 improved from 2019 mainly as a result of increased operating leverage due to higher housing revenues and overhead cost reductions.
Central. The following table presents financial information related to our Central homebuilding reporting segment for the years indicated (dollars in thousands, except average selling price):
 Years Ended November 30,Variance
 2020201920182020 vs 20192019 vs 2018
Revenues$1,192,869 $1,267,892 $1,239,305 (6)  %  %
Construction and land costs(941,381)(1,015,415)(1,010,674)— 
Selling, general and administrative expenses(122,712)(126,176)(111,028)(14)
Operating income $128,776 $126,301 $117,603   %  %
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 Years Ended November 30,Variance
 2020201920182020 vs 20192019 vs 2018
Homes delivered3,932 4,291 4,113 (8)  % %
Average selling price$303,400 $293,500 $297,400  %(1)  %
Housing gross profit margin21.1 %19.9 %18.6 %120 bps130 bps
In 2020, revenues for this segment were generated solely from housing operations. In 2019, revenues for this segment were generated from both housing operations and land sales. Housing revenues in 2020 declined 5% from $1.26 billion in 2019 due to a decrease in the number of homes delivered, partly offset by an increase in the average selling price of those homes. The increase in the average selling price reflected shifts in product and geographic mix of homes delivered, and the favorable pricing environment in this segment. Land sale revenues totaled $8.3 million in 2019.
This segment’s operating income for 2020 increased $2.5 million from 2019, mainly due to a decrease in selling, general and administrative expenses, partly offset by the absence of land sale profits in the current year. Housing gross profits for 2020 were essentially flat year over year as the impact of a higher gross profit margin was offset by a decrease in housing revenues. The housing gross profit margin rose from the previous year primarily due to a shift in the mix of homes delivered, a favorable pricing environment and lower relative amortization of previously capitalized interest, partly offset by an increase in inventory-related charges. Inventory-related charges impacting the housing gross profit margin for 2020 and 2019 were $5.5 million and $.8 million, respectively. Land sales generated profits of $1.6 million in 2019. Selling, general and administrative expenses as a percentage of housing revenues for 2020 increased from the prior year, reflecting reduced operating leverage due to lower housing revenues.
Southeast. The following table presents financial information related to our Southeast homebuilding reporting segment for the years indicated (dollars in thousands, except average selling price):
 Years Ended November 30,Variance
 2020201920182020 vs 20192019 vs 2018
Revenues$429,441 $592,804 $502,087 (28) %18  %
Construction and land costs(355,242)(508,351)(437,522)30 (16)
Selling, general and administrative expenses(51,248)(65,902)(56,940)22 (16)
Operating income$22,951 $18,551 $7,625 24 %143 %
Homes delivered1,486 2,020 1,751 (26) %15  %
Average selling price$288,600 $293,200 $286,600 (2) % %
Housing gross profit margin17.3 %14.3 %12.9 %300 bps140 bps
This segment’s revenues in 2020 and 2019 were generated from both housing operations and land sales. Housing revenues in 2020 decreased 28% to $428.8 million from $592.3 million in 2019 as a result of decreases in both the number of homes delivered and the average selling price of those homes. The year-over-year decrease in the average selling price in 2020 was mainly due to shifts in the product and geographic mix of homes delivered, with a lower proportion of homes delivered from higher-priced communities.
In 2020, this segment’s operating income increased by $4.4 million from 2019 due to a decrease in selling, general and administrative expenses, partly offset by lower housing gross profits. The year-over-year decrease in housing gross profits reflected a decline in housing revenues, partially offset by an increase in the housing gross profit margin. The housing gross profit margin improved primarily due to a shift in the mix of homes delivered and lower relative amortization of previously capitalized interest, partly offset by reduced operating leverage due to lower housing revenues. Selling, general and administrative expenses as a percentage of housing revenues for 2020 increased from the previous year, primarily due to decreased operating leverage as a result of lower housing revenues, partly offset by our overhead reduction efforts and favorable legal settlements and recoveries.
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FINANCIAL SERVICES REPORTING SEGMENT
The following table presents a summary of selected financial and operational data for our financial services reporting segment (dollars in thousands):
 Years Ended November 30,
 202020192018
Revenues$15,472 $15,089 $13,207 
Expenses(4,083)(4,333)(3,844)
Equity in income of unconsolidated joint ventures21,154 12,230 7,301 
Pretax income$32,543 $22,986 $16,664 
Total originations (a):
Loans7,410 7,436 5,659 
Principal$2,457,522 $2,190,823 $1,578,037 
Percentage of homebuyers using KBHS77 %70 %56 %
Average FICO score723 719 718 
Loans sold (a):
Loans sold to Stearns7,900 6,224 5,028 
Principal$2,536,689 $1,827,917 $1,419,140 
Loans sold to other third parties310 772 490 
Principal$102,363 $202,349 $120,815 
Mortgage loan origination mix (a):
Conventional/non-conventional loans56 %58 %56 %
FHA loans28 %26 %27 %
Other government loans16 %16 %17 %
Loan type (a):
Fixed99 %98 %99 %
ARM%%%
(a)Loan originations and sales occurred within KBHS.
Revenues. Our financial services reporting segment generates revenues primarily from insurance commissions and title services. The year-over-year growth in our financial services revenues for 2020 reflected an increase in title services revenues, partly offset by a slight decrease in insurance commissions.
Pretax income. Our financial services pretax income for 2020 grew 42% from the previous year mainly due to an increase in the equity in income of unconsolidated joint ventures. In 2020, our equity in income of our unconsolidated joint venture, KBHS, increased 73% year over year as a result of a substantial increase in the principal amount of loan originations and improved margins. The higher principal amount of loan originations in 2020 primarily reflected an increase in the percentage of homebuyers using KBHS and an increase in the average selling price of homes we delivered, partly offset by a 10% decrease in the number of homes we delivered.

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INCOME TAXES
Our income tax expense and effective income tax rate were as follows (dollars in thousands):
 Years Ended November 30,
 202020192018
Income tax expense$67,800 $79,400 $197,600 
Effective income tax rate 18.6 %22.8 %53.7 %
Our effective tax rate for 2020 decreased from the previous year, mainly due to a $14.4 million increase in federal energy tax credits we earned from building energy-efficient homes and a $6.7 million increase in excess tax benefits related to stock-based compensation, partly offset by a $2.5 million decrease in deferred tax asset valuation allowance reversals.
The federal energy tax credits for the year ended November 30, 2020 resulted from legislation enacted in December 2019 that, among other things, extended the availability of a business tax credit for building new energy-efficient homes through December 31, 2020. The federal energy tax credits for the year ended November 30, 2019 primarily resulted from legislation enacted on February 9, 2018 that, among other things, extended the availability of a business tax credit for building new energy-efficient homes through December 31, 2017. Prior to this legislation, the tax credit expired on December 31, 2016. In December 2020, federal legislation was enacted that, among other things, extended the availability of federal energy tax credits through December 31, 2021. This extension is expected to benefit our income tax provision in future periods.
In June 2020, California enacted tax legislation that approved the suspension of California net operating loss (“NOL”) deductions for tax years 2020, 2021 and 2022. The suspension of California NOL deductions did not have an impact on our income tax expense for the year ended November 30, 2020.
Under current accounting standards, we expect volatility in our income tax expense in future periods, the magnitude of which will depend on, among other factors, the price of our common stock and the timing and volume of stock-based compensation award activity, such as employee exercises of stock options and the vesting of restricted stock awards and performance-based restricted stock units (each, a “PSU”).
For each of the years ended November 30, 2020 and 2019, the amount of income taxes we paid was substantially less than our income tax expense primarily due to the utilization of our deferred tax assets to reduce taxable income. We anticipate the amount of income taxes we pay will be less than our income tax expense for the next several years.
Further information regarding our income taxes is provided in Note 14 – Income Taxes in the Notes to Consolidated Financial Statements in this report.
LIQUIDITY AND CAPITAL RESOURCES
Overview. We have funded our homebuilding and financial services activities over the last several years with:
internally generated cash flows;
public issuances of debt securities;
borrowings under the Credit Facility;
land option contracts and other similar contracts and seller notes;
public issuances of our common stock; and
letters of credit and performance bonds.
We manage our use of cash in the operation of our business to support the execution of our primary strategic goals. Over the past several years, we have primarily used cash for:

land acquisitions and land development;
home construction;
operating expenses;
principal and interest payments on notes payable; and
repayments of borrowings under the Credit Facility.
Cash flows for each of our communities depend on their stage of development and can differ significantly from reported earnings. Early stages of development or expansion require significant cash outflows for land acquisition, zoning plat and other approvals, land development, and construction of model homes, roads, utilities, landscape and other items. Because these costs
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are a component of our inventory and are not recognized in our income statement until a home is delivered, we incur significant cash outflows prior to the recognition of earnings. In the later stages of a community as homes are delivered, cash inflows may significantly exceed earnings reported for financial statement purposes, as the cash outflows associated with the land and home construction were previously incurred.
Though our revenues in 2020 were tempered primarily due to the negative impacts from the COVID-19 pandemic, our net cash provided by operating activities increased to $310.7 million in 2020, compared to $251.0 million in the previous year. In addition, our total liquidity improved to $1.47 billion at November 30, 2020 from $1.23 billion at November 30, 2019. Based on our positive 2021 business forecast as discussed below under “Outlook,” we have no material concerns related to our liquidity. While the ongoing COVID-19 pandemic creates potential liquidity risks, as discussed further below, we believe that our existing cash and cash equivalents, our anticipated cash flows from operations and amounts available under our Credit Facility will be sufficient to fund our anticipated operating and land-related investment needs for at least the next twelve months. We have no significant notes payable maturities until December 2021.
We limited our investments in land and land development in the second and most of the third quarter in prioritizing cash preservation and liquidity in light of lingering uncertainty surrounding the COVID-19 pandemic. With the sustained strong housing demand over the 2020 second half, we intensified our investments in the fourth quarter, resulting in a 63% year-over-year increase. As a result, our investments in land and land development increased to $1.69 billion in 2020, compared to $1.62 billion in 2019. Approximately 50% of our total investments in 2020 related to land acquisitions, compared to approximately 39% in 2019. While we made strategic investments in land and land development in each of our homebuilding reporting segments during 2020 and 2019, approximately 55% and 53%, respectively, of these investments for each year were made in our West Coast homebuilding reporting segment. Our investments in land and land development in the future will depend significantly on market conditions and available opportunities that meet our investment return standards to support home delivery and revenue growth in 2021 and beyond.
The following table presents the number of lots we owned or controlled under land option contracts and other similar contracts and the carrying value of inventory by homebuilding reporting segment (dollars in thousands):
November 30, 2020November 30, 2019Variance
SegmentLots$Lots