KB HOME Our discussion and analysis below is focused on our 2021 and 2020 financial results, including comparisons of our year-over-year performance between these years. Discussion and analysis of our 2019 fiscal year specifically, as well as the year-over-year comparison of our 2020 financial performance to 2019, 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 endedNovember 30, 2020 , filed with theSEC onJanuary 22, 2021 , which is available on our investor relations website at investor.kbhome.com and theSEC'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 EndedNovember 30 ,
Variance
2021 2020 2019 2021 vs 2020 2020 vs 2019
Revenues:
Homebuilding $ 5,705,029 $ 4,167,702 $ 4,537,658 37 % (8) %
Financial services 19,901 15,472 15,089 29 3
Total $ 5,724,930 $ 4,183,174 $ 4,552,747 37 % (8) %
Pretax income:
Homebuilding $ 656,911 $ 331,500 $ 325,189 98 % 2 %
Financial services 38,435 32,543 22,986 18 42
Total 695,346 364,043 348,175 91 5
Income tax expense (130,600) (67,800) (79,400) (93) 15
Net income $ 564,746 $ 296,243 $ 268,775 91 % 10 %
Earnings per share:
Basic $ 6.22 $ 3.26 $ 3.04 91 % 7 %
Diluted $ 6.01 $ 3.13 $ 2.85 92 % 10 %
In 2021, housing market conditions were positive, with healthy demand,
particularly from millennial and Generation Z demographic groups, a limited
supply of new and resale inventory and relatively low mortgage loan interest
rates driving strong results for our business. Considerable demand for our homes
enabled us to lift selling prices in the vast majority of our communities and,
in combination with our focus on balancing pace, price and construction starts
at each community, helped us to enhance the performance of our inventory assets
and improve returns, despite supply chain challenges and rising construction
services and building materials costs. Reflecting these actions, the value of
our net orders for 2021 grew 45% year over year to $7.68 billion due to a 21%
increase in net orders and a 20% rise in their overall average selling price.
The year-over-year increase in our net order volume was due to higher net orders
per community, partly offset by a lower average community count for the year.
Our lower average community count reflected the accelerated sell-out of
communities that resulted from our exceptionally strong monthly net order pace,
which rose 37% to 6.3 in 2021 from 4.6 in 2020, even as we paced lot releases to
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align with our production capacity, as well as delays in new community openings
during 2021, as further described below. Compared to 2020, our average community
count for 2021 decreased 12%, and our ending community count declined 8%.
Since 2020, we have experienced intensifying building material cost pressures,
particularly for lumber, and production capacity issues with some of our main
product suppliers, reflecting sustained high levels of homebuilding and
renovation activity combined with supply chain disruptions stemming from
international and domestic COVID-19 control responses and economy-wide labor
shortages in the U.S. Our housing gross profit margin on homes delivered in the
latter part of 2021 were especially impacted by high lumber costs during the
period in which these homes were started. In 2021, the continuing supply chain
disruptions, combined with construction services availability constraints and
delays with respect to state and municipal construction permitting, inspections
and utilities, extended our construction cycle times by several weeks and
delayed many expected deliveries and new community openings during our fiscal
year. We believe these challenging conditions will generally persist into 2022
and potentially throughout the year. We have incorporated these trends into our
performance expectations, as presented below under "Outlook."
Homebuilding revenues for 2021 grew 37% from the previous year due to an
increase in housing revenues that reflected 26% growth in the number of homes
delivered to 13,472 and a 9% increase in the overall average selling price of
those homes to $422,700 . In 2021, homebuilding operating income rose 109% year
over year to $661.3 million and, as a percentage of homebuilding revenues,
improved 400 basis points to 11.6%. The increase in our homebuilding operating
income margin was driven by significant improvements in both housing gross
profit margin and selling, general and administrative expenses as a percentage
of housing revenues. Our pretax income margin improved 340 basis points to
12.1%, and net income and diluted earnings per share increased 91% and 92%,
respectively, each as compared to 2020. Our 2021 results included a $5.1 million
loss on early extinguishment of debt associated with our purchase, pursuant to a
tender offer that expired on June 8, 2021 , of $269.8 million in aggregate
principal amount of our 7.00% senior notes due 2021 ("7.00% Senior Notes due
2021") prior to their maturity date. . Our 2020 results included severance
charges of $6.7 million , as described below under "COVID-19 Pandemic Impact."
Our return on equity ("ROE") for 2021 improved 810 basis points to 19.9%,
compared to 11.8% for 2020. ROE is calculated as net income for the year divided
by average stockholders' equity, where average stockholders' equity is based on
the ending stockholders' equity balances of the trailing five quarters.
COVID-19 Pandemic Impact. The COVID-19 pandemic and related COVID-19 control
responses considerably disrupted global and national economies, the U.S. housing
market, and our business in the 2020 second quarter. During that period, we
experienced a sizable reduction in net orders and backlog as well as supply
chain disruptions and construction cycle time extensions in most of our served
markets that resulted in home delivery delays. With the uncertainty surrounding
the COVID-19 pandemic, and in prioritizing cash preservation and liquidity, we
limited our land investments and curtailed our overhead expenditures, partly
through workforce realignment and reductions. Due to these workforce-related
actions, our selling, general and administrative expenses for the 2020 second
quarter included severance charges of $6.7 million .
With the easing to varying degrees of restrictive public health orders in our
served markets beginning in May 2020 , our net orders began to rebound
significantly following a low point in April 2020 , as steadily increasing demand
drove our 2020 third- and fourth-quarter net orders to then-15-year highs. The
sharp rise in net orders over these periods substantially expanded the number of
homes in our backlog as well as our backlog value. In 2021, demand for our homes
remained strong, with the value of our net orders for the year up 45% year over
year to $7.68 billion . Our ending backlog value at November 30, 2021 increased
67% to approximately $4.95 billion , our highest fourth-quarter level since 2005,
supporting our expectation for significant year-over-year growth in our scale,
profitability and returns in 2022, as described below under "Outlook." With the
ongoing strong demand, we continued to increase our land acquisition and
development investments in 2021, as we did in the latter part of 2020, to
measurably expand our lot pipeline and support future community count growth.
While we continue to experience construction services availability constraints,
supply chain disruptions and rising and volatile raw material prices and
availability, particularly with respect to lumber, other building materials and
appliances, as well as delays related to state and municipal construction
permitting, inspections and utilities, that could negatively impact our growth,
margins and financial results in future periods, and there remains a risk that
significant COVID-19 pandemic-related disruptions could emerge or re-emerge, we
believe we are well-positioned to operate effectively through the present
environment.
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HOMEBUILDING
Financial Results. 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,
2021 2020 2019
Revenues:
Housing $ 5,694,668 $ 4,150,793 $ 4,510,814
Land 10,361 16,909 26,844
Total 5,705,029 4,167,702 4,537,658
Costs and expenses:
Construction and land costs
Housing (4,466,053) (3,365,509) (3,683,174)
Land (3,258) (14,942) (25,754)
Total (4,469,311) (3,380,451) (3,708,928)
Selling, general and administrative expenses (574,376) (470,779) (497,350)
Total (5,043,687) (3,851,230) (4,206,278)
Operating income 661,342 316,472 331,380
Interest income 1,049 2,554 2,158
Equity in income (loss) of unconsolidated joint ventures (405) 12,474 (1,549)
Loss on early extinguishment of debt (5,075) - (6,800)
Homebuilding pretax income $ 656,911 $ 331,500 $ 325,189
Homes delivered 13,472 10,672 11,871
Average selling price $ 422,700
21.6 % 18.9 % 18.3 %
Housing gross profit margin excluding inventory-related charges as a percentage of housing revenues
21.8 % 19.6 % 18.7 %
Adjusted housing gross profit margin as a percentage of housing revenues
24.4 % 22.7 % 22.2 %
Selling, general and administrative expense as a percentage of housing revenues
10.1 % 11.3 % 11.0 %
Operating income as a percentage of homebuilding revenues 11.6 % 7.6 % 7.3 %
Revenues. Year-over-year growth in homebuilding revenues to $5.71 billion in
2021 reflected an increase in housing revenues, partly offset by a decrease in
land sale revenues. Housing revenues in 2020 were negatively impacted by the
COVID-19 pandemic and related COVID-19 control responses.
Housing revenues in 2021 advanced 37% from the previous year, due to a 26%
increase in the number of homes delivered and a 9% increase in the overall
average selling price of those homes. The higher volume of homes delivered was
largely due to our backlog of homes at the beginning of the year ("beginning
backlog") increasing 54% from 2020, as well as strong net order growth in 2021.
In addition, the number of homes delivered in 2020 was tempered primarily by the
negative impact of the COVID-19 pandemic and related COVID-19 control responses.
The year-over-year increase in the overall average selling price of our homes
delivered in 2021 reflected strong housing market conditions, which enabled us
to raise prices in the vast majority of our communities, as well as product and
geographic mix shifts of homes delivered.
Land sale revenues for 2021 decreased 39% from 2020. 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.
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Operating Income. Our homebuilding operating income grew 109% in 2021, as
compared to the previous year, due to an increase in housing gross profits,
partly offset by an increase in selling, general and administrative expenses. In
2021 and 2020, homebuilding operating income included total inventory-related
charges of $12.0 million and $28.7 million , respectively, as discussed in Note 7
- Inventory Impairments and Land Option Contract Abandonments in the Notes to
Consolidated Financial Statements in this report. In 2020, our homebuilding
operating income also included severance charges of $6.7 million associated with
workforce reductions made during the 2020 second quarter, as discussed above
under "COVID-19 Pandemic Impact." As a percentage of homebuilding revenues, our
homebuilding operating income for 2021 improved 400 basis points year over year
to 11.6%. Excluding inventory-related charges for both periods and the
above-mentioned severance charges in 2020, our homebuilding operating income
margin improved 340 basis points to 11.8% in 2021 from 8.4% in 2020.
•Housing Gross Profits - In 2021, housing gross profits increased by $443.3
million , or 56%, to $1.23 billion from $785.3 million in 2020. The
year-over-year increase in 2021 reflected the higher volume of homes delivered
and an increase in the housing gross profit margin. Housing gross profits for
2021 and 2020 included the respective inventory-related charges described above.
Our housing gross profit margin for 2021 increased 270 basis points from the
previous year, mainly as a result of a favorable pricing environment that more
than offset higher construction services and building materials costs
(approximately 110 basis points); lower amortization of previously capitalized
interest as a percentage of housing revenues (approximately 50 basis points); a
decrease in inventory-related charges (approximately 50 basis points); an
increase in operating leverage due to higher housing revenues (approximately 40
basis points); and other miscellaneous factors (approximately 20 basis points).
As a percentage of housing revenues, the amortization of previously capitalized
interest associated with housing operations was 2.6% for 2021 and 3.1% for 2020.
Excluding the amortization of previously capitalized interest associated with
housing operations and the above-mentioned inventory-related charges for the
applicable periods, our adjusted housing gross profit margin increased 170 basis
points to 24.4% in 2021 from 22.7% in 2020. 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 - The following table presents the
components of our selling, general and administrative expenses (dollars in
thousands):
Years Ended November 30,
% of Housing % of Housing % of Housing
2021 Revenues 2020 Revenues 2019 Revenues
Marketing expenses $ 117,481 2.1 % $ 116,590 2.8 % $ 129,733 2.9 %
Commission expenses (a) 217,608 3.8 164,507 3.9 174,338 3.8
General and administrative
expenses 239,287 4.2 189,682 4.6 193,279 4.3
Total $ 574,376 10.1 % $ 470,779 11.3 % $ 497,350 11.0 %
(a)Commission expenses include sales commissions on homes delivered paid to
internal sales counselors and/or external real estate brokers.
Selling, general and administrative expenses for 2021 increased 22% from the
prior year, mainly due to an increase in commission expenses associated with our
higher housing revenues, and an increase in general and administrative expenses.
The year-over-year increase in general and administrative expenses primarily
reflected higher costs associated with performance-based employee compensation
plans, as well as expenses incurred to support current operations and expected
growth, partly offset by a $4.3 million benefit from an Employee Retention
Credit ("ERC"), which is discussed in Note 14 - Income Taxes in the Notes to
Consolidated Financial Statements in this report, recognized in early 2021 and
the severance charges of $6.7 million recorded in 2020. As a percentage of
housing revenues, our selling, general and administrative expenses improved 120
basis points in 2021 as compared to 2020, largely reflecting increased operating
leverage due to our higher housing revenues, partly offset by the
above-mentioned higher expenses.
Interest Income/Expense. Interest income, which is generated from short-term
investments, totaled $1.0 million in 2021 and $2.6 million in 2020. 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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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 2021,
interest incurred totaled $120.5 million , down 3% from $124.1 million in 2020,
mainly due to both our lower average interest rate and lower average debt level.
All interest incurred during 2021 and 2020 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
2021 or 2020. Further information regarding our interest incurred and
capitalized is provided in Note 6 - Inventories in the Notes to Consolidated
Financial Statements in this report.
Equity in Income (Loss) of Unconsolidated Joint Ventures . Our equity in loss of
unconsolidated joint ventures totaled $.4 million in 2021, compared to equity in
income of unconsolidated joint ventures of $12.5 million in 2020. This
year-over-year change mainly resulted from a decrease in the number of homes
delivered from an unconsolidated joint venture in California . This
unconsolidated joint venture, which delivered its last home in the 2021 second
quarter, delivered 10 homes in 2021, compared to 99 homes delivered in 2020.
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 $5.1 million loss on early
extinguishment of debt in 2021 was associated with our purchase, pursuant to a
tender offer that expired on June 8, 2021 , of $269.8 million in aggregate
principal amount of our 7.00% Senior Notes due 2021 prior to their maturity
date. Further information regarding this transaction is provided in Note 15 -
Notes Payable in the Notes to Consolidated Financial Statements in this report.
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, 2021 and 2020 (dollars in
thousands):
Years Ended November 30,
2021 2020
Net orders 16,206 13,404
Net order value (a) $ 7,683,990 $ 5,299,489
Cancellation rate (b) 10 % 20 %
Ending backlog - homes 10,544 7,810
Ending backlog - value $ 4,951,725 $ 2,962,403
Ending community count 217 236
Average community count 214 243
(a)Net order value represents potential future housing revenues associated with
net orders generated during the period, as well as homebuyer selections of lot
and product premiums and design studio options and upgrades for homes in backlog
during the same period.
(b)Cancellation 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 2021, net orders from our homebuilding operations grew 21% from
2020, reflecting a 37% increase in monthly net orders per community to 6.3,
partly offset by a 12% decrease in our overall average community count, which is
discussed below under "Community Count." This higher monthly net order pace
occurred even as we raised our home selling prices and paced lot releases, as
described above under "Overview." We believe our Built-to-Order homebuying
process, which, as described above under Item 1 - Business in this report,
provides personalization and choice, was a key contributor to our strong 2021
net order pace.
The value of our 2021 net orders rose 45% from 2020 as a result of the growth in
net orders and a 20% increase in the overall average selling price of those
orders. These factors drove net order value expansion in all four of our
homebuilding reporting segments, ranging from 37% in our West Coast segment to
93% in our Southeast segment. The higher overall average selling price of net
orders in 2021 largely reflected strong demand in most of our served markets as
well as product and geographic mix shifts of net orders.
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Backlog. The number of homes in our backlog at November 30, 2021 increased 35%
from the previous year, mainly due to our substantially higher backlog at the
beginning of the fiscal year as well as year-over-year growth in our 2021 net
orders. The potential future housing revenues in our backlog at November 30,
2021 grew 67% year over year as a result of both the higher number of homes in
our backlog and a 24% increase in the average selling price of those homes. The
increases in the number of homes in backlog and backlog value reflected strong
growth in each of our four homebuilding reporting segments, with increases in
backlog value ranging from 53% in our West Coast segment to 106% in our
Southeast segment. Substantially all of the homes in our backlog at November 30,
2021 are expected to be delivered during the year ending November 30, 2022 .
Community Count. Our average community count for 2021 decreased 12% from the
previous year, and our ending community count declined 8%. The year-over-year
decreases in our average and ending community counts primarily reflected
communities that sold out earlier than planned due to an increase in our
demand-driven net order pace and delays in new community openings. We
substantially increased our investments in land acquisition and land development
in 2021 to support future community count growth.
HOMEBUILDING REPORTING SEGMENTS
Operational Data. 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 Delivered Net Orders Cancellation Rates
Segment 2021 2020 2021 2020 2021 2020
West Coast 4,008 2,869 4,425 3,850 10 % 17 %
Southwest 2,574 2,385 3,247 2,668 7 19
Central 4,630 3,932 5,504 4,981 12 21
Southeast 2,260 1,486 3,030 1,905 11 25
Total 13,472 10,672 16,206 13,404 10 % 20 %
Net Order Value Average Community Count
Segment 2021 2020 Variance 2021 2020 Variance
West Coast $ 3,164,684 $ 2,302,785 37 % 60 74 (19) %
Southwest 1,342,562 914,770 47 36 36 -
Central 2,119,617 1,534,747 38 78 89 (12)
Southeast 1,057,127 547,187 93 40 44 (9)
Total $ 7,683,990 $ 5,299,489 45 % 214 243 (12) %
November 30,
Backlog - Homes Backlog - Value
Segment 2021 2020 Variance 2021 2020 Variance
West Coast 2,441 2,024 21 % $ 1,764,911 $ 1,152,609 53 %
Southwest 2,194 1,521 44 910,583 523,705 74
Central 3,911 3,037 29 1,548,574 932,814 66
Southeast 1,998 1,228 63 727,657 353,275 106
Total 10,544 7,810 35 % $ 4,951,725 $ 2,962,403 67 %
As discussed above under Item 1 - Business in this report, 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 sell 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
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variations in our business limit the 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.
Financial Results. 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.
In addition to the results of our homebuilding reporting segments presented
below, our consolidated homebuilding operating income includes the results of
Corporate and other, a non-operating segment described in Note 2 - Segment
Information in the Notes to Consolidated Financial Statements in this report.
Corporate and other had operating losses of $148.9 million in 2021, $107.2
million in 2020 and $104.1 million in 2019. The increase in 2021 as compared to
2020 reflected higher selling, general and administrative expenses, mainly due
to higher costs associated with performance-based employee compensation plans,
as well as expenses to support current operations and expected growth.
With strong housing market conditions from the 2020 third quarter through the
2021 fourth quarter in most of our served markets, we delivered more homes at a
higher overall average selling price and significantly expanded our homebuilding
operating income as a percentage of revenues in each of our homebuilding
segments for 2021, as compared to the previous year. 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 onset of the COVID-19 pandemic,
as discussed in Note 1 - Summary of Significant Accounting Policies in the Notes
to Consolidated Financial Statements in this report
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
2021 2020 2019 2021 vs 2020 2020 vs 2019
Revenues $ 2,552,382 $ 1,748,582 $ 1,912,146 46 % (9) %
Construction and land costs (2,044,274) (1,480,775) (1,591,896) (38) 7
Selling, general and administrative
expenses (162,461) (129,744) (141,324) (25) 8
Operating income $ 345,647 $ 138,063 $ 178,926 150 % (23) %
Homes delivered 4,008 2,869 3,214 40 % (11) %
Average selling price $ 636,800 $ 609,400 $ 592,300 4 % 3 %
Operating income as a percentage of
revenues 13.5 % 7.9 % 9.4 % 560 bps (150) bps
This segment's revenues in 2021 were generated solely from housing operations.
In 2020, revenues for this segment were generated from housing operations and
nominal land sales. Housing revenues for 2021 grew 46% from the previous year
due to increases in the number of homes delivered in California and Washington ,
and the higher average selling price of those homes. The higher average selling
price reflected strong housing market conditions and product and geographic mix
shifts of homes delivered.
Operating income grew significantly from 2020, reflecting higher housing gross
profits, partially offset by higher selling, general and administrative
expenses. As a percentage of revenues, this segment's 2021 operating income
increased from the previous year, reflecting a 460 basis-point expansion in the
housing gross profit margin to 19.9%, and a 100 basis-point improvement in
selling, general and administrative expenses as a percentage of housing revenues
to 6.4%. The housing gross profit margin expansion was primarily driven by a
favorable pricing environment that more than offset higher construction services
and building materials costs, lower relative amortization of previously
capitalized interest, a reduction in inventory-related charges and an increase
in operating leverage due to higher housing revenues. Inventory-related charges
impacting the housing gross profit margin totaled $11.0 million in 2021,
compared to $21.9 million in 2020. The improvement in selling, general and
administrative expenses as a percentage of housing revenues mainly reflected
increased operating leverage from higher housing revenues, partly offset by
higher expenses incurred to support current operations and expected growth.
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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
2021 2020 2019 2021 vs 2020 2020 vs 2019
Revenues $ 965,139 $ 796,810 $ 764,816 21 % 4 %
Construction and land costs (702,947) (596,512) (585,880) (18) (2)
Selling, general and administrative
expenses (75,375) (66,415) (67,223) (13) 1
Operating income $ 186,817 $ 133,883 $ 111,713 40 % 20 %
Homes delivered 2,574 2,385 2,346 8 % 2 %
Average selling price $ 371,300 $ 327,300 $ 322,000 13 % 2 %
Operating income as a percentage of
revenues 19.4 % 16.8 % 14.6 % 260 bps 220 bps
In 2021 and 2020, this segment's revenues were generated from both housing
operations and land sales. Housing revenues for 2021 grew 22% year over year to
$955.7 million , mainly due to an increase in the number of homes delivered from
our Nevada operations and a rise in the average selling price of homes delivered
in both our Arizona and Nevada operations. The higher average selling price
reflected strong housing market conditions and product and geographic mix shifts
of homes delivered. Land sale revenues totaled $9.4 million in 2021 and $16.1
million in 2020.
This segment's operating income for 2021 increased from the previous year,
mainly due to higher housing gross profits and increased land sale profits,
partially offset by higher selling, general and administrative expenses. As a
percentage of revenues, operating income improved from 2020 due to a 130
basis-point increase in the housing gross profit margin to 26.7%, a 60
basis-point improvement in selling, general and administrative expenses as a
percentage of housing revenues to 7.9% and higher profits from land sales. The
housing gross profit margin expansion was largely driven by a favorable pricing
environment that more than offset higher construction services and building
materials costs, and lower relative amortization of previously capitalized
interest. Land sales generated profits of $7.1 million in 2021 and $2.0 million
in 2020. The improvement in selling, general and administrative expenses as a
percentage of housing revenues was mainly due to increased operating leverage
from higher housing revenues.
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
2021 2020 2019 2021 vs 2020 2020 vs 2019
Revenues $ 1,503,857 $ 1,192,869 $ 1,267,892 26 % (6) %
Construction and land costs (1,172,926) (941,381) (1,015,415) (25) 7
Selling, general and administrative
expenses (130,773) (122,712) (126,176) (7) 3
Operating income $ 200,158 $ 128,776 $ 126,301 55 % 2 %
Homes delivered 4,630 3,932 4,291 18 % (8) %
Average selling price $ 324,800 $ 303,400 $ 293,500 7 % 3 %
Operating income as a percentage of
revenues 13.3 % 10.8 % 10.0 % 250 bps 80 bps
In 2021 and 2020, revenues for this segment were generated solely from housing
operations. Housing revenues for 2021 grew 26% from the prior year, reflecting
increases in the number of homes delivered in both states that comprise this
segment, and the higher average selling price of those homes. The increase in
the average selling price reflected strong housing market conditions and product
and geographic mix shifts of homes delivered.
Operating income for 2021 increased from 2020, reflecting growth in housing
gross profits, partially offset by higher selling, general and administrative
expenses. In 2021, the improvement in operating income as a percentage of
revenues
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reflected a 90 basis-point expansion in the housing gross profit margin to 22.0%
and a 160 basis-point improvement in selling, general and administrative
expenses as a percentage of housing revenues to 8.7%. The housing gross profit
margin rose from the previous year primarily due to lower inventory-related
charges, improved operating leverage due to higher housing revenues, and lower
relative amortization of previously capitalized interest. Inventory-related
charges for 2021 were nominal, compared to $5.5 million in 2020. The
year-over-year improvement in selling, general and administrative expenses as a
percentage of housing revenues mainly reflected increased operating leverage
from higher housing revenues, and the continued impact of targeted actions we
took in 2020 to reduce overhead costs in the early stages of the COVID-19
pandemic.
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
2021 2020 2019 2021 vs 2020 2020 vs 2019
Revenues $ 683,651 $ 429,441 $ 592,804 59 % (28) %
Construction and land costs (541,471) (355,242) (508,351) (52) 30
Selling, general and administrative
expenses (64,516) (51,248) (65,902) (26) 22
Operating income $ 77,664 $ 22,951 $ 18,551 238 % 24 %
Homes delivered 2,260 1,486 2,020 52 % (26) %
Average selling price $ 302,100 $ 288,600 $ 293,200 5 % (2) %
Operating income as a percentage of
revenues 11.4 % 5.3 % 3.1 % 610 bps 220 bps
In 2021 and 2020, this segment's revenues were generated from both housing
operations and nominal land sales. Housing revenues for 2021 rose 59% year over
year to $682.7 million due to increases in both the number of homes delivered
and the average selling price of those homes. The higher average selling price
in 2021 as compared to 2020 mainly reflected strong housing market conditions
and product and geographic mix shifts of homes delivered.
Operating income increased from 2020, reflecting higher housing gross profits,
partly offset by higher selling, general and administrative expenses. As a
percentage of revenues, operating income rose from 2020 due to a 350 basis-point
increase in the housing gross profit margin to 20.8% that mainly reflected a
shift in geographic mix, improved operating leverage due to higher housing
revenues, and lower relative amortization of previously capitalized interest. In
addition, selling, general and administrative expenses as a percentage of
housing revenues improved 260 basis points from 2020 to 9.4%, primarily due to
increased operating leverage as a result of higher housing revenues, and the
continued impact of targeted actions we took in 2020 to reduce overhead costs in
the early stages of the COVID-19 pandemic.
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,
2021 2020 2019
Revenues $ 19,901 $ 15,472 $ 15,089
Expenses (5,055) (4,083) (4,333)Equity in income of unconsolidated joint ventures 23,589 21,154
12,230
Pretax income $ 38,435 $ 32,543 $ 22,986
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Years Ended November 30,
2021 2020 2019
Total originations (a):
Loans 9,225 7,580 7,436
Principal $ 3,252,054 $ 2,457,522 $ 2,190,823
Percentage of homebuyers using KBHS 76 % 77 % 70 %
Average FICO score 729 723 719
Loans sold (a):
Loans sold to Stearns/GR Alliance 7,706 7,900 6,224
Principal$ 2,744,685 $ 2,536,689 $
1,827,917
Loans sold to other third parties 1,293 310 772 Principal$ 420,119 $ 102,363 $ 202,349 Mortgage loan origination mix (a): Conventional/non-conventional loans 61 % 56 % 58 % FHA loans 26 % 28 % 26 % Other government loans 13 % 16 % 16 % Loan type (a): Fixed 99 % 99 % 98 % ARM 1 % 1 % 2 % (a)Loan originations and sales occurred within KBHS. Revenues. Our financial services reporting segment, which includes the operations ofKB HOME Mortgage Company , generates revenues primarily from insurance commissions and title services. The year-over-year growth in our financial services revenues for 2021 reflected increases in both title services revenues and insurance commissions. Pretax income. Our financial services pretax income for 2021 grew 18% from the previous year due to improved results from our insurance and title services businesses, and an increase in the equity in income of unconsolidated joint ventures. In 2021, our equity in income of our unconsolidated joint venture, KBHS, increased 12% 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 2021 was primarily due to a 26% increase in the number of homes we delivered and a 9% increase in the average selling price of those homes. OnMarch 1, 2021 , Guaranteed Rate acquired the parent company of Stearns, our KBHS partner prior to that date. InOctober 2021 , Stearns was renamed asGR Alliance . As of the date of this report, we are not aware of any significant changes with respect toGR Alliance or its operations as a result of the transaction being completed. INCOME TAXES Income Tax Expense. Our income tax expense and effective income tax rate were as follows (dollars in thousands): Years Ended November 30, 2021 2020 2019
Income tax expense
Our effective tax rate for 2021 increased slightly from the previous year, as the impacts of higher taxable income, a$5.6 million increase in non-deductible compensation expense and a$4.9 million decrease in excess tax benefits related to stock-based compensation were mostly offset by the favorable effect of a$30.8 million increase in federal tax credits we earned primarily from building energy-efficient homes. The federal energy tax credits for the year endedNovember 30, 2021 resulted from legislation enacted inDecember 2020 and earlier periods. The legislation enacted inDecember 2020 , among other things, extended the availability of a business tax 34 -------------------------------------------------------------------------------- credit for building new energy-efficient homes throughDecember 31, 2021 . Prior to this legislation, the tax credit was set to expire onDecember 31, 2020 . InJune 2020 ,California enacted tax legislation that approved the suspension ofCalifornia net operating loss ("NOL") deductions for tax years 2020, 2021 and 2022. Although the suspension of California NOL deductions did not have an impact on our income tax expense for the years endedNovember 30, 2021 and 2020, it contributed to the year-over-year increase in the amount of income taxes we paid in 2021. 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 endedNovember 30, 2021 and 2020, 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 at least the next year. Further information regarding our income taxes is provided in Note 14 - Income Taxes in the Notes to Consolidated Financial Statements in this report. NON-GAAP FINANCIAL MEASURES This report contains information about our adjusted housing gross profit margin, which is not calculated in accordance with generally accepted accounting principles ("GAAP"). We believe this non-GAAP financial measure is relevant and useful to investors in understanding 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 it is not calculated in accordance with GAAP, this non-GAAP financial measure 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, this non-GAAP financial measure should be used to supplement the most directly comparable GAAP financial measure 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, 2021 2020 2019 Housing revenues$ 5,694,668 $ 4,150,793 $ 4,510,814 Housing construction and land costs (4,466,053) (3,365,509) (3,683,174) Housing gross profits 1,228,615 785,284 827,640 Add: Inventory-related charges (a) 11,953 28,669 17,291
Housing gross profits excluding inventory-related charges 1,240,568
813,953 844,931
Add: Amortization of previously capitalized interest (b) 149,354 129,330 156,114
Adjusted housing gross profits $ 1,389,922
21.6 % 18.9 % 18.3 %
Housing gross profit margin excluding inventory-related charges as a percentage of housing revenues
21.8 % 19.6 % 18.7 %
Adjusted housing gross profit margin as a percentage of housing revenues
24.4 % 22.7 % 22.2 %
(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
35
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housing operations, by housing revenues. The most directly comparable GAAP
financial measure is housing gross profit margin. We believe adjusted housing
gross profit margin is a relevant and useful financial measure to investors in
evaluating our performance as it measures the gross profits we generated
specifically on the homes delivered during a given period. This non-GAAP
financial measure isolates the impact that the housing inventory impairment and
land option contract abandonment charges, and the amortization of previously
capitalized interest associated with housing operations, have on housing gross
profit margins, and allows investors to make comparisons with our competitors
that adjust housing gross profit margins in a similar manner. We also believe
investors will find adjusted housing gross profit margin relevant and useful
because it represents a profitability measure that may be compared to a prior
period without regard to variability of housing inventory impairment and land
option contract abandonment charges, and amortization of previously capitalized
interest associated with housing operations. This financial measure assists us
in making strategic decisions regarding community location and product mix,
product pricing and construction pace.
SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION
As of November 30, 2021 , we had $1.69 billion in aggregate principal amount of
outstanding senior notes and no borrowings outstanding under the Credit
Facility. Our obligations to pay principal, premium, if any, and interest on the
senior notes and borrowings, if any, under the Credit Facility are guaranteed on
a joint and several basis by certain of our subsidiaries ("Guarantor
Subsidiaries"), which are listed on Exhibit 22. Our other subsidiaries,
including all of our subsidiaries associated with our financial services
operations, do not guarantee any such indebtedness (collectively, "Non-Guarantor
Subsidiaries"), although we may cause a Non-Guarantor Subsidiary to become a
Guarantor Subsidiary if we believe it to be in our or the relevant subsidiary's
best interest. See Note 15 - Notes Payable in the Notes to Consolidated
Financial Statements in this report for additional information regarding the
terms of our senior notes and the Credit Facility.
The guarantees are full and unconditional and the Guarantor Subsidiaries are
100% owned by us. The guarantees are senior unsecured obligations of each of the
Guarantor Subsidiaries and rank equally in right of payment with all unsecured
and unsubordinated indebtedness and guarantees of such Guarantor Subsidiaries.
The guarantees are effectively subordinated to any secured indebtedness of such
Guarantor Subsidiaries to the extent of the value of the assets securing such
indebtedness, and structurally subordinated to indebtedness and other
liabilities of Non-Guarantor Subsidiaries.
Pursuant to the terms of the indenture governing the senior notes and the terms
of the Credit Facility, if any of the Guarantor Subsidiaries ceases to be a
"significant subsidiary" as defined by Rule 1-02 of Regulation S-X using a 5%
rather than a 10% threshold (provided that the assets of our non-guarantor
subsidiaries do not in the aggregate exceed 10% of an adjusted measure of our
consolidated total assets), it will be automatically and unconditionally
released and discharged from its guaranty of the senior notes and the Credit
Facility so long as all guarantees by such Guarantor Subsidiary of any other of
our or our subsidiaries' indebtedness are terminated at or prior to the time of
such release.
The following tables present summarized financial information for KB Home and
the Guarantor Subsidiaries on a combined basis, excluding unconsolidated joint
ventures and after the elimination of (a) intercompany transactions and balances
between KB Home and the Guarantor Subsidiaries and (b) equity in earnings from
and investments in the Non-Guarantor Subsidiaries. See Note 9 - Investments in
Unconsolidated Joint Ventures in the Notes to Consolidated Financial Statements
in this report for additional information regarding our unconsolidated joint
ventures.
Summarized Balance Sheet Data (in thousands)
$ 250,118
Inventories 4,425,531
Amounts due from Non-Guarantor Subsidiaries 323,549
Total assets 5,581,883
Liabilities and Stockholders' Equity
Notes payable 1,682,517
Amounts due to Non-Guarantor Subsidiaries 254,717
Total liabilities 2,755,817
Stockholders' equity 2,826,066
36--------------------------------------------------------------------------------
Year Ended
November 30,
Summarized Statement of Operations Data (in thousands) 2021
Revenues $ 5,451,685
Construction and land costs (4,250,958)
Selling, general and administrative expenses (564,112)
Interest income from non-guarantor subsidiary 20,176
Pretax income 652,763
Net income 530,963
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 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.
We ended 2021 with total liquidity of $1.08 billion , including cash and cash
equivalents and $791.4 million of available capacity under the Credit Facility.
Based on our financial position as of November 30, 2021 , and our positive
business forecast for 2022 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 12 months.
Cash Requirements. Our material cash requirements include the following
contractual and other obligations:
Notes Payable. We have outstanding fixed-rate notes payable with varying
maturities. As of November 30, 2021 , our notes payable had an aggregate
principal amount of $1.70 billion , with $353.6 million payable within 12 months.
Future interest payments associated with our notes payable totaled $443.6
million as of November 30, 2021 , with $104.1 million payable within 12 months.
Further information regarding our notes payable is provided in Note 15 - Notes
Payable in the Notes to Consolidated Financial Statements in this report.
Leases. We have operating leases for certain property and equipment with an
expected term at the commencement date of more than 12 months. As of
November 30, 2021 , the future minimum payments required under these leases
totaled $32.6 million , with $10.6 million payable within 12 months. Further
information regarding our leases is provided in Note 13 - Leases in the Notes to
Consolidated Financial Statements in this report.
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Inventory-Related Obligations. As of November 30, 2021 , we had inventory-related
obligations totaling $36.1 million , comprised of liabilities for inventory not
owned associated with financing arrangements as discussed in Note 8 - Variable
Interest Entities in the Notes to Consolidated Financial Statements in this
report, as well as liabilities for fixed or determinable amounts associated with
tax increment financing entity ("TIFE") assessments. Approximately $27.0 million
of these inventory-related obligations are payable within 12 months. However,
TIFE assessment obligations are paid by us only to the extent we do not deliver
homes on applicable lots before the related TIFE obligations mature.
Investments in Land and Land Development . Our investments in land and land
development increased to $2.53 billion in 2021, compared to $1.69 billion in
2020. Approximately 50% of our total investments in both 2021 and 2020 related
to land acquisitions. While we made strategic investments in land and land
development in each of our homebuilding reporting segments during 2021 and 2020,
approximately 53% and 55%, 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 2022 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, 2021 November 30, 2020 Variance
Segment Lots $ Lots $ Lots $
West Coast 23,539 $ 2,300,096 16,990 $ 1,928,500 6,549 $ 371,596
Southwest 12,339 875,438 12,290 688,807 49 186,631
Central 28,961 995,811 23,699 867,170 5,262 128,641
Southeast 21,929 631,484 14,059 413,005 7,870 218,479
Total 86,768 $ 4,802,829 67,038 $ 3,897,482 19,730 $ 905,347
The number and carrying value of lots we owned or controlled under land option
contracts and other similar contracts at November 30, 2021 increased from
November 30, 2020 , primarily due to our investments in land and land development
in 2021 and an increase in the number of homes under construction. The number of
lots in inventory as of November 30, 2021 included 12,434 lots under contract
where the associated deposits were refundable at our discretion, compared to
10,254 of such lots at November 30, 2020 , reflecting ordinary course
fluctuations in the number of such contracts. Our lots controlled under land
option contracts and other similar contracts as a percentage of total lots was
44% at November 30, 2021 and 40% at November 30, 2020 . Generally, this
percentage fluctuates with our decisions to control (or abandon) lots under land
option contracts and other similar contracts or to purchase (or sell owned) lots
based on available opportunities and our investment return standards.
Land Option Contracts and Other Similar Contracts. As discussed in Note 8 -
Variable Interest Entities in the Notes to Consolidated Financial Statements in
this report, our land option contracts and other similar contracts generally do
not contain provisions requiring our specific performance. Our decision to
exercise a particular land option contract or other similar contract depends on
the results of our due diligence reviews and ongoing market and project
feasibility analysis that we conduct after entering into such a contract. In
some cases, our decision to exercise a land option contract or other similar
contract may be conditioned on the land seller obtaining necessary entitlements,
such as zoning rights and environmental and development approvals, and/or
physically developing the underlying land by a pre-determined date. We typically
have the ability not to exercise our rights to the underlying land for any
reason and forfeit our deposits without further penalty or obligation to the
sellers. If we were to acquire all of the land we had under land option
contracts and other similar contracts at November 30, 2021 , we estimate the
remaining purchase price to be paid would be as follows: 2022 - $1.34 billion ;
2023 - $318.7 million ; 2024 - $51.6 million ; 2025 - $78.2 million ; 2026 - $1.7
million ; and thereafter - $0 .
38--------------------------------------------------------------------------------
Liquidity. The table below summarizes our total cash and cash equivalents, and total liquidity (in thousands):
2021 2020
Total cash and cash equivalents$ 290,764 $ 681,190 Credit Facility commitment 800,000
800,000
Borrowings outstanding under the Credit Facility - - Letters of credit outstanding under the Credit Facility (8,618)
(12,429)
Credit Facility availability 791,382 787,571 Total liquidity$ 1,082,146 $ 1,468,761 The majority of our cash equivalents atNovember 30, 2021 and 2020 were invested in interest-bearing bank deposit accounts. Capital Resources. Our notes payable consisted of the following (in thousands): November 30, 2021 2020 Variance Mortgages and land contracts due to land sellers and other loans$ 5,327 $ 4,667 $ 660 Senior notes 1,679,700 1,742,508 (62,808) Total$ 1,685,027 $ 1,747,175 $ (62,148) Our financial leverage, as measured by the ratio of debt to capital, was 35.8% atNovember 30, 2021 , compared to 39.6% atNovember 30, 2020 . The ratio of debt to capital is calculated by dividing notes payable by capital (notes payable plus stockholders' equity). OnJune 9, 2021 , we completed the underwritten public offering of$390.0 million in aggregate principal amount of 4.00% senior notes due 2031 ("4.00% Senior Notes due 2031") at 100% of their aggregate principal amount. Net proceeds from this offering totaled$385.2 million , after deducting the underwriting discount and our expenses relating to the offering. The 4.00% Senior Notes due 2031 will mature onJune 15, 2031 . OnJune 9, 2021 , we used a portion of the net proceeds to purchase, pursuant to a tender offer that expired the previous day,$269.8 million in aggregate principal amount of our outstanding$450.0 million of 7.00% Senior Notes due 2021. We paid$274.9 million to purchase the notes and recorded a charge of$5.1 million for the early extinguishment of debt in the 2021 third quarter due to a premium paid under the tender offer and the unamortized original issue discount associated with these senior notes. OnSeptember 15, 2021 , we redeemed the remaining$180.2 million in aggregate principal amount of 7.00% Senior Notes due 2021 at par value pursuant to the terms of the notes. Together, these 2021 transactions effectively extended the maturity of our senior notes by more than two years and reduced our weighted average borrowing rate by approximately 70 basis points. LOC Facility. OnAugust 12, 2021 , we entered into an amendment to our unsecured letter of credit agreement with a financial institution ("LOC Facility") that increased the limit of letters of credit we may issue from$50.0 million to$75.0 million and extended the expiration date fromFebruary 13, 2022 toFebruary 13, 2025 . We had$34.6 million and$29.7 million of letters of credit outstanding under the LOC Facility atNovember 30, 2021 and 2020, respectively. Performance Bonds. As discussed in Note 17 - Commitments and Contingencies in the Notes to Consolidated Financial Statements in this report, we had$1.11 billion and$897.6 million of performance bonds outstanding atNovember 30, 2021 and 2020, respectively. Unsecured Revolving Credit Facility. We have an$800.0 million Credit Facility that will mature onOctober 7, 2023 . The amount of the Credit Facility available for cash borrowings and the issuance of letters of credit depends on the total cash borrowings and letters of credit outstanding under the Credit Facility and the maximum available amount under the terms of the Credit Facility. As ofNovember 30, 2021 , we had no cash borrowings and$8.6 million of letters of credit outstanding under the Credit Facility. The Credit Facility is further described in Note 15 - Notes Payable in the Notes to Consolidated Financial Statements in this report. 39 -------------------------------------------------------------------------------- Under the terms of the Credit Facility, we are required, among other things, to maintain compliance with various covenants, including financial covenants regarding our consolidated tangible net worth, consolidated leverage ratio ("Leverage Ratio"), and either a consolidated interest coverage ratio ("Interest Coverage Ratio") or minimum liquidity level, each as defined therein. Our compliance with these financial covenants is measured by calculations and metrics that are specifically defined or described by the terms of the Credit Facility and can differ in certain respects from comparable GAAP or other commonly used terms. The financial covenant requirements under the Credit Facility are set forth below: •Consolidated TangibleNet Worth - We must maintain a consolidated tangible net worth at the end of any fiscal quarter greater than or equal to the sum of (a)$1.54 billion , plus (b) an amount equal to 50% of the aggregate of the cumulative consolidated net income for each fiscal quarter commencing afterMay 31, 2019 and ending as of the last day of such fiscal quarter (though there is no reduction if there is a consolidated net loss in any fiscal quarter), plus (c) an amount equal to 50% of the cumulative net proceeds we receive from the issuance of our capital stock afterMay 31, 2019 . •Leverage Ratio - We must also maintain a Leverage Ratio of less than or equal to .65 at the end of each fiscal quarter. The Leverage Ratio is calculated as the ratio of our consolidated total indebtedness to the sum of consolidated total indebtedness and consolidated tangible net worth, all as defined under the Credit Facility. •Interest Coverage Ratio or Liquidity - We are also required to maintain either (a) an Interest Coverage Ratio of greater than or equal to 1.50 at the end of each fiscal quarter; or (b) a minimum level of liquidity, but not both. The Interest Coverage Ratio is the ratio of our consolidated adjusted EBITDA to consolidated interest incurred, each as defined under the Credit Facility, in each case for the previous 12 months. Our minimum liquidity is required to be greater than or equal to consolidated interest incurred, as defined under the Credit Facility, for the four most recently ended fiscal quarters in the aggregate. In addition, under the Credit Facility, our investments in joint ventures and non-guarantor subsidiaries (which are shown, respectively, in Note 9 - Investments inUnconsolidated Joint Ventures in the Notes to Consolidated Financial Statements in this report and under "Supplemental Guarantor Financial Information" above) as of the end of each fiscal quarter cannot exceed the sum of (a)$104.8 million and (b) 20% of consolidated tangible net worth. Further, the Credit Facility does not permit our borrowing base indebtedness, which is the aggregate principal amount of our outstanding indebtedness for borrowed money and non-collateralized financial letters of credit, to be greater than our borrowing base (a measure relating to our inventory and unrestricted cash assets). The covenants and other requirements under the Credit Facility represent the most restrictive provisions that we are subject to with respect to our notes payable. The following table summarizes the financial covenants and other requirements under the Credit Facility, and our actual levels or ratios (as applicable) with respect to those covenants and other requirements, in each case as ofNovember 30, 2021 : Financial Covenants and Other Requirements Covenant Requirement Actual Consolidated tangible net worth >$ 2.08 billion $ 2.98 billion Leverage Ratio < .650 .363 Interest Coverage Ratio (a) > 1.500 7.452 Minimum liquidity (a) >$ 119.5 million $ 290.8 million Investments in joint ventures and non-guarantor subsidiaries < $
701.7 million
n/a $ 2.12 billion
(a)Under the terms of the Credit Facility, we are required to maintain either a
minimum Interest Coverage Ratio or a minimum level of liquidity, but not both.
As of November 30, 2021 , we met both the Interest Coverage Ratio and the minimum
liquidity requirements.
The indenture governing our senior notes does not contain any financial
covenants. Subject to specified exceptions, the indenture contains certain
restrictive covenants that, among other things, limit our ability to incur
secured indebtedness, or engage in sale-leaseback transactions involving
property above a certain specified value. In addition, our senior notes contain
certain limitations related to mergers, consolidations, and sales of assets.
As of the date of this report, we were in compliance with the applicable terms
of all our covenants and other requirements under the Credit Facility, the
senior notes, the indenture, and the mortgages and land contracts due to land
sellers and other loans. Our ability to access the Credit Facility for cash
borrowings and letters of credit and our ability to secure future debt financing
depend, in part, on our ability to remain in such compliance. There are no
agreements that restrict our payment of
40
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dividends other than the Credit Facility, which would restrict our payment of
certain dividends, such as cash dividends on our common stock, if a default
under the Credit Facility exists at the time of any such payment, or if any such
payment would result in such a default (other than dividends paid within 60 days
after declaration, if there was no default at the time of declaration).
Depending on available terms, we finance certain land acquisitions with
purchase-money financing from land sellers or with other forms of financing from
third parties. At November 30, 2021 , we had outstanding mortgages and land
contracts due to land sellers and other loans payable in connection with such
financing of $5.3 million , secured primarily by the underlying property, which
had an aggregate carrying value of $20.8 million .
Unconsolidated Joint Ventures . As discussed in Note 9 - Investments in
Unconsolidated Joint Ventures in the Notes to Consolidated Financial Statements
in this report, we have investments in unconsolidated joint ventures in various
markets where our homebuilding operations are located. None of our
unconsolidated joint ventures had outstanding debt at November 30, 2021 .
Credit Ratings. Our credit ratings are periodically reviewed by rating agencies.
In February 2021 , Moody's Investors Service affirmed our corporate Ba3 credit
rating, and upgraded the rating outlook to positive from stable. In May 2021 ,
Moody's Investors Service upgraded our corporate rating to Ba2 from Ba3, and
changed the rating outlook to stable from positive.
Consolidated Cash Flows. The following table presents a summary of net cash
provided by (used in) our operating, investing and financing activities (in
thousands):
Years Ended November 30,
2021 2020 2019
Net cash provided by (used in):
Operating activities $ (37,296) $ 310,678 $ 251,042
Investing activities (38,084) (26,563) (40,944)
Financing activities (315,013) (56,444) (330,359)
Net increase (decrease) in cash and cash equivalents
Operating Activities. Operating activities used net cash of$37.3 million in 2021 and provided net cash of$310.7 million in 2020. Generally, our net operating cash flows fluctuate primarily based on changes in our inventories and our profitability. Net cash used in operating activities in 2021 mainly reflected a net increase in inventories of$897.8 million and a net increase in receivables of$32.0 million , partly offset by net income of$564.7 million and a net increase in accounts payable, accrued expenses and other liabilities of$181.6 million . Net cash provided by operating activities in 2020 primarily reflected net income of$296.2 million , a net decrease in receivables of$59.3 million , largely due to an income tax refund received, and a net increase in accounts payable, accrued expenses and other liabilities of$4.1 million , partly offset by a net increase in inventories of$183.2 million . Investing Activities. Investing activities used net cash of$38.1 million in 2021 and$26.6 million in 2020. Our uses of cash in 2021 included$39.4 million for net purchases of property and equipment and$11.5 million for contributions to unconsolidated joint ventures. These uses of cash were partially offset by a$12.8 million return of investments in unconsolidated joint ventures. In 2020, the net cash used in investing activities included$28.8 million for net purchases of property and equipment and$10.4 million for contributions to unconsolidated joint ventures. These uses of cash were partly offset by a$12.7 million return of investments in unconsolidated joint ventures. Financing Activities. In 2021, the year-over-year change in net cash used in financing activities was mainly due to financing transactions we completed during the year. In 2021, cash was used for the repayment of$450.0 million in aggregate principal amount of our 7.00% Senior Notes due 2021, stock repurchases totaling$188.2 million , dividend payments on our common stock of$54.1 million , tax payments associated with stock-based compensation awards of$12.3 million , payments of debt issuance costs of$4.8 million and payments on mortgages and land contracts due to land sellers and other loans of$2.3 million . The cash used was partially offset by cash provided from our public offering of$390.0 million in aggregate principal amount of 4.00% Senior Notes due 2031 and$11.7 million of issuances of common stock under employee stock plans. In 2020, net cash was used for dividend payments on our common stock of$38.1 million , payments on mortgages and land contracts due to land sellers and other loans of$24.9 million , and tax payments associated with stock-based compensation awards of$9.5 million . Partially offsetting these uses of cash was$16.1 million of cash provided by issuances of common stock under employee stock plans. 41 -------------------------------------------------------------------------------- Dividends. Our board of directors declared four quarterly cash dividends of$.15 per share of common stock in 2021. In 2020, our board of directors declared quarterly cash dividends of$.09 per share of common stock in the first, second and third quarters. In the 2020 fourth quarter, our board of directors approved an increase in the quarterly cash dividend on our common stock to$.15 per share and declared a quarterly cash dividend at the new higher rate. Cash dividends declared and paid during the years endedNovember 30, 2021 and 2020 totaled$.60 and$.42 per share of common stock, respectively. The declaration and payment of future cash dividends on our common stock, whether at current levels or at all, are at the discretion of our board of directors, and depend upon, among other things, our expected future earnings, cash flows, capital requirements, access to external financing, debt structure and any adjustments thereto, operational and financial investment strategy and general financial condition, as well as general business conditions. Shelf Registration Statement. OnJuly 9, 2020 , we filed an automatically effective universal shelf registration statement ("2020 Shelf Registration") with theSEC . The 2020 Shelf Registration registers the offering of securities that we may issue from time to time in amounts to be determined. Our ability to issue securities is subject to market conditions. The 2020 Shelf Registration replaced our previously effective universal shelf registration statement filed with theSEC onJuly 14, 2017 . Share Repurchase Program. OnJuly 8, 2021 , our board of directors authorized us to repurchase up to 5,000,000 shares of our outstanding common stock. This authorization reaffirmed and incorporated the then-current balance of 2,193,947 shares that remained under a prior board-approved share repurchase program. In 2021, we repurchased 4,668,600 shares of our common stock on the open market pursuant to this authorization at a total cost of$188.2 million . Repurchases under the remaining authorization of 331,400 shares may occur periodically through open market purchases, privately negotiated transactions or otherwise, with the timing and amount at management's discretion and dependent on market and business conditions and other factors. This share repurchase authorization will continue in effect until fully used or earlier terminated or suspended by our board of directors and does not obligate us to purchase any additional shares. Unrelated to the common stock repurchase program, our board of directors authorized in 2014 the repurchase of no more than 680,000 shares of our outstanding common stock solely as necessary for director compensation elections with respect to settling outstanding stock appreciation rights awards ("Director Plan SARs") granted under our Non-Employee Directors Compensation Plan ("Director Plan"). As ofNovember 30, 2021 , we have not repurchased any shares pursuant to the board of directors authorization. While the ongoing COVID-19 pandemic has created uncertainty as to general economic conditions for 2022 and beyond, as of the date of this report, we believe we have adequate capital resources and sufficient access to external financing sources to satisfy our current and reasonably anticipated requirements for funds to conduct our operations and meet other needs in the ordinary course of our business. In 2022, we expect to use or redeploy our cash resources or cash borrowings under the Credit Facility to support our business within the context of prevailing market conditions. During this time, we may also engage in capital markets, bank loan, project debt or other financial transactions, including the repurchase of debt or equity securities or potential new issuances of debt or equity securities to support our business needs. The amounts involved in these transactions, if any, may be material. In addition, as necessary or desirable, we may adjust or amend the terms of and/or expand the capacity of the Credit Facility or the LOC Facility, or enter into additional letter of credit facilities, or other similar facility arrangements, in each case with the same or other financial institutions, or allow any such facilities to mature or expire. However, with the uncertainty surrounding the COVID-19 pandemic, which could materially and negatively affect our business and the housing market, our ability to engage in such transactions may be constrained by volatile or tight economic, capital, credit and/or financial market conditions, as well as moderated investor and/or lender interest or capacity and/or our liquidity, leverage and net worth, and we can provide no assurance as to successfully completing, the costs of, or the operational limitations arising from any one or series of such transactions. Further discussion of the potential impacts from the COVID-19 pandemic on our capital resources and liquidity is provided above under Item 1A - Risk Factors in this report. CRITICAL ACCOUNTING POLICIES AND ESTIMATES The accompanying consolidated financial statements were prepared in conformity with GAAP. The preparation of these financial statements requires the use of estimates, judgments and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the periods presented. Actual results could differ from those estimates and assumptions. See Note 1 - Summary of Significant Accounting Policies in the Notes to Consolidated Financial Statements in this report for a discussion of our significant accounting policies. The following are accounting policies that we believe are critical because of the significance of the activity to which they relate or because they require the use of significant estimates, judgments and/or other assumptions in their application. Homebuilding Revenue Recognition. We recognize homebuilding revenue by applying the following steps in determining the timing and amount of revenue to recognize: (1) identify the contract(s) with a customer; (2) identify the performance 42 -------------------------------------------------------------------------------- obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations in the contract, if applicable; and (5) recognize revenue when (or as) we satisfy a performance obligation. Our home sale transactions are made pursuant to contracts under which we typically have a single performance obligation to deliver a completed home to the homebuyer when closing conditions are met. Revenues from home sales are recognized when we have satisfied the performance obligation within the sales contract, which is generally when title to and possession of the home and the risks and rewards of ownership are transferred to the homebuyer on the closing date. Little to no estimation is involved in recognizing such revenues. Land sale transactions are made pursuant to contracts under which we typically have a performance obligation(s) to deliver specified land parcels to the buyer when closing conditions are met. We evaluate each land sale contract to determine our performance obligation(s) under the contract, including whether we have a distinct promise to perform post-closing land development work that is material within the context of the contract, and use objective criteria to determine our completion of the applicable performance obligation(s), whether at a point in time or over time. Revenues from land sales are recognized when we have satisfied the performance obligation(s) within the sales contract, which is generally when title to and possession of the land and the risks and rewards of ownership are transferred to the land buyer on the closing date. In instances where we have a distinct and material performance obligation(s) within the context of a land sale contract to perform land development work after the closing date, a portion of the transaction price under the contract is allocated to such performance obligation(s) and is recognized as revenue over time based upon our estimated progress toward the satisfaction of the performance obligation(s). We generally measure our progress based on our costs incurred relative to the total costs expected to satisfy the performance obligation(s). Certain land sale contracts may require management judgment in determining the appropriate revenue recognition, but the impact of such transactions is generally immaterial. Inventories and Cost of Sales. Housing and land inventories are stated at cost, unless the carrying value is determined not to be recoverable, in which case the affected inventories are written down to fair value or fair value less associated costs to sell. Fair value is determined based on estimated future net cash flows discounted for inherent risks associated with the real estate assets, or other valuation techniques. Due to uncertainties in the estimation process and other factors beyond our control, it is possible that actual results could differ from those estimated. Other than model homes, our inventories typically do not consist of completed unsold homes. However, as discussed above under Item 1 - Business in this report, we may have unsold completed or partially completed homes in our inventory. We rely on certain estimates to determine our construction and land costs and resulting housing gross profit margins associated with revenues recognized. Construction and land costs are comprised of direct and allocated costs, including estimated future costs for the limited warranty we provide on our homes, and certain amenities within a community. Land acquisition, land development and other common costs are generally allocated on a relative fair value basis to the homes or lots within the applicable community or land parcel. Land acquisition and land development costs include related interest and real estate taxes. In determining a portion of the construction and land costs recognized for each period, we rely on project budgets that are based on a variety of assumptions, including future construction schedules and costs to be incurred. It is possible that actual results could differ from budgeted amounts for various reasons, including construction delays, construction resource shortages, increases in costs that have not yet been committed, changes in governmental requirements, unforeseen environmental hazards or other unanticipated issues encountered during construction and other factors beyond our control. While the actual results for a particular construction project are accurately reported over time, variances between the budgeted and actual costs of a project could result in the understatement or overstatement of construction and land costs and homebuilding gross profits in a particular reporting period. To reduce the potential for such distortion, we have set forth procedures that collectively comprise a critical accounting policy. These procedures, which we have applied on a consistent basis, include assessing, updating and revising project budgets on a monthly basis, obtaining commitments to the extent possible from independent contractors and vendors for future costs to be incurred, reviewing the adequacy of warranty accruals and historical warranty claims experience, and utilizing the most current information available to estimate construction and land costs to be charged to expense. Variances to the budgeted costs after an estimate has been charged to expense that are related to project costs are generally allocated on a relative fair value basis to the remaining homes to be delivered within the community or land parcel, while such variances related to direct construction costs are generally expensed as incurred. The variances between budgeted and actual costs have historically not been material to our consolidated financial statements. We believe that our policies provide for reasonably dependable estimates to be used in the calculation and reporting of construction and land costs. Inventory Impairments and Land Option Contract Abandonments. Each community or land parcel in our owned inventory is assessed to determine if indicators of potential impairment exist. Impairment indicators are assessed separately for each community or land parcel on a quarterly basis and include, but are not limited to, the following: significant decreases in net orders, average selling prices, volume of homes delivered, gross profit margins on homes delivered or projected gross profit 43 -------------------------------------------------------------------------------- margins on homes in backlog or future deliveries; significant increases in budgeted land development and home construction costs or cancellation rates; or projected losses on expected future land sales. If indicators of potential impairment exist for a community or land parcel, the identified asset is evaluated for recoverability. We evaluated one, 11 and 21 communities or land parcels for recoverability as ofNovember 30, 2021 , 2020 and 2019, respectively. The carrying values of those communities or land parcels evaluated as ofNovember 30, 2021 , 2020 and 2019 were$29.9 million ,$123.4 million and$207.7 million , respectively. The higher number and corresponding carrying value of communities or land parcels evaluated as ofNovember 30, 2020 and 2019 reflected the then-current conditions and trends in the markets where the communities are located, as well as certain communities or land parcels previously held for future development that were reactivated as part of our efforts to improve our asset efficiency. When an indicator of potential impairment is identified for a community or land parcel, we test the asset for recoverability by comparing the carrying value of the asset to the undiscounted future net cash flows expected to be generated by the asset. The undiscounted future net cash flows are impacted by then-current conditions and trends in the market in which the asset is located as well as factors known to us at the time the cash flows are calculated. These factors may include recent trends in our orders, backlog, cancellation rates and volume of homes delivered, as well as our expectations related to the following: product offerings; market supply and demand, including estimated average selling prices and related price appreciation; and land development, home construction and overhead costs to be incurred and related cost inflation. The following table presents information regarding inventory impairment and land option contract abandonment charges included in construction and land costs in our consolidated statements of operations (dollars in thousands): Years Ended November 30, 2021 2020 2019 Inventory impairments:
Number of communities or land parcels written down to fair value
2 10 8
Pre-impairment carrying value of communities or land parcels written down to fair value
$ 27,923 $ 69,211 $ 41,160 Inventory impairment charges (9,903) (22,723) (14,031) Post-impairment fair value$ 18,020 $ 46,488 $ 27,129 Land option contract abandonments charges$ 2,050
The inventory impairment charges in 2021, 2020 and 2019 reflected our decisions
to make changes in our operational strategies aimed at more quickly monetizing
our investment in certain communities by accelerating the overall pace for
selling, building and delivering homes therein, including communities on land
previously held for future development.
As further described in Note 7 - Inventory Impairments and Land Option Contract
Abandonments in the Notes to Consolidated Financial Statements in this report,
given the inherent challenges and uncertainties in forecasting future results,
our inventory assessments at the time they are made take into consideration
whether a community or land parcel is active, meaning whether it is open for
sales and/or undergoing development, or whether it is being held for future
development or held for sale.
We record an inventory impairment charge on a community or land parcel that is
active or held for future development when indicators of potential impairment
exist and the carrying value of the real estate asset is greater than the
undiscounted future net cash flows the asset is expected to generate. These real
estate assets are written down to fair value, which is primarily determined
based on the estimated future net cash flows discounted for inherent risk
associated with each such asset, or other valuation techniques. Inputs used in
our calculation of estimated discounted future net cash flows are specific to
each affected real estate asset and are based on our expectations for each such
asset as of the applicable measurement date, including, among others,
expectations related to average selling prices and volume of homes delivered.
The discount rates used in our estimated discounted cash flows ranged from 18% -
19% in 2021, 17% - 18% in 2020, and 17% during 2019. The discount rates we used
were impacted by one or more of the following at the time the calculation was
made: the risk-free rate of return; expected risk premium based on estimated
land development, home construction and delivery timelines; market risk from
potential future price erosion; cost uncertainty due to land development or home
construction cost increases; and other risks specific to the asset or conditions
in the market in which the asset is located.
We record an inventory impairment charge on land held for sale when the carrying
value of the real estate asset is greater than its fair value. These real estate
assets are written down to fair value, less associated costs to sell. The fair
value of such
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real estate assets is generally based on bona fide letters of intent from
outside parties, executed sales contracts, broker quotes or similar information.
As of November 30, 2021 , the aggregate carrying value of our inventory that had
been impacted by inventory impairment charges was $87.7 million , representing 11
communities and various other land parcels. As of November 30, 2020 , the
aggregate carrying value of our inventory that had been impacted by inventory
impairment charges was $113.1 million , representing 16 communities and various
other land parcels.
Our inventory controlled under land option contracts and other similar contracts
is assessed to determine whether it continues to meet our investment return
standards. Assessments are made separately for each optioned land parcel on a
quarterly basis and are affected by the following factors relative to the market
in which the asset is located, among others: current and/or anticipated net
orders, average selling prices and volume of homes delivered; estimated land
development and home construction costs; and projected profitability on expected
future housing or land sales. When a decision is made not to exercise certain
land option contracts and other similar contracts due to market conditions
and/or changes in our marketing strategy, we write off the related inventory
costs, including non-refundable deposits and unrecoverable pre-acquisition
costs.
The estimated remaining life of each community or land parcel in our inventory
depends on various factors, such as the total number of lots remaining; the
expected timeline to acquire and entitle land and develop lots to build homes;
the anticipated future net order and cancellation rates; and the expected
timeline to build and deliver homes sold. While it is difficult to determine a
precise timeframe for any particular inventory asset, based on current market
conditions and expected delivery timelines, we estimate our inventory assets'
remaining operating lives to range generally from one year to in excess of 10
years and expect to realize, on an overall basis, the majority of our inventory
balance as of November 30, 2021 within five years. The following table presents
as of November 30, 2021 and 2020, respectively, the estimated timeframe of
delivery for the last home in an applicable community or land parcel and the
corresponding percentage of total inventories such categories represent within
our inventory balance (dollars in millions):
Greater than
0-2 years 3-5 years 6-10 years 10 years
$ % $ % $ % $ % Total
2021 $ 2,646.3 55 % $ 1,961.3 41 % $ 176.5 4 % $ 18.7 - % $ 4,802.8
2020 1,893.9 49 1,843.8 47 140.7 4 19.1 - 3,897.5
The inventory balances in the 0-2 years and 3-5 years categories were located
throughout all of our homebuilding reporting segments, though mostly in our West
Coast , Southwest and Central segments. These categories collectively represented
96% of our total inventories as of November 30, 2021 and November 30, 2020 . The
inventory balances in the 6-10 years and greater than 10 years categories were
primarily located in our Central and Southeast segments, and together totaled
$195.2 million at November 30, 2021 , compared to $159.8 million at November 30,
2020 . The year-over-year increase mainly reflected larger land positions in the
Central and Southeast homebuilding reporting segments acquired during 2021,
partly offset by our decisions to accelerate the overall timing for selling,
building and delivering homes through community reactivations and generally
favorable market conditions. The inventories in the 6-10 years and greater than
10 years categories as of November 30, 2021 were mostly comprised of active,
multi-phase communities with large remaining land positions. As of November 30,
2020 , such inventories also included certain land held for future development.
Due to the judgment and assumptions applied in our inventory impairment and land
option contract abandonment assessment processes, and in our estimations of the
remaining operating lives of our inventory assets and the realization of our
inventory balances, particularly as to land held for future development, it is
possible that actual results could differ substantially from those estimated.
Deterioration in the supply and demand factors in the overall housing market or
in an individual market or submarket, or changes to our operational or selling
strategy at certain communities may lead to additional inventory impairment
charges, future charges associated with land sales or the abandonment of land
option contracts or other similar contracts related to certain assets. Due to
the nature or location of the projects, land held for future development that we
activate as part of our strategic growth initiatives or to accelerate sales
and/or our return on investment, or that we otherwise monetize to help improve
our asset efficiency, may have a somewhat greater likelihood of being impaired
than other of our active inventory.
We believe the carrying value of our inventory balance as of November 30, 2021
is recoverable. Our considerations in making this determination include the
factors and trends incorporated into our impairment analyses, and as applicable,
the prevailing regulatory environment, competition from other homebuilders,
inventory levels and sales activity of resale homes, and the local economic
conditions where an asset is located. In addition, we consider the financial and
operational status and
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expectations of our inventories as well as unique attributes of each community
or land parcel that could be viewed as indicators for potential future
impairments. However, if conditions in the overall housing market or in a
specific market or submarket worsen in the future beyond our current
expectations, including, among other things, from ongoing negative effects of
the COVID-19 pandemic and related COVID-19 control responses, if future changes
in our business strategy significantly affect any key assumptions used in our
projections of future cash flows, or if there are material changes in any of the
other items we consider in assessing recoverability, we may recognize charges in
future periods for inventory impairments or land option contract abandonments,
or both, related to our current inventory assets. Any such charges could be
material to our consolidated financial statements.
Warranty Costs. We provide a limited warranty on all of our homes. The specific
terms and conditions of our limited warranty program vary depending upon the
markets in which we do business. We estimate the costs that may be incurred
under each limited warranty and record a liability in the amount of such costs
at the time the revenue associated with the sale of each home is recognized. In
assessing our overall warranty liability at a reporting date, we evaluate the
costs for warranty-related items on a combined basis for all of our previously
delivered homes that are under our limited warranty program.
Our primary assumption in estimating the amounts we accrue for warranty costs is
that historical claims experience is a strong indicator of future claims
experience. Factors that affect our warranty liability include the number of
homes delivered, historical and anticipated rates of warranty claims, and cost
per claim. We periodically assess the adequacy of our accrued warranty
liability, which is included in accrued expenses and other liabilities in our
consolidated balance sheets, and adjust the amount as necessary based on our
assessment. Our assessment includes the review of our actual warranty costs
incurred to identify trends and changes in our warranty claims experience, and
considers our home construction quality and customer service initiatives and
outside events. Based on this assessment, we may from time to time adjust our
warranty accrual rates, which would be applied on a prospective basis to homes
delivered. Although adjustments to the accrual rates are generally infrequent,
they may be necessary when actual warranty expenditures have increased or
decreased on a sustained basis, as was the case in recent years when we reduced
our warranty accrual rates to reflect favorable trends in our warranty
expenditures. Based on our assessment, we may also make adjustments to our
previously recorded accrued warranty liability. Such adjustments are recorded in
the period in which the change in estimate occurs. During 2021, 2020 and 2019,
we made adjustments to reduce our accrued warranty liability by $4.0 million ,
$3.6 million and $5.6 million , respectively. While we believe we may face
increased future home warranty and construction defect claims associated with
replacing or servicing substitute products or materials used in some instances
to address supply shortages in certain served markets or communities, as
discussed above under Item 1A - Risk Factors in this report, as of the date of
this report, we have not made any adjustments to our accrued liabilities
associated with this potential risk. We have not made any material changes in
the methodology used to establish our accrued warranty liability during 2021,
2020 and 2019. Our accrued warranty liability is presented on a gross basis for
all years without consideration of recoveries and amounts we have paid on behalf
of and expect to recover from other parties, if any. Estimates of recoveries and
amounts we have paid on behalf of and expect to recover from other parties, if
any, are recorded as receivables when such recoveries are considered probable.
While we believe the warranty liability currently reflected in our consolidated
balance sheets to be adequate, unanticipated changes or developments in the
legal environment, local weather, land or environmental conditions, quality of
materials or methods used in the construction of homes or customer service
practices and/or our warranty claims experience could have a significant impact
on our actual warranty costs in future periods and such amounts could differ
significantly from our current estimates. A 10% change in the historical
warranty rates used to estimate our accrued warranty liability would not result
in a material change in our accrual.
Self-Insurance . We maintain, and require the majority of our independent
contractors to maintain, general liability insurance (including construction
defect and bodily injury coverage) and workers' compensation insurance. These
insurance policies protect us against a portion of our risk of loss from claims
related to our homebuilding activities, subject to certain self-insured
retentions, deductibles and other coverage limits. We self-insure a portion of
our overall risk through the use of a captive insurance subsidiary. In Arizona ,
California , Colorado and Nevada , our contractors' general liability insurance
primarily takes the form of a wrap-up policy under a program where eligible
independent contractors are enrolled as insureds on each community. Enrolled
contractors contribute toward the cost of the insurance and agree to pay a
contractual amount in the future if there is a claim related to their work.
We record liabilities based on the estimated costs required to cover reported
claims, claims incurred but not yet reported, and claim adjustment expenses.
These estimated costs are based on an actuarial analysis of our historical
claims and expense data, as well as industry data. Our self-insurance
liabilities are presented on a gross basis without consideration of
insurance recoveries and amounts we have paid on behalf of and expect to recover
from other parties, if any.
The amount of our self-insurance liability is based on an analysis performed by
a third-party actuary that uses our historical claim and expense data, as well
as industry data to estimate these overall costs. These estimates are subject to
uncertainty due
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to a variety of factors, the most significant being the long period of time
between the delivery of a home to a homebuyer and when a structural warranty or
construction defect claim may be made, and the ultimate resolution of any such
construction defect claim. Though state regulations vary, construction defect
claims are reported and resolved over a long period of time, which can extend
for 10 years or more. As a result, the majority of the estimated self-insurance
liability based on the actuarial analysis relates to claims incurred but not yet
reported. Therefore, adjustments related to individual existing claims generally
do not significantly impact the overall estimated liability. Adjustments to our
liabilities related to homes delivered in prior years are recorded in the period
in which a change in our estimate occurs. During 2021, we recorded adjustments
to increase our previously recorded liabilities by $6.8 million . In 2020 and
2019, we recorded adjustments to reduce our previously recorded liabilities by
$4.0 million and $2.5 million , respectively. The adjustments in 2021, 2020 and
2019 resulted from changes in estimates due to actual claims experience
differing from previous actuarial projections and, in turn, impacting actuarial
estimates for existing and potential future claims. We have not made any
material changes in our methodology used to establish our self-insurance
liabilities during 2021, 2020 or 2019.
The projection of losses related to these liabilities requires the use of
actuarial assumptions. Key assumptions used in developing these estimates
include claim frequencies, severities and resolution patterns, which can occur
over an extended period of time. These estimates are subject to variability due
to the length of time between the delivery of a home to a homebuyer and when a
construction defect claim is made, and the ultimate resolution of such claim;
uncertainties regarding such claims relative to our markets and the types of
product we build; and legal or regulatory actions and/or interpretations, among
other factors. Due to the degree of judgment involved and the potential for
variability in these underlying assumptions, our actual future costs could
differ from those estimated. In addition, changes in the frequency and severity
of reported claims and the estimates to resolve claims can impact the trends and
assumptions used in the actuarial analysis, which could be material to our
consolidated financial statements. A 10% increase in the claim frequency and the
average cost per claim used to estimate the self-insurance liability would
result in increases of approximately $26.7 million in our liability and
approximately $10.2 million in our receivable as of November 30, 2021 , and
additional expense of approximately $16.5 million for 2021. A 10% decrease in
the claim frequency and the average cost per claim used to estimate the
self-insurance liability would result in decreases of approximately $24.8
million in our liability and approximately $7.6 million in our receivable as of
November 30, 2021 , and a reduction to expense of approximately $17.2 million for
2021.
Estimates of insurance recoveries and amounts we have paid on behalf of other
parties, if any, are recorded as receivables when such recoveries are considered
probable. These estimated recoveries are principally based on actuarially
determined amounts and depend on various factors, including, among other things,
the above-described claim cost estimates, our insurance policy coverage limits
for the applicable policy year(s), historical third-party recovery rates,
insurance industry practices, the regulatory environment, and legal precedent,
and are subject to a high degree of variability from year to year. Because of
the inherent uncertainty and variability in these assumptions, our actual
insurance recoveries could differ significantly from amounts currently
estimated.
Legal Matters Accruals. We record contingent liabilities resulting from claims
against us when a loss is assessed to be probable and the amount of the loss is
reasonably estimable. Assessing the probability of losses and estimating
probable losses requires analysis of multiple factors, including in some cases
judgments about the potential actions of third-party claimants, regulatory
agencies, mediators, arbitrators, responsible third parties and/or courts, as
the case may be. Recorded contingent liabilities are based on the most recent
information available and actual losses in any future period are inherently
uncertain. If future adjustments to estimated probable future losses or actual
losses exceed our recorded liability for such claims, we would record additional
charges during the period in which the actual loss or change in estimate
occurred. In addition to contingent liabilities recorded for probable losses, we
disclose contingent liabilities when there is a reasonable possibility the
ultimate loss will materially exceed the recorded liability. While we cannot
predict the outcome of pending legal matters with certainty, we do not believe
any currently identified claim or proceeding, either individually or in
aggregate, will have a material impact on our results of operations, financial
position or cash flows.
Stock-Based Compensation. We measure and recognize compensation expense
associated with our grants of equity-based awards at an amount equal to the fair
value of such share-based payments over their applicable vesting period. We have
provided compensation benefits to certain of our employees in the form of stock
options, restricted stock and PSUs, and to our non-employee directors in the
form of unrestricted shares of common stock, deferred common stock awards and
Director Plan SARs. Determining the fair value of share-based awards requires
judgment to identify the appropriate valuation model and develop the assumptions
to be used in the calculation, including the expected term of the stock options
or Director Plan SARs, expected stock-price volatility and dividend yield. We
estimate the fair value of stock options and Director Plan SARs granted using
the Black-Scholes option-pricing model with assumptions based primarily on
historical data. The expected volatility factor is based on a combination of the
historical volatility of our common stock and the implied volatility of publicly
traded options on our common stock. We believe this blended approach balances
the forward-looking nature of implied volatility with the relative stability
over time of historical volatility to arrive at a reasonable estimate of
expected volatility. Additionally, judgment is required in estimating the
percentage of share-based awards that are expected to vest, and in the case of
PSUs, the
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level of performance that will be achieved and the number of shares that will be
earned. If actual results differ significantly from these estimates, stock-based
compensation expense could be higher and have a material impact on our
consolidated financial statements.
Income Taxes. As discussed in Note 14 - Income Taxes in the Notes to the
Consolidated Financial Statements in this report, we evaluate our deferred tax
assets quarterly to determine if adjustments to our valuation allowance are
required based on the consideration of all available positive and negative
evidence using a "more likely than not" standard with respect to whether
deferred tax assets will be realized. This evaluation considers, among other
factors, our historical operating results, our expectation of future
profitability, the duration of the applicable statutory carryforward periods,
and conditions in the housing market and the broader economy. The ultimate
realization of our deferred tax assets depends primarily on our ability to
generate future taxable income during the periods in which the related deferred
tax assets become deductible. The value of our deferred tax assets in our
consolidated balance sheets depends on applicable income tax rates. We base our
estimate of deferred tax assets and liabilities on current tax laws and rates.
In certain cases, we also base this estimate on business plan forecasts and
other expectations about future outcomes. Changes in positive and negative
evidence, including differences between our future operating results and
estimates, could result in the establishment of an additional valuation
allowance against our deferred tax assets. Accounting for deferred taxes is
based upon estimates of future results. Judgment is required in determining the
future tax consequences of events that have been recognized in our consolidated
financial statements and/or tax returns. Differences between the anticipated and
actual outcomes of these future results could have a material impact on our
consolidated financial statements. Also, changes in existing federal and state
tax laws and corporate income tax rates could affect future tax results and the
realization of deferred tax assets over time.
We recognize accrued interest and penalties related to unrecognized tax benefits
in our consolidated financial statements as a component of the provision for
income taxes. Our liability for unrecognized tax benefits, combined with accrued
interest and penalties, is reflected as a component of accrued expenses and
other liabilities in our consolidated balance sheets. Judgment is required in
evaluating uncertain tax positions. We evaluate our uncertain tax positions
quarterly based on various factors, including changes in facts or circumstances,
tax laws or the status of audits by tax authorities. Changes in the recognition
or measurement of uncertain tax positions could have a material impact on our
consolidated financial statements in the period in which we make the change.
INFLATION
The impact of inflation on us is reflected in increased costs for land, land
development, construction, and overhead. Inflation may also raise our financing
costs. We generally enter into contracts to acquire land a significant period of
time before development and sales efforts commence. Accordingly, to the extent
land acquisition costs are fixed, subsequent increases or decreases in our home
selling prices will affect our profits. As the selling price of each of our
homes is fixed at the time a buyer enters into a home purchase contract, and
because we generally commence construction of a home only after we have a signed
purchase contract with a homebuyer, any construction-related cost inflation can
result in lower housing gross profit margins. In order to help moderate that
effect, we typically enter into fixed-price contracts with our larger trade
partners and building material suppliers for specified periods of time.
RECENT ACCOUNTING PRONOUNCEMENTS
Recent accounting pronouncements are discussed in Note 1 - Summary of
Significant Accounting Policies in the Notes to Consolidated Financial
Statements in this report.
OUTLOOK
We believe several long-term housing market fundamental factors will remain
positive in 2022, including favorable demographics, a housing supply-demand
imbalance resulting from a decade-plus underproduction of new homes in relation
to population growth, a limited supply of resale homes available for sale and
relatively low mortgage loan interest rates. We believe our highly
customer-centric, personalized approach to homebuilding and operational
capabilities will enable us to effectively adapt to evolving buyer preferences
and needs and, together with an expected year-over-year increase in our
community count, drive further growth in our results in 2022, subject to
business conditions and other factors described in this report.
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Our present 2022 outlook is as follows:
2022 First Quarter -
•We expect to generate housing revenues in the range of $1.43 billion to $1.53
billion , an increase from $1.14 billion in the corresponding period of 2021, and
anticipate our average selling price to be approximately $472,000 , compared to
$397,100 in the year-earlier period.
•We expect our homebuilding operating income margin will be approximately 12.0%,
assuming no inventory-related charges, up from 10.4% for the year-earlier
quarter.
•We expect our housing gross profit margin to be in the range of 22.0% to 22.6%,
assuming no inventory-related charges, compared to 21.1% for the corresponding
2021 quarter.
•We expect our selling, general and administrative expenses as a percentage of
housing revenues to be approximately 10.4%, an improvement of 30 basis points
from the 2021 first quarter.
•We expect the effective tax rate will be approximately 25%, excluding any
favorable impacts from federal tax credits for building energy-efficient homes.
The effective tax rate for the year-earlier quarter was approximately 21%.
•We expect our ending community count will be relatively flat sequentially and
represent the likely low point for 2022, and expect our average community count
to decline by a low single-digit percentage from the 2021 first quarter.
2022 Full Year -
•We expect our housing revenues to be in the range of $7.20 billion to $7.60
billion , an increase of 30% at the mid-point of the range, from $5.69 billion in
2021, and anticipate our average selling price to be in the range of $480,000 to
$490,000 , an increase of between 14% and 16% from 2021.
•We expect our homebuilding operating income margin to be in the range of 15.7%
to 16.5%, assuming no inventory-related charges, compared to 11.8% for 2021.
•We expect our housing gross profit margin to be in the range of 25.4% to 26.2%,
assuming no inventory-related charges, compared to 21.8% for 2021, reflecting
sequential expansion beginning in the second quarter.
•We expect our selling, general and administrative expenses as a percentage of
housing revenues to be in the range of 9.4% to 9.9%, compared to 10.1% in the
prior year.
•We expect the effective tax rate will be approximately 25%, assuming no federal
energy tax credit extension is enacted. The effective tax rate for 2021 was
approximately 19%, which reflected the favorable effect of federal tax credits
we earned primarily from building energy-efficient homes.
•We expect our ending community count will increase 20% to 25% from 2021.
•We expect our return on equity to be in excess of 26%, an improvement of more
than 600 basis points compared to 19.9% for 2021.
We believe we are well-positioned for 2022 due to, among other things, our
strong backlog, planned new community openings, investments in land and land
development and current positive economic and demographic trends, to varying
degrees, in many of our served markets.
However, our future performance and the strategies we implement (and adjust or
refine as necessary or appropriate) will depend significantly on prevailing
economic, homebuilding industry and capital, credit and financial market
conditions and on a fairly stable and constructive political and regulatory
environment (particularly in regards to housing and mortgage loan financing
policies). In particular, we and other residential construction firms continue
to experience services and supply constraints and rising and volatile raw
material prices, particularly for lumber. Although we continue to work with our
suppliers and trade partners to resolve these issues, we believe they will
generally persist into 2022 and potentially throughout the year. Continued
supply chain disruptions, construction services and building material shortages,
and delays with respect to state and municipal construction permitting,
inspections and utilities could further extend our construction cycle times,
delay our new community openings and intensify construction-related cost
pressures beyond our experience in 2021. In addition, consumer demand for our
homes and our ability to grow our scale, revenues, net orders, backlog and
returns in 2022 could be materially and negatively affected by persistent
inflation in the U.S. economy, the severity of the ongoing COVID-19 pandemic and
related COVID-19 control responses (including new or more restrictive
"stay-at-home" orders and other new or revised
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public health requirements recommended or imposed by federal, state and local
authorities), and/or other factors that cause mortgage loan interest rates to
increase or that temper mortgage loan availability, employment or income levels
or consumer confidence in the U.S. or in our served markets. The potential
effect of these factors on our business is highly uncertain, unpredictable and
outside our control, and our past performance should not be considered
indicative of our future results on any metric or set of metrics.
FORWARD-LOOKING STATEMENTS
Investors are cautioned that certain statements contained in this report, as
well as some statements by us in periodic press releases and other public
disclosures and some oral statements by us to securities analysts, stockholders
and others during presentations, are "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995 (the "Act").
Statements that are predictive in nature, that depend upon or refer to future
events or conditions, or that include words such as "expect," "anticipate,"
"intend," "plan," "believe," "estimate," "hope," and similar expressions
constitute forward-looking statements. In addition, any statements that we may
make or provide concerning future financial or operating performance (including
without limitation future revenues, community count, homes delivered, net
orders, selling prices, sales pace per new community, expenses, expense ratios,
housing gross profits, housing gross profit margins, earnings or earnings per
share, or growth or growth rates), future market conditions, future interest
rates, and other economic conditions, ongoing business strategies or prospects,
future dividends and changes in dividend levels, the value of our backlog
(including amounts that we expect to realize upon delivery of homes included in
our backlog and the timing of those deliveries), the value of our net orders,
potential future asset acquisitions and the impact of completed acquisitions,
future share issuances or repurchases, future debt issuances, repurchases or
redemptions and other possible future actions are also forward-looking
statements as defined by the Act. Forward-looking statements are based on our
current expectations and projections about future events and are subject to
risks, uncertainties, and assumptions about our operations, economic and market
factors, and the homebuilding industry, among other things. These statements are
not guarantees of future performance, and we have no specific policy or
intention to update these statements. In addition, forward-looking and other
statements in this report and in other public or oral disclosures that express
or contain opinions, views or assumptions about market or economic conditions;
the success, performance, effectiveness and/or relative positioning of our
strategies, initiatives or operational activities; and other matters, may be
based in whole or in part on general observations of our management, limited or
anecdotal evidence and/or business or industry experience without in-depth or
any particular empirical investigation, inquiry or analysis.
Actual events and results may differ materially from those expressed or
forecasted in forward-looking statements due to a number of factors. The most
important risk factors that could cause our actual performance and future events
and actions to differ materially from such forward-looking statements include,
but are not limited to, the following:
•general economic, employment and business conditions;
•population growth, household formations and demographic trends;
•conditions in the capital, credit and financial markets;
•our ability to access external financing sources and raise capital through the
issuance of common stock, debt or other securities, and/or project financing, on
favorable terms;
•the execution of any securities repurchases pursuant to our board of directors'
authorization;
•material and trade costs and availability, including building materials and
appliances;
•consumer and producer price inflation;
•changes in interest rates;
•our debt level, including our ratio of debt to capital, and our ability to
adjust our debt level and maturity schedule;
•our compliance with the terms of the Credit Facility;
•volatility in the market price of our common stock;
•home selling prices, including our homes' selling prices, increasing at a
faster rate than consumer incomes;
•weak or declining consumer confidence, either generally or specifically with
respect to purchasing homes;
•competition from other sellers of new and resale homes;
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•weather events, significant natural disasters and other climate and
environmental factors;
•any failure of lawmakers to agree on a budget or appropriation legislation to
fund the federal government's operations, and financial markets' and businesses'
reactions to any such failure;
•government actions, policies, programs and regulations directed at or affecting
the housing market (including the tax benefits associated with purchasing and
owning a home, and the standards, fees and size limits applicable to the
purchase or insuring of mortgage loans by government-sponsored enterprises and
government agencies), the homebuilding industry, or construction activities;
•changes in existing tax laws or enacted corporate income tax rates, including
those resulting from regulatory guidance and interpretations issued with respect
thereto;
•changes in U.S. trade policies, including the imposition of tariffs and duties
on homebuilding materials and products, and related trade disputes with and
retaliatory measures taken by other countries;
•the adoption of new or amended financial accounting standards and the guidance
and/or interpretations with respect thereto;
•the availability and cost of land in desirable areas and our ability to timely
develop acquired land parcels and open new communities;
•our warranty claims experience with respect to homes previously delivered and
actual warranty costs incurred;
•costs and/or charges arising from regulatory compliance requirements or from
legal, arbitral or regulatory proceedings, investigations, claims or
settlements, including unfavorable outcomes in any such matters resulting in
actual or potential monetary damage awards, penalties, fines or other direct or
indirect payments, or injunctions, consent decrees or other voluntary or
involuntary restrictions or adjustments to our business operations or practices
that are beyond our current expectations and/or accruals;
•our ability to use/realize the net deferred tax assets we have generated;
•our ability to successfully implement our current and planned strategies and
initiatives related to our product, geographic and market positioning, gaining
share and scale in our served markets and in entering into new markets;
•our operational and investment concentration in markets in California ;
•consumer interest in our new home communities and products, particularly from
first-time homebuyers and higher-income consumers;
•our ability to generate orders and convert our backlog of orders to home
deliveries and revenues, particularly in key markets in California ;
•our ability to successfully implement our business strategies and achieve any
associated financial and operational targets and objectives, including those
discussed in this report or in other public filings, presentations or
disclosures;
•income tax expense volatility associated with stock-based compensation;
•the ability of our homebuyers to obtain residential mortgage loans and mortgage
banking services;
•the performance of mortgage lenders to our homebuyers;
•the performance of KBHS;
•information technology failures and data security breaches;
•an epidemic or pandemic (such as the outbreak and worldwide spread of
COVID-19), and the control response measures that international, federal, state
and local governments, agencies, law enforcement and/or health authorities
implement to address it, which may (as with COVID-19) precipitate or exacerbate
one or more of the above-mentioned and/or other risks, and significantly disrupt
or prevent us from operating our business in the ordinary course for an extended
period;
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•widespread protests and civil unrest, whether due to political events, efforts to institute law enforcement and other social and political reforms, and the impacts of implementing or failing to implement any such reforms, or otherwise; and •other events outside of our control.
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