KB Home (KBH) 10-K2019 FY Annual report

KB Home is one of the largest and most recognized homebuilding companies in the U.S. We have been building homes for over 60 years, with more than 600,000 homes delivered since our founding in 1957. We build a variety of new homes designed primarily for first-time and first move-up, as well as second move-up and active adult homebuyers, including attached and detached single-family residential homes, townhomes and condominiums. We offer homes in development communities, at urban in-fill locations and as part of mixed-use projects. Our homebuilding operations represent the majority of our business, accounting for 99.7% of our total revenues in 2019. Our financial services operations, which accounted for the remaining .3% of our total revenues in 2019, offer various insurance products to our homebuyers in the markets where we build homes and provide title services in certain of those markets. Our financial services operations also provide mortgage banking services, including residential consumer mortgage loan (“mortgage loan”) originations, to our homebuyers indirectly through KBHS Home Loans, LLC (“KBHS”), an unconsolidated joint venture we formed with Stearns Ventures, LLC (“Stearns”).

Unless the context indicates otherwise, the terms “we,” “our” and “us” used in this report refer to KB Home, a Delaware corporation, and its predecessors and subsidiaries. We also use the following terms in our business with the corresponding meanings: “home” is a single-family residence, whether it is a single-family home or other type of residential property; “homes delivered” are homes for which the sale has closed and title has passed to a customer; “community” is a single development in which new homes are constructed as part of an integrated plan; and “community count” is the number of communities we have open for sales with at least five homes/lots left to sell.

The following charts present homes delivered, homebuilding revenues, homebuilding operating income and pretax income for the years ended November 30, 2017, 2018 and 2019:

Reflecting the geographic reach of our homebuilding business, we have ongoing operations in the eight states and 42 major markets presented below. We also operate in various submarkets within these major markets. We may refer to these markets and submarkets collectively as our “served markets.” For reporting purposes, we organize our homebuilding operations into four segments — West Coast, Southwest, Central and Southeast.

Additional financial and operational information related to our homebuilding reporting segments, including revenues, operating income (loss), pretax income (loss), inventories and assets, is provided below in Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations and in Note 2 – Segment Information in the Notes to Consolidated Financial Statements in this report.

Our core business strategy, which we have evolved from KB2020 to KB Edge™, is to expand our scale primarily within our current geographic footprint to achieve a top-five position in each of our served markets (based on homes delivered). KB Edge is a systematic, fact-based and process-driven approach to homebuilding that is grounded in gaining a detailed understanding of consumers’ location and product preferences and product price-to-value perceptions. In our business, we use the term “product” to mean and encompass a home’s floor plan design and interior/exterior style, amenities, functions and features.

KB Edge consists of the following key principles with respect to customers, land, products and operations:

The 2019 financial targets under our Returns-Focused Growth Plan were as follows:

As further discussed below under Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations in this report, we achieved most of our Returns-Focused Growth Plan objectives, and intend to continue to follow its primary tenets in 2020 and beyond. This includes working to improve our asset efficiency by, among other things, calibrating home sales rates and selling prices at each of our communities to enhance profitability; further controlling our direct construction costs within our communities; accelerating inventory turns; structuring land acquisitions to minimize upfront costs, as further discussed below under “Community Development and Land Inventory Management”; reactivating communities that have been held for future development; and deploying excess cash flow from operations to help fuel additional revenue growth and/or reduce debt. The anticipated associated revenue and pretax income growth from this strategic approach should help drive the utilization of our deferred tax assets, which totaled $364.5 million at November 30, 2019, and allow us to realize substantial tax cash savings through 2020 that can be productively deployed in our business and/or to enhance our capital structure.

Our intense customer focus drives, among other things, how and where we acquire land for our new home communities; the design and selection of our products; our investments in, and choice of suppliers of, advanced materials, systems, equipment and technologies intended to enhance the performance and resource efficiency of our homes; and our community development and home construction methods and processes, as described in this report. In addition, we aim to present our homebuyers with a simple path to owning their unique new home with the assistance of our community team members who partner closely with homebuyers through each major step in the design, construction and closing of their home. We believe our approach sets us apart from most other homebuilders and from resale homes, and is particularly well suited for the current as well as future generations of first-time buyers – historically our core customer demographic.

Our corporate management and support personnel develop and oversee the implementation of company-wide strategic initiatives, our overall operational policies and internal control standards, and perform various centralized functions, including architecture; purchasing and national contracts; treasury and cash management; land acquisition approval; risk and litigation management; accounting and financial reporting; internal audit and compliance activities; information technology systems; marketing; and investor and media relations.

Developable land for the production of homes is a core resource for our business. Based on our current strategic plans, we seek to own or control land sufficient to meet our forecasted production goals for the next three to five years. In 2020, we intend to continue to invest in and develop land positions within attractive submarkets and selectively acquire or control additional land that meets our investment return standards. However, we may periodically sell certain land interests or monetize land previously held for future development.

Our community development process generally consists of four phases: land acquisition, land development into finished lots for a community (if necessary), home construction and delivery of completed homes to homebuyers. Historically, our community development process has typically ranged from six to 18 months in our West Coast homebuilding reporting segment, with a somewhat shorter duration in our other homebuilding reporting segments. The development process in our West Coast homebuilding reporting segment is typically longer than in our other segments due to the municipal and regulatory requirements that are generally more stringent in California. Our community development process varies based on, among other things, the extent and speed of required government approvals and utility service activations, the overall size of a particular community, the scope of necessary site preparation activities, the type of product(s) that will be offered, weather conditions, time of year, promotional marketing results, the availability of construction resources, consumer demand, local and general economic and housing market conditions, and other factors.

Although they vary significantly in size and complexity, our single-family residential home communities typically consist of 50 to 200 lots per product line, with lots ranging in size from 2,000 to 9,000 square feet. In our communities, we typically offer three to 15 home design choices. We also generally build one to three model homes at each community so that prospective homebuyers can preview the various products available. Depending on the community, we may offer premium lots containing more square footage, better views and/or location benefits. Some of our communities consist of multiple-story structures that encompass several attached condominium-style units.

We generally structure our land acquisition and land development activities to minimize, or defer the timing of, expenditures in order to reduce both the market risks associated with holding land and our working capital and financial commitments, including interest and other carrying costs. We typically use contracts that, in exchange for a small initial option payment or earnest money deposit, give us an option or similar right to acquire land at a future date, usually at a pre-determined price and pending our satisfaction with the feasibility of developing and selling homes on the land and/or an underlying land seller’s completion of certain obligations, such as securing entitlements, developing infrastructure or finishing lots. We refer to land subject to such option or

The following table presents the number of inventory lots we owned, in various stages of development, or controlled under land option contracts or other similar contracts by homebuilding reporting segment as of November 30, 2019 and 2018:

The following charts present the percentage of inventory lots we owned or had under land option contracts or other similar contracts by homebuilding reporting segment and the percentage of total lots we owned and had under option, including 9,212 lots under contract where the associated deposits were refundable at our discretion, as of November 30, 2019:

We act as the general contractor for the majority of our communities, and engage outside general contractors in all other instances. We, or the outside general contractors we engage, contract with a variety of independent subcontractors, who are typically locally based, to perform all land development and home construction work through their own employees or subcontractors. We do not self-perform any land development or home construction work. These independent subcontractors also supply some of the building materials required for such production activities. Our contracts with these independent subcontractors require that they comply with all laws applicable to their work, including wage and safety laws, meet performance standards, and follow local building codes and permits.

Our “backlog” consists of homes that are under a purchase contract but have not yet been delivered to a homebuyer. Ending backlog represents the number of homes in backlog from the previous period plus the number of net orders (new orders for homes less cancellations) generated during the current period minus the number of homes delivered during the current period. Our backlog at any given time will be affected by cancellations, homes delivered and our community count. Backlog value represents potential future housing revenues from homes in backlog. Our cancellation rates and the factors affecting such rates are further discussed below in both Item 1A – Risk Factors and Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations in this report.

At December 31, 2019 and 2018, we had approximately 2,140 and 2,005 full-time employees, respectively. None of our employees are represented by a collective bargaining agreement.

In markets experiencing heavy construction activity, including areas recovering from earthquakes, wildfires, hurricanes or other natural disasters, there can be severe craft and skilled trade shortages that limit independent subcontractors’ ability to supply construction services to us, which in turn tends to drive up our costs and/or extend our production schedules. Elevated construction activity, and reallocations of staff for public safety priorities after natural disasters or otherwise, has also contributed to measurable increases in the amount of time needed to obtain governmental approvals or utility service activations and, combined with tariffs recently imposed or increased by the U.S. and other governments, the cost of certain raw building materials, such as steel, Canadian lumber, drywall and concrete, input commodities or finished products. Since 2013, we also have seen higher prices for desirable land amid heightened competition with homebuilders and other developers and investors (both domestic and international), particularly in the land-constrained areas where we operate. We expect these upward cost trends to continue in 2020, if and as housing market activity grows and there is greater competition for these resources.

Our operations have historically been funded by internally generated cash flows, public equity and debt issuances, land option contracts and other similar contracts, land seller financing, and performance bonds and letters of credit. We also have the ability to borrow funds under our unsecured revolving credit facility with various banks (“Credit Facility”). Depending on market conditions and available opportunities, we may obtain project financing, or secure external financing with community or other inventory assets that we own or control. By “project financing,” we mean loans that are specifically obtained for, or secured by, particular communities or other inventory assets. We may also arrange or engage in bank loan, project debt or other financial transactions and/or expand the capacity of the Credit Facility or our unsecured letter of credit facility with certain financial institutions (“LOC Facility”) or enter into additional such facilities.

As part of our due diligence process for land acquisitions, we often use third-party environmental consultants to investigate potential environmental risks, and we require disclosures, representations and warranties from land sellers regarding environmental risks. We may acquire property that requires us to incur environmental clean-up costs after conducting appropriate due diligence. In such instances, we take steps prior to our acquisition of the land to gain reasonable assurance as to the precise scope of work required and the costs associated with removal, site restoration and/or monitoring. To the extent contamination or other environmental issues have occurred in the past, we will attempt to recover restoration costs from third parties, such as the generators of hazardous waste, land sellers or others in the prior chain of title and/or their insurers. Based on these practices, we anticipate that it is unlikely that environmental clean-up costs will have a material effect on our consolidated financial statements. However, despite these efforts, there can be no assurance that we will avoid material liabilities relating to the existence or removal of toxic wastes, site restoration, monitoring or other environmental matters affecting properties currently or previously owned or controlled by us, and no estimate of any potential liabilities can be made. We have not been notified by any governmental agency of any claim that any of the properties owned or formerly owned by us are identified by the U.S. Environmental Protection Agency (or similar state or local agency) as being a “Superfund” (or similar state or local) clean-up site requiring remediation, which could have a material effect on our future consolidated financial statements. Costs associated with the use of environmental consultants are not material to our consolidated financial statements.

We have made a dedicated effort to further differentiate ourselves from other homebuilders and resale homes through our ongoing commitment to become a leading national company in environmental sustainability. We continually seek out and utilize innovative technologies and systems to further improve the energy and water efficiency of our homes, as well as engage in campaigns and other educational efforts, sometimes together with other companies, organizations and groups, to increase consumer awareness of the importance and impact of sustainability in selecting a home and the products within a home. Under our commitment to sustainability, we, among other things:

For several years, we have been recognized by the U.S. Environmental Protection Agency for our sustainability achievements, and have earned awards under all of the agency’s programs aimed at homebuilders: ENERGY STAR, which sets energy efficiency standards; WaterSense®, which establishes water efficiency standards; and Indoor airPLUS®, which focuses on indoor air quality. In 2019, we received the ENERGY STAR Partner of the Year — Sustained Excellence Award for the ninth consecutive year, and the WaterSense Sustained Excellence Award for water efficiency for the fifth consecutive year.

More information about our sustainability commitment can be found in our annual sustainability reports, which we have published on our website since 2008. We intend to continue to research, evaluate and utilize new or improved products and construction and business practices consistent with our commitment and believe our sustainability initiatives can help put us in a better position, compared to resale homes and homebuilders with less-developed programs, to comply with evolving local, state

Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, beneficial ownership reports on Forms 3, 4 and 5 and proxy statements, as well as all amendments to those reports are available free of charge through our investor relations website at investor.kbhome.com, as soon as reasonably practicable after such reports are electronically filed with, or furnished to, the Securities and Exchange Commission (“SEC”). They can also be found at the SEC’s website at www.sec.gov. We will also provide these reports in electronic or paper format free of charge upon request made to our investor relations department at investorrelations@kbhome.com or at our principal executive offices. We intend for our investor relations website to be the primary location where investors and the general public can obtain announcements regarding, and can learn more about, our financial and operational performance, business plans and prospects, our board of directors, our senior executive management team, and our corporate governance policies, including our articles of incorporation, by-laws, corporate governance principles, board committee charters, and ethics policy. We may from time to time choose to disclose or post important information about our business on or through our investor relations website, and/or through other electronic channels, including social media outlets, such as Facebook® (Facebook.com/KBHome) and Twitter® (Twitter.com/KBHome), and other evolving communication technologies. The content available on or through our primary website at www.kbhome.com, our investor relations website, including our sustainability reports, or social media outlets and other evolving communication technologies is not incorporated by reference in this report or in any other filing we make with the SEC, and our references to such content are intended to be inactive textual or oral references only.

None.

None.

Our legal proceedings are discussed in Note 17 – Legal Matters in the Notes to Consolidated Financial Statements in this report.

Our common stock is traded on the New York Stock Exchange under the ticker symbol “KBH.” As of December 31, 2019, there were 552 holders of record of our common stock.

Information regarding the shares of our common stock that may be issued under our equity compensation plans is provided below in Item 12 – Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters in this report.

The following table summarizes our purchases of our own equity securities during the three months ended November 30, 2019:

The shares purchased during the three months ended November 30, 2019 were previously issued shares delivered to us by employees to satisfy withholding taxes on the vesting of restricted stock awards. These transactions are not considered repurchases under the board of directors’ authorization.

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

The data in this table should be read in conjunction with Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations and Item 8 – Financial Statements and Supplementary Data in this report.

Housing market conditions were generally healthy in 2019, with strong employment levels, relatively high consumer confidence and a limited supply of homes available for sale. During the year, we continued to execute on our long-standing, customer-centric operating strategy and our Returns-Focused Growth Plan.

The increase in our housing gross profit margin for 2019 primarily reflected lower amortization of previously capitalized interest, accounting changes from our adoption of Accounting Standards Codification Topic 606, “Revenue from Contracts with Customers” (“ASC 606”), effective December 1, 2018, and a decrease in inventory-related charges. This was partly offset by higher construction and land costs, the impact of fewer homes delivered from certain communities in our West Coast homebuilding reporting segment with relatively high average selling prices and housing gross profit margins as compared to the previous year, and an increase in sales incentives as a result of pricing pressure on our net orders in the 2018 fourth quarter and 2019 first quarter due to weaker market conditions during those periods. Our selling, general and administrative expenses as a percentage of housing revenues increased 120 basis points from the prior year to 11.0%, primarily reflecting our adoption of ASC 606 and higher marketing expenses to support new community openings. Further information regarding the accounting impacts from our adoption of ASC

Our net income and diluted earnings per share for 2019 were up 58% and 67%, respectively, year over year, and included a $6.8 million loss on the early extinguishment of debt. In 2018, our net income and diluted earnings per share included a non-cash charge of $112.5 million for TCJA-related impacts.

We plan to continue to follow the primary tenets of our Returns-Focused Growth Plan in 2020 and believe we are well positioned to make further improvements as discussed below under “Outlook.”

We invested $1.62 billion in land and land development in 2019 to support home delivery and revenue growth in 2020 and beyond. In 2018, such investments totaled $1.89 billion. Approximately 39% of our total investment in 2019 related to land acquisitions, compared to approximately 50% in 2018.

The following table presents a summary of certain financial and operational data for our homebuilding operations (dollars in thousands, except average selling price):

The following tables present 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):

Housing revenues in 2019 were on par with the previous year, as a 5% increase in homes delivered was offset by a 5% decrease in the overall average selling price of those homes. The year-over-year increase in homes delivered in 2019 reflected a 17% rise in our net orders during the year as our beginning backlog was down 7%, reflecting lower net sales in the latter part of 2018 stemming from restrained buyer demand that primarily resulted from affordability concerns driven by price appreciation trends and rising mortgage interest rates preceding and during that period. The overall average selling price of our homes delivered decreased in 2019 as compared to 2018, mainly due to a 10% decline in our West Coast homebuilding reporting segment that resulted from fewer homes delivered from certain communities with relatively high average selling prices, and a community mix shift toward lower-priced inland California markets and coastal communities at more affordable price points.

Land sale revenues for 2019 increased 62% from 2018. 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.

In 2019, housing gross profits rose by $39.3 million, or 5%, to $827.6 million from $788.3 million in 2018. The year-over-year increase in 2019 reflected the higher volume of homes delivered and an increase in the housing gross profit margin. Housing gross profits for 2019 and 2018 included the respective inventory-related charges described above.

Our housing gross profit margin for 2019 increased 80 basis points from the previous year, primarily due to the favorable impacts of lower amortization of previously capitalized interest as a percentage of housing revenues (approximately 90 basis points), our adoption of ASC 606 (approximately 70 basis points), and a decrease in inventory-related charges (approximately 20 basis points). These items were partly offset by higher construction and land costs (approximately 70 basis points), an increase in sales incentives as a result of pricing pressure on our net orders in the 2018 fourth quarter and 2019 first quarter due to weaker market conditions during those periods (approximately 20 basis points), and higher fixed community-level expenses supporting community count growth (approximately 10 basis points). Our housing gross profit margin for 2019 was also negatively impacted in part by fewer homes delivered from certain West Coast homebuilding reporting segment communities with relatively high average selling prices and housing gross profit margins as compared to the previous year.

Excluding the amortization of previously capitalized interest associated with housing operations of $156.1 million and $197.9 million in 2019 and 2018, respectively, and the above-mentioned inventory-related charges in the applicable periods, our adjusted housing gross profit margin decreased 30 basis points to 22.2% in 2019 from 22.5% in 2018. 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 rose 12% in 2019 from the prior year, primarily due to our adoption of ASC 606 and increased marketing expenses to support new community openings. As a percentage of housing revenues, our selling, general and administrative expenses rose 120 basis points in 2019 as compared to 2018.

Interest incurred declined 4% to $143.4 million in 2019, from $149.7 million in 2018, due to our lower average debt level, partly offset by a higher average interest rate. The lower average debt level in 2019 primarily reflected the repayment of certain senior notes during the year. 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.

Interest amortized to construction and land costs associated with housing operations totaled $156.1 million in 2019 and $197.9 million in 2018. The year-over-year decrease in interest amortized in 2019 mainly reflected the reduction in our interest incurred and the growth in our active inventory, which enabled us to allocate the lower level of interest over a larger population of owned lots. As a percentage of housing revenues, the amortization of previously capitalized interest associated with housing operations was 3.5% for 2019 and 4.4% for 2018. Interest amortized to construction and land costs in 2019 and 2018 included $.7 million and $4.8 million, respectively, of amortization of previously capitalized interest related to land sales that occurred during those years.

This report contains information about our adjusted housing gross profit margin, adjusted income tax expense, adjusted net income, adjusted diluted earnings per share, adjusted effective tax rate, return on invested capital, and ratio of net debt to capital, none of which are calculated in accordance with generally accepted accounting principles (“GAAP”). We believe these non-GAAP financial measures are relevant and useful to investors in understanding our operations and the leverage employed in our operations, and may be helpful in comparing us with other companies in the homebuilding industry to the extent they provide similar information. However, because they are not calculated in accordance with GAAP, these non-GAAP financial measures may not be completely comparable to other companies in the homebuilding industry and, thus, should not be considered in isolation or as an alternative to operating performance and/or financial measures prescribed by GAAP. Rather, these non-GAAP financial measures should be used to supplement their respective most directly comparable GAAP financial measures in order to provide a greater understanding of the factors and trends affecting our operations.

Adjusted housing gross profit margin is a non-GAAP financial measure, which we calculate by dividing housing revenues less housing construction and land costs excluding (1) housing inventory impairment and land option contract abandonment charges (as applicable) recorded during a given period and (2) amortization of previously capitalized interest associated with housing operations, by housing revenues. The most directly comparable GAAP financial measure is housing gross profit margin. We believe adjusted housing gross profit margin is a relevant and useful financial measure to investors in evaluating our performance as it measures the gross profits we generated specifically on the homes delivered during a given period. This non-GAAP financial measure isolates the impact that the housing inventory impairment and land option contract abandonment charges, and the amortization of previously capitalized interest associated with housing operations, have on housing gross profit margins, and allows investors to make comparisons with our competitors that adjust housing gross profit margins in a similar 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.

Our adjusted income tax expense, adjusted net income, adjusted diluted earnings per share and adjusted effective tax rate are non-GAAP financial measures, which we calculate by excluding a non-cash charge of $112.5 million recorded in 2018 from our reported income tax expense, net income, diluted earnings per share and effective tax rate, respectively. This charge was primarily due to our accounting re-measurement of our deferred tax assets based on the above-noted reduction in the federal corporate income tax rate under the TCJA. The most directly comparable GAAP financial measures are our income tax expense, net income, diluted earnings per share and effective tax rate. We believe that these non-GAAP measures are meaningful to investors as they allow for an evaluation of our operating results without the impact of the TCJA-related charge.

We define return on invested capital as net operating profit after tax, a non-GAAP financial measure, for the most recent 12-month period divided by average invested capital (average notes payable and stockholders’ equity for the trailing five quarters). In addition to its use in measuring our performance under our Returns-Focused Growth Plan against the corresponding three-year objective, we believe return on invested capital is a relevant and useful financial measure to investors in understanding how effectively we deploy our capital.

The ratio of net debt to capital is a non-GAAP financial measure, which we calculate by dividing notes payable, net of homebuilding cash and cash equivalents, by capital (notes payable, net of homebuilding cash and cash equivalents, plus stockholders’ equity). The most directly comparable GAAP financial measure is the ratio of debt to capital. We believe the ratio of net debt to capital is a relevant and useful financial measure to investors in understanding the degree of leverage employed in our operations.

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.

This segment’s revenues in 2019 and 2018 were generated from both housing operations and land sales. Housing revenues of $1.90 billion in 2019 decreased 9% from $2.09 billion in 2018, reflecting a lower average selling price of homes delivered, partly offset by an increase in the number of homes delivered. The decrease in the average selling price of homes delivered in 2019 reflected a product and geographic mix shift, particularly the impact from fewer deliveries from certain communities with relatively high average selling prices, and a greater number of homes delivered from lower-priced inland California markets and coastal communities at more affordable price points. The growth in the number of homes delivered mainly reflected a 19% rise in net orders during the year as this segment’s beginning backlog was down 19% compared to the year-earlier period, which reflected an 11% year-over-year reduction in the average community count in 2018 and softer market conditions that impacted net orders in the 2018 latter half.

This segment’s operating income in 2019 declined from the previous year, mainly reflecting lower housing gross profits and higher selling, general and administrative expenses. The decrease in housing gross profits reflected declines in both housing revenues and the housing gross profit margin. The decrease in the housing gross profit margin was primarily due to an increase in construction and land costs as a percentage of housing revenues as a result of a mix shift, with a lower proportion of homes delivered from communities with relatively high average selling prices and housing gross profit margins; reduced operating leverage on fixed costs due to lower housing revenues; and an increase in sales incentives. These cost increases were partly offset by lower amortization of previously capitalized interest, accounting changes resulting from our adoption of ASC 606, and a decrease in inventory-related charges. Inventory-related charges impacting the housing gross profit margin totaled $15.6 million in 2019, compared to $20.4 million in 2018. Selling, general and administrative expenses as a percentage of housing revenues for 2019 rose from the previous year, primarily as a result of our adoption of ASC 606, higher marketing expenses to support new community openings and reduced operating leverage on fixed costs due to lower housing revenues.

In 2019, this segment’s revenues were generated from both housing operations and land sales, with housing revenues totaling $755.4 million. In 2018, this segment’s revenues were generated solely from housing operations. Housing revenues increased 7% in 2019 as compared to the corresponding previous year, reflecting growth in the number of homes delivered and a higher average selling price of those homes. In 2019, the year-over-year increase in the number of homes delivered was attributable to our Nevada operations. The higher average selling price was mainly due to a product and geographic mix shift of homes delivered and generally favorable market conditions.

This segment’s operating income increased $23.7 million from 2018 due to higher housing gross profits, partly offset by higher selling, general and administrative expenses. The year-over-year increase in housing gross profits reflected growth in housing revenues and an increase in the housing gross profit margin. The improvement in the housing gross profit margin was largely due to a greater proportion of homes delivered from newer, higher-margin communities, lower amortization of previously capitalized interest, and accounting changes resulting from our adoption of ASC 606. Selling, general and administrative expenses as a percentage of housing revenues for 2019 increased from 2018, mainly as a result of our adoption of ASC 606, as well as legal recoveries and a favorable legal settlement in 2018.

In 2019 and 2018, revenues for this segment were generated from both housing operations and land sales. Housing revenues in 2019 increased 3% to $1.26 billion from $1.22 billion in 2018 due to an increase in the number of homes delivered, which was partially offset by a slight decrease in the average selling price of those homes. In 2019, the growth in the number of homes delivered was attributable to our Texas operations. The decrease in the average selling price reflected a shift in product and geographic mix, with fewer homes delivered from our Colorado operations, which typically have higher-priced communities relative to our Texas operations. Land sale revenues were $8.3 million in 2019, compared to $16.1 million in 2018.

In 2019, this segment’s operating income increased $8.7 million from 2018, mainly due to an increase in housing gross profits that was partly offset by an increase in selling, general and administrative expenses. Housing gross profits increased mainly due to improvement in the housing gross profit margin. The housing gross profit margin rose from the previous year primarily due to lower amortization of previously capitalized interest, and accounting changes resulting from our adoption of ASC 606. Selling, general and administrative expenses as a percentage of housing revenues for 2019 increased from the prior year, primarily due to our adoption of ASC 606 and higher marketing expenses.

This segment’s revenues in 2019 and 2018 were generated from both housing operations and land sales. Housing revenues in 2019 increased 18% to $592.3 million from $501.9 million in 2018. The year-over-year growth in housing revenues in 2019 reflected increases in both the number of homes delivered and the average selling price of those homes. In 2019, the increase in the number of homes delivered mainly reflected a larger beginning backlog, which was up 14% compared to the year-earlier period, and an increase in homes delivered from newer communities. The year-over-year increase in the average selling price in 2019 was mainly due to a greater proportion of homes delivered from higher-priced communities.

This segment’s operating income in 2019 rose $10.9 million from 2018 due to an increase in housing gross profits, partly offset by an increase in selling, general and administrative expenses. The year-over-year growth in housing gross profits reflected

The following table presents a summary of selected financial and operational data for our financial services reporting segment (dollars in thousands):

On July 9, 2019, the parent company of Stearns, our partner in KBHS, filed a voluntary bankruptcy petition in the United States Bankruptcy Court, Southern District of New York, with Stearns included as a debtor in the case. KBHS was not included

Our income tax expense and effective tax rate for 2019 reflected the favorable impacts of $5.3 million of excess tax benefits related to stock-based compensation, a $4.4 million deferred tax asset valuation allowance reversal and $4.3 million of federal energy tax credits, partly offset by a $1.9 million non-cash charge due to the re-measurement of deferred tax assets based on a reduction in certain state income tax rates.

Our income tax expense and effective tax rate for 2018 included a non-cash charge of $112.5 million for TCJA-related impacts; the favorable effect of the reduction in the federal corporate income tax rate under the TCJA; the favorable net impact of federal energy tax credits of $10.7 million that we earned from building energy-efficient homes; a $2.1 million net tax benefit from a reduction in our state deferred tax asset valuation allowance; and excess tax benefits related to stock-based compensation of $1.0 million. The TCJA required us to use a blended federal tax rate for our 2018 fiscal year by applying a prorated percentage of days before and after the January 1, 2018 effective date. As a result, our 2018 federal statutory tax rate was approximately 22%.

The federal energy tax credits for the year ended November 30, 2018 resulted from legislation enacted on February 9, 2018, which, among other things, extended the availability of a business tax credit for building new energy-efficient homes through December 31, 2017. Prior to this legislation, the tax credit expired on December 31, 2016. In December 2019, federal legislation was enacted, which among other things, extended the availability of the credit through December 31, 2020. This extension is expected to benefit our income tax provision in future periods.

Excluding the above-mentioned charge of $112.5 million for TCJA-related impacts, our adjusted income tax expense and adjusted effective tax rate for 2018 were $85.1 million and 23.1%, respectively. The calculations of adjusted income tax expense and adjusted effective tax rate are described above under “Non-GAAP Financial Measures.”

Under current accounting standards, we expect volatility in our income tax expense in future periods, the magnitude of which will depend on, among other factors, the price of our common stock and the timing and volume of stock-based compensation award activity, such as employee exercises of stock options and the vesting of restricted stock awards and performance-based restricted stock units (each, a “PSU”).

For each of the years ended November 30, 2019 and 2018, 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 this will continue for the next several years due to the sizable deferred tax assets remaining as of November 30, 2019.

Further information regarding our income taxes is provided in Note 13 – Income Taxes in the Notes to Consolidated Financial Statements in this report.

We also have the ability to borrow funds under the Credit Facility. 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:

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):

The number and carrying value of lots we owned or controlled under land option contracts and other similar contracts at November 30, 2019 increased from November 30, 2018, primarily due to our investments in land and land development during 2019 and an increase in the number of homes completed or under construction. The number of lots in inventory as of November 30, 2019 and 2018 excludes 9,212 and 11,185 lots, respectively, under contract where the associated deposits were refundable at our discretion. Including these lots, our land under contract as a percentage of total lots was 41% at November 30, 2019 and 39% at November 30, 2018. 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.

Our cash and cash equivalents at November 30, 2019 and 2018 were invested in interest-bearing bank deposit accounts.

The change in our notes payable balance at November 30, 2019 compared to November 30, 2018 primarily reflected our financing activities in 2019 that are described in Note 14 – Notes Payable in the Notes to Consolidated Financial Statements in this report.

Our financial leverage, as measured by the ratio of debt to capital, was 42.3% at November 30, 2019, compared to 49.7% at November 30, 2018. Our ratio of net debt to capital (a calculation that is described above under “Non-GAAP Financial Measures”) at November 30, 2019 improved to 35.2%, compared to 41.6% at November 30, 2018.

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, as amended, are set forth below:

In addition, under the Credit Facility, our investments in joint ventures and non-guarantor subsidiaries (which are shown, respectively, in Note 9 – Investments in Unconsolidated Joint Ventures and in Note 23 – Supplemental Guarantor Information in the Notes to Consolidated Financial Statements in this report) 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

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 of November 30, 2019:

Our obligations to pay principal, premium, if any, and interest under our 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”). The guarantees are full and unconditional and the Guarantor Subsidiaries are 100% owned by us. We may also cause other subsidiaries of ours to become Guarantor Subsidiaries if we believe it to be in our or the relevant subsidiary’s best interests. Condensed consolidating financial information for our subsidiaries considered to be Guarantor Subsidiaries is provided in Note 23 – Supplemental Guarantor Information in the Notes to Consolidated Financial Statements in this report.

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. Unless there is a default under the Credit Facility, there are no agreements that restrict our payment of dividends.

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, 2019, we had outstanding mortgages and land contracts due to land sellers and other loans payable in connection with such financing of $7.9 million, secured primarily by the underlying property, which had an aggregate carrying value of $29.2 million.

Net cash provided by operating activities in 2019 mainly reflected net income of $268.8 million and a net decrease in receivables of $44.4 million, partly offset by a net increase in inventories of $165.3 million and a net decrease in accounts payable, accrued expenses and other liabilities of $40.6 million. Net cash provided by operating activities in 2018 primarily reflected net income of $170.4 million adjusted for various non-cash items, including a net decrease of $191.8 million in our deferred tax assets, and a net increase in accounts payable, accrued expenses and other liabilities of $126.7 million, partly offset by a net increase in inventories of $270.1 million and a net increase in receivables of $49.8 million.

In 2018, net cash was used for the repayment of $300.0 million in aggregate principal amount of our 7 1/4% senior notes due 2018 (“7 1/4% Senior Notes due 2018”), repurchases of shares of our common stock at a total cost of $35.0 million, payments on mortgages and land contracts due to land sellers and other loans of $14.8 million, dividend payments on our common stock of $8.9 million and tax payments associated with stock-based compensation awards of $8.5 million. The cash used was partly offset by $20.0 million of issuances of common stock under employee stock plans.

Our board of directors declared quarterly cash dividends of $.025 per share of common stock in both the 2019 first and second quarters. In the 2019 third quarter, our board of directors approved an increase in the quarterly cash dividend on our common stock to $.090 per share, and declared quarterly cash dividends at the new rate in the 2019 third and fourth quarters. Our board of directors declared four quarterly cash dividends of $.025 per share of common stock in 2018. Cash dividends declared and paid during the years ended November 30, 2019 and 2018 totaled $.23 and $.10 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.

Unrelated to the common stock repurchase program, as further discussed in Note 18 – Stockholders’ Equity in the Notes to Consolidated Financial Statements in this report, 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 of November 30, 2019, we have not repurchased any shares pursuant to the board of directors authorization.

We believe we have adequate capital resources and sufficient access to the credit and capital markets and external financing sources to satisfy our current and reasonably anticipated long-term requirements for funds to acquire assets and land, to use and/or develop acquired assets and land, to construct homes, to finance our financial services operations and to meet other needs in the ordinary course of our business. In addition to acquiring and/or developing land that meets our investment return standards, in 2020, we may use or redeploy our cash resources or cash borrowings under the Credit Facility to support other business purposes that are aligned with our primary strategic growth goals. We may also arrange or engage in capital markets, bank loan, project debt or other financial transactions. These transactions may include repurchases from time to time of our outstanding common stock. They may also include repurchases from time to time of our outstanding senior notes or other debt through redemptions, tender offers, exchange offers, private exchanges, open market or private purchases or other means, as well as potential new issuances of equity or senior or convertible senior notes or other debt through public offerings, private placements or other arrangements to raise or access additional capital to support our current land and land development investment targets, to complete strategic transactions and for other business purposes and/or to effect repurchases or redemptions of our outstanding senior notes or other debt. The amounts involved in these transactions, if any, may be material. 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. Our ability to engage in such transactions, however, may be constrained by economic, capital, credit and/or financial market conditions, investor interest and/or our current leverage ratios, and we can provide no assurance of the success or costs of any such transactions.

The following table presents our future cash requirements under contractual obligations as of November 30, 2019 (in millions):