What changed in this filing

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Item 5. Market for Registrant’s Common Equity

2022-01-21 compared with 2021-01-22 · 402 added, 456 removed, 487 unchanged (64% of the section changed)

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Total 85,050 $ 41.00 —

In May 2018, our board of directors authorized us to repurchase a total of up to 4,000,000 shares of our outstanding common stock.

This authorization reaffirmed and incorporated the then-current balance of 1,627,000 shares that remained under a prior board-approved share repurchase program.

In 2018, we repurchased 1,806,053 shares of our common stock pursuant to this authorization, at a total cost of $35.0 million.

As of November 30, 2020, we had 2,193,947 shares authorized for repurchase under a share repurchase program approved by our board of directors in 2018.

On July 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 the prior authorization.

In the 2021 third quarter, we purchased 4,668,600 shares of our common stock pursuant to this authorization at a total cost of $188.2 million.

As of November 30, 2021, we had 331,400 shares authorized for repurchase.

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Total return assumes $100 invested at market close on November 30, 2016 in KB Home common stock, the S&P 500 Index and the Dow Jones US Home Construction Index, including reinvestment of dividends.

SELECTED FINANCIAL DATA

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

SELECTED FINANCIAL DATA

(Dollars In Thousands, Except Per Share Amounts and Average Selling Price)

Years Ended November 30,

2020 2019 2018 2017 2016

Statement of Operations Data:

Homebuilding $ 4,167,702 $ 4,537,658 $ 4,533,795 $ 4,356,265 $ 3,582,943

Financial services 15,472 15,089 13,207 12,264 11,703

Total $ 4,183,174 $ 4,552,747 $ 4,547,002 $ 4,368,529 $ 3,594,646

Operating income:

Homebuilding $ 316,472 $ 331,380 $ 345,721 $ 283,403 $ 152,401

Financial services 11,389 10,756 9,363 8,834 7,886

Total $ 327,861 $ 342,136 $ 355,084 $ 292,237 $ 160,287

Pretax income $ 364,043 $ 348,175 $ 367,965 $ 289,995 $ 149,315

Net income (a) 296,243 268,775 170,365 180,595 105,615

Earnings per share:

Basic $ 3.26 $ 3.04 $ 1.93 $ 2.09 $ 1.23

Diluted 3.13 2.85 1.71 1.85 1.12

Cash dividends declared per share .42 .23 .10 .10 .10

Balance Sheet Data:

Homebuilding $ 5,320,240 $ 4,977,086 $ 5,061,191 $ 5,029,158 $ 5,121,125

Financial services 36,202 38,396 12,380 12,357 10,499

Total $ 5,356,442 $ 5,015,482 $ 5,073,571 $ 5,041,515 $ 5,131,624

Notes payable $ 1,747,175 $ 1,748,747 $ 2,060,263 $ 2,324,845 $ 2,640,149

Stockholders’ equity 2,665,769 2,383,122 2,087,500 1,926,311 1,723,145

Stockholders’ equity per share 29.09 26.60 24.01 22.13 20.25

Homebuilding Data:

Homes delivered 10,672 11,871 11,317 10,909 9,829

Average selling price $ 388,900 $ 380,000 $ 399,200 $ 397,400 $ 363,800

Net orders 13,404 12,841 11,014 10,900 10,283

Ending backlog — homes 7,810 5,078 4,108 4,411 4,420

Average community count 243 250 223 233 238

(a) Net income for the year ended November 30, 2018 included a non-cash charge of $112.5 million to income tax expense related to the 2019 Tax Cuts and Jobs Act (“TCJA”).

MANAGEMENT ’ S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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Diluted $ 6.01 $ 3.13 $ 2.85 92 % 10 %

During 2020, we, like many companies worldwide, experienced dramatic variability in market conditions that produced stark differences in our quarterly results over the course of the year.

In part, our results reflect several strategic adjustments we made in response to the extreme fluctuations we experienced in our 2020 operating environment, both quarter-to-quarter and within quarters.

These adjustments were precipitated by rapid changes in public health requirements and guidelines and reflected our efforts to address the significant challenges they presented while also striving to protect the safety of our employees, customers and business partners;

meeting a strong and sustained upswing in consumer demand for our homes;

managing our capital requirements;

and aligning our workforce for our short- and long-term business needs.

Although we continue to navigate an uncertain economic landscape, based on the substantial net orders we generated in the 2020 second half and our robust backlog at the end of the year, we are confident about our growth prospects in 2021 and beyond.

Following a particularly strong 2020 first quarter, in which we had the highest revenues, net orders, ending backlog and ending backlog value for any first quarter since 2007 and increased our net income by 99% year over year, the onset of the COVID-19 pandemic and the institution of COVID-19 control responses in our served markets, including quarantines, “stay-at-home” orders and similar mandates, during the second quarter severely impacted global and national economies (with the U.S.

entering a recession), the housing market and our business.

Amid extraordinary economic disruptions;

a sudden rise in unemployment;

significant stock market and secondary mortgage market volatility;

uncertainty about how to effectively contain COVID-19’s spread;

weakened consumer confidence;

and our swift closing of our sales centers, model homes and design studios to the public and shift to virtual sales tools and appointment-only personalized home sales processes, where permitted, we saw a drastic decrease in demand for new homes (including homes ordered in the first quarter) and our order pace slowed significantly.

Along with a considerable increase in home purchase cancellations, largely reflecting our proactive efforts to

assure a backlog of qualified homebuyers amid the pandemic-induced economic downturn, we experienced a sizable reduction in our 2020 second quarter net orders.

Due to this reduction in net orders, we entered the third quarter with 14% fewer homes in backlog as compared to the previous year.

Further, our construction activities were restricted in many jurisdictions, and completely shut down in some of them, and together with the reduced availability or capacity of some municipal and private services necessary to build and deliver homes, and supply chain disruptions, our cycle times became extended.

This caused home delivery delays during most of the second quarter, which tempered our revenues for the period.

With the easing of restrictive public health orders to varying degrees in our served markets beginning in May 2020 and the associated ability to open our communities to walk-in traffic, following appropriate safety protocols and applicable public health guidelines, complemented by our enhanced virtual selling capabilities, as discussed under Item 1 – Business, our net orders began to rebound significantly.

This positive momentum continued through the 2020 second half, largely fueled by the combination of historically low mortgage interest rates, a limited supply of resale inventory, an underproduction of new homes over the past decade, favorable demographic trends and consumers’ increasing desire to own a home.

Reflecting this strong demand, our 2020 third and fourth quarter net orders rose to their respective highest levels since 2005.

Though this sharp rise in net orders in the second half generated a substantial expansion in our backlog, as discussed below, our deliveries and revenues for our third and fourth quarters were moderated primarily by the negative effects of the COVID-19 pandemic in our 2020 second quarter.

During the 2020 second quarter and most of the third quarter, in prioritizing cash preservation and liquidity in light of lingering uncertainty surrounding the COVID-19 pandemic, we limited our investments in land and land development, resulting in a 24% decrease in those quarters combined as compared to the corresponding year-earlier periods.

With the sustained strong housing demand over the 2020 second half, we intensified our investments, resulting in a 63% year-over-year increase in the fourth quarter, to measurably expand our lot pipeline and support community growth in the future.

For 2020, we invested a total of $1.69 billion in land and land development, compared to $1.62 billion in 2019.

Although the trajectory and strength of the current housing recovery remains uncertain, and could be slowed or reversed by a number of factors, including a widespread resurgence in COVID-19 infections, whether due to the spread of any variants of the virus or otherwise, combined with the seasonal flu and others discussed above under Item 1A – Risk Factors, and our business, including our margins, could be negatively affected by labor and supply constraints and rising and volatile raw material prices, particularly for lumber, as was the case during 2020, we believe we are well-positioned to operate effectively and generate profitable growth in 2021.

Financial and Operational Highlights.

Reflecting the above-described impact from the COVID-19 pandemic and related COVID-19 control responses, within our homebuilding operations, housing revenues of $4.15 billion for 2020 were down 8% from the prior year due to a 10% decrease in homes delivered, partly offset by a 2% increase in the overall average selling price of those homes.

In 2020, homebuilding operating income decreased 4% year over year to $316.5 million, which included total inventory-related charges of $28.7 million and severance charges of $6.7 million.

The severance charges were associated with workforce reductions made during the second quarter in light of the sharp reduction in business activity and highly uncertain outlook at the time, as discussed above.

In 2019, homebuilding operating income included $17.3 million of inventory-related charges.

As a percentage of homebuilding revenues, our homebuilding operating income for 2020 improved 30 basis points year over year to 7.6%.

Excluding inventory-related charges for both periods and the above-mentioned severance charges in the 2020 period, our homebuilding operating income margin improved 70 basis points to 8.4% from 2019.

Our housing gross profits for 2020 decreased 5% from 2019 mainly due to lower housing revenues, partly offset by a 60 basis point improvement in our housing gross profit margin to 18.9%.

The year-over-year increase in our housing gross profit margin in 2020 primarily reflected a mix shift of homes delivered, a favorable pricing environment that enabled us to increase selling prices in many of our communities, lower relative amortization of previously capitalized interest, and a slight decrease in sales incentives, partly offset by an increase in inventory-related charges.

Our selling, general and administrative expenses as a percentage of housing revenues increased 30 basis points from the prior year to 11.3%, primarily due to the above-mentioned severance charges and reduced operating leverage from lower housing revenues, partly offset by our targeted actions, including workforce reductions in the 2020 second quarter, to reduce overhead costs.

Excluding the severance charges in 2020, our selling, general and administrative expenses as a percentage of housing revenues were 11.2%.

Our net income and diluted earnings per share for 2020 each rose 10% year over year.

In 2019, our net income and diluted earnings per share included a $6.8 million loss on the early extinguishment of debt.

Net Orders, Backlog and Community Count.

The following table presents information about our net orders, cancellation rate, ending backlog, and community count for the years ended November 30, 2020 and 2019 (dollars in thousands):

Years Ended November 30,

Net orders 13,404 12,841

Net order value (a) $ 5,299,489 $ 4,890,153

Cancellation rate (b) 20 % 19 %

Ending backlog — homes 7,810 5,078

Ending backlog — value $ 2,962,403 $ 1,813,707

Ending community count 236 251

Average community count 243 250

(a) Net order value represents the potential future housing revenues associated with net orders generated during a period, as well as homebuyer selections of lot and product premiums and design studio options and upgrades for homes in backlog during the same period.

(b) Cancellation rate represents the total number of contracts for new homes cancelled during a period divided by the total (gross) orders for new homes generated during the same period.

In 2020, net orders from our homebuilding operations grew 4% from 2019, reflecting strong year-over-year increases of 31%, 27% and 42% in the first, third and fourth quarters, respectively, partly offset by a decrease of 57% in the second quarter due to the negative impact from the COVID-19 pandemic and related control responses.

The year-over-year net order growth in the 2020 first, third and fourth quarters was largely driven by the factors described above with respect to our second half performance.

We also believe our Built-to-Order model, which, as described above under Item 1 – Business, provides personalization and choice, was a key factor that contributed to our strong net orders during these periods.

In 2020, the growth in our overall net orders compared to 2019 reflected a 7% increase in monthly net orders per community to 4.6, partly offset by a 3% decrease in our overall average community count, which is discussed below under “Community Count.”

The value of our 2020 net orders rose 8% from 2019 as a result of the growth in net orders and a 4% increase in the overall average selling price of those orders, with these factors driving net order value expansion in three of our four homebuilding reporting segments, ranging from 9% in our Southwest segment to 13% in our Central segment.

Net order value in our Southeast segment declined 8% year over year due to a decrease in net orders, as the average selling price of those orders remained relatively flat.

The number of homes in our backlog at November 30, 2020 increased 54% from the previous year, mainly due to the substantial increase in our net orders during the 2020 third and fourth quarters.

The potential future housing revenues in our backlog at November 30, 2020 grew 63% year over year, reflecting the higher number of homes in our backlog and a 6% increase in the average selling price of those homes.

The increases in the number of homes in backlog and our backlog value reflected strong growth in each of our four homebuilding reporting segments, with increases in backlog value ranging from 34% in our Southwest segment to 93% in our West Coast segment.

Substantially all of the homes in our backlog at November 30, 2020 are expected to be delivered during the year ending November 30, 2021.

Community Count .

Our average community count for 2020 declined 3% from the previous year, reflecting decreases of 12% in our Southwest and Southeast homebuilding reporting segments and 3% in our Central segment, partly offset by a 10% increase in our West Coast segment.

Our ending community count for 2020 was down 6% from the prior year.

The year-over-year decreases in both our average and ending community counts primarily reflected the close-out of communities earlier than planned due to our accelerated, demand-driven net order pace, our reduced investments in land and land development in the 2020 second and third quarters, and delays in community openings due in part to the negative impacts from the COVID-19 pandemic.

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

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.

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):

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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

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Operating income as a percentage of homebuilding revenues 11.6 % 7.6 % 7.3 %

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.

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,

2021 % of Housing Revenues 2020 % of Housing Revenues 2019 % of Housing 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.

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,

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.

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.

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):

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Total 13,472 10,672 16,206 13,404 10 % 20 %

Years Ended November 30,

Net Order Value Average Community Count

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Total 10,544 7,810 35 % $ 4,951,725 $ 2,962,403 67 %

As discussed above under Item 1 – Business, the composition of our homes delivered, net orders and backlog shifts with the mix of our active communities and the corresponding average selling prices of the homes ordered and/or delivered at these communities in any particular period, and it changes as new communities open and existing communities wind down or close out.

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 variations in our business limit the effective comparability of our homes delivered, net orders and backlog as well as their corresponding values between sequential and year-over-year periods, in addition to the effect of prevailing economic or housing market conditions in or across any particular periods.

Homebuilding revenues of $4.17 billion in 2020 decreased from 2019, reflecting declines in both housing and land sale revenues largely caused by the negative impacts from the COVID-19 pandemic discussed above under “Overview.”

Housing revenues in 2020 decreased 8% from the previous year, as a 10% decrease in homes delivered was partly offset by a 2% increase in the overall average selling price of those homes.

In 2020, homes delivered were tempered primarily by the negative impact of the COVID-19 pandemic and related COVID-19 control responses, including the substantial year-over-year decline in our 2020 second quarter net orders.

The overall average selling price of our homes delivered rose in 2020 as compared to 2019, largely due to the favorable pricing environment in the 2020 second half that enabled us to increase prices in many of our communities.

Land sale revenues for 2020 decreased 37% from 2019.

Operating Income.

Our homebuilding operating income decreased 4% in 2020, as compared to the previous year, due to a decline in housing gross profits, partly offset by a decrease in selling, general and administrative expenses.

In 2020, homebuilding operating income included total inventory-related charges of $28.7 million, as discussed in Note 7 – Inventory Impairments and Land Option Contract Abandonments in the Notes to Consolidated Financial Statements in this report, and severance charges of $6.7 million.

The severance charges were associated with workforce reductions made during the 2020 second quarter and were estimated at implementation to yield annualized savings of approximately $40 million allocated between construction and land costs and selling, general and administrative expenses.

In 2019, homebuilding operating income included $17.3 million of inventory-related charges.

As a percentage of homebuilding revenues, our homebuilding operating income for 2020 improved 30 basis points year over year to 7.6%.

Excluding inventory-related charges for both periods and the above-mentioned severance charges in 2020, our homebuilding operating income margin improved 70 basis points to 8.4% in 2020 from 7.7% in 2019.

In 2020, housing gross profits decreased by $42.4 million, or 5%, to $785.3 million from $827.6 million in 2019.

The year-over-year decrease in 2020 reflected the lower volume of homes delivered, partly offset by an increase in the housing gross profit margin.

Housing gross profits for 2020 and 2019 included the respective inventory-related charges described above.

Our housing gross profit margin for 2020 increased 60 basis points from the previous year, mainly as a result of a shift in the mix of homes delivered and a favorable pricing environment (approximately 40 basis points);

lower amortization of previously capitalized interest as a percentage of housing revenues (approximately 40 basis points);

and a decrease in sales incentives, reflecting strong housing demand (approximately 10 basis points).

These items were partly offset by an increase in inventory-related charges (approximately 30 basis points).

We incur interest principally from our borrowings to finance land acquisitions, land development, home construction and other operating and capital needs.

The amount of interest incurred generally fluctuates based on the average amount of debt outstanding for the period and/or the interest rate on that debt.

In 2020, interest incurred totaled $124.1 million, down 13% from $143.4 million in 2019, mainly due to our lower average debt level.

All interest incurred during 2020 and 2019 was capitalized as the average amount of our inventory qualifying for interest capitalization was higher than our average debt level for each period.

As a result, we had no interest expense for 2020 or 2019.

Interest amortized to construction and land costs associated with housing operations totaled $129.3 million in 2020 and $156.1 million in 2019.

The year-over-year decrease in interest amortized in 2020 mainly reflected fewer homes delivered and the reduction in our interest incurred.

As a percentage of housing revenues, the amortization of previously capitalized interest associated with housing operations was 3.1% for 2020 and 3.5% for 2019.

Interest amortized to construction and land costs in 2020 and 2019 included $.4 million and $.7 million, respectively, of amortization of previously capitalized interest related to land sales that occurred during those years.

Excluding the amortization of previously capitalized interest associated with housing operations and the above-mentioned inventory-related charges in the applicable periods, our adjusted housing gross profit margin increased 50 basis points to 22.7% in 2020 from 22.2% in 2019.

The calculation of adjusted housing gross profit margin, which we believe provides a clearer measure of the performance of our business, is described below under “Non-GAAP Financial Measures.”

Selling, general and administrative expenses for 2020 decreased 5% from the prior year, primarily reflecting the lower number of homes delivered and our targeted actions to reduce overhead costs, partly offset by the above-mentioned severance charges of $6.7 million we recorded in the 2020 second quarter.

As a percentage of housing revenues, our selling, general and administrative expenses rose 30 basis points in 2020 as compared to 2019 primarily due to decreased operating leverage from lower housing revenues, partly offset by the lower expenses.

Excluding the severance charges recorded in 2020, our selling, general and administrative expenses as a percentage of revenues rose 20 basis points year over year to 11.2%.

The following table presents the components of our selling, general and administrative expenses (dollars in thousands):

Years Ended November 30,

2020 % of Housing Revenues 2019 % of Housing Revenues 2018 % of Housing Revenues

Marketing expenses (a) $ 116,590 2.8 % $ 129,733 2.9 % $ 91,027 2.0 %

Commission expenses (b) 164,507 3.9 174,338 3.8 168,162 3.7

General and administrative expenses 189,682 4.6 193,279 4.3 184,965 4.1

Total $ 470,779 11.3 % $ 497,350 11.0 % $ 444,154 9.8 %

(a) Marketing expenses in 2020 and 2019 reflect our adoption of Accounting Standards Codification Topic 606, “Revenue from Contracts with Customers” (“ASC 606”) effective December 1, 2018, as described in Note 1 – Summary of Significant Accounting Policies in the Notes to Consolidated Financial Statements in this report.

(b) Commission expenses include sales commissions on homes delivered paid to internal sales counselors and/or external real estate brokers.

Interest Income.

Interest income, which is generated from short-term investments, totaled $2.6 million in 2020 and $2.2 million in 2019.

Generally, increases and decreases in interest income are attributable to changes in the interest-bearing average balances of short-term investments and fluctuations in interest rates.

Equity in Income (Loss) of Unconsolidated Joint Ventures.

Our equity in income of unconsolidated joint ventures totaled $12.5 million in 2020, compared to equity in loss of unconsolidated joint ventures of $1.5 million in 2019.

The improved results primarily reflected 99 homes delivered from an unconsolidated joint venture in California in 2020, compared to no homes delivered from unconsolidated joint ventures in 2019.

Loss on Early Extinguishment of Debt.

Our $6.8 million loss on early extinguishment of debt in 2019 was associated with our optional redemption of $350.0 million in aggregate principal amount of our 8.00% senior notes due 2020 (“8.00% Senior Notes due 2020”) prior to their maturity date.

Non-GAAP Financial Measures

This report contains information about our adjusted housing gross profit margin, adjusted income tax expense, adjusted net income, adjusted diluted earnings per share, adjusted effective tax rate, and ratio of net debt to capital, none of which are calculated in accordance with generally accepted accounting principles (“GAAP”).

We believe these non-GAAP financial measures are relevant and useful to investors in understanding our operations and the leverage employed in our operations, and may be helpful in comparing us with other companies in the homebuilding industry to the extent they provide similar information.

However, because they are not calculated in accordance with GAAP, these non-GAAP financial measures may not be completely comparable to other companies in the homebuilding industry and, thus, should not be considered in isolation or as an alternative to operating performance and/or financial measures prescribed by GAAP.

Rather, these non-GAAP financial measures should be used to supplement their respective most directly comparable GAAP financial measures in order to provide a greater understanding of the factors and trends affecting our operations.

Adjusted Housing Gross Profit Margin.

The following table reconciles our housing gross profit margin calculated in accordance with GAAP to the non-GAAP financial measure of our adjusted housing gross profit margin (dollars in thousands):

Years Ended November 30,

2020 2019 2018

Housing revenues $ 4,150,793 $ 4,510,814 $ 4,517,244

Housing construction and land costs (3,365,509) (3,683,174) (3,728,917)

Housing gross profits 785,284 827,640 788,327

Inventory-related charges (a)

28,669 17,291 28,994

Housing gross profits excluding inventory-related charges

813,953 844,931 817,321

Amortization of previously capitalized interest (b)

129,330 156,114 197,936

Adjusted housing gross profits

$ 943,283 $ 1,001,045 $ 1,015,257

Housing gross profit margin as a percentage of housing revenues

18.9 % 18.3 % 17.5 %

Housing gross profit margin excluding inventory-related charges as a percentage of housing revenues

19.6 % 18.7 % 18.1 %

Adjusted housing gross profit margin as a percentage of housing revenues

22.7 % 22.2 % 22.5 %

(a) Represents inventory impairment and land option contract abandonment charges associated with housing operations.

(b) Represents the amortization of previously capitalized interest associated with housing operations.

Adjusted housing gross profit margin is a non-GAAP financial measure, which we calculate by dividing housing revenues less housing construction and land costs excluding (1) housing inventory impairment and land option contract abandonment charges (as applicable) recorded during a given period and (2) amortization of previously capitalized interest associated with housing operations, by housing revenues.

The most directly comparable GAAP financial measure is housing gross profit margin.

We believe adjusted housing gross profit margin is a relevant and useful financial measure to investors in evaluating our performance as it measures the gross profits we generated specifically on the homes delivered during a given period.

This non-GAAP financial measure isolates the impact that the housing inventory impairment and land option contract abandonment charges, and the amortization of previously capitalized interest associated with housing operations, have on housing gross profit margins, and allows investors to make comparisons with our competitors that adjust housing gross profit margins in a similar

We also believe investors will find adjusted housing gross profit margin relevant and useful because it represents a profitability measure that may be compared to a prior period without regard to variability of housing inventory impairment and land option contract abandonment charges, and amortization of previously capitalized interest associated with housing operations.

This financial measure assists us in making strategic decisions regarding community location and product mix, product pricing and construction pace.

Adjusted Income Tax Expense, Adjusted Net Income, Adjusted Diluted Earnings Per Share and Adjusted Effective Tax Rate.

The following table reconciles our income tax expense, net income, diluted earnings per share and effective tax rate calculated in accordance with GAAP to the non-GAAP financial measures of adjusted income tax expense, adjusted net income, adjusted diluted earnings per share and adjusted effective tax rate, respectively (in thousands, except per share amounts):

Years ended November 30,

2020 2019 2018

As Reported As Reported As Reported TCJA Adjustment As Adjusted

Total pretax income $ 364,043 $ 348,175 $ 367,965 $ — $ 367,965

Income tax expense (a) (67,800) (79,400) (197,600) 112,500 (85,100)

Net income $ 296,243 $ 268,775 $ 170,365 $ 112,500 $ 282,865

Diluted earnings per share $ 3.13 $ 2.85 $ 1.71 $ 2.82

Weighted average shares outstanding — diluted 94,086 93,838 101,059 101,059

Effective tax rate (a) 18.6 % 22.8 % 53.7 % 23.1 %

(a) For the year ended November 30, 2020, income tax expense and the related effective tax rate reflected the favorable impacts of $18.7 million of federal energy tax credits we earned from building energy-efficient homes, $12.0 million of excess tax benefits related to stock-based compensation, partly offset by $5.7 million of non-deductible executive compensation expense under Internal Revenue Code 162(m).

For the year ended November 30, 2019, income tax expense and the related effective tax rate reflected the favorable impacts of $5.3 million of excess tax benefits related to stock-based compensation, a $4.4 million deferred tax asset valuation allowance reversal and $4.3 million of federal energy tax credits we earned from building energy-efficient homes, partly offset by $5.3 million of non-deductible executive compensation expense and a $1.9 million non-cash charge due to the re-measurement of deferred tax assets based on a reduction in certain state income tax rates.

For the year ended November 30, 2018, income tax expense and adjusted income tax expense, as well as the related effective tax rate and adjusted effective tax rate, included the favorable impacts of the reduction in the federal corporate income tax rate from 35% to 21%, effective January 1, 2018, $10.7 million of federal energy tax credits we earned from building energy-efficient homes, a $2.1 million net benefit from a reduction in our deferred tax asset valuation allowance, and $1.0 million of excess tax benefits from stock-based compensation as a result of our adoption of Accounting Standards Update No.

2016-09, “Compensation — Stock Compensation (Topic 718):

Improvements to Employee Share-Based Payment Accounting” (“ASU 2016-09”), effective December 1, 2017.

Our adjusted income tax expense, adjusted net income, adjusted diluted earnings per share and adjusted effective tax rate are non-GAAP financial measures, which we calculate by excluding a non-cash charge of $112.5 million recorded in 2018 from our reported income tax expense, net income, diluted earnings per share and effective tax rate, respectively.

This charge was primarily due to our accounting re-measurement of our deferred tax assets based on the above-noted reduction in the federal corporate income tax rate under the TCJA.

The most directly comparable GAAP financial measures are our income tax expense, net income, diluted earnings per share and effective tax rate.

We believe that these non-GAAP measures are meaningful to investors as they allow for an evaluation of our operating results without the impact of the TCJA-related charge.

Ratio of Net Debt to Capital.

The following table reconciles our ratio of debt to capital calculated in accordance with GAAP to the non-GAAP financial measure of our ratio of net debt to capital (dollars in thousands):

Notes payable $ 1,747,175 $ 1,748,747

Stockholders’ equity 2,665,769 2,383,122

Total capital $ 4,412,944 $ 4,131,869

Ratio of debt to capital 39.6 % 42.3 %

Notes payable $ 1,747,175 $ 1,748,747

Cash and cash equivalents (681,190) (453,814)

Net debt 1,065,985 1,294,933

Stockholders’ equity 2,665,769 2,383,122

Total capital $ 3,731,754 $ 3,678,055

Ratio of net debt to capital 28.6 % 35.2 %

The ratio of net debt to capital is a non-GAAP financial measure, which we calculate by dividing notes payable, net of homebuilding cash and cash equivalents, by capital (notes payable, net of homebuilding cash and cash equivalents, plus stockholders’ equity).

The most directly comparable GAAP financial measure is the ratio of debt to capital.

We believe the ratio of net debt to capital is a relevant and useful financial measure to investors in understanding the degree of leverage employed in our operations.

HOMEBUILDING REPORTING SEGMENTS

These intrinsic

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.

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The difference between each homebuilding reporting segment’s operating income (loss) and pretax income (loss) is generally due to the equity in income (loss) of unconsolidated joint ventures, which is also presented in Note 2 – Segment Information in the Notes to Consolidated Financial Statements in this report, and/or interest income and expense.

The financial results for each of our homebuilding reporting segments for the year ended November 30, 2020 were negatively affected by the impacts from the COVID-19 pandemic, as discussed above under “Overview.” In three of our four homebuilding reporting segments, we delivered fewer homes in 2020 compared to the previous year largely as a result of the significant decrease in our net orders in the 2020 second quarter.

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

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):

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Average selling price $ 636,800 $ 609,400 $ 592,300 4 % 3 %

Housing gross profit margin 15.3 % 16.8 % 17.5 % (150) bps (70) bps

This segment’s revenues in 2020 and 2019 were generated from both housing operations and land sales.

Housing revenues of $1.75 billion in 2020 declined 8% from $1.90 billion in 2019, reflecting a lower number of homes delivered, partly offset by an increase in the average selling price of those homes.

The year-over-year increase in the average selling price of homes delivered in 2020 was primarily due to product and geographic mix shifts of homes delivered and the favorable pricing environment in this segment.

Land sale revenues were nominal in 2020 and totaled $8.6 million in 2019.

This segment’s operating income in 2020 decreased from the previous year, mainly reflecting lower housing gross profits, partly offset by lower selling, general and administrative expenses.

Housing gross profits declined due to decreases in both housing revenues and the housing gross profit margin.

The decrease in the housing gross profit margin was primarily due to a mix shift of homes delivered and an increase in inventory-related charges.

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.

Selling, general and administrative expenses as a percentage of housing revenues for 2020 were flat with the previous year as the favorable impacts of overhead cost reductions and lower legal fees were offset by reduced operating leverage as a result of lower housing revenues.

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.

The following table presents financial information related to our Southwest homebuilding reporting segment for the years indicated (dollars in thousands, except average selling price):

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Average selling price $ 371,300 $ 327,300 $ 322,000 13 % 2 %

Housing gross profit margin 25.4 % 23.8 % 19.6 % 160 bps 420 bps

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 2020 grew 3% year over year to $780.7 million, reflecting increases in both the number of homes delivered and the average selling price of those homes.

The growth in the number of homes delivered was attributable to our Nevada operations.

The higher average selling price was mainly due to shifts in the product and geographic mix of homes delivered, and the favorable pricing environment in this segment.

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 increased $22.2 million from 2019 primarily due to higher housing and land sale gross profits.

The year-over-year increase in housing gross profits reflected growth in housing revenues and an increase in the housing gross profit margin.

The improvement in the housing gross profit margin was largely due to lower relative amortization of previously capitalized interest, a mix shift of homes delivered, a favorable pricing environment, and increased operating leverage due to higher housing revenues.

Land sales generated profits of $2.0 million in 2020, compared to a loss of $.5 million in 2019.

Selling, general and administrative expenses as a percentage of housing revenues for 2020 improved from 2019 mainly as a result of increased operating leverage due to higher housing revenues and overhead cost reductions.

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.

The following table presents financial information related to our Central homebuilding reporting segment for the years indicated (dollars in thousands, except average selling price):

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Operating income $ 200,158 $ 128,776 $ 126,301 55 % 2 %

Years Ended November 30, Variance

2020 2019 2018 2020 vs 2019 2019 vs 2018

Homes delivered 4,630 3,932 4,291 18 % (8) %

Average selling price $ 324,800 $ 303,400 $ 293,500 7 % 3 %

Housing gross profit margin 21.1 % 19.9 % 18.6 % 120 bps 130 bps

In 2020, revenues for this segment were generated solely from housing operations.

In 2019, revenues for this segment were generated from both housing operations and land sales.

Housing revenues in 2020 declined 5% from $1.26 billion in 2019 due to a decrease in the number of homes delivered, partly offset by an increase in the average selling price of those homes.

The increase in the average selling price reflected shifts in product and geographic mix of homes delivered, and the favorable pricing environment in this segment.

Land sale revenues totaled $8.3 million in 2019.

This segment’s operating income for 2020 increased $2.5 million from 2019, mainly due to a decrease in selling, general and administrative expenses, partly offset by the absence of land sale profits in the current year.

Housing gross profits for 2020 were essentially flat year over year as the impact of a higher gross profit margin was offset by a decrease in housing revenues.

The housing gross profit margin rose from the previous year primarily due to a shift in the mix of homes delivered, a favorable pricing environment and lower relative amortization of previously capitalized interest, partly offset by an increase in inventory-related charges.

Inventory-related charges impacting the housing gross profit margin for 2020 and 2019 were $5.5 million and $.8 million, respectively.

Land sales generated profits of $1.6 million in 2019.

Selling, general and administrative expenses as a percentage of housing revenues for 2020 increased from the prior year, reflecting reduced operating leverage due to lower housing revenues.

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

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.

The following table presents financial information related to our Southeast homebuilding reporting segment for the years indicated (dollars in thousands, except average selling price):

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Average selling price $ 302,100 $ 288,600 $ 293,200 5 % (2) %

Housing gross profit margin 17.3 % 14.3 % 12.9 % 300 bps 140 bps

This segment’s revenues in 2020 and 2019 were generated from both housing operations and land sales.

Housing revenues in 2020 decreased 28% to $428.8 million from $592.3 million in 2019 as a result of decreases in both the number of homes delivered and the average selling price of those homes.

The year-over-year decrease in the average selling price in 2020 was mainly due to shifts in the product and geographic mix of homes delivered, with a lower proportion of homes delivered from higher-priced communities.

In 2020, this segment’s operating income increased by $4.4 million from 2019 due to a decrease in selling, general and administrative expenses, partly offset by lower housing gross profits.

The year-over-year decrease in housing gross profits reflected a decline in housing revenues, partially offset by an increase in the housing gross profit margin.

The housing gross profit margin improved primarily due to a shift in the mix of homes delivered and lower relative amortization of previously capitalized interest, partly offset by reduced operating leverage due to lower housing revenues.

Selling, general and administrative expenses as a percentage of housing revenues for 2020 increased from the previous year, primarily due to decreased operating leverage as a result of lower housing revenues, partly offset by our overhead reduction efforts and favorable legal settlements and recoveries.

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

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Pretax income $ 38,435 $ 32,543 $ 22,986

Years Ended November 30,

2021 2020 2019

Total originations (a):

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Loans sold (a):

Loans sold to Stearns 7,900 6,224 5,028

Loans sold to Stearns/GR Alliance 7,706 7,900 6,224

Principal $ 2,744,685 $ 2,536,689 $ 1,827,917

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(a) Loan originations and sales occurred within KBHS.

Our financial services reporting segment generates revenues primarily from insurance commissions and title services.

The year-over-year growth in our financial services revenues for 2020 reflected an increase in title services revenues, partly offset by a slight decrease in insurance commissions.

Our financial services reporting segment, which includes the operations of KB 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 2020 grew 42% from the previous year mainly due to an increase in the equity in income of unconsolidated joint ventures.

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 2020 primarily reflected an increase in the percentage of homebuyers using KBHS and an increase in the average selling price of homes we delivered, partly offset by a 10% decrease in the number of homes we delivered.

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.

On March 1, 2021, Guaranteed Rate acquired the parent company of Stearns, our KBHS partner prior to that date.

In October 2021, Stearns was renamed as GR Alliance.

As of the date of this report, we are not aware of any significant changes with respect to GR Alliance or its operations as a result of the transaction being completed.

Income Tax Expense .

Our income tax expense and effective income tax rate were as follows (dollars in thousands):

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Effective income tax rate 18.8 % 18.6 % 22.8 %

Our effective tax rate for 2020 decreased from the previous year, mainly due to a $14.4 million increase in federal energy tax credits we earned from building energy-efficient homes and a $6.7 million increase in excess tax benefits related to stock-based compensation, partly offset by a $2.5 million decrease in deferred tax asset valuation allowance reversals.

The federal energy tax credits for the year ended November 30, 2020 resulted from legislation enacted in December 2019 that, among other things, extended the availability of a business tax credit for building new energy-efficient homes through December 31, 2020.

The federal energy tax credits for the year ended November 30, 2019 primarily resulted from legislation enacted on February 9, 2018 that, among other things, extended the availability of a business tax credit for building new energy-efficient homes through December 31, 2017.

Prior to this legislation, the tax credit expired on December 31, 2016.

In December 2020, federal legislation was enacted that, among other things, extended the availability of federal energy tax credits through December 31, 2021.

This extension is expected to benefit our income tax provision in future periods.

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 ended November 30, 2021 resulted from legislation enacted in December 2020 and earlier periods.

The legislation enacted in December 2020, among other things, extended the availability of a business tax

credit for building new energy-efficient homes through December 31, 2021.

Prior to this legislation, the tax credit was set to expire on December 31, 2020.

In June 2020, California enacted tax legislation that approved the suspension of California net operating loss (“NOL”) deductions for tax years 2020, 2021 and 2022.

The suspension of California NOL deductions did not have an impact on our income tax expense for the year ended November 30, 2020.

Although the suspension of California NOL deductions did not have an impact on our income tax expense for the years ended November 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 ended November 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 the next several years.

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

Inventory-related charges (a)

11,953 28,669 17,291

Housing gross profits excluding inventory-related charges

1,240,568 813,953 844,931

Amortization of previously capitalized interest (b)

149,354 129,330 156,114

Adjusted housing gross profits

$ 1,389,922 $ 943,283 $ 1,001,045

Housing gross profit margin as a percentage of housing revenues

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.

housing operations, by housing revenues.

The most directly comparable GAAP financial measure is housing gross profit margin.

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.

November 30, 2021

Summarized Balance Sheet Data (in thousands)

Cash $ 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

Year Ended November 30, 2021

Summarized Statement of Operations Data (in thousands)

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

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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.

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.

Though our revenues in 2020 were tempered primarily due to the negative impacts from the COVID-19 pandemic, our net cash provided by operating activities increased to $310.7 million in 2020, compared to $251.0 million in the previous year.

In addition, our total liquidity improved to $1.47 billion at November 30, 2020 from $1.23 billion at November 30, 2019.

Based on our positive 2021 business forecast as discussed below under “Outlook,” we have no material concerns related to our liquidity.

While the ongoing COVID-19 pandemic creates potential liquidity risks, as discussed further below, we believe that our existing cash and cash equivalents, our anticipated cash flows from operations and amounts available under our Credit Facility will be sufficient to fund our anticipated operating and land-related investment needs for at least the next twelve months.

We have no significant notes payable maturities until December 2021.

We limited our investments in land and land development in the second and most of the third quarter in prioritizing cash preservation and liquidity in light of lingering uncertainty surrounding the COVID-19 pandemic.

With the sustained strong housing demand over the 2020 second half, we intensified our investments in the fourth quarter, resulting in a 63% year-over-year increase.

As a result, our investments in land and land development increased to $1.69 billion in 2020, compared to $1.62 billion in 2019.

Approximately 50% of our total investments in 2020 related to land acquisitions, compared to approximately 39% in 2019.

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.

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.

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.

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.

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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 under contracts and other similar contracts as a percentage of total lots was 40% at November 30, 2020 and 41% at November 30, 2019.

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.

The table below summarizes our total cash and cash equivalents, and total liquidity (in thousands):

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Our financial leverage, as measured by the ratio of debt to capital, was 35.8% at November 30, 2021, compared to 39.6% at November 30, 2020.

Our ratio of net debt to capital (a calculation that is described above under “Non-GAAP Financial Measures”) at November 30, 2020 improved to 28.6%, compared to 35.2% at November 30, 2019.

Our next scheduled debt maturity is on December 15, 2021, when $450.0 million in aggregate principal amount of our 7.00% Senior Notes due 2021 become due.

The ratio of debt to capital is calculated by dividing notes payable by capital (notes payable plus stockholders’ equity).

On June 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 on June 15, 2031.

On June 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.

On September 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 .

On August 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 from February 13, 2022 to February 13, 2025.

We had $34.6 million and $29.7 million of letters of credit outstanding under the LOC Facility at November 30, 2021 and 2020, respectively.

Further information regarding our LOC Facility is provided in Note 15 – Notes Payable in the Notes to Consolidated Financial Statements in this report.

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 at November 30, 2021 and 2020, respectively.

Unsecured Revolving Credit Facility .

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As of November 30, 2021, we had no cash borrowings and $8.6 million of letters of credit outstanding under the Credit Facility.

We did not borrow under the Credit Facility during 2020.

The Credit Facility is further described in Note 15 – Notes Payable in the Notes to Consolidated Financial Statements in this report.

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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 in Unconsolidated Joint Ventures in the Notes to Consolidated Financial Statements in this report and under Supplemental Guarantor Financial Information below) 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.

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 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).

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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 dividends other than the Credit Facility, which would restrict our payment of cash and certain other 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).

There are no agreements that restrict our payment of

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 January 2020, Standard and Poor’s Financial Services upgraded our credit rating to BB from BB-, and changed the rating outlook to stable from positive.

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.

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Operating Activities .

Operating activities provided net cash of $310.7 million in 2020, compared to $251.0 million in 2019.

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 provided by operating activities in 2020 primarily reflected net income of $296.2 million, a net decrease in receivables of $59.3 million, largely reflecting 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.

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, partially 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 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 .

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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 $5.8 million of proceeds from the sale of a building and a $5.0 million return of investments in unconsolidated joint ventures.

These uses of cash were partly offset by a $12.7 million return of investments in unconsolidated joint ventures.

Financing Activities .

Financing activities used net cash of $56.4 million in 2020 and $330.4 million in 2019.

The year-over-year change in net cash used in financing activities was mainly due to the financing transactions we completed in 2019.

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.

The cash used was partially offset by cash provided by $16.1 million of issuances of common stock under employee stock plans.

In 2019, net cash was used for our total repayment of $980.0 million in aggregate principal amount of our 8.00% Senior Notes due 2020, 1.375% convertible senior notes due 2019 (“1.375% Convertible Senior Notes due 2019”) and 4.75% senior notes due 2019 (“4.75% Senior Notes due 2019”), payments on mortgages and land contracts due to land sellers and other loans of $41.1 million, dividend payments on our common stock of $20.4 million and tax payments associated with stock-based compensation awards of $7.3 million.

The cash used was partly offset by cash provided by our public offering of $300.0 million in aggregate principal amount of 4.80% senior notes due 2029 (“4.80% Senior Notes due 2029”), concurrent public offerings of $300.0 million in aggregate principal amount of 6.875% senior notes due 2027 (“6.875% Senior Notes due 2027”) and an additional $100.0 million in aggregate principal amount of our existing series of 7.625% senior notes due 2023 (“7.625% Senior Notes due 2023”), and $30.5 million of issuances of common stock under employee stock plans.

Our board of directors declared quarterly cash dividends of $.09 per share of common stock in the 2020 first, second and third quarters.

Partially offsetting these uses of cash was $16.1 million of cash provided by issuances of common stock under employee stock plans.

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.

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 $.09 per share, and declared quarterly cash dividends at the new rate in the 2019 third and fourth quarters.

Cash dividends declared and paid during the years ended November 30, 2021 and 2020 totaled $.60 and $.42 per share of common stock, respectively.

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The 2020 Shelf Registration replaced our previously effective universal shelf registration statement filed with the SEC on July 14, 2017.

We have not made any offerings of securities under the 2020 Shelf Registration.

Share Repurchase Program.

In May 2018, our board of directors authorized us to repurchase a total of up to 4,000,000 shares of our outstanding common stock.

On July 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 2018, we repurchased 1,806,053 shares of our common stock pursuant to this authorization, at a total cost of $35.0 million.

We did not repurchase any of our common stock under this authorization in 2020 or 2019.

The amount and timing of shares purchased under the remaining share repurchase authorization are subject to market and business conditions and other factors, and purchases may be made from time to time and at any time through open market or privately negotiated transactions.

The remaining share repurchase authorization will continue in effect until fully used or earlier terminated or suspended by our board of directors.

Unrelated to the common stock repurchase program, as further discussed in Note 19 – 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”).

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 of November 30, 2021, we have not repurchased any shares pursuant to the board of directors authorization.

While the unprecedented public health and governmental efforts to contain the spread of COVID-19 have created uncertainty as to general economic conditions for 2021 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 short-term and reasonably anticipated long-term requirements for funds to conduct our operations and meet other needs in the ordinary course of our business.

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.

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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.

SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION

As of November 30, 2020, we had $1.75 billion in aggregate principal amount of outstanding senior notes and no borrowings outstanding under the Credit Facility.

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 effectively subordinated to any secured indebtedness of such Guarantor Subsidiaries to the extent the value of the assets securing such indebtedness, and structurally subordinated to indebtedness and other liabilities of Non-Guarantor Subsidiaries.

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.

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.

November 30, 2020

Summarized Balance Sheet Data (in thousands)

Cash $ 644,157

Inventories 3,464,674

Amounts due from Non-Guarantor Subsidiaries 394,226

Total assets 5,102,197

Liabilities and Stockholders’ Equity

Notes payable 1,743,508

Amounts due to Non-Guarantor Subsidiaries 221,330

Total liabilities 2,589,971

Stockholders’ equity 2,512,226

Year Ended November 30, 2020

Summarized Statement of Operations Data (in thousands)

Revenues $ 3,767,283

Construction and land costs (3,038,658)

Selling, general and administrative expenses (444,700)

Interest income from non-guarantor subsidiary 24,734

Pretax income 311,136

Net income 251,536

OFF-BALANCE SHEET ARRANGEMENTS

Unconsolidated Joint Ventures.

None of our unconsolidated joint ventures had outstanding debt at November 30, 2020.

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, in the ordinary course of our business, we enter into land option contracts and other similar contracts with third parties and unconsolidated entities to acquire rights to land for the construction of homes.

Our land option contracts and other similar contracts generally do not contain provisions requiring our specific performance.

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, 2020, we estimate the remaining purchase price to be paid would be as follows:

2021 – $883.4 million;

2022 – $256.7 million;

2023 – $109.8 million;

2024 – $53.8 million;

2025 – $57.8 million;

and thereafter – $2.3 million.

CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS

The following table presents our future cash requirements under contractual obligations as of November 30, 2020 (in millions):

Payments due by Period

Total Fiscal Year

2021 Fiscal Years

2022-2023 Fiscal Years

2024-2025 Thereafter

Contractual obligations:

Long-term debt $ 1,754.7 $ 2.1 $ 1,151.9 $ .7 $ 600.0

Interest 431.5 120.8 152.1 70.0 88.6

Operating lease obligations 42.8 11.2 18.2 10.3 3.1

Inventory-related obligations (a) 32.1 18.3 3.0 1.3 9.5

Total $ 2,261.1 $ 152.4 $ 1,325.2 $ 82.3 $ 701.2

(a) Represents 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.

As homes are delivered, the obligation to pay the remaining TIFE assessments associated with each underlying lot is transferred to the homebuyer.

As such, these assessment obligations will be paid by us only to the extent we do not deliver homes on applicable lots before the related TIFE obligations mature.

As discussed in Note 17 – Commitments and Contingencies in the Notes to Consolidated Financial Statements in this report, we had $897.6 million of performance bonds and $42.1 million of letters of credit outstanding at November 30, 2020.

At November 30, 2019, we had $793.9 million of performance bonds and $34.7 million of letters of credit outstanding.

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

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Homebuilding Revenue Recognition.

We recognize homebuilding revenue in accordance with ASC 606 by applying the following steps in determining the timing and amount of revenue to recognize:

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 obligations in the contract;

(2) identify the performance

obligations in the contract;

(3) determine the transaction price;

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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).

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.

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Other than model homes, our inventories typically do not consist of completed unsold homes.

However, as discussed above under Item 1 – Business, we may have unsold completed or partially completed homes in our inventory.

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.

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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 subcontractors 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.

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.

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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 margins on homes in backlog or future deliveries;

significant decreases in net orders, average selling prices, volume of homes delivered, gross profit margins on homes delivered or projected gross profit

margins on homes in backlog or future deliveries;

significant increases in budgeted land development and home construction costs or cancellation rates;

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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 of November 30, 2021, 2020 and 2019, respectively.

The carrying values of those communities or land parcels evaluated as of November 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 of November 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):

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Inventory impairments:

Number of communities or land parcels evaluated for recoverability (a) 24 40 57

Carrying value of communities or land parcels evaluated for recoverability (a) $ 228,063 $ 326,255 $ 356,100

Number of communities or land parcels written down to fair value 2 10 8

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Land option contract abandonments charges $ 2,050 $ 5,946 $ 3,260

(a) As impairment indicators are assessed on a quarterly basis, some of the communities or land parcels evaluated during the years ended November 30, 2020, 2019 and 2018 were evaluated in more than one quarterly period.

Communities or land parcels evaluated for recoverability in more than one quarterly period are counted only once for each applicable year.

In addition, we evaluated land held for future development for recoverability during 2020, 2019 and 2018.

The inventory impairment charges in each of those years 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.

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 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.

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These real estate assets are written down to fair value, less associated costs to sell.

The fair value of such real estate assets is generally based on bona fide letters of intent from outside parties, executed sales contracts, broker quotes or similar information.

The fair value of such

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.

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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 and Central segments.

These categories collectively represented 96% of our total inventories as of November 30, 2020, compared to 94% as of November 30, 2019.

The inventory balances in the 6-10 years and greater than 10 years categories were primarily located in our West Coast, Southwest and Central segments, and together totaled $159.8 million at November 30, 2020, compared to $231.2 million at November 30, 2019.

The year-over-year decrease was primarily related to 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 were generally comprised of land held for future development and active, multi-phase communities with large remaining land positions.

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.

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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 that the carrying value of our inventory balance as of November 30, 2020 is recoverable.

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 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.

In addition, we consider the financial and operational status and

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.

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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 infrequent, they may be necessary when actual warranty expenditures have increased or decreased on a sustained basis.

Our 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.

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 warranty accrual would not result in a material change in our accrual.

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 subcontractors to maintain, general liability insurance (including construction defect and bodily injury coverage) and workers’ compensation 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 subcontractors’ general liability insurance primarily takes the form of a wrap-up policy under a program where eligible independent subcontractors are enrolled as insureds on each community.

Enrolled subcontractors 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.

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.

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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 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.

These estimates are subject to uncertainty due

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.

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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.

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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 $10.4 million in our liability and approximately

$2.5 million in our receivable as of November 30, 2020, and additional expense of approximately $7.9 million for 2020.

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.

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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 level of performance that will be achieved and the number of shares that will be earned.

Additionally, judgment is required in estimating the percentage of share-based awards that are expected to vest, and in the case of PSUs, the

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.

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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.

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.

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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.

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.

Given the strong demand we and the homebuilding industry experienced in the 2020 second half, we believe long-term housing market fundamentals are positive.

Subsequent to the end of our 2020 fiscal year, demand remained strong, with our net orders for the first seven weeks of the 2021 first quarter up 39% from the corresponding period of 2020.

However, we anticipate this year-over-year net order growth will moderate by the end of the quarter due to tougher weekly comparisons for the remainder of the quarter and an anticipated decline in our average community count for the period.

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 community count beginning in the second half of the year, help drive our business in 2021, subject to business conditions.

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.

Our present 2022 outlook is as follows:

2022 First Quarter –

• We expect to generate housing revenues in the range of $1.14 billion to $1.22 billion, an increase from $1.07 billion in the corresponding period of 2020, and anticipate our average selling price to be approximately $390,000, flat as compared to the year-earlier period.

• We expect our homebuilding operating income margin to be in the range of 9.0% to 9.3%, assuming no inventory-related charges, up from 6.1% for the year-earlier 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 in the range of 10.8% to 11.2%, an improvement from the 2020 first quarter ratio of 11.8%.

• We expect the effective tax rate will be approximately 24%, including an expected favorable impact from federal energy tax credits for building energy-efficient homes.

The effective tax rate for the prior year quarter was approximately 13%.

• We expect a sequential decrease in our ending community count to a low point for the year, and expect our average community count to decline by a low double-digit percentage range from the 2020 first 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 10.4% to 11.0%, assuming no inventory-related charges, compared to 8.4%, which excludes both inventory-related charges and severance charges, for 2020.

◦ We expect our housing gross profit margin to be in the range of 20.5% to 21.1%, with each quarter at or above 20%, assuming no inventory-related charges, compared to 19.6% for 2020.

◦ We expect our selling, general and administrative expenses as a percentage of housing revenues to be in the range of 9.9% to 10.3%, compared to 11.2%, excluding severance charges, in the prior year.

• We expect the effective tax rate will be approximately 24%, including an expected favorable impact from federal energy tax credits.

The effective tax rate for 2020 was approximately 19%.

• We expect our ending community count to be up in the mid to high single-digit percentage range from 2020.

• We expect our return on equity will be above 17%, an improvement of more than 500 basis points compared to 11.8% for 2020.

We believe we are well positioned for 2021 due to, among other things, our strong backlog, planned new home 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 industry continues to experience labor and supply constraints and rising and volatile raw material prices, particularly for lumber.

Demand for our products could also be substantially diminished if the public health effort to contain the virulence and spread of COVID-19 continues for a prolonged period during 2021.

If these issues worsen in 2021, our business and ability to generate positive growth could be negatively impacted.

Our future performance and the strategies we implement (and adjust or refine as necessary or appropriate) will depend significantly on prevailing economic 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), among other factors.

• 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

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

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• 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 share repurchases pursuant to our board of directors’ authorization;

• material and trade costs and availability, particularly lumber;

• 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;

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• volatility in the market price of our common stock;

• weak or declining consumer confidence, either generally or specifically with respect to purchasing homes;

• 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;

• 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, or to approve additional COVID-19-related relief or stimulus measures, 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 Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) relief provisions for outstanding mortgage loans and any extensions or broadening thereof, 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;

• 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;

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• 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 home communities;

• 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;

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 5. Market for Registrant’s Common Equity