What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-04-08 compared with 2021-10-08 · 244 added, 380 removed, 316 unchanged (66% of the section changed)

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The following table presents a summary of our consolidated results of operations (dollars in thousands, except per share amounts):

Three Months Ended August 31, Nine Months Ended August 31,

2021 2020 Variance 2021 2020 Variance

Three Months Ended February 28,

2022 2021 Variance

$ 1,394,154 $ 1,138,008 23 %

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$ 1.47 $ 1.02 44 %

Housing market conditions remained positive through the nine months ended August 31, 2021, as healthy demand, particularly from millennial and Generation Z demographic groups, a limited supply of new and resale inventory, and low mortgage interest rates drove strong results for our business.

Amid the considerable demand for our homes and steadily increasing construction labor and building materials costs, we lifted selling prices in the vast majority of our communities and took other operational steps during the 2021 third quarter to balance pace, price and construction starts, optimize the performance of our inventory assets and improve returns.

Reflecting these initiatives, the value of our net orders for the 2021 third quarter increased 22% from the 2020 third quarter due to a 26% rise in their overall selling price, partly offset by a 3% decline in net order volume.

The decrease in net order volume was due to our lower average community count in the current period, partly offset by higher monthly net orders per community.

Our lower average community count reflected the accelerated close-out of communities that resulted from our exceptionally strong monthly net order pace over the past few quarters and delays in new community openings during the nine months ended August 31, 2021.

Compared to the 2021 second quarter, our current quarter average community count held steady, and ending community count increased 5%, reflecting our efforts to grow our business.

The strong housing demand in our served markets propelled our monthly net orders per community to 6.6 from 5.9, even as we raised prices and strategically paced lot releases to enhance margins and align with current production capacity.

As during the 2021 first half, we continued to confront production issues in the third quarter due to industry-wide supply chain disruptions that created shortages of certain construction materials and other products, and experienced trade labor availability constraints and delays with respect to state and municipal construction permitting, inspections and utilities.

As in the 2021 second quarter, these factors extended our construction cycle times in the 2021 third quarter, and many expected deliveries and new community openings were pushed beyond the quarter end.

Though we are closely monitoring these risks to our construction cycle times and new community openings, we believe these challenging conditions will generally persist for the remainder of the year and into 2022.

We have incorporated these trends into our performance expectations, as presented below under “Outlook.”

Homebuilding revenues for the 2021 third quarter grew 47% from the year-earlier quarter due to an increase in housing revenues that reflected 35% growth in the number of homes delivered to 3,425, our highest third-quarter level since 2007, and an 11% increase in the overall average selling price of those homes to $426,800.

Homebuilding operating income for the three months ended August 31, 2021 rose 91% year over year to $169.9 million and, as a percentage of revenues, improved 270 basis points to 11.6%.

The increase in our homebuilding operating income margin was driven by significant improvements in both our housing gross profit margin and selling, general and administrative expenses as a percentage of housing revenues.

Housing market conditions were favorable through the three months ended February 28, 2022, with solid demand driven by healthy demographic trends, particularly from millennial and Generation Z groups, a limited supply of new and resale inventory, and steady employment and wage growth.

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 our inventory assets’ performance and improve returns, despite significant persistent supply chain challenges and higher construction costs, as described further below.

The value of our net orders for the 2022 first quarter increased 15% from the year-earlier quarter due to a 17% increase in their overall average selling price, partly offset by a 2% decline in net orders.

The decrease in net orders was due to our lower average community count in the current period, partly offset by slightly higher monthly net orders per community.

Our lower average community count reflected the accelerated sell-out of communities as a result of our strong monthly net order pace over the past few quarters and supply chain-related delays in new community openings.

The strong housing demand in our served markets lifted our monthly net orders per community slightly to 6.6 from 6.4, even as we raised selling prices and strategically paced lot releases to enhance margins and help align with current production capacity.

Since the outbreak of COVID-19 in 2020, we have experienced intensifying building material cost pressures, particularly for lumber, and production capacity constraints affecting our product suppliers driven by sustained high levels of homebuilding and renovation activity, combined with supply chain disruptions stemming largely from international and domestic COVID-19 control responses and economy-wide labor shortages in the U.S.

In the 2022 first quarter, these continuing supply chain disruptions, as well as ongoing restricted construction services availability and delays with respect to state and municipal construction permitting, inspection and utility processes, were exacerbated by a resurgence of COVID-19 infections with the Omicron variant.

Consequently, our construction cycle times were extended by approximately two weeks, primarily affecting the finishing stages, as compared to the 2021 fourth quarter, and many deliveries and new community openings expected for the 2022 first quarter were delayed.

We have adapted to the extent possible to these changing conditions, re-sequencing construction when necessary, and, in some cases, ordering items in advance of starting homes to mitigate delays.

We believe these challenging circumstances affecting our land development and home construction activities will generally persist throughout the year.

We continue to be proactive and, as feasible, aim to address issues as they arise to mitigate the impact on our business going forward.

We have incorporated these trends into our performance expectations, as presented below under “Outlook.” However, it is possible that supply chain disruptions will worsen in the coming periods due to the military conflict in Ukraine that began in late February 2022 and the wide-ranging sanctions the U.S.

and other countries have imposed or may further impose on Russian business sectors, financial organizations, individuals and raw materials.

Homebuilding revenues for the 2022 first quarter grew 23% due to an increase in housing revenues, driven by a 22% increase in the overall average selling price of homes delivered to $486,100, as the number of homes delivered was essentially even with

the year-earlier quarter.

Homebuilding operating income for the three months ended February 28, 2022 rose 49% year over year to $169.6 million and, as a percentage of revenues, improved 220 basis points to 12.2%.

The increase in our homebuilding operating income margin reflected improvements in both our housing gross profit margin and selling, general and administrative expenses as a percentage of housing revenues.

Our pretax income margin improved 190 basis points to 12.7%, and net income and diluted earnings per share increased 38% and 44%, respectively, each as compared to the corresponding quarter of 2021.

Our 2021 third quarter 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 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.

Excluding the loss on early extinguishment of debt, our pretax income grew 77% to $179.3 million and, as a percentage of revenues, increased 210 basis points to 12.2%.

COVID-19 Pandemic Impact.

The COVID-19 pandemic and related governmental control measures considerably disrupted global and national economies, the U.S.

housing market, and our business during the 2020 second quarter.

During that period, we experienced a sizable reduction in net orders and backlog, as discussed below under “Net Orders,” as well as protracted supply chain delays 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.

As a result, 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 housing demand drove our 2020 third- and fourth-quarter net orders to 15-year highs and our 2021 first- and second-quarter net orders to 14-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.

While our 2021 third quarter net orders decreased modestly from the year-earlier quarter reflecting our lower average community count, partly offset by an increase in net orders per community, our ending backlog value at August 31, 2021 increased 89% to approximately $4.84 billion, our highest third-quarter level since 2006.

With this robust backlog, we expect to achieve significant year-over-year growth in our scale, profitability and returns during 2021 and further growth in 2022, as described below under “Outlook.” In addition, with the ongoing strong housing demand in the first three quarters of 2021, we continued to increase our land acquisition and development investments, as we did in the latter part of 2020, to measurably expand our lot pipeline and support future community count growth.

Our favorable outlook could be materially affected by adverse developments, if any, related to the COVID-19 pandemic, 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.

Until the COVID-19 pandemic has been resolved as a public health crisis, it retains the potential to cause further and more severe disruption of global and national economies, the U.S.

housing market and our business, including our net orders, backlog and revenues.

In addition, as mentioned above, we are continuing to experience labor constraints, supply chain issues and rising and volatile raw material prices and availability, particularly with respect to 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.

Despite these challenges, and other factors, which may individually or in combination slow or reverse the current housing recovery from the COVID-19 pandemic-induced disruptions in the 2020 second quarter, we believe we are well-positioned to operate effectively through the present environment.

The COVID-19 pandemic and related COVID-19 control responses have adversely affected many economic sectors, significantly disrupted the global supply chain and fueled producer price and consumer inflation.

Our business was impacted by these issues during the three months ended February 28, 2022, as we experienced, among other things, supply chain bottlenecks and the other production-related challenges during the quarter described above that, to various degrees, extended our construction cycle times, delayed home deliveries and community openings and raised our costs.

They could negatively impact our growth, margins and financial results in future periods, as could additional significant COVID-19-related disruptions, if they emerge.

At the same time, we continue to experience strong demand for our products and believe we are well-positioned to operate effectively through the present environment.

Our ending backlog value at February 28, 2022 grew 55% to approximately $5.71 billion, our highest first-quarter level since 2007.

With this robust backlog, we expect to achieve significant year-over-year growth in our scale, profitability and returns in the 2022 second quarter and full year, as described below under “Outlook.” In addition, with the ongoing strong housing demand in the first quarter of 2022, we continued to increase our land acquisition and development investments, as we did in 2021, to measurably expand our lot pipeline and support future community count growth.

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):

Three Months Ended August 31, Nine Months Ended August 31,

2021 2020 2021 2020

$ 1,461,648 $ 979,113 $ 4,035,033 $ 2,960,901

Three Months Ended February 28,

$ 1,394,154 $ 1,137,353

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(1,082,112) (901,909)

(1,147,642) (798,495) (3,177,569) (2,429,001)

Selling, general and administrative expenses

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Operating income 169,562 114,094

Three Months Ended August 31, Nine Months Ended August 31,

2021 2020 2021 2020

Interest income 36 653

Equity in income (loss) of unconsolidated joint ventures (182) 1,922 (5) 11,981

Loss on early extinguishment of debt (5,075) — (5,075) —

Equity in income of unconsolidated joint ventures 23 304

Homebuilding pretax income $ 169,621 $ 115,051

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Housing gross profit margin as a percentage of housing revenues 22.4 % 20.8 %

Housing gross profit margin excluding inventory-related charges as a percentage of housing revenues 22.0 % 20.6 % 21.6 % 19.0 %

Adjusted housing gross profit margin as a percentage of housing revenues 22.4 % 21.1 %

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Operating income as a percentage of revenues 12.2 % 10.0 %

Homebuilding revenues of $1.46 billion for the three months ended August 31, 2021 rose from the corresponding year-earlier period due to a 49% increase in housing revenues, partly offset by a decrease in land sale revenues.

The year-over-year growth in housing revenues reflected a 35% increase in the number of homes delivered and an 11% 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 quarter (“beginning backlog”) increasing 98% year over year as a result of strong net order growth over the past several quarters.

However, ongoing industry-wide supply chain disruptions, labor constraints, and delays with respect to state and municipal construction permitting, inspections and utilities extended build times in most of our served markets and pushed many expected deliveries beyond the quarter end.

The overall average selling price of homes delivered 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.

For the nine months ended August 31, 2021, homebuilding revenues grew 36% year over year to $4.04 billion, reflecting growth in housing revenues, partially offset by a decrease in land sale revenues.

Housing revenues for the nine months ended August 31, 2021 also increased 36% from the corresponding 2020 period as a result of a 26% increase in the number of homes delivered and an 8% rise in the overall average selling price of those homes.

Homebuilding revenues for the 2022 first quarter grew from the year-earlier quarter mainly due to a 23% increase in housing revenues.

The year-over-year growth in housing revenues was driven by a 22% increase in the overall average selling price of homes delivered that reflected strong housing market conditions as well as product and geographic mix shifts of homes delivered.

Although our backlog of homes at the beginning of the quarter (“beginning backlog”) increased 35% year over year, the number of homes delivered in the 2022 first quarter was essentially flat primarily due to the supply chain disruptions and other production-related issues that intensified during the quarter, as described above under “Overview.” These operational challenges extended our construction cycle times by two weeks, as compared to the 2021 fourth quarter, and delayed many expected deliveries.

Reflecting these challenges, the number of homes delivered as a percentage of beginning backlog decreased to 27% in the 2022 first quarter, compared to 37% in the year-earlier period.

Operating Income .

The year-over-year growth in our operating income for the three-month and nine-month periods ended August 31, 2021 primarily reflected increases in housing gross profits, partly offset by increases in selling, general and administrative expenses.

Our operating income for the three months ended August 31, 2021 increased 91% from the year-earlier period.

Operating income for the 2021 third quarter included inventory-related charges of $6.7 million, compared to $6.9 million in the year-earlier quarter.

As a percentage of revenues, our operating income for the three months ended August 31, 2021 improved 270 basis points to 11.6%, compared to 8.9% for the corresponding 2020 period.

Excluding inventory-related charges, our operating income as a percentage of revenues increased 250 basis points to 12.1% for the 2021 third quarter from 9.6% for the year-earlier quarter.

For the nine months ended August 31, 2021, our operating income grew 123% compared to the prior-year period.

Operating income for the first three quarters of 2021 included inventory-related charges of $11.2 million.

For the nine months ended August 31, 2020, operating income included inventory-related charges of $16.9 million and 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 revenues, our operating income for the nine months ended August 31, 2021 increased 440 basis points year over year to 11.1%.

Excluding inventory-related charges for both periods and the above-mentioned severance charges in the 2020 period, our operating income margin improved to 11.4% for the nine months ended August 31, 2021, compared to 7.5% for the nine months ended August 31, 2020.

Housing Gross Profits .

Housing gross profits of $314.2 million for the three months ended August 31, 2021 grew 61% from $194.7 million for the year-earlier period, reflecting increases in both our housing revenues and housing gross profit margin.

Our housing gross profit margin for the 2021 third quarter rose 160 basis points year over year to 21.5%, mainly as a result of a favorable pricing environment that more than offset higher construction costs (approximately 80 basis points);

lower amortization of previously capitalized interest as a percentage of housing revenues (approximately 60 basis points);

and a decrease in inventory-related charges (approximately 20 basis points).

As a percentage of housing revenues, the amortization of previously capitalized interest associated with housing operations was 2.5% and 3.1% for the three months ended August 31, 2021 and 2020, respectively.

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 for the 2021 third quarter increased 80 basis points from the year-earlier quarter to 24.5%.

For the first three quarters of 2021, our housing gross profits of $858.4 million increased 57% from $546.8 million for the year-earlier period.

Housing gross profits for the nine months ended August 31, 2021 included $11.2 million of inventory-related charges, compared to $16.9 million of such charges in the corresponding 2020 period.

Our housing gross profit margin of 21.3% for the nine months ended August 31, 2021 increased 280 basis points year over year, primarily due to the reasons described above with respect to the three months ended August 31, 2021.

As a percentage of housing revenues, the amortization of previously capitalized interest associated with housing operations was 2.7% for the nine months ended August 31, 2021, compared to 3.2% for the corresponding 2020 period.

Our adjusted housing gross profit margin for the nine months ended August 31, 2021 increased 210 basis points from the year-earlier period to 24.3%.

Our operating income for the three months ended February 28, 2022 grew 49% from the year-earlier period, reflecting higher housing gross profits, partly offset by an increase in selling, general and administrative expenses.

Operating income for the 2022 first quarter included inventory-related charges of $.2 million, compared to $4.1 million in the year-earlier quarter.

As a percentage of revenues, our operating income for the three months ended February 28, 2022 improved 220 basis points to 12.2%, compared to 10.0% for the corresponding 2021 period.

Excluding inventory-related charges, our operating income as a percentage of revenues increased 180 basis points to 12.2% for the 2022 first quarter from 10.4% for the year-earlier quarter.

• Housing Gross Profits – Housing gross profits of $312.0 million for the three months ended February 28, 2022 grew 32% from $236.2 million for the year-earlier period due to increases in both our housing revenues and housing gross profit margin.

Our housing gross profit margin for the 2022 first quarter rose 160 basis points year over year to 22.4%, mainly as a result of a favorable pricing environment that more than offset higher construction costs (approximately 80 basis points), lower amortization of previously capitalized interest as a percentage of housing revenues (approximately 80 basis points), a decrease in inventory-related charges (approximately 30 basis points) and other miscellaneous factors (approximately 30 basis points).

These favorable impacts were partly offset by increased expenses to support current operations and expected growth (approximately 60 basis points).

As a percentage of housing revenues, the amortization of previously capitalized interest associated with housing operations was 2.1% and 2.9% for the three months ended February 28, 2022 and 2021, respectively.

Excluding the above-mentioned inventory-related charges for the applicable periods, our adjusted housing gross profit margin for the 2022 first quarter increased 130 basis points from the year-earlier period.

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):

Three Months Ended August 31, Nine Months Ended August 31,

2021 % of Housing Revenues 2020 % of Housing Revenues 2021 % of Housing Revenues 2020 % of Housing Revenues

• Selling, General and Administrative Expenses – The following table presents the components of our selling, general and administrative expenses (dollars in thousands):

Three Months Ended February 28,

2022 % of Housing Revenues 2021 % of Housing Revenues

Marketing expenses $ 28,848 2.1 % $ 28,406 2.5 %

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

Selling, general and administrative expenses for the 2021 third quarter rose 34% from the year-earlier quarter, 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 and expected growth.

As a percentage of housing revenues, our selling, general and administrative expenses improved 110 basis points, largely reflecting increased operating leverage due to our higher housing revenues as compared to the year-earlier quarter, partly offset by the above-mentioned higher expenses.

For the nine months ended August 31, 2021, selling, general and administrative expenses increased 18% year over year, mainly due to the reasons described above with respect to the three months ended August 31, 2021, partly offset by a $4.3 million benefit from the ERC recognized in early 2021 and the above-mentioned severance charges recognized in 2020.

The ERC, which is discussed in Note 14 – Income Taxes in the Notes to Consolidated Financial Statements in this report, favorably impacted each of our homebuilding reporting segments.

As a percentage of housing revenues, selling, general and administrative expenses for the nine months ended August 31, 2021 improved 160 basis points to 10.2%.

Selling, general and administrative expenses for the 2022 first quarter rose 17% from the year-earlier quarter, mainly due to an increase in commission expenses associated with our higher housing revenues, and an increase in general and administrative expenses.

In addition, general and administrative expenses in the year-earlier quarter benefited from a $4.3 million ERC, which is described in Note 13 – Income Taxes in the Notes to Consolidated Financial Statements in this report.

As a percentage of housing revenues, our selling, general and administrative expenses for the 2022 first quarter improved 50 basis points, largely reflecting increased operating leverage due to our higher housing revenues as compared to the year-earlier quarter, partly offset by the above-mentioned higher expenses.

Interest Income/Expense .

Interest income, which is generated from short-term investments, totaled $.1 million for the three months ended August 31, 2021 and $.8 million for the year-earlier period.

For the nine-month periods ended August 31, 2021 and 2020, our interest income totaled $1.0 million and $2.2 million, respectively.

Generally, increases and decreases in interest

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

Interest income, which is generated from short-term investments, was nominal for the three months ended February 28, 2022 and $.7 million for the year-earlier period.

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.

All interest incurred during the three-month and nine-month periods ended August 31, 2021 and 2020 was capitalized due to the average amount of our inventory qualifying for interest capitalization exceeding our average debt level for each period.

All interest incurred during the three-month periods ended February 28, 2022 and 2021 was capitalized due to the average amount of our inventory qualifying for interest capitalization exceeding our average debt level for each period.

As a result, we had no interest expense for these periods.

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 was $.2 million for the three months ended August 31, 2021, compared to equity in income of unconsolidated joint ventures of $1.9 million for the year-earlier period.

For the nine months ended August 31, 2021, our equity in loss of unconsolidated joint ventures was nominal, compared to equity in income of $12.0 million for the corresponding 2020 period.

The year-over-year changes for both periods 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, had no deliveries in the three months ended August 31, 2021 and 10 deliveries in the nine months ended August 31, 2021, compared to 17 and 90 homes delivered in the corresponding year-earlier periods, respectively.

Equity in Income of Unconsolidated Joint Ventures .

Our equity in income of unconsolidated joint ventures was nominal for each of the three-month periods ended February 28, 2022 and 2021.

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 for the 2021 third quarter 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, Cancellation Rates, Backlog and Community Count .

The following table presents information concerning our net orders, cancellation rates, ending backlog and community count (dollars in thousands):

Three Months Ended August 31, Nine Months Ended August 31,

2021 2020 2021 2020

Three Months Ended February 28,

Net orders 4,210 4,292

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(b) Cancellation rates represent 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.

For the three months ended August 31, 2021, net orders from our homebuilding operations decreased 3% from the year-earlier period, reflecting a decrease in our average community count, partly offset by a 12% increase in monthly net orders per community to 6.6 from 5.9 in the year-earlier period.

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 provides personalization and choice, also was a key contributor to our strong 2021 third quarter monthly net order pace.

Though we experienced a modest decrease in our net orders for the 2021 third quarter compared to strong 2020 third-quarter net orders, which reached a 15-year high, the value of our net orders rose 22% due to a 26% increase in the overall average selling price of net orders that largely reflected strong housing demand in most of our served markets as well as a product and

geographic mix shift.

The year-over-year growth in overall net order value was due to improvements in all four of our homebuilding reporting segments, with net order value increases ranging from 3% in our West Coast segment to 89% in our Southeast segment.

Our cancellation rate as a percentage of gross orders for the three months ended August 31, 2021 improved from the year-earlier period.

The number of homes in our backlog at August 31, 2021 increased 58% from August 31, 2020, reflecting our substantially higher backlog at the beginning of the fiscal year as well as year-over-year growth in our net orders for the nine months ended August 31, 2021.

The potential future housing revenues in our backlog at August 31, 2021 rose 89% from the prior year as a result of both the higher number of homes in our backlog and a 19% increase in the overall average selling price of those homes.

For the three months ended February 28, 2022, net orders from our homebuilding operations decreased 2% year over year, reflecting our lower average community count described further below, partly offset by a slight increase in monthly net orders per community to 6.6 from 6.4 in the year-earlier period.

Along with the healthy housing demand, particularly from millennial and Generation Z demographic groups, we believe our Built-to-Order® homebuying process, which provides personalization and choice, continues to be a key contributor to our strong monthly net order pace.

Though we experienced a slight decrease in net orders for the 2022 first quarter, compared to our strong 2021 first-quarter net orders, which reached a 14-year high, the value of our net orders rose 15% due to a 17% increase in the overall average selling price of net orders that largely reflected robust housing demand in most of our served markets as well as a product and geographic mix shift.

The year-over-year growth in overall net order value resulted from improvements in three of our four homebuilding reporting segments, with net order value increases ranging from 8% in our West Coast segment to 79% in our Southeast segment.

Net order value from our Southwest homebuilding reporting segment decreased 2%.

Our cancellation rate as a percentage of gross orders for the three months ended February 28, 2022 was nearly even with the year-earlier period.

The number of homes in our backlog at February 28, 2022 increased 29% from February 28, 2021, reflecting our substantially higher backlog at the beginning of the quarter, partly offset by a slight year-over-year decrease in our net orders for the three months ended February 28, 2022.

The potential future housing revenues in our backlog at February 28, 2022 grew 55% from February 28, 2021 as a result of both the higher number of homes in our backlog and a 20% increase in the overall average selling price of those homes.

Each of our four homebuilding reporting segments generated year-over-year increases in backlog value, ranging from 38% in our West Coast segment to 114% in our Southeast segment.

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We use the term “community count” to refer to the number of communities open for sale with at least five homes left to sell at the end of a reporting period.

Our average community count for the 2021 third quarter decreased 14% from the year-earlier period, and our ending community count declined 9%.

The year-over-year decreases in our overall average and ending community counts primarily reflected the close-out of communities earlier than anticipated due to both an increase in our demand-driven net order pace and delays in new community openings during the nine months ended August 31, 2021, as described above under “Overview.” Compared to the 2021 second quarter, our current quarter average community count held steady, and our ending community count increased 5%.

As described above under “COVID-19 Pandemic Impact,” we have substantially increased our investments in land acquisition and land development in 2021 to support future community count growth.

Our average community count for the 2022 first quarter decreased 4% from the year-earlier period, and our ending community count was essentially flat at 208.

The year-over-year decreases in our overall average and ending community counts primarily reflected communities selling out earlier than anticipated due to both an increase in our demand-driven net order pace and delays in new community openings during the three months ended February 28, 2022, as described above under “Overview.” We substantially increased our investments in land acquisition and land development in the 2022 first quarter, as we did in 2021, to support future community count growth.

HOMEBUILDING REPORTING SEGMENTS

For reporting purposes, we organize our homebuilding operations into four segments — West Coast, Southwest, Central and Southeast.

As of August 31, 2021, our homebuilding reporting segments conducted ongoing operations in the following states:

West Coast — California and Washington;

Southwest — Arizona and Nevada;

Central — Colorado and Texas;

and Southeast — Florida and North Carolina.

Operational Data.

The following tables present homes delivered, net orders, cancellation rates as a percentage of gross orders, net order value, average community count and ending backlog (number of homes and value) by homebuilding reporting segment (dollars in thousands):

Three Months Ended August 31,

Homes Delivered Net Orders Cancellation Rates

Segment 2021 2020 2021 2020 2021 2020

West Coast 1,035 626 1,078 1,329 10 % 12 %

Southwest 626 628 818 857 7 13

Central 1,174 958 1,382 1,469 11 22

Southeast 590 333 807 559 7 19

Total 3,425 2,545 4,085 4,214 9 % 17 %

Three Months Ended August 31,

Net Order Value Average Community Count

Segment 2021 2020 Variance 2021 2020 Variance

West Coast $ 785,430 $ 761,742 3 % 56 74 (24) %

Southwest 350,806 285,917 23 36 35 3

Central 575,737 438,697 31 73 88 (17)

Southeast 297,219 157,404 89 40 41 (2)

Total $ 2,009,192 $ 1,643,760 22 % 205 238 (14) %

Nine Months Ended August 31,

Three Months Ended February 28,

Homes Delivered Net Orders Cancellation Rates

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Total 11,886 9,238 29 % $ 5,711,305 $ 3,694,118 55 %

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 changes as new communities open and existing communities wind down or close out.

In addition, with our Built-to-Order model, the selling prices of 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.

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 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 .

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Further information regarding these segments, including their pretax income (loss), is included in Note 2 – Segment Information in the Notes to Consolidated Financial Statements in this report.

The difference between each homebuilding reporting segment’s operating income (loss) and pretax income (loss) is generally due to the equity in income (loss) of unconsolidated joint ventures and/or interest income and expense.

The financial results for each of our homebuilding reporting segments for the three months and nine months ended August 31, 2020 were negatively affected by the impacts from the onset of the COVID-19 pandemic, as discussed above under “COVID-19 Pandemic Impact.” With housing market conditions remaining strong from the 2020 third quarter through the 2021 third quarter, we delivered more homes at a higher overall average selling price and significantly expanded our operating income as a percentage of revenues for the three months and nine months ended August 31, 2021, as compared to the corresponding year-earlier periods.

The following table presents financial information related to our West Coast segment for the periods indicated (dollars in thousands, except average selling price):

Three Months Ended August 31, Nine Months Ended August 31,

2021 2020 Variance 2021 2020 Variance

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 and/or interest income and expense.

In addition to the results of our homebuilding reporting segments presented below, our consolidated homebuilding operating income includes the results of Corporate and other, a non-operating segment.

Corporate and other had operating losses of $34.7 million in the three months ended February 28, 2022 and $30.4 million in the three months ended February 28, 2021.

The year over year increase 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.

The financial results of our homebuilding reporting segments for the three months ended February 28, 2022 were negatively affected by intensifying building material cost pressures, as well as the supply chain disruptions and other production-related challenges during the quarter that are described above under “Overview.”

The following table presents financial information related to our West Coast segment (dollars in thousands, except average selling price):

Three Months Ended February 28,

2022 2021 Variance

Revenues $ 658,874 $ 514,516 28 %

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Average selling price $ 720,900 $ 582,000 24 %

Operating income as a percentage of revenues 14.1 % 8.5 % 560 bps 12.7 % 7.0 % 570 bps

This segment’s revenues for the three-month and nine-month periods ended August 31, 2021 were generated solely from housing operations.

For the three months and nine months ended August 31, 2020, this segment generated revenues from housing operations and nominal land sales.

Housing revenues for the three-month and nine-month periods ended August 31, 2021 grew from the corresponding year-earlier periods due to increases in the number of homes delivered in both states that comprise this segment, and higher average selling prices of those homes.

The increases in the average selling price of homes delivered for these same periods reflected strong housing market conditions and product and geographic mix shifts of homes delivered.

Operating income for the three months and nine months ended August 31, 2021 grew from the corresponding year-earlier periods, reflecting higher housing gross profits, partly offset by higher selling, general and administrative expenses.

For the 2021 third quarter, this segment’s operating income as a percentage of revenues rose from the year-earlier quarter, primarily due to a 410 basis-point increase in the housing gross profit margin to 20.1% and a 150 basis-point improvement in selling, general and administrative expenses as a percentage of housing revenues to 6.0%.

The housing gross profit margin expansion was largely driven by a favorable pricing environment, lower relative amortization of previously capitalized interest and a reduction in inventory-related charges as a percentage of housing revenues.

Inventory-related charges totaled $6.5 million in the three months ended August 31, 2021, compared to $5.5 million in the year-earlier period.

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 and expected growth.

For the nine months ended August 31, 2021, the year-over-year growth in this segment’s operating income as a percentage of revenues mainly reflected a 420 basis-point rise in the housing gross profit margin to 19.1% and an improvement in selling, general and administrative expenses as a percentage of housing revenues to 6.5% from 7.9%.

The housing gross profit margin improved primarily for the reasons described above with respect to the three months ended August 31, 2021, as well as an increase in operating leverage due to higher housing revenues.

Inventory-related charges decreased slightly to $10.4 million in the 2021 first nine months, compared to $10.6 million in the year-earlier period.

Selling, general and administrative expenses as a percentage of revenues improved primarily for the reason described above with respect to the three months ended August 31, 2021, as well as 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 Southwest segment for the periods indicated (dollars in thousands, except average selling price):

Three Months Ended August 31, Nine Months Ended August 31,

2021 2020 Variance 2021 2020 Variance

Operating income as a percentage of revenues 16.7 % 11.3 % 540 bps

This segment’s revenues grew year over year due to increases in both the number of homes delivered and the average selling price of those homes.

The higher average selling price of homes delivered reflected strong housing market conditions and product and geographic mix shifts of homes delivered.

Operating income grew from the year-earlier period, reflecting higher housing gross profits, partly offset by higher selling, general and administrative expenses.

As a percentage of revenues, operating income increased from the year-earlier quarter, primarily due to a 480 basis-point expansion in the housing gross profit margin to 23.0% and a 60 basis-point improvement in selling, general and administrative expenses as a percentage of housing revenues to 6.3%.

The higher housing gross profit margin was largely driven by a favorable pricing environment and lower relative amortization of previously capitalized interest.

In addition, this segment had no inventory-related charges in the 2022 first quarter, compared to $3.8 million of such charges in the year-earlier period.

The following table presents financial information related to our Southwest segment (dollars in thousands, except average selling price):

Three Months Ended February 28,

2022 2021 Variance

Revenues $ 209,767 $ 187,685 12 %

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Operating income $ 36,015 $ 33,179 9 %

Three Months Ended August 31, Nine Months Ended August 31,

2021 2020 Variance 2021 2020 Variance

Homes delivered 516 534 (3) %

Average selling price $ 406,500 $ 351,500 16 %

Operating income as a percentage of revenues 19.6 % 17.7 % 190 bps 18.8 % 16.4 % 240 bps

This segment’s revenues for the three-month and nine-month periods ended August 31, 2021 were generated solely from housing revenues.

For the three months and nine months ended August 31, 2020, revenues were generated from housing operations as well as land sales.

Housing revenues for the three months ended August 31, 2021 rose 13% year over year from $207.7 million, reflecting an increase in the average selling price of homes delivered.

For the nine months ended August 31, 2021, housing revenues rose 19% from $573.5 million 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 Nevada and Arizona operations.

The increase in the average selling price for each period reflected strong housing market conditions and a shift in product and geographic mix of homes delivered.

Operating income for the three months and nine months ended August 31, 2021 rose from the corresponding 2020 periods, primarily due to higher housing gross profits, partially offset by higher selling, general and administrative expenses.

As a percentage of revenues, operating income for the three-month period ended August 31, 2021 grew from the year-earlier period largely due to a 100 basis-point increase in the housing gross profit margin to 26.8% and a 60 basis-point improvement in selling, general and administrative expenses as a percentage of housing revenues to 7.2%.

The housing gross margin expansion was largely driven by a favorable pricing environment and lower relative amortization of previously capitalized interest.

The improvement in selling, general and administrative expenses as a percentage of revenues was mainly due to increased operating leverage from higher housing revenues.

The year-over-year growth in this segment’s operating income as a percentage of revenues for the nine months ended August 31, 2021 mainly reflected a 150 basis-point increase in the housing gross profit margin to 26.5% and a 90 basis-point improvement in selling, general and administrative expenses as a percentage of housing revenues to 7.6% from 8.5%.

The housing gross profit margin increased and selling, general and administrative expenses as a percentage of revenues improved primarily for the reasons described above with respect to the 2021 third quarter.

In addition, selling, general and administrative expenses as a percentage of revenues for the nine months ended August 31, 2021 benefited from 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 Central segment for the periods indicated (dollars in thousands, except average selling price):

Three Months Ended August 31, Nine Months Ended August 31,

2021 2020 Variance 2021 2020 Variance

Operating income as a percentage of revenues 17.2 % 17.7 % (50) bps

The year-over-year growth in this segment’s revenues reflected an increase in the average selling price of homes delivered, partly offset by a slight decrease in the number of homes delivered.

The higher average selling price reflected strong housing market conditions and a shift in product and geographic mix of homes delivered.

Operating income increased from the corresponding 2021 period, primarily due to higher housing gross profits, partially offset by higher selling, general and administrative expenses.

As a percentage of revenues, operating income for the three-month period ended February 28, 2022 decreased from the year-earlier period largely due to a 70 basis-point decline in the housing gross profit margin to 25.4%, partly offset by a 20 basis-point improvement in selling, general and administrative expenses as a percentage of housing revenues to 8.2%.

The following table presents financial information related to our Central segment (dollars in thousands, except average selling price):

Three Months Ended February 28,

2022 2021 Variance

Revenues $ 355,322 $ 309,708 15 %

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Average selling price $ 372,800 $ 306,300 22 %

Operating income margin as a percentage of revenues 13.9 % 11.9 % 200 bps 13.9 % 9.8 % 410 bps

This segment’s revenues for the three-month and nine-month periods ended August 31, 2021 and 2020 were generated solely from housing operations.

Housing revenues for the three months and nine months ended August 31, 2021 grew from the corresponding year-earlier periods, reflecting increases in the number of homes delivered in both states that comprise this segment, and the higher average selling prices of those homes.

The increases in the average selling price for each period reflected the strong housing market conditions and shifts in the product and geographic mix of homes delivered.

Operating income for the three months and nine months ended August 31, 2021 rose from the corresponding year-earlier periods due to growth in housing gross profits, partially offset by higher selling, general and administrative expenses.

For the three months ended August 31, 2021, the increase in this segment’s operating income as a percentage of revenues primarily reflected a 210 basis-point improvement in selling, general and administrative expenses as a percentage of housing revenues to 7.8%, as the housing gross profit margin was essentially flat at 21.7%.

There were no inventory-related charges for the three months ended August 31, 2021, compared to $1.1 million for the year-earlier period.

Operating income margin as a percentage of revenues 10.7 % 13.2 % (250) bps

This segment’s revenues grew from the corresponding year-earlier period due to an increase in the average selling price of homes delivered, partly offset by a decrease in the number of homes delivered.

The higher average selling price reflected strong housing market conditions and shifts in the product and geographic mix of homes delivered.

Operating income decreased from the corresponding year-earlier period mainly due to higher selling, general and administrative expenses.

For the three months ended February 28, 2022, the decrease in this segment’s operating income as a percentage of revenues primarily reflected a 300 basis-point decrease in the housing gross profit margin to 19.8%, partly offset by a 50 basis-point decrease in selling, general and administrative expenses as a percentage of housing revenues to 9.1%.

The decline in the housing gross profit margin was largely due to higher construction and land costs and increased expenses to support current operations and expected growth, partly offset by lower relative amortization of capitalized interest.

The improvement in selling, general and administrative expenses as a percentage of housing revenues mainly reflected increased operating leverage from higher housing revenues.

For the nine months ended August 31, 2021, the year-over-year expansion in this segment’s operating income as a percentage of revenues reflected a 210 basis-point increase in the housing gross profit margin to 22.5% and a 190 basis-point improvement in selling, general and administrative expenses as a percentage of housing revenues to 8.6%.

The housing gross profit expansion was mainly driven by a favorable pricing environment, lower inventory-related charges, improved operating leverage due to higher housing revenues and lower relative amortization of previously capitalized interest.

Inventory-related charges for the nine months ended August 31, 2021 were nominal, compared to $5.5 million in the year-earlier period.

The year-over-year improvement in selling, general and administrative expenses as a percentage of revenues was primarily due to the reason described above with respect to the three months ended August 31, 2021, as well as 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 segment for the periods indicated (dollars in thousands, except average selling price):

Three Months Ended August 31, Nine Months Ended August 31,

2021 2020 Variance 2021 2020 Variance

The following table presents financial information related to our Southeast segment (dollars in thousands, except average selling price):

Three Months Ended February 28,

2022 2021 Variance

Revenues $ 170,191 $ 126,099 35 %

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Average selling price $ 350,900 $ 288,400 22 %

Operating income as a percentage of revenues 11.2 % 6.2 % 500 bps 10.9 % 4.6 % 630 bps

This segment’s revenues for the three-month and nine-month periods ended August 31, 2021 and 2020 were generated from both housing operations and nominal land sales.

Housing revenues for the three months ended August 31, 2021 increased 87% year over year to $178.6 million from $95.4 million.

For the nine months ended August 31, 2021, housing revenues grew 42% year over year to $465.8 million from $327.4 million.

The housing revenue expansion in the three-month and nine-month periods primarily resulted from growth in the number of homes delivered and increases in the overall average selling price of these homes, which reflected strong housing market conditions and shifts in the product and geographic mix of homes delivered.

Operating income for the three months and nine months ended August 31, 2021 increased from the corresponding year-earlier periods, reflecting higher housing gross profits, partly offset by higher selling, general and administrative expenses.

As a percentage of revenues, operating income for the 2021 third quarter rose from the year-earlier period due to a 250 basis-point increase in the housing gross profit margin to 20.5% that mainly reflected a shift in geographic mix, and lower relative amortization of previously capitalized interest.

In addition, selling, general and administrative expenses as a percentage of housing revenues improved 230 basis points from the year-earlier period to 9.4%, primarily due to increased operating leverage as a result of higher housing revenues.

For the nine months ended August 31, 2021, the year-over-year increase in this segment’s operating income as a percentage of revenues reflected a 380 basis-point increase in the housing gross profit margin to 20.4% and a 240 basis-point improvement in selling, general and administrative expenses as a percentage of housing revenues to 9.5%.

The housing gross profit margin expanded primarily for the reasons described above for the three months ended August 31, 2021, as well as increased operating leverage due to higher housing revenues.

The improvement in selling, general and administrative expenses as a percentage of housing revenues was mainly due to the reasons described above with respect to the three months ended August 31, 2021.

addition, selling, general and administrative expenses as a percentage of revenues benefited from the continued impact of targeted actions we took in 2020 to reduce overhead costs in the early stages of the COVID-19 pandemic.

Operating income as a percentage of revenues 11.9 % 9.6 % 230 bps

This segment’s revenues for the three months ended February 28, 2022 were generated solely from housing operations.

For the three months ended February 28, 2021 revenues were generated from both housing operations and nominal land sales.

Housing revenues for 2022 first quarter increased 36% year over year from $125.4 million.

The housing revenue expansion resulted

from growth in the number of homes delivered and an increase in the overall average selling price of those homes, which reflected strong housing market conditions and shifts in the product and geographic mix of homes delivered.

Operating income increased from the corresponding year-earlier period, reflecting higher housing gross profits, partly offset by higher selling, general and administrative expenses.

As a percentage of revenues, operating income for the 2022 first quarter rose from the year-earlier period due to a 240 basis-point increase in the housing gross profit margin to 22.3% that mainly reflected a shift in geographic mix, lower relative amortization of previously capitalized interest and reduced sales incentives.

Selling, general and administrative expenses as a percentage of housing revenues increased 20 basis points from the year-earlier period to 10.4%.

FINANCIAL SERVICES REPORTING SEGMENT

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

Three Months Ended August 31, Nine Months Ended August 31,

2021 2020 2021 2020

Three Months Ended February 28,

Revenues $ 4,635 $ 3,730

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Loans sold (a):

Loans sold to Stearns/Guaranteed Rate 2,087 1,936 5,772 5,985

Loans sold to Stearns/GR Alliance 1,527 1,554

Principal $ 595,959 $ 523,905

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(a) Loan originations and sales occurred within KBHS.

Financial services revenues for the three months and nine months ended August 31, 2021 rose from the corresponding periods of 2020 due to increases in title services revenues and insurance commissions.

Financial services revenues for the three months ended February 28, 2022 grew from the corresponding period of 2021 due to increases in both title services revenues and insurance commissions.

Pretax income.

Our financial services pretax income for the three months ended August 31, 2021 was down 3% from the year-earlier period due to a decrease in the equity in income of unconsolidated joint ventures that was partly offset by an increase in income from title services and insurance commissions.

In the 2021 third quarter, our equity in income of our unconsolidated joint venture, KBHS, decreased 21% year over year due to lower margins, reflecting increased competition in the primary mortgage market, partly offset by an increase in the principal amount of loan originations.

The higher principal amount of loan originations primarily reflected a 35% rise in the number of homes we delivered and an 11% increase in the average selling price of those homes, partly offset by a decrease in the percentage of homebuyers using KBHS.

For the nine months ended August 31, 2021, our financial services pretax income rose 24% from the corresponding 2020 period primarily due to a 24% increase in our equity in income of KBHS that reflected a substantial increase in the principal amount of loan originations and improved margins.

The year-over-year increase in the principal amount of loan originations was largely due to a 26% increase in the number of homes we delivered and an 8% rise in the average selling price of those homes.

On January 5, 2021, Guaranteed Rate announced it had reached an agreement to acquire Stearns’ parent company.

This transaction closed on March 1, 2021.

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

Financial services pretax income for the three months ended February 28, 2022 was essentially even with the year-earlier period, as a decrease in our equity in income of unconsolidated joint ventures was offset by an increase in income from title services and insurance commissions.

In the 2022 first quarter, the equity in income of our unconsolidated joint venture, KBHS, decreased 14% year over year due to a lower principal amount of loan originations combined with lower margins, reflecting increased competition in the primary mortgage market, partly offset by an increase in the fair value of interest rate lock commitments.

The lower principal amount of loan originations was mainly due to a decrease in the percentage of homebuyers using KBHS, partly offset by a 22% increase in the average selling price of homes delivered.

Income Tax Expense.

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

Three Months Ended August 31, Nine Months Ended August 31,

2021 2020 2021 2020

Three Months Ended February 28,

Income tax expense $ 43,800 $ 26,500

Effective tax rate 24.6 % 21.4 %

Our effective tax rate for the three months ended August 31, 2021 decreased from the year-earlier period, mainly due to an $18.4 million increase in the federal energy tax credits we earned from building energy-efficient homes.

For the nine months ended August 31, 2021, our effective tax rate decreased slightly from the corresponding 2020 period, primarily reflecting the favorable impact of a $28.9 million increase in federal energy tax credits on the overall rate, partly offset by an increase of $2.6 million in non-deductible executive compensation expense and a $1.7 million decrease in excess tax benefits related to stock-based compensation.

The federal energy tax credits for the three months and nine months ended August 31, 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 expired on December 31, 2020.

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

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

The suspension of California net operating loss deductions did not have an impact on our income tax expense for the three months or nine months ended August 31, 2021.

Our effective tax rate for the three months ended February 28, 2022 increased from the year-earlier period, mainly due to a $2.5 million decrease in the federal tax credits we earned primarily from building energy-efficient homes, reflecting the expiration of these credits for homes delivered after December 31, 2021.

Also contributing to the higher effective tax rate were a $1.3 million decrease in excess tax benefits related to stock-based compensation, and an increase of $.3 million in non-deductible executive compensation expense.

In June 2020, California enacted tax legislation that approved the suspension of California NOL deductions for tax years 2020, 2021 and 2022.

On February 9, 2022, California enacted legislation restoring the NOL deduction for tax years beginning on or after January 1, 2022, which would be effective for our 2023 fiscal year.

Although the suspension of California NOL deductions did not have an impact on our income tax expense for the three months ended February 28, 2022, it contributed to the year-over-year increase in the amount of taxes we paid in the period.

Further information regarding our income taxes is provided in Note 13 – 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 and ratio of net debt to capital, neither of which is calculated in accordance with 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.

This report contains information about our adjusted housing gross profit margin, which is not calculated in accordance with GAAP.

We believe this non-GAAP financial measure is 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 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):

Three Months Ended August 31, Nine Months Ended August 31,

2021 2020 2021 2020

Three Months Ended February 28,

Housing revenues $ 1,394,154 $ 1,137,353

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Inventory-related charges (a)

6,701 6,888 11,222 16,939

Housing gross profits excluding inventory-related charges 320,901 201,574 869,612 563,781

Amortization of previously capitalized interest (b)

37,544 30,186 109,640 93,507

Adjusted housing gross profits $ 312,217 $ 240,239

Three Months Ended August 31, Nine Months Ended August 31,

2021 2020 2021 2020

Housing gross profit margin as a percentage of housing revenues 22.4 % 20.8 %

Housing gross profit margin excluding inventory-related charges as a percentage of housing revenues 22.0 % 20.6 % 21.6 % 19.0 %

Adjusted housing gross profit margin as a percentage of housing revenues 22.4 % 21.1 %

24.5 % 23.7 % 24.3 % 22.2 %

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

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

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

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 housing inventory impairment and land option contract abandonment charges (as applicable) recorded during a given period, by housing revenues.

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

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

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

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

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

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

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):

2021 November 30,

Notes payable $ 1,863,501 $ 1,747,175

Stockholders’ equity 2,841,733 2,665,769

Total capital $ 4,705,234 $ 4,412,944

Ratio of debt to capital 39.6 % 39.6 %

Notes payable $ 1,863,501 $ 1,747,175

Cash and cash equivalents

(350,141) (681,190)

Net debt 1,513,360 1,065,985

Stockholders’ equity 2,841,733 2,665,769

Total capital $ 4,355,093 $ 3,731,754

Ratio of net debt to capital 34.7 % 28.6 %

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.

On September 15, 2021, we redeemed the remaining $180.2 million in aggregate principal amount of the 7.00% Senior Notes due 2021 at par value pursuant to the terms of the notes.

On a pro forma basis, assuming this redemption occurred during the 2021 third quarter, our ratio of debt to capital would have been 37.2% as of August 31, 2021.

Liquidity and Capital Resources

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• repayments of borrowings under the Credit Facility.

We ended the 2021 third quarter with total liquidity of $1.14 billion, including cash and cash equivalents and $791.4 million of available capacity under the Credit Facility.

Based on our financial position as of August 31, 2021, and our positive business forecast for the remainder of 2021 as discussed below under “Outlook,” we have no material concerns related to our liquidity.

We ended the 2022 first quarter with total liquidity of $1.07 billion, including cash and cash equivalents and $831.4 million of available capacity under the Credit Facility.

Based on our financial position as of February 28, 2022, and our generally positive business forecast for the remainder of 2022 as discussed below under “Outlook,” we have no material concerns related to our liquidity.

While the ongoing COVID-19 pandemic creates potential liquidity risks, as discussed further below, we believe that our existing cash and cash equivalents, our anticipated cash flows from operations and amounts available under our Credit Facility will be sufficient to fund our anticipated operating and land-related investment needs for at least the next 12 months.

Our investments in land and land development increased 83% to $1.91 billion for the nine months ended August 31, 2021, compared to $1.04 billion for the prior-year period.

Approximately 52% of our total investments for the nine months ended August 31, 2021 related to land acquisition, compared to approximately 46% in the year-earlier period.

While we made strategic investments in land and land development in each of our homebuilding reporting segments during the nine months ended August 31, 2021 and 2020, approximately 52% and 51%, respectively, of these investments for each period were made in our West Coast homebuilding reporting segment.

Cash Requirements .

There have been no significant changes in our cash requirements from those reported in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section of our Annual Report on Form 10-K for the year ended November 30, 2021.

Investments in Land and Land Development.

Our investments in land and land development increased 27% to $704.7 million for the three months ended February 28, 2022, compared to $556.0 million for the year-earlier period.

Approximately 52% of our total investments for the three months ended February 28, 2022 related to land acquisition, compared to approximately 49% in the prior-year period.

While we made strategic investments in land and land development in each of our homebuilding reporting segments during the three months ended February 28, 2022 and 2021, approximately 57% and 53%, respectively, of these investments for each period were made in our West Coast homebuilding reporting segment.

Our investments in land and land development in the future will depend significantly on market conditions and available opportunities that meet our investment return standards to support home delivery and revenue growth in the remainder of 2022 and beyond.

The following table presents the number of lots we owned or controlled under land option contracts and other similar contracts and the carrying value of inventory by homebuilding reporting segment (dollars in thousands):

August 31, 2021 November 30, 2020 Variance

February 28, 2022 November 30, 2021 Variance

Segment Lots $ Lots $ Lots $

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Total 88,212 $ 5,197,833 86,768 $ 4,802,829 1,444 $ 395,004

The number and carrying value of lots we owned or controlled under land option contracts and other similar contracts at August 31, 2021 increased from November 30, 2020, primarily due to our investments in land and land development in the nine months ended August 31, 2021 and an increase in the number of homes under construction.

The number of lots in inventory as of August 31, 2021 included 11,602 lots under contract where the associated deposits were refundable at our discretion, compared to 10,254 of such lots at November 30, 2020.

Our lots controlled under land option contracts and other similar contracts as a percentage of total lots was 42% at August 31, 2021, compared to 40% at November 30, 2020.

The number and carrying value of lots we owned or controlled under land option contracts and other similar contracts at February 28, 2022 increased from November 30, 2021, primarily due to our investments in land and land development in the three months ended February 28, 2022 and an increase in the number of homes under construction.

The number of lots in inventory as of February 28, 2022 included 11,365 lots under contract where the associated deposits were refundable at our discretion, compared to 10,254 of such lots at November 30, 2021.

Our lots controlled under land option contracts and other similar contracts as a percentage of total lots was 42% at February 28, 2022, compared to 44% at November 30, 2021.

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 the land we had under land option contracts and other similar contracts at February 28, 2022, we estimate the remaining purchase price to be paid would be as follows:

2022 – $1.06 billion;

2023 – $449.9 million;

2024 – $66.2 million;

2025 – $79.7 million;

2026 – $15.0 million;

and thereafter – $0.

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

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Total liquidity $ 1,072,070 $ 1,082,146

The majority of our cash equivalents at August 31, 2021 and November 30, 2020 were invested in interest-bearing bank deposit accounts.

The majority of our cash equivalents at February 28, 2022 and November 30, 2021 were invested in interest-bearing bank deposit accounts.

Capital Resources.

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2021 Variance

Credit Facility $ 250,000 $ — $ 250,000

Mortgages and land contracts due to land sellers and other loans 4,927 5,327 (400)

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$ 1,934,948 $ 1,685,027 $ 249,921

Our financial leverage, as measured by the ratio of debt to capital was 39.6% at both August 31, 2021 and November 30, 2020.

Our ratio of net debt to capital (a calculation that is described above under “Non-GAAP Financial Measures”) at August 31, 2021 was 34.7%, compared to 28.6% at November 30, 2020.

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 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.

The transactions completed in the 2021 third quarter, together with the redemption of the remaining 7.00% Senior Notes due 2021 subsequent to the end of the quarter, 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.

Further information regarding these transactions is provided in Note 15 – Notes Payable in the Notes to Consolidated Financial Statements in this report.

On a pro forma basis, assuming the $180.2 million redemption occurred during the 2021 third quarter, our ratio of debt to capital would have been 37.2% as of August 31, 2021.

Our financial leverage, as measured by the ratio of debt to capital, was 38.2% at February 28, 2022, compared to 35.8% at November 30, 2021.

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

LOC Facility .

On August 12, 2021, we entered into an amendment to our 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 $35.0 million and $29.7 million of letters of credit outstanding under the LOC Facility at August 31, 2021 and November 30, 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.

We maintain an LOC Facility to obtain letters of credit from time to time in the ordinary course of operating our business.

Under the LOC Facility, which expires on February 13, 2025, we may issue up to $75.0 million of letters of credit.

As of February 28, 2022 and November 30, 2021, we had letters of credit outstanding under the LOC Facility of $36.7 million and $34.6 million, respectively.

Performance Bonds .

As discussed in Note 16 – Commitments and Contingencies in the Notes to Consolidated Financial Statements in this report, we had $1.15 billion and $1.11 billion of performance bonds outstanding at February 28, 2022 and November 30, 2021, respectively.

Unsecured Revolving Credit Facility .

We have an $800.0 million Credit Facility that will mature on October 7, 2023.

On February 18, 2022, we entered into an amendment to our Credit Facility that increased its borrowing capacity from $800.0 million to $1.09 billion and extended its maturity from October 7, 2023 to February 18, 2027.

The Credit Facility contains an uncommitted accordion feature under which its aggregate principal amount of available loans can be increased to a maximum of $1.29 billion under certain conditions, including obtaining additional bank commitments.

The amount of the Credit Facility available for cash borrowings and the issuance of letters of credit depends on the total cash borrowings and letters of credit outstanding under the Credit Facility and the maximum available amount under the terms of the Credit Facility.

As of August 31, 2021, we had no cash borrowings and $8.6 million of letters of credit outstanding under the Credit Facility.

As of February 28, 2022, we had $250.0 million of cash borrowings and $8.6 million of letters

of credit outstanding under the Credit Facility, with the outstanding borrowings reflecting a focus to operate with a more efficient cash balance as we continue to drive returns-focused growth.

The Credit Facility is further described in Note 14 – Notes Payable in the Notes to Consolidated Financial Statements in this report.

There have been no changes to the terms of the Credit Facility during the nine months ended August 31, 2021 from those disclosed in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section of our Annual Report on Form 10-K for the year ended November 30, 2020.

Under the terms of the Credit Facility, we are required, among other things, to maintain compliance with various covenants, including financial covenants regarding our consolidated tangible net worth, Leverage Ratio, and either an Interest Coverage Ratio or minimum liquidity level, each as defined therein.

Our compliance with these financial covenants is measured by calculations and metrics that are specifically defined or described by the terms of the Credit Facility and can differ in certain respects from comparable GAAP or other commonly used terms.

The financial covenant requirements under the Credit Facility, as amended, are set forth below:

• Consolidated Tangible Net Worth – We must maintain a consolidated tangible net worth at the end of any fiscal quarter greater than or equal to the sum of (a) $2.09 billion, plus (b) an amount equal to 50% of the aggregate of the cumulative consolidated net income for each fiscal quarter commencing after November 30, 2021 and ending as of the last day of such fiscal quarter (though there is no reduction if there is a consolidated net loss in any fiscal quarter), plus (c) an amount equal to 50% of the cumulative net proceeds we receive from the issuance of our capital stock after November 30, 2021.

• Leverage Ratio – We must also maintain a Leverage Ratio of less than or equal to .60 at the end of each fiscal quarter.

The Leverage Ratio is calculated as the ratio of our consolidated total indebtedness to the sum of consolidated total indebtedness and consolidated tangible net worth, all as defined under the Credit Facility.

• Interest Coverage Ratio or Liquidity – We are also required to maintain either (a) an Interest Coverage Ratio of greater than or equal to 1.50 at the end of each fiscal quarter;

or (b) a minimum level of liquidity, but not both.

The Interest Coverage Ratio is the ratio of our consolidated adjusted EBITDA to consolidated interest incurred, each as defined under the Credit Facility, in each case for the previous 12 months.

Our minimum liquidity is required to be greater than or equal to consolidated interest incurred, as defined under the Credit Facility, for the four most recently ended fiscal quarters in the aggregate.

In addition, under the Credit Facility, our investments in joint ventures and non-guarantor subsidiaries (which are shown, respectively, in Note 9 – Investments 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.

Further, for so long as we do not hold an investment grade rating, as defined under the Credit Facility, the Credit Facility does not permit our borrowing base indebtedness, which generally is the aggregate principal amount of our and certain of our subsidiaries’ outstanding indebtedness for borrowed money and non-collateralized financial letters of credit, to be greater than our borrowing base (a measure relating to our inventory and unrestricted cash assets).

The covenants and other requirements under the Credit Facility represent the most restrictive covenants that we are subject to with respect to our notes payable.

The following table summarizes the financial covenants and other requirements under the Credit Facility, and our actual levels or ratios (as applicable) with respect to those covenants and other requirements, in each case as of August 31, 2021:

Financial Covenants and Other Requirements Covenant Requirement Actual

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Borrowing base in excess of borrowing base indebtedness (as defined) n/a $2.16 billion

(a) Under the terms of the Credit Facility, we are required to maintain either a minimum Interest Coverage Ratio or a minimum level of liquidity, but not both.

As of August 31, 2021, we met both the Interest Coverage Ratio and the minimum liquidity requirements.

(a) Under the terms of the Credit Facility, we are required to maintain either a minimum Interest Coverage Ratio or a minimum level of liquidity.

The indenture governing our senior notes does not contain any financial covenants.

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In addition, the indenture contains certain limitations related to mergers, consolidations, and sales of assets.

As of August 31, 2021, we were in compliance with the applicable terms of all of our covenants and other requirements under the Credit Facility, the senior notes, the indenture, and the mortgages and land contracts due to land sellers and other loans.

As of February 28, 2022, we were in compliance with the applicable terms of all of our covenants and other requirements under the Credit Facility, the senior notes, the indenture, and the mortgages and land contracts due to land sellers and other loans.

Our ability to access the Credit Facility for cash borrowings and letters of credit and our ability to secure future debt financing depend, in part, on our ability to remain in such compliance.

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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 August 31, 2021, we had outstanding mortgages and land contracts due to land sellers and other loans payable in connection with such financing of $4.1 million, secured primarily by the underlying property, which had an aggregate carrying value of $16.6 million.

At February 28, 2022, we had outstanding mortgages and land contracts due to land sellers and other loans payable in connection with such financing of $4.9 million, secured primarily by the underlying property, which had an aggregate carrying value of $18.5 million.

Credit Ratings .

Our credit ratings are periodically reviewed by rating agencies.

In February 2021, Moody’s Investors Service affirmed our corporate Ba3 credit rating, and upgraded the rating outlook to positive from stable.

In May 2021, Moody’s Investors Service upgraded our corporate rating to Ba2 from Ba3, and changed the rating outlook to stable from positive.

In January 2022, Standard and Poor’s Financial Services reaffirmed our BB credit rating and changed its rating outlook to positive from stable.

Consolidated Cash Flows .

The following table presents a summary of net cash provided by (used in) our operating, investing and financing activities (in thousands):

Nine Months Ended August 31,

Three Months Ended February 28,

Net cash provided by (used in):

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Financing activities 219,512 (20,582)

Net increase (decrease) in cash and cash equivalents $ (331,184) $ 268,268

Net decrease in cash and cash equivalents $ (49,399) $ (111,570)

Operating Activities .

Generally, our net operating cash flows fluctuate primarily based on changes in our inventories and our profitability.

Our net cash used in operating activities for the nine months ended August 31, 2021 mainly reflected a net increase in inventories of $760.4 million and a net increase in receivables of $22.5 million, partly offset by net income of $390.5 million and a net increase in accounts payable, accrued expenses and other liabilities of $102.1 million.

In the nine months ended August 31, 2020, our net cash provided by operating activities primarily reflected net income of $190.2 million, a $62.8 million net decrease in receivables and a $46.6 million net decrease in inventories, partly offset by a net decrease in accounts payable, accrued expenses and other liabilities of $62.4 million.

Our net cash used in operating activities for the three months ended February 28, 2022 mainly reflected a net increase in inventories of $405.9 million and a net increase in receivables of $8.6 million, partly offset by net income of $134.3 million and a net increase in accounts payable, accrued expenses and other liabilities of $2.1 million.

In the three months ended February 28, 2021, our net cash used in operating activities mainly reflected a net increase in inventories of $229.1 million and a net decrease in accounts payable, accrued expenses and other liabilities of $10.1 million, partially offset by net income of $97.1 million and a net decrease in receivables of $23.3 million.

Investing Activities .

In the nine months ended August 31, 2021, our uses of cash included $28.2 million for net purchases of property and equipment and $11.1 million for contributions to unconsolidated joint ventures.

In the three months ended February 28, 2022, our uses of cash included $10.6 million for net purchases of property and equipment and $8.6 million for contributions to unconsolidated joint ventures.

These uses of cash were partially offset by a $1.3 million return of investments in unconsolidated joint ventures.

In the nine months ended August 31, 2020, the net cash used for investing activities reflected $21.2 million for net purchases of property and equipment and $6.0 million for contributions to unconsolidated joint ventures.

These uses of cash were partially offset by an $8.8 million return of investments in unconsolidated joint ventures.

In the three months ended February 28, 2021, the net cash used for investing activities reflected $9.1 million for net purchases of property and equipment and $2.6 million for contributions to unconsolidated joint ventures.

Financing Activities .

In the nine months ended August 31, 2021, cash was used for our repayment of $269.8 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 $41.0 million, tax payments associated with stock-based compensation awards of $8.5 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 $.6 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 $3.5 million of issuances of common stock under employee stock plans.

In the nine months ended August 31, 2020, cash was used for dividend payments on our common stock of $24.4 million, payments on mortgages and land contracts due to land sellers and other loans of $20.3 million and tax payments associated with stock-based compensation awards of $6.2 million.

In the three months ended February 28, 2022, cash was provided by net borrowings under the Credit Facility of $250.0 million.

Partially offsetting the cash provided were $14.1 million of dividend payments on our common stock, $12.2 million of tax payments associated with stock-based compensation awards, $3.8 million of costs incurred for the Credit Facility amendment and $.4 million of payments on mortgages and land contracts due to land sellers and other loans.

In the three months ended February 28, 2021, net cash was used for dividend payments on our common stock of $14.1 million, tax payments associated with stock-based compensation awards of $8.5 million and payments on mortgages and land contracts due to land sellers and other loans of $.6 million.

The cash used was partially offset by $2.5 million of issuances of common stock under employee stock plans.

In the three-month period ended August 31, 2021, our board of directors declared, and we paid, a quarterly cash dividend on our common stock of $.15 per share.

In the three-month period ended August 31, 2020, our board of directors declared, and we paid, a quarterly cash dividend on our common stock of $.09 per share.

Quarterly cash dividends declared and paid during the nine-month periods ended August 31, 2021 and 2020 totaled $.45 per share and $.27 per share of common stock, respectively.

In the three-month periods ended February 28, 2022 and 2021, our board of directors declared, and we paid, a quarterly cash dividend on our common stock of $.15 per share.

The declaration and payment of future cash dividends on our common stock, whether at current levels or at all, are at the discretion of our board of directors and depend upon, among other things, our expected future earnings, cash flows, capital requirements, access to external financing, debt structure and any adjustments thereto, operational and financial investment strategy and general financial condition, as well as general business conditions.

While the ongoing COVID-19 pandemic has created uncertainty as to general economic conditions for the remainder of 2021, 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.

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.

For the remainder of 2022, we expect to use or redeploy our cash resources or cash borrowings under the Credit Facility to support our business within the context of prevailing market conditions.

During this time, we may also engage in capital markets, bank loan, project debt or other financial transactions, including the repurchase of debt or equity securities, which we did in the 2021 third quarter, or potential new issuances of debt or equity securities to support our business needs.

During this time, we may also engage in capital markets, bank loan, project debt or other financial transactions, including the repurchase of debt or equity securities or potential new issuances of debt or equity securities to support our business needs.

The amounts involved in these transactions, if any, may be material.

In addition, as necessary or desirable, we may adjust or amend the terms of and/or expand the capacity of the Credit Facility or the LOC Facility, or enter into additional letter of credit facilities, or other similar facility arrangements, in each case with the same or other financial institutions, or allow any such facilities to mature or expire.

However, with the uncertainty surrounding the COVID-19 pandemic, which could materially and negatively affect our business and the housing market, our ability to engage in such transactions may be constrained by volatile or tight economic, capital, credit and/or financial market conditions, as well as moderated investor and/or lender interest or capacity and/or our liquidity, leverage and net worth, and we can provide no assurance as to successfully completing, the costs of, or the operational limitations arising from any one or series of such transactions.

However, with the uncertainty surrounding the COVID-19 pandemic and international and domestic COVID-19 control responses, including in China, as well as the ongoing global supply chain disruptions, which may be exacerbated by the military conflict in Ukraine and the associated wide-ranging sanctions imposed on Russian business sectors, financial organizations, individuals and raw materials, each of 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 in the “Risk Factors” section of our Annual Report on Form 10-K for the year ended November 30, 2021.

Supplemental Guarantor Financial Information

As of August 31, 2021, we had $1.87 billion in aggregate principal amount of outstanding senior notes and no borrowings outstanding under the Credit Facility.

As of February 28, 2022, we had $1.69 billion in aggregate principal amount of outstanding senior notes and $ 250.0 million of 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”).

Non-Guarantor Subsidiary to become a Guarantor Subsidiary if we believe it to be in our or the relevant subsidiary’s best interest.

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 14 – 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.

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Total assets 5,948,818 5,581,883

2022 November 30,

Summarized Balance Sheet Data (in thousands)

Liabilities and Stockholders’ Equity

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Stockholders’ equity 2,935,250 2,826,066

Nine Months Ended August 31, 2021

Three Months Ended

February 28, 2022

Summarized Statement of Operations Data (in thousands)

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Net income 127,820

Off-Balance Sheet Arrangements, Contractual Obligations and Commercial Commitments

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 August 31, 2021 or 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 the land we had under land option contracts and other similar contracts at August 31, 2021, we estimate the remaining purchase price to be paid during each year ending November 30 would be as follows:

2021 – $517.2 million;

2022 – $718.2 million;

2023 – $187.0 million;

2024 – $49.5 million;

2025 – $80.9 million;

and thereafter – $1.7 million.

Contractual Obligations.

Due to the debt issuance and purchase described in Note 15 – Notes Payable in the Notes to Consolidated Financial Statements in this report, our contractual obligations as of August 31, 2021 have changed materially from those reported in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section in our Annual Report on Form 10-K for the year ended November 30, 2020.

The following table sets forth our future cash requirements related to the contractual obligations of our long-term debt and interest as of August 31, 2021 (in millions):

Payments due by Period

Total Fiscal Year

2021 Fiscal Years

2022-2023 Fiscal Years

2024-2025 Thereafter

Contractual obligations:

Long-term debt $ 1,874.2 $ 1.1 $ 882.4 $ .7 $ 990.0

Interest 498.2 55.1 167.6 101.2 174.3

Total $ 2,372.4 $ 56.2 $ 1,050.0 $ 101.9 $ 1,164.3

There have been no other significant changes in our contractual obligations from those reported in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section of our Annual Report on Form 10-K for the year ended November 30, 2020.

Critical Accounting Policies

The preparation of our consolidated financial statements requires the use of judgment in the application of accounting policies and estimates of uncertain matters.

There have been no significant changes to our critical accounting policies and estimates during the nine months ended August 31, 2021 from those disclosed in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section of our Annual Report on Form 10-K for the year ended November 30, 2020.

There have been no significant changes to our critical accounting policies and estimates during the three months ended February 28, 2022 from those disclosed in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section of our Annual Report on Form 10-K for the year ended November 30, 2021.

Recent Accounting Pronouncements

Recent accounting pronouncements are discussed in Note 1 – Basis of Presentation and Significant Accounting Policies in the Notes to Consolidated Financial Statements in this report.

We believe long-term housing market fundamentals supporting demand remain positive.

Most notably, demographic trends are favorable especially with respect to first-time homebuyers, largely comprised of the approximately 140 million members of the millennial and Generation Z cohorts in their prime homebuying years.

First-time buyers accounted for 61% of our homes delivered in the three months ended August 31, 2021.

We believe our Built-to-Order model, which provides our buyers a significant degree of personalization and choice, as well as the industry leading energy efficiency of our homes, including our commitment to building ENERGY STAR® certified homes and solar homes that help lower the total cost of homeownership, gives us a meaningful and distinct competitive advantage over other homebuilders, and both resale and rental homes, particularly in serving first-time homebuyers.

Mortgage interest rates are at relatively low levels and housing affordability remains generally favorable.

For the remainder of 2021, we plan to continue to execute on our customer-centric, personalized approach to homebuilding, which we believe contributed to our robust year-over-year net orders in the first three quarters of 2021, and expand our community count to support future growth.

In addition, we expect to continue to focus on aligning our housing starts with our net orders, and working to stabilize our construction cycle times, in order to deliver our homes in backlog and meet our expected delivery volumes for the year.

We expect our increased investments in land and land development in recent quarters and more than 200 planned new community openings over the next five quarters will lead to sequential increases in our ending community count for the 2021 fourth quarter and each quarter of 2022.

Our present outlook for the 2021 fourth quarter, the 2021 full year and the 2022 full year is as follows:

2021 Fourth Quarter

• We expect to generate housing revenues in the range of $1.65 billion to $1.75 billion, compared to $1.19 billion in the year-earlier quarter, and anticipate our average selling price to be approximately $450,000, representing a year-over-year increase of 9%.

• We expect our housing operating income as a percentage of revenues, assuming no inventory-related charges, to be approximately 11.8%, compared to 10.7% for the prior-year quarter.

◦ We expect our housing gross profit margin to be in the range of 21.6% to 22.0%, assuming no inventory-related charges.

◦ We expect our selling, general and administrative expenses as a percentage of housing revenues to be approximately 10.0%, an improvement from 10.3% for the 2020 fourth quarter.

• We expect an effective tax rate of approximately 24%.

• We estimate a weighted average share count of 91 million shares for calculating diluted earnings per share.

• We expect our ending community count will be up slightly from the third quarter, resulting in a high single-digit decrease in our fourth quarter average community count compared to the year-earlier quarter.

2021 Full Year

• We expect our housing revenues to be about $5.74 billion, compared to $4.15 billion in 2020, and anticipate our average selling price will be roughly $422,600, compared to $388,900 in 2020.

• We expect our homebuilding operating income as a percentage of revenues, assuming no inventory-related charges, will be approximately 11.5%, compared to 8.4% for 2020, which excluded severance charges of $6.7 million associated with pandemic-related workforce reductions.

◦ We expect our housing gross profit margin to be around 21.6%, assuming no inventory-related charges, versus 19.6% for 2020.

◦ We expect our selling, general and administrative expenses as a percentage of housing revenues to be approximately 10.1%, compared to 11.2%, excluding severance charges, in the prior year.

• We expect an effective tax rate of approximately 19%.

• We expect our return on equity will be approximately 20%, an improvement of more than 800 basis points compared to 11.8% for 2020.

• We estimate a weighted average share count of 93.5 million shares for calculating diluted earnings per share.

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 steady employment and job growth.

We believe our highly customer-centric, personalized approach to homebuilding and operational capabilities will enable us to address 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, including the risks described below.

Our present outlook for the 2022 second quarter and full year is as follows:

2022 Second Quarter

• We expect to generate housing revenues in the range of $1.55 billion to $1.65 billion, an increase from $1.44 billion in the corresponding 2021 period, and anticipate our average selling price to be approximately $490,000, compared to $409,800 in the year-earlier period.

• We expect our homebuilding operating income margin will be in the range of 14.3% to 14.7%, assuming no inventory-related charges, up from 11.4% for the year-earlier quarter.

• We expect our housing gross profit margin to be in the range of 24.4% to 25.0%, assuming no inventory-related charges, compared to 21.5% 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 10.0% to 10.5%, compared to 10.1% in the 2021 second quarter.

• We expect our effective tax rate will be approximately 25%.

The effective tax rate for the year-earlier quarter was approximately 17%, reflecting the favorable effect of then-available federal tax credits we earned primarily from building energy-efficient homes.

• We expect a small sequential increase in our ending community count, and a low-to-mid single-digit percentage increase year over year in our average community count.

2022 Full Year

• We expect our housing revenues to be over $7.00 billion.

• We expect our year-end community count will be up about 20% and the average count will be around 10% higher, both as compared to 2021.

We believe we are well positioned to achieve our targets for the 2021 fourth quarter, the 2021 full year and the 2022 full year 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 industry continues to experience labor and supply constraints and rising and volatile raw material prices and availability, particularly related to building materials and appliances, as well as delays with respect to state and municipal construction permitting, inspections and utilities.

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 the rest of the year or if there is a material rise in inflation.

If these issues worsen in the remainder of 2021 or in 2022, our business and our ability to generate positive growth could be negatively impacted.

• 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 $490,000 to $500,000, an increase of between 16% and 18% from 2021.

• We expect our homebuilding operating income margin to be in the range of 16.0% to 16.6%, assuming no inventory-related charges, compared to 11.8% for 2021.

• We expect our housing gross profit margin to be in the range of 25.5% to 26.3%, 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 9.2% to 9.8%, compared to 10.1% in the prior year.

• We expect the effective tax rate will be approximately 25%.

The effective tax rate for 2021 was approximately 19%, which reflected the favorable effect of then-available federal tax credits we earned primarily from building energy-efficient homes.

• We expect our ending community count to be approximately 255.

• We expect our return on equity to be in excess of 27%, an improvement of more than 700 basis points compared to 19.9% for 2021.

We believe we are well-positioned to achieve our targets for the 2022 second quarter and full year 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 regarding 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, that were exacerbated in the 2022 first quarter by a resurgence of COVID-19 infections with the Omicron variant.

Although we continue to work with our suppliers and trade partners to resolve these land development and home construction issues, we believe they will generally persist throughout the year.

Ongoing supply chain disruptions and other production-related challenges described above under “Overview,” which may worsen in the coming periods due to the military conflict in Ukraine and the associated wide-ranging sanctions imposed on Russian business sectors, financial organizations, individuals and raw materials, could further extend our construction cycle times, delay our new community openings and intensify construction-related cost pressures beyond our experience in the 2022 first quarter or 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 and the Federal Reserve’s raising of the federal funds interest rate and other actions to moderate inflation, the severity of the ongoing COVID-19 pandemic and related international and domestic COVID-19 control responses, including in China, and/or other factors that cause mortgage loan interest rates to increase or that temper mortgage loan availability, employment or income levels or consumer confidence in the U.S.

or in our served markets.

The potential effect of these factors on our business is highly uncertain, unpredictable and outside our control, and our past performance should not be considered indicative of our future results on any metric or set of metrics.

Forward-Looking Statements

Investors are cautioned that certain statements contained in this report, as well as some statements by us in periodic press releases and other public disclosures and some oral statements by us to securities analysts, stockholders and others during presentations, are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 (the “Act”).

Statements that are predictive in nature, that depend upon or refer to future events or conditions, or that include words such as “expect,” “anticipate,” “intend,” “plan,” “believe,” “estimate,” “hope,” and similar expressions constitute forward-looking statements.

looking statements.

In addition, any statements that we may make or provide concerning future financial or operating performance (including without limitation future revenues, community count, homes delivered, net orders, selling prices, sales pace per new community, expenses, expense ratios, housing gross profits, housing gross profit margins, earnings or earnings per share, or growth or growth rates), future market conditions, future interest rates, and other economic conditions, ongoing business strategies or prospects, future dividends and changes in dividend levels, the value of our backlog (including amounts that we expect to realize upon delivery of homes included in our backlog and the timing of those deliveries), the value of our net orders, potential future asset acquisitions and the impact of completed acquisitions, future share issuances or repurchases, future debt issuances, repurchases or redemptions and other possible future actions are also forward-looking statements as defined by the Act.

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• the execution of any securities repurchases pursuant to our board of directors’ authorization;

• material and trade costs and availability, including building materials and appliances;

• material and trade costs and availability, including building materials, especially lumber, and appliances;

• consumer and producer price inflation;

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• 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 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;

• 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 to thereto;

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trade policies, including the imposition of tariffs and duties on homebuilding materials and products, and related trade disputes with and retaliatory measures taken by other countries;

• disruptions in world and regional trade flows, economic activity and supply chains due to the military conflict in Ukraine, including those stemming from wide-ranging sanctions the U.S.

and other countries have imposed or may further impose on Russian business sectors, financial organizations, individuals and raw materials, the impact of which may, among other things, increase our operational costs, exacerbate building materials and appliance shortages and/or reduce our revenues and earnings;

• the adoption of new or amended financial accounting standards and the guidance and/or interpretations with respect thereto;

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• information technology failures and data security breaches;

• an epidemic or pandemic (such as the outbreak and worldwide spread of COVID-19), and the control response measures that international, federal, state and local governments, agencies, law enforcement and/or health authorities implement to address it, which may (as with COVID-19) precipitate or exacerbate one or more of the above-mentioned and/or other risks, and significantly disrupt or prevent us from operating our business in the ordinary course for an extended period;

• widespread protests and civil unrest, whether due to political events, efforts to institute law enforcement and other social and political reforms, and the impacts of implementing or failing to implement any such reforms, or otherwise;

• an epidemic or pandemic (such as the outbreak and worldwide spread of COVID-19), and the control response measures that international (including China), federal, state and local governments, agencies, law enforcement and/or health authorities implement to address it, which may (as with COVID-19) precipitate or exacerbate one or more of the above-mentioned and/or other risks, and significantly disrupt or prevent us from operating our business in the ordinary course for an extended period;

• other events outside of our control.

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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-Q

Item 2. Management’s Discussion and Analysis