What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2022-07-08 compared with 2022-04-08 · 236 added, 181 removed, 379 unchanged (52% 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 February 28,

2022 2021 Variance

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

Three Months Ended May 31, Six Months Ended May 31,

2022 2021 Variance 2022 2021 Variance

Homebuilding $ 1,714,826 $ 1,436,035 19 % $ 3,108,980 $ 2,574,043 21 %

Financial services 5,236 4,857 8 9,871 8,587 15

4,635 3,730 24

Total revenues $ 1,720,062 $ 1,440,892 19 % $ 3,118,851 $ 2,582,630 21 %

$ 1,398,789 $ 1,141,738 23 %

Pretax income:

$ 169,621 $ 115,051 47 %

Homebuilding $ 264,189 $ 163,016 62 % $ 433,810 $ 278,067 56 %

Financial services 18,681 10,648 75 27,117 19,148 42

8,436 8,500 (1)

Total pretax income 282,870 173,664 63 460,927 297,215 55

178,057 123,551 44

Income tax expense

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$ 2.32 $ 1.50 55 % $ 3.79 $ 2.52 50 %

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.

Housing market conditions were generally favorable during the six months ended May 31, 2022, with solid demand and home price appreciation, reflecting a limited supply of new and resale inventory, and steady employment and wage growth.

However, during the 2022 second quarter, the pace of sales across the homebuilding industry moderated from the levels experienced over the previous 18 months, stemming from a sharp increase in mortgage interest rates in the quarter, significant inflation in the broader economy, the substantial rise in home prices, and stock market volatility.

These macro-economic trends have pressured housing affordability and negatively impacted homebuyer sentiment.

The value of our net orders for the 2022 second quarter increased 4% from the year-earlier quarter due to a 15% increase in their overall average selling price, partly offset by a 9% decline in net orders.

The decrease in net orders reflected a moderation in our monthly net orders per community to 6.2 from 7.0, partly offset by a 3% increase in our average community count due to new community openings.

Considerable demand for our homes enabled us to lift selling prices in the vast majority of our communities during the 2022 second quarter and, in combination with our focus on balancing pace, price and construction starts at each community, helped us to enhance our returns, offset in part by the impact of significant persistent supply chain challenges and higher construction costs, as described further below.

Since the outbreak of COVID-19 in 2020, we have experienced intensifying building material cost pressures, including 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 second quarter, these supply chain disruptions continued, as well as ongoing restricted construction services availability and delays with respect to state and municipal construction permitting, inspection and utility processes.

Although our construction cycle times experienced modest improvement in the current quarter from the 2022 first quarter, they remained extended as compared to the 2021 fourth quarter.

Despite these operational challenges, we delivered approximately the same number of homes in the 2022 second quarter as we did in the year-earlier quarter.

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.

In addition, we continue to work with our suppliers and trade partners to address these issues as part of our efforts toward returning to historical construction cycle times.

We believe these challenging circumstances affecting our land development and home construction activities will generally persist throughout the year, and this is reflected in 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%.

Homebuilding revenues for the 2022 second quarter grew 19% due to higher housing revenues, driven by a 21% increase in the overall average selling price of homes delivered to $494,300, as the number of homes delivered was essentially even with the year-earlier quarter.

Approximately 56% of our homes delivered in the 2022 second quarter were to first-time homebuyers.

Homebuilding operating income for the three months ended May 31, 2022 rose 62% year over year to $264.5 million and, as a percentage of revenues, improved 410 basis points to 15.4%.

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.

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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.

Our business was impacted by these issues during the three-month and six-month periods ended May 31, 2022, as we experienced, among other things, supply chain bottlenecks and the other production-related challenges, including construction services availability constraints, during these periods as 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.

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

Our ending backlog value at May 31, 2022 grew 43% to approximately $6.12 billion, the highest second-quarter level in our history.

With this backlog, we expect to achieve year-over-year growth in our scale, profitability and returns in the 2022 third quarter and full year, as described below under “Outlook.” In addition, to help achieve our growth objectives over the next few years, we continued to increase our land acquisition and development investments to expand our lot pipeline and support future community count growth.

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.

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 February 28,

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

Three Months Ended May 31, Six Months Ended May 31,

2022 2021 2022 2021

Housing $ 1,714,826 $ 1,436,032 $ 3,108,980 $ 2,573,385

Land — 3 — 658

Total 1,714,826 1,436,035 3,108,980 2,574,043

Costs and expenses:

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Housing (1,281,752) (1,128,017) (2,363,864) (2,029,195)

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

Land — (1) — (732)

Total (1,281,752) (1,128,018) (2,363,864) (2,029,927)

Selling, general and administrative expenses (168,614) (145,115) (311,094) (267,120)

(142,480) (122,005)

(1,224,592) (1,023,914)

Total (1,450,366) (1,273,133) (2,674,958) (2,297,047)

Operating income 264,460 162,902 434,022 276,996

Interest income 39 241 75 894

Equity in income of unconsolidated joint ventures 23 304

Equity in income (loss) of unconsolidated joint ventures (310) (127) (287) 177

Homebuilding pretax income $ 264,189 $ 163,016 $ 433,810 $ 278,067

Three Months Ended May 31, Six Months Ended May 31,

2022 2021 2022 2021

Homes delivered 3,469 3,504 6,337 6,368

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Operating income as a percentage of revenues 15.4 % 11.3 % 14.0 % 10.8 %

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.

Homebuilding revenues for the 2022 second quarter grew from the year-earlier quarter due to a 19% increase in housing revenues.

The year-over-year growth in housing revenues resulted from a 21% increase in the overall average selling price of homes delivered that reflected favorable 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 29% year over year, the number of homes delivered in the 2022 second quarter was essentially flat primarily due to the ongoing supply chain disruptions and other production-related issues that extended our construction cycle times, as described above under “Overview.” Reflecting these challenges, the number of homes delivered as a percentage of beginning backlog was 29% in the 2022 second quarter, compared to 38% in the year-earlier period, improving from 27% in the 2022 first quarter.

For the six months ended May 31, 2022, homebuilding revenues grew 21% year over year to $3.11 billion, reflecting growth in housing revenues.

The increase in housing revenues for the six months ended May 31, 2022 was driven by a 21% rise in the overall average selling price of homes delivered, as the number of homes delivered in the 2022 first half was essentially the same as in the year-earlier period.

Operating Income .

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).

Our operating income for the three months ended May 31, 2022 grew 62% 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 second quarter included inventory-related charges of $.7 million, compared to $.5 million in the year-earlier quarter.

As a percentage of revenues, our operating income for the three months ended May 31, 2022 improved 410 basis points to 15.4%, compared to 11.3% for the corresponding 2021 period.

Excluding inventory-related charges, our operating income as a percentage of revenues increased 410 basis points to 15.5% for the 2022 second quarter from 11.4% for the year-earlier quarter.

For the six months ended May 31, 2022, our operating income increased 57% from the prior-year period.

Operating income for the 2022 first half included inventory-related charges of $.9 million, compared to $4.5 million of such charges in the corresponding 2021 period.

As a percentage of revenues, our operating income for the six months ended May 31, 2022 grew 320 basis points year over year to 14.0%.

Excluding inventory-related charges, our operating income as a percentage of revenues increased 310 basis points to 14.0% for the six months ended May 31, 2022 from 10.9% for the corresponding year-earlier period.

• Housing Gross Profits – Housing gross profits of $433.1 million for the three months ended May 31, 2022 grew 41% from $308.0 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 second quarter rose 390 basis points year over year to 25.3%, mainly as a result of a favorable pricing environment that more than offset higher construction costs (approximately 320 basis points), lower amortization of previously capitalized interest as a percentage of housing revenues (approximately 70 basis points), a decrease in inventory-related charges (approximately 10 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 40 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.

As a percentage of housing revenues, the amortization of previously capitalized interest associated with housing operations was 2.0% and 2.7% for the three months ended May 31, 2022 and 2021, respectively.

Excluding the above-mentioned inventory-related charges for the applicable periods, our adjusted housing gross profit margin for the 2022 second quarter increased 380 basis points from the year-earlier period.

For the six months ended May 31, 2022, our housing gross profits of $745.1 million increased 37% from $544.2 million for the year-earlier period.

Our housing gross profit margin for the six months ended May 31, 2022 increased 290 basis points to 24.0%.

Excluding the inventory-related charges mentioned above, our adjusted housing gross profit margin of 24.0% for the six months ended May 31, 2022 increased 270 basis points year over year, primarily due to the reasons described

above with respect to the three months ended May 31, 2022.

As a percentage of housing revenues, the amortization of previously capitalized interest associated with housing operations was 2.1% for the six months ended May 31, 2022, compared to 2.8% for the corresponding 2021 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 February 28,

2022 % of Housing Revenues 2021 % of Housing Revenues

Three Months Ended May 31, Six Months Ended May 31,

2022 % of Housing Revenues 2021 % of Housing Revenues 2022 % of Housing Revenues 2021 % of Housing Revenues

Marketing expenses $ 35,655 2.1 % $ 29,498 2.1 % $ 64,503 2.1 % $ 57,904 2.3 %

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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 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.

Selling, general and administrative expenses for the three months ended May 31, 2022 rose 16% from the year-earlier quarter, mainly due to an increase in general and administrative expenses and marketing expenses.

The year-over-year increase in general and administrative expenses primarily reflected higher costs associated with performance-based employee compensation plans, as well as expenses incurred to support current operations and expected growth.

Marketing expenses for the three months ended May 31, 2022 increased from the year-earlier period mainly due to higher advertising costs to support our higher average community count.

As a percentage of housing revenues, our selling, general and administrative expenses for the 2022 second quarter improved 30 basis points, largely reflecting lower external sales commissions and 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 six months ended May 31, 2022, selling, general and administrative expenses increased 16% year over year, mainly due to the reasons described above with respect to the three months ended May 31, 2022.

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.

As a percentage of housing revenues, selling, general and administrative expenses for the six months improved 40 basis points to 10.0%, mainly due to the reasons described above with respect to the three months ended May 31, 2022, partly offset by the impact of the ERC in the year-earlier period.

Interest Income/Expense .

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.

Interest income, which is generated from short-term investments, was nominal for the three months ended May 31, 2022 and 2021.

For the six-month period ended May 31, 2022, interest income was nominal, compared to $.9 million in 2021.

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 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.

All interest incurred during the three-month and six-month periods ended May 31, 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 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.

Equity in Income (Loss) of Unconsolidated Joint Ventures .

Our equity in income (loss) of unconsolidated joint ventures was nominal for the three-month and six-month periods ended May 31, 2022 and 2021.

Further information regarding our investments in homebuilding unconsolidated joint ventures is provided in Note 9 – Investments in Unconsolidated Joint Ventures 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 February 28,

Three Months Ended May 31, Six Months Ended May 31,

2022 2021 2022 2021

Net orders 3,914 4,300 8,124 8,592

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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 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.

For the three months ended May 31, 2022, net orders from our homebuilding operations decreased 9% year over year, reflecting a moderation in monthly net orders per community to 6.2 from 7.0 in the year-earlier period, partly offset by an increase in our average community count.

The moderation in our orders per community was due to the impact of higher mortgage interest rates, increased selling prices, and other inflationary pressures on current homebuyer demand.

We believe our Built-to-Order® homebuying process, which provides personalization and choice, contributed to our solid monthly net order pace in the current quarter, particularly given recent affordability pressures.

Though our net orders for the 2022 second quarter decreased from our 2021 second-quarter net orders, which reached a 14-year high, the value of our net orders rose 4% due to a 15% increase in their overall average selling price that largely reflected positive housing demand as well as product and geographic mix shifts.

The year-over-year growth in overall net order value resulted from increases of 26% in our Central homebuilding reporting segment and 37% in our Southeast segment, partly offset by decreases in our West Coast and Southwest homebuilding reporting segments of 10% and 9%, respectively.

Our cancellation rate as a percentage of gross orders for the three months ended May 31, 2022 increased from the year-earlier period, reflecting the recent sharp increase in mortgage interest rates as well as the housing demand we experienced in 2021.

At the same time, the 2022 second quarter cancellation rate remained below our historical average.

The number of homes in our backlog at May 31, 2022 increased 23% from May 31, 2021, reflecting our substantially higher backlog at the beginning of the quarter, partly offset by a year-over-year decrease in our net orders for the three months ended May 31, 2022.

The potential future housing revenues in our backlog at May 31, 2022 grew 43% from May 31, 2021 as a result of both the higher number of homes in our backlog and a 16% 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 18% in our West Coast segment to 98% 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 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.

Our average community count for the 2022 second quarter increased 3% from the year-earlier period, and our ending community count increased 7% to 214.

The year-over-year increases in our overall average and ending community counts primarily reflected new community openings during the three months ended May 31, 2022.

We substantially increased our investments in land acquisition and land development in the 2022 first half, as we did in 2021, to support future community count growth.

HOMEBUILDING REPORTING SEGMENTS

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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 February 28,

Three Months Ended May 31,

Homes Delivered Net Orders Cancellation Rates

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Total $ 2,124,754 $ 2,036,837 4 % 211 205 3 %

Six Months Ended May 31,

Homes Delivered Net Orders Cancellation Rates

Segment 2022 2021 2022 2021 2022 2021

West Coast 1,943 1,890 2,182 2,460 13 % 9 %

Southwest 1,201 1,249 1,467 1,791 9 7

Central 2,070 2,243 2,744 2,890 18 12

Southeast 1,123 986 1,731 1,451 12 11

Total 6,337 6,368 8,124 8,592 14 % 10 %

Net Order Value Average Community Count

Segment 2022 2021 Variance 2022 2021 Variance

West Coast $ 1,690,348 $ 1,716,967 (2) % 58 62 (6) %

Southwest 668,809 708,619 (6) 36 36 —

Central 1,200,093 1,016,687 18 75 78 (4)

Southeast 719,238 463,632 55 44 39 13

Total $ 4,278,488 $ 3,905,905 10 % 213 215 (1) %

Backlog – Homes Backlog – Value

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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 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.”

Corporate and other had operating losses of $43.3 million in the three months ended May 31, 2022 and $37.9 million in the three months ended May 31, 2021.

For the six months ended May 31, 2022, Corporate and other had operating losses of $78.0 million, compared to $68.3 million for the corresponding year-earlier period.

The year-over-year increases for the three-month and six-month periods 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 and six months ended May 31, 2022 were negatively affected by intensifying building material cost pressures, as well as the supply chain disruptions and other production-related challenges, as 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

Three Months Ended May 31, Six Months Ended May 31,

2022 2021 Variance 2022 2021 Variance

Revenues $ 761,217 $ 625,690 22 % $ 1,420,091 $ 1,140,206 25 %

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Average selling price $ 739,800 $ 622,000 19 % $ 730,900 $ 603,300 21 %

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 improvement in selling, general and administrative expenses as a percentage of housing revenues mainly reflected increased operating leverage from higher housing revenues, partly offset by higher expenses incurred to support current operations and expected growth.

Operating income as a percentage of revenues 18.1 % 12.3 % 580 bps 17.4 % 11.8 % 560 bps

This segment’s revenues for the three-month and six-month periods ended May 31, 2022 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 favorable housing market conditions and product and geographic mix shifts of homes delivered.

Operating income for the three months and six months ended May 31, 2022 grew from the corresponding year-earlier periods, reflecting higher housing gross profits, partly offset by higher selling, general and administrative expenses.

Operating income as a percentage of revenues for the 2022 second quarter increased from the year-earlier quarter, primarily due to a 550 basis-point expansion in the housing gross profit margin to 24.4% and a 40 basis-point improvement in selling, general and administrative expenses as a percentage of housing revenues to 6.3%.

For the six months ended May 31, 2022, operating income as a percentage of revenues expanded from the corresponding 2021 period, primarily due to a 510 basis-point increase in the housing gross profit margin to 23.7% and a 50 basis-point improvement in selling, general and administrative expenses as a percentage of housing revenues to 6.3%.

The year-over-year increases in the housing gross profit margins for the three-month and six-month periods ended May 31, 2022 were largely driven by a favorable pricing environment and lower relative amortization of previously capitalized interest.

In addition, housing gross profit margin for the six months ended May 31, 2022 included nominal inventory-related charges,

compared to $3.9 million of such charges in the year-earlier period.

The improvement in selling, general and administrative expenses as a percentage of housing revenues for these same periods mainly reflected increased operating leverage from higher housing revenues, partly offset by higher expenses incurred to support current operations and expected growth.

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

Three Months Ended February 28,

2022 2021 Variance

Three Months Ended May 31, Six Months Ended May 31,

2022 2021 Variance 2022 2021 Variance

Revenues $ 290,924 $ 258,061 13 % $ 500,691 $ 445,746 12 %

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Average selling price $ 424,700 $ 360,900 18 % $ 416,900 $ 356,900 17 %

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%.

Operating income as a percentage of revenues 22.2 % 19.0 % 320 bps 20.1 % 18.4 % 170 bps

The year-over-year growth in this segment’s revenues for the three-month and six-month periods ended May 31, 2022 reflected 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 positive housing market conditions and a shift in product and geographic mix of homes delivered.

Operating income for the three months and six months ended May 31, 2022 increased from the corresponding 2021 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 May 31, 2022 improved from the year-earlier period largely due to a 330 basis-point expansion in the housing gross profit margin to 29.7%, partly offset by a 10 basis-point increase in selling, general and administrative expenses as a percentage of housing revenues to 7.5%.

For the six months ended May 31, 2022, operating income as a percentage of revenues expanded from the corresponding 2021 period, primarily due to a 160 basis-point increase in the housing gross profit margin to 27.9% and a 10 basis-point improvement in selling, general and administrative expenses as a percentage of housing revenues to 7.8%.

The year-over-year increases in the housing gross profit margins for the three-month and six-month periods ended May 31, 2022 primarily reflected a favorable pricing environment and lower relative amortization of previously capitalized interest, partly offset by higher construction and land costs and increased expenses to support current operations and expected growth.

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

Three Months Ended May 31, Six Months Ended May 31,

2022 2021 Variance 2022 2021 Variance

Revenues $ 433,046 $ 390,555 11 % $ 788,368 $ 700,263 13 %

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Average selling price $ 387,700 $ 317,000 22 % $ 380,900 $ 312,200 22 %

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.

Operating income as a percentage of revenues 15.3 % 14.4 % 90 bps 13.2 % 13.9 % (70) bps

This segment’s revenues for the three-month and six-month periods ended May 31, 2022 grew from the corresponding year-earlier periods 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 in areas where we operate within the segment and shifts in the product and geographic mix of homes delivered.

Operating income for the three-month and six-month periods ended May 31, 2022 increased from the corresponding year-earlier periods mainly due to higher housing gross profits, partly offset by higher selling, general and administrative expenses.

For the three months ended May 31, 2022, this segment’s operating income as a percentage of revenues increased from the year-earlier period primarily due to a 70 basis-point increase in the housing gross profit margin to 23.7% and a 20 basis-point improvement in selling, general and administrative expenses as a percentage of housing revenues to 8.4%.

The year-over-year increase in the housing gross profit margin for the three-month period ended May 31, 2022 reflected lower relative amortization of previously capitalized interest, partly offset by increased expenses to support current operations and expected growth.

For the six months ended May 31, 2022, operating income as a percentage of revenues decreased from the year-earlier period due to a 100 basis-point decline in the housing gross profit margin to 21.9%, partly offset by a 30 basis-point improvement in selling, general and administrative expenses as a percentage of housing revenues to 8.7%.

The year-over-year decrease in the housing gross profit margin for the six-month period ended May 31, 2022 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 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

Three Months Ended May 31, Six Months Ended May 31,

2022 2021 Variance 2022 2021 Variance

Revenues $ 229,639 $ 161,729 42 % $ 399,830 $ 287,828 39 %

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Average selling price $ 359,900 $ 293,500 23 % $ 356,000 $ 291,300 22 %

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%.

Operating income as a percentage of revenues 17.0 % 11.7 % 530 bps 14.8 % 10.8 % 400 bps

This segment’s revenues for the three months and six months ended May 31, 2022 were generated solely from housing operations.

For the three months and six months ended May 31, 2021, revenues were generated from both housing operations and nominal land sales.

Housing revenues for the 2022 second quarter increased 42% year over year from $161.7 million.

Housing revenues for the six months ended May 31, 2022 grew 39% year over year from $287.2 million.

The housing revenue expansion for the three-month and six-month periods ended May 31, 2022 resulted from growth in the number of homes delivered and an increase in the overall average selling price of those homes, which reflected favorable housing market conditions and shifts in the product and geographic mix of homes delivered.

Operating income for the three-month and six-month periods ended May 31, 2022 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 2022 second quarter rose from the year-earlier period mainly due to a 570 basis-point increase in the housing gross profit margin to 26.4% that primarily 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 for the three months ended May 31, 2022 increased 40 basis points from the year-earlier period to 9.4%.

For the six months ended May 31, 2022, operating income as a percentage of revenues expanded from the year-earlier period, primarily reflecting a 440 basis-point increase in the housing gross profit margin to 24.7% due to the reasons described above for the three months ended May 31, 2022.

Selling, general and administrative expenses as a percentage of housing revenues for the six months ended May 31, 2022 increased 40 basis points to 9.9%.

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 February 28,

Three Months Ended May 31, Six Months Ended May 31,

2022 2021 2022 2021

Revenues $ 5,236 $ 4,857 $ 9,871 $ 8,587

Expenses (1,362) (1,253) (2,709) (2,453)

Equity in income of unconsolidated joint venture 5,148 5,970

Equity in income of unconsolidated joint ventures 14,807 7,044 19,955 13,014

Pretax income

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(a) Loan originations and sales occurred within KBHS.

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.

Financial services revenues for the three months and six months ended May 31, 2022 grew from the corresponding 2021 periods due to increases in both title services revenues and insurance commissions.

Pretax income.

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.

Financial services pretax income for the three months ended May 31, 2022 grew 75% from the year-earlier period, mainly due to an increase in our equity in income of unconsolidated joint ventures.

In the 2022 second quarter, the equity in income of our unconsolidated joint venture, KBHS, increased 110% year over year primarily reflecting a substantial increase in the fair value of IRLCs within the joint venture as a greater number of customers elected to lock their mortgage interest rates and for relatively extended periods, aligned with their expected home delivery date, due to the sharp rise in such rates during the period.

This impact was partly offset by a lower principal amount of loan originations combined with lower margins, reflecting increased competition in the primary mortgage market.

The lower principal amount of loan originations was mainly due to a decrease in the percentage of homebuyers using KBHS, partly offset by a 21% increase in the average selling price of homes delivered.

For the six months ended May 31, 2022, our financial services pretax income increased 42% from the corresponding 2021 period, primarily due to a 53% increase in the equity in income of our unconsolidated joint venture, KBHS, that reflected the factors described above for the three months ended May 31, 2022.

KBHS’ accounting for the above-mentioned IRLCs had a favorable pull-forward effect on its earnings for the three months and six months ended May 31, 2022, shifting some of our expected equity in income of KBHS from the 2022 second half to the 2022 first half.

Income Tax Expense.

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

Three Months Ended February 28,

Three Months Ended May 31, Six Months Ended May 31,

2022 2021 2022 2021

Income tax expense $ 72,200 $ 30,300 $ 116,000 $ 56,800

Effective tax rate 25.5 % 17.4 % 25.2 % 19.1 %

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.

Our effective tax rate for the three months ended May 31, 2022 increased from the year-earlier period, mainly due to a $14.2 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 $.4 million decrease in excess tax benefits related to stock-based compensation, and a $.3 million increase in non-deductible executive compensation expense.

For the six months ended May 31, 2022, our effective tax rate increased from the year-earlier period, primarily due to a $16.7 million decrease in the federal tax credits we earned primarily from building energy-efficient homes, a $1.7 million decrease in excess tax benefits related to stock-based compensation, and a $.6 million increase 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.

Although the suspension of California NOL deductions did not have an impact on our income tax expense for the three months and six months ended May 31, 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.

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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 February 28,

Three Months Ended May 31, Six Months Ended May 31,

2022 2021 2022 2021

Housing revenues $ 1,714,826 $ 1,436,032 $ 3,108,980 $ 2,573,385

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Inventory-related charges (a)

732 457 907 4,521

Adjusted housing gross profits $ 433,806 $ 308,472 $ 746,023 $ 548,711

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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.

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

This financial

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

Liquidity and Capital Resources

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• repayments of borrowings under the Credit Facility.

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.

We ended the 2022 second quarter with total liquidity of $925.6 million, including cash and cash equivalents and $681.4 million of available capacity under the Credit Facility.

Based on our financial position as of May 31, 2022, and our 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 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.

As disclosed in Note 21 – Subsequent Event in the Notes to Consolidated Financial Statements in this report, on June 22, 2022, we completed the underwritten public offering of $350.0 million in aggregate principal amount of 7.25% Senior Notes due 2030 at 100% of their aggregate principal amount.

We used the net proceeds from the issuance of the 7.25% Senior Notes due 2030, together with cash on hand, to retire our outstanding $350.0 million in aggregate principal amount of 7.50% Senior Notes due 2022 on July 7, 2022, by redemption pursuant to the optional redemption terms specified for such notes.

Cash Requirements .

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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 increased 24% to $1.40 billion for the six months ended May 31, 2022, compared to $1.13 billion for the year-earlier period.

Approximately 44% of our total investments for the six months ended May 31, 2022 related to land acquisition, compared to approximately 47% in the prior-year period.

While we made strategic investments in land and land development in each of our homebuilding reporting segments during the six months ended May 31, 2022 and 2021, approximately 52% 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):

February 28, 2022 November 30, 2021 Variance

Segment Lots $ Lots $ Lots $

May 31, 2022 November 30, 2021 Variance

Segment Lots Carrying Value Lots Carrying Value Lots Carrying Value

West Coast 25,154 $ 2,579,035 23,539 $ 2,300,096 1,615 $ 278,939

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Total 89,778 $ 5,557,649 86,768 $ 4,802,829 3,010 $ 754,820

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.

The number and carrying value of lots we owned or controlled under land option contracts and other similar contracts at May 31, 2022 increased from November 30, 2021, primarily due to our investments in land and land development in the six months ended May 31, 2022 and an increase in the number of homes under construction.

The number of lots in inventory as of May 31, 2022 included 11,887 lots under contract where the associated deposits were refundable at our discretion, compared to 12,434 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 May 31, 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.

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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;

If we were to acquire all the land we had under land option contracts and other similar contracts at May 31, 2022, we estimate the remaining purchase price to be paid would be as follows:

2022 – $907.2 million;

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2025 – $81.1 million;

2026 – $15.8 million;

and thereafter – $0.

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

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

2022 November 30,

Total cash and cash equivalents $ 240,688 $ 290,764

Cash and cash equivalents $ 244,186 $ 290,764

Credit Facility commitment 1,090,000 800,000

3 unchanged sentences

Total liquidity $ 925,568 $ 1,082,146

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

The majority of our cash equivalents at May 31, 2022 and November 30, 2021 were invested in interest-bearing bank deposit accounts.

Capital Resources.

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$ 2,085,275 $ 1,685,027 $ 400,248

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.

Our financial leverage, as measured by the ratio of debt to capital, was 38.8% at May 31, 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).

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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.

As of May 31, 2022 and November 30, 2021, we had letters of credit outstanding under the LOC Facility of $36.4 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.

As discussed in Note 16 – Commitments and Contingencies in the Notes to Consolidated Financial Statements in this report, we had $1.24 billion and $1.11 billion of performance bonds outstanding at May 31, 2022 and November 30, 2021, respectively.

Unsecured Revolving Credit Facility .

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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 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.

As of May 31, 2022, we had $400.0 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.

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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 February 28, 2022:

Financial Covenants and Other Requirements Covenant Requirement Actual

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

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.

As of May 31, 2022, we were in compliance with 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 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.

At May 31, 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 $22.2 million.

Credit Ratings .

Our credit ratings are periodically reviewed by rating agencies.

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

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

In June 2022, Moody’s Investor Service reaffirmed our Ba2 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):

Three Months Ended February 28,

Six Months Ended May 31,

Net cash provided by (used in):

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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 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.

Our net cash used in operating activities for the six months ended May 31, 2022 mainly reflected a net increase in inventories of $764.2 million and a net increase in receivables of $11.1 million, partly offset by net income of $344.9 million and a net increase in accounts payable, accrued expenses and other liabilities of $84.3 million.

In the six months ended May 31, 2021, our net cash used in operating activities mainly reflected a net increase in inventories of $379.9 million, partly offset by net income of $240.4 million, a net increase in accounts payable, accrued expenses and other liabilities of $44.8 million and a net decrease in receivables of $1.7 million.

Investing Activities .

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.

In the six months ended May 31, 2022, our uses of cash included $22.1 million for net purchases of property and equipment and $16.4 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 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.

In the six months ended May 31, 2021, the net cash used for investing activities reflected $18.3 million for net purchases of property and equipment and $6.3 million for contributions to unconsolidated joint ventures.

These uses of cash were partially offset by a $2.5 million return of investments in unconsolidated joint ventures.

Financing Activities .

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.

In the six months ended May 31, 2022, cash was provided by net borrowings under the Credit Facility of $400.0 million.

Partially offsetting the cash provided were $50.0 million of stock repurchases, $27.1 million of dividend payments on our common stock, $12.2 million of tax payments associated with stock-based compensation awards, $3.8 million of issuance costs for the Credit Facility amendment and $.4 million of payments on mortgages and land contracts due to land sellers and other loans.

In the six months ended May 31, 2021, net cash was used for dividend payments on our common stock of $27.8 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 $3.5 million of issuances of common stock under employee stock plans.

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.

In the three-month periods ended May 31, 2022 and 2021, our board of directors declared, and we paid, a quarterly cash dividend on our common stock of $.15 per share.

Quarterly dividends declared and paid during the six-month periods ended May 31, 2022 and 2021 totaled $.30 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.

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Supplemental Guarantor Financial Information

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”).

As of May 31, 2022, we had $1.69 billion in aggregate principal amount of outstanding senior notes and $400.0 million of borrowings outstanding under the Credit Facility.

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.

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Total assets 6,314,890 5,581,883

2022 November 30,

Summarized Balance Sheet Data (in thousands)

Liabilities and Stockholders’ Equity

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Stockholders’ equity 3,069,776 2,826,066

Three Months Ended

February 28, 2022

Six Months Ended

Summarized Statement of Operations Data (in thousands)

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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 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.

There have been no significant changes to our critical accounting policies and estimates during the six months ended May 31, 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 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 believe several long-term housing market fundamental factors remain positive, including favorable demographics, a housing supply-demand imbalance resulting from a decade-plus underproduction of new homes in relation to population growth, and a limited supply of resale homes available for sale.

However, the impact of rapidly rising mortgage interest rates, persistent significant inflationary pressures, high home prices, and stock market volatility is challenging housing affordability and is expected to weaken demand in the 2022 third and fourth quarters, and potentially beyond, compared to the prior 18 months, with higher cancellation rates for these same periods as compared to the 2022 second quarter.

Lower demand could also heighten the typical seasonal decrease in net orders we experience in the third and fourth quarters.

Nonetheless, we believe the ability of our differentiating, highly customer-centric Built-to-Order business model to effectively meet evolving consumer preferences and budgets, our operational capabilities and an anticipated year-over-year increase in our community count will assist us in navigating the changing market conditions and help drive growth in revenues and operating margin in 2022, as compared to 2021, subject to the factors and risks described in this report.

Based on the foregoing, our present outlook for the 2022 third quarter and full year is as follows:

2022 Third Quarter

• We expect to generate housing revenues in the range of $1.82 billion to $1.92 billion, an increase from $1.46 billion in the corresponding 2021 period, and anticipate our average selling price to be approximately $495,000, compared to $426,800 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 homebuilding operating income margin will be approximately 16.9%, assuming no inventory-related charges, up from 12.1% for the year-earlier quarter.

• We expect our housing gross profit margin to be approximately 26.5%, assuming no inventory-related charges, compared to 22.0% for the corresponding 2021 quarter.

• We expect our selling, general and administrative expenses as a percentage of housing revenues to be approximately 9.6%, compared to 9.9% in the 2021 third quarter.

• We expect to recognize a charge of approximately $4.0 million for the early extinguishment of debt due to the optional redemption of our 7.50% Senior Notes due 2022 on July 7, 2022.

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

The effective tax rate for the year-earlier quarter was approximately 14%, 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.

• We expect a small sequential increase in our ending community count.

2022 Full Year

• We expect our housing revenues to be in the range of $7.20 billion to $7.60 billion, an increase of 30% at the mid-point of the range, from $5.69 billion in 2021, and anticipate our average selling price to be in the range of $490,000 to $500,000, an increase of between 16% and 18% from 2021.

• We expect our housing revenues to be in the range of $7.30 billion to $7.50 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 approximately $500,000, an increase of 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 housing gross profit margin to be in the range of 25.6% to 26.2%, assuming no inventory-related charges, compared to 21.8% for 2021.

• We expect our selling, general and administrative expenses as a percentage of housing revenues to be in the range of 9.3% to 9.7%, compared to 10.1% in the prior year.

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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 ending community count to be approximately 250, up 15% compared to year-end 2021.

• 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.

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, including for lumber.

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.

Ongoing supply chain disruptions and other production-related challenges may worsen in the coming periods, as described above under “Overview,” and could extend our construction cycle times, delay our new community openings and intensify construction-related cost pressures beyond our experience in the 2022 first half or in 2021.

In addition, as noted above, 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, as well as 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.

The potential extent and effect of these factors on our business is highly

uncertain, unpredictable and outside our control, and our past performance, including in the 2022 first half, should not be considered indicative of our future results on any metric or set of metrics.

Forward-Looking Statements

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

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

looking statements.

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

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• consumer and producer price inflation;

• changes in interest rates;

• changes in interest rates, including those set by the Federal Reserve, available in the capital markets or from financial institutions and other lenders, and applicable to mortgage loans;

• our debt level, including our ratio of debt to capital, and our ability to adjust our debt level and maturity schedule;

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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