Item 2. Management’s Discussion and Analysis
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Results of Operations
OVERVIEW
Revenues are generated from our homebuilding and financial services operations. The following table presents a summary of our consolidated results of operations (dollars in thousands, except per share amounts):
Three Months Ended May 31, Six Months Ended May 31,
2022 2021 Variance 2022 2021 Variance
Revenues:
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
Total revenues $ 1,720,062 $ 1,440,892 19 % $ 3,118,851 $ 2,582,630 21 %
Pretax income:
Homebuilding $ 264,189 $ 163,016 62 % $ 433,810 $ 278,067 56 %
Financial services 18,681 10,648 75 27,117 19,148 42
Total pretax income 282,870 173,664 63 460,927 297,215 55
Income tax expense
(72,200) (30,300) (138) (116,000) (56,800) (104)
Net income $ 210,670 $ 143,364 47 % $ 344,927 $ 240,415 43 %
Diluted earnings per share
$ 2.32 $ 1.50 55 % $ 3.79 $ 2.52 50 %
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. 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.
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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. Our pretax income margin improved 430 basis points to 16.4%, and net income and diluted earnings per share increased 47% and 55%, respectively, each as compared to the corresponding quarter of 2021.
COVID-19 Pandemic Impact. 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-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. 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.
HOMEBUILDING
Financial Results . The following table presents a summary of certain financial and operational data for our homebuilding operations (dollars in thousands, except average selling price):
Three Months Ended May 31, Six Months Ended May 31,
2022 2021 2022 2021
Revenues:
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:
Construction and land costs
Housing (1,281,752) (1,128,017) (2,363,864) (2,029,195)
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)
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 (loss) of unconsolidated joint ventures (310) (127) (287) 177
Homebuilding pretax income $ 264,189 $ 163,016 $ 433,810 $ 278,067
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Three Months Ended May 31, Six Months Ended May 31,
2022 2021 2022 2021
Homes delivered 3,469 3,504 6,337 6,368
Average selling price $ 494,300 $ 409,800 $ 490,600 $ 404,100
Housing gross profit margin as a percentage of housing revenues 25.3 % 21.4 % 24.0 % 21.1 %
Adjusted housing gross profit margin as a percentage of housing revenues 25.3 % 21.5 % 24.0 % 21.3 %
Selling, general and administrative expenses as a percentage of housing revenues 9.8 % 10.1 % 10.0 % 10.4 %
Operating income as a percentage of revenues 15.4 % 11.3 % 14.0 % 10.8 %
Revenues . 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 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 2.0% 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
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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 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 %
Commission expenses (a) 54,794 3.2 56,623 3.9 103,423 3.3 101,475 3.9
General and administrative expenses 78,165 4.5 58,994 4.1 143,168 4.6 107,741 4.2
Total $ 168,614 9.8 % $ 145,115 10.1 % $ 311,094 10.0 % $ 267,120 10.4 %
(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 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, 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 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 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 (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):
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Three Months Ended May 31, Six Months Ended May 31,
2022 2021 2022 2021
Net orders 3,914 4,300 8,124 8,592
Net order value (a) $ 2,124,754 $ 2,036,837 $ 4,278,488 $ 3,905,905
Cancellation rates (b) 17 % 9 % 14 % 10 %
Ending backlog — homes 12,331 10,034 12,331 10,034
Ending backlog — value $ 6,121,233 $ 4,294,923 $ 6,121,233 $ 4,294,923
Ending community count 214 200 214 200
Average community count 211 205 213 215
(a) Net order value represents the potential future housing revenues associated with net orders generated during the period, as well as homebuyer selections of lot and product premiums and design studio options and upgrades for homes in backlog during the same period.
(b) Cancellation 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.
Net Orders . 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.
Backlog . 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.
Community Count . 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 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
Operational Data. The following tables present homes delivered, net orders, cancellation rates as a percentage of gross orders, net order value, average community count and ending backlog (number of homes and value) by homebuilding reporting segment (dollars in thousands):
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Three Months Ended May 31,
Homes Delivered Net Orders Cancellation Rates
Segment 2022 2021 2022 2021 2022 2021
West Coast 1,029 1,006 1,088 1,300 15 % 9 %
Southwest 685 715 719 924 11 5
Central 1,117 1,232 1,300 1,292 22 12
Southeast 638 551 807 784 16 10
Total 3,469 3,504 3,914 4,300 17 % 9 %
Net Order Value Average Community Count
Segment 2022 2021 Variance 2022 2021 Variance
West Coast $ 844,831 $ 937,416 (10) % 59 58 2 %
Southwest 341,240 374,700 (9) 36 36 —
Central 582,084 463,746 26 73 73 —
Southeast 356,599 260,975 37 43 38 13
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) %
May 31,
Backlog – Homes Backlog – Value
Segment 2022 2021 Variance 2022 2021 Variance
West Coast 2,680 2,594 3 % $ 2,035,168 $ 1,729,370 18 %
Southwest 2,460 2,063 19 1,078,701 786,578 37
Central 4,585 3,684 24 1,960,299 1,249,238 57
Southeast 2,606 1,693 54 1,047,065 529,737 98
Total 12,331 10,034 23 % $ 6,121,233 $ 4,294,923 43 %
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The composition of our homes delivered, net orders and backlog shifts with the mix of our active communities and the corresponding average selling prices of the homes ordered and/or delivered at these communities in any particular period, and changes as new communities open and existing communities wind down or sell out. In addition, with our Built-to-Order model, the selling prices of individual homes within a community may vary due to differing lot sizes and locations, home square footage, and option and upgrade selections. These intrinsic variations in our business limit the comparability of our homes delivered, net orders and backlog, as well as their corresponding values, between sequential and year-over-year periods, in addition to the effect of prevailing economic or housing market conditions in or across any particular periods.
Financial Results . Below is a discussion of the financial results for each of our homebuilding reporting segments. Further information regarding these segments, including their pretax income (loss), is included in Note 2 – Segment Information in the Notes to Consolidated Financial Statements in this report. The difference between each homebuilding reporting segment’s operating income (loss) and pretax income (loss) is generally due to the equity in income (loss) of unconsolidated joint ventures 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 $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.”
West Coast . The following table presents financial information related to our West Coast segment (dollars in thousands, except average selling price):
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 %
Construction and land costs (575,709) (507,276) (13) (1,083,174) (928,331) (17)
Selling, general and administrative expenses (47,741) (41,748) (14) (89,249) (77,006) (16)
Operating income $ 137,767 $ 76,666 80 % $ 247,668 $ 134,869 84 %
Homes delivered 1,029 1,006 2 % 1,943 1,890 3 %
Average selling price $ 739,800 $ 622,000 19 % $ 730,900 $ 603,300 21 %
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,
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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.
Southwest . The following table presents financial information related to our Southwest segment (dollars in thousands, except average selling price):
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 %
Construction and land costs
(204,469) (189,921) (8) (360,897) (328,602) (10)
Selling, general and administrative expenses
(21,764) (19,144) (14) (39,088) (34,969) (12)
Operating income $ 64,691 $ 48,996 32 % $ 100,706 $ 82,175 23 %
Homes delivered 685 715 (4) % 1,201 1,249 (4) %
Average selling price $ 424,700 $ 360,900 18 % $ 416,900 $ 356,900 17 %
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.
Central . The following table presents financial information related to our Central segment (dollars in thousands, except average selling price):
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 %
Construction and land costs
(330,473) (300,914) (10) (615,333) (539,865) (14)
Selling, general and administrative expenses
(36,373) (33,359) (9) (68,719) (63,124) (9)
Operating income $ 66,200 $ 56,282 18 % $ 104,316 $ 97,274 7 %
Homes delivered 1,117 1,232 (9) % 2,070 2,243 (8) %
Average selling price $ 387,700 $ 317,000 22 % $ 380,900 $ 312,200 22 %
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
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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.
Southeast . The following table presents financial information related to our Southeast segment (dollars in thousands, except average selling price):
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 %
Construction and land costs
(168,905) (128,307) (32) (301,135) (229,540) (31)
Selling, general and administrative expenses
(21,671) (14,559) (49) (39,366) (27,311) (44)
Operating income $ 39,063 $ 18,863 107 % $ 59,329 $ 30,977 92 %
Homes delivered 638 551 16 % 1,123 986 14 %
Average selling price $ 359,900 $ 293,500 23 % $ 356,000 $ 291,300 22 %
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%.
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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 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 ventures 14,807 7,044 19,955 13,014
Pretax income
$ 18,681 $ 10,648 $ 27,117 $ 19,148
Total originations (a):
Loans 2,052 2,357 3,835 4,429
Principal $ 799,552 $ 810,515 $ 1,491,485 $ 1,521,439
Percentage of homebuyers using KBHS 68 % 75 % 69 % 77 %
Average FICO score 734 727 733 726
Loans sold (a):
Loans sold to Stearns/GR Alliance 1,830 2,131 3,357 3,685
Principal $ 733,838 $ 741,776 $ 1,329,797 $ 1,265,681
Loans sold to third parties 265 200 617 636
Principal $ 89,809 $ 64,838 $ 202,000 $ 209,224
(a) Loan originations and sales occurred within KBHS.
Revenues . 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 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. 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.
INCOME TAXES
Income Tax Expense. Our income tax expense and effective tax rates were as follows (dollars in thousands):
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 %
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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 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.
NON-GAAP FINANCIAL MEASURES
This report contains information about our adjusted housing gross profit margin, which is not calculated in accordance with GAAP. We believe this non-GAAP financial measure is relevant and useful to investors in understanding our operations and the leverage employed in our operations, and may be helpful in comparing us with other companies in the homebuilding industry to the extent they provide similar information. However, because it is not calculated in accordance with GAAP, this non-GAAP financial measure may not be completely comparable to other companies in the homebuilding industry and, thus, should not be considered in isolation or as an alternative to operating performance and/or financial measures prescribed by GAAP. Rather, this non-GAAP financial measure should be used to supplement the most directly comparable GAAP financial measure in order to provide a greater understanding of the factors and trends affecting our operations.
Adjusted Housing Gross Profit Margin. The following table reconciles our housing gross profit margin calculated in accordance with GAAP to the non-GAAP financial measure of our adjusted housing gross profit margin (dollars in thousands):
Three Months Ended 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
Housing construction and land costs (1,281,752) (1,128,017) (2,363,864) (2,029,195)
Housing gross profits 433,074 308,015 745,116 544,190
Add: Inventory-related charges (a)
732 457 907 4,521
Adjusted housing gross profits $ 433,806 $ 308,472 $ 746,023 $ 548,711
Housing gross profit margin as a percentage of housing revenues 25.3 % 21.4 % 24.0 % 21.1 %
Adjusted housing gross profit margin as a percentage of housing revenues 25.3 % 21.5 % 24.0 % 21.3 %
(a) Represents inventory impairment and land option contract abandonment charges associated with housing operations.
Adjusted housing gross profit margin is a non-GAAP financial measure, which we calculate by dividing housing revenues less housing construction and land costs excluding housing inventory impairment and land option contract abandonment charges (as applicable) recorded during a given period, by housing revenues. The most directly comparable GAAP financial measure is housing gross profit margin. We believe adjusted housing gross profit margin is a relevant and useful financial measure to investors in evaluating our performance as it measures the gross profits we generated specifically on the homes delivered during a given period. This non-GAAP financial measure isolates the impact that the housing inventory impairment and land option contract abandonment charges have on housing gross profit margins, and allows investors to make comparisons with our competitors that adjust housing gross profit margins in a similar manner. We also believe investors will find adjusted housing gross profit margin relevant and useful because it represents a profitability measure that may be compared to a prior period without regard to variability of housing inventory impairment and land option contract abandonment charges. This financial
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measure assists us in making strategic decisions regarding community location and product mix, product pricing and construction pace.
Liquidity and Capital Resources
Overview. We have funded our homebuilding and financial services activities over the last several years with:
• internally generated cash flows;
• public issuances of debt securities;
• borrowings under the Credit Facility;
• land option contracts and other similar contracts and seller notes;
• public issuances of our common stock; and
• letters of credit and performance bonds.
We manage our use of cash in the operation of our business to support the execution of our primary strategic goals. Over the past several years, we have primarily used cash for:
• land acquisition and land development;
• home construction;
• operating expenses;
• principal and interest payments on notes payable; and
• repayments of borrowings under the Credit Facility.
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 . There have been no significant changes in our cash requirements from those reported in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section of our Annual Report on Form 10-K for the year ended November 30, 2021.
Investments in Land and Land Development. Our investments in land and land development increased 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):
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
Southwest 11,322 985,325 12,339 875,438 (1,017) 109,887
Central 30,762 1,197,682 28,961 995,811 1,801 201,871
Southeast 22,540 795,607 21,929 631,484 611 164,123
Total 89,778 $ 5,557,649 86,768 $ 4,802,829 3,010 $ 754,820
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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.
Land Option Contracts and Other Similar Contracts. As discussed in Note 8 – Variable Interest Entities in the Notes to Consolidated Financial Statements in this report, our land option contracts and other similar contracts generally do not contain provisions requiring our specific performance. Our decision to exercise a particular land option contract or other similar contract depends on the results of our due diligence reviews and ongoing market and project feasibility analysis that we conduct after entering into such a contract. In some cases, our decision to exercise a land option contract or other similar contract may be conditioned on the land seller obtaining necessary entitlements, such as zoning rights and environmental and development approvals, and/or physically developing the underlying land by a pre-determined date. We typically have the ability not to exercise our rights to the underlying land for any reason and forfeit our deposits without further penalty or obligation to the sellers. If we were to acquire all the land we had under land option contracts and other similar contracts at May 31, 2022, we estimate the remaining purchase price to be paid would be as follows: 2022 – $907.2 million; 2023 – $653.2 million; 2024 – $132.7 million; 2025 – $81.1 million; 2026 – $15.8 million; and thereafter – $0.
Liquidity. The table below summarizes our cash and cash equivalents, and total liquidity (in thousands):
May 31,
2022 November 30,
2021
Cash and cash equivalents $ 244,186 $ 290,764
Credit Facility commitment 1,090,000 800,000
Borrowings outstanding under the Credit Facility (400,000) —
Letters of credit outstanding under the Credit Facility (8,618) (8,618)
Credit Facility availability 681,382 791,382
Total liquidity $ 925,568 $ 1,082,146
The majority of our cash equivalents at May 31, 2022 and November 30, 2021 were invested in interest-bearing bank deposit accounts.
Capital Resources. Our notes payable consisted of the following (in thousands):
May 31,
2022 November 30,
2021 Variance
Credit Facility $ 400,000 $ — $ 400,000
Mortgages and land contracts due to land sellers and other loans 4,927 5,327 (400)
Senior notes 1,680,348 1,679,700 648
Total
$ 2,085,275 $ 1,685,027 $ 400,248
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).
LOC Facility . We maintain an LOC Facility to obtain letters of credit from time to time in the ordinary course of operating our business. Under the LOC Facility, which expires on February 13, 2025, we may issue up to $75.0 million of letters of credit. As of 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 $1.24 billion and $1.11 billion of performance bonds outstanding at May 31, 2022 and November 30, 2021, respectively.
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Unsecured Revolving Credit Facility . On February 18, 2022, we entered into an amendment to our Credit Facility that increased its borrowing capacity from $800.0 million to $1.09 billion and extended its maturity from October 7, 2023 to February 18, 2027. The Credit Facility contains an uncommitted accordion feature under which its aggregate principal amount of available loans can be increased to a maximum of $1.29 billion under certain conditions, including obtaining additional bank commitments. The amount of the Credit Facility available for cash borrowings and the issuance of letters of credit depends on the total cash borrowings and letters of credit outstanding under the Credit Facility and the maximum available amount under the terms of the Credit Facility. As of 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.
Under the terms of the Credit Facility, we are required, among other things, to maintain compliance with various covenants, including financial covenants regarding our consolidated tangible net worth, Leverage Ratio, and either an Interest Coverage Ratio or minimum liquidity level, each as defined therein. Our compliance with these financial covenants is measured by calculations and metrics that are specifically defined or described by the terms of the Credit Facility and can differ in certain respects from comparable GAAP or other commonly used terms. The financial covenant requirements under the Credit Facility, as amended, are set forth below:
• Consolidated Tangible Net Worth – We must maintain a consolidated tangible net worth at the end of any fiscal quarter greater than or equal to the sum of (a) $2.09 billion, plus (b) an amount equal to 50% of the aggregate of the cumulative consolidated net income for each fiscal quarter commencing after November 30, 2021 and ending as of the last day of such fiscal quarter (though there is no reduction if there is a consolidated net loss in any fiscal quarter), plus (c) an amount equal to 50% of the cumulative net proceeds we receive from the issuance of our capital stock after November 30, 2021.
• Leverage Ratio – We must also maintain a Leverage Ratio of less than or equal to .60 at the end of each fiscal quarter. The Leverage Ratio is calculated as the ratio of our consolidated total indebtedness to the sum of consolidated total indebtedness and consolidated tangible net worth, all as defined under the Credit Facility.
• Interest Coverage Ratio or Liquidity – We are also required to maintain either (a) an Interest Coverage Ratio of greater than or equal to 1.50 at the end of each fiscal quarter; or (b) a minimum level of liquidity, but not both. The Interest Coverage Ratio is the ratio of our consolidated adjusted EBITDA to consolidated interest incurred, each as defined under the Credit Facility, in each case for the previous 12 months. Our minimum liquidity is required to be greater than or equal to consolidated interest incurred, as defined under the Credit Facility, for the four most recently ended fiscal quarters in the aggregate.
In addition, under the Credit Facility, our investments in joint ventures and non-guarantor subsidiaries (which are shown, respectively, in Note 9 – Investments in Unconsolidated Joint Ventures in the Notes to Consolidated Financial Statements in this report and under “Supplemental Guarantor Financial Information” below) as of the end of each fiscal quarter cannot exceed the sum of (a) $104.8 million and (b) 20% of consolidated tangible net worth. Further, for so long as we do not hold an investment grade rating, as defined under the Credit Facility, the Credit Facility does not permit our borrowing base indebtedness, which generally is the aggregate principal amount of our and certain of our subsidiaries’ outstanding indebtedness for borrowed money and non-collateralized financial letters of credit, to be greater than our borrowing base (a measure relating to our inventory and unrestricted cash assets).
The covenants and other requirements under the Credit Facility represent the most restrictive covenants that we are subject to with respect to our notes payable. The following table summarizes the financial covenants and other requirements under the Credit Facility, and our actual levels or ratios (as applicable) with respect to those covenants and other requirements, in each case as of May 31, 2022:
Financial Covenants and Other Requirements Covenant Requirement Actual
Consolidated tangible net worth > $2.26 billion $3.25 billion
Leverage Ratio < .600 .392
Interest Coverage Ratio (a) > 1.500 9.043
Minimum liquidity (a) > $115.4 million $(155.8) million
Investments in joint ventures and non-guarantor subsidiaries < $755.5 million $266.1 million
Borrowing base in excess of borrowing base indebtedness (as defined) n/a $2.30 billion
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(a) Under the terms of the Credit Facility, we are required to maintain either a minimum Interest Coverage Ratio or a minimum level of liquidity.
The indenture governing our senior notes does not contain any financial covenants. Subject to specified exceptions, the indenture contains certain restrictive covenants that, among other things, limit our ability to incur secured indebtedness, or engage in sale and leaseback transactions involving property above a certain specified value. In addition, the indenture contains certain limitations related to mergers, consolidations, and sales of assets.
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. There are no agreements that restrict our payment of dividends other than the Credit Facility, which would restrict our payment of certain dividends, such as cash dividends on our common stock, if a default under the Credit Facility exists at the time of any such payment, or if any such payment would result in such a default (other than dividends paid within 60 days after declaration, if there was no default at the time of declaration).
Depending on available terms, we finance certain land acquisitions with purchase-money financing from land sellers or with other forms of financing from third parties. At 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 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):
Six Months Ended May 31,
2022 2021
Net cash provided by (used in):
Operating activities $ (314,812) $ (18,067)
Investing activities (37,243) (22,068)
Financing activities 306,500 (33,347)
Net decrease in cash and cash equivalents $ (45,555) $ (73,482)
Operating Activities . Generally, our net operating cash flows fluctuate primarily based on changes in our inventories and our profitability. Our net cash used in operating activities for the 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 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 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 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
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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.
Dividends. 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.
As of the date of this report, we believe we have adequate capital resources and sufficient access to external financing sources to satisfy our current and reasonably anticipated requirements for funds to conduct our operations and meet other needs in the ordinary course of our business. For the remainder of 2022, we expect to use or redeploy our cash resources or cash borrowings under the Credit Facility to support our business within the context of prevailing market conditions. During this time, we may also engage in capital markets, bank loan, project debt or other financial transactions, including the repurchase of debt or equity securities or potential new issuances of debt or equity securities to support our business needs. The amounts involved in these transactions, if any, may be material. In addition, as necessary or desirable, we may adjust or amend the terms of and/or expand the capacity of the Credit Facility or the LOC Facility, or enter into additional letter of credit facilities, or other similar facility arrangements, in each case with the same or other financial institutions, or allow any such facilities to mature or expire. However, with the uncertainty surrounding the COVID-19 pandemic and international and domestic COVID-19 control responses, including in China, as well as the ongoing global supply chain disruptions, which may be exacerbated by the military conflict in Ukraine and the associated wide-ranging sanctions imposed on Russian business sectors, financial organizations, individuals and raw materials, each of which could materially and negatively affect our business and the housing market, our ability to engage in such transactions may be constrained by volatile or tight economic, capital, credit and/or financial market conditions, as well as moderated investor and/or lender interest or capacity and/or our liquidity, leverage and net worth, and we can provide no assurance as to successfully completing, the costs of, or the operational limitations arising from any one or series of such transactions. Further discussion of the potential impacts from the COVID-19 pandemic on our capital resources and liquidity is provided in the “Risk Factors” section of our Annual Report on Form 10-K for the year ended November 30, 2021.
Supplemental Guarantor Financial Information
As of 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 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 our Guarantor Subsidiaries. Our other subsidiaries, including all of our subsidiaries associated with our financial services operations, do not guarantee any such indebtedness (collectively, “Non-Guarantor Subsidiaries”), although we may cause a Non-Guarantor Subsidiary to become a Guarantor Subsidiary if we believe it to be in our or the relevant subsidiary’s best interest. See Note 14 – Notes Payable in the Notes to Consolidated Financial Statements in this report for additional information regarding the terms of our senior notes and the Credit Facility.
The guarantees are full and unconditional, and the Guarantor Subsidiaries are 100% owned by us. The guarantees are senior unsecured obligations of each of the Guarantor Subsidiaries and rank equally in right of payment with all unsecured and unsubordinated indebtedness and guarantees of such Guarantor Subsidiaries. The guarantees are effectively subordinated to any secured indebtedness of such Guarantor Subsidiaries to the extent of the value of the assets securing such indebtedness, and structurally subordinated to indebtedness and other liabilities of Non-Guarantor Subsidiaries.
Pursuant to the terms of the indenture governing the senior notes and the terms of the Credit Facility, if any of the Guarantor Subsidiaries ceases to be a “significant subsidiary” as defined by Rule 1-02 of Regulation S-X using a 5% rather than a 10% threshold (provided that the assets of our Non-Guarantor subsidiaries do not in the aggregate exceed 10% of an adjusted measure of our consolidated total assets), it will be automatically and unconditionally released and discharged from its guaranty of the senior notes and the Credit Facility so long as all guarantees by such Guarantor Subsidiary of any other of our or our subsidiaries’ indebtedness are terminated at or prior to the time of such release.
The following tables present summarized financial information for KB Home and the Guarantor Subsidiaries on a combined basis, excluding unconsolidated joint ventures and after the elimination of (a) intercompany transactions and balances between KB Home and the Guarantor Subsidiaries and (b) equity in earnings from and investments in the Non-Guarantor Subsidiaries. See Note 9 – Investments in Unconsolidated Joint Ventures in the Notes to Consolidated Financial Statements in this report for additional information regarding our unconsolidated joint ventures.
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May 31,
2022 November 30,
2021
Summarized Balance Sheet Data (in thousands)
Assets
Cash $ 211,457 $ 250,118
Inventories 5,079,727 4,425,531
Amounts due from Non-Guarantor Subsidiaries 413,041 323,549
Total assets 6,314,890 5,581,883
Liabilities and Stockholders’ Equity
Notes payable $ 2,082,765 $ 1,682,517
Amounts due to Non-Guarantor Subsidiaries 269,459 254,717
Total liabilities 3,245,114 2,755,817
Stockholders’ equity 3,069,776 2,826,066
Six Months Ended
May 31, 2022
Summarized Statement of Operations Data (in thousands)
Revenues $ 2,941,460
Construction and land costs (2,224,189)
Selling, general and administrative expenses (302,412)
Interest income from non-guarantor subsidiary 13,212
Pretax income 428,135
Net income 320,135
Critical Accounting Policies
The preparation of our consolidated financial statements requires the use of judgment in the application of accounting policies and estimates of uncertain matters. There have been no significant changes to our critical accounting policies and estimates during the 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.
Outlook
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:
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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 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.
2022 Full Year
• 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 25.6% 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.
• We expect the effective tax rate will be approximately 25%. The effective tax rate for 2021 was approximately 19%, which reflected the favorable effect of then-available federal tax credits we earned primarily from building energy-efficient homes.
• We expect our ending community count to be approximately 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.
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 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 extent and effect of these factors on our business is highly
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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. Forward-looking statements are based on our current expectations and projections about future events and are subject to risks, uncertainties, and assumptions about our operations, economic and market factors, and the homebuilding industry, among other things. These statements are not guarantees of future performance, and we have no specific policy or intention to update these statements. In addition, forward-looking and other statements in this report and in other public or oral disclosures that express or contain opinions, views or assumptions about market or economic conditions; the success, performance, effectiveness and/or relative positioning of our strategies, initiatives or operational activities; and other matters, may be based in whole or in part on general observations of our management, limited or anecdotal evidence and/or business or industry experience without in-depth or any particular empirical investigation, inquiry or analysis.
Actual events and results may differ materially from those expressed or forecasted in forward-looking statements due to a number of factors. The most important risk factors that could cause our actual performance and future events and actions to differ materially from such forward-looking statements include, but are not limited to, the following:
• general economic, employment and business conditions;
• population growth, household formations and demographic trends;
• conditions in the capital, credit and financial markets;
• our ability to access external financing sources and raise capital through the issuance of common stock, debt or other securities, and/or project financing, on favorable terms;
• the execution of any securities repurchases pursuant to our board of directors’ authorization;
• material and trade costs and availability, including building materials, especially lumber, and appliances;
• consumer and producer price inflation;
• 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;
• our compliance with the terms of the Credit Facility;
• volatility in the market price of our common stock;
• home selling prices, including our homes’ selling prices, increasing at a faster rate than consumer incomes;
• weak or declining consumer confidence, either generally or specifically with respect to purchasing homes;
• competition from other sellers of new and resale homes;
• weather events, significant natural disasters and other climate and environmental factors;
• any failure of lawmakers to agree on a budget or appropriation legislation to fund the federal government’s operations, and financial markets’ and businesses’ reactions to any such failure;
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• government actions, policies, programs and regulations directed at or affecting the housing market (including the tax benefits associated with purchasing and owning a home, and the standards, fees and size limits applicable to the purchase or insuring of mortgage loans by government-sponsored enterprises and government agencies), the homebuilding industry, or construction activities;
• changes in existing tax laws or enacted corporate income tax rates, including those resulting from regulatory guidance and interpretations issued with respect to thereto;
• changes in U.S. trade policies, including the imposition of tariffs and duties on homebuilding materials and products, and related trade disputes with and retaliatory measures taken by other countries;
• disruptions in world and regional trade flows, economic activity and supply chains due to the military conflict in Ukraine, including those stemming from wide-ranging sanctions the U.S. and other countries have imposed or may further impose on Russian business sectors, financial organizations, individuals and raw materials, the impact of which may, among other things, increase our operational costs, exacerbate building materials and appliance shortages and/or reduce our revenues and earnings;
• the adoption of new or amended financial accounting standards and the guidance and/or interpretations with respect thereto;
• the availability and cost of land in desirable areas and our ability to timely develop acquired land parcels and open new home communities;
• our warranty claims experience with respect to homes previously delivered and actual warranty costs incurred;
• costs and/or charges arising from regulatory compliance requirements or from legal, arbitral or regulatory proceedings, investigations, claims or settlements, including unfavorable outcomes in any such matters resulting in actual or potential monetary damage awards, penalties, fines or other direct or indirect payments, or injunctions, consent decrees or other voluntary or involuntary restrictions or adjustments to our business operations or practices that are beyond our current expectations and/or accruals;
• our ability to use/realize the net deferred tax assets we have generated;
• our ability to successfully implement our current and planned strategies and initiatives related to our product, geographic and market positioning, gaining share and scale in our served markets and in entering into new markets;
• our operational and investment concentration in markets in California;
• consumer interest in our new home communities and products, particularly from first-time homebuyers and higher-income consumers;
• our ability to generate orders and convert our backlog of orders to home deliveries and revenues, particularly in key markets in California;
• our ability to successfully implement our business strategies and achieve any associated financial and operational targets and objectives, including those discussed in this report or in any of our other public filings, presentations or disclosures;
• income tax expense volatility associated with stock-based compensation;
• the ability of our homebuyers to obtain residential mortgage loans and mortgage banking services;
• the performance of mortgage lenders to our homebuyers;
• the performance of KBHS;
• information technology failures and data security breaches;
• an epidemic or pandemic (such as the outbreak and worldwide spread of COVID-19), and the control response measures that international (including China), federal, state and local governments, agencies, law enforcement and/or health authorities implement to address it, which may (as with COVID-19) precipitate or exacerbate one or more of the above-mentioned and/or other risks, and significantly disrupt or prevent us from operating our business in the ordinary course for an extended period; and
• other events outside of our control.
Please see our Annual Report on Form 10-K for the year ended November 30, 2021 and other filings with the SEC for a further discussion of these and other risks and uncertainties applicable to our business.
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Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.