What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-10-07 compared with 2022-07-08 · 236 added, 217 removed, 398 unchanged (53% of the section changed)

3 unchanged sentences

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,

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

2022 2021 Variance 2022 2021 Variance

11 unchanged sentences

$ 2.86 $ 1.60 79 % $ 6.63 $ 4.11 61 %

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 generated strong year-over-year improvements in most of our key financial metrics in the 2022 third quarter and first nine months with our ongoing focus on balancing pace, price and construction starts at each community, which helped us to enhance our returns, within the favorable pricing and housing supply/demand environment prevailing in prior periods when most buyers contracted to purchase the homes delivered.

At the same time, our results for each period were partly offset by significant persistent supply chain challenges and higher construction costs, as described further below.

In addition, during the 2022 third quarter, U.S.

housing demand weakened significantly compared to the year-ago quarter and much of the 2022 first half, as the combination of sharply higher mortgage interest rates since early 2022, several years of rising housing prices, volatility across financial markets, elevated inflation and various other macroeconomic and geopolitical concerns weighed on consumer budgets and confidence.

These housing affordability and other pressures negatively impacted homebuyer sentiment, resulting in many prospective buyers pausing their homebuying decisions, which led to year-over-year decreases in our net orders and net order value of 50% and 51%, respectively, for the three months ended August 31, 2022.

The decline in net orders reflected a slowing in our monthly net orders per community to 3.1 from 6.6, partly offset by an 8% increase in our average community count due to new community openings and fewer communities selling out.

Although we believe the long-term housing market outlook remains positive, supported by strong fundamentals, including demographic trends, the extended underproduction of new homes in relation to population growth and low resale home inventory, we expect affordability pressures and consumer uncertainty to continue to measurably impact demand for the remainder of the year and into 2023 compared to corresponding prior-year periods.

Homebuilding revenues for the 2022 third quarter grew 26% year over year due to higher housing revenues, driven by a 6% increase in the number of homes delivered to 3,615 and a 19% increase in their overall average selling price to $508,700.

Approximately 54% of our homes delivered in the 2022 third quarter were to first-time homebuyers.

Homebuilding operating income for the three months ended August 31, 2022 rose 91% year over year to $325.1 million and, as a percentage of revenues, improved 610 basis points to 17.7%.

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 580 basis points to 17.7%, and net income and diluted earnings per share increased 70% and 79%, respectively, each as compared to the corresponding 2021 quarter.

Since the outbreak of COVID-19 in 2020, we have experienced intense building material cost pressures and production capacity and shipping constraints affecting our product suppliers driven by sustained high levels of homebuilding and renovation activity, combined with various supply chain disruptions.

In the 2022 third quarter, we, like many other homebuilders, continued to experience production challenges due to these 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, which have been disrupted by key equipment shortages.

These disruptions have resulted in construction cycle times that remain

extended, and delays in deliveries.

Despite these operational challenges, which resulted in our construction cycle time expanding by 11 days during the 2022 third quarter after improving slightly in the 2022 second quarter, we delivered more homes in the 2022 third quarter than 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.

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%.

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.

While we believe these challenging circumstances affecting our land development and home construction activities will generally persist through the 2022 fourth quarter, as reflected in our performance expectations presented below under “Outlook,” it is possible they will worsen in that and in later periods.

Our ending backlog value at August 31, 2022 grew 9% to approximately $5.26 billion.

With this backlog, we expect to achieve year-over-year growth in our scale, profitability and returns in the 2022 fourth quarter and full year, as described below under “Outlook.”

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,

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

2022 2021 2022 2021

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Interest income 192 144 267 1,038

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

Equity in loss of unconsolidated joint ventures (100) (182) (387) (5)

Loss on early extinguishment of debt (3,598) (5,075) (3,598) (5,075)

Homebuilding pretax income $ 321,604 $ 164,816 $ 755,414 $ 442,883

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

2022 2021 2022 2021

Homes delivered 3,615 3,425 9,952 9,793

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Operating income as a percentage of revenues 17.7 % 11.6 % 15.3 % 11.1 %

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.

Homebuilding revenues for the 2022 third quarter increased from the year-earlier quarter due to a 26% increase in housing revenues.

The year-over-year growth in housing revenues resulted from a 6% increase in the number of homes delivered and a 19% increase in their overall average selling price that primarily reflected the favorable pricing and housing supply/demand environment in prior periods when most buyers contracted to purchase those homes, 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 23% year over year, the number of homes delivered in the 2022 third quarter increased by only 6%, 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 third quarter, compared to 34% in the year-earlier period, and 27% and 29% in the 2022 first and second quarters, respectively.

For the nine months ended August 31, 2022, homebuilding revenues grew 23% year over year to $4.95 billion, reflecting growth in housing revenues.

The increase in housing revenues for the nine months ended August 31, 2022 was driven by a slight increase in the number of homes delivered and a 21% rise in the overall average selling price of those homes.

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

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.

Our operating income for the three months ended August 31, 2022 grew 91% 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 third quarter included inventory-related charges of $8.5 million, compared to $6.7 million in the year-earlier quarter.

As a percentage of revenues, our operating income for the three months ended August 31, 2022 improved 610 basis points to 17.7%, compared to 11.6% for the corresponding 2021 period.

Excluding inventory-related charges, our operating income as a percentage of revenues increased 600 basis points to 18.1% for the 2022 third quarter from 12.1% for the year-earlier quarter.

For the nine months ended August 31, 2022, our operating income increased 70% from the prior-year period.

Operating income for the nine months ended August 31, 2022 included inventory-related charges of $9.4 million, compared to $11.2 million of such charges in the corresponding 2021 period.

As a percentage of revenues, our operating income for the nine months ended August 31, 2022 grew 420 basis points year over year to 15.3%.

Excluding inventory-related charges, our operating income as a percentage of revenues increased 410 basis points to 15.5% for the nine months ended August 31, 2022 from 11.4% for the corresponding year-earlier period.

• Housing Gross Profits – Housing gross profits of $490.9 million for the three months ended August 31, 2022 grew 56% from $314.2 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 third quarter rose 520 basis points year over year to 26.7%, mainly as a result of the favorable pricing and housing supply/demand environment in prior periods when most buyers contracted to purchase the homes delivered (approximately 460 basis points), lower amortization of previously capitalized interest as a percentage of housing revenues (approximately 50 basis points), and a decrease in inventory-related charges (approximately 20 basis points).

These favorable impacts were partly offset by increased expenses to support current operations (approximately 10 basis points).

As a percentage of housing revenues, the amortization of previously capitalized interest associated with housing operations was 2.0% and 2.5% for the three months ended August 31, 2022 and 2021, respectively.

Excluding the inventory-related charges associated with housing operations of $5.9 million in the current quarter and $6.7 million in the year-earlier quarter, our adjusted housing gross profit margin for the 2022 third quarter increased 500 basis points year over year.

For the nine months ended August 31, 2022, our housing gross profits of $1.24 billion increased 44% from $858.4 million for the year-earlier period.

Our housing gross profit margin for the nine months ended August 31, 2022 increased 370 basis points to 25.0%.

Excluding the inventory-related charges associated with housing operations of $6.8 million in the current period and $11.2 million in the year-earlier period, our adjusted housing gross profit margin of 25.1% for the nine months ended August 31, 2022 increased 350 basis points year over year, primarily due to the reasons described above with respect to the three months ended August 31, 2022.

As a percentage of housing revenues, the amortization of previously capitalized interest associated with housing operations was 2.0% for the nine months ended August 31, 2022, compared to 2.7% 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.”

• Land Sale Profits (Losses) – Land sale losses of $2.6 million for the three months and nine months ended August 31, 2022 were comprised solely of an inventory impairment charge related to a parcel of land previously held for future development that we plan to sell.

For the three months and nine months ended August 31, 2021, land sales generated nominal results.

• 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,

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

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

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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 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.

Selling, general and administrative expenses for the three months ended August 31, 2022 rose 13% from the year-earlier quarter, mainly due to an increase in general and administrative expenses and marketing expenses.

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

As a percentage of housing revenues, our selling, general and administrative expenses for the 2022 third quarter improved 100 basis points, largely reflecting lower external sales commission rates 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 nine months ended August 31, 2022, selling, general and administrative expenses increased 15% year over year, mainly due to the reasons described above with respect to the three months ended August 31, 2022.

In addition, general and administrative expenses in the year-earlier period 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 nine months ended August 31, 2022 improved 60 basis points to 9.6%, mainly due to the reasons described above with respect to the three months ended August 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.

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

For the nine-month period ended August 31, 2022, interest income was nominal, compared to $1.0 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.

All interest incurred during the three-month and nine-month periods ended August 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.

Equity in Loss of Unconsolidated Joint Ventures .

Our equity in loss of unconsolidated joint ventures was nominal for the three-month and nine-month periods ended August 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.

Loss on Early Extinguishment of Debt .

For the three-month and nine-month periods ended August 31, 2022 and 2021, we recognized losses on the early extinguishment of debt of $3.6 million and $5.1 million, respectively.

The loss for the three months and nine months ended August 31, 2022 was associated with our retirement of $350.0 million in aggregate principal amount of our 7.50% Senior Notes due 2022 before their maturity date, by redemption pursuant to the optional redemption terms specified for such notes.

The loss on early extinguishment of debt for the three-month and nine-month periods ended August 31, 2021 was associated with our purchase, pursuant to a tender offer, of $269.8 million in aggregate principal amount of senior notes before their maturity date.

Further information regarding these transactions is provided in Note 14 – Notes Payable in the Notes to Consolidated Financial Statements in this report.

Net Orders, Cancellation Rates, Backlog and Community Count .

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

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

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

2022 2021 2022 2021

8 unchanged sentences

(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 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.

Reflecting the decline in housing market demand in the 2022 third quarter stemming from the factors described above under “Overview,” net orders from our homebuilding operations for the three months ended August 31, 2022 declined 50% year over year with the pace of monthly net orders per community slowing to 3.1, compared to 6.6 in the year-earlier period.

The value of our net orders declined 51% year over year, reflecting the overall decrease in our net orders as well as the impact of current-quarter selling price adjustments made to homes in backlog.

Both net orders and net order values were down on a year-over-year basis in each of our four homebuilding reporting segments.

Our cancellation rate as a percentage of gross orders for the three months ended August 31, 2022 rose from the year-earlier period and is higher than our typical historical levels, reflecting both the recent softening in housing market demand and the strong demand levels we experienced in 2021.

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

The potential future housing revenues in our backlog at August 31, 2022 grew 9% from August 31, 2021 primarily due to an 8% increase in the overall average selling price of the homes in backlog.

The overall growth in our backlog value reflected increases of 54% in our Southeast homebuilding reporting segment, 24% in our Central segment and 5% in our Southwest segment, partially offset by a decrease of 18% in our West Coast 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.

Our ending and average community counts for the 2022 third quarter each increased 8% from the year-earlier period primarily reflecting new community openings and fewer communities selling out during the three months ended August 31, 2022.

While we made substantial investments in land acquisition and land development in the first nine months of 2022, as we did in 2021, to support future community count growth, we pivoted our land investment strategy in the 2022 third quarter in response to the recent softening in housing market demand.

Therefore, we reduced our land acquisition spending and increased our focus on developing land positions we already own or control to continue to drive new community openings, as discussed below under “Liquidity and Capital Resources.”

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 May 31,

Three Months Ended August 31,

Homes Delivered Net Orders Cancellation Rates

12 unchanged sentences

Total $ 978,969 $ 2,009,192 (51) % 221 205 8 %

Six Months Ended May 31,

Nine Months Ended August 31,

Homes Delivered Net Orders Cancellation Rates

27 unchanged sentences

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.”

Corporate and other had operating losses of $42.9 million in each of the three-month periods ended August 31, 2022 and 2021.

For the nine months ended August 31, 2022, Corporate and other had operating losses of $120.9 million, compared to $111.2 million for the corresponding year-earlier period.

The year-over-year increase for the nine-month period ended August 31, 2022 reflected higher selling, general and administrative expenses, mainly due to higher costs associated with performance-based employee compensation plans, as well as expenses incurred to support current operations and expected community count growth.

The financial results of our homebuilding reporting segments for the three-month and nine-month periods ended August 31, 2022 were favorably impacted by year-over-year increases in the average selling prices of homes delivered that reflected the favorable pricing and housing supply/demand environment in prior periods when most buyers contracted to purchase the homes delivered, as well as product and geographic mix shifts of homes delivered.

The segment financial results for three-month and nine-month periods ended August 31, 2022 were negatively affected by 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 May 31, Six Months Ended May 31,

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

2022 2021 Variance 2022 2021 Variance

6 unchanged sentences

Operating income as a percentage of revenues 20.6 % 14.1 % 650 bps 18.6 % 12.7 % 590 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.

This segment’s revenues for the three-month and nine-month periods ended August 31, 2022 grew year over year due to increases in both the number of homes delivered and the average selling price of those homes.

Operating income for the three months and nine months ended August 31, 2022 grew from the corresponding year-earlier periods, reflecting higher housing gross profits, partly offset by higher selling, general and administrative expenses and a $2.6 million land sale loss, which was comprised solely of an inventory impairment charge related to a parcel of land previously held for future development that we plan to sell.

Operating income as a percentage of revenues for the 2022 third quarter increased from the year-earlier quarter, primarily due to a 610 basis-point expansion in the housing gross profit margin to 26.2% and a 70 basis-point improvement in selling, general and administrative expenses as a percentage of housing revenues to 5.3%.

For the nine months ended August 31, 2022, operating income as a percentage of revenues expanded from the corresponding 2021 period, primarily due to a 550 basis-point increase in the housing gross profit margin to 24.6% and a 60 basis-point improvement in selling, general and administrative expenses as a percentage of housing revenues to 5.9%.

The year-over-year increases in the housing gross profit margins for the three-month and nine-month periods ended August 31, 2022 were largely driven by the favorable pricing and housing supply/demand environment in prior periods when most buyers contracted to purchase the homes delivered, and lower relative amortization of previously capitalized interest.

In addition, the housing gross profit margin for the three months ended August 31, 2022 included $1.9 million of inventory-related charges, compared to $6.5 million in the year-earlier quarter.

The housing gross profit margin for the nine months ended August 31, 2022 included $2.1 million of inventory-related charges, compared to $10.4 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 lower external sales commission rates and increased operating leverage from higher housing revenues.

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,

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

2022 2021 Variance 2022 2021 Variance

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Operating income as a percentage of revenues 24.1 % 19.6 % 450 bps 21.7 % 18.8 % 290 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 year-over-year growth in this segment’s revenues for the three-month and nine-month periods ended August 31, 2022 reflected an increase in both the number of homes delivered and the overall average selling price of those homes.

Operating income for the three months and nine months ended August 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 August 31, 2022 improved from the year-earlier period largely due to a 440 basis-point expansion in the housing gross profit margin to 31.2% and a 10 basis-point improvement in selling, general and administrative expenses as a percentage of housing revenues to 7.1%.

For the nine months ended August 31, 2022, operating income as a percentage of revenues expanded from the corresponding 2021 period, primarily due to a 270 basis-point increase in the housing gross profit margin to 29.2% and a 10 basis-point improvement in selling, general and administrative expenses as a percentage of housing revenues to 7.5%.

The year-over-year increases in the housing gross profit margins for the three-month and nine-month periods ended August 31, 2022 primarily reflected the favorable pricing and housing supply/demand environment in prior periods when most buyers contracted to purchase the homes delivered in these periods, 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 community count growth.

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,

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

2022 2021 Variance 2022 2021 Variance

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Operating income as a percentage of revenues 17.9 % 13.9 % 400 bps 14.9 % 13.9 % 100 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.

This segment’s revenues for the three-month and nine-month periods ended August 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.

Operating income for the three-month and nine-month periods ended August 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 August 31, 2022, this segment’s operating income as a percentage of revenues increased from the year-earlier period primarily due to a 380 basis-point increase in the housing gross profit margin to 25.5% and a 20 basis-point improvement in selling, general and administrative expenses as a percentage of housing revenues to 7.7%.

For the nine months ended August 31, 2022, operating income as a percentage of revenues increased from the year-earlier period due to a 70 basis-point increase in the housing gross profit margin to 23.2%, and a 30 basis-point improvement in selling, general and administrative expenses as a percentage of housing revenues to 8.3%.

The year-over-year increase in the housing gross profit margin for the three-month and nine-month periods ended August 31, 2022 reflected the favorable pricing and housing supply/demand environment in prior periods when most buyers contracted to purchase the homes delivered in these periods, and lower relative amortization of previously capitalized interest.

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,

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

2022 2021 Variance 2022 2021 Variance

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Operating income as a percentage of revenues 16.5 % 11.2 % 530 bps 15.5 % 10.9 % 460 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%.

This segment’s revenues for the three-month and nine-month periods ended August 31, 2022 were generated solely from housing operations.

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

Housing revenues for the 2022 third quarter increased 37% year over year from $178.6 million.

Housing revenues for the nine months ended August 31, 2022 grew 38% year over year from $465.8 million.

The housing revenue expansion for the three-month and nine-month periods ended August 31, 2022 resulted from growth in the number of homes delivered and an increase in the overall average selling price of those homes.

Operating income for the three-month and nine-month periods ended August 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 third quarter rose from the year-earlier period mainly due to a 500 basis-point increase in the housing gross profit margin to 25.5% that primarily reflected the favorable pricing and housing supply/demand environment in prior periods when most buyers contracted to purchase the homes delivered, a shift in geographic mix, and lower relative amortization of previously capitalized interest and sales incentives.

Selling, general and administrative expenses as a percentage of housing revenues for the three months ended August 31, 2022 improved 40 basis points from the year-earlier period to 9.0%.

For the nine months ended August 31, 2022, operating income as a percentage of revenues expanded from the year-earlier period, primarily reflecting a 460 basis-point increase in the housing gross profit margin to 25.0% mainly due to the reasons described above for the three months ended August 31, 2022.

Selling, general and administrative expenses as a percentage of housing revenues for the nine months ended August 31, 2022 was flat at 9.5%.

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,

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

2022 2021 2022 2021

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(a) Loan originations and sales occurred within KBHS.

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.

Financial services revenues for the three months and nine months ended August 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.

Financial services pretax income for the three months ended August 31, 2022 declined 51% from the year-earlier period, mainly due to a decrease in our equity in income of unconsolidated joint ventures.

In the 2022 third quarter, the equity in income of our unconsolidated joint venture, KBHS, was nominal, compared to $5.4 million in the year-earlier quarter, primarily due to a $6.3 million loss in the fair value of IRLCs in the current quarter.

This loss mainly reflected a lower number of IRLCs at August 31, 2022 compared to May 31, 2022 largely due to a greater number of customers electing to lock their mortgage interest rates in the 2022 second quarter, as described further below.

This impact was partially offset by a higher principal amount of loan originations mainly due to a 19% increase in the average selling price of homes delivered, partly offset by a decrease in the percentage of homebuyers using KBHS.

For the nine months ended August 31, 2022, our financial services pretax income increased 11% from the corresponding 2021 period, primarily due to a 9% increase in the equity in income of our unconsolidated joint venture, KBHS.

The increase in the equity in income of KBHS primarily reflected a $27.1 million gain resulting from the 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 in the 2022 second quarter, aligned with their expected home delivery date, due to the sharp rise in such rates during that period.

KBHS’ accounting for these IRLCs had a favorable pull-forward effect on its earnings for the nine months ended August 31, 2022, primarily in the second quarter, shifting some of our expected equity in income of KBHS from the 2022 fourth quarter to the nine months ended August 31, 2022.

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.

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

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

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

2022 2021 2022 2021

1 unchanged sentence

Effective tax rate 21.7 % 13.8 % 23.7 % 17.2 %

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.

Our effective tax rate for the three months ended August 31, 2022 increased from the year-earlier period, primarily due to a $6.2 million decrease in the federal tax credits we recognized primarily from building energy-efficient homes.

For the nine months ended August 31, 2022, our effective tax rate increased from the year-earlier period, mainly due to a $22.9 million

decrease in the federal tax credits we recognized primarily from building energy-efficient homes, a $1.7 million decrease in excess tax benefits related to stock-based compensation, and a $1.0 million increase in non-deductible executive compensation expense.

The year-over-year decreases in tax credits for the three months and nine months ended August 31, 2022 were due to the corresponding 2021 periods including the impact of tax credits related to homes delivered in certain previous years.

On August 16, 2022, the IRA was enacted into law.

The IRA contains significant tax law changes, including a corporate alternative minimum tax of 15% on adjusted financial statement income for applicable corporations, and a 1% excise tax on stock repurchases after December 31, 2022.

If applicable, the corporate alternative minimum tax will not be effective for us until our fiscal year ending November 30, 2024.

The IRA also extends the federal tax credit for building new energy-efficient homes for homes delivered from January 1, 2022 (retroactively) through December 31, 2032, as well as modifies and increases it starting in 2023.

Previously, the federal tax credit expired for homes delivered after December 31, 2021.

The federal energy tax credits we recognized in the three-month and nine-month periods ended August 31, 2022 reflected the impact of the recent extension under the IRA.

We are currently evaluating the other potential effects of the IRA on our consolidated financial statements.

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.

Although the suspension of California NOL deductions did not have an impact on our income tax expense for the three months and nine months ended August 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 May 31, Six Months Ended May 31,

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

2022 2021 2022 2021

10 unchanged sentences

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.

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

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 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.

• dividends paid to stockholders and repurchases of our common stock.

We ended the 2022 third quarter with total liquidity of $928.8 million, including cash and cash equivalents and $733.4 million of available capacity under the Credit Facility.

Based on our financial position as of August 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 recent softening in homebuyer demand indicates potential liquidity risks, we believe that our existing cash and cash equivalents, our anticipated cash flows from operations and amounts available under our Credit Facility and the Term Loan will be sufficient to fund our anticipated operating and land-related investment needs, as well as our upcoming debt maturities, for at least the next 12 months.

As disclosed in Note 14 – Notes Payable 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.

On July 7, 2022, 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 before their September 15, 2022 maturity date, 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 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.

Our investments in land and land development for the three months ended August 31, 2022 decreased 29% to $556.0 million, compared to $779.3 million for the year-earlier period, primarily due to a strategic reduction in land acquisitions.

In the three months ended August 31, 2022, our land acquisitions decreased 71% to $135.3 million from $467.4 million, reflecting a pivot in our land investment strategy in response to the recent softening in housing market demand, deciding to focus more on developing land positions we already own or control under land option contracts and other similar contracts to continue to drive new community openings.

For the nine months ended August 31, 2022, our investments in land and land development increased 3% to $1.96 billion, compared to $1.91 billion for the year-earlier period.

Approximately 39% of our total investments for the nine months ended August 31, 2022 related to land acquisition, compared to approximately 52% in the prior-year period.

While we made strategic investments in land and land development in each of our homebuilding reporting segments during the nine months ended August 31, 2022 and 2021, approximately 51% and 52%, respectively, of these investments for each period were made in our West Coast homebuilding reporting segment.

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

August 31, 2022 November 30, 2021 Variance

Segment Lots Carrying Value Lots Carrying Value Lots Carrying Value

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Total 79,098 $ 5,736,702 86,768 $ 4,802,829 (7,670) $ 933,873

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.

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

The number of lots we owned or controlled under land option contracts and other similar contracts at August 31, 2022 decreased from November 30, 2021, reflecting the recent above-mentioned pivot in our land investment strategy and our abandonment of 8,761 previously controlled lots in the 2022 third quarter.

The number of lots in inventory as of August 31, 2022 included 7,935 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 35% at August 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 May 31, 2022, we estimate the remaining purchase price to be paid would be as follows:

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

2022 – $302.2 million;

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Total liquidity $ 928,752 $ 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.

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

Capital Resources.

6 unchanged sentences

$ 2,031,192 $ 1,685,027 $ 346,165

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.

Our financial leverage, as measured by the ratio of debt to capital, was 36.8% at August 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 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.

As of August 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.

As discussed in Note 16 – Commitments and Contingencies in the Notes to Consolidated Financial Statements in this report, we had $1.26 billion and $1.11 billion of performance bonds outstanding at August 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 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.

As of August 31, 2022, we had $350.0 million of cash borrowings and $6.7 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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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.

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:

The covenants and other requirements under the Credit Facility and the Term Loan 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 the Term Loan, and our actual levels or ratios (as applicable) with respect to those covenants and other requirements, in each case as of August 31, 2022:

Financial Covenants and Other Requirements Covenant Requirement Actual

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Borrowing base in excess of borrowing base indebtedness (as defined) n/a $2.44 billion

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

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

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

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

As of 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).

As of August 31, 2022, we were in compliance with our covenants and other requirements under the Credit Facility, the Term Loan, 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, our ability to access the Term Loan for cash borrowings 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 and the Term Loan, which would restrict our payment of certain dividends, such as cash dividends on our common stock, if a default under the Credit Facility or the Term Loan 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.

At August 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 $33.7 million.

Senior Unsecured Term Loan .

On August 25, 2022, we entered into the Term Loan with the lenders party thereto, pursuant to which the lenders have committed to lend us up to $310.0 million.

Under certain circumstances, the aggregate commitment under the Term Loan may be increased to up to $400.0 million, provided additional lender commitments we are pursuing are obtained.

We may draw up to the committed amount at any time through November 23, 2022, subject to certain conditions.

The Term Loan will mature on August 25, 2026, or earlier if we secure borrowings under the Credit Facility without similarly securing the Term Loan (subject to certain exceptions).

As of August 31, 2022, we had not drawn under the Term Loan.

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

We intend to use the proceeds from the Term Loan toward the redemption of our outstanding $350.0 million in aggregate principal amount of 7.625% senior notes due May 15, 2023, which may be called at par, plus accrued and unpaid interest thereon, six months prior to that date.

After retiring these senior notes, our next senior note maturity will be June 15, 2027.

Credit Ratings .

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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,

Nine Months Ended August 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 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.

Our net cash used in operating activities for the nine months ended August 31, 2022 mainly reflected a net increase in inventories of $954.2 million and a net increase in receivables of $40.5 million, partly offset by net income of $600.3 million and a net increase in accounts payable, accrued expenses and other liabilities of $94.7 million.

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

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.

In the nine months ended August 31, 2022, our uses of cash included $33.8 million for net purchases of property and equipment and $21.6 million for contributions to unconsolidated joint ventures.

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

In the 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.

In the nine months ended August 31, 2021, the net cash used for investing activities reflected $28.2 million for net purchases of property and equipment and $11.1 million for contributions to unconsolidated joint ventures.

These uses of cash were partially offset by a $12.7 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

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 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.

In the nine months ended August 31, 2022, cash was provided by our issuance of $350.0 million in aggregate principal amount of 7.25% Senior Notes due 2030 and net borrowings under the Credit Facility of $350.0 million.

The cash provided was partially offset by our repayment of $350.0 million in aggregate principal amount of our 7.50% Senior Notes due 2022, $100.0 million of stock repurchases, $39.9 million of dividend payments on our common stock, $12.2 million of tax payments associated with stock-based compensation awards, $10.7 million of issuance costs and $.4 million of payments on mortgages and land contracts due to land sellers and other loans.

In the nine months ended August 31, 2021, net cash was used for our repayment of $269.8 million in aggregate principal amount of our senior notes, stock repurchases totaling $188.2 million, dividend payments on our common stock of $41.0 million, tax payments associated with stock-based compensation awards of $8.5 million, payments of issuance costs of $4.8 million and payments on mortgages and land contracts due to land sellers and other loans of $.6 million.

The cash used was partially offset by cash provided from our issuance of $390.0 million in aggregate principal amount of 4.00% Senior Notes due 2031 and $3.5 million of issuances of common stock under employee stock plans.

In the three-month periods ended August 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 nine-month periods ended August 31, 2022 and 2021 totaled $.45 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.

In the 2022 fourth quarter, we expect to use or redeploy our cash resources or cash borrowings under the Credit Facility and the Term Loan 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, under our current board of directors’ authorization described in Note 18 – Stockholders’ Equity in the Notes to Consolidated Financial Statements in this report or otherwise, 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.

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

Our ability to

engage in such transactions may be constrained by volatile or tight economic, capital, credit and/or financial market conditions or moderated investor and/or lender interest or capacity stemming from the unfavorable industry trends described above under “Overview” or other factors, 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.

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.

As of August 31, 2022, we had $1.69 billion in aggregate principal amount of outstanding senior notes and $350.0 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 and the Term Loan 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.

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 and the Term Loan.

The guarantees are full and unconditional, and the Guarantor Subsidiaries are 100% owned by us.

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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.

Pursuant to the terms of the indenture governing the senior notes and the terms of the Credit Facility and the Term Loan, 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, the Credit Facility and the Term Loan 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.

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Stockholders’ equity 3,254,236 2,826,066

Six Months Ended

Nine Months Ended

August 31, 2022

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 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.

There have been no significant changes to our critical accounting policies and estimates during the nine months ended August 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 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.

However, the combination of sharply higher mortgage interest rates since early 2022, several years of rising housing prices, elevated inflation and various other macroeconomic and geopolitical concerns, is moderating housing demand and expected to continue in the 2022 fourth quarter and into 2023, with lower net orders and higher cancellation rates anticipated for these same periods as compared to the corresponding year-earlier periods.

Reduced demand from these affordability pressures and consumer uncertainty could also heighten what has historically been our seasonal fourth quarter decrease in net orders.

Given current conditions, we plan to continue to monitor market dynamics and individual community performance and adjust selling prices as necessary to balance between preserving our backlog and achieving the applicable minimum absorption rates to optimize each asset.

We also expect to continue at a lower level of land acquisition spending for an extended period.

Yet, we believe the ability of our differentiating, highly customer-centric Built-to-Order business model to effectively meet evolving consumer preferences and budgets, and our operational capabilities will assist us in navigating the changing market conditions and help drive growth in revenues and operating margin in the 2022 fourth quarter, as compared to the corresponding 2021 period, subject to the factors and risks described in this report.

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

2022 Fourth Quarter

• We expect to generate housing revenues in the range of $1.95 billion to $2.05 billion, an increase from $1.66 billion in the corresponding 2021 period, and anticipate our average selling price to be approximately $503,000, compared to $451,100 in the year-earlier period, a 12% increase year over year.

• We expect our homebuilding operating income margin will be approximately 16.7%, assuming no inventory-related charges, up from 12.9% 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 housing gross profit margin will be in the range of 25.0% to 26.0%, assuming no inventory-related charges, compared to 22.4% for the corresponding 2021 quarter.

• We expect our selling, general and administrative expenses as a percentage of housing revenues to be approximately 8.8%, compared to 9.8% in the 2021 fourth quarter.

• We expect our effective tax rate will be approximately 24%.

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.

The effective tax rate for the year-earlier quarter was approximately 22%.

• We expect our ending community count will be in the range of 235 to 250, which, at the mid-point of the range, would result in a 12% year-over-year increase in the average community count.

2022 Full Year

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• We expect our housing gross profit margin to be in the range of 25.1% to 25.4%, 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 our selling, general and administrative expenses as a percentage of housing revenues to be approximately 9.4%, compared to 10.1% in the prior year.

• We expect the effective tax rate will be approximately 24%.

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.

The effective tax rate for 2021 was approximately 19%.

• We expect our return on equity of approximately 26%, an improvement of more than 600 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.

The Federal Reserve’s aggressive raising of the federal funds interest rate and other measures during the first nine months of 2022 to moderate persistent U.S.

inflation, and the further actions it has stated it intends to take, are expected to be an ongoing headwind for the housing market in the 2022 fourth quarter and beyond, as they have elevated mortgage loan interest rates, and created macroeconomic uncertainty and volatility across financial markets.

In addition, we and other residential construction firms continue to experience services and supply constraints and rising and volatile raw material prices.

Although we continue to work with our suppliers and trade partners to resolve these land development and home construction issues, and are seeking to reduce our build costs where possible, we believe they will generally persist in the fourth quarter and into 2023.

Prolonged supply chain disruptions and other production-related challenges, as described above under “Overview,” could extend our construction cycle times, delay our new community openings and intensify construction-related cost pressures beyond our experience in the first nine months of 2022.

In addition, as noted above, consumer demand for our homes, as reflected in our net orders and backlog, and our ability to grow our scale, revenues and returns in the 2022 fourth quarter and 2023 could be materially and negatively affected by the above-described monetary policy impacts or other factors that curtail mortgage loan availability, employment or income growth 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

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.

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 first nine months of 2022, should not be considered indicative of our future results on any metric or set of metrics.

Forward-Looking Statements

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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.

These statements are not guarantees of future performance, and we have no specific policy or

intention to update these statements.

If we update or revise any such statement(s), no assumption should be made that we will further update or revise that statement(s) or update or revise any other such statement(s).

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;

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

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

• material and trade costs and availability, including building materials and appliances, and delays related to state and municipal construction, permitting, inspection and utility processes, which have been disrupted by key equipment shortages;

• 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;

• changes in interest rates, including those set by the Federal Reserve , which the Federal Reserve has increased sharply in the past few quarters and signaled an intention to aggressively further increase this year and potentially beyond to moderate inflation, 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;

• our compliance with the terms of the Credit Facility and the Term Loan;

• volatility in the market price of our common stock;

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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