KB HOME 10-Q

Item 1. Financial Statements KB HOME CONSOLIDATED STATEMENTS OF OPERATIONS (In Thousands, Except Per Share Amounts – Unaudited) Three Months Ended August 31, Nine Months Ended August 31, 2022 2021 2022 2021 Total revenues $ 1,844,895 $ 1,467,102 $ 4,963,746 $ 4,049,732 Homebuilding: Revenues $ 1,838,888 $ 1,461,896 $ 4,947,868 $ 4,035,939 Construction and land costs ( 1,350,540 ) ( 1,147,642 ) ( 3,714,404 ) ( 3,177,569 ) Selling, general and administrative expenses ( 163,238 ) ( 144,325 ) ( 474,332 ) ( 411,445 ) Operating income 325,110 169,929 759,132 446,925 Interest income 192 144 267 1,038 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 Financial services: Revenues 6,007 5,206 15,878 13,793 Expenses ( 1,510 ) ( 1,234 ) ( 4,219 ) ( 3,687 ) Equity in income of unconsolidated joint ventures 128 5,409 20,083 18,423 Financial services pretax income 4,625 9,381 31,742 28,529 Total pretax income 326,229 174,197 787,156 471,412 Income tax expense ( 70,900 ) ( 24,100 ) ( 186,900 ) ( 80,900 ) Net income $ 255,329 $ 150,097 $ 600,256 $ 390,512 Earnings per share: Basic $ 2.94 $ 1.66 $ 6.82 $ 4.26 Diluted $ 2.86 $ 1.60 $ 6.63 $ 4.11 Weighted average shares outstanding: Basic 86,487 90,076 87,538 91,290 Diluted 88,857 93,264 90,075 94,512 See accompanying notes. 3 KB HOME CONSOLIDATED BALANCE SHEETS (In Thousands – Unaudited) August 31, 2022 November 30, 2021 Assets Homebuilding: Cash and cash equivalents $ 195,402 $ 290,764 Receivables 344,659 304,191 Inventories 5,736,702 4,802,829 Investments in unconsolidated joint ventures 46,521 36,088 Property and equipment, net 86,219 76,313 Deferred tax assets, net 156,278 177,378 Other assets 108,286 104,153 6,674,067 5,791,716 Financial services 56,522 44,202 Total assets $ 6,730,589 $ 5,835,918 Liabilities and stockholders’ equity Homebuilding: Accounts payable $ 450,451 $ 371,826 Accrued expenses and other liabilities 755,248 756,905 Notes payable 2,031,192 1,685,027 3,236,891 2,813,758 Financial services 3,090 2,685 Stockholders’ equity: Common stock 100,711 100,711 Paid-in capital 841,939 848,620 Retained earnings 2,939,706 2,379,364 Accumulated other comprehensive loss ( 19,119 ) ( 19,119 ) Grantor stock ownership trust, at cost ( 72,718 ) ( 72,718 ) Treasury stock, at cost ( 299,911 ) ( 217,383 ) Total stockholders’ equity 3,490,608 3,019,475 Total liabilities and stockholders’ equity $ 6,730,589 $ 5,835,918 See accompanying notes. 4 KB HOME CONSOLIDATED STATEMENTS OF CASH FLOWS (In Thousands – Unaudited) Nine Months Ended August 31, 2022 2021 Cash flows from operating activities: Net income $ 600,256 $ 390,512 Adjustments to reconcile net income to net cash used in operating activities: Equity in income of unconsolidated joint ventures ( 19,696 ) ( 18,418 ) Distributions of earnings from unconsolidated joint ventures 10,679 18,625 Amortization of debt issuance costs and premiums 1,884 2,203 Depreciation and amortization 23,861 21,296 Deferred income taxes 21,100 36,300 Loss on early extinguishment of debt 3,598 5,075 Stock-based compensation 22,944 19,768 Inventory impairments and land option contract abandonments 9,371 11,222 Changes in assets and liabilities: Receivables ( 40,530 ) ( 22,457 ) Inventories ( 954,231 ) ( 760,350 ) Accounts payable, accrued expenses and other liabilities 94,688 102,087 Other, net 2,077 13,912 Net cash used in operating activities ( 223,999 ) ( 180,225 ) Cash flows from investing activities: Contributions to unconsolidated joint ventures ( 21,609 ) ( 11,057 ) Return of investments in unconsolidated joint ventures 1,255 12,724 Purchases of property and equipment, net ( 33,766 ) ( 28,219 ) Net cash used in investing activities ( 54,120 ) ( 26,552 ) Cash flows from financing activities: Proceeds from issuance of debt 350,000 390,000 Repayment of senior notes ( 353,598 ) ( 274,904 ) Payment of issuance costs ( 10,695 ) ( 4,813 ) Borrowings under revolving credit facility 1,485,000 — Repayments under revolving credit facility ( 1,135,000 ) — Payments on mortgages and land contracts due to land sellers and other loans ( 400 ) ( 600 ) Issuance of common stock under employee stock plans — 3,506 Stock repurchases ( 100,000 ) ( 188,175 ) Tax payments associated with stock-based compensation awards ( 12,153 ) ( 8,456 ) Payments of cash dividends ( 39,914 ) ( 40,965 ) Net cash provided by (used in) financing activities 183,240 ( 124,407 ) Net decrease in cash and cash equivalents ( 94,879 ) ( 331,184 ) Cash and cash equivalents at beginning of period 292,136 682,529 Cash and cash equivalents at end of period $ 197,257 $ 351,345 See accompanying notes. 5 KB HOME NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. Basis of Presentation and Significant Accounting Policies Basis of Presentation. The accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and the rules and regulations of the Securities and Exchange Commission (“SEC”). Accordingly, they do not include all the information and footnotes required by GAAP for complete financial statements. These unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements for the year ended November 30, 2021, which are contained in our Annual Report on Form 10-K for that period. The consolidated balance sheet at November 30, 2021 has been taken from the audited consolidated financial statements as of that date. In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments (consisting of normal recurring adjustments) considered necessary for the fair presentation of our results for the interim periods presented. The results of our consolidated operations for the three months and nine months ended August 31, 2022 are not necessarily indicative of the results to be expected for the full year due to seasonal variations in operating results and other factors. Unless the context indicates otherwise, the terms “we,” “our,” and “us” used in this report refer to KB Home, a Delaware corporation, and its subsidiaries. Impact of COVID-19 Pandemic on Consolidated Financial Statements. The 2019 coronavirus disease (“COVID-19”) pandemic and related responses by public health and governmental authorities to contain and combat the outbreak and spread (“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 continued to be impacted by these issues during the three months and nine months ended August 31, 2022. We experienced, among other things, ongoing construction services availability constraints, supply chain bottlenecks and rising and volatile raw and other building material prices amid uneven availability. In addition, we encountered delays related to state and municipal construction permitting, inspection and utility processes, which have been disrupted by key equipment shortages. All these factors, to varying degrees, extended our construction cycle times, delayed home deliveries and community openings and raised our costs in the three months and nine months ended August 31, 2022. These factors could also negatively impact our growth, margins and financial results in future periods. Use of Estimates. The preparation of financial statements in conformity with GAAP requires management to make estimates and judgments that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates. Cash and Cash Equivalents. We consider all highly liquid short-term investments purchased with an original maturity of three months or less to be cash equivalents. Our cash equivalents totaled $ 23.5 million at August 31, 2022 and $ 15.4 million at November 30, 2021. At August 31, 2022 and November 30, 2021, the majority of our cash equivalents was invested in interest-bearing bank deposit accounts. Comprehensive Income. Our comprehensive income was $ 255.3 million for the three months ended August 31, 2022 and $ 150.1 million for the three months ended August 31, 2021. For the nine months ended August 31, 2022 and 2021, our comprehensive income was $ 600.3 million and $ 390.5 million, respectively. Our comprehensive income for each of the three-month and nine-month periods ended August 31, 2022 and 2021 was equal to our net income for the respective periods. Adoption of New Accounting Pronouncement . In December 2019, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes” (“ASU 2019-12”), which simplifies the accounting for income taxes, eliminates certain exceptions within Accounting Standards Codification Topic 740, “Income Taxes” (“ASC 740”), and clarifies certain aspects of ASC 740 to promote consistency among reporting entities. Our adoption of ASU 2019-12, effective December 1, 2021, did not have a material impact on our consolidated financial statements. Recent Accounting Pronouncements Not Yet Adopted . In March 2020, the FASB issued Accounting Standards Update No. 2020-04, “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting” (“ASU 2020-04”), which provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships and other transactions affected by the discontinuation of the London Interbank Offered Rate (“LIBOR”) or by another reference rate expected to be discontinued because of reference rate reform. The guidance was effective beginning March 12, 2020 and can be applied prospectively through December 31, 2022. In January 2021, the FASB issued 6 Accounting Standards Update No. 2021-01, “Reference Rate Reform (Topic 848): Scope” (“ASU 2021-01”), which clarified the scope and application of the original guidance. We plan to adopt ASU 2020-04 and ASU 2021-01 when LIBOR is discontinued. We are currently evaluating the potential impact of adopting this guidance, but do not expect it to have a material impact on our consolidated financial statements. 2. Segment Information We have identified five operating reporting segments, comprised of four homebuilding reporting segments and one financial services reporting segment. As of August 31, 2022, our homebuilding reporting segments conducted ongoing operations in the following states: West Coast: California, Idaho and Washington Southwest: Arizona and Nevada Central: Colorado and Texas Southeast: Florida and North Carolina Our homebuilding reporting segments are engaged in the acquisition and development of land primarily for residential purposes and offer a wide variety of homes that are designed to appeal to first-time, first move-up and active adult homebuyers. Our homebuilding operations generate most of their revenues from the delivery of completed homes to homebuyers. They also earn revenues from the sale of land. Our financial services reporting segment offers property and casualty insurance and, in certain instances, earthquake, flood and personal property insurance to our homebuyers in the same markets as our homebuilding reporting segments, and provides title services in the majority of our markets located within our Southwest, Central and Southeast homebuilding reporting segments. Our financial services reporting segment earns revenues primarily from insurance commissions and from the provision of title services. We offer mortgage banking services, including residential consumer mortgage loan (“mortgage loan”) originations, to our homebuyers indirectly through KBHS Home Loans, LLC (“KBHS”), our unconsolidated joint venture with GR Alliance Ventures, LLC (“GR Alliance”). We and GR Alliance each have a 50.0 % ownership interest, with GR Alliance providing management oversight of KBHS’ operations. Our reporting segments follow the same accounting policies used for our consolidated financial statements. The results of each reporting segment are not necessarily indicative of the results that would have occurred had the segment been an independent, stand-alone entity during the periods presented, nor are they indicative of the results to be expected in future periods. The following tables present financial information relating to our homebuilding reporting segments (in thousands): Three Months Ended August 31, Nine Months Ended August 31, 2022 2021 2022 2021 Revenues: West Coast $ 829,405 $ 663,563 $ 2,249,496 $ 1,803,769 Southwest 321,808 234,933 822,499 680,679 Central 443,581 384,532 1,231,949 1,084,795 Southeast 244,094 178,868 643,924 466,696 Total $ 1,838,888 $ 1,461,896 $ 4,947,868 $ 4,035,939 Pretax income (loss): West Coast $ 171,041 $ 93,247 $ 418,593 $ 228,508 Southwest 77,368 46,021 177,908 127,985 Central 79,258 53,375 183,574 150,650 Southeast 40,202 19,979 99,527 50,955 Corporate and other ( 46,265 ) ( 47,806 ) ( 124,188 ) ( 115,215 ) Total $ 321,604 $ 164,816 $ 755,414 $ 442,883 7 Three Months Ended August 31, Nine Months Ended August 31, 2022 2021 2022 2021 Inventory impairment and land option contract abandonment charges: West Coast $ 4,465 $ 6,458 $ 4,622 $ 10,376 Southwest 432 243 596 536 Central 1,311 — 1,897 70 Southeast 2,256 — 2,256 240 Total $ 8,464 $ 6,701 $ 9,371 $ 11,222 August 31, 2022 November 30, 2021 Assets: West Coast $ 2,755,936 $ 2,520,374 Southwest 1,074,914 938,300 Central 1,495,817 1,168,242 Southeast 920,828 684,752 Corporate and other 426,572 480,048 Total $ 6,674,067 $ 5,791,716 3. Financial Services The following tables present financial information relating to our financial services reporting segment (in thousands): Three Months Ended August 31, Nine Months Ended August 31, 2022 2021 2022 2021 Revenues Insurance commissions $ 3,250 $ 2,771 $ 8,364 $ 7,051 Title services 2,757 2,435 7,495 6,742 Other — — 19 — Total 6,007 5,206 15,878 13,793 Expenses General and administrative ( 1,510 ) ( 1,234 ) ( 4,219 ) ( 3,687 ) Operating income 4,497 3,972 11,659 10,106 Equity in income of unconsolidated joint ventures 128 5,409 20,083 18,423 Pretax income $ 4,625 $ 9,381 $ 31,742 $ 28,529 August 31, 2022 November 30, 2021 Assets Cash and cash equivalents $ 1,855 $ 1,372 Receivables 2,228 2,166 Investments in unconsolidated joint ventures 25,966 16,317 Other assets (a) 26,473 24,347 Total assets $ 56,522 $ 44,202 8 August 31, 2022 November 30, 2021 Liabilities Accounts payable and accrued expenses $ 3,090 $ 2,685 Total liabilities $ 3,090 $ 2,685 (a) Other assets at August 31, 2022 and November 30, 2021 included $ 26.3 million and $ 24.1 million, respectively, of contract assets for estimated future renewal commissions. 4. Earnings Per Share Basic and diluted earnings per share were calculated as follows (in thousands, except per share amounts): Three Months Ended August 31, Nine Months Ended August 31, 2022 2021 2022 2021 Numerator: Net income $ 255,329 $ 150,097 $ 600,256 $ 390,512 Less: Distributed earnings allocated to nonvested restricted stock ( 62 ) ( 62 ) ( 190 ) ( 188 ) Less: Undistributed earnings allocated to nonvested restricted stock ( 1,150 ) ( 625 ) ( 2,685 ) ( 1,594 ) Numerator for basic earnings per share 254,117 149,410 597,381 388,730 Effect of dilutive securities: Add: Undistributed earnings allocated to nonvested restricted stock 1,150 625 2,685 1,594 Less: Undistributed earnings reallocated to nonvested restricted stock ( 1,119 ) ( 604 ) ( 2,610 ) ( 1,540 ) Numerator for diluted earnings per share $ 254,148 $ 149,431 $ 597,456 $ 388,784 Denominator: Weighted average shares outstanding — basic 86,487 90,076 87,538 91,290 Effect of dilutive securities: Share-based payments 2,370 3,188 2,537 3,222 Weighted average shares outstanding — diluted 88,857 93,264 90,075 94,512 Basic earnings per share $ 2.94 $ 1.66 $ 6.82 $ 4.26 Diluted earnings per share $ 2.86 $ 1.60 $ 6.63 $ 4.11 We compute earnings per share using the two-class method, which is an allocation of earnings between the holders of common stock and a company’s participating security holders. Our outstanding nonvested shares of restricted stock contain non-forfeitable rights to dividends and, therefore, are considered participating securities for purposes of computing earnings per share pursuant to the two-class method. We had no other participating securities at August 31, 2022 or 2021. For the three-month and nine-month periods ended August 31, 2022 and 2021, no outstanding stock options were excluded from the diluted earnings per share calculations. Contingently issuable shares associated with outstanding performance-based restricted stock units (each, a “PSU”) were not included in the basic earnings per share calculations for the periods presented as the applicable vesting conditions had not been satisfied. 9 5. Receivables Receivables consisted of the following (in thousands): August 31, 2022 November 30, 2021 Due from utility companies, improvement districts and municipalities $ 186,268 $ 151,284 Recoveries related to self-insurance and other legal claims 82,600 95,063 Refundable deposits and bonds 16,837 13,681 Other 64,043 49,359 Subtotal 349,748 309,387 Allowance for doubtful accounts ( 5,089 ) ( 5,196 ) Total $ 344,659 $ 304,191 6. Inventories Inventories consisted of the following (in thousands): August 31, 2022 November 30, 2021 Homes completed or under construction $ 2,696,548 $ 2,103,038 Land under development 3,040,154 2,699,791 Total $ 5,736,702 $ 4,802,829 Land under development at August 31, 2022 and November 30, 2021 included land held for future development or sale of $ 53.3 million and $ 45.2 million, respectively . Interest is capitalized to inventories while the related communities or land parcels are being actively developed and until homes are completed or the land is available for immediate sale. Capitalized interest is amortized to construction and land costs as the related inventories are delivered to homebuyers or land buyers (as applicable). In the case of land held for future development and land held for sale, applicable interest is expensed as incurred. Our interest costs were as follows (in thousands): Three Months Ended August 31, Nine Months Ended August 31, 2022 2021 2022 2021 Capitalized interest at beginning of period $ 154,665 $ 180,065 $ 161,119 $ 190,113 Interest incurred 31,778 29,605 89,102 91,807 Interest amortized to construction and land costs (a) ( 35,979 ) ( 37,544 ) ( 99,757 ) ( 109,794 ) Capitalized interest at end of period $ 150,464 $ 172,126 $ 150,464 $ 172,126 (a) For the nine months ended August 31, 2021, interest amortized to construction and land costs included a nominal amount related to land sales during the period. 7. Inventory Impairments and Land Option Contract Abandonments Each community or land parcel in our owned inventory is assessed on a quarterly basis to determine if indicators of potential impairment exist. We record an inventory impairment charge on a community or land parcel that is active or held for future development when indicators of potential impairment exist and the carrying value of the real estate asset is greater than the undiscounted future net cash flows the asset is expected to generate. These real estate assets are written down to fair value, which is primarily determined based on the estimated future net cash flows discounted for inherent risk associated with each such asset, or other valuation techniques. We record an inventory impairment charge on land held for sale when the carrying value of a land parcel is greater than its fair value. These real estate assets are written down to fair value, less associated costs to sell. The estimated fair values of such assets are generally based on bona fide letters of intent 10 from outside parties, executed sales contracts, broker quotes or similar information. As of August 31, 2022 and November 30, 2021, no active communities or land parcels with indicators of potential impairment were identified. As a result, no active communities or land parcels were evaluated for recoverability as of these dates. We evaluated land held for future development for recoverability as of both August 31, 2022 and November 30, 2021. Based on the results of our evaluations, we recognized inventory impairment charges of $ 2.6 million for both the three months and nine months ended August 31, 2022 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, we recognized inventory impairment charges of $ 6.3 million and $ 9.9 million, respectively, that reflected our decisions to make changes in our operational strategies aimed at more quickly monetizing our investment in certain communities by accelerating the overall pace for selling, building and delivering homes therein, including communities on land previously held for future development. The following table summarizes significant quantitative unobservable inputs we utilized in our fair value measurements with respect to the impaired communities written down to fair value: Three Months Ended August 31, Nine Months Ended August 31, Unobservable Input (a) 2022 2021 2022 2021 Average selling price $ — $ 949,400 $ — $ 471,000 - $ 949,400 Deliveries per month — 4 — 4 - 5 Discount rate — % 18 % — % 18 % - 19 % (a) Ranges of inputs presented primarily reflect differences between the housing markets where each impacted community is located, rather than fluctuations in prevailing market rates. As of August 31, 2022, the aggregate carrying value of our inventory that had been impacted by inventory impairment charges was $ 76.7 million, representing seven communities and various other land parcels. As of November 30, 2021, the aggregate carrying value of our inventory that had been impacted by inventory impairment charges was $ 87.7 million, representing 11 communities and various other land parcels. Our inventory controlled under land option contracts and other similar contracts is assessed on a quarterly basis to determine whether it continues to meet our investment return standards. When a decision is made not to exercise certain land option contracts and other similar contracts due to market conditions and/or changes in our marketing strategy, we write off the related inventory costs, including non-refundable deposits and unrecoverable pre-acquisition costs. Based on the results of our assessments, we recognized land option contract abandonment charges of $ 5.9 million for the three months ended August 31, 2022 and $ 6.8 million for the nine months ended August 31, 2022. For the three months and nine months ended August 31, 2021, we recognized land option contract abandonment charges of $.4 million and $ 1.3 million, respectively. Due to the judgment and assumptions applied in our inventory impairment and land option contract abandonment assessment processes, and in our estimations of the remaining operating lives of our inventory assets and the realization of our inventory balances, particularly as to land held for future development, it is possible that actual results could differ substantially from those estimated. 8. Variable Interest Entities Unconsolidated Joint Ventures. We participate in joint ventures from time to time that conduct land acquisition, land development and/or other homebuilding activities in various markets where our homebuilding operations are located. Our investments in these joint ventures may create a variable interest in a variable interest entity (“VIE”), depending on the contractual terms of the arrangement. We analyze our joint ventures under the variable interest model to determine whether they are VIEs and, if so, whether we are the primary beneficiary. Based on our analyses, we determined that one of our joint ventures at August 31, 2022 and November 30, 2021 was a VIE, but we were not the primary beneficiary of the VIE. Therefore, all of our joint ventures at August 31, 2022 and November 30, 2021 were unconsolidated and accounted for under the equity method because we did not have a controlling financial interest. Land Option Contracts and Other Similar Contracts. In the ordinary course of our business, we enter into land option contracts and other similar contracts with third parties and unconsolidated entities to acquire rights to land for the construction of homes. Under these contracts, we typically make a specified option payment or earnest money deposit in 11 consideration for the right to purchase land in the future, usually at a predetermined price. We analyze each of our land option contracts and other similar contracts under the variable interest model to determine whether the land seller is a VIE and, if so, whether we are the primary beneficiary. Although we do not have legal title to the underlying land, we are required to consolidate a VIE if we are the primary beneficiary. As a result of our analyses, we determined that as of August 31, 2022 and November 30, 2021, we were not the primary beneficiary of any VIEs from which we have acquired rights to land under land option contracts and other similar contracts. We perform ongoing reassessments of whether we are the primary beneficiary of a VIE. The following table presents a summary of our interests in land option contracts and other similar contracts (in thousands): August 31, 2022 November 30, 2021 Cash Deposits Aggregate Purchase Price Cash Deposits Aggregate Purchase Price Unconsolidated VIEs $ 23,793 $ 820,554 $ 38,333 $ 1,093,669 Other land option contracts and other similar contracts 35,482 713,096 36,176 766,182 Total $ 59,275 $ 1,533,650 $ 74,509 $ 1,859,851 In addition to the cash deposits presented in the table above, our exposure to loss related to our land option contracts and other similar contracts with third parties and unconsolidated entities consisted of pre-acquisition costs of $ 36.6 million at August 31, 2022 and $ 38.1 million at November 30, 2021. These pre-acquisition costs and cash deposits were included in inventories in our consolidated balance sheets. For land option contracts and other similar contracts where the land seller entity is not required to be consolidated under the variable interest model, we consider whether such contracts should be accounted for as financing arrangements. Land option contracts and other similar contracts that may be considered financing arrangements include those we enter into with third-party land financiers or developers in conjunction with such third parties acquiring a specific land parcel(s) on our behalf, at our direction, and those with other landowners where we or our designee make improvements to the optioned land parcel(s) during the applicable option period. For these land option contracts and other similar contracts, we record the remaining purchase price of the associated land parcel(s) in inventories in our consolidated balance sheets with a corresponding financing obligation if we determine that we are effectively compelled to exercise the option to purchase the land parcel(s). As a result of our evaluations of land option contracts and other similar contracts for financing arrangements, we recorded inventories in our consolidated balance sheets, with a corresponding increase to accrued expenses and other liabilities, of $ 7.1 million at August 31, 2022 and $ 26.5 million at November 30, 2021. 9. Investments in Unconsolidated Joint Ventures Homebuilding. We have investments in unconsolidated joint ventures that conduct land acquisition, land development and/or other homebuilding activities in various markets where our homebuilding operations are located. We and our unconsolidated joint venture partners make initial and/or ongoing capital contributions to these unconsolidated joint ventures, typically on a pro rata basis, according to our respective equity interests. The obligations to make capital contributions are governed by each such unconsolidated joint venture’s respective operating agreement and related governing documents. As of both August 31, 2022 and November 30, 2021, we had investments in six homebuilding unconsolidated joint ventures. The following table presents combined condensed information from the statements of operations for our homebuilding unconsolidated joint ventures (in thousands): Three Months Ended August 31, Nine Months Ended August 31, 2022 2021 2022 2021 Revenues $ 1,293 $ 1,979 $ 5,251 $ 14,818 Construction and land costs ( 801 ) ( 1,453 ) ( 3,872 ) ( 12,397 ) Other expense, net ( 666 ) ( 591 ) ( 2,014 ) ( 2,000 ) Income (loss) $ ( 174 ) $ ( 65 ) $ ( 635 ) $ 421 12 The following table presents combined condensed balance sheet information for our homebuilding unconsolidated joint ventures (in thousands): August 31, 2022 November 30, 2021 Assets Cash and cash equivalents $ 17,594 $ 15,731 Receivables 3,279 795 Inventories 111,067 64,034 Other assets 680 50 Total assets $ 132,620 $ 80,610 Liabilities and equity Accounts payable and other liabilities $ 13,556 $ 12,285 Notes payable (a) 30,735 — Equity 88,329 68,325 Total liabilities and equity $ 132,620 $ 80,610 (a) As of August 31, 2022, one of our unconsolidated joint ventures had borrowings outstanding under a revolving line of credit it entered into with a third-party lender in April 2022 to finance its land acquisition, development and construction activities. Borrowings under this line of credit, which has a maximum commitment of $ 62.0 million, are secured by the underlying property and related project assets. The line of credit is scheduled to mature on April 19, 2026 , unless extended or terminated pursuant to its applicable terms. None of our other unconsolidated joint ventures had outstanding debt at August 31, 2022 or November 30, 2021 . We provide certain guarantees and indemnities to the lender in connection with the above-described revolving line of credit, including a guaranty of interest and carry costs; a guaranty to complete the construction of phases of the improvements for the project as such phases are commenced; a guaranty against losses suffered due to certain bad acts or failures to act by the unconsolidated joint venture or its partners; and an indemnity from environmental issues. Except to the extent related to the foregoing guarantees and indemnities, we do not have a guaranty or any other obligation to repay borrowings under the line of credit or to support the value of the underlying collateral. However, various financial and non-financial covenants apply under the line of credit and with respect to the related guaranty and indemnity obligations, and a failure to comply with such covenants could result in a default and cause the lender to seek to enforce such guaranty and indemnity obligations. As of the date of this report, we were in compliance with the relevant covenants. We do not believe that our existing exposure under our guaranty and indemnity obligations related to outstanding borrowings under the line of credit is material to our consolidated financial statements. Financial Services. The following table presents combined condensed information from the statements of operations for our financial services unconsolidated joint ventures, primarily comprised of KBHS (in thousands): Three Months Ended August 31, Nine Months Ended August 31, 2022 2021 2022 2021 Revenues $ 19,857 $ 31,560 $ 100,057 $ 96,930 Expenses ( 19,601 ) ( 20,712 ) ( 59,888 ) ( 60,085 ) Income $ 256 $ 10,848 $ 40,169 $ 36,845 Revenues are primarily generated from fees earned on mortgage loan originations, interest earned for the period loans are held by KBHS, and gains on the sales of mortgage loans held for sale. Gains on the sales of mortgage loans held for sale include the realized and unrealized gains and losses associated with changes in the fair value of such loans and any related derivative financial instruments. 13 The following table presents combined condensed balance sheet information for our financial services unconsolidated joint ventures, primarily comprised of KBHS (in thousands): August 31, 2022 November 30, 2021 Assets Cash and cash equivalents $ 21,093 $ 23,916 Mortgage loans held for sale 138,253 234,669 Other assets 61,094 46,218 Total assets $ 220,440 $ 304,803 Liabilities and equity Accounts payable and other liabilities $ 16,429 $ 18,375 Funding facilities 152,079 253,791 Equity 51,932 32,637 Total liabilities and equity $ 220,440 $ 304,803 Mortgage loans held for sale . Originated mortgage loans expected to be sold into the secondary market in the foreseeable future are reported as mortgage loans held for sale and carried in KBHS’ balance sheets at fair value, with changes in fair value recognized within revenues in KBHS’ statements of operations. Interest Rate Lock Commitments (“IRLCs”) . KBHS enters into IRLCs in connection with originating certain mortgage loans held for sale, at specified interest rates and within a specified period of time, with customers who have applied for a mortgage loan and meet certain credit and underwriting criteria. KBHS accounts for IRLCs as free-standing derivatives and does not designate any for hedge accounting. As a result, IRLCs are recognized in KBHS’ balance sheets at fair value, and gains or losses resulting from changes in fair value are recognized within revenues in KBHS’ statements of operations. The fair value of IRLCs is based on market prices, which includes an estimate of the fair value of the associated mortgage servicing rights, adjusted for estimated costs to originate the underlying mortgage loans as well as the probability that the mortgage loans will fund within the terms of the IRLCs. The fair value of IRLCs included in other assets in KBHS’ balance sheets was $ 36.6 million at August 31, 2022 and $ 9.5 million at November 30, 2021. The change in fair value of IRLCs, which was reported in revenues, was a loss of $ 6.3 million for the three months ended August 31, 2022 and a gain of $ 27.1 million for the nine months ended August 31, 2022. For the three months and nine months ended August 31, 2021, these changes in fair value were a loss of $.5 million and a gain of $ 2.1 million, respectively. KBHS manages the interest rate and price risk associated with its outstanding IRLCs by entering into best efforts forward sale commitments under which mortgage loans locked with a borrower are simultaneously committed to a secondary market investor at a fixed price, subject to the underlying mortgage loans being funded. These best efforts forward sale commitments do not meet the definition of derivative financial instruments and are therefore not recorded in KBHS’ balance sheets. If the mortgage loans underlying the IRLCs do not fund, KBHS has no obligation to fulfill the secondary market investor commitments. Funding facilities . KBHS maintains warehouse line of credit and master repurchase agreements with various financial institutions to fund its originated mortgage loans, with its mortgage loans held for sale pledged as collateral under these agreements. The agreements contain covenants which include certain financial requirements, including maintenance of minimum tangible net worth, minimum liquid assets, maximum debt to net worth ratio and positive net income, as defined in the agreements. KBHS was in compliance with these covenants as of August 31, 2022. KBHS intends to renew these agreements when they expire at various dates in 2022 and 2023. The warehouse line of credit and master repurchase agreements are not guaranteed by us or any of the subsidiaries that guarantee our homebuilding notes payable (“Guarantor Subsidiaries”) . 14 10. Other Assets Other assets consisted of the following (in thousands): August 31, 2022 November 30, 2021 Cash surrender value of corporate-owned life insurance contracts $ 62,746 $ 68,748 Lease right-of-use assets 24,362 27,508 Prepaid expenses 16,570 6,344 Debt issuance costs associated with unsecured revolving credit facility, net 4,608 1,553 Total $ 108,286 $ 104,153 11. Accrued Expenses and Other Liabilities Accrued expenses and other liabilities consisted of the following (in thousands): August 31, 2022 November 30, 2021 Self-insurance and other legal liabilities $ 241,110 $ 239,129 Employee compensation and related benefits 188,050 192,549 Warranty liability 99,500 96,153 Customer deposits 91,726 71,032 Lease liabilities 26,272 29,279 Accrued interest payable 25,654 24,554 Real estate and business taxes 20,405 17,563 Inventory-related obligations (a) 16,098 36,146 Federal and state taxes payable 5,470 8,290 Other 40,963 42,210 Total $ 755,248 $ 756,905 (a) Represents liabilities for financing arrangements discussed in Note 8 – Variable Interest Entities, as well as liabilities for fixed or determinable amounts associated with tax increment financing entity (“TIFE”) assessments. As homes are delivered, our obligation to pay the remaining TIFE assessments associated with each underlying lot is transferred to the homebuyer. As such, these assessment obligations will be paid by us only to the extent we do not deliver homes on applicable lots before the related TIFE obligations mature. 12. Leases We lease certain property and equipment for use in our operations. We recognize lease expense for these leases generally on a straight-line basis over the lease term and combine lease and non-lease components for all leases. Lease right-of-use assets and lease liabilities are recorded in our consolidated balance sheets for leases with an expected term at the commencement date of more than 12 months. Lease expense is included in selling, general and administrative expenses in our consolidated statements of operations and includes costs for leases with terms of more than 12 months as well as short-term leases with terms of 12 months or less. Our total lease expense for the three-month periods ended August 31, 2022 and 2021 was $ 5.4 million and $ 4.3 million, respectively , and included short-term lease costs of $ 2.2 million and $ 1.2 million, respectively. For the nine-month periods ended August 31, 2022 and 2021, our total lease expense was $ 14.6 million and $ 12.9 million, respectively, and included short-term lease costs of $ 5.2 million and $ 3.7 million, respectively. Variable lease costs and external sublease income for the three-month and nine-month periods ended August 31, 2022 and 2021 were immaterial. 15 The following table presents our lease right-of-use assets and lease liabilities (in thousands): August 31, 2022 November 30, 2021 Lease right-of-use assets (a) $ 24,470 $ 27,693 Lease liabilities (b) 26,390 29,481 (a) Represents lease right-of-use assets within our homebuilding operations and financial services operations of $ 24.4 million and $.1 million, respectively, at August 31, 2022, and $ 27.5 million and $.2 million, respectively, at November 30, 2021 . (b) Represents lease liabilities within our homebuilding operations and financial services operations of $ 26.3 million and $.1 million, respectively, at August 31, 2022, and $ 29.3 million and $.2 million, respectively, at November 30, 2021. 13. Income Taxes Income Tax Expense. Our income tax expense and effective tax rates were as follows (dollars in thousands): Three Months Ended August 31, Nine Months Ended August 31, 2022 2021 2022 2021 Income tax expense $ 70,900 $ 24,100 $ 186,900 $ 80,900 Effective tax rate 21.7 % 13.8 % 23.7 % 17.2 % Our income tax expense and effective tax rate for the three months ended August 31, 2022 included the favorable impact of $ 15.3 million of federal tax credits we recognized primarily from building energy-efficient homes, partly offset by $ 2.9 million of non-deductible executive compensation expense under Internal Revenue Code Section 162(m). Our income tax expense and effective tax rate for the three months ended August 31, 2021 reflected the favorable impacts of $ 21.5 million of federal tax credits we recognized from building energy-efficient homes, partly offset by $ 2.5 million of non-deductible executive compensation expense. For the nine months ended August 31, 2022, our income tax expense and effective tax rate included the favorable impacts of $ 16.1 million of federal tax credits we recognized primarily from building energy-efficient homes and $ 2.2 million of excess tax benefits related to stock-based compensation, partly offset by $ 6.8 million of non-deductible executive compensation expense under Internal Revenue Code Section 162(m). Our income tax expense and effective tax rate for the nine months ended August 31, 2021 reflected the favorable impacts of $ 39.0 million of federal tax credits we recognized primarily from building energy-efficient homes and $ 3.9 million of excess tax benefits related to stock-based compensation, partly offset by $ 5.8 million of non-deductible executive compensation expense. On August 16, 2022, the Inflation Reduction Act of 2022 (“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. The Coronavirus Aid, Relief, and Economic Security Act, enacted on March 27, 2020, provided an Employee Retention Credit (“ERC”), which was a refundable payroll tax credit that encouraged businesses to keep employees on the payroll during the COVID-19 pandemic. Eligible employers could qualify for up to $ 5,000 of credit for each employee based on certain wages paid after March 12, 2020 and before January 1, 2021. Based on our evaluation of this provision and the significant pandemic-related impacts on our operations in 2020, we recognized an ERC of $ 4.3 million as an offset to payroll tax expenses within selling, general and administrative expenses in our consolidated statements of operations upon filing for the refund in the 2021 first quarter. We received the refund in the 2021 fourth quarter. In June 2020, California enacted tax legislation that approved the suspension of California net operating loss (“NOL”) deductions for tax years 2020, 2021 and 2022. 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 16 the suspension of California NOL deductions did not have an impact on our income tax expense for the three months or nine months ended August 31, 2022, it contributed to the year-over-year increase in the amount of taxes we paid in these periods. Deferred Tax Asset Valuation Allowance. We evaluate our deferred tax assets quarterly to determine if adjustments to our valuation allowance are required based on the consideration of all available positive and negative evidence using a “more likely than not” standard with respect to whether deferred tax assets will be realized. Our evaluation considers, among other factors, our historical operating results, our expectation of future profitability, the duration of the applicable statutory carryforward periods, and conditions in the housing market and the broader economy. The ultimate realization of our deferred tax assets depends primarily on our ability to generate future taxable income during the periods in which the related deferred tax assets become deductible. The value of our deferred tax assets depends on applicable income tax rates. Our deferred tax assets of $ 173.7 million as of August 31, 2022 and $ 194.8 million as of November 30, 2021 were each partly offset by a valuation allowance of $ 17.4 million. The deferred tax asset valuation allowances as of August 31, 2022 and November 30, 2021 were primarily related to certain state NOLs that had not met the “more likely than not” realization standard at those dates. Based on the evaluation of our deferred tax assets as of August 31, 2022, we determined that most of our deferred tax assets would be realized. Therefore, no adjustments to our deferred tax valuation allowance were needed for the nine months ended August 31, 2022. We will continue to evaluate both the positive and negative evidence on a quarterly basis in determining the need for a valuation allowance with respect to our deferred tax assets. The accounting for deferred tax assets is based upon estimates of future results. Changes in positive and negative evidence, including differences between estimated and actual results, could result in changes in the valuation of our deferred tax assets that could have a material impact on our consolidated financial statements. Changes in existing federal and state tax laws and corporate income tax rates could also affect actual tax results and the realization of deferred tax assets over time. 14. Notes Payable Notes payable consisted of the following (in thousands): August 31, 2022 November 30, 2021 Unsecured revolving credit facility $ 350,000 $ — Mortgages and land contracts due to land sellers and other loans 4,927 5,327 7.50 % Senior notes due September 15, 2022 — 349,471 7.625 % Senior notes due May 15, 2023 350,401 350,788 6.875 % Senior notes due June 15, 2027 297,484 297,161 4.80 % Senior notes due November 15, 2029 297,147 296,905 7.25 % Senior notes due July 15, 2030 345,557 — 4.00 % Senior notes due June 15, 2031 385,676 385,375 Total $ 2,031,192 $ 1,685,027 The carrying amounts of our senior notes listed above are net of unamortized debt issuance costs and premiums, which totaled $ 13.7 million at August 31, 2022 and $ 10.3 million at November 30, 2021. Unsecured Revolving Credit Facility. On February 18, 2022, we entered into an amendment to our unsecured revolving credit facility with various banks (“Credit Facility”) that increased its borrowing capacity from $ 800.0 million to $ 1.09 billion and extended its maturity from October 7, 2023 to February 18, 2027 . The Credit Facility contains an uncommitted accordion feature under which its aggregate principal amount of available loans can be increased to a maximum of $ 1.29 billion under certain conditions, including obtaining additional bank commitments. The Credit Facility also contains a sublimit of $ 250.0 million for the issuance of letters of credit. Interest on amounts borrowed under the Credit Facility accrues at a rate based on either a Secured Overnight Financing Rate (“SOFR”) or a base rate, plus a spread that depends on our consolidated leverage ratio (“Leverage Ratio”), as defined under the Credit Facility. Interest is payable quarterly (base rate) or each month or three months (adjusted term SOFR). The Credit Facility also requires the payment of a commitment fee at a per annum rate ranging from .15 % to .35 % of the unused commitment, based on our Leverage Ratio. Under the terms of the Credit Facility, we are required, among other things, to maintain compliance with various covenants, including financial covenants relating to our consolidated tangible net worth, Leverage Ratio, and either a consolidated interest coverage ratio (“Interest Coverage Ratio”) or minimum level of liquidity, each as defined therein. 17 Our obligations to pay borrowings under the Credit Facility are guaranteed on a joint and several basis by our Guarantor Subsidiaries. The amount of the Credit Facility available for cash borrowings and the issuance of letters of credit depends on the total cash borrowings and letters of credit outstanding under the Credit Facility and the maximum available amount under the terms of the Credit Facility. As of August 31, 2022, we had $ 350.0 million of cash borrowings and $ 6.7 million of letters of credit outstanding under the Credit Facility. Therefore, as of August 31, 2022, we had $ 733.4 million available for cash borrowings under the Credit Facility, with up to $ 243.4 million of that amount available for the issuance of letters of credit. Senior Unsecured Term Loan. On August 25, 2022, we entered into a senior unsecured term loan agreement (“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. Interest rates under the Term Loan generally will be based on either an adjusted term SOFR or a base rate, plus a spread that depends on our Leverage Ratio. The Term Loan contains various covenants that are substantially the same as those under the Credit Facility. Proceeds drawn under the Term Loan are guaranteed on a joint and several basis by our Guarantor Subsidiaries. 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. Letter of Credit Facility. We maintain an unsecured letter of credit agreement with a financial institution (“LOC Facility”) to obtain letters of credit from time to time in the ordinary course of operating our business. Under the LOC Facility, which expires on February 13, 2025 , we may issue up to $ 75.0 million of letters of credit. As of 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. Mortgages and Land Contracts Due to Land Sellers and Other Loans. As of August 31, 2022, inventories having a carrying value of $ 33.7 million were pledged to collateralize mortgages and land contracts due to land sellers and other loans. Senior Notes. All the senior notes outstanding at August 31, 2022 and November 30, 2021 represent senior unsecured obligations that are guaranteed by our Guarantor Subsidiaries and rank equally in right of payment with all of our and our Guarantor Subsidiaries’ existing unsecured and unsubordinated indebtedness. All of our senior notes were issued in underwritten public offerings. Interest on each of these senior notes is payable semi-annually. 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 (“7.25% Senior Notes due 2030”) at 100 % of their aggregate principal amount. Net proceeds from this offering totaled $ 345.5 million, after deducting the underwriting discount and our expenses relating to the offering. Interest on the 7.25 % Senior Notes due 2030 is payable semi-annually in arrears on January 15 and July 15, commencing on January 15, 2023. These notes will mature on July 15, 2030. 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 then-outstanding $ 350.0 million in aggregate principal amount of 7.50 % senior notes due 2022 (“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. We paid $ 353.6 million to redeem the notes and recorded a charge of $ 3.6 million for the early extinguishment of debt in the 2022 third quarter. In the three months ended August 31, 2021, we issued $ 390.0 million in aggregate principal amount of 4.00 % senior notes due 2031 (“4.00% Senior Notes due 2031”) and used a portion of the net proceeds to purchase, pursuant to a tender offer, $ 269.8 million in aggregate principal amount of certain outstanding senior notes before their maturity date. We paid $ 274.9 million to purchase these notes and recorded a charge of $ 5.1 million for the early extinguishment of debt in the 2021 third quarter. On September 15, 2021, we redeemed the remaining $ 180.2 million in aggregate principal amount of those then-outstanding notes at par value pursuant to their terms. The indenture governing our senior notes does not contain any financial covenants. Subject to specified exceptions, the indenture contains certain restrictive covenants that, among other things, limit our ability to incur secured indebtedness, or engage in sale and leaseback transactions involving property above a certain specified value. In addition, the indenture contains certain limitations related to mergers, consolidations, and sales of assets. 18 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 and our ability to secure future debt financing depend, in part, on our ability to remain in such compliance. As of August 31, 2022, principal payments on senior notes, mortgages and land contracts due to land sellers and other loans are due during each year ending November 30 as follows: 2022 – $ 2.6 million; 2023 – $ 350.9 million; 2024 – $ 1.0 million; 2025 – $.4 million; 2026 – $ 0 ; and thereafter – $ 1.34 billion. 15. Fair Value Disclosures Fair value measurements of assets and liabilities are categorized based on the following hierarchy: Level 1 Fair value determined based on quoted prices in active markets for identical assets or liabilities. Level 2 Fair value determined using significant observable inputs, such as quoted prices for similar assets or liabilities or quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability, or inputs that are derived principally from or corroborated by observable market data, by correlation or other means. Level 3 Fair value determined using significant unobservable inputs, such as pricing models, discounted cash flows, or similar techniques. Fair value measurements are used for inventories on a nonrecurring basis when events and circumstances indicate that their carrying value is not recoverable. The following table presents the fair value hierarchy and our assets measured at fair value on a nonrecurring basis for the nine months ended August 31, 2022 and the year ended November 30, 2021 (in thousands): August 31, 2022 November 30, 2021 Description Fair Value Hierarchy Pre-Impairment Value Inventory Impairment Charges Fair Value (a) Pre-Impairment Value Inventory Impairment Charges Fair Value (a) Inventories Level 3 $ 3,500 $ ( 2,541 ) $ 959 $ 27,923 $ ( 9,903 ) $ 18,020 (a) Amounts represent the aggregate fair value for real estate assets impacted by inventory impairment charges during the applicable period, as of the date that the fair value measurements were made. The carrying value for these real estate assets may have subsequently increased or decreased from the fair value reflected due to activity that has occurred since the measurement date. The fair values for inventories that were determined using Level 3 inputs were based on the estimated future net cash flows discounted for inherent risk associated with each underlying asset. The following table presents the fair value hierarchy, carrying value and estimated fair value of our financial instruments, except those for which the carrying values approximate fair values (in thousands): August 31, 2022 November 30, 2021 Description Fair Value Hierarchy Carrying Value (a) Estimated Fair Value Carrying Value (a) Estimated Fair Value Financial Liabilities: Senior notes Level 2 $ 1,676,265 $ 1,547,375 $ 1,679,700 $ 1,796,500 (a) The carrying values for the senior notes, as presented, include unamortized debt issuance costs. Debt issuance costs are not factored into the estimated fair values of these notes. The fair values of our senior notes are generally estimated based on quoted market prices for these instruments. The carrying values reported for cash and cash equivalents, mortgages and land contracts due to land sellers and other loans, and outstanding borrowings under the Credit Facility approximate fair values. The carrying value of corporate-owned life insurance is based on the cash surrender value of the policies and, accordingly, approximates fair value. 19 16. Commitments and Contingencies Commitments and contingencies include typical obligations of homebuilders for the completion of contracts and those incurred in the ordinary course of business. Warranty . We provide a limited warranty on all of our homes. The specific terms and conditions of our limited warranty program vary depending upon the markets in which we do business. We generally provide a structural warranty of 10 years, a warranty on electrical, heating, cooling, plumbing and certain other building systems each varying from two to five years based on geographic market and state law, and a warranty of one year for other components of the home. Our limited warranty program is ordinarily how we respond to and account for homeowners’ requests to local division offices seeking repairs of certain conditions or defects, including claims where we could have liability under applicable state statutes or tort law for a defective condition in or damages to a home. Our warranty liability covers our costs of repairs associated with homeowner claims made under our limited warranty program. These claims are generally made directly by a homeowner and involve their individual home. We estimate the costs that may be incurred under each limited warranty and record a liability in the amount of such costs at the time the revenue associated with the sale of each home is recognized. Our primary assumption in estimating the amounts we accrue for warranty costs is that historical claims experience is a strong indicator of future claims experience. Factors that affect our warranty liability include the number of homes delivered, historical and anticipated rates of warranty claims, and cost per claim. We periodically assess the adequacy of our accrued warranty liability, which is included in accrued expenses and other liabilities in our consolidated balance sheets, and adjust the amount as necessary based on our assessment. Our assessment includes the review of our actual warranty costs incurred to identify trends and changes in our warranty claims experience, and considers our home construction quality and customer service initiatives and outside events. While we believe the warranty liability currently reflected in our consolidated balance sheets to be adequate, unanticipated changes or developments in the legal environment, local weather, land or environmental conditions, quality of materials or methods used in the construction of homes or customer service practices and/or our warranty claims experience could have a significant impact on our actual warranty costs in future periods and such amounts could differ significantly from our current estimates. The changes in our warranty liability were as follows (in thousands): Three Months Ended August 31, Nine Months Ended August 31, 2022 2021 2022 2021 Balance at beginning of period $ 99,207 $ 95,853 $ 96,153 $ 91,646 Warranties issued 10,377 8,264 27,945 25,099 Payments ( 10,084 ) ( 6,304 ) ( 24,598 ) ( 18,932 ) Balance at end of period $ 99,500 $ 97,813 $ 99,500 $ 97,813 Guarantees. In the normal course of our business, we issue certain representations, warranties and guarantees related to our home sales and land sales. Based on historical experience, we do not believe any potential liability with respect to these representations, warranties or guarantees would be material to our consolidated financial statements. Self-Insurance. We maintain, and require the majority of our independent contractors to maintain, general liability insurance (including construction defect and bodily injury coverage) and workers’ compensation insurance. These insurance policies protect us against a portion of our risk of loss from claims related to our homebuilding activities, subject to certain self-insured retentions, deductibles and other coverage limits. We also maintain certain other insurance policies. Costs associated with our self-insurance programs are included in selling, general and administrative expenses. In Arizona, California, Colorado and Nevada, our contractors’ general liability insurance primarily takes the form of a wrap-up policy under a program where eligible independent contractors are enrolled as insureds on each community. Enrolled contractors generally contribute toward the cost of the insurance and agree to pay a contractual amount in the future if there is a claim related to their work. To the extent provided under the wrap-up program, we absorb the enrolled contractors’ general liability associated with the work performed on our homes within the applicable community as part of our overall general liability insurance and our self-insurance. We self-insure a portion of our overall risk through the use of a captive insurance subsidiary, which provides coverage for our exposure to construction defect, bodily injury and property damage claims and related litigation or regulatory actions, up to certain limits. Our self-insurance liability generally covers the costs of settlements and/or repairs, if any, as well as our costs to defend and resolve the following types of claims: 20 • Construction defect : Construction defect claims, which represent the largest component of our self-insurance liability, typically originate through a legal or regulatory process rather than directly by a homeowner and involve the alleged occurrence of a condition affecting two or more homes within the same community, or they involve a common area or homeowners’ association property within a community. These claims typically involve higher costs to resolve than individual homeowner warranty claims, and the rate of claims is highly variable. • Bodily injury : Bodily injury claims typically involve individuals (other than our employees) who claim they were injured while on our property or as a result of our operations. • Property damage : Property damage claims generally involve claims by third parties for alleged damage to real or personal property as a result of our operations. Such claims may occasionally include those made against us by owners of property located near our communities. Our self-insurance liability at each reporting date represents the estimated costs of reported claims, claims incurred but not yet reported, and claim adjustment expenses. The amount of our self-insurance liability is based on an analysis performed by a third-party actuary that uses our historical claim and expense data, as well as industry data to estimate these overall costs. Key assumptions used in developing these estimates include claim frequencies, severities and resolution patterns, which can occur over an extended period of time. These estimates are subject to variability due to the length of time between the delivery of a home to a homebuyer and when a construction defect claim is made, and the ultimate resolution of such claim; uncertainties regarding such claims relative to our markets and the types of products we build; and legal or regulatory actions and/or interpretations, among other factors. Due to the degree of judgment involved and the potential for variability in these underlying assumptions, our actual future costs could differ from those estimated. In addition, changes in the frequency and severity of reported claims and the estimates to resolve claims can impact the trends and assumptions used in the actuarial analysis, which could be material to our consolidated financial statements. Though state regulations vary, construction defect claims are reported and resolved over a long period of time, which can extend for 10 years or more. As a result, the majority of the estimated self-insurance liability based on the actuarial analysis relates to claims incurred but not yet reported. Therefore, adjustments related to individual existing claims generally do not significantly impact the overall estimated liability. Adjustments to our liabilities related to homes delivered in prior years are recorded in the period in which a change in our estimate occurs. Our self-insurance liability is presented on a gross basis for all periods without consideration of insurance recoveries and amounts we have paid on behalf of and expect to recover from other parties, if any. Estimated probable insurance and other recoveries of $ 38.7 million and $ 57.8 million are included in receivables in our consolidated balance sheets at August 31, 2022 and November 30, 2021, respectively. These self-insurance recoveries are principally based on actuarially determined amounts and depend on various factors, including, among other things, the above-described claim cost estimates, our insurance policy coverage limits for the applicable policy year(s), historical third-party recovery rates, insurance industry practices, the regulatory environment and legal precedent, and are subject to a high degree of variability from period to period. Because of the inherent uncertainty and variability in these assumptions, our actual insurance recoveries could differ significantly from amounts currently estimated. The changes in our self-insurance liability were as follows (in thousands): Three Months Ended August 31, Nine Months Ended August 31, 2022 2021 2022 2021 Balance at beginning of period $ 168,675 $ 194,269 $ 189,131 $ 194,180 Self-insurance provided 5,763 5,168 16,275 15,679 Payments ( 860 ) ( 4,699 ) ( 14,990 ) ( 20,296 ) Adjustments (a) ( 2,300 ) ( 8,072 ) ( 19,138 ) ( 2,897 ) Balance at end of period $ 171,278 $ 186,666 $ 171,278 $ 186,666 (a) Represents net changes in estimated probable recoveries related to self-insurance, which are recorded in receivables, to present our self-insurance liability on a gross basis. The amount for the nine months ended August 31, 2022 primarily reflected a change in the actuarially determined estimate of probable recoveries largely associated with higher self-insured retention levels in our more recent coverage years, and an insurance carrier’s payment of a portion of a townhome claim settlement reached in the 2022 first quarter. For most of our claims, there is no interaction between our warranty liability and self-insurance liability. Typically, if a matter is identified at its outset as either a warranty or self-insurance claim, it remains as such through its resolution. However, there can be instances of interaction between the liabilities, such as where individual homeowners in a 21 community separately request warranty repairs to their homes to address a similar condition or issue and subsequently join together to initiate, or potentially initiate, a legal process with respect to that condition or issue and/or the repair work we have undertaken. In these instances, the claims and related repair work generally are initially covered by our warranty liability, and the costs associated with resolving the legal matter (including any additional repair work) are covered by our self-insurance liability. The payments we make in connection with claims and related repair work, whether covered within our warranty liability and/or our self-insurance liability, may be recovered from our insurers to the extent such payments exceed the self-insured retentions or deductibles under our general liability insurance policies. Also, in certain instances, in the course of resolving a claim, we pay amounts in advance of and/or on behalf of an independent contractor(s) or their insurer(s) and believe we will be reimbursed for such payments. Estimates of all such amounts, if any, are recorded as receivables in our consolidated balance sheets when any such recovery is considered probable. Florida Chapter 558 Actions . We and certain of our trade partners continue to receive claims from attorneys on behalf of individual owners of our homes and/or homeowners’ associations that allege, pursuant to Chapter 558 of the Florida Statutes, various construction defects, with most relating to stucco and water-intrusion issues. The claims primarily involve homes in our Jacksonville, Orlando, and Tampa operations. Under Chapter 558, homeowners must serve written notice of a construction defect(s) and provide the served construction and/or design contractor(s) with an opportunity to respond to the noticed issue(s) before they can file a lawsuit. Although we have resolved many of these claims without litigation, and a number of others have been resolved with applicable trade partners or their insurers covering the related costs, as of August 31, 2022, we had approximately 512 outstanding noticed claims, and some are scheduled for trial over the next few quarters and beyond. In addition, some of our trade partners’ insurers in some of these cases have informed us of their inability to continue to pay claims-related costs. At August 31, 2022, we had an accrual for our estimated probable loss for these matters and a receivable for estimated probable insurance recoveries. While it is reasonably possible that our loss could exceed the amount accrued and our recoveries could be less than the amount recorded, at this time, we are unable to estimate the total amount of the loss in excess of the accrued amount and/or associated with a shortfall in the recoveries that is reasonably possible. In addition, although we believe it is probable we will receive additional claims in future periods, we are unable to reasonably estimate the number of such claims or the amount or range of any potential losses associated with such claims as each of these is dependent on several factors, including the actions of third parties over which we have no control; the nature of any specific claims; and our evaluation of the particular facts surrounding each such claim. Performance Bonds and Letters of Credit . We are often required to provide to various municipalities and other government agencies performance bonds and/or letters of credit to secure the completion of our projects and/or in support of obligations to build community improvements such as roads, sewers, water systems and other utilities, and to support similar development activities by certain of our unconsolidated joint ventures. At August 31, 2022, we had $ 1.26 billion of performance bonds and $ 43.1 million of letters of credit outstanding. At November 30, 2021, we had $ 1.11 billion of performance bonds and $ 43.2 million of letters of credit outstanding. If any such performance bonds or letters of credit are called, we would be obligated to reimburse the issuer of the performance bond or letter of credit. We do not believe that a material amount of any currently outstanding performance bonds or letters of credit will be called. Performance bonds do not have stated expiration dates. Rather, we are released from the performance bonds as the underlying performance is completed. The expiration dates of some letters of credit issued in connection with community improvements coincide with the expected completion dates of the related projects or obligations. Most letters of credit, however, are issued with an initial term of one year and are typically extended on a year-to-year basis until the related performance obligations are completed. Land Option Contracts and Other Similar Contracts . In the ordinary course of our business, we enter into land option contracts and other similar contracts to acquire rights to land for the construction of homes. At August 31, 2022, we had total cash deposits of $ 59.3 million to purchase land having an aggregate purchase price of $ 1.53 billion. Our land option contracts and other similar contracts generally do not contain provisions requiring our specific performance. 22 17. Legal Matters We are involved in litigation and regulatory proceedings incidental to our business that are in various procedural stages. We believe the accruals we have recorded for probable and reasonably estimable losses with respect to these proceedings are adequate and that, as of August 31, 2022, it was not reasonably possible that an additional material loss had been incurred in an amount in excess of the estimated amounts already recognized or disclosed in our consolidated financial statements. We evaluate our accruals for litigation and regulatory proceedings at least quarterly and, as appropriate, adjust them to reflect (a) the facts and circumstances known to us at the time, including information regarding negotiations, settlements, rulings and other relevant events and developments; (b) the advice and analyses of counsel; and (c) the assumptions and judgment of management. Similar factors and considerations are used in establishing new accruals for proceedings as to which losses have become probable and reasonably estimable at the time an evaluation is made. Our accruals for litigation and regulatory proceedings are presented on a gross basis without consideration of recoveries and amounts we have paid on behalf of and expect to recover from other parties, if any. Estimates of recoveries and amounts we have paid on behalf of and expect to recover from other parties, if any, are recorded as receivables when such recoveries are considered probable. Based on our experience, we believe the amounts that may be claimed or alleged against us in these proceedings are not a meaningful indicator of our potential liability. The outcome of any of these proceedings, including the defense and other litigation-related costs and expenses we may incur, however, is inherently uncertain and could differ significantly from the estimate reflected in a related accrual, if made. Therefore, it is possible that the ultimate outcome of any proceeding, if in excess of a related accrual or if an accrual had not been made, could be material to our consolidated financial statements. Pursuant to SEC rules, we will disclose any proceeding in which a governmental authority is a party and that arises under any federal, state or local provisions enacted or adopted regulating the discharge of materials into the environment or primarily for the purpose of protecting the environment only where we believe that such proceeding will result in monetary sanctions on us, exclusive of interest and costs, above $1.0 million or is otherwise material to our consolidated financial statements . 18. Stockholders’ Equity A summary of changes in stockholders’ equity is presented below (in thousands): Three Months Ended August 31, 2022 and 2021 Number of Shares Common Stock Grantor Stock Ownership Trust Treasury Stock Common Stock Paid-in Capital Retained Earnings Accumulated Other Comprehensive Loss Grantor Stock Ownership Trust Treasury Stock Total Stockholders’ Equity Balance at May 31, 2022 100,711 ( 6,705 ) ( 6,840 ) $ 100,711 $ 834,883 $ 2,697,149 $ ( 19,119 ) $ ( 72,718 ) $ ( 249,911 ) $ 3,290,995 Net income — — — — — 255,329 — — — 255,329 Dividends on common stock — — — — — ( 12,772 ) — — — ( 12,772 ) Stock-based compensation — — — — 7,056 — — — — 7,056 Stock repurchases — — ( 1,582 ) — — — — — ( 50,000 ) ( 50,000 ) Balance at August 31, 2022 100,711 ( 6,705 ) ( 8,422 ) $ 100,711 $ 841,939 $ 2,939,706 $ ( 19,119 ) $ ( 72,718 ) $ ( 299,911 ) $ 3,490,608 Balance at May 31, 2021 100,151 ( 6,705 ) ( 1,303 ) $ 100,151 $ 836,353 $ 2,081,288 $ ( 22,276 ) $ ( 72,718 ) $ ( 35,933 ) $ 2,886,865 Net income — — — — — 150,097 — — — 150,097 Dividends on common stock — — — — — ( 13,168 ) — — — ( 13,168 ) Stock awards — — 3 — ( 87 ) — — — 87 — Stock-based compensation — — — — 6,114 — — — — 6,114 Stock repurchases — — ( 4,669 ) — — — — — ( 188,175 ) ( 188,175 ) Balance at August 31, 2021 100,151 ( 6,705 ) ( 5,969 ) $ 100,151 $ 842,380 $ 2,218,217 $ ( 22,276 ) $ ( 72,718 ) $ ( 224,021 ) $ 2,841,733 23 Nine Months Ended August 31, 2022 and 2021 Number of Shares Common Stock Grantor Stock Ownership Trust Treasury Stock Common Stock Paid-in Capital Retained Earnings Accumulated Other Comprehensive Loss Grantor Stock Ownership Trust Treasury Stock Total Stockholders’ Equity Balance at November 30, 2021 100,711 ( 6,705 ) ( 5,785 ) $ 100,711 $ 848,620 $ 2,379,364 $ ( 19,119 ) $ ( 72,718 ) $ ( 217,383 ) $ 3,019,475 Net income — — — — — 600,256 — — — 600,256 Dividends on common stock — — — — — ( 39,914 ) — — — ( 39,914 ) Stock awards — — 785 — ( 29,625 ) — — — 29,625 — Stock-based compensation — — — — 22,944 — — — — 22,944 Stock repurchases — — ( 3,102 ) — — — — — ( 100,000 ) ( 100,000 ) Tax payments associated with stock-based compensation awards — — ( 320 ) — — — — — ( 12,153 ) ( 12,153 ) Balance at August 31, 2022 100,711 ( 6,705 ) ( 8,422 ) $ 100,711 $ 841,939 $ 2,939,706 $ ( 19,119 ) $ ( 72,718 ) $ ( 299,911 ) $ 3,490,608 Balance at November 30, 2020 99,869 ( 7,124 ) ( 1,107 ) $ 99,869 $ 824,306 $ 1,868,896 $ ( 22,276 ) $ ( 77,265 ) $ ( 27,761 ) $ 2,665,769 Cumulative effect of adoption of new accounting standard for credit losses — — — — — ( 226 ) — — — ( 226 ) Net income — — — — — 390,512 — — — 390,512 Dividends on common stock — — — — — ( 40,965 ) — — — ( 40,965 ) Employee stock options/other 238 — — 238 3,268 — — — — 3,506 Stock awards 44 419 15 44 ( 4,962 ) — — 4,547 371 — Stock-based compensation — — — — 19,768 — — — — 19,768 Stock repurchases — — ( 4,669 ) — — — — — ( 188,175 ) ( 188,175 ) Tax payments associated with stock-based compensation awards — — ( 208 ) — — — — — ( 8,456 ) ( 8,456 ) Balance at August 31, 2021 100,151 ( 6,705 ) ( 5,969 ) $ 100,151 $ 842,380 $ 2,218,217 $ ( 22,276 ) $ ( 72,718 ) $ ( 224,021 ) $ 2,841,733 On February 17, 2022, the management development and compensation committee of our board of directors approved the payout of 674,677 shares of our common stock in connection with the vesting of PSUs that were granted to certain employees on October 4, 2018. The shares paid out under the PSUs reflected our achievement of certain performance measures that were based on cumulative earnings per share, average return on invested capital, and revenue growth relative to a peer group of high-production public homebuilding companies over the three-year period from December 1, 2018 through November 30, 2021. Of the shares of common stock paid out, 319,815 shares, or $ 12.2 million, were purchased by us in the 2022 first quarter to satisfy the recipients’ withholding taxes on the vesting of the PSUs. The shares purchased were not considered repurchases under the authorizations described below. On April 7, 2022, our board of directors authorized us to repurchase up to $ 300.0 million of our outstanding common stock. This authorization replaced a prior board of directors authorization, which had 331,400 shares remaining for repurchase. In the 2022 third quarter, we repurchased 1,581,504 shares of our common stock on the open market pursuant to this authorization at a total cost of $ 50.0 million, bringing our total repurchases for the nine months ended August 31, 2022 to 3,101,150 shares of common stock at a total cost of $ 100.0 million. Repurchases under the new authorization may occur periodically through open market purchases, privately negotiated transactions or otherwise, with the timing and amount at management’s discretion and dependent on market, business and other conditions. This share repurchase authorization will continue in effect until fully used or earlier terminated or suspended by our board of directors, and does not obligate us to purchase any shares. As of August 31, 2022, we were authorized to repurchase up to $ 200.0 million of our outstanding common stock. On April 7, 2022, our board of directors also terminated a separate stock repurchase authorization it made in 2014 for the repurchase of not more than 680,000 shares of our outstanding common stock, solely as necessary for director elections in respect of outstanding stock appreciation rights awards granted under our Non-Employee Directors Compensation Plan. As the remaining outstanding stock appreciation rights awards expired in April 2022, this stock repurchase authorization was no longer needed. 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. 24 19. Stock-Based Compensation Stock Options. At both August 31, 2022 and November 30, 2021, we had 1,674,393 stock options outstanding and exercisable with a weighted average exercise price of $ 15.56 . We have not granted any stock option awards since 2016. As of August 31, 2022, stock options outstanding and stock options exercisable each had a weighted average remaining contractual life of 3.1 years. As all outstanding stock options have been fully vested since 2019, there was no unrecognized compensation expense related to stock option awards at August 31, 2022 and no stock-based compensation expense associated with stock options for the three-month and nine-month periods ended August 31, 2022 and 2021. Stock options outstanding and stock options exercisable each had an aggregate intrinsic value of $ 21.9 million at August 31, 2022. (The intrinsic value of a stock option is the amount by which the market value of a share of the underlying common stock exceeds the exercise price of the stock option.) Other Stock-Based Awards. From time to time, we grant restricted stock and PSUs to various employees as a compensation benefit. We recognized total compensation expense of $ 7.0 million and $ 6.1 million for the three months ended August 31, 2022 and 2021, respectively, related to restricted stock and PSUs. For the nine months ended August 31, 2022 and 2021, we recognized total compensation expense of $ 22.9 million and $ 19.8 million, respectively. 20. Supplemental Disclosure to Consolidated Statements of Cash Flows The following are supplemental disclosures to the consolidated statements of cash flows (in thousands): Nine Months Ended August 31, 2022 2021 Summary of cash and cash equivalents at end of period: Homebuilding $ 195,402 $ 350,141 Financial services 1,855 1,204 Total $ 197,257 $ 351,345 Supplemental disclosures of cash flow information: Interest paid, net of amounts capitalized $ ( 1,100 ) $ ( 2,934 ) Income taxes paid 168,709 43,248 Supplemental disclosures of non-cash activities: Increase (decrease) in consolidated inventories not owned ( 19,423 ) 4,011 Increase in inventories due to distributions of land and land development from an unconsolidated joint venture 8,436 5,451 21. Subsequent Event On October 3, 2022, we obtained an additional lender commitment of $ 50.0 million to the Term Loan in accordance with its terms, which are further described in Note 14 – Notes Payable, increasing the aggregate commitment under the Term Loan to $ 360.0 million. As of the date of this report, we had not drawn under the Term Loan. 25