What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-04-07 compared with 2022-10-07 · 235 added, 295 removed, 339 unchanged (61% of the section changed)

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

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

2022 2021 Variance 2022 2021 Variance

Three Months Ended February 28,

2023 2022 Variance

Homebuilding $ 1,378,537 $ 1,394,154 (1) %

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$ 1.45 $ 1.47 (1) %

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 generated solid financial results in the 2023 first quarter despite significantly more challenging conditions compared to the year-earlier quarter, as the combination of relatively high mortgage interest rates, elevated inflation and various other macroeconomic and geopolitical concerns that weighed on consumer budgets and confidence throughout the 2022 second half continued to negatively impact housing market demand.

During the quarter, we remained focused on balancing pace, price and construction starts at each community to optimize our return on each inventory asset within its market context.

Positioning for the Spring selling season, we also implemented targeted sales strategies, including selective price adjustments and other homebuyer concessions (particularly, mortgage-related concessions such as interest rate buydown or lock programs), which, together with a stabilizing mortgage interest rate environment, helped drive order activity and decrease cancellations.

While our net orders and net order value decreased 49% and 53%, respectively, compared to the year-earlier period, we generated sequential improvement in our net orders in both January and February, and net orders remained strong in March.

Although we are encouraged by this progress, we expect consumer caution from interest rate and economic uncertainties as well as affordability pressures to continue to negatively impact homebuyer demand for the remainder of the year.

We also anticipate the price adjustments and other homebuyer concessions we have implemented, along with other factors discussed below under “Outlook,” will contribute to a year-over-year decrease in the average selling price of homes delivered in each of the remaining quarters of 2023.

Homebuilding revenues for the three months ended February 28, 2023 and 2022 were generated entirely from housing revenues.

Housing revenues for the 2023 first quarter were essentially the same as the year-earlier quarter, as a 3% decrease in the number of homes delivered to 2,788 was mostly offset by a 2% increase in their average selling price to $494,500.

Approximately 50% of our homes delivered in the 2023 first quarter were to first-time homebuyers.

Homebuilding operating income for the three months ended February 28, 2023 decreased 8% year over year to $156.5 million and, as a percentage of revenues, was down 80 basis points to 11.4%.

Our homebuilding operating income margin for the 2023 first quarter reflected a decrease in our housing gross profit margin to 21.5%, compared to 22.4% for the year-ago quarter, partly offset by a slight improvement in selling, general and administrative expenses as a percentage of housing revenues.

Although net income decreased 7%, diluted earnings per share was nearly even with the year-earlier period due to the favorable impact of our common stock repurchases over the past several quarters, which are discussed in Note 18 – Stockholders’ Equity in the Notes to Consolidated Financial Statements in this report.

In the 2023 first quarter, we, like many other homebuilders, continued to experience production challenges due to supply chain disruptions, as well as ongoing construction services availability constraints and delays with respect to state and municipal construction permitting, inspection and utility processes, which have been impacted by key equipment shortages.

These issues, which have persisted to varying degrees since the 2020 second quarter, have resulted in cycle times that remain extended

relative to our historical average, and delays in deliveries and community openings.

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.

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.”

In addition, we are committed to reducing construction cycle times and continue to work with our suppliers and trade partners to improve their performance and pricing, which may help offset some of the impact of the above-described price adjustments and other homebuyer concessions we have implemented.

While these challenging circumstances are diminishing as to certain construction stages, we expect them to continue to negatively affect our land development and home construction activities through the remainder of 2023, and it is possible they will worsen in that and in later periods.

Reflecting the slowdown in housing market demand that began in the 2022 second half and continued throughout the 2023 first quarter, our ending backlog value at February 28, 2023 decreased 42% year over year to approximately $3.31 billion.

Yet, we believe we are well-positioned to achieve solid results for the 2023 second 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 August 31, Nine Months Ended August 31,

2022 2021 2022 2021

Three Months Ended February 28,

Housing $ 1,378,537 $ 1,394,154

Land — 248 — 906

Total 1,378,537 1,394,154

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Housing (1,082,821) (1,082,112)

Land (2,541) (194) (2,541) (926)

Total (1,082,821) (1,082,112)

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Interest income 467 36

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)

Equity in income (loss) of unconsolidated joint ventures (757) 23

Homebuilding pretax income $ 156,199 $ 169,621

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Operating income as a percentage of revenues 11.4 % 12.2 %

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.

Homebuilding revenues for the three months ended February 28, 2023 and 2022 were comprised solely of housing revenues.

In the 2023 first quarter, housing revenues were nearly even with the year-earlier quarter, as a 3% decrease in the number of homes delivered was mostly offset by a 2% increase in their overall average selling price.

The year-over-year decrease in the number of homes delivered primarily reflected a 14% decline in our West Coast homebuilding reporting segment, partly offset by increases of 4% and 9% in our Southwest and Southeast homebuilding reporting segments, respectively.

The decline in our West Coast homebuilding reporting segment mainly resulted from a 47% year-over-year

decrease in this segment’s backlog of homes at the beginning of the quarter.

The higher overall average selling price primarily reflected product and geographic mix factors, partly offset by increased homebuyer concessions we selectively extended to buyers within backlog prior to delivery in conjunction with our targeted sales strategies described above under “Overview.”

Operating Income .

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.

Our homebuilding operating income for the three months ended February 28, 2023 decreased 8% from the year-earlier period, reflecting lower housing gross profits, partly offset by lower selling, general and administrative expenses.

Operating income for the 2023 first quarter included inventory-related charges of $5.3 million, compared to $.2 million in the year-earlier quarter.

As a percentage of revenues, our operating income for the three months ended February 28, 2023 was 11.4%, compared to 12.2% for the corresponding 2022 period.

Excluding inventory-related charges, our operating income as a percentage of revenues decreased 50 basis points to 11.7% for the 2023 first quarter from 12.2% for the year-earlier quarter.

• Housing Gross Profits – Housing gross profits of $295.7 million for the three months ended February 28, 2023 declined 5% from $312.0 million for the year-earlier period, largely due to a decrease in our housing gross profit margin.

Our housing gross profit margin for the 2023 first quarter decreased 90 basis points year over year to 21.5%, mainly as a result of:

higher relative construction costs, partly due to shifts in product and geographic mix;

increased homebuyer concessions in light of affordability pressures;

and greater inventory-related charges.

As a percentage of housing revenues, the amortization of previously capitalized interest associated with housing operations, which is included in construction and land costs, was 1.9% and 2.1% for the three months ended February 28, 2023 and 2022, respectively.

Excluding the inventory-related charges associated with housing operations of $5.3 million in the current quarter and $.2 million in the year-earlier quarter, our adjusted housing gross profit margin for the 2023 first quarter decreased 60 basis points year over year.

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 August 31, Nine Months Ended August 31,

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

Three Months Ended February 28,

2023 % of Housing Revenues 2022 % of Housing Revenues

Marketing expenses $ 33,138 2.4 % $ 28,848 2.1 %

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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 August 31, 2022 rose 13% 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 community count growth.

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.

Selling, general and administrative expenses for the three months ended February 28, 2023 decreased 2% from the year-earlier quarter.

As a percentage of housing revenues, our selling, general and administrative expenses for the 2023 first quarter improved 10 basis points, reflecting lower general and administrative expenses and commission expenses, partly offset by higher marketing expenses to support our higher average community count.

Interest Income/Expense .

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.

Interest income, which is generated from short-term investments, totaled $.5 million for the three months ended February 28, 2023 and was nominal for the year-earlier period.

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

We incur interest principally from our borrowings to finance land acquisitions, land development, home construction and other operating and capital needs.

All interest incurred during the three-month and nine-month periods ended August 31, 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.

All interest incurred during the three-month periods ended February 28, 2023 and 2022 was capitalized as the average amount of our inventory qualifying for interest capitalization was higher than our average debt level for each period.

Accordingly, 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 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.

Equity in Income (Loss) of Unconsolidated Joint Ventures .

Our equity in loss of unconsolidated joint ventures was $.8 million for the three months ended February 28, 2023, compared to nominal equity in income of unconsolidated joint ventures for the year-earlier period.

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 August 31, Nine Months Ended August 31,

2022 2021 2022 2021

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

Three Months Ended February 28,

Net orders 2,142 4,210

Net order value (a) $ 1,001,868 $ 2,153,734

Cancellation rates (b) 35 % 9 % 19 % 10 %

Cancellation rate (b) 36 % 11 %

Ending backlog — homes 7,016 11,886

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Average community count 251 213

(a) Net order value represents the potential future housing revenues associated with net orders generated during the period, as well as homebuyer selections of lot and product premiums and design studio options and upgrades for homes in backlog during the same period.

(a) Net order value represents potential future housing revenues associated with net orders generated during the period, as well as homebuyer selections of lot and product premiums and design studio options and upgrades for homes in backlog during the same period.

(b) Cancellation rates represent the total number of contracts for new homes cancelled during a period divided by the total (gross) orders for new homes generated during the same period.

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.

Reflecting the softening housing market demand that began in the 2022 second half from the factors described above under “Overview,” net orders for the 2023 first quarter decreased 49% from the year-earlier quarter, with the pace of monthly net orders per community slowing to 2.8, compared to 6.6.

The decrease in net orders and the slower monthly pace reflected lower gross orders combined with higher cancellations.

The value of our net orders declined 53% year over year due to the overall decrease in our net orders, as well as the lower average selling price for those homes.

The year-over-year net order and net order value comparisons for the 2023 first quarter improved from the declines of 80% and 79%, respectively, in the 2022 fourth quarter, as mortgage interest rates stabilized and we implemented selective price adjustments and other homebuyer concessions (particularly, mortgage-related concessions such as interest rate buydown or lock programs) ahead of the Spring selling season to help generate orders and decrease cancellations.

In the 2023 first quarter, both net orders and net order values were down on a year-over-year basis in each of our four homebuilding reporting segments.

Reflecting price adjustments and other homebuyer concessions as well as a shift in product and geographic mix, the average selling price of our net orders for the 2023 first quarter was $467,700, down 9% from the year-earlier period.

Our cancellation rate as a percentage of gross orders for the three months ended February 28, 2023 increased compared to the year-earlier period and was higher than our typical historical levels, reflecting the soft housing market demand.

The cancellation rate for the three months ended February 28, 2022 was exceptionally low due to the strong demand levels we experienced in that period.

On a sequential basis, the cancellation rate improved from 68% in the 2022 fourth quarter.

The number of homes in our backlog at February 28, 2023 decreased 41% from February 28, 2022, reflecting our substantially lower backlog at the beginning of the quarter and a year-over-year decrease in our net orders for the three months ended February 28, 2023.

The potential future housing revenues in our backlog at February 28, 2023 declined 42% from February 28, 2022 as a result of both the lower number of homes in backlog and a 2% decrease in their average selling price.

The year-over-year decrease in our overall backlog value at February 28, 2023 reflected decreases in all of our homebuilding reporting segments, ranging from 30% in the Southeast to 53% in the West Coast.

A portion of the orders in backlog will not result in homes delivered due to cancellations.

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 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.”

We continued to expand our community count in the 2023 first quarter, with ending community count up 23% and the average community count up 18%, each as compared to the year-earlier period, primarily reflecting new community openings and fewer communities selling out during the three months ended February 28, 2023.

While maintaining a healthy supply of land owned or controlled under land option contracts and other similar contracts to fuel future community openings, we continued to moderate our land investments in the 2023 first quarter in response to soft housing market conditions, as discussed below under “Liquidity and Capital Resources.”

HOMEBUILDING REPORTING SEGMENTS

Operational Data.

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

Three Months Ended August 31,

Homes Delivered Net Orders Cancellation Rates

Segment 2022 2021 2022 2021 2022 2021

West Coast 1,156 1,035 520 1,078 37 % 10 %

Southwest 737 626 430 818 22 7

Central 1,072 1,174 573 1,382 45 11

Southeast 650 590 517 807 28 7

Total 3,615 3,425 2,040 4,085 35 % 9 %

Net Order Value Average Community Count

Segment 2022 2021 Variance 2022 2021 Variance

West Coast $ 317,329 $ 785,430 (60) % 66 56 18 %

Southwest 191,868 350,806 (45) 40 36 11

Central 272,288 575,737 (53) 76 73 4

Southeast 197,484 297,219 (34) 39 40 (3)

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

Nine Months Ended August 31,

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

Three Months Ended February 28,

Homes Delivered Net Orders Cancellation Rates

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Total 7,016 11,886 (41) % $ 3,314,890 $ 5,711,305 (42) %

The composition of our homes delivered, net orders and backlog shifts with the mix of our active communities and the corresponding average selling prices of the homes ordered and/or delivered at these communities in any particular period, and changes as new communities open and existing communities wind down or sell out.

In addition, with our Built-to-Order model, the selling prices of individual homes within a community may vary due to differing lot sizes and locations, home square footage, and option and upgrade selections.

The composition of our homes delivered, net orders and backlog shifts with the product and geographic mix of our active communities and the corresponding average selling prices of the homes ordered and/or delivered at these communities in any particular period, changing as new communities open and existing communities wind down or sell out in the ordinary course.

In addition, with our Built to Order model, the selling prices of individual homes within a community may vary due to differing lot sizes and locations, home square footage, product premiums and the design studio options and upgrades buyers select in the community.

These intrinsic variations in our business limit the comparability of our homes delivered, net orders and backlog, as well as their corresponding values, between sequential and year-over-year periods, in addition to the effect of prevailing economic or housing market conditions in or across any particular periods.

As described above under “Overview,” housing market conditions in the 2023 first quarter are significantly more challenging than in the year-ago quarter.

Financial Results .

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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 $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.”

Corporate and other had operating losses of $30.2 million and $34.7 million in the three months ended February 28, 2023 and 2022, respectively.

The financial results of our homebuilding reporting segments for the three months ended February 28, 2023 were negatively impacted to varying degrees by homebuyer concessions we selectively extended to buyers within backlog prior to delivery in conjunction with our targeted sales strategies described above under “Overview,” as well as shifts in the product and geographic mix of homes delivered.

Segment financial results for three months ended February 28, 2023 were also affected by construction services availability constraints and building material cost pressures, as well as ongoing supply chain disruptions and other production-related challenges, also 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 August 31, Nine Months Ended August 31,

2022 2021 Variance 2022 2021 Variance

Three Months Ended February 28,

2023 2022 Variance

Revenues $ 540,019 $ 658,874 (18) %

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Average selling price $ 687,000 $ 720,900 (5) %

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 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.

Operating income as a percentage of revenues 11.2 % 16.7 % (550) bps

This segment’s revenues for the three months ended February 28, 2023 declined from the year-earlier quarter due to a decrease in the number of homes delivered and their lower average selling price.

Operating income for the three months ended February 28, 2023 was down year over year, reflecting lower housing gross profits, partly offset by reduced selling, general and administrative expenses.

Operating income as a percentage of revenues decreased from the year-earlier quarter, primarily due to a 470 basis-point decline in the housing gross profit margin to 18.3% and an 80 basis-point increase in selling, general and administrative expenses as a percentage of housing revenues to 7.1%.

The year-over-year decrease in the housing gross profit margin primarily reflected higher relative construction costs, shifts in the product and geographic mix of homes delivered, and reduced operating leverage from lower housing revenues.

In addition, the housing gross profit margin for the three months ended February 28, 2023 included $.9 million of inventory-related charges, while there were no such charges in the year-earlier quarter.

The increase in selling, general and administrative expenses as a percentage of housing revenues mainly reflected reduced operating leverage from lower housing revenues.

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

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

2022 2021 Variance 2022 2021 Variance

Three Months Ended February 28,

2023 2022 Variance

Revenues $ 239,587 $ 209,767 14 %

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Average selling price $ 447,000 $ 406,500 10 %

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 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.

Operating income as a percentage of revenues 18.4 % 17.2 % 120 bps

The year-over-year growth in this segment’s revenues for the three months ended February 28, 2023 reflected increases in both the number of homes delivered and their average selling price.

Operating income increased from the year-earlier period due to higher housing gross profits, partially offset by higher selling, general and administrative expenses.

As a percentage of revenues, this segment’s operating income improved from the year-earlier quarter, reflecting a 70 basis-point expansion in the housing gross profit margin to 26.1% and a 50 basis-point improvement in selling, general and administrative expenses as a percentage of housing revenues to 7.7%.

The housing gross profit margin expansion primarily reflected lower relative amortization of previously capitalized interest and improved operating leverage from higher housing revenues.

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

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

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

2022 2021 Variance 2022 2021 Variance

Three Months Ended February 28,

2023 2022 Variance

Revenues $ 389,951 $ 355,322 10 %

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Average selling price $ 417,100 $ 372,800 12 %

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 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.

Operating income as a percentage of revenues 15.1 % 10.7 % 440 bps

This segment’s revenues for the three months ended February 28, 2023 increased from the corresponding year-earlier period, primarily reflecting a higher average selling price of homes delivered.

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

This segment’s operating income as a percentage of revenues improved from the year-earlier period primarily due to a 400 basis-point increase in the housing gross profit margin to 23.8% and a 40 basis-point improvement in selling, general and administrative expenses as a percentage of housing revenues to 8.7%.

The year-over-year increase in the housing gross profit margin primarily reflected lower relative construction and land costs due to a shift in the product and geographic mix of homes delivered and lower relative amortization of previously capitalized interest, partly offset by increased homebuyer concessions.

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

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

2022 2021 Variance 2022 2021 Variance

Three Months Ended February 28,

2023 2022 Variance

Revenues $ 208,980 $ 170,191 23 %

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Average selling price $ 393,600 $ 350,900 12 %

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-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%.

Operating income as a percentage of revenues 11.3 % 11.9 % (60) bps

This segment’s revenues for the three months ended February 28, 2023 grew year over year as a result of an increase in the number of homes delivered and the higher average selling price of those homes.

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

As a percentage of revenues, operating income declined from the year-earlier period mainly due to a 130 basis-point decrease in the housing gross profit margin to 21.0% that primarily reflected an increase in inventory-related charges to $3.5 million, compared to no such charges in the year-earlier period, and an increase in homebuyer concessions, partly offset by a shift in product and geographic mix of homes delivered and improved operating leverage from higher housing revenues.

Selling, general and administrative expenses as a percentage of housing revenues improved 70 basis points from the year-earlier period to 9.7%, mainly reflecting increased operating leverage from higher housing revenues.

FINANCIAL SERVICES REPORTING SEGMENT

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

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

2022 2021 2022 2021

Three Months Ended February 28,

Revenues $ 5,777 $ 4,635

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Loans sold (a):

Loans sold to Stearns/GR Alliance 2,107 2,087 5,464 5,772

Loans sold to GR Alliance 1,828 1,527

Principal $ 741,468 $ 595,959

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(a) Loan originations and sales occurred within KBHS.

Financial services revenues for the three months and nine months ended August 31, 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 ended February 28, 2023 grew from the corresponding 2022 period due to increases in both title services revenues and insurance commissions.

Pretax income.

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.

Financial services pretax income for the three months ended February 28, 2023 decreased 29% from the year-earlier period, as a decrease in the equity in income of our unconsolidated joint venture was partly offset by improved results from our insurance and title services businesses.

In the 2023 first quarter, the equity in income of our unconsolidated joint venture, KBHS, decreased to $1.6 million, compared to $5.1 million in the year-earlier quarter, as a result of a decline in KBHS’ income.

The year-over-year decline in KBHS’ income was primarily due to losses of $1.5 million in the fair value of IRLCs in the current quarter, compared to gains of $7.6 million in the year-earlier quarter, mainly reflecting a lower volume of new IRLCs in the 2023 first quarter.

Partly offsetting this impact were the higher principal amount of loan originations, which reflected the 2% increase in the average selling price of homes delivered, and an increase in the percentage of homebuyers using KBHS.

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 August 31, Nine Months Ended August 31,

2022 2021 2022 2021

Three Months Ended February 28,

Income tax expense $ 36,700 $ 43,800

Effective tax rate 22.6 % 24.6 %

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 nine months ended August 31, 2022, it contributed to the year-over-year increase in the amount of taxes we paid in the period.

Our effective tax rate for the three months ended February 28, 2023 decreased from the year-earlier period, mainly due to a $5.5 million increase in the federal tax credits we recognized primarily from building energy-efficient homes and a $.5 million increase in excess tax benefits related to stock-based compensation, partly offset by a $1.4 million increase in nondeductible executive compensation expense.

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 August 31, Nine Months Ended August 31,

2022 2021 2022 2021

Three Months Ended February 28,

Housing revenues $ 1,378,537 $ 1,394,154

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Inventory-related charges (a)

5,923 6,701 6,830 11,222

Adjusted housing gross profits $ 301,005 $ 312,217

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

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

a given period.

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

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• borrowings under the Credit Facility;

• the Term Loan;

• land option contracts and other similar contracts and seller notes;

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• repayments of borrowings under the Credit Facility;

• 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.

• dividends paid to stockholders;

• repurchases of our common stock.

We ended the 2023 first quarter with total liquidity of $1.24 billion, including cash and cash equivalents and $983.4 million of available capacity under the Credit Facility.

Based on our financial position as of February 28, 2023, and our business forecast for the remainder of 2023 as discussed below under “Outlook,” we have no material concerns related to our liquidity.

While the softening in homebuyer demand that began in the 2022 second half 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 will be sufficient to fund our anticipated operating and land-related investment needs for at least the next 12 months.

Though the financial industry and capital markets turmoil that began with regulatory authorities closing two U.S.

banks in early March 2023 could also create a potential liquidity risk if it spreads, as discussed below under Part II, Item 1A – Risk Factors, as of the date of this report, we believe it will not impair our ability to access any cash and cash equivalents we have invested in interest-bearing bank deposit accounts, or the full borrowing, credit extension and payment guarantee capacities available under our Credit Facility and the LOC Facility.

Cash Requirements .

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Investments in Land and Land Development.

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.

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 2022 fourth quarter and beyond.

Our investments in land and land development for the three months ended February 28, 2023 decreased 48% to $367.0 million, compared to $704.7 million for the year-earlier period, primarily due to a strategic reduction in land acquisitions.

In the three months ended February 28, 2023, our land acquisitions decreased 86% to $50.0 million from $365.8 million, reflecting a pivot in our land investment strategy beginning in the 2022 third quarter in response to softening housing market conditions, to emphasize developing land positions we already own or control under land option contracts and other similar contracts.

We have also evaluated our transaction pipeline and renegotiated pricing and terms for many deals while abandoning others that no longer met our investment return standards.

In addition, we have modified our land development strategy, electing where appropriate to build in smaller phases, and in some cases, defer the start of the next phase of lots in a community to align with expected demand.

Reflecting these shifts in our land strategy, approximately 14% of our total investments for the three months ended February 28, 2023 related to land acquisitions, 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 three months ended February 28, 2023 and 2022, approximately 53% and 57%, respectively, of these investments for each period were made in our West Coast homebuilding reporting segment.

For the remainder of 2023, we intend to continue to invest in and develop land positions within attractive submarkets and selectively acquire or control additional land that meets our investment standards, though we anticipate at a lower level than in the past two years.

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.

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

August 31, 2022 November 30, 2021 Variance

February 28, 2023 November 30, 2022 Variance

Segment Lots Carrying Value Lots Carrying Value Lots Carrying Value

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Total 62,404 $ 5,445,153 68,795 $ 5,543,176 (6,391) $ (98,023)

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.

The number and carrying value of lots we owned or controlled under land option contracts and other similar contracts at February 28, 2023 decreased from November 30, 2022, reflecting homes delivered in the 2023 first quarter as well as the above-mentioned pivot in our land investment strategy, which included our abandonment of 3,799 previously controlled lots in the current quarter.

The number of lots in inventory as of February 28, 2023 included 4,027 lots under contract where the associated deposits were refundable at our discretion, compared to 5,543 of such lots at November 30, 2022.

controlled under land option contracts and other similar contracts as a percentage of total lots was 26% at February 28, 2023, compared to 30% at November 30, 2022.

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 August 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 February 28, 2023, we estimate the remaining purchase price to be paid would be as follows:

2023 – $428.2 million;

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2027 – $6.0 million;

and thereafter – $0.

and thereafter – $3.3 million.

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

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Total liquidity $ 1,243,477 $ 1,261,867

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

The majority of our cash equivalents at February 28, 2023 and November 30, 2022 were invested in interest-bearing bank deposit accounts.

Capital Resources.

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Credit Facility $ 100,000 $ 150,000 $ (50,000)

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

Term Loan 357,653 357,485 168

Senior notes 1,326,674 1,326,266 408

Mortgages and land contracts due to land sellers and other loans 4,523 4,760 (237)

$ 1,788,850 $ 1,838,511 $ (49,661)

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.

Our financial leverage, as measured by the ratio of debt to capital, was 32.6% at February 28, 2023, compared to 33.4% at November 30, 2022.

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

LOC Facility .

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

We maintain the 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.

As of February 28, 2023 and November 30, 2022, we had letters of credit outstanding under the LOC Facility of $23.1 million and $36.4 million, respectively.

Performance Bonds .

As discussed in Note 16 – Commitments and Contingencies in the Notes to Consolidated Financial Statements in this report, we had $1.26 billion and $1.11 billion of performance bonds outstanding at August 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 $1.30 billion and $1.27 billion of performance bonds outstanding at February 28, 2023 and November 30, 2022, respectively.

Unsecured Revolving Credit Facility .

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

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

We have a $1.09 billion Credit Facility that will mature on February 18, 2027.

The Credit Facility contains an uncommitted accordion feature under which its aggregate principal amount of available loans can be

increased to a maximum of $1.29 billion under certain conditions, including obtaining additional bank commitments.

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

As of August 31, 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.

As of February 28, 2023, we had $100.0 million of cash borrowings and $6.6 million of letters of credit outstanding under the Credit Facility.

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

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

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

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

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

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

The financial covenant requirements under the Credit Facility and the Term Loan are set forth below:

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

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

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

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

In addition, under the Credit Facility, our investments in joint ventures and non-guarantor subsidiaries (which are shown, respectively, in Note 9 – Investments in Unconsolidated Joint Ventures in the Notes to Consolidated Financial Statements in

this report and under “Supplemental Guarantor Financial Information” below) as of the end of each fiscal quarter cannot exceed the sum of (a) $104.8 million and (b) 20% of consolidated tangible net worth.

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

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

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

In addition, under the Credit Facility and the Term Loan, our equity investments in joint ventures and non-guarantor subsidiaries and other unconsolidated entities 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 and the Term Loan, the Credit Facility and the Term Loan do not permit our borrowing base indebtedness, which, subject to certain exceptions, 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 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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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.

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-leaseback transactions involving property above a certain specified value.

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

As of 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.

As of February 28, 2023, we were in compliance with the applicable terms of all of 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.

Our ability to access the Credit Facility’s full borrowing capacity, as well as the LOC Facility’s full issuance capacity, also depends on the ability and willingness of the applicable lenders and financial institutions, including any substitute or additional lenders and financial institutions, to meet their commitments to fund loans, extend credit or provide payment guarantees to or for us under those instruments.

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 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.

At February 28, 2023, we had outstanding mortgages and land contracts due to land sellers and other loans payable in connection with such financing of $4.5 million, secured primarily by the underlying property, which had an aggregate carrying value of $28.4 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.

We have a $360.0 million Term Loan with the lenders party thereto that 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).

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 .

Our credit ratings are periodically reviewed by rating agencies.

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

In June 2022, Moody’s Investor Service reaffirmed our Ba2 credit rating and changed its rating outlook to positive from stable.

Consolidated Cash Flows .

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

Nine Months Ended August 31,

Three Months Ended February 28,

Net cash provided by (used in):

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Operating Activities .

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

Our net cash used in operating activities for the nine months ended August 31, 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.

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

Our net cash provided by operating activities for the three months ended February 28, 2023 primarily reflected net income of $125.5 million and a net decrease in inventories of $101.3 million, partly offset by a net decrease in accounts payable, accrued expenses and other liabilities of $131.7 million and a net increase in receivables of $25.3 million.

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

Investing Activities .

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.

In the three months ended February 28, 2023, our uses of cash included $13.2 million for contributions to unconsolidated joint ventures and $8.8 million for net purchases of property and equipment.

These uses of cash were partially offset by a $5.1 million return of investments in 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.

In the three months ended February 28, 2022, the net cash used for investing activities reflected $10.6 million for net purchases of property and equipment and $8.6 million for contributions to unconsolidated joint ventures.

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

Financing Activities .

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.

In the three months ended February 28, 2023, our uses of cash included stock repurchases of $75.0 million, net repayments under the Credit Facility of $50.0 million, dividend payments on our common stock of $12.5 million, tax payments associated with stock-based compensation awards of $9.7 million and payments on mortgages and land contracts due to land sellers and other loans of $.2 million.

The cash used was partly offset by $1.1 million of issuances of common stock under employee stock plans.

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

Partially offsetting the cash provided were $14.1 million of dividend payments on our

common stock, $12.2 million of tax payments associated with stock-based compensation awards, $3.8 million of costs incurred for an amendment of the Credit Facility and $.4 million of payments on mortgages and land contracts due to land sellers and other loans.

In the three-month periods ended February 28, 2023 and 2022, our board of directors declared, and we paid, a quarterly cash dividend on our common stock of $.15 per share.

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

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.

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.

For the remainder of 2023, we expect to use or redeploy our cash resources or cash borrowings under the Credit Facility to support our business within the context of prevailing market conditions.

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

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

In addition, as necessary or desirable, we may adjust or amend the terms of and/or expand the capacity of the Credit Facility, 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.

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 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.

The potential liquidity risks from the financial industry and capital markets turmoil that began in early March 2023 with the closing of two U.S.

banks is discussed below under Part II, Item 1A – Risk Factors.

Supplemental Guarantor Financial Information

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.

As of February 28, 2023, we had $1.34 billion in aggregate principal amount of outstanding senior notes, $100.0 million of borrowings outstanding under the Credit Facility and $360.0 million in aggregate principal amount of borrowings outstanding under the Term Loan.

Our obligations to pay principal 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 and the Term Loan.

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, 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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Stockholders’ equity 3,456,484 3,427,407

Nine Months Ended

August 31, 2022

Three Months Ended

February 28, 2023

Summarized Statement of Operations Data (in thousands)

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Selling, general and administrative expenses (135,957)

Interest income from non-guarantor subsidiary 17,606

Interest income from Non-Guarantor Subsidiaries 6,613

Pretax income 159,657

Net income 124,057

Critical Accounting Policies

Critical Accounting Policies and Estimates

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

There have been no significant changes to our critical accounting policies and estimates during the nine months ended August 31, 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 three months ended February 28, 2023 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, 2022.

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 low resale home inventory.

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.

There are no recent accounting pronouncements that are expected to have a material impact on our consolidated financial statements.

We believe several long-term housing market fundamental factors remain positive, including favorable demographics, a decade-plus underproduction of new homes in relation to population growth and low resale home inventory.

However, sharply higher mortgage interest rates beginning in early 2022, several years of rising housing prices, elevated inflation and various other macroeconomic and geopolitical concerns combined to significantly weaken housing market demand in the 2022 second half, and the soft market conditions continued in the 2023 first quarter.

We expect consumer caution from interest rate and economic uncertainties as well as affordability pressures to continue to negatively impact homebuyer demand for the remainder of 2023, with lower net orders and higher cancellation rates anticipated for the 2023 second quarter, each as compared to the corresponding prior-year period.

Given these conditions, and depending on the market dynamics and the size and construction stage of the backlog within each community, we plan to continue to implement or maintain selective price adjustments and other homebuyer concessions to help generate new orders as we did in the 2023 first quarter.

We anticipate the pricing adjustments and other homebuyer concessions we have selectively implemented since the 2022 third quarter and may continue to implement, as well as a community mix shift within our West Coast homebuilding reporting segment with a lower proportion of deliveries expected from higher-priced communities, will contribute to a year-over-year decrease in the overall average selling price of homes

delivered in each of the remaining quarters of 2023.

At the same time, with the deceleration in housing starts compared to a year ago, we are continuing to pursue reductions in our direct construction costs and cycle times to help offset any such pricing adjustments and other homebuyer concessions.

We are committed to reducing our cycle times to achieve deliveries within a more traditional timeframe of between six and seven months from home sale to delivery.

We believe we are in a strong position to operate effectively through changing market conditions, with a solid balance sheet and liquidity, and anticipated healthy operating cash flow for the 2023 fiscal year.

We plan to continue to moderate and be highly selective in our land investments until market conditions improve, as well as maintain a balanced approach to capital allocation to maximize long-term stockholder value.

In this regard, on March 21, 2023, our board of directors approved a $500.0 million share repurchase authorization, providing us flexibility to continue to repurchase our common stock on an opportunistic basis.

We plan to continue to manage our product offerings, pricing, net order pace and inventory levels to optimize each asset based on local housing market conditions, leveraging our differentiating, highly customer-centric Built to Order business model and operational capabilities to help effectively meet evolving consumer preferences and budgets.

With our backlog value of $3.31 billion at February 28, 2023, we believe we can achieve our projected results for 2023, subject to the factors and risks described in this report.

Based on the foregoing, our present outlook for the 2023 second quarter and full year is as follows:

2023 Second Quarter

• We expect to generate housing revenues in the range of $1.35 billion to $1.50 billion, a decrease from $1.71 billion in the corresponding 2022 period, and anticipate our average selling price to be approximately $480,000, compared to $494,300 in the year-earlier period, a 3% decrease year over year.

• We expect our homebuilding operating income margin will be in the range of 9.5% to 10.5%, assuming no inventory-related charges, down from 15.5% for the year-earlier quarter.

• We expect our housing gross profit margin will be in the range of 20.0% to 21.0%, assuming no inventory-related charges, compared to 25.3% for the corresponding 2022 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 selling, general and administrative expenses as a percentage of housing revenues to be in the range of 10.3% to 10.8%, compared to 9.8% in the 2022 second quarter.

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

The effective tax rate for the year-earlier quarter was approximately 26%.

• 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.

• We expect our average community count will be up in the range of 15% to 20%, compared to the prior-year quarter.

• We expect our net orders will range between 3,000 and 3,700, representing a year-over-year decline of 14% at the mid-point.

2023 Full Year

• We expect our housing revenues to be in the range of $6.90 billion to $7.00 billion, an increase of 22% at the mid-point of the range, from $5.69 billion in 2021, and anticipate our average selling price to be approximately $500,000, an increase of 18% from 2021.

• We expect our housing revenues to be in the range of $5.20 billion to $5.90 billion, a decrease of 19% at the mid-point of the range, from $6.88 billion in 2022, and anticipate our average selling price will be in the range of $480,000 to $490,000, a decrease from $500,800 for 2022.

• We expect our homebuilding operating income margin to be in the range of 10.0% to 11.0%, assuming no inventory-related charges, compared to 15.6% for 2022.

• We expect our housing gross profit margin to be in the range of 20.5% to 21.5%, assuming no inventory-related charges, compared to 24.8% for 2022.

• 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%.

• 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).

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

• We expect our selling, general and administrative expenses as a percentage of housing revenues to be in the range of 10.0% to 11.0%, compared to 9.2% in the prior year.

• We expect the effective tax rate will be approximately 24%, flat with 2022.

• We expect our average community count will be up year over year in the low double-digit percentage range.

• We expect a return on equity in the low double-digit percentage range.

Our future performance and the strategies we implement (and adjust or refine as necessary or appropriate) will depend significantly on prevailing economic, employment, homebuilding industry and capital, credit and financial market conditions

and on a fairly stable and constructive political and regulatory environment (particularly in regard to housing and mortgage loan financing policies).

The Federal Reserve’s aggressive raising of the federal funds interest rate and other measures during 2022 and into 2023 to moderate persistent U.S.

inflation, and the further actions it may take, are expected to be an ongoing headwind for the housing market for the remainder of 2023, as they have elevated mortgage loan interest rates and created macroeconomic uncertainty and financial market turbulence that, among other things, has tempered consumer demand for homes and disrupted credit and lending markets.

In addition, we believe the supply chain disruptions, other production challenges and construction cost pressures described in this Management’s Discussion and Analysis of Financial Condition and Results of Operations will generally persist for the remainder of 2023.

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 2023 first quarter, should not be considered indicative of our future results on any metric or set of metrics, including, but not limited to, our net orders, backlog, revenues and returns.

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).

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• consumer and producer price inflation;

• 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;

• 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 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 and the Term Loan;

• the ability and willingness of the applicable lenders, including any substitute or additional lenders, to meet their commitments to fund loans, extend credit or provide payment guarantees to or for us under the Credit Facility or LOC Facility;

• volatility in the market price of our common stock;

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• weather events, significant natural disasters and other climate and environmental factors;

• any failure of lawmakers to agree on a budget or appropriation legislation to fund the federal government’s operations, and financial markets’ and businesses’ reactions to any such failure;

• any failure of lawmakers to agree on a budget or appropriation legislation to fund the federal government’s operations or raise the amount the federal government is authorized to borrow to meet its existing legal obligations, and financial markets’ and businesses’ reactions to any such failure;

• government actions, policies, programs and regulations directed at or affecting the housing market (including the tax benefits associated with purchasing and owning a home, and the standards, fees and size limits applicable to the purchase or insuring of mortgage loans by government-sponsored enterprises and government agencies), the homebuilding industry, or construction activities;

6 unchanged sentences

• the availability and cost of land in desirable areas and our ability to timely develop acquired land parcels and open new home communities;

• impairment, land option contract abandonment or other inventory-related charges, including any stemming from decreases in the value of our land assets;

• our warranty claims experience with respect to homes previously delivered and actual warranty costs incurred;

7 unchanged sentences

• income tax expense volatility associated with stock-based compensation;

• the ability of our homebuyers to obtain residential mortgage loans and mortgage banking services;

• the ability of our homebuyers to obtain residential mortgage loans and mortgage banking services, which may depend on the ability and willingness of lenders and financial institutions to offer such loans and services to our homebuyers;

• the performance of mortgage lenders to our homebuyers;

• the performance of KBHS;

• the ability and willingness of the applicable lenders and financial institutions to extend credit facilities to KBHS to fund its originated mortgage loans;

• information technology failures and data security breaches;

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

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

• other events outside of our control.

Please see our Annual Report on Form 10-K for the year ended November 30, 2022 and other filings with the SEC for a further discussion of these and other risks and uncertainties applicable to our business.

Quantitative and Qualitative Disclosures About Market Risk

There have been no material changes in our market risk since November 30, 2022.

For additional information regarding our market risk, refer to the “Quantitative and Qualitative Disclosures About Market Risk” section of our Annual Report on Form 10-K for the year ended November 30, 2022.

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