What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-10-06 compared with 2023-07-07 · 255 added, 224 removed, 413 unchanged (54% 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 May 31, Six Months Ended May 31,

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

2023 2022 Variance 2023 2022 Variance

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$ 1.80 $ 2.86 (37) % $ 5.18 $ 6.63 (22) %

We generated solid financial results in the 2023 second quarter amid improving housing market conditions compared to the 2022 second half and 2023 first quarter, periods in which the combination of relatively high mortgage interest rates, elevated inflation and various other macroeconomic and geopolitical concerns significantly depressed demand.

Though the business environment continues to be less favorable than during the 2022 first half, we achieved monthly sequential increases in our net orders in the current quarter, sustaining the trend we experienced in the first quarter, due to typical seasonal factors, buyers adjusting to the higher mortgage interest rates, and low resale home inventory.

Our total net orders for the 2023 second quarter were slightly above the year-earlier quarter, and up 84% sequentially, as a 20% year-over-year increase in our average community count offset a slower monthly net order pace per community of 5.2.

While this monthly pace is down from the year-ago period’s exceptional 6.2 level, it is generally in line with our second-quarter average, prior to the pandemic-driven volatility.

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

With market conditions having improved compared to the 2022 second half and 2023 first quarter, reflecting a stabilizing mortgage interest rate environment, we were able to raise or maintain selling prices in most of our communities compared to those earlier periods.

On a more selective basis and to a lesser extent than in the first quarter, we implemented targeted sales strategies, including pricing adjustments and other homebuyer concessions (particularly, mortgage-related concessions such as interest rate buydown or lock programs), to drive order activity and minimize cancellations.

These actions, together with product and geographic mix shifts, as discussed below under “Homebuilding” and “Homebuilding Reporting Segments,” contributed to our 2023 second quarter net orders increasing 1% year over year and net order value decreasing 11%, reflecting a lower average selling price for these net orders.

These year-over-year comparisons improved significantly from the 2023 first quarter when our net orders and net order value were down 49% and 53%, respectively.

However, we anticipate the pricing 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 2023 quarters.

Homebuilding revenues for the three months ended May 31, 2023 and 2022 were generated entirely from housing revenues.

Housing revenues for the 2023 second quarter rose 3% from the year-earlier quarter due to a 6% increase in the number of homes delivered to 3,666, partly offset by a 3% decrease in their average selling price to $479,500.

Approximately 48% of our homes delivered in the 2023 second quarter were to first-time homebuyers.

Homebuilding operating income for the three months ended May 31, 2023 decreased 24% year over year to $202.1 million and, as a percentage of revenues, was down 390 basis points to 11.5%.

Our homebuilding operating income margin for the 2023 second quarter reflected a decrease in our housing gross profit margin to 21.1%, compared to 25.3% for the year-ago quarter.

Net income and diluted earnings per share for the three months ended May 31, 2023 decreased 22% and 16%, respectively.

Our diluted earnings per share for the 2023

second quarter reflected 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 second quarter, we achieved a meaningful sequential improvement in our construction cycle times.

This was driven by a normalizing supply chain and better construction services availability as well as our ongoing initiative to simplify our product offerings, alleviating to an extent the significant production challenges that have persisted to varying degrees since the 2020 second quarter, and resulted in cycle times that remain extended relative to our historical average, and delivery and community opening delays.

We remain committed to further reducing build times and continue to work with our suppliers and trade partners to improve their performance and cost, which may help offset some of the impact of the above-described pricing adjustments and other homebuyer concessions we have implemented.

While we are pleased with the production gains in the second quarter, ongoing supply chain-related challenges for certain items may continue to negatively affect our land development and home construction activities through the 2023 second half, and it is possible they will worsen in that and in later periods.

We generated solid financial results in the 2023 third quarter, though below our exceptional results in the year-earlier quarter, when we achieved record-high third-quarter net income and diluted earnings per share.

Housing market conditions improved in the current period compared to the 2022 second half and 2023 first quarter, periods in which the combination of relatively high mortgage interest rates, elevated inflation and various other macroeconomic and geopolitical concerns significantly depressed demand.

We continued to experience steady demand throughout the 2023 third quarter as we did in the second quarter, even as mortgage interest rates rose, indicative of constrained resale home inventory, favorable demographic trends and demand for homes at our price points.

Our net orders for the 2023 third quarter grew 52% from the year-earlier quarter, driven by a 9% year-over-year expansion in our average community count and a higher monthly net order pace per community of 4.3.

This pace increased from 3.1 a year ago and was above our historical third-quarter average, prior to pandemic-driven volatility.

During the third 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.

With recent market conditions having improved, we were able to raise or maintain selling prices in the 2023 second and third quarters in most of our communities.

At the same time, ongoing elevated mortgage interest rates and inflation continued to negatively affect housing affordability and temper demand, which we expect will continue in the 2023 fourth quarter.

On a more selective basis and to a lesser extent than in the first and second quarters, in the current quarter we employed targeted sales strategies, including pricing adjustments and other homebuyer concessions (particularly, mortgage-related concessions such as interest rate buydown or lock programs), to help drive order activity and minimize cancellations.

These actions, together with product and geographic mix shifts, as discussed below under “Homebuilding” and “Homebuilding Reporting Segments,” contributed to our 2023 third-quarter net orders increasing 52% year over year and net order value increasing 54%, reflecting a higher average selling price for these net orders.

Our year-over-year performance improved significantly from the 2022 third quarter, when the negative factors described above impacted our net orders and net order value, which decreased 50% and 51%, respectively, compared to the corresponding 2021 period.

However, we anticipate the pricing adjustments and other homebuyer concessions we have utilized in 2023 will contribute to a year-over-year decrease in the average selling price of homes delivered in the 2023 fourth quarter.

Homebuilding revenues for the three months ended August 31, 2023 were generated from housing revenues and $6.0 million of land sale revenues.

In the three months ended August 31, 2022, homebuilding revenues were generated entirely from housing revenues.

Housing revenues of $1.57 billion for the 2023 third quarter were down 14% from the year-earlier quarter due to a 7% decrease in the number of homes delivered to 3,375 and an 8% decline in their average selling price to $466,300.

Approximately 49% of our homes delivered in the 2023 third quarter were to first-time homebuyers.

Homebuilding operating income for the three months ended August 31, 2023 was $179.2 million, compared to $325.1 million for the year-earlier quarter, and as a percentage of revenues, was 11.3%, compared to 17.7%.

Our homebuilding operating income margin for the 2023 third quarter reflected a decrease in our housing gross profit margin to 21.5%, compared to 26.7% for the year-ago

Net income and diluted earnings per share for the three months ended August 31, 2023 were down 41% and 37%, respectively, from the record third-quarter results we achieved in the year-earlier period.

Our diluted earnings per share for the 2023 third quarter reflected the favorable impact of our common stock repurchases over the past several quarters.

In the 2023 third quarter, we achieved a meaningful sequential improvement in our construction cycle times, as we did in the 2023 second quarter.

This was driven by a stabilizing supply chain and better construction services availability as well as our ongoing initiative to simplify our product offerings, alleviating, to an extent, the significant production challenges that have persisted to varying degrees since the 2020 second quarter, and resulted in cycle times that remain extended relative to our historical average, and delays in opening communities and delivering homes.

We remain committed to further reducing our build times.

While we are pleased with the production gains in the second and third quarters, ongoing supply chain-related challenges for certain items may continue to negatively affect our land development and home construction activities through the 2023 fourth quarter, and it is possible they may worsen in that and in later periods.

We believe our strong balance sheet and liquidity position provide us with the flexibility to operate effectively through evolving market conditions.

In the 2023 first half, we generated $608.7 million of cash from operating activities, reflecting our reduced investments in land and land development as we continue to calibrate those investments to evolving market conditions.

As a result, we ended the 2023 second quarter with total liquidity of $1.64 billion, including cash and cash equivalents and $1.08 billion of available capacity under the Credit Facility.

We had no cash borrowings outstanding under the Credit Facility at May 31, 2023.

Our ending backlog value at May 31, 2023 decreased 44% year over year to approximately $3.46 billion, largely due to our lower backlog at the beginning of the quarter, which reflected the slowdown in housing market demand that began in the 2022 second half and continued into the 2023 first quarter.

Yet, we believe we are well-positioned to achieve solid results for the 2023 third quarter and full year, as described below under “Outlook.”

For the nine months ended August 31, 2023, we generated $772.5 million of cash from operating activities, reflecting our reduced investments in land and land development in the 2023 first half due to the prevailing housing environment in the 2022 second half and 2023 first quarter.

In the 2023 third quarter, we increased our investments in land and land development to $554.5 million, up 40% from the 2023 second quarter and essentially equal to the year-earlier period.

We also repurchased approximately 1.5 million shares of our common stock during the quarter, bringing our total repurchases in 2023 to approximately 5.7 million shares at a total cost of $249.6 million.

In July 2023, our board of directors increased the quarterly cash dividend on our common stock by approximately 33% to $.20 per share, from $.15.

We ended the 2023 third quarter with total liquidity of $1.70 billion, including cash and cash equivalents and $1.08 billion of available capacity under the Credit Facility.

With net repayments of $150.0 million under the Credit Facility in the first nine months of 2023, we had no cash borrowings outstanding under the Credit Facility at August 31, 2023.

Our ending backlog value at August 31, 2023 decreased 35% year over year to approximately $3.40 billion, largely due to our lower backlog at the beginning of the quarter, which reflected the slowdown in housing market demand that began in the 2022 second half and continued into the 2023 first quarter.

Yet, we believe we are well-positioned to achieve solid results for the 2023 fourth quarter and full year, as described below under “Outlook.”

Financial Results .

The following table presents a summary of certain financial and operational data for our homebuilding operations (dollars in thousands, except average selling price):

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

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

2023 2022 2023 2022

Housing $ 1,573,684 $ 1,838,888 $ 4,710,067 $ 4,947,868

Land 6,035 — 6,035 —

Total 1,579,719 1,838,888 4,716,102 4,947,868

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Housing (1,235,469) (1,347,999) (3,704,848) (3,711,863)

Land (4,911) (2,541) (4,911) (2,541)

Total (1,240,380) (1,350,540) (3,709,759) (3,714,404)

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Equity in loss of unconsolidated joint ventures (112) (100) (1,182) (387)

Loss on early extinguishment of debt — (3,598) — (3,598)

Homebuilding pretax income $ 184,622 $ 321,604 $ 544,339 $ 755,414

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

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

2023 2022 2023 2022

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Operating income as a percentage of revenues 11.3 % 17.7 % 11.4 % 15.3 %

Homebuilding revenues for the three months and six months ended May 31, 2023 and 2022 were comprised solely of housing revenues.

In the 2023 second quarter, housing revenues grew 3% from the year-earlier quarter, reflecting a 6% increase in the number of homes delivered, partly offset by a 3% decrease in their overall average selling price.

The year-over-year growth in the number of homes delivered reflected increases of 23%, 17% and 14% in our Southeast, Central and Southwest homebuilding reporting segments, respectively, partly offset by a 22% decrease in our West Coast homebuilding reporting segment.

The decline in our West Coast homebuilding reporting segment mainly resulted from a 48% year-over-year decrease in this segment’s backlog of homes at the beginning of the quarter.

The lower overall average selling price primarily reflected product and geographic mix factors, and increased concessions we selectively extended to buyers within backlog prior to delivery in conjunction with our targeted sales strategies.

For the six months ended May 31, 2023, housing revenues were about the same as the corresponding 2022 period, as the number of homes delivered increased 2% and their overall average selling price was essentially even with the year-earlier period.

Homebuilding revenues for the three months and nine months ended August 31, 2023 were comprised of housing revenues and $6.0 million of land sale revenues.

Homebuilding revenues for the three months and nine months ended August 31, 2022 were comprised solely of housing revenues.

In the 2023 third quarter, housing revenues were down 14% from the year-earlier quarter, reflecting decreases of 7% in the number of homes delivered and 8% in their overall average selling price.

The year-over-year decline in the number of homes delivered reflected decreases of 37% and 3% in our West Coast and Southwest homebuilding reporting segments, respectively, partly offset by increases of 17% and 3% in our Central and Southeast homebuilding reporting segments, respectively.

The decline in our West Coast homebuilding reporting segment mainly resulted from a 31% year-over-year decrease in this segment’s backlog of homes at the beginning of the quarter combined with a decrease in its backlog conversion rate, which largely reflected that the beginning backlog for the current period was more heavily weighted to the early building stages.

The lower overall average selling price primarily reflected product and geographic mix factors, mainly a shift away from our higher-priced West Coast homebuilding reporting segment, and increased concessions we selectively extended to buyers within backlog prior to delivery in conjunction with our targeted sales strategies.

For the nine months ended August 31, 2023, housing revenues were down 5% from the corresponding 2022 period, with the number of homes delivered nearly even with the year-earlier period and their overall average selling price declining 4%.

Operating Income .

Our homebuilding operating income for the three months ended May 31, 2023 decreased 24% from the year-earlier period, primarily reflecting lower housing gross profits.

Operating income for the 2023 second quarter included inventory-related charges of $4.3 million, compared to $.7 million in the year-earlier quarter.

As a percentage of revenues, our operating income for the three months ended May 31, 2023 was 11.5%, compared to 15.4% for the corresponding 2022 period, reflecting a lower housing gross profit margin.

Excluding inventory-related charges, our operating income as a percentage of revenues decreased 380 basis points to 11.7% for the 2023 second quarter from 15.5% for the year-earlier quarter.

For the six months ended May 31, 2023, our operating income decreased 17% from the prior-year period due to lower housing gross profits, partly offset by lower selling, general and administrative expenses.

Operating income for the six months ended May 31, 2023 included inventory-related charges of $9.6 million, compared to $.9 million of such charges in the corresponding 2022 period.

As a percentage of revenues, our operating income for the six months ended May 31, 2023 decreased 260 basis points year over year to 11.4%, reflecting a lower housing gross profit margin.

Excluding inventory-related charges, our operating income as a percentage of revenues declined 230 basis points to 11.7% for the six months ended May 31, 2023 from 14.0% for the corresponding year-earlier period.

• Housing Gross Profits – Housing gross profits of $371.3 million for the three months ended May 31, 2023 declined 14% from $433.1 million for the year-earlier period, due to a decrease in our housing gross profit margin, partly offset by an increase in housing revenues.

Our housing gross profit margin for the 2023 second quarter decreased 420 basis points year over year to 21.1%, mainly due to price decreases and other homebuyer concessions, together with higher construction costs, product and geographic mix shifts, and increased 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 1.8% and 2.0% for the three months ended May 31, 2023 and 2022, respectively.

Excluding the inventory-related charges associated with housing operations of $4.3 million in the current quarter and $.7 million in the year-earlier quarter, our adjusted housing gross profit margin for the 2023 second quarter decreased 390 basis points year over year.

For the six months ended May 31, 2023, our housing gross profits of $667.0 million decreased 10% from $745.1 million for the year-earlier period.

Our housing gross profit margin for the six months ended May 31, 2023 declined 270 basis points to 21.3%, primarily due to the reasons described above with respect to the three months ended May 31, 2023.

As a percentage of housing revenues, the amortization of previously capitalized interest associated with housing operations was 1.9% for the six months ended May 31, 2023, compared to 2.1% for the corresponding 2022 period.

Excluding the inventory-related charges associated with housing operations of $9.6 million in the current period and $.9 million in the

year-earlier period, our adjusted housing gross profit margin of 21.6% for the six months ended May 31, 2023 decreased 240 basis points year over year.

Our homebuilding operating income for the three months ended August 31, 2023 was down 45% year over year, mainly reflecting lower housing gross profits.

Operating income for the 2023 third quarter included inventory-related charges of $.6 million, compared to $5.9 million in the year-earlier quarter.

As a percentage of revenues, our operating income for the three months ended August 31, 2023 was 11.3%, compared to 17.7% for the corresponding 2022 period, reflecting a lower housing gross profit margin and higher selling, general and administrative expenses as a percentage of housing revenues.

Excluding inventory-related charges, our operating income as a percentage of revenues decreased to 11.4% for the 2023 third quarter from 18.1% for the year-earlier quarter.

For the nine months ended August 31, 2023, our operating income decreased 29% from the prior-year period primarily due to lower housing gross profits.

Operating income for the nine months ended August 31, 2023 included inventory-related charges of $10.2 million, compared to $9.4 million of such charges in the corresponding 2022 period.

As a percentage of revenues, our operating income for the nine months ended August 31, 2023 decreased 390 basis points year over year to 11.4%, mainly reflecting a lower housing gross profit margin.

Excluding inventory-related charges, our operating income as a percentage of revenues declined 390 basis points to 11.6% for the nine months ended August 31, 2023 from 15.5% for the corresponding year-earlier period.

• Housing Gross Profits – Housing gross profits of $338.2 million for the three months ended August 31, 2023 declined 31% from $490.9 million for the year-earlier period, due to decreases in both our housing gross profit margin and housing revenues.

Our housing gross profit margin for the 2023 third quarter was 21.5%, down 520 basis points year over year, primarily due to price decreases and other homebuyer concessions, higher construction costs, and product and geographic mix shifts, partly offset by a decrease in inventory-related charges.

Excluding the inventory-related charges associated with housing operations of $.6 million in the current quarter and $5.9 million in the year-earlier quarter, our adjusted housing gross profit margin for the 2023 third quarter decreased 550 basis points year over year.

For the nine months ended August 31, 2023, our housing gross profits of $1.01 billion decreased 19% from $1.24 billion for the year-earlier period.

Our housing gross profit margin for the nine months ended August 31, 2023 declined 370 basis

points to 21.3%, primarily due to the reasons described above with respect to the three months ended August 31, 2023.

As a percentage of housing revenues, the amortization of previously capitalized interest associated with housing operations was 1.9% for the nine months ended August 31, 2023, compared to 2.0% for the corresponding 2022 period.

Excluding the inventory-related charges associated with housing operations of $10.2 million in the current period and $6.8 million in the year-earlier period, our adjusted housing gross profit margin of 21.6% for the nine months ended August 31, 2023 decreased 350 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 profits totaled $1.1 million for the three months and nine months ended August 31, 2023.

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 held for sale.

• Selling, General and Administrative Expenses – The following table presents the components of our selling, general and administrative expenses (dollars in thousands):

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

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

2023 % of Housing Revenues 2022 % of Housing Revenues 2023 % of Housing Revenues 2022 % of Housing Revenues

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(a) Commission expenses include sales commissions on homes delivered paid to internal sales counselors and external real estate brokers.

Selling, general and administrative expenses for the three months ended May 31, 2023 were essentially even with the year-earlier quarter.

As a percentage of housing revenues, our selling, general and administrative expenses for the 2023 second quarter improved 20 basis points, reflecting increased operating leverage due to our higher housing revenues as compared to the year-earlier quarter.

For the six months ended May 31, 2023, selling, general and administrative expenses decreased slightly year over year.

As a percentage of housing revenues, selling, general and administrative expenses for the six months ended May 31, 2023 improved 20 basis points, reflecting the slight decrease in general and administrative expenses, and housing revenues that were about the same as the year-earlier period.

Selling, general and administrative expenses for the three months ended August 31, 2023 decreased 2% from the year-earlier quarter.

As a percentage of housing revenues, our selling, general and administrative expenses for the 2023 third quarter increased 130 basis points, mainly reflecting reduced operating leverage due to our lower housing revenues as compared to the year-earlier quarter and higher sales commissions.

For the nine months ended August 31, 2023, selling, general and administrative expenses were down slightly from the corresponding 2022 period.

As a percentage of housing revenues, selling, general and administrative expenses for the nine months ended August 31, 2023 increased 30 basis points, primarily due to the reasons described above with respect to the three months ended August 31, 2023.

Interest Income/Expense .

Interest income, which is generated from short-term investments, totaled $1.7 million and $2.2 million for the three-month and six-month periods ended May 31, 2023, respectively, and was nominal for the corresponding year-earlier periods.

Interest income, which is generated from short-term investments, totaled $5.5 million and $7.7 million for the three-month and nine-month periods ended August 31, 2023, respectively, and was nominal for both corresponding year-earlier periods.

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

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

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

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

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Equity in Loss of Unconsolidated Joint Ventures .

Our equity in loss of unconsolidated joint ventures was nominal for the three months ended May 31, 2023 and 2022.

For the six months ended May 31, 2023, our equity in loss of unconsolidated joint ventures was $1.1 million, compared to a nominal amount for the year-earlier period.

Our equity in loss of unconsolidated joint ventures was nominal for the three months ended August 31, 2023 and 2022.

For the nine months ended August 31, 2023, our equity in loss of unconsolidated joint ventures was $1.2 million, compared to $.4 million 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 months and nine months ended August 31, 2022, we recognized a $3.6 million loss on the early extinguishment of debt associated with our retirement of $350.0 million in aggregate principal amount of senior notes before their maturity date, pursuant to the optional redemption terms specified for such notes.

Net Orders, Cancellation Rates, Backlog and Community Count .

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

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

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

2023 2022 2023 2022

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

Net orders for the 2023 second quarter rose 1% from the year-earlier quarter, reflecting an increase in gross orders, partly offset by higher cancellations.

Although the pace of monthly net orders per community slowed to 5.2 in the 2023 second quarter, compared to 6.2 in the corresponding quarter of 2022, overall net orders increased slightly due to a 20% increase in our average community count.

The value of our net orders declined 11% year over year, due to the lower average selling price for those homes.

Reflecting pricing adjustments and other homebuyer concessions, as well as a product and geographic mix shift, the average selling price of our net orders for the 2023 second quarter was $482,600, down 11% from the year-earlier period.

The year-over-year net order and net order value comparisons for the 2023 second quarter improved from the declines of 49% and 53%, respectively, in the 2023 first quarter.

In the 2023 second quarter, the year-over-year growth in our overall net orders reflected increases of 19% and 10% in our West Coast and Southwest homebuilding reporting segments, respectively, partly offset by a 20% decrease in our Central segment.

Net orders in our Southeast segment were essentially even with the year-earlier quarter.

Our cancellation rate as a percentage of gross orders for the three months ended May 31, 2023 increased compared to the year-earlier period, reflecting elevated mortgage interest rates and ongoing economic uncertainty.

On a sequential basis, the cancellation rate for the 2023 second quarter improved from 36% in the 2023 first quarter, reflecting a moderation back toward historical levels.

The number of homes in our backlog at May 31, 2023 decreased 41% from May 31, 2022, mainly due to our substantially lower backlog at the beginning of the quarter and a year-over-year increase in homes delivered in the 2023 second quarter.

The potential future housing revenues in our backlog at May 31, 2023 declined 44% from May 31, 2022 as a result of both the lower number of homes in backlog and a 4% decrease in their average selling price.

The year-over-year decrease in our overall backlog value at May 31, 2023 reflected decreases in all of our homebuilding reporting segments, ranging from 36% in our Southwest segment to 55% in our Central segment.

Net orders for the 2023 third quarter rose 52% from the year-earlier quarter, reflecting improved demand and a lower cancellation rate as compared to the year-earlier quarter, when the combination of rapidly rising mortgage interest rates, ongoing inflation and other macroeconomic concerns caused many prospective buyers to pause on their homebuying decision.

The pace of monthly net orders per community increased to 4.3 in the 2023 third quarter, compared to 3.1 in the corresponding 2022 quarter, and was above our historical third-quarter average, prior to pandemic-related volatility.

The value of our net orders grew 54% year over year as a result of the growth in net orders and a 2% increase in the average selling price for those homes to $488,300.

In the 2023 third quarter, the year-over-year growth in our overall net orders reflected increases in all four homebuilding reporting segments, ranging from 30% in our Southeast segment to 74% in our West Coast segment.

Our cancellation rate as a percentage of gross orders for the three months ended August 31, 2023 improved from the year-earlier period, reflecting softer housing market demand in the year-ago period.

On a sequential basis, the cancellation rate for the 2023 third quarter improved slightly from 22% in the 2023 second quarter.

The number of homes in our backlog and our backlog value at August 31, 2023 each decreased 35% from August 31, 2022, mainly due to our substantially lower backlog levels at the beginning of the quarter.

The year-over-year decrease in our overall backlog value at August 31, 2023 reflected decreases in all of our homebuilding reporting segments, ranging from 11% in our West Coast segment to 62% in our Central segment.

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

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We use the term “community count” to refer to the number of communities open for sale with at least five homes left to sell at the end of a reporting period.

Our average community count for the three months ended May 31, 2023 expanded 20% from the year-earlier period, reflecting increases in each of our homebuilding reporting segments.

Our ending community count for the 2023 second quarter rose 16% from the corresponding quarter of 2022.

The year-over-year increases in our average and ending community counts primarily reflected new community openings and fewer communities selling out during the three months ended May 31, 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 half with evolving housing market conditions, as discussed below under “Liquidity and Capital Resources.”

Our average community count for the three months ended August 31, 2023 expanded 9% from the year-earlier period, reflecting increases in each of our homebuilding reporting segments.

Our ending community count for the 2023 third quarter rose 1% from the corresponding 2022 quarter, as the number of new community openings exceeded the number of communities selling out over the past twelve months.

On a sequential basis, our average and ending community counts for the 2023 third quarter were down 5% and 8%, respectively, as the number of communities selling out exceeded the number of community openings during the three months ended August 31, 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 calibrate our land investments for the nine months ended August 31, 2023 with evolving housing market conditions, as discussed below under “Liquidity and Capital Resources.”

HOMEBUILDING REPORTING SEGMENTS

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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 May 31,

Three Months Ended August 31,

Homes Delivered Net Orders Cancellation Rates

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Total $ 1,512,380 $ 978,969 54 % 240 221 9 %

Six Months Ended May 31,

Nine Months Ended August 31,

Homes Delivered Net Orders Cancellation Rates

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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 $38.3 million and $43.3 million in the three months ended May 31, 2023 and 2022, respectively.

For the six months ended May 31, 2023, Corporate and other had operating losses of $68.5 million, compared to $78.0 million for the corresponding year-earlier period.

Housing market conditions in the three-month and six-month periods ended May 31, 2023 were significantly more challenging than in the corresponding year-earlier periods.

The financial results of our homebuilding reporting segments for each of the 2023 periods 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, as well as product and geographic mix shifts of homes delivered.

Segment financial results for three months and six months ended May 31, 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.

Corporate and other had operating losses of $36.0 million and $42.9 million in the three months ended August 31, 2023 and 2022, respectively.

For the nine months ended August 31, 2023, Corporate and other had operating losses of $104.5 million, compared to $120.9 million for the corresponding year-earlier period.

The financial results of our homebuilding reporting segments for the three-month and nine-month periods ended August 31, 2023 were negatively impacted to varying degrees by homebuyer concessions we selectively extended to buyers in conjunction with our targeted sales strategies, as well as product and geographic mix shifts of homes delivered.

Segment financial results for the three months and nine months ended August 31, 2023 were also affected by construction services availability constraints and building material cost pressures, as well as supply chain disruptions and other production-related challenges, though these impacts lessened in the 2023 third quarter compared to the 2023 first half and 2022 second half periods.

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

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

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

2023 2022 Variance 2023 2022 Variance

6 unchanged sentences

Operating income as a percentage of revenues 10.9 % 20.6 % (970) bps 10.6 % 18.6 % (800) bps

This segment’s revenues for the three-month and six-month periods ended May 31, 2023 declined from the corresponding year-earlier periods due to decreases in both the number of homes delivered and their average selling price.

Operating income for each of the three-month and six-month periods ended May 31, 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 for the 2023 second quarter decreased from the year-earlier quarter, primarily due to a 680 basis-point decline in the housing gross profit margin to 17.6% and a 140 basis-point increase in selling, general and administrative expenses as a percentage of housing revenues to 7.7%.

For the six months ended May 31, 2023, operating income as a percentage of revenues declined from the corresponding 2022 period, reflecting a 580 basis-point decrease in the housing gross profit margin to 17.9% and a 110 basis-point increase in selling, general and administrative expenses as a percentage of housing revenues to 7.4%.

The year-over-year decreases in the housing gross profit margins for the three-month and six-month periods ended May 31, 2023 primarily reflected price decreases and other homebuyer concessions, higher relative construction costs, a product and geographic mix shift of homes delivered, and reduced operating leverage from lower housing revenues, partially offset by lower relative amortization of previously capitalized interest.

In addition, the housing gross profit margins for the three-month and six-month periods ended May 31, 2023 included $3.1 million and $3.9 million of inventory-related charges, respectively, compared to nominal inventory-related charges in each of the corresponding year-earlier periods.

The year-over-year increases in selling, general and administrative expenses as a percentage of housing revenues for the three-month and six-month periods ended May 31, 2023 reflected reduced operating leverage from lower housing revenues, partly offset by a decrease in these expenses.

This segment’s revenues for the three-month and nine-month periods ended August 31, 2023 declined from the corresponding year-earlier periods due to decreases in both the number of homes delivered and their average selling price.

Operating income

for each of the three-month and nine-month periods ended August 31, 2023 was also down year over year, reflecting lower housing gross profits, partly offset by reduced selling, general and administrative expenses and the absence of a $2.6 million land sale loss included in the prior-year periods.

Operating income as a percentage of revenues for the 2023 third quarter decreased from the year-earlier quarter, primarily due to a 770 basis-point decline in the housing gross profit margin to 18.5% and a 240 basis-point increase in selling, general and administrative expenses as a percentage of housing revenues to 7.7%.

For the nine months ended August 31, 2023, operating income as a percentage of revenues declined from the corresponding 2022 period, mainly reflecting a 650 basis-point decrease in the housing gross profit margin to 18.1% and a 160 basis-point increase in selling, general and administrative expenses as a percentage of housing revenues to 7.5%.

The year-over-year decreases in the housing gross profit margins for the three-month and nine-month periods ended August 31, 2023 primarily reflected price decreases and other homebuyer concessions, higher relative construction costs, product and geographic mix shifts of homes delivered and reduced operating leverage from lower housing revenues.

In the three months ended August 31, 2023, inventory-related charges associated with housing operations were nominal, compared to $1.9 million in the year-earlier period.

For the nine months ended August 31, 2023, such inventory-related charges increased to $4.3 million, compared to $2.1 million in the year-earlier period.

The year-over-year increases in selling, general and administrative expenses as a percentage of housing revenues for the three-month and nine-month periods ended August 31, 2023 reflected reduced operating leverage from lower housing revenues and higher sales commissions.

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

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

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

2023 2022 Variance 2023 2022 Variance

8 unchanged sentences

Operating income as a percentage of revenues 15.1 % 24.1 % (900) bps 16.7 % 21.7 % (500) bps

The year-over-year growth in this segment’s revenues for the three-month and six-month periods ended May 31, 2023 reflected increases in both the number of homes delivered and their average selling price.

Operating income for the three months ended May 31, 2023 decreased from the corresponding year-earlier period due to lower housing gross profits and higher selling, general and administrative expenses.

As a percentage of revenues, this segment’s operating income for the 2023 second quarter declined from the year-earlier quarter, reflecting a 590 basis-point decrease in the housing gross profit margin to 23.8% that was partly offset by a 70 basis-point improvement in selling, general and administrative expenses as a percentage of housing revenues to 6.8%.

For the six months ended May 31, 2023, operating income was nearly even with the corresponding year-earlier period, while operating income as a percentage of revenues declined from the corresponding 2022 period, reflecting a 320 basis-point decrease in the housing gross profit margin to 24.7%, partially offset by a 70 basis-point improvement in selling, general and administrative expenses as a percentage of housing revenues to 7.1%.

The year-over-year decline in the housing gross profit margin for the three months ended May 31, 2023 primarily reflected price decreases and other homebuyer concessions, a product and geographic mix shift of homes delivered, and higher relative amortization of previously capitalized interest, partly offset by improved operating leverage from higher housing revenues.

The year-over-year decrease in the housing gross profit margin for the six months ended May 31, 2023 was mainly due to the same reasons described for the three months ended May 31, 2023, except for the relative amortization of previously capitalized interest, which was the same year over year.

The year-over-year improvement in selling, general and administrative expenses as a percentage of housing revenues for the three-month and six-month periods ended May 31, 2023 primarily reflected increased operating leverage from higher housing revenues as well as relatively lower general and administrative expenses.

This segment’s revenues for the three-month and nine-month periods ended August 31, 2023 were comprised of housing revenues and land sale revenues.

Revenues for the three-month and nine-month periods ended August 31, 2022 were solely from housing operations.

The year-over-year decline in this segment’s housing revenues to $300.2 million for the three months ended August 31, 2023 reflected decreases in both the number of homes delivered and their average selling price.

Housing revenues for the nine months ended August 31, 2023 grew to $875.7 million, reflecting increases in both the number of homes delivered and their average selling price.

Operating income for the three-month and nine-month periods ended August 31, 2023 was down from the corresponding year-earlier periods primarily due to lower housing gross profits, partly offset by a land sale gain of $1.1 million in each period.

As a percentage of revenues, this segment’s operating income for the 2023 third quarter declined from the year-earlier quarter, reflecting an 880 basis-point decrease in the housing gross profit margin to 22.4% and a 30 basis-point increase in selling, general and administrative expenses as a percentage of housing revenues to 7.4%.

For the nine months ended August 31, 2023, operating income as a percentage of revenues was down from the corresponding 2022 period, reflecting a 530 basis-point decrease in the housing gross profit margin to 23.9%, partially offset by a 30 basis-point improvement in selling, general and administrative expenses as a percentage of housing revenues to 7.2%.

The year-over-year decline in the housing gross profit margin for the three months ended August 31, 2023 primarily reflected price decreases and other homebuyer concessions, a product and geographic mix shift of homes delivered, and reduced operating leverage from lower housing revenues.

For the nine months ended August 31, 2023, the year-over-year decrease in the housing gross profit margin was mainly due to price decreases and other homebuyer concessions, and a product and geographic mix shift of homes delivered, partly offset by increased operating leverage from higher housing revenues.

The year-over-year increase in selling, general and administrative expenses as a percentage of housing revenues for the three months ended August 31, 2023 primarily reflected reduced operating leverage from lower housing revenues.

The improvement in selling, general and administrative expenses as a percentage of housing revenues for the nine-month period ended August 31, 2023, compared to the year-earlier period, was mainly due to 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 May 31, Six Months Ended May 31,

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

2023 2022 Variance 2023 2022 Variance

8 unchanged sentences

Operating income as a percentage of revenues 14.9 % 17.9 % (300) bps 14.8 % 14.9 % (10) bps

This segment’s revenues for the three-month and six-month periods ended May 31, 2023 rose from the corresponding year-earlier periods, reflecting increases in both the number of homes delivered and their average selling price.

Operating income for the 2023 second quarter and first half increased from the corresponding year-earlier periods 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 for the three months ended May 31, 2023 decreased from the year-earlier period primarily due to a 160 basis-point decline in the housing gross profit margin to 22.1%, partly offset by an 80 basis-point improvement in selling, general and administrative expenses as a percentage of housing revenues to 7.6%.

For the six months ended May 31, 2023, operating income as a percentage of revenues increased from the corresponding 2022 period, reflecting a 90 basis-point increase in the housing gross profit margin to 22.8% and a 60 basis-point improvement in selling, general and administrative expenses as a percentage of housing revenues to 8.1%.

The year-over-year decrease in the housing gross profit margin for the three months ended May 31, 2023 primarily reflected higher construction costs, a product and geographic mix shift of homes delivered and increased homebuyer concessions, partly offset by improved operating leverage from higher housing revenues.

For the six months ended May 31, 2023, the year-over-year increase in the housing gross profit margin mainly reflected a product and geographic mix shift of homes delivered and improved operating leverage on higher housing revenues, partly offset by increased inventory-related charges and homebuyer concessions.

Inventory-related charges for the 2023 first half were $2.1 million, compared to $.6 million for the year-earlier period.

The year-over-year improvement in selling, general and administrative expenses as a percentage of housing revenues for the three-month and six-month periods ended May 31, 2023 was primarily due to increased operating leverage from higher housing revenues.

This segment’s revenues for the three months ended August 31, 2023 rose from the corresponding year-earlier period, reflecting an increase in the number of homes delivered, partly offset by a decrease in their average selling price.

For the nine months ended August 31, 2023, this segment’s revenues grew from the corresponding 2022 period due to increases in both the number of homes delivered and their average selling price.

Operating income for the 2023 third quarter decreased from the year-earlier quarter due to higher selling, general and administrative expenses, partly offset by higher housing gross profits.

This segment’s operating income as a percentage of revenues for the three months ended August 31, 2023 was down from the year-earlier period primarily due to a 230 basis-point decline in the housing gross profit margin to 23.2% and a 60 basis-point increase in selling, general and administrative expenses as a percentage of housing revenues to 8.3%.

For the nine months ended August 31, 2023, operating income rose from the year-earlier period, reflecting higher housing gross profits, partly offset by higher selling, general and administrative expenses.

As a percentage of revenues, operating income for the nine months ended August 31, 2023 was down slightly from the corresponding 2022 period, reflecting a 30 basis-point decrease in the housing gross profit margin to 22.9% and a 10 basis-point improvement in selling, general and administrative expenses as a percentage of housing revenues to 8.2%.

The year-over-year decrease in the housing gross profit margin for the three-month and nine-month periods ended August 31, 2023 primarily reflected higher construction costs, a product and geographic mix shift of homes delivered and increased homebuyer concessions, partly offset by improved operating leverage from higher housing revenues.

The year-over-year increase in selling, general and administrative expenses as a percentage of housing revenues for the three months and nine months ended August 31, 2023 was primarily due to increased sales commissions, partly offset by increased operating leverage from higher housing revenues.

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

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

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

2023 2022 Variance 2023 2022 Variance

8 unchanged sentences

Operating income as a percentage of revenues 14.8 % 16.5 % (170) bps 14.2 % 15.5 % (130) bps

This segment’s revenues for the three-month and six-month periods ended May 31, 2023 grew year over year from the corresponding 2022 periods as a result of increases in both the number of homes delivered and their average selling prices.

Operating income for the 2023 second quarter and first half each increased year over year, reflecting higher housing gross

profits, partly offset by higher selling, general and administrative expenses.

As a percentage of revenues, operating income for the 2023 second quarter declined from the year-earlier quarter mainly due to a 270 basis-point decrease in the housing gross profit margin to 23.7%, partly offset by a 130 basis-point improvement in selling, general and administrative expenses as a percentage of housing revenues to 8.1%.

For the six months ended May 31, 2023, operating income as a percentage of revenues decreased from the corresponding 2022 period, reflecting a 210 basis-point decline in the housing gross profit margin to 22.6%, partly offset by a 120 basis-point improvement in selling, general and administrative expenses as a percentage of housing revenues to 8.7%.

The year-over-year decline in the housing gross profit margin for the three-month and six-month periods ended May 31, 2023 primarily reflected higher construction costs, a product and geographic mix shift of homes delivered and increased homebuyer concessions, partly offset by improved operating leverage from higher housing revenues.

The year-over-year decrease in the housing gross profit margin for the six months ended May 31, 2023 was also due to inventory-related charges of $3.5 million in the current period, compared to no such charges in the year-earlier period.

This segment’s revenues for the three-month and nine-month periods ended August 31, 2023 grew year over year from the corresponding 2022 periods as a result of increases in both the number of homes delivered and their average selling prices.

Operating income for the 2023 third quarter decreased from the year-earlier quarter, reflecting higher selling, general and

administrative expenses.

As a percentage of revenues, operating income for the 2023 third quarter declined from the year-earlier quarter mainly due to a 160 basis-point decrease in the housing gross profit margin to 23.9% and a 10 basis-point increase in selling, general and administrative expenses as a percentage of housing revenues to 9.1%.

For the nine months ended August 31, 2023, operating income increased from the year-earlier period, reflecting higher housing gross profits, partly offset by higher selling, general and administrative expenses.

Operating income as a percentage of revenues for the nine months ended August 31, 2023 decreased from the corresponding 2022 period, reflecting a 190 basis-point decline in the housing gross profit margin to 23.1%, partly offset by a 60 basis-point improvement in selling, general and administrative expenses as a percentage of housing revenues to 8.9%.

The year-over-year decline in the housing gross profit margin for the three-month and nine-month periods ended August 31, 2023 primarily reflected higher construction costs, a product and geographic mix shift of homes delivered and increased homebuyer concessions, partly offset by improved operating leverage from higher housing revenues.

The housing gross profit margin for the three months ended August 31, 2023 included no inventory-related charges, compared to $2.3 million of such charges in the year-earlier period.

The housing gross profit margin for the nine months ended August 31, 2023 and 2022 included inventory-related charges of $3.5 million and $2.3 million, respectively.

The year-over-year improvement in selling, general and administrative expenses as a percentage of housing revenues for the nine months ended August 31, 2023 primarily reflected 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 May 31, Six Months Ended May 31,

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

2023 2022 2023 2022

15 unchanged sentences

(a) Loan originations and sales occurred within KBHS.

Financial services revenues for the three-month and six-month periods ended May 31, 2023 grew from the corresponding 2022 periods due to increases in both title services revenues and insurance commissions.

Financial services revenues for the three-month and nine-month periods ended August 31, 2023 grew from the corresponding 2022 periods due to increases in both title services revenues and insurance commissions.

Pretax income.

Financial services pretax income for the three months ended May 31, 2023 declined 39% from the year-earlier period, as a decrease in the equity in income of unconsolidated joint ventures was partly offset by improved results from our insurance and title services businesses.

In the 2023 second quarter, the equity in income of unconsolidated joint ventures decreased to $5.4 million, compared to $14.8 million in the year-earlier quarter, primarily as a result of a decline in KBHS’ income.

The year-over-year decline in KBHS’ income mainly reflected losses of $2.7 million in the fair value of IRLCs in the current quarter, compared to gains of $25.8 million in the year-earlier quarter, due to a lower volume of new IRLCs in the 2023 second quarter.

Partly offsetting this were the higher principal amount of loans originated in the current quarter, which primarily reflected increases in both the number of homes delivered and the percentage of homebuyers using KBHS.

The significant gain in the 2022 second quarter resulted from a substantial increase in the fair value of IRLCs within the joint venture as a greater number of customers elected to lock their mortgage interest rates and for relatively extended periods, due to the sharp rise in such rates during that period.

This substantial increase within KBHS resulted in a shift of some of our then-expected equity in income of KBHS from the 2022 second half to the 2022 first half.

For the six months ended May 31, 2023, our financial services pretax income declined 36% from the corresponding 2022 period, reflecting a decrease in the equity in income of unconsolidated joint ventures, partially offset by improved results from our insurance and title services businesses.

In the 2023 first half, the equity in income of unconsolidated joint ventures decreased to $7.0 million, compared to $20.0 million in the year-earlier period, mainly as a result of a decline in KBHS’ income.

The year-over-year decline in KBHS’ income was primarily due to losses of $4.2 million in the fair value of IRLCs in the current period, compared to gains of $33.4 million in the year-earlier period due to the factors described above for the three months ended May 31, 2023.

Financial services pretax income for the three months ended August 31, 2023 grew 114% from the year-earlier period, reflecting an increase in the equity in income of unconsolidated joint ventures and improved results from our insurance and title services businesses.

In the 2023 third quarter, the equity in income of unconsolidated joint ventures increased to $4.1 million, from $.1 million in the year-earlier quarter, due to an increase in KBHS’ income.

KBHS income was nominal in the 2022 third quarter, reflecting a significant decrease in the volume of new IRLCs following a surge in the 2022 second quarter driven by the sharp rise in mortgage interest rates during that period.

This IRLC volume surge effectively resulted in a shift of our equity in income of KBHS from the 2022 second half to the 2022 first half.

Also contributing to the year-over-year increase in KBHS’ income was the higher principal amount of loans originated in the current quarter, which primarily reflected an increase in the percentage of homebuyers using KBHS.

KBHS’ income in the 2023 third quarter included losses of $5.2 million in the fair value of IRLCs in the current quarter, compared to $6.3 million of such losses in the year-earlier quarter.

For the nine months ended August 31, 2023, our financial services pretax income declined 14% from the corresponding 2022 period, reflecting a decrease in the equity in income of unconsolidated joint ventures, partially offset by improved results from our insurance and title services businesses.

In the nine months ended August 31, 2023, the equity in income of unconsolidated joint ventures decreased to $11.2 million, from $20.1 million in the year-earlier period, mainly as a result of a decline in KBHS’ income.

The year-over-year decline in KBHS’ income was primarily due to losses of $9.4 million in the fair value of IRLCs in the current period, compared to gains of $27.1 million in the year-earlier period.

The significant gain in the nine months ended August 31, 2022 resulted from a substantial increase in the fair value of IRLCs within the joint venture in the 2022 second quarter due to the above-described volume surge.

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.

1 unchanged sentence

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

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

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

2023 2022 2023 2022

1 unchanged sentence

Effective tax rate 22.9 % 21.7 % 23.1 % 23.7 %

Our effective tax rate for the three months ended May 31, 2023 decreased from the year-earlier period, mainly due to a $6.2 million increase in the federal tax credits we recognized primarily from building energy-efficient homes and a $1.1 million increase in excess tax benefits related to stock-based compensation, partly offset by a $1.3 million increase in nondeductible executive compensation expense.

For the six months ended May 31, 2023, our effective tax rate decreased from the year-earlier period, mainly due to a $11.7 million increase in the federal tax credits we recognized primarily from building energy-efficient homes and a $1.6 million increase in excess tax benefits related to stock-based compensation, partly offset by a $2.7 million increase in nondeductible executive compensation expense.

The year-over-year increase in federal tax credits for the three months and six months ended May 31, 2023 reflected the enactment of the Inflation Reduction Act of 2022 on August 16, 2022, which extended the federal tax credit for building energy-efficient homes for homes delivered from January 1, 2022 (retroactively) through December 31, 2032, as well as modified and increased it starting in 2023.

Our effective tax rate for the three months ended August 31, 2023 increased from the year-earlier period, mainly due to an $8.4 million decrease in the federal tax credits we recognized primarily from building energy-efficient homes, partly offset by a $1.9 million increase in excess tax benefits related to stock-based compensation and a $.3 million decrease in nondeductible executive compensation expense.

For the nine months ended August 31, 2023, our effective tax rate decreased slightly from the year-earlier period, mainly due to a $3.5 million increase in excess tax benefits related to stock-based compensation and a $3.3 million increase in the federal tax credits we recognized primarily from building energy-efficient homes, partly offset by a $2.4 million increase in nondeductible executive compensation expense.

The federal tax credits for the three months and nine months ended August 31, 2023 reflected the enactment of the Inflation Reduction Act of 2022 on August 16, 2022, which extended the federal tax credit for building energy-efficient homes for homes delivered from January 1, 2022 (retroactively) through December 31, 2032, as well as modified and increased it starting in 2023.

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

7 unchanged sentences

The following table reconciles our housing gross profit margin calculated in accordance with GAAP to the non-GAAP financial measure of our adjusted housing gross profit margin (dollars in thousands):

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

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

2023 2022 2023 2022

32 unchanged sentences

• repurchases of our common stock.

We ended the 2023 second quarter with total liquidity of $1.64 billion, including cash and cash equivalents and $1.08 billion of available capacity under the Credit Facility.

Based on our financial position as of May 31, 2023, and our business forecast for the remainder of 2023 as discussed below under “Outlook,” we have no material concerns related to our liquidity.

We ended the 2023 third quarter with total liquidity of $1.70 billion, including cash and cash equivalents and $1.08 billion of available capacity under the Credit Facility.

Based on our financial position as of August 31, 2023, and our business forecast as discussed below under “Outlook,” we have no material concerns related to our liquidity.

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 .

Other than the decrease in our notes payable presented in the table below, which reflects the repayment of all cash borrowings outstanding under the Credit Facility during the six months ended May 31, 2023, there have been no significant changes in our cash requirements from those reported in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section of our Annual Report on Form 10-K for the year ended November 30, 2022.

Other than the decrease in our notes payable presented in the table below, which reflects the repayment of all cash borrowings outstanding under the Credit Facility during the nine months ended August 31, 2023, there have been no

significant changes in our cash requirements from those reported in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section of our Annual Report on Form 10-K for the year ended November 30, 2022.

Investments in Land and Land Development.

Our investments in land and land development for the six months ended May 31, 2023 decreased 46% to $763.2 million, compared to $1.40 billion for the year-earlier period, as we continued to calibrate our investments with evolving market conditions.

In the six months ended May 31, 2023, our land acquisitions decreased 79% to $130.6 million from $624.0 million, reflecting a pivot in our land investment strategy beginning in the 2022 third quarter in response to then-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.

Our investments in land and land development for the nine months ended August 31, 2023 decreased 33% to $1.32 billion, compared to $1.96 billion for the year-earlier period, reflecting lower investments in the 2023 first half, as our 2023 third-quarter investments of $554.5 million were essentially equal to the year-earlier period.

In the nine months ended August 31, 2023, land acquisition expenditures, which are included in our investments in land and land development, decreased 57% to $329.5 million from $759.2 million.

Our reduced investments in land and land development in the 2023 first half reflected a pivot in our land investment strategy beginning in the 2022 third quarter in response to then-softening housing market conditions, to emphasize developing land positions we already own or control under land option contracts and other similar contracts.

As part of this pivot, we 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 calibrating our investments to evolving market conditions and our outlook, we increased our investments in land and land development sequentially in both the 2023 second and third quarters.

In the 2023 third quarter, our investments in land and land development were up 40% from the 2023 second quarter, as land acquisition expenditures more than doubled.

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 17% of our total investments for the six months ended May 31, 2023 related to land acquisitions, compared to approximately 44% in the prior-year period.

While we made strategic investments in land and land development in each of our homebuilding reporting segments during the six months ended May 31, 2023 and 2022, approximately 55% and 52%, 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.

While we expect our land acquisition activity to increase during the 2023 second half as compared to the 2023 first half, 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.

Reflecting these shifts in our land strategy, approximately 25% of our total investments for the nine months ended August 31, 2023 related to land acquisitions, compared to approximately 39% 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, 2023 and 2022, approximately 55% and 51%, respectively, of these investments for each period were made in our West Coast homebuilding reporting segment.

In the 2023 fourth quarter, 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.

While we expect our land acquisition activity to increase during the 2023 fourth quarter as compared to the prior 2023 quarters, 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):

May 31, 2023 November 30, 2022 Variance

August 31, 2023 November 30, 2022 Variance

Segment Lots Carrying Value Lots Carrying Value Lots Carrying Value

4 unchanged sentences

Total 57,132 $ 5,185,875 68,795 $ 5,543,176 (11,663) $ (357,301)

The number and carrying value of lots we owned or controlled under land option contracts and other similar contracts at May 31, 2023 decreased from November 30, 2022, reflecting homes delivered in the 2023 first half as well as the above-mentioned pivot in our land investment strategy, which included our abandonment of 6,179 previously controlled lots in the six months ended May 31, 2023.

The number of lots in inventory as of May 31, 2023 included 3,448 lots under contract where the associated deposits were refundable at our discretion, compared to 5,543 of such lots at November 30, 2022.

Our lots controlled under land option contracts and other similar contracts as a percentage of total lots was 25% at May 31, 2023, compared to 30% at November 30, 2022.

The number and carrying value of lots we owned or controlled under land option contracts and other similar contracts at August 31, 2023 decreased from November 30, 2022, reflecting homes delivered in the nine months ended August 31, 2023 as well as the above-mentioned pivot in our land investment strategy, which included our abandonment of 8,097 previously controlled lots in the nine months ended August 31, 2023.

The number of lots in inventory as of August 31, 2023 included 4,506 lots under contract where the associated deposits were refundable at our discretion, compared to 5,543 of such lots at November 30, 2022.

Our lots controlled under land option contracts and other similar contracts as a percentage of total lots was 25% at August 31, 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

If we were to acquire all the land we had under land option contracts and other similar contracts at May 31, 2023, we estimate the remaining purchase price to be paid would be as follows:

If we were to acquire all the land we had under land option contracts and other similar contracts at August 31, 2023, we estimate the remaining purchase price to be paid would be as follows:

2023 – $257.7 million;

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Total liquidity $ 1,695,426 $ 1,261,867

The majority of our cash equivalents at May 31, 2023 and November 30, 2022 were invested in interest-bearing bank deposit accounts.

The majority of our cash equivalents at August 31, 2023 and November 30, 2022 were invested in interest-bearing bank deposit accounts.

Capital Resources.

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$ 1,689,958 $ 1,838,511 $ (148,553)

Our financial leverage, as measured by the ratio of debt to capital, was 30.9% at May 31, 2023, compared to 33.4% at November 30, 2022.

Our financial leverage, as measured by the ratio of debt to capital, was 30.6% at August 31, 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).

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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 May 31, 2023 and November 30, 2022, we had letters of credit outstanding under the LOC Facility of $14.5 million and $36.4 million, respectively.

Under the LOC Facility, we may issue up to $75.0 million of letters of credit.

On August 10, 2023, we entered into an amendment to the LOC Facility that extended the expiration date from February 13, 2025 to February 18, 2027.

As of August 31, 2023 and November 30, 2022, we had letters of credit outstanding under the LOC Facility of $13.0 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 $1.34 billion and $1.27 billion of performance bonds outstanding at May 31, 2023 and November 30, 2022, respectively.

As discussed in Note 16 – Commitments and Contingencies in the Notes to Consolidated Financial Statements in this report, we had $1.32 billion and $1.27 billion of performance bonds outstanding at August 31, 2023 and November 30, 2022, respectively.

Unsecured Revolving Credit Facility .

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

As of May 31, 2023, we had no cash borrowings and $6.6 million of letters of credit outstanding under the Credit Facility.

As of August 31, 2023, we had no 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 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.

Under the terms of the Credit Facility and the Term Loan, 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:

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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 May 31, 2023:

Financial Covenants and Other Requirements Covenant Requirement Actual

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

As of May 31, 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.

As of August 31, 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).

the Term Loan exists at the time of any such payment, or if any such payment would result in such a default (other than dividends paid within 60 days after declaration, if there was no default at the time of declaration).

Depending on available terms, we finance certain land acquisitions with purchase-money financing from land sellers or with other forms of financing from third parties.

At May 31, 2023, we had outstanding mortgages and land contracts due to land sellers and other loans payable in connection with such financing of $1.8 million, secured primarily by the underlying property, which had an aggregate carrying value of $23.6 million.

At August 31, 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 $33.2 million.

Senior Unsecured Term Loan .

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

Six Months Ended May 31,

Nine Months Ended August 31,

Net cash provided by (used in):

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

Our net cash provided by operating activities for the six months ended May 31, 2023 primarily reflected a net decrease in inventories of $413.8 million and net income of $289.9 million, partly offset by a net decrease in accounts payable, accrued expenses and other liabilities of $132.2 million and a net increase in receivables of $18.5 million.

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

Our net cash provided by operating activities for the nine months ended August 31, 2023 primarily reflected net income of $439.9 million and a net decrease in inventories of $355.3 million, partly offset by a net decrease in accounts payable, accrued expenses and other liabilities of $100.5 million and a net increase in receivables of $1.6 million.

In the nine months ended August 31, 2022, our net cash used in operating activities 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.

Investing Activities .

In the six months ended May 31, 2023, our uses of cash included $18.3 million for net purchases of property and equipment and $17.7 million for contributions to unconsolidated joint ventures.

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

In the six months ended May 31, 2022, the net cash used for investing activities reflected $22.1 million for net purchases of property and equipment and $16.4 million for contributions to unconsolidated joint ventures.

In the nine months ended August 31, 2023, our uses of cash included $26.4 million for net purchases of property and equipment and $23.5 million for contributions to unconsolidated joint ventures.

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, 2022, the net cash used for investing activities reflected $33.8 million for net purchases of property and equipment and $21.6 million for contributions to unconsolidated joint ventures.

The cash used was partially offset by a $1.3 million return of investments in unconsolidated joint ventures.

Financing Activities .

In the six months ended May 31, 2023, our uses of cash included stock repurchases of $167.1 million, net repayments under the Credit Facility of $150.0 million, dividend payments on our common stock of $25.7 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 $3.0 million.

In the nine months ended August 31, 2023, our uses of cash included stock repurchases of $249.6 million, net repayments under the Credit Facility of $150.0 million, dividend payments on our common stock of $41.6 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 $3.2 million.

The cash used was partly offset by $8.6 million of issuances of common stock under employee stock plans.

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

Partially offsetting the cash provided were $50.0 million of stock repurchases, $27.1 million of dividend payments on our common stock, $12.2 million of tax payments associated with stock-based compensation awards, $3.8 million of 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 May 31, 2023 and 2022, our board of directors declared, and we paid, a quarterly cash dividend on our common stock of $.15 per share.

Quarterly dividends declared and paid during the six-month periods ended May 31, 2023 and 2022 totaled $.30 per share.

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

As of the date of this report, we believe we have adequate capital resources and sufficient access to external financing sources to satisfy our current and reasonably anticipated requirements for funds to conduct our operations and meet other needs in the

ordinary course of our business.

For the remainder of 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.

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 $350.0 million of net borrowings under the Credit Facility.

The cash provided was partially offset by our repayment of $350.0 million in aggregate principal amount of our senior notes, $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 2023 third quarter, our board of directors approved a $.05 per share increase in the quarterly cash dividend on our common stock to $.20 per share and declared, and we paid, a quarterly cash dividend at the new higher rate.

In the 2022 third quarter, 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, 2023 and 2022 totaled $.50 per share and $.45 per share, respectively.

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.

Shelf Registration.

On July 10, 2023, we filed the 2023 Shelf Registration with the SEC.

The 2023 Shelf Registration registers the offering of securities that we may issue from time to time in amounts to be determined.

Our ability to issue securities is subject to market conditions and, with respect to debt securities, other factors impacting our borrowing capacity.

The 2023 Shelf Registration replaced our previously effective universal shelf registration statement filed with the SEC on July 9, 2020.

We have not made any offerings of securities under the 2023 Shelf Registration.

For the 2023 fourth quarter, 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.

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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 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.

Our ability to engage in such transactions may be constrained by volatile or tight economic, capital, credit and/or financial market conditions or other factors, including those described below under “Outlook,” and/or our liquidity, leverage and net worth, and we can provide no assurance as to successfully completing, the costs of, or the operational limitations arising from any one or series of such transactions.

Supplemental Guarantor Financial Information

As of May 31, 2023, we had $1.34 billion in aggregate principal amount of outstanding senior notes, no borrowings outstanding under the Credit Facility and $360.0 million in aggregate principal amount of borrowings outstanding under the Term Loan.

As of August 31, 2023, we had $1.34 billion in aggregate principal amount of outstanding senior notes, no 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.

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Stockholders’ equity 3,567,625 3,427,407

Six Months Ended

Nine Months Ended

August 31, 2023

Summarized Statement of Operations Data (in thousands)

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

There have been no significant changes to our critical accounting policies and estimates during the six months ended May 31, 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.

There have been no significant changes to our critical accounting policies and estimates during the nine months ended August 31, 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

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 relative to population growth and low resale home inventory.

In the current period, while mortgage interest rates and inflation remained elevated, demand strengthened compared to the 2022 second half and 2023 first quarter, with buyers adjusting to the higher mortgage interest rates and a stabilizing rate environment.

Our 3,936 net orders for the 2023 second quarter were about even with the year-earlier quarter and we achieved a 5.2 monthly net orders per community pace, generally in line with our second-quarter average, prior to the pandemic-driven volatility.

We anticipate a sequential decline in net orders in the 2023 third and fourth quarters, partly due to seasonality.

This could be influenced up or down by inventory levels or movement in mortgage interest rates, among other supply and demand factors, including expected continued consumer caution from interest rate and economic uncertainties as well as affordability pressures.

With market conditions having improved compared to the 2022 second half and 2023 first quarter, we were able to raise or maintain selling prices in most of our communities in the 2023 second quarter as compared to those earlier periods.

However, we anticipate the pricing adjustments and other homebuyer concessions we have selectively implemented since the 2022 second half and plan to use to a lesser extent in the 2023 second half, subject to market dynamics and the size and construction stage of the backlog within each community, as well as lower proportion of deliveries expected from higher-priced communities within our West Coast homebuilding reporting segment, will contribute to a year-over-year decrease in the average selling price of homes delivered in each of the remaining 2023 quarters.

At the same time, 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 build times to achieve deliveries within our normal historical period of between six and seven months from home order.

We believe several long-term housing market fundamental factors remain positive, including favorable demographic trends, a decade-plus underproduction of new homes relative to population growth and constrained resale home inventory.

In the current period, even as mortgage interest rates rose, demand remained steady, supported by these positive factors.

Our 3,097 net orders for the 2023 third quarter were up 52% from the year-earlier quarter and we achieved a 4.3 monthly net orders per community pace, which is above our historical third-quarter average, prior to pandemic-driven volatility.

However, there is considerable uncertainty regarding the near-term direction of mortgage interest rates, which in recent weeks reached 20-year highs, inflation, consumer confidence and the overall economy, and the degree to which these factors, individually or collectively, may impact demand for our homes in the 2023 fourth quarter and beyond.

We currently anticipate a sequential decline in net orders in the 2023 fourth quarter, partly due to seasonality.

This could be influenced up or down by resale inventory levels or movement in mortgage interest rates, among other supply and demand factors, including economic uncertainties as well as affordability pressures.

While we were able to raise or maintain selling prices in the 2023 second and third quarters in most of our communities, we anticipate the pricing adjustments and other homebuyer concessions we have selectively employed since the 2022 second half and expect to use to a lesser extent in the 2023 fourth quarter will contribute to a year-over-year decrease in the average selling price of homes delivered in the 2023 fourth quarter.

Our use of such concessions will depend on, among other things, market dynamics, including mortgage interest rates and overall housing affordability, and community-specific considerations,

including the size and construction stage of the backlog, net order pace and lots remaining available for sale.

On a sequential basis, we project our average selling price will increase in the 2023 fourth quarter due to an expected mix shift toward higher-priced deliveries from our West Coast homebuilding reporting segment.

We are committed to further reducing our build times in the 2023 fourth quarter and moving closer to achieving deliveries within our historical build time of between four and five months.

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 intend to maintain a balanced approach to capital allocation to maximize long-term stockholder value.

In this regard, we ended the 2023 second quarter with approximately $407.9 million remaining under our current board of directors share repurchase authorization, which provides us flexibility to continue to repurchase our common stock.

We plan to continue to balance pace, price and construction starts at each community to optimize our return on each inventory asset within its market context, leveraging our differentiated, 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 $3.46 billion at May 31, 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 third quarter and full year is as follows:

2023 Third Quarter

While we expect our land acquisition activity to increase during the 2023 fourth quarter as compared to the previous 2023 quarters, 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.

We intend to maintain a balanced approach to capital allocation designed to maximize long-term stockholder value.

In this regard, we ended the 2023 third quarter with approximately $325.4 million remaining under our current board of directors share repurchase authorization.

This provides us flexibility to continue to repurchase our common stock in the 2023 fourth quarter, with the volume and timing based on considerations of our operating cash flow, liquidity outlook, land investment opportunities and needs, the market price of our common stock, and the housing market and general economic environments.

With our backlog value of $3.40 billion at August 31, 2023, we believe we can achieve our projected results for 2023, subject to the factors and risks described in this report.

Our present outlook for the 2023 fourth quarter, the 2023 full year and the 2024 full year as to certain metrics is as follows:

2023 Fourth Quarter

• We expect to generate housing revenues in the range of $1.55 billion to $1.65 billion, a decrease from $1.93 billion in the corresponding 2022 period, and anticipate our average selling price to be approximately $486,000, compared to $510,400 in the year-earlier period.

• We expect our homebuilding operating income margin will be in the range of 9.5% to 10.1%, assuming no inventory-related charges, down from 18.1% for the year-earlier quarter.

• We expect our housing gross profit margin will be in the range of 20.4% to 21.0%, assuming no inventory-related charges, compared to 27.0% for the corresponding 2022 quarter.

• We expect our selling, general and administrative expenses as a percentage of housing revenues to be in the range of 10.6% to 11.2%, compared to 8.9% in the 2022 third quarter.

• We expect our effective tax rate will be approximately 23%.

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

• We expect our average community count will be up approximately 10%, compared to the prior-year quarter, with a sequential decline in our quarter-end community count.

• We expect our net orders will range between 3,000 and 3,500, representing a 59% year-over-year increase at the mid-point.

• We expect our homebuilding operating income margin will be approximately 10.5%, assuming no inventory-related charges, down from 15.8% for the year-earlier quarter.

• We expect our housing gross profit margin will be approximately 20.5%, assuming no inventory-related charges, compared to 23.9% for the corresponding 2022 quarter.

• We expect our selling, general and administrative expenses as a percentage of housing revenues to be about 10.0%, compared to 8.0% in the 2022 fourth quarter.

• We expect our effective tax rate will be approximately 24%, essentially the same as the year-earlier quarter.

• We expect our ending community count will be approximately flat sequentially.

• We expect our net orders will range between 2,070 and 2,760.

2023 Full Year

• We expect our housing revenues to be in the range of $5.80 billion to $6.20 billion, a 13% decrease at the mid-point from $6.88 billion in 2022, and anticipate our average selling price will be approximately $485,000, a decrease from $500,800 for 2022.

• We expect our housing revenues to be approximately $6.31 billion, an 8% decrease from $6.88 billion in 2022, and anticipate our average selling price will be approximately $481,000, a decrease from $500,800 for 2022.

• We expect our homebuilding operating income margin to be about 11.3%, assuming no inventory-related charges, compared to 15.6% for 2022.

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• We expect the effective tax rate will be approximately 23%, compared to approximately 24% for 2022.

• We expect our average community count will be up roughly 10%, and our ending community count flat, year over year.

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.

• We expect our average community count will be up about 9% year over year, with ending community count of approximately 230.

2024 Full Year

• We expect our housing revenues to be in the range of $6.50 billion to $7.00 billion.

• We expect our year-end community count will be up about 15%, as compared to 2023.

In addition to factors discussed elsewhere in this report, 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).

For instance, the Federal Reserve’s aggressive raising of the federal funds interest rate and other measures during 2022 and 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, as they have elevated mortgage 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, while we experienced improvement with respect to ongoing 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, we believe they will generally persist for the 2023 second half.

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 second quarter and first half, 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.

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 third quarter and first nine months, 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

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

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

looking statements.

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

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• consumer and producer price inflation;

• changes in interest rates, including those set by the Federal Reserve , which the Federal Reserve has increased sharply in the past few quarters and may further increase to moderate inflation, and those 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 over the past year and may further increase to moderate inflation, and those available in the capital markets or from financial institutions and other lenders, and applicable to mortgage loans;

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

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• weather events, significant natural disasters and other climate and environmental factors, such as a lack of adequate water supply to permit new home communities in certain areas;

• 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 (also known as a government shutdown), 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;

• changes in existing tax laws or enacted corporate income tax rates, including those resulting from regulatory guidance and interpretations issued with respect to thereto;

• changes in existing tax laws or enacted corporate income tax rates, including those resulting from regulatory guidance and interpretations issued with respect thereto;

• changes in U.S.

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• disruptions in world and regional trade flows, economic activity and supply chains due to the military conflict in Ukraine, including those stemming from wide-ranging sanctions the U.S.

and other countries have imposed or may further impose on Russian business sectors, financial organizations, individuals and raw materials, the impact of which may, among other things, increase our operational costs, exacerbate building materials and appliance shortages and/or reduce our revenues and earnings;

and other countries have imposed or may further impose on Russian business sectors, financial organizations, individuals and raw materials, the impact of which may, among other things, increase our operational costs, create and/or exacerbate building materials and appliance shortages and/or reduce our revenues and earnings;

• the adoption of new or amended financial accounting standards and the guidance and/or interpretations with respect thereto;

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

• the ability of our homebuyers to obtain homeowners insurance policies, which may depend on the ability and willingness of insurers to offer coverage in certain locations at an affordable price or at all;

• the ability of our homebuyers to obtain homeowners and flood insurance policies, and/or typical or lender-required policies for other hazards or events, for their homes, which may depend on the ability and willingness of insurers or government-funded or -sponsored programs to offer coverage at an affordable price or at all;

• 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;

3 unchanged sentences

• information technology failures and data security breaches;

• 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;

• an epidemic, pandemic or significant seasonal or other disease outbreak, 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.

1 unchanged sentence

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