KB HOME 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations Results of Operations OVERVIEW Revenues are generated from our homebuilding and financial services operations. The following table presents a summary of our consolidated results of operations (dollars in thousands, except per share amounts): Three Months Ended August 31, Nine Months Ended August 31, 2023 2022 Variance 2023 2022 Variance Revenues: Homebuilding $ 1,579,719 $ 1,838,888 (14) % $ 4,716,102 $ 4,947,868 (5) % Financial services 7,292 6,007 21 20,539 15,878 29 Total revenues $ 1,587,011 $ 1,844,895 (14) % $ 4,736,641 $ 4,963,746 (5) % Pretax income: Homebuilding $ 184,622 $ 321,604 (43) % $ 544,339 $ 755,414 (28) % Financial services 9,911 4,625 114 27,336 31,742 (14) Total pretax income 194,533 326,229 (40) 571,675 787,156 (27) Income tax expense (44,600) (70,900) 37 (131,800) (186,900) 29 Net income $ 149,933 $ 255,329 (41) % $ 439,875 $ 600,256 (27) % Diluted earnings per share $ 1.80 $ 2.86 (37) % $ 5.18 $ 6.63 (22) % 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 25 quarter. 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. 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.” HOMEBUILDING Financial Results . The following table presents a summary of certain financial and operational data for our homebuilding operations (dollars in thousands, except average selling price): Three Months Ended August 31, Nine Months Ended August 31, 2023 2022 2023 2022 Revenues: 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 Costs and expenses: Construction and land costs 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) Selling, general and administrative expenses (160,097) (163,238) (468,510) (474,332) Total (1,400,477) (1,513,778) (4,178,269) (4,188,736) Operating income 179,242 325,110 537,833 759,132 Interest income 5,492 192 7,688 267 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 26 Three Months Ended August 31, Nine Months Ended August 31, 2023 2022 2023 2022 Homes delivered 3,375 3,615 9,829 9,952 Average selling price $ 466,300 $ 508,700 $ 479,200 $ 497,200 Housing gross profit margin as a percentage of housing revenues 21.5 % 26.7 % 21.3 % 25.0 % Adjusted housing gross profit margin as a percentage of housing revenues 21.5 % 27.0 % 21.6 % 25.1 % Selling, general and administrative expenses as a percentage of housing revenues 10.2 % 8.9 % 9.9 % 9.6 % Operating income as a percentage of revenues 11.3 % 17.7 % 11.4 % 15.3 % Revenues . 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 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. 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 August 31, 2023 and 2022, respectively. 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 27 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 August 31, Nine Months Ended August 31, 2023 % of Housing Revenues 2022 % of Housing Revenues 2023 % of Housing Revenues 2022 % of Housing Revenues Marketing expenses $ 37,059 2.4 % $ 35,011 1.9 % $ 107,985 2.3 % $ 99,509 2.0 % Commission expenses (a) 56,145 3.6 56,368 3.1 165,538 3.5 159,791 3.2 General and administrative expenses 66,893 4.2 71,859 3.9 194,987 4.1 215,032 4.4 Total $ 160,097 10.2 % $ 163,238 8.9 % $ 468,510 9.9 % $ 474,332 9.6 % (a) Commission expenses include sales commissions on homes delivered paid to internal sales counselors and external real estate brokers. Selling, general and administrative expenses for the three months ended August 31, 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 $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 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. Further information regarding our interest incurred and capitalized is provided in Note 6 – Inventories in the Notes to Consolidated Financial Statements in this report. Equity in Loss of Unconsolidated Joint Ventures . Our equity in loss of unconsolidated joint ventures was nominal for the three 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. 28 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 August 31, Nine Months Ended August 31, 2023 2022 2023 2022 Net orders 3,097 2,040 9,175 10,164 Net order value (a) $ 1,512,380 $ 978,969 $ 4,413,897 $ 5,257,457 Cancellation rate (b) 21 % 35 % 26 % 19 % Ending backlog — homes 7,008 10,756 7,008 10,756 Ending backlog — value $ 3,395,389 $ 5,261,314 $ 3,395,389 $ 5,261,314 Ending community count 230 227 230 227 Average community count 240 221 245 217 (a) Net order value represents potential future housing revenues associated with net orders generated during the period, as well as homebuyer selections of lot and product premiums and design studio options and upgrades for homes in backlog during the same period. (b) Cancellation rates represent the total number of contracts for new homes cancelled during a period divided by the total (gross) orders for new homes generated during the same period. Net Orders . 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. Backlog . 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. Community Count . We use the term “community count” to refer to the number of communities open for sale with at least five homes left to sell at the end of a reporting period. Our average community count for the 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.” 29 HOMEBUILDING REPORTING SEGMENTS Operational Data. 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 August 31, Homes Delivered Net Orders Cancellation Rates Segment 2023 2022 2023 2022 2023 2022 West Coast 732 1,156 906 520 15 % 37 % Southwest 717 737 656 430 13 22 Central 1,258 1,072 865 573 33 45 Southeast 668 650 670 517 19 28 Total 3,375 3,615 3,097 2,040 21 % 35 % Net Order Value Average Community Count Segment 2023 2022 Variance 2023 2022 Variance West Coast $ 638,643 $ 317,329 101 % 71 66 8 % Southwest 296,811 191,868 55 44 40 10 Central 296,255 272,288 9 79 76 4 Southeast 280,671 197,484 42 46 39 18 Total $ 1,512,380 $ 978,969 54 % 240 221 9 % Nine Months Ended August 31, Homes Delivered Net Orders Cancellation Rates Segment 2023 2022 2023 2022 2023 2022 West Coast 2,320 3,099 3,062 2,702 15 % 19 % Southwest 2,031 1,938 1,915 1,897 18 13 Central 3,495 3,142 2,318 3,317 40 24 Southeast 1,983 1,773 1,880 2,248 26 17 Total 9,829 9,952 9,175 10,164 26 % 19 % Net Order Value Average Community Count Segment 2023 2022 Variance 2023 2022 Variance West Coast $ 2,044,331 $ 2,007,677 2 % 75 62 21 % Southwest 819,543 860,677 (5) 44 37 19 Central 800,936 1,472,381 (46) 80 75 7 Southeast 749,087 916,722 (18) 46 43 7 Total $ 4,413,897 $ 5,257,457 (16) % 245 217 13 % 30 August 31, Backlog – Homes Backlog – Value Segment 2023 2022 Variance 2023 2022 Variance West Coast 2,029 2,044 (1) % $ 1,356,175 $ 1,523,092 (11) % Southwest 1,576 2,153 (27) 692,175 948,761 (27) Central 1,812 4,086 (56) 678,994 1,789,006 (62) Southeast 1,591 2,473 (36) 668,045 1,000,455 (33) Total 7,008 10,756 (35) % $ 3,395,389 $ 5,261,314 (35) % The composition of our homes delivered, net orders and backlog shifts with the product and geographic mix of our active communities and the corresponding average selling prices of the homes ordered and/or delivered at these communities in any particular period, changing as new communities open and existing communities wind down or sell out in the ordinary course. In addition, with our Built to Order model, the selling prices of individual homes within a community may vary due to differing lot sizes and locations, home square footage, product premiums and the design studio options and upgrades buyers select in the community. These intrinsic variations in our business limit the comparability of our homes delivered, net orders and backlog, as well as their corresponding values, between sequential and year-over-year periods, in addition to the effect of prevailing economic or housing market conditions in or across any particular periods. Financial Results . Below is a discussion of the financial results for each of our homebuilding reporting segments. Further information regarding these segments, including their pretax income (loss), is included in Note 2 – Segment Information in the Notes to Consolidated Financial Statements in this report. The difference between each homebuilding reporting segment’s operating income (loss) and pretax income (loss) is generally due to the equity in income (loss) of unconsolidated joint ventures and/or interest income and expense. In addition to the results of our homebuilding reporting segments presented below, our consolidated homebuilding operating income includes the results of Corporate and other, a non-operating segment. Corporate and other had operating losses of $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. West Coast . The following table presents financial information related to our West Coast segment (dollars in thousands, except average selling price): Three Months Ended August 31, Nine Months Ended August 31, 2023 2022 Variance 2023 2022 Variance Revenues $ 506,802 $ 829,405 (39) % $ 1,611,171 $ 2,249,496 (28) % Construction and land costs (412,915) (614,462) 33 (1,319,259) (1,697,636) 22 Selling, general and administrative expenses (38,786) (43,847) 12 (120,983) (133,096) 9 Operating income $ 55,101 $ 171,096 (68) % $ 170,929 $ 418,764 (59) % Homes delivered 732 1,156 (37) % 2,320 3,099 (25) % Average selling price $ 692,400 $ 717,500 (3) % $ 694,500 $ 725,900 (4) % 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 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 31 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. Southwest . The following table presents financial information related to our Southwest segment (dollars in thousands, except average selling price): Three Months Ended August 31, Nine Months Ended August 31, 2023 2022 Variance 2023 2022 Variance Revenues $ 306,284 $ 321,808 (5) % $ 881,699 $ 822,499 7 % Construction and land costs (237,844) (221,634) (7) (670,882) (582,531) (15) Selling, general and administrative expenses (22,203) (22,764) 2 (63,397) (61,852) (2) Operating income $ 46,237 $ 77,410 (40) % $ 147,420 $ 178,116 (17) % Homes delivered 717 737 (3) % 2,031 1,938 5 % Average selling price $ 418,800 $ 436,600 (4) % $ 431,100 $ 424,400 2 % Operating income as a percentage of revenues 15.1 % 24.1 % (900) bps 16.7 % 21.7 % (500) bps 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. 32 Central . The following table presents financial information related to our Central segment (dollars in thousands, except average selling price): Three Months Ended August 31, Nine Months Ended August 31, 2023 2022 Variance 2023 2022 Variance Revenues $ 506,640 $ 443,581 14 % $ 1,441,805 $ 1,231,949 17 % Construction and land costs (389,150) (330,269) (18) (1,111,064) (945,602) (17) Selling, general and administrative expenses (42,073) (34,056) (24) (117,516) (102,775) (14) Operating income $ 75,417 $ 79,256 (5) % $ 213,225 $ 183,572 16 % Homes delivered 1,258 1,072 17 % 3,495 3,142 11 % Average selling price $ 402,700 $ 413,800 (3) % $ 412,500 $ 392,100 5 % 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 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. Southeast . The following table presents financial information related to our Southeast segment (dollars in thousands, except average selling price): Three Months Ended August 31, Nine Months Ended August 31, 2023 2022 Variance 2023 2022 Variance Revenues $ 259,993 $ 244,094 7 % $ 781,427 $ 643,924 21 % Construction and land costs (197,737) (181,843) (9) (601,141) (482,978) (24) Selling, general and administrative expenses (23,761) (22,049) (8) (69,480) (61,415) (13) Operating income $ 38,495 $ 40,202 (4) % $ 110,806 $ 99,531 11 % Homes delivered 668 650 3 % 1,983 1,773 12 % Average selling price $ 389,200 $ 375,500 4 % $ 394,100 $ 363,200 9 % 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 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 33 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 August 31, Nine Months Ended August 31, 2023 2022 2023 2022 Revenues $ 7,292 $ 6,007 $ 20,539 $ 15,878 Expenses (1,530) (1,510) (4,360) (4,219) Equity in income of unconsolidated joint ventures 4,149 128 11,157 20,083 Pretax income $ 9,911 $ 4,625 $ 27,336 $ 31,742 Total originations (a): Loans 2,396 2,112 6,657 5,947 Principal $ 937,037 $ 848,954 $ 2,630,317 $ 2,340,439 Percentage of homebuyers using KBHS 84 % 69 % 81 % 69 % Average FICO score 735 734 735 733 Loans sold (a): Loans sold to GR Alliance 2,469 2,107 6,680 5,464 Principal $ 972,776 $ 850,740 $ 2,662,715 $ 2,180,537 Loans sold to third parties 93 141 273 758 Principal $ 32,910 $ 47,554 $ 96,274 $ 249,554 (a) Loan originations and sales occurred within KBHS. Revenues . 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 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. 34 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. INCOME TAXES Income Tax Expense. Our income tax expense and effective tax rates were as follows (dollars in thousands): Three Months Ended August 31, Nine Months Ended August 31, 2023 2022 2023 2022 Income tax expense $ 44,600 $ 70,900 $ 131,800 $ 186,900 Effective tax rate 22.9 % 21.7 % 23.1 % 23.7 % 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. Further information regarding our income taxes is provided in Note 13 – Income Taxes in the Notes to Consolidated Financial Statements in this report. NON-GAAP FINANCIAL MEASURES This report contains information about our adjusted housing gross profit margin, which is not calculated in accordance with GAAP. We believe this non-GAAP financial measure is relevant and useful to investors in understanding our operations and the leverage employed in our operations, and may be helpful in comparing us with other companies in the homebuilding industry to the extent they provide similar information. However, because it is not calculated in accordance with GAAP, this non-GAAP financial measure may not be completely comparable to other companies in the homebuilding industry and, thus, should not be considered in isolation or as an alternative to operating performance and/or financial measures prescribed by GAAP. Rather, this non-GAAP financial measure should be used to supplement the most directly comparable GAAP financial measure in order to provide a greater understanding of the factors and trends affecting our operations. Adjusted Housing Gross Profit Margin. The following table reconciles our housing gross profit margin calculated in accordance with GAAP to the non-GAAP financial measure of our adjusted housing gross profit margin (dollars in thousands): 35 Three Months Ended August 31, Nine Months Ended August 31, 2023 2022 2023 2022 Housing revenues $ 1,573,684 $ 1,838,888 $ 4,710,067 $ 4,947,868 Housing construction and land costs (1,235,469) (1,347,999) (3,704,848) (3,711,863) Housing gross profits 338,215 490,889 1,005,219 1,236,005 Add: Inventory-related charges (a) 631 5,923 10,207 6,830 Adjusted housing gross profits $ 338,846 $ 496,812 $ 1,015,426 $ 1,242,835 Housing gross profit margin as a percentage of housing revenues 21.5 % 26.7 % 21.3 % 25.0 % Adjusted housing gross profit margin as a percentage of housing revenues 21.5 % 27.0 % 21.6 % 25.1 % (a) Represents inventory impairment and land option contract abandonment charges associated with housing operations. Adjusted housing gross profit margin is a non-GAAP financial measure, which we calculate by dividing housing revenues less housing construction and land costs excluding housing inventory impairment and land option contract abandonment charges (as applicable) recorded during a given period, by housing revenues. The most directly comparable GAAP financial measure is housing gross profit margin. We believe adjusted housing gross profit margin is a relevant and useful financial measure to investors in evaluating our performance as it measures the gross profits we generated specifically on the homes delivered during a given period. This non-GAAP financial measure isolates the impact that the housing inventory impairment and land option contract abandonment charges have on housing gross profit margins, and allows investors to make comparisons with our competitors that adjust housing gross profit margins in a similar manner. We also believe investors will find adjusted housing gross profit margin relevant and useful because it represents a profitability measure that may be compared to a prior period without regard to variability of housing inventory impairment and land option contract abandonment charges. This financial measure assists us in making strategic decisions regarding community location and product mix, product pricing and construction pace. Liquidity and Capital Resources Overview. We have funded our homebuilding and financial services activities over the last several years with: • internally generated cash flows; • public issuances of debt securities; • borrowings under the Credit Facility; • the Term Loan; • land option contracts and other similar contracts and seller notes; • public issuances of our common stock; and • letters of credit and performance bonds. We manage our use of cash in the operation of our business to support the execution of our primary strategic goals. Over the past several years, we have primarily used cash for: • land acquisition and land development; • home construction; • operating expenses; • principal and interest payments on notes payable; • repayments of borrowings under the Credit Facility; • dividends paid to stockholders; and • repurchases of our common stock. 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. 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 nine months ended August 31, 2023, there have been no 36 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 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 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): August 31, 2023 November 30, 2022 Variance Segment Lots Carrying Value Lots Carrying Value Lots Carrying Value West Coast 18,422 $ 2,480,497 19,302 $ 2,425,141 (880) $ 55,356 Southwest 7,340 842,389 8,841 993,059 (1,501) (150,670) Central 17,662 984,024 24,001 1,278,420 (6,339) (294,396) Southeast 13,708 878,965 16,651 846,556 (2,943) 32,409 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 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. Land Option Contracts and Other Similar Contracts. As discussed in Note 8 – Variable Interest Entities in the Notes to Consolidated Financial Statements in this report, our land option contracts and other similar contracts generally do not contain provisions requiring our specific performance. Our decision to exercise a particular land option contract or other similar contract depends on the results of our due diligence reviews and ongoing market and project feasibility analysis that we conduct after entering into such a contract. In some cases, our decision to exercise a land option contract or other similar contract may be conditioned on the land seller obtaining necessary entitlements, such as zoning rights and environmental and development approvals, and/or physically developing the underlying land by a pre-determined date. We typically have the ability not to exercise our rights to the underlying land for any reason and forfeit our deposits without further penalty or obligation to the 37 sellers. 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; 2024 – $546.2 million; 2025 – $157.8 million; 2026 – $193.4 million; 2027 – $6.0 million; and thereafter – $3.3 million. Liquidity. The table below summarizes our cash and cash equivalents, and total liquidity (in thousands): August 31, 2023 November 30, 2022 Cash and cash equivalents $ 612,076 $ 328,517 Credit Facility commitment 1,090,000 1,090,000 Borrowings outstanding under the Credit Facility — (150,000) Letters of credit outstanding under the Credit Facility (6,650) (6,650) Credit Facility availability 1,083,350 933,350 Total liquidity $ 1,695,426 $ 1,261,867 The majority of our cash equivalents at August 31, 2023 and November 30, 2022 were invested in interest-bearing bank deposit accounts. Capital Resources. Our notes payable consisted of the following (in thousands): August 31, 2023 November 30, 2022 Variance Credit Facility $ — $ 150,000 $ (150,000) Term Loan 357,988 357,485 503 Senior notes 1,327,507 1,326,266 1,241 Mortgages and land contracts due to land sellers and other loans 4,463 4,760 (297) Total $ 1,689,958 $ 1,838,511 $ (148,553) 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). LOC Facility . 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, 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 $1.32 billion and $1.27 billion of performance bonds outstanding at August 31, 2023 and November 30, 2022, respectively. Unsecured Revolving Credit Facility . We have a $1.09 billion Credit Facility that will mature on February 18, 2027. The Credit Facility contains an uncommitted accordion feature under which its aggregate principal amount of available loans can be increased to a maximum of $1.29 billion under certain conditions, including obtaining additional bank commitments. The amount of the Credit Facility available for cash borrowings and the issuance of letters of credit depends on the total cash borrowings and letters of credit outstanding under the Credit Facility and the maximum available amount under the terms of the Credit Facility. As of August 31, 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, 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 38 Loan and can differ in certain respects from comparable GAAP or other commonly used terms. The financial covenant requirements under the Credit Facility and the Term Loan are set forth below: • Consolidated tangible net worth – We must maintain a consolidated tangible net worth at the end of any fiscal quarter greater than or equal to the sum of (a) $2.09 billion, plus (b) an amount equal to 50% of the aggregate of the cumulative consolidated net income for each fiscal quarter commencing after November 30, 2021 and ending as of the last day of such fiscal quarter (though there is no reduction if there is a consolidated net loss in any fiscal quarter), plus (c) an amount equal to 50% of the cumulative net proceeds we receive from the issuance of our capital stock after November 30, 2021. • Leverage Ratio – We must also maintain a Leverage Ratio of less than or equal to .60 at the end of each fiscal quarter. The Leverage Ratio is calculated as the ratio of our consolidated total indebtedness to the sum of consolidated total indebtedness and consolidated tangible net worth, all as defined under the Credit Facility. • Interest Coverage Ratio or liquidity – We are also required to maintain either (a) an Interest Coverage Ratio of greater than or equal to 1.50 at the end of each fiscal quarter; or (b) a minimum level of liquidity, but not both. The Interest Coverage Ratio is the ratio of our consolidated adjusted EBITDA to consolidated interest incurred, each as defined under the Credit Facility and the Term Loan, in each case for the previous 12 months. Our minimum liquidity is required to be greater than or equal to consolidated interest incurred, as defined under the Credit Facility and the Term Loan, for the four most recently ended fiscal quarters in the aggregate. In addition, under the Credit Facility and the Term Loan, our equity investments in joint ventures and non-guarantor subsidiaries and other unconsolidated entities as of the end of each fiscal quarter cannot exceed the sum of (a) $104.8 million and (b) 20% of consolidated tangible net worth. Further, for so long as we do not hold an investment grade rating, as defined under the Credit Facility and the Term Loan, the Credit Facility and the Term Loan do not permit our borrowing base indebtedness, which, subject to certain exceptions, is the aggregate principal amount of our and certain of our subsidiaries’ outstanding indebtedness for borrowed money and non-collateralized financial letters of credit, to be greater than our borrowing base (a measure relating to our inventory and unrestricted cash assets). The covenants and other requirements under the Credit Facility and the Term Loan represent the most restrictive covenants that we are subject to with respect to our notes payable. The following table summarizes the financial covenants and other requirements under the Credit Facility and the Term Loan, and our actual levels or ratios (as applicable) with respect to those covenants and other requirements, in each case as of August 31, 2023: Financial Covenants and Other Requirements Covenant Requirement Actual Consolidated tangible net worth > $2.72 billion $3.79 billion Leverage Ratio < .600 .311 Interest Coverage Ratio (a) > 1.500 9.905 Minimum liquidity (a) > $104.2 million $612.1 million Investments in joint ventures and non-guarantor subsidiaries < $862.5 million $318.9 million Borrowing base in excess of borrowing base indebtedness (as defined) n/a $2.76 billion (a) Under the terms of the Credit Facility and the Term Loan, we are required to maintain either a minimum Interest Coverage Ratio or a minimum level of liquidity. The indenture governing our senior notes does not contain any financial covenants. Subject to specified exceptions, the indenture contains certain restrictive covenants that, among other things, limit our ability to incur secured indebtedness, or engage in sale-leaseback transactions involving property above a certain specified value. In addition, the indenture contains certain limitations related to mergers, consolidations, and sales of assets. As of August 31, 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 39 the Term Loan exists at the time of any such payment, or if any such payment would result in such a default (other than dividends paid within 60 days after declaration, if there was no default at the time of declaration). Depending on available terms, we finance certain land acquisitions with purchase-money financing from land sellers or with other forms of financing from third parties. At August 31, 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 . We have a $360.0 million Term Loan with the lenders party thereto that will mature on August 25, 2026, or earlier if we secure borrowings under the Credit Facility without similarly securing the Term Loan (subject to certain exceptions). The Term Loan is further described in Note 14 – Notes Payable in the Notes to Consolidated Financial Statements in this report. Credit Ratings. Our credit ratings are periodically reviewed by rating agencies. In April 2023, S&P Global reaffirmed our BB credit rating and changed its rating outlook to stable from positive. Consolidated Cash Flows . The following table presents a summary of net cash provided by (used in) our operating, investing and financing activities (in thousands): Nine Months Ended August 31, 2023 2022 Net cash provided by (used in): Operating activities $ 772,523 $ (223,999) Investing activities (44,773) (54,120) Financing activities (445,551) 183,240 Net increase (decrease) in cash and cash equivalents $ 282,199 $ (94,879) Operating Activities . 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 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 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 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 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. Dividends. 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 40 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. 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 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. The amounts involved in these transactions, if any, may be material. In addition, as necessary or desirable, we may adjust or amend the terms of and/or expand the capacity of the Credit Facility or the LOC Facility, or enter into additional letter of credit facilities, or other similar facility arrangements, in each case with the same or other financial institutions, or allow any such facilities 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, 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 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. Our other subsidiaries, including all of our subsidiaries associated with our financial services operations, do not guarantee any such indebtedness (collectively, “Non-Guarantor Subsidiaries”), although we may cause a Non-Guarantor Subsidiary to become a Guarantor Subsidiary if we believe it to be in our or the relevant subsidiary’s best interest. See Note 14 – Notes Payable in the Notes to Consolidated Financial Statements in this report for additional information regarding the terms of our senior notes, the Credit Facility and the Term Loan. The guarantees are full and unconditional, and the Guarantor Subsidiaries are 100% owned by us. The guarantees are senior unsecured obligations of each of the Guarantor Subsidiaries and rank equally in right of payment with all unsecured and unsubordinated indebtedness and guarantees of such Guarantor Subsidiaries. The guarantees are effectively subordinated to any secured indebtedness of such Guarantor Subsidiaries to the extent of the value of the assets securing such indebtedness, and structurally subordinated to indebtedness and other liabilities of Non-Guarantor Subsidiaries. Pursuant to the terms of the indenture governing the senior notes and the terms of the Credit Facility and the Term Loan, if any of the Guarantor Subsidiaries ceases to be a “significant subsidiary” as defined by Rule 1-02 of Regulation S-X using a 5% rather than a 10% threshold (provided that the assets of our Non-Guarantor Subsidiaries do not in the aggregate exceed 10% of an adjusted measure of our consolidated total assets), it will be automatically and unconditionally released and discharged from its guaranty of the senior notes, the Credit Facility and the Term Loan so long as all guarantees by such Guarantor Subsidiary of any other of our or our subsidiaries’ indebtedness are terminated at or prior to the time of such release. The following tables present summarized financial information for KB Home and the Guarantor Subsidiaries on a combined basis, excluding unconsolidated joint ventures and after the elimination of (a) intercompany transactions and balances between KB Home and the Guarantor Subsidiaries and (b) equity in earnings from and investments in the Non-Guarantor Subsidiaries. See Note 9 – Investments in Unconsolidated Joint Ventures in the Notes to Consolidated Financial Statements in this report for additional information regarding our unconsolidated joint ventures. 41 August 31, 2023 November 30, 2022 Summarized Balance Sheet Data (in thousands) Assets Cash $ 588,058 $ 265,916 Inventories 4,701,567 5,118,252 Amounts due from Non-Guarantor Subsidiaries 509,557 403,249 Total assets 6,404,654 6,404,755 Liabilities and Stockholders’ Equity Notes payable $ 1,689,958 $ 1,836,001 Amounts due to Non-Guarantor Subsidiaries 323,176 283,280 Total liabilities 2,837,029 2,977,348 Stockholders’ equity 3,567,625 3,427,407 Nine Months Ended August 31, 2023 Summarized Statement of Operations Data (in thousands) Revenues $ 4,450,829 Construction and land costs (3,487,808) Selling, general and administrative expenses (454,057) Interest income from Non-Guarantor Subsidiaries 20,163 Pretax income 536,075 Net income 411,975 Critical Accounting Policies and Estimates The preparation of our consolidated financial statements requires the use of judgment in the application of accounting policies and estimates of uncertain matters. There have been no significant changes to our critical accounting policies and estimates during the nine months ended August 31, 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. Outlook 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, 42 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. 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. 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, and shifts in demand arising from, among other things, additional increases in mortgage interest rates and/or softening economic conditions. 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 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 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. • We expect our housing gross profit margin to be approximately 21.3%, assuming no inventory-related charges, compared to 24.8% for 2022. • We expect our selling, general and administrative expenses as a percentage of housing revenues to be about 10.0%, compared to 9.2% in the prior year. • We expect the effective tax rate will be approximately 23%, compared to approximately 24% for 2022. 43 • 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 persist to a certain degree in the 2023 fourth quarter. 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. Forward-looking statements are based on our current expectations and projections about future events and are subject to risks, uncertainties, and assumptions about our operations, economic and market factors, and the homebuilding industry, among other things. These statements are not guarantees of future performance, and we have no specific policy or intention to update these statements. If we update or revise any such statement(s), no assumption should be made that we will further update or revise that statement(s) or update or revise any other such statement(s). In addition, forward-looking and other statements in this report and in other public or oral disclosures that express or contain opinions, views or assumptions about market or economic conditions; the success, performance, effectiveness and/or relative positioning of our strategies, initiatives or operational activities; and other matters, may be based in whole or in part on general observations of our management, limited or anecdotal evidence and/or business or industry experience without in-depth or any particular empirical investigation, inquiry or analysis. Actual events and results may differ materially from those expressed or forecasted in forward-looking statements due to a number of factors. The most important risk factors that could cause our actual performance and future events and actions to differ materially from such forward-looking statements include, but are not limited to, the following: • general economic, employment and business conditions; • population growth, household formations and demographic trends; • conditions in the capital, credit and financial markets; • our ability to access external financing sources and raise capital through the issuance of common stock, debt or other securities, and/or project financing, on favorable terms; 44 • the execution of any securities repurchases pursuant to our board of directors’ authorization; • material and trade costs and availability, including building materials and appliances, and delays related to state and municipal construction, permitting, inspection and utility processes, which have been disrupted by key equipment shortages; • consumer and producer price inflation; • changes in interest rates, including those set by the Federal Reserve , 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; • our compliance with the terms of the Credit Facility and the Term Loan; • the ability and willingness of the applicable lenders and financial institutions, or any substitute or additional lenders and financial institutions, to meet their commitments or fund borrowings, extend credit or provide payment guarantees to or for us under the Credit Facility or LOC Facility; • volatility in the market price of our common stock; • home selling prices, including our homes’ selling prices, being unaffordable relative to consumer incomes; • weak or declining consumer confidence, either generally or specifically with respect to purchasing homes; • competition from other sellers of new and resale homes; • weather events, significant natural disasters and other climate and environmental factors, 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 (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 thereto; • changes in U.S. trade policies, including the imposition of tariffs and duties on homebuilding materials and products, and related trade disputes with and retaliatory measures taken by other countries; • disruptions in world and regional trade flows, economic activity and supply chains due to the military conflict in Ukraine, including those stemming from wide-ranging sanctions the U.S. and other countries have imposed or may further impose on Russian business sectors, financial organizations, individuals and raw materials, the impact of which may, among other things, increase our operational costs, 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; • the availability and cost of land in desirable areas and our ability to timely and efficiently develop acquired land parcels and open new home communities; • impairment, land option contract abandonment or other inventory-related charges, including any stemming from decreases in the value of our land assets; • our warranty claims experience with respect to homes previously delivered and actual warranty costs incurred; • costs and/or charges arising from regulatory compliance requirements or from legal, arbitral or regulatory proceedings, investigations, claims or settlements, including unfavorable outcomes in any such matters resulting in actual or potential monetary damage awards, penalties, fines or other direct or indirect payments, or injunctions, consent decrees or other voluntary or involuntary restrictions or adjustments to our business operations or practices that are beyond our current expectations and/or accruals; 45 • our ability to use/realize the net deferred tax assets we have generated; • our ability to successfully implement our current and planned strategies and initiatives related to our product, geographic and market positioning, gaining share and scale in our served markets and in entering into new markets; • our operational and investment concentration in markets in California; • consumer interest in our new home communities and products, particularly from first-time homebuyers and higher-income consumers; • our ability to generate orders and convert our backlog of orders to home deliveries and revenues, particularly in key markets in California; • our ability to successfully implement our business strategies and achieve any associated financial and operational targets and objectives, including those discussed in this report or in any of our other public filings, presentations or disclosures; • income tax expense volatility associated with stock-based compensation; • the ability of our homebuyers to obtain 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; • the performance of mortgage lenders to our homebuyers; • the performance of KBHS; • the ability and willingness of lenders and financial institutions to extend credit facilities to KBHS to fund its originated mortgage loans; • information technology failures and data security breaches; • an epidemic, 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; and • other events outside of our control. Please see our Annual Report on Form 10-K for the year ended November 30, 2022 and other filings with the SEC for a further discussion of these and other risks and uncertainties applicable to our business.