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 February 29, 2024 February 28, 2023 Variance Revenues: Homebuilding $ 1,461,698 $ 1,378,537 6 % Financial services 6,068 5,777 5 Total revenues $ 1,467,766 $ 1,384,314 6 % Pretax income: Homebuilding $ 163,088 $ 156,199 4 % Financial services 11,577 6,001 93 Total pretax income 174,665 162,200 8 Income tax expense (36,000) (36,700) 2 Net income $ 138,665 $ 125,500 10 % Diluted earnings per share $ 1.76 $ 1.45 21 % We generated solid results in our 2024 first quarter, including year-over-year expansion in deliveries, revenues, net income and diluted earnings per share, and a significant increase in our net orders. This performance principally reflected healthy housing market conditions, including a decline in mortgage interest rates since the 2023 fourth quarter, favorable demographic trends, the long-term underproduction of new homes relative to population growth, constrained resale home inventory and demand for homes at our price points. We also continued to employ targeted sales strategies during the quarter, including homebuyer concessions (particularly, mortgage-related concessions such as interest rate buydown or lock programs), to address homebuyer affordability challenges and help drive order activity and minimize cancellations. In this environment, our net orders for the 2024 first quarter rose 55% from the year-earlier quarter, driven by a higher monthly net order pace per community of 4.6, which increased from 2.8 a year ago, partly offset by a 4% year-over-year decrease in our average community count. Net order value for the 2024 first quarter improved 58% year over year to $1.58 billion, reflecting the growth in net orders and a higher average selling price of those orders. Homebuilding revenues for the three months ended February 29, 2024 were generated from housing revenues and $3.6 million of land sales. Housing revenues of $1.46 billion grew 6% from the year-earlier quarter due to a 9% increase in the number of homes delivered to 3,037, partly offset by a 3% decline in their average selling price to $480,100. Approximately 50% of our homes delivered in the 2024 first quarter were to first-time homebuyers. Homebuilding operating income for the three months ended February 29, 2024 totaled $157.7 million, up slightly from $156.5 million for the year-earlier quarter, and as a percentage of revenues, was 10.8%, compared to 11.4%. Our homebuilding operating income margin for the 2024 first quarter mainly reflected an increase in selling, general and administrative expenses as a percentage of housing revenues due to higher costs associated with a planned increase in our community count during the year as we position our operations for growth. Our housing gross profit margin of 21.5% for the 2024 first quarter was even with the year-earlier quarter. Net income and diluted earnings per share for the three months ended February 29, 2024 increased 10% and 21%, respectively, year over year. Our diluted earnings per share for the 2024 first quarter reflected the favorable impact of our common stock repurchases over the past several quarters. During the 2024 first 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. The significant supply chain disruptions we experienced in recent years have largely subsided, and together with our ongoing initiative to simplify our product offerings, we have maintained the improvement in our construction cycle times that we achieved last year. Reflecting our improved build times, our homes delivered as a percentage of beginning backlog increased to 55% for the 2024 first quarter, from 36% for the year-earlier quarter. Though we are encouraged by our progress, there are some ongoing supply chain-related challenges that could 25 continue to negatively affect our land development and home construction activities, and it is possible they may worsen during this year and/or in later periods. We believe our strong balance sheet and liquidity position provide us with the flexibility to operate effectively through evolving market conditions in 2024 and pursue our priorities of investing in land and land development to support future growth and returning capital to our stockholders. In the 2024 first quarter, we increased our investments in land and land development to $587.1 million, up 60% from the year-earlier period. We also repurchased approximately 826,663 shares of our common stock during the quarter at a total cost of $50.0 million. With our strong operating cash flow, we ended the 2024 first quarter with total liquidity of $1.75 billion, including cash and cash equivalents and $1.08 billion of available capacity under the Credit Facility. We had no cash borrowings outstanding under the Credit Facility at February 29, 2024. Although our ending backlog value at February 29, 2024 decreased 16% year over year to approximately $2.79 billion, we believe we are well-positioned to achieve solid results for the 2024 second quarter and full year, as described below under “Outlook.” On a sequential basis, our ending backlog value increased 5% from the 2023 fourth quarter. 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 February 29, 2024 February 28, 2023 Revenues: Housing $ 1,458,126 $ 1,378,537 Land 3,572 — Total 1,461,698 1,378,537 Costs and expenses: Construction and land costs Housing (1,144,427) (1,082,821) Land (2,101) — Total (1,146,528) (1,082,821) Selling, general and administrative expenses (157,494) (139,227) Total (1,304,022) (1,222,048) Operating income 157,676 156,489 Interest income 5,857 467 Equity in loss of unconsolidated joint ventures (445) (757) Homebuilding pretax income $ 163,088 $ 156,199 Homes delivered 3,037 2,788 Average selling price $ 480,100 $ 494,500 Housing gross profit margin as a percentage of housing revenues 21.5 % 21.5 % Adjusted housing gross profit margin as a percentage of housing revenues 21.6 % 21.8 % Selling, general and administrative expenses as a percentage of housing revenues 10.8 % 10.1 % Operating income as a percentage of revenues 10.8 % 11.4 % Revenues . Homebuilding revenues for the three months ended February 29, 2024 were comprised of housing revenues and land sale revenues. In the three months ended February 28, 2023, revenues were generated solely from housing operations. Housing revenues for the 2024 first quarter grew 6% from the year-earlier quarter, driven by a 9% increase in the number of homes delivered, partly offset by a 3% decrease in their overall average selling price. The year-over-year growth in the number of homes delivered reflected increases of 5%, 34% and 17% in our West Coast, Southwest and Southeast homebuilding reporting segments, respectively, partly offset by a 7% decrease in our Central segment. The lower overall average selling price primarily reflected product and geographic mix factors, partly offset by a year-over-year decrease in homebuyer concessions we selectively extended to buyers within backlog prior to delivery in conjunction with our targeted sales strategies. 26 Land sale revenues for the quarter ended February 29, 2024 totaled $3.6 million. There were no land sales in the year-earlier quarter. Generally, land sale revenues fluctuate with our decisions to maintain or decrease our land ownership position in certain markets based upon the volume of our holdings, our business strategy, the strength and number of developers and other land buyers in particular markets at given points in time, the availability of opportunities to sell land at acceptable prices and prevailing market conditions. Operating Income . Our homebuilding operating income for the three months ended February 29, 2024 was up slightly year over year, reflecting higher housing gross profits and land sale profits, partly offset by higher selling, general and administrative expenses. Operating income for the 2024 first quarter included inventory-related charges of $1.3 million, compared to $5.3 million in the year-earlier quarter. As a percentage of revenues, our operating income for the three months ended February 29, 2024 was 10.8%, compared to 11.4% for the corresponding 2023 period, mainly due to 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 10.9% for the 2024 first quarter from 11.7% for the year-earlier quarter. • Housing Gross Profits – Housing gross profits of $313.7 million for the three months ended February 29, 2024 increased 6% from $295.7 million for the year-earlier period, reflecting an increase in housing revenues with our housing gross profit margin of 21.5% for the 2024 first quarter remaining even with the 2023 first quarter. The housing gross profit margin mainly reflected higher relative construction and land costs and a shift in product and geographic mix, offset by decreases in inventory-related charges and homebuyer concessions. 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 1.9% for the three months ended February 29, 2024 and February 28, 2023, respectively. Excluding the inventory-related charges associated with housing operations of $1.3 million in the current quarter and $5.3 million in the year-earlier quarter, our adjusted housing gross profit margin for the 2024 first quarter decreased 20 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 – Land sale profits totaled $1.5 million for the three months ended February 29, 2024. There were no land sales in the year-earlier period. • Selling, General and Administrative Expenses – The following table presents the components of our selling, general and administrative expenses (dollars in thousands): Three Months Ended February 29, 2024 % of Housing Revenues February 28, 2023 % of Housing Revenues Marketing expenses $ 36,360 2.5 % $ 33,138 2.4 % Commission expenses (a) 51,830 3.6 46,487 3.4 General and administrative expenses 69,304 4.7 59,602 4.3 Total $ 157,494 10.8 % $ 139,227 10.1 % (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 February 29, 2024 increased 13% from the year-earlier quarter. As a percentage of housing revenues, our selling, general and administrative expenses for the 2024 first quarter increased 70 basis points, mainly reflecting higher costs including marketing, advertising and other expenses associated with a planned increase in our community count during the year as we position our operations for growth, and an increase in sales commissions. We also invested in personnel and other resources in alignment with the expected larger scale of our business. Interest Income/Expense . Interest income, which is generated from short-term investments, increased to $5.9 million for the three months ended February 29, 2024, compared to $.5 million for the year-earlier quarter, reflecting our higher average balance of cash equivalents and a higher interest rate in the 2024 period. Generally, increases and decreases in interest income are attributable to changes in the interest-bearing average balances of short-term investments and fluctuations in interest rates. We incur interest principally from our borrowings to finance land acquisitions, land development, home construction and other operating and capital needs. All interest incurred during the three-month periods ended February 29, 2024 and February 28, 27 2023 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 $.4 million and $.8 million for the three months ended February 29, 2024 and February 28, 2023, respectively. 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. 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 February 29, 2024 February 28, 2023 Net orders 3,323 2,142 Net order value (a) $ 1,582,191 $ 1,001,868 Cancellation rate (b) 14 % 36 % Ending backlog — homes 5,796 7,016 Ending backlog — value $ 2,791,744 $ 3,314,890 Ending community count 238 256 Average community count 240 251 (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 2024 first quarter rose 55% from the year-earlier quarter, reflecting improved demand and a lower cancellation rate. The pace of monthly net orders per community increased to 4.6 in the 2024 first quarter, compared to 2.8 in the corresponding 2023 quarter. We had positive momentum throughout the 2024 first quarter, with monthly net orders increasing sequentially as the quarter progressed. The value of our net orders grew 58% 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 $476,100. In the 2024 first quarter, the year-over-year growth in our overall net order value reflected increases in all four homebuilding reporting segments, ranging from 18% in our West Coast segment to 161% in our Central segment. Our cancellation rate as a percentage of gross orders for the three months ended February 29, 2024 improved from the year-earlier period, reflecting stronger housing market demand in the current period. On a sequential basis, the cancellation rate for the 2024 first quarter improved from 28% in the 2023 fourth quarter. Backlog . The number of homes in our backlog and our backlog value at February 29, 2024 decreased 17% and 16%, respectively, from February 28, 2023. The year-over-year decline in our overall backlog value at February 29, 2024 reflected decreases in three of our homebuilding reporting segments, ranging from 10% in our Southeast segment to 53% in our Central segment, partly offset by a 20% increase in our West Coast segment. On a sequential basis, the number of homes in our ending backlog and our backlog value each increased 5% from the previous quarter. 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 February 29, 2024 decreased 4% from the year-earlier period. Our ending community count for the 2024 first quarter was down 7% year over year, as the number of communities selling out exceeded the number of new community openings over the past twelve months. On a sequential basis, our average community count for the 2024 first quarter expanded 2%. In order to drive future community count growth, we increased our investments in land and land development on a year-over-year basis in the 2024 28 first quarter, and expect to increase our investments on a year-over-year basis in the remaining 2024 quarters, as discussed below under “Liquidity and Capital Resources.” 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 Homes Delivered Net Orders Cancellation Rates Segment February 29, 2024 February 28, 2023 February 29, 2024 February 28, 2023 February 29, 2024 February 28, 2023 West Coast 828 786 950 857 13 % 20 % Southwest 717 536 698 470 10 26 Central 870 935 1,017 411 15 58 Southeast 622 531 658 404 20 39 Total 3,037 2,788 3,323 2,142 14 % 36 % Net Order Value Average Community Count Segment February 29, 2024 February 28, 2023 Variance February 29, 2024 February 28, 2023 Variance West Coast $ 633,400 $ 535,539 18 % 73 80 (9) % Southwest 314,863 177,392 77 44 45 (2) Central 363,923 139,468 161 77 80 (4) Southeast 270,005 149,469 81 46 46 — Total $ 1,582,191 $ 1,001,868 58 % 240 251 (4) % Backlog – Homes Backlog – Value Segment February 29, 2024 February 28, 2023 Variance February 29, 2024 February 28, 2023 Variance West Coast 1,667 1,358 23 % $ 1,100,889 $ 918,535 20 % Southwest 1,360 1,626 (16) 608,455 686,101 (11) Central 1,414 2,465 (43) 505,194 1,069,380 (53) Southeast 1,355 1,567 (14) 577,206 640,874 (10) Total 5,796 7,016 (17) % $ 2,791,744 $ 3,314,890 (16) % 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® business 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. 29 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 $35.1 million and $30.2 million in the three months ended February 29, 2024 and February 28, 2023, respectively. The financial results of our homebuilding reporting segments for the three-month periods ended February 29, 2024 and February 28, 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. West Coast . The following table presents financial information related to our West Coast segment (dollars in thousands, except average selling price): Three Months Ended February 29, 2024 February 28, 2023 Variance Revenues $ 558,302 $ 540,019 3 % Construction and land costs (447,433) (441,186) (1) Selling, general and administrative expenses (44,738) (38,613) (16) Operating income $ 66,131 $ 60,220 10 % Homes delivered 828 786 5 % Average selling price $ 673,800 $ 687,000 (2) % Operating income as a percentage of revenues 11.8 % 11.2 % 60 bps In the 2024 first quarter, this segment’s revenues were comprised of housing revenues and land sale revenues. In the 2023 first quarter, revenues were generated solely from housing operations. Housing revenues for the three months ended February 29, 2024 grew 3% from the year-earlier period to $557.9 million due to an increase in the number of homes delivered, partially offset by a decrease in their average selling price. Operating income for the three months ended February 29, 2024 was up year over year, reflecting higher housing gross profits, partly offset by increased selling, general and administrative expenses. Operating income as a percentage of revenues for the 2024 first quarter increased from the year-earlier quarter, primarily due to a 150 basis-point increase in the housing gross profit margin to 19.8%, partly offset by a 90 basis-point increase in selling, general and administrative expenses as a percentage of housing revenues to 8.0%. The year-over-year expansion in the housing gross profit margin for the three months ended February 29, 2024 mainly reflected lower relative construction and land costs. In the three months ended February 29, 2024, inventory-related charges associated with housing operations were $1.3 million, compared to $.9 million in the year-earlier period. The year-over-year increase in selling, general and administrative expenses as a percentage of housing revenues for the three months ended February 29, 2024 reflected higher costs including marketing and other expenses associated with a planned increase in our community count in this segment during the year, and an increase in sales commissions. Southwest . The following table presents financial information related to our Southwest segment (dollars in thousands, except average selling price): Three Months Ended February 29, 2024 February 28, 2023 Variance Revenues $ 323,125 $ 239,587 35 % Construction and land costs (244,491) (177,003) (38) Selling, general and administrative expenses (22,870) (18,466) (24) Operating income $ 55,764 $ 44,118 26 % Homes delivered 717 536 34 % Average selling price $ 450,700 $ 447,000 1 % Operating income as a percentage of revenues 17.3 % 18.4 % (110) bps The year-over-year growth in this segment’s revenues for the three months ended February 29, 2024 reflected increases in both the number of homes delivered and their average selling price. Operating income for the three months ended February 29, 2024 rose from the corresponding year-earlier period due to higher housing gross profits, partly offset by increased selling, general 30 and administrative expenses. As a percentage of revenues, this segment’s operating income for the 2024 first quarter declined from the year-earlier quarter, reflecting a 180 basis-point decrease in the housing gross profit margin to 24.3%, partly offset by a 70 basis-point decrease in selling, general and administrative expenses as a percentage of housing revenues to 7.0%. The year-over-year decline in the housing gross profit margin for the three months ended February 29, 2024 was mainly due to higher construction and land costs and a product and geographic mix shift of homes delivered, partly offset by a decrease in homebuyer concessions and increased operating leverage from higher housing revenues. The year-over-year decrease in selling, general and administrative expenses as a percentage of housing revenues for the three months ended February 29, 2024 primarily reflected increased operating leverage from higher housing revenues, partly offset by higher costs including marketing and other expenses associated with a planned increase in our community count in this segment during the year, and an increase in sales commissions. Central . The following table presents financial information related to our Central segment (dollars in thousands, except average selling price): Three Months Ended February 29, 2024 February 28, 2023 Variance Revenues $ 320,484 $ 389,951 (18) % Construction and land costs (249,840) (297,286) 16 Selling, general and administrative expenses (32,073) (33,839) 5 Operating income $ 38,571 $ 58,826 (34) % Homes delivered 870 935 (7) % Average selling price $ 364,700 $ 417,100 (13) % Operating income as a percentage of revenues 12.0 % 15.1 % (310) bps In the 2024 first quarter, this segment’s revenues were comprised of housing revenues and land sale revenues. In the 2023 first quarter, revenues were generated solely from housing operations. Housing revenues for the three months ended February 29, 2024 were $317.3 million, down 19% from the year-earlier period, reflecting decreases in both the number of homes delivered and their average selling price. Operating income for the 2024 first quarter declined from the year-earlier quarter due to lower housing gross profits, partly offset by lower selling, general and administrative expenses and current-quarter land sale profits of $1.1 million. This segment’s operating income as a percentage of revenues for the three months ended February 29, 2024 was down from the year-earlier period primarily due to a 190 basis-point decline in the housing gross profit margin to 21.9% and a 140 basis-point increase in selling, general and administrative expenses as a percentage of housing revenues to 10.1%. The year-over-year decrease in the housing gross profit margin for the three months ended February 29, 2024 primarily reflected higher relative construction and land costs, a product and geographic mix shift of homes delivered, an increase in homebuyer concessions and reduced operating leverage from lower housing revenues. The year-over-year increase in selling, general and administrative expenses as a percentage of housing revenues for the three months ended February 29, 2024 was primarily due to higher costs including marketing, advertising and other expenses associated with a planned increase in our community count in this segment during the year, an increase in sales commissions and reduced operating leverage from lower housing revenues. Southeast . The following table presents financial information related to our Southeast segment (dollars in thousands, except average selling price): Three Months Ended February 29, 2024 February 28, 2023 Variance Revenues $ 259,787 $ 208,980 24 % Construction and land costs (203,791) (165,056) (23) Selling, general and administrative expenses (23,731) (20,399) (16) Operating income $ 32,265 $ 23,525 37 % Homes delivered 622 531 17 % Average selling price $ 417,700 $ 393,600 6 % Operating income as a percentage of revenues 12.4 % 11.3 % 110 bps 31 This segment’s revenues for the three months ended February 29, 2024 grew year over year as a result of increases in both the number of homes delivered and their average selling price. Operating income for the 2024 first quarter increased from the year-earlier quarter, reflecting higher housing gross profits, partly offset by higher selling, general and administrative expenses. As a percentage of revenues, operating income for the 2024 first quarter increased from the year-earlier quarter mainly due to a 60 basis-point increase in the housing gross profit margin to 21.6% and a 50 basis-point improvement in selling, general and administrative expenses as a percentage of housing revenues to 9.2%. The year-over-year expansion in the housing gross profit margin for the three months ended February 29, 2024 primarily reflected the absence of inventory-related charges in the current quarter, compared to $3.5 million of such charges in the year-earlier period, a decrease in homebuyer concessions and improved operating leverage from higher housing revenues, partly offset by higher construction and land costs. The year-over-year decrease in selling, general and administrative expenses as a percentage of housing revenues for the three months ended February 29, 2024 was primarily due to improved operating leverage from higher housing revenues, partly offset by higher costs including marketing, advertising and other expenses associated with a planned increase in our community count in this segment during the year, and an increase in sales commissions. 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 February 29, 2024 February 28, 2023 Revenues $ 6,068 $ 5,777 Expenses (1,546) (1,358) Equity in income of unconsolidated joint venture 7,055 1,582 Pretax income $ 11,577 $ 6,001 Total originations (a): Loans 2,146 1,816 Principal $ 840,566 $ 726,665 Percentage of homebuyers using KBHS 85 % 79 % Average FICO score 743 733 Loans sold (a): Loans sold to GR Alliance 2,239 1,828 Principal $ 886,241 $ 741,468 Loans sold to third parties 37 91 Principal $ 14,153 $ 32,242 (a) Loan originations and sales occurred within KBHS. Revenues . Financial services revenues for the three months ended February 29, 2024 rose from the year-earlier period due to increases in both title services revenues and insurance commissions. Pretax income. Financial services pretax income for the three months ended February 29, 2024 grew 93% from the year-earlier period, mainly due to an increase in the equity in income of our unconsolidated joint venture, KBHS. In the 2024 first quarter, the equity in income of our unconsolidated joint venture increased to $7.1 million, from $1.6 million in the year-earlier quarter, due to an increase in KBHS’ income. The year-over-year increase in KBHS’ income was due to gains of $2.9 million in the fair value of IRLCs in the current quarter, compared to $1.5 million of losses in the fair value of IRLCs in the year-earlier quarter. Also contributing to the year-over-year increase in KBHS’ income was the higher principal amount of loans originated, as more homes were delivered in the current period and 85% of the buyers financing their home purchases used KBHS, up from 79% in the year-earlier quarter. 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. 32 INCOME TAXES Income Tax Expense. Our income tax expense and effective tax rates were as follows (dollars in thousands): Three Months Ended February 29, 2024 February 28, 2023 Income tax expense $ 36,000 $ 36,700 Effective tax rate 20.6 % 22.6 % Our effective tax rate for the three months ended February 29, 2024 decreased from the year-earlier period, mainly due to a $3.4 million increase in excess tax benefits related to stock-based compensation and a $.6 million decrease in nondeductible executive compensation expense, partly offset by a $1.6 million decrease in the Section 45L tax credits we recognized primarily from building energy-efficient homes. 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): Three Months Ended February 29, 2024 February 28, 2023 Housing revenues $ 1,458,126 $ 1,378,537 Housing construction and land costs (1,144,427) (1,082,821) Housing gross profits 313,699 295,716 Add: Inventory-related charges (a) 1,298 5,289 Adjusted housing gross profits $ 314,997 $ 301,005 Housing gross profit margin as a percentage of housing revenues 21.5 % 21.5 % Adjusted housing gross profit margin as a percentage of housing revenues 21.6 % 21.8 % (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. 33 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 2024 first quarter with total liquidity of $1.75 billion, including cash and cash equivalents and $1.08 billion of available capacity under the Credit Facility. Based on our financial position as of February 29, 2024, 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 . In the three months ended February 29, 2024, there have been no significant changes in our cash requirements from those reported in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section of our Annual Report on Form 10-K for the year ended November 30, 2023. Investments in Land and Land Development. Our investments in land and land development for the three months ended February 29, 2024 increased 60% to $587.1 million, compared to $367.0 million for the year-earlier period. Land acquisition expenditures, which are included in our investments in land and land development, increased to $214.4 million in the three months ended February 29, 2024, from $50.0 million in the corresponding period of 2023. Approximately 37% of our total investments for the three months ended February 29, 2024 related to land acquisitions, compared to approximately 14% in the prior-year period. While we made strategic investments in land and land development in each of our homebuilding reporting segments during the three months ended February 29, 2024 and February 28, 2023, approximately 50% and 53%, respectively, of these investments for each period were made in our West Coast homebuilding reporting segment. For the remainder of 2024, 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 on a year-over-year basis in the remaining 2024 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): February 29, 2024 November 30, 2023 Variance Segment Lots Carrying Value Lots Carrying Value Lots Carrying Value West Coast 17,926 $ 2,546,929 18,220 $ 2,455,336 (294) $ 91,593 Southwest 7,150 835,212 7,017 830,514 133 4,698 Central 16,559 905,498 17,328 942,168 (769) (36,670) Southeast 13,874 955,942 13,411 905,628 463 50,314 Total 55,509 $ 5,243,581 55,976 $ 5,133,646 (467) $ 109,935 34 The carrying value of lots we owned or controlled under land option contracts and other similar contracts at February 29, 2024 increased 2% from November 30, 2023, reflecting land investments during the three months ended February 29, 2024, partly offset by homes delivered and our abandonment of 1,439 previously controlled lots. The number of lots we owned or controlled as of February 29, 2024 was essentially even with November 30, 2023. The number of lots in inventory as of February 29, 2024 included 6,885 lots under contract where the associated deposits were refundable at our discretion, compared to 6,260 of such lots at November 30, 2023. Our lots controlled under land option contracts and other similar contracts as a percentage of total lots was 28% at February 29, 2024, compared to 27% at November 30, 2023. 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, if applicable, forfeit our deposits without further penalty or obligation to the sellers. If we were to acquire all the land we had under land option contracts and other similar contracts at February 29, 2024, we estimate the remaining purchase price to be paid would be as follows: 2024 – $596.8 million; 2025 – $354.4 million; 2026 – $206.8 million; 2027 – $59.5 million; 2028 – $63.9 million; and thereafter – $0. Liquidity. The table below summarizes our cash and cash equivalents, and total liquidity (in thousands): February 29, 2024 November 30, 2023 Cash and cash equivalents $ 668,084 $ 727,076 Credit Facility commitment 1,090,000 1,090,000 Letters of credit outstanding under the Credit Facility (6,650) (6,650) Credit Facility availability 1,083,350 1,083,350 Total liquidity $ 1,751,434 $ 1,810,426 Our cash equivalents at February 29, 2024 and November 30, 2023 were mainly invested in interest-bearing bank deposit accounts and money market funds. Capital Resources. Our notes payable consisted of the following (in thousands): February 29, 2024 November 30, 2023 Variance Term Loan $ 358,323 $ 358,156 $ 167 Senior notes 1,328,366 1,327,934 432 Mortgages and land contracts due to land sellers and other loans 6,040 3,808 2,232 Total $ 1,692,729 $ 1,689,898 $ 2,831 Our financial leverage, as measured by the ratio of debt to capital, was 30.4% at February 29, 2024, compared to 30.7% at November 30, 2023. On a year-over-year basis, our debt to capital ratio improved 220 basis points from 32.6%. 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, which expires on February 18, 2027, we may issue up to $75.0 million of letters of credit. As of February 29, 2024 and November 30, 2023, we had letters of credit outstanding under the LOC Facility of $25.5 million and $12.5 million, respectively. Performance Bonds . As discussed in Note 16 – Commitments and Contingencies in the Notes to Consolidated Financial Statements in this report, we had $1.30 billion and $1.32 billion of performance bonds outstanding at February 29, 2024 and November 30, 2023, respectively. 35 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 February 29, 2024, we had no cash borrowings and $6.7 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 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 and the Term Loan. • 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 February 29, 2024: Financial Covenants and Other Requirements Covenant Requirement Actual Consolidated tangible net worth > $2.87 billion $3.84 billion Leverage Ratio < .600 .308 Interest Coverage Ratio (a) > 1.500 10.661 Minimum liquidity (a) > $86.6 million $668.1 million Investments in joint ventures and non-guarantor subsidiaries < $873.1 million $359.1 million Borrowing base in excess of borrowing base indebtedness (as defined) n/a $2.82 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 36 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 February 29, 2024, 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, the LOC Facility and the mortgages and land contracts due to land sellers and other loans. Our ability to access the Credit Facility for cash borrowings and letters of credit and our ability to secure future debt financing depend, in part, on our ability to remain in such compliance. Our ability to access the Credit Facility’s full borrowing capacity, as well as the LOC Facility’s full issuance capacity, also depends on the ability and willingness of the applicable lenders and financial institutions, including any substitute or additional lenders and financial institutions, to meet their commitments to fund loans, extend credit or provide payment guarantees to or for us under those instruments. There are no agreements that restrict our payment of dividends other than the Credit Facility and the Term Loan, which would restrict our payment of certain dividends, such as cash dividends on our common stock, if a default under the Credit Facility or the Term Loan exists at the time of any such payment, or if any such payment would result in such a default (other than dividends paid within 60 days after declaration, if there was no default at the time of declaration). Depending on available terms, we finance certain land acquisitions with purchase-money financing from land sellers or with other forms of financing from third parties. At February 29, 2024, we had outstanding mortgages and land contracts due to land sellers and other loans payable in connection with such financing of $6.0 million, secured primarily by the underlying property, which had an aggregate carrying value of $19.6 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. Unconsolidated Joint Ventures. As discussed in Note 9 – Investments in Unconsolidated Joint Ventures in the Notes to Consolidated Financial Statements in this report, we have investments in unconsolidated joint ventures in various markets where our homebuilding operations are located. As of February 29, 2024, one of our unconsolidated joint ventures had borrowings outstanding under a revolving line of credit with a third-party lender and secured by the underlying property and related project assets. None of our other unconsolidated joint ventures had outstanding debt at February 29, 2024. Credit Ratings. Our credit ratings are periodically reviewed by rating agencies. In March 2024, S&P Global Ratings upgraded our corporate credit rating to BB+ from BB and maintained its rating outlook at stable. Consolidated Cash Flows . The following table presents a summary of net cash provided by (used in) our operating, investing and financing activities (in thousands): Three Months Ended February 29, 2024 February 28, 2023 Net cash provided by (used in): Operating activities $ 28,518 $ 93,917 Investing activities (12,592) (16,961) Financing activities (74,973) (146,327) Net decrease in cash and cash equivalents $ (59,047) $ (69,371) 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 three months ended February 29, 2024 mainly reflected net income of $138.7 million and a net decrease in receivables of $10.1 million, partly offset by a net increase in inventories of $107.5 million and a net decrease in accounts payable, accrued expenses and other liabilities of $38.5 million. In the three months ended February 28, 2023, our net cash provided by operating activities primarily reflected net income of $125.5 million and a net decrease in inventories of $101.3 million, partly offset by a net decrease in accounts payable, accrued expenses and other liabilities of $131.7 million and a net increase in receivables of $25.3 million. Investing Activities . In the three months ended February 29, 2024, our uses of cash included $9.5 million for net purchases of property and equipment and $3.1 million for contributions to unconsolidated joint ventures. In the three months ended February 28, 2023, the net cash used for investing activities reflected $13.2 million for contributions to unconsolidated joint 37 ventures and $8.8 million for net purchases of property and equipment. The cash used was partially offset by a $5.1 million return of investments in unconsolidated joint ventures. Financing Activities . In the three months ended February 29, 2024, our uses of cash included stock repurchases of $50.0 million, tax payments associated with stock-based compensation awards of $16.5 million, dividend payments on our common stock of $16.4 million, and payments on mortgages and land contracts due to land sellers and other loans of $.9 million. The cash used was partly offset by $8.8 million of issuances of common stock under employee stock plans. In the three months ended February 28, 2023, our uses of cash included stock repurchases of $75.0 million, net repayments under the Credit Facility of $50.0 million, dividend payments on our common stock of $12.5 million, tax payments associated with stock-based compensation awards of $9.7 million and payments on mortgages and land contracts due to land sellers and other loans of $.2 million. The cash used was partially offset by $1.1 million of issuances of common stock under employee stock plans. Dividends. In the 2024 first quarter, our board of directors declared, and we paid, a quarterly cash dividend on our common stock of $.20 per share. In the 2023 first quarter, our board of directors declared, and we paid, a quarterly cash dividend on our common stock of $.15 per share. The declaration and payment of future cash dividends on our common stock, whether at current levels or at all, are at the discretion of our board of directors and depend upon, among other things, our expected future earnings, cash flows, capital requirements, access to external financing, debt structure and any adjustments thereto, operational and financial investment strategy and general financial condition, as well as general business conditions. As of the date of this report, we believe we have adequate capital resources and sufficient access to external financing sources to satisfy our current and reasonably anticipated requirements for funds to conduct our operations and meet other needs in the ordinary course of our business. As 2024 progresses, we expect to use or redeploy our cash resources or cash borrowings under the Credit Facility primarily to position our operations for growth 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 intended uses of our cash resources or cash borrowings, and ability to engage in any of the transactions described in the foregoing two sentences, 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 February 29, 2024, 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. 38 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. February 29, 2024 November 30, 2023 Summarized Balance Sheet Data (in thousands) Assets Cash $ 631,841 $ 683,323 Inventories 4,692,961 4,599,468 Amounts due from Non-Guarantor Subsidiaries 532,770 534,865 Total assets 6,456,135 6,367,410 Liabilities and Stockholders’ Equity Notes payable $ 1,692,729 $ 1,689,898 Amounts due to Non-Guarantor Subsidiaries 348,623 338,390 Total liabilities 2,872,845 2,834,555 Stockholders’ equity 3,583,290 3,532,855 Three Months Ended February 29, 2024 Summarized Statement of Operations Data (in thousands) Revenues $ 1,330,420 Construction and land costs (1,041,327) Selling, general and administrative expenses (152,241) Interest income from Non-Guarantor Subsidiaries 7,097 Pretax income 149,575 Net income 118,275 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 three months ended February 29, 2024 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, 2023. Recent Accounting Pronouncements There are no recent accounting pronouncements that are expected to have a material impact on our consolidated financial statements. Outlook Since our 2023 fiscal year ended, housing demand has improved largely in conjunction with a decline in mortgage interest rates since the 2023 fourth quarter and has been supported by positive factors, such as favorable demographic trends, the long-term underproduction of new homes relative to population growth, constrained resale home inventory and demand for homes at our price points. Our 3,323 net orders for the 2024 first quarter were up 55% from the year-earlier quarter and we improved our pace to 4.6 monthly net orders per community, compared to 2.8 a year ago. This positive momentum in our net orders has continued into the 2024 second quarter to date and we believe we are well-positioned to capitalize on it given our commitment to offering homebuyers the ability to personalize their home, our well-designed products and attractive price points, as well as our expanding community count. At the same time, there is uncertainty regarding the near-term direction of mortgage interest rates, inflation, consumer confidence and the overall economy, and the degree to which these factors, individually or collectively, may impact housing affordability and demand for our homes in the remainder of 2024 and beyond. We plan to continue to focus on generating cash flows from our homebuilding operations and on balancing pace, price and 39 construction starts at each community to optimize our return on each inventory asset within its market context. We anticipate the pricing adjustments and other homebuyer concessions we have selectively extended to buyers since the 2022 second half will negatively impact the average selling price of homes delivered in the remainder of 2024. Our use of such concessions in the remaining quarters of 2024 will depend on, among other things, market dynamics, including mortgage interest rates and overall housing affordability, as well as community-specific considerations, including the size and construction stage of the backlog, net order pace and lots remaining available for sale. With our strong balance sheet and liquidity position, we believe we can operate effectively through evolving market conditions in 2024 and continue to prioritize investing in land acquisition and development to support future growth, as well as returning capital to our stockholders. While we expect our land acquisition activity to increase during the remainder of 2024 as compared to the corresponding period of 2023, our investments in land and land development will depend significantly on market conditions and available opportunities that meet our investment return standards. We ended the 2024 first quarter with $113.6 million remaining under our current board of directors share repurchase authorization. This provides us the opportunity to continue to repurchase our common stock in 2024, 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 conditions. 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 $2.79 billion at February 29, 2024, we believe we can achieve our projected results for 2024, subject to the factors and risks described in this report. Our present outlook for the 2024 second quarter and the 2024 full year as to certain metrics is as follows: 2024 Second Quarter • We expect to generate housing revenues in the range of $1.60 billion to $1.70 billion, compared to $1.76 billion for the corresponding 2023 period, and anticipate our average selling price to be approximately $483,000, compared to $479,500 in the year-earlier period. • We expect our homebuilding operating income margin will be in the range of 10.1% to 10.5%, assuming no inventory-related charges, compared to 11.7% for the year-earlier quarter. • We expect our housing gross profit margin will be in the range of 20.5% to 21.0%, assuming no inventory-related charges, compared to 21.4% for the corresponding 2023 quarter. • We expect our selling, general and administrative expenses as a percentage of housing revenues to be approximately 10.5%, compared to 9.6% in the 2023 second 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 around 250, a sequential increase of about 5%, and our average community count will be 244. 2024 Full Year • We expect our housing revenues to be in the range of $6.50 billion to $6.90 billion, an increase from $6.37 billion for 2023. • We expect our average selling price to be in the range of $480,000 to $490,000, compared to $481,300 for 2023. • We expect our homebuilding operating income margin as a percentage of revenues to be in the range of 10.9% to 11.3%, assuming no inventory-related charges, compared to 11.4% for 2023. • We expect our housing gross profit margin to be in the range of 21.0% to 21.4%, assuming no inventory-related charges, compared to 21.4% for 2023. • We expect our selling, general and administrative expenses as a percentage of housing revenues to be approximately 10.2%, compared to 9.9% for 2023. • We expect our effective tax rate to be approximately 23.0%, compared to 23.5% for 2023. 40 • We expect our ending community count to be about 260, up 7%, compared to 242 for 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 created significant and ongoing headwinds for the housing market, tempering consumer demand for homes and disrupting credit and lending markets. While the Federal Reserve is expected to lower interest rates in 2024, we cannot provide any assurance it will or that any interest rate reduction(s) will positively affect demand or our business, results of operations or consolidated financial statements. In addition, while we experienced improvement with respect to supply chain-related disruptions as described in this Management’s Discussion and Analysis of Financial Condition and Results of Operations, we believe they could persist to a certain degree during 2024. 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 2024 first quarter, should not be considered indicative of our future results on any metric or set of metrics, including, but not limited to, our net orders, backlog, revenues and returns. Forward-Looking Statements 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; • 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; 41 • changes in interest rates, including those set by the Federal Reserve , which the Federal Reserve has increased sharply over the past two years 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, such as the IRS’ recent guidance regarding heightened qualification requirements for federal tax credits for building energy-efficient homes; • 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 and other attacks in the Middle East region and military conflict in Ukraine, including those stemming from wide-ranging sanctions the U.S. and other countries have imposed or may further impose on Russian business sectors, financial organizations, individuals and raw materials, the impact of which may, among other things, increase our operational costs, exacerbate building materials and appliance shortages and/or reduce our revenues and earnings; • 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, including the costs to implement recent federal and state climate-related disclosure rules, 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; • 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; 42 • 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; • widespread protests and/or civil unrest, whether due to political events, social movements or other reasons; and • other events outside of our control. Please see our Annual Report on Form 10-K for the year ended November 30, 2023 and other filings with the SEC for a further discussion of these and other risks and uncertainties applicable to our business. Item 3. Quantitative and Qualitative Disclosures About Market Risk There have been no material changes in our market risk since November 30, 2023. For additional information regarding our market risk, refer to the “Quantitative and Qualitative Disclosures About Market Risk” section of our Annual Report on Form 10-K for the year ended November 30, 2023.