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, 2024 2023 Variance 2024 2023 Variance Revenues: Homebuilding $ 1,745,979 $ 1,579,719 11 % $ 4,909,189 $ 4,716,102 4 % Financial services 6,629 7,292 (9) 20,998 20,539 2 Total revenues $ 1,752,608 $ 1,587,011 10 % $ 4,930,187 $ 4,736,641 4 % Pretax income: Homebuilding $ 196,476 $ 184,622 6 % $ 567,420 $ 544,339 4 % Financial services 10,953 9,911 11 35,793 27,336 31 Total pretax income 207,429 194,533 7 603,213 571,675 6 Income tax expense (50,100) (44,600) (12) (138,800) (131,800) (5) Net income $ 157,329 $ 149,933 5 % $ 464,413 $ 439,875 6 % Diluted earnings per share $ 2.04 $ 1.80 13 % $ 5.94 $ 5.18 15 % In the 2024 third quarter, our operational execution contributed to year-over-year growth in total revenues, net income and diluted earnings per share. While longer-term housing market drivers remain largely positive, including favorable demographic trends, rising household formations, solid employment, wage growth and the undersupply of new and resale homes, net orders for the 2024 third quarter were essentially flat with the year-earlier quarter, reflecting variability in demand across the quarter. Homebuying demand softened from late June through July, primarily due to consumers evaluating elevated mortgage interest rates, as well as rising general economic concerns. Amid the uneven market conditions, and considering the price increases we had implemented in most of our communities in the 2024 first half, we selectively adjusted pricing at certain communities in the third quarter to help stimulate demand and optimize the sales price and pace balance for each such asset. We also employed targeted sales strategies during the 2024 third quarter, as we have to varying degrees since the 2022 second half, including homebuyer concessions (particularly, mortgage-related concessions such as interest rate buydowns), to support homebuyers, helping to drive order activity and minimize cancellations. With these actions and a general moderation in mortgage interest rates, our weekly net orders improved sequentially in each of the last three weeks of August. For the 2024 third quarter, we achieved a monthly net order pace per community of 4.1, compared to 4.3 a year ago. The net order value for the current quarter increased 2% year over year to $1.54 billion, driven by an increase in the average selling price of our net orders, mainly due to shifts in product and geographic mix. Our average community count for the quarter increased 5% year over year, and we ended the quarter with 254 communities, up 10%. Homebuilding revenues for the three months ended August 31, 2024 were generated solely from housing operations. In the year-earlier period, homebuilding revenues were generated from housing operations and land sales. Our 2024 third-quarter housing revenues grew 11% year over year to $1.75 billion due to an 8% increase in the number of homes delivered to 3,631 and a 3% increase in their average selling price to $480,900. Approximately 50% of our homes delivered in the 2024 third quarter were to first-time homebuyers. Homebuilding operating income for the three months ended August 31, 2024 rose 5% from the year-earlier period to $189.0 million. As a percentage of revenues, homebuilding operating income was 10.8% for the 2024 third quarter compared to 11.3% for the year-earlier quarter, primarily reflecting a lower housing gross profit margin, partly offset by a modest improvement in selling, general and administrative expenses as a percentage of housing revenues. Our housing gross profit margin for the 2024 third quarter was 20.6%, compared to 21.5% for the year-earlier quarter. Net income and diluted earnings per share for the three months ended August 31, 2024 increased 5% and 13%, respectively, year over year. The increase in diluted earnings per share for the 2024 third quarter was driven by higher net income and the favorable impact of our common stock repurchases over the past several quarters . During the nine months ended August 31, 2024, 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, 25 we have continued to improve our construction cycle times compared to last year. Among other benefits, faster construction times make our Built to Order® personalized homes more appealing to customers, increase our inventory turns and expand the population of homes available for delivery. Reflecting our improved build times and lower cancellation rate in the current period, our homes delivered as a percentage of backlog at the beginning of the quarter increased to 58% for the 2024 third quarter, from 46% for the year-earlier quarter. We believe our strong balance sheet and liquidity position will provide us with the flexibility to operate effectively through evolving market conditions during the 2024 fourth quarter and pursue our priorities of investing in land and land development to support future growth and returning capital to our stockholders. We continue to take a balanced approach in allocating our capital aligned with these priorities. For the nine months ended August 31, 2024, we increased our investments in land and land development to $2.10 billion, representing a 59% increase from the prior-year period, and repurchased 3,460,697 shares of our common stock at a total cost of $250.0 million. Over the nine months ended August 31, 2024, we have repurchased about 5% of our shares that were outstanding at the start of the fiscal year. Additionally, in the 2024 second quarter, we raised the quarterly cash dividend on our common stock by $.05 per share, or 25%, to $.25 per share, and we paid a cash dividend at this rate in the 2024 second and third quarters. We ended the 2024 third quarter with total liquidity of $1.46 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 August 31, 2024. Although our ending backlog value at August 31, 2024 decreased 14% year over year to approximately $2.92 billion, we believe we are well-positioned to achieve solid results for the 2024 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, 2024 2023 2024 2023 Revenues: Housing $ 1,745,979 $ 1,573,684 $ 4,905,617 $ 4,710,067 Land — 6,035 3,572 6,035 Total 1,745,979 1,579,719 4,909,189 4,716,102 Costs and expenses: Construction and land costs Housing (1,385,563) (1,235,469) (3,872,092) (3,704,848) Land — (4,911) (2,101) (4,911) Total (1,385,563) (1,240,380) (3,874,193) (3,709,759) Selling, general and administrative expenses (171,466) (160,097) (500,187) (468,510) Total (1,557,029) (1,400,477) (4,374,380) (4,178,269) Operating income 188,950 179,242 534,809 537,833 Interest income and other 4,073 5,492 29,379 7,688 Equity in income (loss) of unconsolidated joint ventures 3,453 (112) 3,232 (1,182) Homebuilding pretax income $ 196,476 $ 184,622 $ 567,420 $ 544,339 Homes delivered 3,631 3,375 10,191 9,829 Average selling price $ 480,900 $ 466,300 $ 481,400 $ 479,200 Housing gross profit margin as a percentage of housing revenues 20.6 % 21.5 % 21.1 % 21.3 % Adjusted housing gross profit margin as a percentage of housing revenues 20.7 % 21.5 % 21.1 % 21.6 % Selling, general and administrative expenses as a percentage of housing revenues 9.8 % 10.2 % 10.2 % 9.9 % Operating income as a percentage of revenues 10.8 % 11.3 % 10.9 % 11.4 % 26 Revenues . Homebuilding revenues for the three months ended August 31, 2024 were generated solely from housing operations. For the three months ended August 31, 2023, homebuilding revenues were generated from housing operations and land sales. Housing revenues for the 2024 third quarter grew 11% from the year-earlier quarter due to increases of 8% in the overall number of homes delivered and 3% in their overall average selling price. The year-over-year growth in our 2024 third quarter housing revenues reflected increases of 50%, 15% and 4% in our West Coast, Southeast and Southwest homebuilding reporting segments, respectively, partially offset by a 26% decrease in our Central segment. The growth in the number of homes delivered as compared to the year-earlier quarter reflected increases of 57% and 9% in our West Coast and Southeast homebuilding reporting segments, respectively, partly offset by decreases of 5% and 15% in our Southwest and Central segments, respectively. The higher overall average selling price primarily resulted from the combined effect of product and geographic mix factors, particularly a greater proportion of homes delivered from our higher-priced West Coast homebuilding reporting segment, and a year-over-year decrease in homebuyer concessions. For the nine months ended August 31, 2024 and 2023, homebuilding revenues were generated from both housing operations and land sales. Housing revenues for the nine months ended August 31, 2024 rose 4% from the corresponding 2023 period, due to 4% growth in the number of homes delivered, while the average selling price remained essentially the same. There were no land sales for the three months ended August 31, 2024, compared to $6.0 million of land sale revenues for the three months ended August 31, 2023. For the nine months ended August 31, 2024 and 2023, land sale revenues totaled $3.6 million and $6.0 million, respectively. 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 August 31, 2024 increased 5% year over year, reflecting higher housing gross profits, partly offset by higher selling, general and administrative expenses. Operating income for the 2024 third quarter included inventory-related charges of $1.2 million, compared to $.6 million in the year-earlier quarter. As a percentage of revenues, our operating income for the three months ended August 31, 2024 was 10.8%, compared to 11.3% for the corresponding 2023 period due to a lower housing gross profit margin, partially offset by lower selling, general and administrative expenses as a percentage of housing revenues. Excluding inventory-related charges, our operating income as a percentage of revenues was 10.9% for the 2024 third quarter, compared to 11.4% for the year-earlier quarter. For the nine months ended August 31, 2024, our operating income decreased slightly from the year-earlier period, as higher selling, general and administrative expenses were mostly offset by higher housing gross profits. Operating income for the nine months ended August 31, 2024 included inventory-related charges of $3.7 million, compared to $10.2 million of such charges in the corresponding 2023 period. As a percentage of revenues, our operating income for the nine months ended August 31, 2024 decreased 50 basis points year over year to 10.9%, reflecting higher selling, general and administrative expenses as a percentage of housing revenues and a lower housing gross profit margin. Excluding inventory-related charges, our operating income as a percentage of revenues declined 60 basis points to 11.0% for the nine months ended August 31, 2024 from 11.6% for the corresponding year-earlier period. • Housing Gross Profits – Housing gross profits of $360.4 million for the three months ended August 31, 2024 grew 7% year over year, reflecting an increase in housing revenues, partly offset by a 90 basis-point decrease in our housing gross profit margin to 20.6%. The decline in the housing gross profit margin was primarily due to product and geographic mix shifts of homes delivered along with higher relative construction and land costs, which included the impact of pricing adjustments to support demand, partially offset by reduced 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 1.6% and 1.8% for the three months ended August 31, 2024 and 2023, respectively. Excluding the inventory-related charges associated with housing operations of $1.2 million in the current quarter and $.6 million in the year-earlier quarter, our adjusted housing gross profit margin of 20.7% for the 2024 third quarter decreased 80 basis points year over year. For the nine months ended August 31, 2024, our housing gross profits of $1.03 billion increased 3% from the year-earlier period due to higher housing revenues, partially offset by a 20 basis-point decline in our housing gross profit margin to 21.1%. The housing gross profit margin mainly reflected product and geographic mix shifts of homes delivered and higher relative construction and land costs, largely offset by decreases in both inventory-related charges and homebuyer concessions. As a percentage of housing revenues, the amortization of previously capitalized interest associated with housing operations was 1.7% for the nine months ended August 31, 2024, compared to 1.9% for the corresponding 2023 period. Excluding the inventory-related charges associated with housing operations of $3.7 million in the current period and $10.2 million in the year-earlier period, our adjusted housing gross profit margin of 21.1% for the nine months ended August 31, 2024 decreased 50 basis points year over year. 27 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 – There was no land sale activity in the three months ended August 31, 2024, compared to land sale profits of $1.1 million in the three months ended August 31, 2023. For the nine months ended August 31, 2024 and 2023, land sale profits totaled $1.5 million and $1.1 million, respectively. • 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, 2024 % of Housing Revenues 2023 % of Housing Revenues 2024 % of Housing Revenues 2023 % of Housing Revenues Marketing expenses $ 39,700 2.3 % $ 37,059 2.4 % $ 115,944 2.4 % $ 107,985 2.3 % Commission expenses (a) 59,961 3.4 56,145 3.6 172,171 3.5 165,538 3.5 General and administrative expenses 71,805 4.1 66,893 4.2 212,072 4.3 194,987 4.1 Total $ 171,466 9.8 % $ 160,097 10.2 % $ 500,187 10.2 % $ 468,510 9.9 % (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, 2024 increased 7% from the year-earlier quarter. As a percentage of housing revenues, our selling, general and administrative expenses for the 2024 third quarter decreased 40 basis points, primarily reflecting increased operating leverage from higher housing revenues. For the nine months ended August 31, 2024, selling, general and administrative expenses increased 7% year over year. As a percentage of housing revenues, selling, general and administrative expenses for the nine months ended August 31, 2024 increased 30 basis points mainly due to higher costs, including marketing and other expenses associated with the increase in our community count during the year to position our operations for growth, partially offset by increased operating leverage from higher housing revenues. Interest Income/Expense and Other . Interest income and other for the three months ended August 31, 2024 and the three months and nine months ended August 31, 2023, was comprised solely of interest income. For the nine months ended August 31, 2024, interest income and other was comprised of interest income and a $12.5 million gain associated with the sale of a privately held technology company in which we held an ownership interest. Further information regarding this gain is provided in Note 10 – Other Assets in the Notes to Consolidated Financial Statements in this report. Interest income, which is generated from short-term investments, was $4.1 million for the three months ended August 31, 2024, compared to $5.5 million for the year-earlier quarter, reflecting a decrease in the average balance of cash equivalents and a lower interest rate. For the nine months ended August 31, 2024, interest income increased to $16.9 million, compared to $7.7 million for the corresponding period of 2023, due to a 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 and nine-month periods ended August 31, 2024 and 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 Income (Loss) of Unconsolidated Joint Ventures . Our equity in income of unconsolidated joint ventures was $3.5 million and $3.2 million for the three-month and nine-month periods ended August 31, 2024, respectively. For the three-month and nine-month periods ended August 31, 2023, our equity in loss of unconsolidated joint ventures was nominal and $1.2 million, respectively. The year-over-year improvement for the 2024 periods mainly reflected homes delivered by an unconsolidated joint venture in California. In the corresponding periods of 2023, our unconsolidated joint ventures did not 28 deliver any homes. 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 August 31, Nine Months Ended August 31, 2024 2023 2024 2023 Net orders 3,085 3,097 10,405 9,175 Net order value (a) $ 1,543,148 $ 1,512,380 $ 5,157,242 $ 4,413,897 Cancellation rate (b) 15 % 21 % 14 % 26 % Ending backlog — homes 5,724 7,008 5,724 7,008 Ending backlog — value $ 2,919,304 $ 3,395,389 $ 2,919,304 $ 3,395,389 Ending community count 254 230 254 230 Average community count 251 240 245 245 (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 third quarter were essentially flat with the year-earlier quarter, reflecting variability in demand across the quarter. Homebuying demand softened from late June through July, primarily due to consumers evaluating elevated mortgage interest rates, as well as rising general economic concerns. Amid the uneven market conditions, and considering the price increases we had implemented in most of our communities in the 2024 first half, we selectively adjusted pricing at certain communities in the third quarter to help stimulate demand and optimize the sales price and pace balance for each such asset. We also employed targeted sales strategies during the 2024 third quarter, as we have to varying degrees since the 2022 second half, including homebuyer concessions (particularly, mortgage-related concessions such as interest rate buydowns), to support homebuyers, helping to drive order activity and minimize cancellations. With these actions and a general moderation in mortgage interest rates, our weekly net orders improved sequentially in each of the last three weeks of August. The pace of monthly net orders per community was 4.1 in the 2024 third quarter, compared to 4.3 in the corresponding 2023 quarter, reflecting our higher average community count for the quarter. The value of our net orders expanded 2% year over year as a result of a 2% increase in the average selling price for our net orders to $500,200, primarily due to a shift in product and geographic mix. In the 2024 third quarter, the year-over-year growth in our overall net order value reflected increases of 6% in both our West Coast and Central homebuilding reporting segments, partly offset by decreases of 2% and 7% in our Southwest and Southeast segments, respectively. Our cancellation rate as a percentage of gross orders for the three months ended August 31, 2024 improved from the year-earlier period, reflecting positive housing market dynamics, as well as buyers’ ability and willingness to close on their homes when available for delivery. Backlog . The number of homes in our backlog and our backlog value at August 31, 2024 decreased 18% and 14%, respectively, from August 31, 2023. The decline in our overall backlog value reflected decreases in each of our homebuilding reporting segments, ranging from 9% in our Southwest segment to 24% in our Southeast segment. Based on our historical experience, 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, 2024 increased 5% from the year-earlier period. Our ending community count for the 2024 third quarter grew 10% from the year-earlier quarter. On a sequential basis, our 2024 third quarter ending community count expanded 3%. To help drive future community count growth, we increased our investments in land and land development on a year-over-year basis for the nine months ended August 31, 2024, 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 2024 2023 2024 2023 2024 2023 West Coast 1,150 732 958 906 15 % 15 % Southwest 681 717 616 656 11 13 Central 1,073 1,258 871 865 15 33 Southeast 727 668 640 670 18 19 Total 3,631 3,375 3,085 3,097 15 % 21 % Net Order Value Average Community Count Segment 2024 2023 Variance 2024 2023 Variance West Coast $ 678,783 $ 638,643 6 % 83 71 17 % Southwest 290,229 296,811 (2) 44 44 — Central 313,108 296,255 6 77 79 (3) Southeast 261,028 280,671 (7) 47 46 2 Total $ 1,543,148 $ 1,512,380 2 % 251 240 5 % Nine Months Ended August 31, Homes Delivered Net Orders Cancellation Rates Segment 2024 2023 2024 2023 2024 2023 West Coast 3,021 2,320 3,134 3,062 13 % 15 % Southwest 2,110 2,031 2,099 1,915 10 18 Central 2,971 3,495 3,188 2,318 14 40 Southeast 2,089 1,983 1,984 1,880 19 26 Total 10,191 9,829 10,405 9,175 14 % 26 % Net Order Value Average Community Count Segment 2024 2023 Variance 2024 2023 Variance West Coast $ 2,214,666 $ 2,044,331 8 % 77 75 3 % Southwest 967,880 819,543 18 44 44 — Central 1,162,855 800,936 45 77 80 (4) Southeast 811,841 749,087 8 47 46 2 Total $ 5,157,242 $ 4,413,897 17 % 245 245 — % 30 August 31, Backlog – Homes Backlog – Value Segment 2024 2023 Variance 2024 2023 Variance West Coast 1,658 2,029 (18) % $ 1,223,121 $ 1,356,175 (10) % Southwest 1,368 1,576 (13) 629,995 692,175 (9) Central 1,484 1,812 (18) 555,474 678,994 (18) Southeast 1,214 1,591 (24) 510,714 668,045 (24) Total 5,724 7,008 (18) % $ 2,919,304 $ 3,395,389 (14) % 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. 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 $37.9 million and $36.0 million in the three months ended August 31, 2024 and 2023, respectively. For the nine months ended August 31, 2024, Corporate and other had an operating loss of $111.6 million, compared to an operating loss of $104.5 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, 2024 and 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 August 31, Nine Months Ended August 31, 2024 2023 Variance 2024 2023 Variance Revenues $ 760,617 $ 506,802 50 % $ 2,017,336 $ 1,611,171 25 % Construction and land costs (617,497) (412,915) (50) (1,629,350) (1,319,259) (24) Selling, general and administrative expenses (47,451) (38,786) (22) (139,297) (120,983) (15) Operating income $ 95,669 $ 55,101 74 % $ 248,689 $ 170,929 45 % Homes delivered 1,150 732 57 % 3,021 2,320 30 % Average selling price $ 661,400 $ 692,400 (4) % $ 667,600 $ 694,500 (4) % Operating income as a percentage of revenues 12.6 % 10.9 % 170 bps 12.3 % 10.6 % 170 bps In the three months ended August 31, 2024 and the three-month and nine-month periods ended August 31, 2023, revenues were generated solely from housing operations. In the nine months ended August 31, 2024, this segment’s revenues were comprised of housing revenues and nominal land sale revenues. The year-over-year growth in housing revenues for the three-month and nine-month periods ended August 31, 2024 was driven by an increase in the number of homes delivered, partially offset by a decrease in their average selling price. Operating income for the three months and nine months ended August 31, 2024 was up 31 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 third quarter rose from the year-earlier quarter, primarily due to a 30 basis-point increase in the housing gross profit margin to 18.8% and a 140 basis-point improvement in selling, general and administrative expenses as a percentage of housing revenues to 6.2%. For the nine months ended August 31, 2024, operating income as a percentage of revenues increased from the corresponding 2023 period, reflecting a 110 basis-point expansion in the housing gross profit margin to 19.2% and a 60 basis-point improvement in selling, general and administrative expenses as a percentage of housing revenues to 6.9%. The year-over-year expansion in the housing gross profit margins for the three-month and nine-month periods ended August 31, 2024 mainly reflected lower relative construction and land costs, which occurred despite the effects of selective pricing adjustments aimed at stimulating demand. Additionally, the year-over-year expansion reflected increased operating leverage from higher housing revenues. The higher housing gross profit margin for the nine-month period ended August 31, 2024 also benefited from a decrease in homebuyer concessions. For the three months ended August 31, 2024, inventory-related charges associated with housing operations were $.5 million, compared to $.4 million for the year-earlier period. For the nine months ended August 31, 2024, inventory-related charges associated with housing operations were $2.4 million, compared to $4.3 million for the year-earlier period. The year-over-year improvement in selling, general and administrative expenses as a percentage of housing revenues for the three-month and nine-month periods ended August 31, 2024 reflected lower relative sales commissions and improved operating leverage from higher housing revenues, partly offset by higher costs including marketing and other expenses associated with our increased community count in this segment. 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, 2024 2023 Variance 2024 2023 Variance Revenues $ 312,812 $ 306,284 2 % $ 954,602 $ 881,699 8 % Construction and land costs (233,638) (237,844) 2 (719,134) (670,882) (7) Selling, general and administrative expenses (24,258) (22,203) (9) (69,979) (63,397) (10) Operating income $ 54,916 $ 46,237 19 % $ 165,489 $ 147,420 12 % Homes delivered 681 717 (5) % 2,110 2,031 4 % Average selling price $ 459,300 $ 418,800 10 % $ 452,400 $ 431,100 5 % Operating income as a percentage of revenues 17.6 % 15.1 % 250 bps 17.3 % 16.7 % 60 bps In the three-month and nine-month periods ended August 31, 2024, revenues were generated solely from housing operations. Revenues for the three-month and nine-month periods ended August 31, 2023 were comprised of housing revenues and land sale revenues. This segment’s housing revenues for the three months ended August 31, 2024 improved from $300.2 million in the year-earlier quarter, reflecting an increase in the average selling price of homes delivered, partly offset by a decrease in the number of homes delivered. For the nine months ended August 31, 2024, housing revenues grew as a result of increases in both the number of homes delivered and their average selling price. Operating income for the three months and nine months ended August 31, 2024 increased from the corresponding year-earlier period, due to higher housing gross profits, partially offset by higher selling, general and administrative expenses and the absence of land sale profits in the current periods, compared to $1.1 million of land sale profits in the year-earlier periods. As a percentage of revenues, this segment’s operating income for the 2024 third quarter improved from the year-earlier quarter, reflecting a 290 basis-point increase in the housing gross profit margin to 25.3%, partly offset by a 40 basis-point increase in selling, general and administrative expenses as a percentage of housing revenues to 7.8%. Operating income as a percentage of revenues for the nine months ended August 31, 2024 improved from the corresponding 2023 period, primarily reflecting an 80 basis-point increase in the housing gross profit margin to 24.7%, partly offset by a 10 basis-point increase in selling, general and administrative expenses as a percentage of housing revenues to 7.3%. The year-over-year expansion in the housing gross profit margins for the three-month and nine-month periods ended August 31, 2024 primarily reflected lower relative construction and land costs, increased operating leverage from higher housing revenues, a decrease in homebuyer concessions and product and geographic mix shifts of homes delivered. 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, 2024 was mainly due to higher costs including marketing and other expenses, partly offset by improved 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, 2024 2023 Variance 2024 2023 Variance Revenues $ 372,862 $ 506,640 (26) % $ 1,069,136 $ 1,441,805 (26) % Construction and land costs (291,734) (389,150) 25 (834,195) (1,111,064) 25 Selling, general and administrative expenses (37,836) (42,073) 10 (106,515) (117,516) 9 Operating income $ 43,292 $ 75,417 (43) % $ 128,426 $ 213,225 (40) % Homes delivered 1,073 1,258 (15) % 2,971 3,495 (15) % Average selling price $ 347,500 $ 402,700 (14) % $ 358,800 $ 412,500 (13) % Operating income as a percentage of revenues 11.6 % 14.9 % (330) bps 12.0 % 14.8 % (280) bps In the three months ended August 31, 2024 and the three-month and nine-month periods ended August 31, 2023, this segment’s revenues were generated solely from housing operations. In the nine months ended August 31, 2024, this segment’s revenues were comprised of housing revenues and land sale revenues. Housing revenues for the three months ended August 31, 2024 decreased 26% from the year-earlier period. For the nine months ended August 31, 2024, housing revenues of $1.07 billion were also down 26% year over year. The lower housing revenues for the three-month and nine-month periods ended August 31, 2024 reflected decreases in both the number of homes delivered and their average selling price. Operating income for the three months and nine months ended August 31, 2024 declined from the year-earlier period due to lower housing gross profits, partly offset by lower selling, general and administrative expenses. Operating income for the nine months ended August 31, 2024 also reflected land sale profits of $1.1 million. This segment’s operating income as a percentage of revenues for the 2024 third quarter decreased from the year-earlier period, primarily due to a 190 basis-point increase in selling, general and administrative expenses as a percentage of housing revenues to 10.1%, and a 140 basis-point decline in the housing gross profit margin to 21.8%. Operating income as a percentage of revenues for the nine months ended August 31, 2024 decreased from the corresponding 2023 period, mainly reflecting a 100 basis-point decrease in the housing gross profit margin to 21.9% and a 180 basis-point increase in selling, general and administrative expenses as a percentage of housing revenues to 10.0%. The housing gross profit margin for the three months ended August 31, 2024 declined due to higher relative construction and land costs, which included the impact of selective pricing adjustments aimed at stimulating demand, and reduced operating leverage from lower housing revenues, partly offset by a decrease in amortization of previously capitalized interest and lower homebuyer concessions. For the nine months ended August 31, 2024, the year-over-year decrease in the housing gross profit margin primarily reflected higher relative construction and land costs, product and geographic mix shifts of homes delivered, and reduced operating leverage from lower housing revenues, partly offset by a decrease in amortization of previously capitalized interest. Inventory-related charges associated with housing operations for the nine months ended August 31, 2024 were $.7 million, compared to $2.3 million for 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 and nine months ended August 31, 2024 was primarily due to reduced operating leverage from lower housing revenues as well as higher costs, including marketing and other expenses. 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, 2024 2023 Variance 2024 2023 Variance Revenues $ 299,688 $ 259,993 15 % $ 868,115 $ 781,427 11 % Construction and land costs (239,753) (197,737) (21) (686,442) (601,141) (14) Selling, general and administrative expenses (26,932) (23,761) (13) (77,868) (69,480) (12) Operating income $ 33,003 $ 38,495 (14) % $ 103,805 $ 110,806 (6) % 33 Three Months Ended August 31, Nine Months Ended August 31, 2024 2023 Variance 2024 2023 Variance Homes delivered 727 668 9 % 2,089 1,983 5 % Average selling price $ 412,200 $ 389,200 6 % $ 415,600 $ 394,100 5 % Operating income as a percentage of revenues 11.0 % 14.8 % (380) bps 12.0 % 14.2 % (220) bps This segment’s revenues for the three-month and nine-month periods ended August 31, 2024 and 2023 were generated solely from housing operations. Housing revenues for the three-month and nine-month periods ended August 31, 2024 grew year over year due to 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, 2024 decreased from the corresponding year-earlier periods, primarily reflecting higher selling, general and administrative expenses, as housing gross profits were essentially flat year over year. As a percentage of revenues, operating income for the 2024 third quarter decreased from the year-earlier quarter due to a 390 basis-point decrease in the housing gross profit margin to 20.0%, slightly offset by a 10 basis-point improvement in selling, general and administrative expenses as a percentage of housing revenues to 9.0%. For the nine months ended August 31, 2024, operating income as a percentage of revenues for the nine months ended August 31, 2024 decreased from the year-earlier period, reflecting a 220 basis-point decline in the housing gross profit margin to 20.9%. The year-over-year decrease in the housing gross profit margin for the three months ended August 31, 2024 primarily reflected higher relative construction and land costs and product and geographic mix shifts of homes delivered. For the nine months ended August 31, 2024, the housing gross profit margin decreased year over year mainly due to higher relative construction and land costs, partly offset by decreases in both homebuyer concessions and inventory-related charges. For the nine months ended August 31, 2024, inventory-related charges associated with housing operations were $.4 million, compared to $3.5 million for the year-earlier period. 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, 2024 2023 2024 2023 Revenues $ 6,629 $ 7,292 $ 20,998 $ 20,539 Expenses (1,608) (1,530) (4,627) (4,360) Equity in income of unconsolidated joint venture 5,932 4,149 19,422 11,157 Pretax income $ 10,953 $ 9,911 $ 35,793 $ 27,336 Total originations (a): Loans 2,704 2,396 7,332 6,657 Principal $ 1,080,071 $ 937,037 $ 2,916,804 $ 2,630,317 Percentage of homebuyers using KBHS 88 % 84 % 87 % 81 % Average FICO score 742 735 743 735 Loans sold (a): Loans sold to GR Alliance 2,188 2,469 6,722 6,680 Principal $ 857,274 $ 972,776 $ 2,661,191 $ 2,662,715 Loans sold to third parties 368 93 551 273 Principal $ 155,094 $ 32,910 $ 227,610 $ 96,274 (a) Loan originations and sales occurred within KBHS. Revenues . Financial services revenues for the three months ended August 31, 2024 declined 9% year over year, due to decreases in both insurance commissions and title services revenues. For the nine months ended August 31, 2024, financial services revenues rose slightly from the year-earlier period, as an increase in insurance commissions was largely offset by a decrease in title services revenues. 34 Pretax income. Financial services pretax income for the three months ended August 31, 2024 grew 11% from the year-earlier period, largely due to an increase in the equity in income of our unconsolidated joint venture, KBHS. In the 2024 third quarter, the equity in income of our unconsolidated joint venture increased to $5.9 million, from $4.1 million in the year-earlier quarter, due to an increase in KBHS’ income. The year-over-year increase in KBHS’ income reflected the loss in the fair value of IRLCs decreasing to $.4 million in the current quarter, compared to $5.2 million in the year-earlier quarter. Also contributing to the year-over-year increase in KBHS’ income was the higher principal amount of loans originated, which reflected increases in both the number of homes we delivered and the percentage of homebuyers using KBHS. In the 2024 third quarter, 88% of the buyers financing their home purchases used KBHS, up from 84% in the year-earlier quarter. For the nine months ended August 31, 2024, our financial services pretax income increased 31% from the corresponding 2023 period, mostly due to an increase in the equity in income of our unconsolidated joint venture. In the nine months ended August 31, 2024, the equity in income of unconsolidated joint venture rose to $19.4 million, compared to $11.2 million in the year-earlier period, mainly as a result of an increase in KBHS’ income. The year-over-year increase in KBHS’ income was primarily due to gains of $3.8 million in the fair value of IRLCs in the current period, compared to losses of $9.4 million in the year-earlier period, as well as the factors described above for the three months ended August 31, 2024. Further information regarding our investments in unconsolidated joint ventures, including KBHS, 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, 2024 2023 2024 2023 Income tax expense $ 50,100 $ 44,600 $ 138,800 $ 131,800 Effective tax rate 24.2 % 22.9 % 23.0 % 23.1 % Our effective tax rate for the three months ended August 31, 2024 increased from the year-earlier period, mainly due to a $3.0 million decline in the Section 45L tax credits we recognized primarily from building energy-efficient homes and a $1.9 million decrease in excess tax benefits related to stock-based compensation, partly offset by a $2.4 million decrease in state taxes. For the nine months ended August 31, 2024, our effective tax rate was essentially flat with the year-earlier period, primarily reflecting a $5.3 million decrease in state income taxes, a $1.3 million decline in nondeductible executive compensation expense and a $.8 million increase in excess tax benefits related to stock-based compensation, largely offset by a $6.6 million decrease in the Section 45L tax credits. 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. 35 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 August 31, Nine Months Ended August 31, 2024 2023 2024 2023 Housing revenues $ 1,745,979 $ 1,573,684 $ 4,905,617 $ 4,710,067 Housing construction and land costs (1,385,563) (1,235,469) (3,872,092) (3,704,848) Housing gross profits 360,416 338,215 1,033,525 1,005,219 Add: Inventory-related charges (a) 1,177 631 3,685 10,207 Adjusted housing gross profits $ 361,593 $ 338,846 $ 1,037,210 $ 1,015,426 Housing gross profit margin as a percentage of housing revenues 20.6 % 21.5 % 21.1 % 21.3 % Adjusted housing gross profit margin as a percentage of housing revenues 20.7 % 21.5 % 21.1 % 21.6 % (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 acquisitions 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 third quarter with total liquidity of $1.46 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, 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. 36 Cash Requirements . In the nine months ended August 31, 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 nine months ended August 31, 2024 increased 59% to $2.10 billion, compared to $1.32 billion for the year-earlier period. Land acquisition expenditures, which are included in our investments in land and land development, increased to $916.9 million in the nine months ended August 31, 2024, from $329.5 million in the corresponding period of 2023. Approximately 44% of our total investments for the nine months ended August 31, 2024 related to land acquisitions, compared to approximately 25% in the prior-year period. While we made investments in land and land development in each of our homebuilding reporting segments during the nine months ended August 31, 2024 and 2023, approximately 55% of these investments for each period were made in our West Coast homebuilding reporting segment. For the 2024 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 on a year-over-year basis in the 2024 fourth quarter, 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, 2024 November 30, 2023 Variance Segment Lots Carrying Value Lots Carrying Value Lots Carrying Value West Coast 22,335 $ 2,870,421 18,220 $ 2,455,336 4,115 $ 415,085 Southwest 10,306 886,994 7,017 830,514 3,289 56,480 Central 20,106 893,954 17,328 942,168 2,778 (48,214) Southeast 16,532 997,561 13,411 905,628 3,121 91,933 Total 69,279 $ 5,648,930 55,976 $ 5,133,646 13,303 $ 515,284 The carrying value of lots we owned or controlled under land option contracts and other similar contracts at August 31, 2024 increased 10% from November 30, 2023, reflecting land investments during the nine months ended August 31, 2024, partly offset by homes delivered and our abandonment of 5,590 previously controlled lots. The number of lots we owned or controlled as of August 31, 2024 increased 24% from November 30, 2023. The number of lots in inventory as of August 31, 2024 included 16,069 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 42% at August 31, 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 August 31, 2024, we estimate the remaining purchase price to be paid would be as follows: 2024 – $436.1 million; 2025 – $1.06 billion; 2026 – $406.2 million; 2027 – $123.6 million; 2028 – $91.0 million; and thereafter – $.6 million. 37 Liquidity. The table below summarizes our cash and cash equivalents, and total liquidity (in thousands): August 31, 2024 November 30, 2023 Cash and cash equivalents $ 374,911 $ 727,076 Credit Facility commitment 1,090,000 1,090,000 Letters of credit outstanding under the Credit Facility (8,260) (6,650) Credit Facility availability 1,081,740 1,083,350 Total liquidity $ 1,456,651 $ 1,810,426 Our cash equivalents at August 31, 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): August 31, 2024 November 30, 2023 Variance Term Loan $ 358,659 $ 358,156 $ 503 Senior notes 1,329,252 1,327,934 1,318 Mortgages and land contracts due to land sellers and other loans 3,149 3,808 (659) Total $ 1,691,060 $ 1,689,898 $ 1,162 Our financial leverage, as measured by the ratio of debt to capital, improved 90 basis points to 29.8% at August 31, 2024, compared to 30.7% at November 30, 2023. On a year-over-year basis, our debt to capital ratio improved 80 basis points from 30.6%. 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 August 31, 2024 and November 30, 2023, we had letters of credit outstanding under the LOC Facility of $70.6 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 $1.31 billion and $1.32 billion of performance bonds outstanding at August 31, 2024 and November 30, 2023, 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, 2024, we had no cash borrowings and $8.3 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. 38 • 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 August 31, 2024: Financial Covenants and Other Requirements Covenant Requirement Actual Consolidated tangible net worth > $3.03 billion $3.95 billion Leverage Ratio < .600 .302 Interest Coverage Ratio (a) > 1.500 11.246 Minimum liquidity (a) > $83.2 million $374.9 million Investments in joint ventures and non-guarantor subsidiaries < $894.2 million $384.6 million Borrowing base in excess of borrowing base indebtedness (as defined) n/a $2.81 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, 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 August 31, 2024, we had outstanding mortgages and land contracts due to land sellers and other loans payable in connection with such financing of $3.1 million, secured primarily by the underlying property, which had an aggregate carrying value of $11.7 million. 39 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 August 31, 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 August 31, 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. In May 2024, Moody’s Ratings upgraded our corporate credit rating to Ba1 from Ba2 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, 2024 2023 Net cash provided by (used in): Operating activities $ 81 $ 772,523 Investing activities (38,138) (44,773) Financing activities (313,592) (445,551) Net increase (decrease) in cash and cash equivalents $ (351,649) $ 282,199 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, 2024 mainly reflected net income of $464.4 million and a net decrease in receivables of $6.2 million, partly offset by a net increase in inventories of $504.4 million and a net decrease in accounts payable, accrued expenses and other liabilities of $14.4 million. In the nine months ended August 31, 2023, our net cash provided by operating activities 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. Investing Activities . In the nine months ended August 31, 2024, our uses of cash included $29.2 million for net purchases of property and equipment and $12.6 million for contributions to unconsolidated joint ventures. These uses of cash were partially offset by a $2.0 million return of investments in unconsolidated joint ventures and $1.7 million of proceeds from the sale of an investment. In the nine months ended August 31, 2023, the net cash used for investing activities reflected $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. Financing Activities . In the nine months ended August 31, 2024, our uses of cash included stock repurchases of $250.0 million, dividend payments on our common stock of $53.5 million, tax payments associated with stock-based compensation awards of $16.5 million, and payments on mortgages and land contracts due to land sellers and other loans of $2.8 million. The cash used was partly offset by $9.3 million of issuances of common stock under employee stock plans. 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 partially offset by $8.6 million of issuances of common stock under employee stock plans. Dividends. In the 2024 second quarter, our board of directors approved a $.05 per share increase in the quarterly cash dividend on our common stock to $.25 per share. In the 2024 third quarter, our board of directors declared, and we paid, a quarterly cash dividend on our common stock of $.25 per share. In the 2023 third quarter, our board of directors declared, and we paid, a quarterly cash dividend on our common stock of $.20 per share. Quarterly dividends declared and paid during the nine-month periods ended August 31, 2024 and 2023 totaled $.70 per share and $.50 per share, respectively. The declaration and payment of future cash dividends on our common stock, whether at current levels or at all, are at the discretion of our board of directors and depend upon, among other things, our expected future earnings, cash flows, capital requirements, access to external 40 financing, debt structure and any adjustments thereto, operational and financial investment strategy and general financial condition, as well as general business conditions. Share Repurchase Program. On March 21, 2023, our board of directors authorized us to repurchase up to $500.0 million of our outstanding common stock. As of November 30, 2023, there was $163.6 million of remaining availability under this share repurchase authorization. In the 2024 first quarter, we repurchased 826,663 shares of our common stock at a total cost of $50.0 million. On April 18, 2024, our board of directors authorized us to repurchase up to $1.00 billion of our outstanding common stock. This authorization replaced the prior board of directors authorization, which had $113.6 million remaining. In the 2024 second quarter, we repurchased 764,742 shares of our common stock at a total cost of $50.0 million. In the 2024 third quarter, we repurchased 1,869,292 shares of our common stock at a total cost of $150.0 million, bringing our total repurchases for the nine months ended August 31, 2024 to 3,460,697 shares of common stock at a total cost of $250.0 million. Repurchases under the authorization may occur periodically through open market purchases, privately negotiated transactions or otherwise, with the timing and amount at management’s discretion and dependent on market, business and other conditions. This share repurchase authorization will continue in effect until fully used or earlier terminated or suspended by our board of directors, and does not obligate us to purchase any shares. As of August 31, 2024, there was $800.0 million of remaining availability under this share repurchase authorization. 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 2024 fourth quarter, 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 August 31, 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. 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. 41 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. August 31, 2024 November 30, 2023 Summarized Balance Sheet Data (in thousands) Assets Cash $ 343,158 $ 683,323 Inventories 5,078,525 4,599,468 Amounts due from Non-Guarantor Subsidiaries 527,057 534,865 Total assets 6,593,909 6,367,410 Liabilities and Stockholders’ Equity Notes payable $ 1,691,060 $ 1,689,898 Amounts due to Non-Guarantor Subsidiaries 371,597 338,390 Total liabilities 2,928,404 2,834,555 Stockholders’ equity 3,665,505 3,532,855 Nine Months Ended August 31, 2024 Summarized Statement of Operations Data (in thousands) Revenues $ 4,473,855 Construction and land costs (3,519,335) Selling, general and administrative expenses (478,004) Interest income from Non-Guarantor Subsidiaries 22,986 Pretax income 528,181 Net income 401,981 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, 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 We have achieved solid results through our 2024 first three quarters. Our performance reflects, among other things, longer-term housing market drivers remaining largely positive, including favorable demographic trends, rising household formations, solid employment, wage growth and the undersupply of new and resale homes. However, net orders for the 2024 third quarter were essentially flat with the year-earlier quarter, reflecting variability in demand across the quarter. Homebuying demand softened from late June through July, primarily due to consumers evaluating elevated mortgage interest rates, as well as rising general economic concerns. Amid the uneven market conditions, and considering the price increases we had implemented in most of our communities in the 2024 first half, we selectively adjusted pricing at certain communities in the third quarter to help stimulate demand and optimize the sales price and pace balance for each such asset. We also employed targeted sales strategies during the 2024 third quarter, as we have to varying degrees since the 2022 second half, including homebuyer concessions (particularly, mortgage-related concessions such as interest rate buydowns), to support homebuyers, helping to drive order activity and minimize cancellations. With these actions and a general moderation in mortgage interest rates, our weekly net orders improved sequentially in each of the last three weeks of August. We are encouraged by the strengthening in demand as August progressed, and the continuing positive trend in our 2024 fourth quarter to date. Further, given the soft 42 comparison in the year-ago fourth quarter, we expect a strong year-over year comparison in our 2024 fourth quarter net orders, positioning us to enter 2025 with momentum. In the 2024 fourth quarter, we plan to continue to focus operationally on maintaining high customer satisfaction levels, achieving additional improvement in our build times, and further simplifying and value engineering our products to lower direct costs. More broadly, our key objectives remain to increase our scale, profitability and returns, as well as generate cash flows, by expanding our lot count through land acquisitions that meet our underwriting standards, opening new communities on time, driving net orders and balancing pace, price and construction starts at each community to optimize our return on each inventory asset within its market context. At the same time, we anticipate the homebuyer concessions we have selectively extended to buyers since the 2022 second half will continue to temper the average selling price of homes delivered. Our use of such concessions in the 2024 fourth quarter 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. While we expect our land acquisition activity to increase during the 2024 fourth quarter as compared to the corresponding 2023 quarter, our investments in land and land development will depend significantly on market conditions and available opportunities that meet our investment return standards. In addition, our focus is on capital efficiency, developing lots where possible in smaller phases and balancing development with our starts pace to manage our inventory of finished lots. 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. We ended the 2024 third quarter with $800.0 million remaining under our current board of directors share repurchase authorization. This provides us the opportunity to continue to repurchase our common stock in the 2024 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 conditions. Overall, we believe we are well positioned to achieve our goals over the remainder of 2024 given our commitment to offering homebuyers the ability to meaningfully personalize their home; our well-designed products and attractive price points; backlog value of $2.92 billion at August 31, 2024; and measurable improvement in our build times, subject to the factors and risks described in this report, including uncertainty regarding the near-term direction of mortgage interest rates, inflation, consumer confidence and the economy. Our present outlook for the 2024 fourth quarter, the 2024 full year and the 2025 full year as to certain metrics is as follows: 2024 Fourth Quarter • We expect to generate housing revenues in the range of $1.94 billion to $2.04 billion, compared to $1.66 billion for the corresponding 2023 period, and anticipate our average selling price to be approximately $510,000, compared to $487,300 in the year-earlier period. • We expect our homebuilding operating income margin will be in the range of 11.4% to 11.8%, assuming no inventory-related charges, compared to 10.9% for the year-earlier quarter. • We expect our housing gross profit margin will be in the range of 21.0% to 21.4%, assuming no inventory-related charges, compared to 20.8% for the corresponding 2023 quarter. • We expect our selling, general and administrative expenses as a percentage of housing revenues to be approximately 9.6%, compared to 9.9% for the 2023 fourth quarter. • We expect our effective tax rate will be approximately 24.0%, compared to 24.7% for the year-earlier quarter. • We expect our average community count will be up 7% to 8%, as compared to the prior-year quarter. 2024 Full Year • We expect our housing revenues to be in the range of $6.85 billion to $6.95 billion, an increase from $6.37 billion for 2023. • We expect our average selling price to be approximately $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 11.1% to 11.2%, assuming no inventory-related charges, compared to 11.4% for 2023. 43 • We expect our housing gross profit margin to be in the range of 21.1% to 21.2%, 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 10.0%, compared to 9.9% for 2023. • We expect our effective tax rate to be approximately 23%, compared to 23.5% for 2023. • We expect our return on equity to be approximately 16.5%, compared to 15.7% for 2023. • We expect our ending community count to be in the range of 250 to 255, compared to 242 for 2023. 2025 Full Year • We expect our housing revenues to be approximately $7.50 billion . 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 reduced interest rates in September 2024 and may lower interest rates further in 2024 or later periods, we cannot provide any assurance it will or that any interest rate reduction(s), or other monetary policy changes, 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 the remainder of 2024. The potential extent and effect of these and other factors on our business is highly uncertain, unpredictable and outside our control, and our past performance, including in the 2024 first three quarters, 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: 44 • 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 the greater costs associated with achieving current and expected higher standards for ENERGY STAR certified homes, 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 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 IRS 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; 45 • 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, through, among other things, our making substantial investments in land and land development, which, in some cases, involves putting significant capital over several years into large projects in one location, 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; • 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. 46