KB HOME 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations Results of Operations OVERVIEW Revenues are generated from our homebuilding and financial services operations. The following table presents a summary of our consolidated results of operations (dollars in thousands, except per share amounts): Three Months Ended February 28, 2025 February 29, 2024 Variance Revenues: Homebuilding $ 1,387,041 $ 1,461,698 (5) % Financial services 4,736 6,068 (22) Total revenues $ 1,391,777 $ 1,467,766 (5) % Pretax income: Homebuilding $ 131,831 $ 163,088 (19) % Financial services 7,526 11,577 (35) Total pretax income 139,357 174,665 (20) Income tax expense (29,800) (36,000) 17 Net income $ 109,557 $ 138,665 (21) % Diluted earnings per share $ 1.49 $ 1.76 (15) % In the 2025 first quarter, market conditions were shaped by ongoing elevated mortgage interest rates, housing affordability concerns and heightened macroeconomic and geopolitical uncertainties that have negatively affected consumer confidence and caused homebuyers to take longer to make their purchase decisions. Within this environment, our first-quarter performance fell short of our expectations, with a 9% year-over-year decrease in the number of homes delivered to 2,770, primarily due to fewer inventory homes sold and delivered, and utility services-related delays stemming from the unprecedented wildfires in Southern California as certain municipal resources were diverted to fire-related priorities. Reflecting the market conditions, demand at the start of the Spring selling season was more muted relative to the past few years, and despite a healthy level of traffic in our communities, our 2,772 net orders for the 2025 first quarter were down 17% year over year, and our monthly net order pace per community was 3.6, compared to 4.6. Also contributing to the year-over-year decline in our net orders were delays in several of our planned community openings until late in the first quarter or, in some cases, into the second quarter. Even with the delayed openings, our average community count for the first quarter increased 7% year over year to 257, and our ending community count was 255, also up 7%. We employed targeted sales strategies during the 2025 first quarter to improve affordability for our homebuyers and help drive order activity. These sales strategies, which we have used to varying degrees since the 2022 second half, included homebuyer concessions, particularly mortgage-related concessions such as interest rate buydowns. Additionally, in mid-February 2025, we selectively reduced selling prices on a community-by-community basis at roughly one-half of our communities to stimulate demand, and in many cases, we lowered or eliminated homebuyer concessions, helping to offset the margin impact of those price changes. Consumers responded favorably to these steps, which were focused around offering the most compelling value, and we saw improved weekly net orders and a normalizing absorption pace at the end of the quarter. Homebuilding revenues for the three months ended February 28, 2025 were generated solely from housing operations. In the year-earlier period, homebuilding revenues were generated from housing operations and land sales. Our 2025 first-quarter housing revenues were down 5% year over year to $1.39 billion due to a 9% decrease in the number of homes delivered to 2,770, partly offset by a 4% increase in their average selling price to $500,700. Approximately 49% of our homes delivered in the 2025 first quarter were to first-time homebuyers. Our homes delivered as a percentage of backlog at the beginning of the quarter increased to 62% for the 2025 first quarter, from 55% for the year-earlier quarter, mainly due to our improved build times. Homebuilding operating income for the three months ended February 28, 2025 declined 19% from the year-earlier period to $127.3 million. As a percentage of revenues, homebuilding operating income was 9.2% for the 2025 first quarter compared to 10.8% for the corresponding 2024 period, primarily reflecting a lower housing gross profit margin. Our housing gross profit margin for the 2025 first quarter was 20.2%, compared to 21.5% for the year-earlier quarter, mainly due to higher 25 relative land costs, increased homebuyer concessions and reduced operating leverage from lower housing revenues. Net income and diluted earnings per share for the three months ended February 28, 2025 decreased 21% and 15%, respectively, year over year. Our diluted earnings per share for the 2025 first quarter reflected lower net income, partly offset by the favorable impact of our common stock repurchases over the past several quarters . We continue to take a balanced approach in allocating our capital aligned with our priorities of investing in land and land development to support future growth and returning capital to our stockholders. For the three months ended February 28, 2025, we increased our investments in land and land development to $920.3 million, representing a 57% increase from the prior-year period, and repurchased 753,939 shares of our common stock at a total cost of $50.0 million. We ended the 2025 first quarter with total liquidity of $1.25 billion, including cash and cash equivalents and $981.7 million of available capacity under the Credit Facility. We had $100.0 million of cash borrowings outstanding under the Credit Facility at February 28, 2025. We have revised our projections for 2025 due to our first quarter results, the relatively soft start to the Spring selling season and the selling price adjustments we implemented in mid-February 2025. Although our ending backlog value at February 28, 2025 decreased 21% year over year to approximately $2.20 billion, we believe we are well positioned to achieve our updated projections for the 2025 second 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 February 28, 2025 February 29, 2024 Revenues: Housing $ 1,387,041 $ 1,458,126 Land — 3,572 Total 1,387,041 1,461,698 Costs and expenses: Construction and land costs Housing (1,107,414) (1,144,427) Land — (2,101) Total (1,107,414) (1,146,528) Selling, general and administrative expenses (152,288) (157,494) Total (1,259,702) (1,304,022) Operating income 127,339 157,676 Interest income 2,079 5,857 Equity in income (loss) of unconsolidated joint ventures 2,413 (445) Homebuilding pretax income $ 131,831 $ 163,088 Homes delivered 2,770 3,037 Average selling price $ 500,700 $ 480,100 Housing gross profit margin as a percentage of housing revenues 20.2 % 21.5 % Adjusted housing gross profit margin as a percentage of housing revenues 20.3 % 21.6 % Selling, general and administrative expenses as a percentage of housing revenues 11.0 % 10.8 % Operating income as a percentage of revenues 9.2 % 10.8 % 26 Revenues . Homebuilding revenues for the three months ended February 28, 2025 were generated solely from housing operations. For the three months ended February 29, 2024, homebuilding revenues were generated from housing operations and land sales. Housing revenues for the 2025 first quarter declined 5% from the year-earlier quarter due to a 9% decrease in the number of homes delivered, partly offset by a 4% increase in their overall average selling price. Our 2025 first-quarter housing revenues reflected year-over-year decreases of 3%, 13% and 24% in our Southwest, Central and Southeast homebuilding reporting segments, respectively, partially offset by an 8% increase in our West Coast segment. The number of homes delivered decreased as compared to the year-earlier quarter, primarily due to fewer inventory homes sold and delivered, and utility services-related delays stemming from the unprecedented wildfires in Southern California as certain municipal resources were diverted to fire-related priorities. 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, partly offset by a year-over-year increase in homebuyer concessions. There were no land sales for the three months ended February 28, 2025, compared to $3.6 million of land sale revenues for the three months ended February 29, 2024. Generally, land sale revenues fluctuate with our decisions to maintain or decrease our land ownership position in certain markets based upon the volume of our holdings, our business strategy, the strength and number of developers and other land buyers in particular markets at given points in time, the availability of opportunities to sell land at acceptable prices and prevailing market conditions. Operating Income . Our homebuilding operating income for the three months ended February 28, 2025 decreased 19% year over year, reflecting lower housing gross profits, partly offset by lower selling, general and administrative expenses. Operating income for the 2025 first quarter included inventory-related charges of $1.5 million, compared to $1.3 million in the year-earlier quarter. As a percentage of revenues, our operating income for the three months ended February 28, 2025 was 9.2%, compared to 10.8% for the corresponding 2024 period, mainly due to a lower housing gross profit margin and higher selling, general and administrative expenses as a percentage of housing revenues. Excluding inventory-related charges, our operating income as a percentage of revenues was 9.3% for the 2025 first quarter, compared to 10.9% for the year-earlier quarter. • Housing Gross Profits – Housing gross profits of $279.6 million for the three months ended February 28, 2025 were down 11% year over year, reflecting a decrease in housing revenues and a 130 basis-point decrease in our housing gross profit margin to 20.2%. The decline in the housing gross profit margin was primarily due to higher relative land costs, increased homebuyer concessions and reduced operating leverage from lower housing revenues. 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 1.7% and 1.8% for the three months ended February 28, 2025 and February 29, 2024, respectively. Excluding the above-mentioned inventory-related charges, all of which were associated with housing operations, our adjusted housing gross profit margin of 20.3% for the 2025 first quarter decreased 130 basis points year over year. The calculation of adjusted housing gross profit margin, which we believe provides a clearer measure of the performance of our business, is described below under “Non-GAAP Financial Measures.” • Land Sale Profits – There was no land sale activity in the three months ended February 28, 2025, compared to land sale profits of $1.5 million in the three months ended February 29, 2024. • Selling, General and Administrative Expenses – The following table presents the components of our selling, general and administrative expenses (dollars in thousands): Three Months Ended February 28, 2025 % of Housing Revenues February 29, 2024 % of Housing Revenues Marketing expenses $ 39,663 2.9 % $ 36,360 2.5 % Commission expenses (a) 47,166 3.4 51,830 3.6 General and administrative expenses 65,459 4.7 69,304 4.7 Total $ 152,288 11.0 % $ 157,494 10.8 % (a) Commission expenses include sales commissions on homes delivered paid to internal sales counselors and external real estate brokers. Selling, general and administrative expenses for the three months ended February 28, 2025 decreased 3% from the year-earlier quarter. As a percentage of housing revenues, our selling, general and administrative expenses for the 2025 first quarter increased 20 basis points, primarily reflecting reduced operating leverage from lower housing revenues. 27 Interest Income/Expense . Interest income, which is generated from short-term investments, was $2.1 million for the three months ended February 28, 2025, compared to $5.9 million for the year-earlier quarter, reflecting a decrease in the average balance of cash equivalents and a lower interest rate. Generally, increases and decreases in interest income are attributable to changes in the interest-bearing average balances of short-term investments and fluctuations in interest rates. We incur interest principally from our borrowings to finance land acquisitions, land development, home construction and other operating and capital needs. All interest incurred during the three-month periods ended February 28, 2025 and February 29, 2024 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 $2.4 million for the three months ended February 28, 2025, compared to our equity in loss of unconsolidated joint ventures of $.4 million for three months ended February 29, 2024. The year-over-year improvement for the 2025 period mainly reflected homes delivered by an unconsolidated joint venture in California. In the corresponding period of 2024, our unconsolidated joint ventures did not 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 February 28, 2025 February 29, 2024 Net orders 2,772 3,323 Net order value (a) $ 1,346,067 $ 1,582,191 Cancellation rate (b) 16 % 14 % Ending backlog — homes 4,436 5,796 Ending backlog — value $ 2,201,933 $ 2,791,744 Ending community count 255 238 Average community count 257 240 (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 choices and options for homes in backlog during the same period. (b) Cancellation rate represents 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 2025 first quarter decreased 17%, compared to the year-earlier quarter, and the pace of monthly net orders per community was 3.6 in the 2025 first quarter, compared to 4.6 in the corresponding 2024 quarter, reflecting our lower net orders as well as a higher average community count. The decreases in our net orders and monthly pace per community reflected market conditions in the 2025 first quarter, with demand at the start of the Spring selling season more muted relative to the past few years, shaped by ongoing elevated mortgage interest rates, housing affordability concerns and heightened macroeconomic and geopolitical uncertainties that have negatively affected consumer confidence and caused homebuyers to take longer to make their purchase decisions. In addition, several of our planned community openings were delayed until late in the first quarter or, in some cases, into the second quarter, which also contributed to the year-over-year decline in our net orders. We employed targeted sales strategies during the 2025 first quarter to improve affordability for our homebuyers and help drive order activity. These sales strategies, which we have used to varying degrees since the 2022 second half, included homebuyer concessions, particularly mortgage-related concessions such as interest rate buydowns. Additionally, in mid-February 2025, we selectively reduced selling prices on a community-by-community basis at roughly half of our communities to stimulate demand, with a focus around offering consumers the most compelling value, and from these steps we saw improved weekly net orders and a normalizing absorption pace at the end of the quarter. The value of our net orders for the 2025 first quarter decreased 28 15% year over year as a result of the 17% decrease in net orders, partly offset by a 2% increase in their average selling price to $485,600. Our cancellation rate as a percentage of gross orders for the three months ended February 28, 2025 increased slightly from the year-earlier period. Backlog . The number of homes in our backlog and our backlog value at February 28, 2025 decreased 23% and 21%, respectively, from February 29, 2024. The decline in our overall backlog value reflected decreases in each of our homebuilding reporting segments, ranging from 20% in our West Coast and Southwest segments to 25% 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 ending community count for the 2025 first quarter grew 7% from the year-earlier quarter. Our average community count for the three months ended February 28, 2025 also increased 7% from the year-earlier period. To help drive future growth, we increased our investments in land and land development on a year-over-year basis for the three months ended February 28, 2025, as discussed below under “Liquidity and Capital Resources.” HOMEBUILDING REPORTING SEGMENTS Operational Data. The following tables present information about our homes delivered, net orders, cancellation rates as a percentage of gross orders, net order value, average community count and ending backlog (number of homes and value) by homebuilding reporting segment (dollars in thousands): Three Months Ended Homes Delivered Net Orders Cancellation Rates Segment February 28, 2025 February 29, 2024 February 28, 2025 February 29, 2024 February 28, 2025 February 29, 2024 West Coast 849 828 898 950 15 % 13 % Southwest 678 717 545 698 14 10 Central 751 870 720 1,017 16 15 Southeast 492 622 609 658 20 20 Total 2,770 3,037 2,772 3,323 16 % 14 % Net Order Value Average Community Count Segment February 28, 2025 February 29, 2024 Variance February 28, 2025 February 29, 2024 Variance West Coast $ 607,179 $ 633,400 (4) % 88 73 21 % Southwest 269,222 314,863 (14) 40 44 (9) Central 239,725 363,923 (34) 68 77 (12) Southeast 229,941 270,005 (15) 61 46 33 Total $ 1,346,067 $ 1,582,191 (15) % 257 240 7 % Backlog – Homes Backlog – Value Segment February 28, 2025 February 29, 2024 Variance February 28, 2025 February 29, 2024 Variance West Coast 1,260 1,667 (24) % $ 879,894 $ 1,100,889 (20) % Southwest 1,001 1,360 (26) 488,714 608,455 (20) Central 1,102 1,414 (22) 400,205 505,194 (21) Southeast 1,073 1,355 (21) 433,120 577,206 (25) Total 4,436 5,796 (23) % $ 2,201,933 $ 2,791,744 (21) % 29 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 choices and options buyers select. These intrinsic variations in our business limit the comparability of our homes delivered, net orders and backlog, as well as their corresponding values, between sequential and year-over-year periods, in addition to the effect of prevailing economic or housing market conditions in or across any particular periods. Financial Results . Below is a discussion of the financial results for each of our homebuilding reporting segments. Further information regarding these segments, including their pretax income (loss), is included in Note 2 – Segment Information in the Notes to Consolidated Financial Statements in this report. The difference between each homebuilding reporting segment’s operating income (loss) and pretax income (loss) is generally due to the equity in income (loss) of unconsolidated joint ventures and/or interest income and expense. In addition to the results of our homebuilding reporting segments presented below, our consolidated homebuilding operating income includes the results of Corporate and other, a non-operating segment. Corporate and other had operating losses of $36.5 million and $35.1 million in the three months ended February 28, 2025 and February 29, 2024, respectively. The financial results of our homebuilding reporting segments for the three months ended February 28, 2025 and February 29, 2024 were impacted to varying degrees by homebuyer concessions we extended to buyers in conjunction with our targeted sales strategies, as well as product and geographic mix shifts of homes delivered. West Coast . The following table presents financial information related to our West Coast segment (dollars in thousands, except average selling price): Three Months Ended February 28, 2025 February 29, 2024 Variance Revenues $ 601,649 $ 558,302 8 % Construction and land costs (491,168) (447,433) (10) Selling, general and administrative expenses (43,989) (44,738) 2 Operating income $ 66,492 $ 66,131 1 % Homes delivered 849 828 3 % Average selling price $ 708,700 $ 673,800 5 % Operating income as a percentage of revenues 11.1 % 11.8 % (70) bps In the three months ended February 28, 2025, this segment’s revenues were generated solely from housing operations. In the three months ended February 29, 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 months ended February 28, 2025 was driven by increases in both the number of homes delivered and their average selling price. Operating income for the three months ended February 28, 2025 was nearly even year over year, as housing gross profits were essentially flat, and a slight decrease in selling, general and administrative expenses was partly offset by the absence of land sale profits in the current period. Land sale profits were $.4 million in the year-earlier period. Operating income as a percentage of revenues for the 2025 first quarter was down from the year-earlier quarter, primarily due to a 140 basis-point decrease in the housing gross profit margin to 18.4%, partly offset by a 70 basis-point improvement in selling, general and administrative expenses as a percentage of housing revenues to 7.3%. The year-over-year decrease in the housing gross profit margin for the three months ended February 28, 2025 mainly reflected higher relative land costs as well as increased homebuyer concessions. For the three months ended February 28, 2025, inventory-related charges associated with housing operations were $.6 million, compared to $1.3 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 months ended February 28, 2025 primarily reflected 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. 30 Southwest . The following table presents financial information related to our Southwest segment (dollars in thousands, except average selling price): Three Months Ended February 28, 2025 February 29, 2024 Variance Revenues $ 312,879 $ 323,125 (3) % Construction and land costs (232,718) (244,491) 5 Selling, general and administrative expenses (21,386) (22,870) 6 Operating income $ 58,775 $ 55,764 5 % Homes delivered 678 717 (5) % Average selling price $ 461,500 $ 450,700 2 % Operating income as a percentage of revenues 18.8 % 17.3 % 150 bps In the three-month periods ended February 28, 2025 and February 29, 2024, this segment’s revenues were generated solely from housing operations. The year-over-year decline in this segment’s housing revenues for the three months ended February 28, 2025 reflected a decrease in the number of homes delivered, partly offset by an increase in their average selling price. Operating income for the three months ended February 28, 2025 increased from the corresponding year-earlier period due to higher housing gross profits and lower selling, general and administrative expenses. As a percentage of revenues, this segment’s operating income for the 2025 first quarter grew from the year-earlier quarter, reflecting a 130 basis-point increase in the housing gross profit margin to 25.6% and a 20 basis-point improvement in selling, general and administrative expenses as a percentage of housing revenues to 6.8%. The year-over-year expansion in the housing gross profit margin for the three months ended February 28, 2025 primarily reflected lower relative construction and land costs, partly offset by increased homebuyer concessions and reduced operating leverage from lower housing revenues. For the three months ended February 28, 2025, inventory-related charges associated with housing operations were $.3 million, compared to none for the year-earlier period. Central . The following table presents financial information related to our Central segment (dollars in thousands, except average selling price): Three Months Ended February 28, 2025 February 29, 2024 Variance Revenues $ 275,613 $ 320,484 (14) % Construction and land costs (219,896) (249,840) 12 Selling, general and administrative expenses (30,229) (32,073) 6 Operating income $ 25,488 $ 38,571 (34) % Homes delivered 751 870 (14) % Average selling price $ 367,000 $ 364,700 1 % Operating income as a percentage of revenues 9.2 % 12.0 % (280) bps In the three months ended February 28, 2025, this segment’s revenues were generated solely from housing operations. In the three months ended February 29, 2024, this segment’s revenues were comprised of housing revenues and land sale revenues. Housing revenues for the three months ended February 28, 2025 were down 13% from $317.3 million in the year-earlier period due to a decrease in the number of homes delivered, partly offset by a slight increase in their average selling price. Land sale revenues totaled $3.2 million in the three months ended February 29, 2024. Operating income for the 2025 first quarter declined from the year-earlier period mainly due to lower housing gross profits and the absence of land sale profits in the current quarter, partly offset by lower selling, general and administrative expenses. Land sale profits totaled $1.1 million for the 2024 first quarter. This segment’s operating income as a percentage of revenues for the 2025 first quarter decreased from the year-earlier period, primarily due to a 170 basis-point decline in the housing gross profit margin to 20.2% and a 90 basis-point increase in selling, general and administrative expenses as a percentage of housing revenues to 11.0%. The housing gross profit margin for the three months ended February 28, 2025 declined mainly due to higher relative land costs, and reduced operating leverage from lower housing revenues. Inventory-related charges associated with housing operations for the three months ended February 28, 2025 were $.3 million, compared to none for the year-earlier period. The year-over-year increase in 31 selling, general and administrative expenses as a percentage of housing revenues for the three months ended February 28, 2025 was mainly due to reduced operating leverage from lower housing revenues. Southeast . The following table presents financial information related to our Southeast segment (dollars in thousands, except average selling price): Three Months Ended February 28, 2025 February 29, 2024 Variance Revenues $ 196,900 $ 259,787 (24) % Construction and land costs (162,056) (203,791) 20 Selling, general and administrative expenses (21,767) (23,731) 8 Operating income $ 13,077 $ 32,265 (59) % Homes delivered 492 622 (21) % Average selling price $ 400,200 $ 417,700 (4) % Operating income as a percentage of revenues 6.6 % 12.4 % (580) bps This segment’s revenues for the three months ended February 28, 2025 and February 29, 2024 were generated solely from housing operations. Housing revenues for the three-month period ended February 28, 2025 declined from the corresponding year-earlier period due to decreases in both the number of homes delivered and their average selling price. Operating income for the three months ended February 28, 2025 was down year over year, reflecting lower housing gross profits, partly offset by lower selling, general and administrative expenses. As a percentage of revenues, operating income for the 2025 first quarter decreased from the year-earlier quarter due to a 390 basis-point decline in the housing gross profit margin to 17.7% and a 190 basis-point increase in selling, general and administrative expenses as a percentage of housing revenues to 11.1%. The year-over-year decrease in the housing gross profit margin primarily reflected higher relative construction and land costs, increased homebuyer concessions and reduced operating leverage from lower housing revenues. The year-over-year increase in selling, general and administrative expenses as a percentage of housing revenues for the three months ended February 28, 2025 was mainly due to reduced operating leverage from lower housing revenues as well as higher costs, including marketing and other expenses associated with our expanded community count in this segment. FINANCIAL SERVICES REPORTING SEGMENT The following table presents a summary of selected financial and operational data for our financial services reporting segment (dollars in thousands): Three Months Ended February 28, 2025 February 29, 2024 Revenues $ 4,736 $ 6,068 Expenses (1,539) (1,546) Equity in income of unconsolidated joint venture 4,329 7,055 Pretax income $ 7,526 $ 11,577 Total originations (a): Loans 2,067 2,146 Principal $ 868,655 $ 840,566 Percentage of homebuyers using KBHS 90 % 85 % Average FICO score 746 743 32 Three Months Ended February 28, 2025 February 29, 2024 Loans sold (a): Loans sold to GR Alliance 1,421 2,239 Principal $ 575,300 $ 886,241 Loans sold to third parties 563 37 Principal $ 249,977 $ 14,153 (a) Loan originations and sales occurred within KBHS. Revenues . Financial services revenues for the three months ended February 28, 2025 declined 22% year over year, due to decreases in both insurance commissions and title services revenues. Pretax income. Financial services pretax income for the three months ended February 28, 2025 was down 35% from the year-earlier period, largely due to a decrease in the equity in income of our unconsolidated joint venture, KBHS. In the 2025 first quarter, the equity in income of our unconsolidated joint venture was $4.3 million, compared to $7.1 million in the year-earlier quarter, reflecting a decrease in KBHS’ income. The year-over-year decrease in KBHS’ income primarily reflected a loss in the fair value of IRLCs of $1.5 million in the current quarter, compared to a gain in the fair value of IRLCs of $2.9 million in the year-earlier quarter. Also contributing to the year-over-year decrease in KBHS’ income was a decline in the number of loans originated, which reflected a decrease in the number of homes we delivered, partly offset by an increase in the percentage of homebuyers using KBHS. 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 February 28, 2025 February 29, 2024 Income tax expense $ 29,800 $ 36,000 Effective tax rate 21.4 % 20.6 % Our effective tax rate for the three months ended February 28, 2025 increased from the year-earlier period, mainly due to a $2.4 million decrease in the Section 45L tax credits we recognized primarily from building energy-efficient homes and a $.7 million decrease in excess tax benefits related to stock-based compensation. The year-over-year decrease in Section 45L tax credits reflects the impact of guidance the IRS issued in 2023 that heightened the Section 45L energy-efficiency qualification standard for homes built in California relative to other states and our decision to build homes in many of our markets beginning in 2025 that are highly energy efficient and qualify for ENERGY STAR certification but do not qualify for Section 45L tax credits. We believe the additional costs necessary to satisfy the higher standards for some of our homes outweigh the possible benefits of meeting those standards for both our business and our buyers. 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 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. 33 Adjusted Housing Gross Profit Margin. The following table reconciles our housing gross profit margin calculated in accordance with GAAP to the non-GAAP financial measure of our adjusted housing gross profit margin (dollars in thousands): Three Months Ended February 28, 2025 February 29, 2024 Housing revenues $ 1,387,041 $ 1,458,126 Housing construction and land costs (1,107,414) (1,144,427) Housing gross profits 279,627 313,699 Add: Inventory-related charges (a) 1,455 1,298 Adjusted housing gross profits $ 281,082 $ 314,997 Housing gross profit margin as a percentage of housing revenues 20.2 % 21.5 % Adjusted housing gross profit margin as a percentage of housing revenues 20.3 % 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 2025 first quarter with total liquidity of $1.25 billion, including cash and cash equivalents and $981.7 million of available capacity under the Credit Facility, with $100.0 million of cash borrowings outstanding. Cash and cash equivalents totaled $267.8 million at February 28, 2025, compared to $598.0 million at November 30, 2024. Cash equivalents included in the total were $48.7 million at February 28, 2025 and $385.1 million at November 30, 2024, and were mainly invested in interest-bearing bank deposit accounts and money market funds. Based on our financial position as of February 28, 2025, and our business forecast as discussed below under “Outlook,” we have no material concerns related to our liquidity. We believe 34 that our existing cash and cash equivalents, our anticipated cash flows from operations and amounts available under our Credit Facility will be sufficient to fund our anticipated operating and land-related investment needs for at least the next 12 months. Cash Requirements . In the three months ended February 28, 2025, 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, 2024. Investments in Land and Land Development. Our investments in land and land development for the three months ended February 28, 2025 grew 57% to $920.3 million, compared to $587.1 million for the corresponding year-earlier period. This increase reflected the execution of our strategic priority to expand our land-related investments to support future growth, and our opportunistic purchase of two sizable land parcels in our Southwest homebuilding reporting segment to replace a large community that is approaching close out. Land acquisition expenditures, which are included in our investments in land and land development, increased to $538.0 million, or 58% of our total investments, for the three months ended February 28, 2025, from $214.4 million, or approximately 37% of our total investments, for the corresponding period of 2024. While we made investments in land and land development in each of our homebuilding reporting segments during the three months ended February 28, 2025 and February 29, 2024, approximately 47% and 50%, respectively, of these investments for each period were made in our West Coast homebuilding reporting segment. For the remainder of 2025, 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, depending significantly on market conditions and available opportunities that meet our investment return standards. The following table presents the number of lots we owned or controlled under land option contracts and other similar contracts and the carrying value of inventory by homebuilding reporting segment (dollars in thousands): February 28, 2025 November 30, 2024 Variance Segment Lots Carrying Value Lots Carrying Value Lots Carrying Value West Coast 25,145 $ 3,077,792 23,956 $ 2,915,543 1,189 $ 162,249 Southwest 11,901 1,026,310 13,117 845,910 (1,216) 180,400 Central 22,918 837,410 21,056 839,920 1,862 (2,510) Southeast 18,269 1,001,035 18,574 926,647 (305) 74,388 Total 78,233 $ 5,942,547 76,703 $ 5,528,020 1,530 $ 414,527 The carrying value of lots we owned or controlled under land option contracts and other similar contracts at February 28, 2025 increased 7% from November 30, 2024, reflecting land investments during the three months ended February 28, 2025, partly offset by homes delivered and our abandonment of 4,621 previously controlled lots. The number of lots we owned or controlled as of February 28, 2025 increased 2% from November 30, 2024. The number of lots in inventory as of February 28, 2025 included 13,993 lots under contract where the associated deposits were refundable at our discretion, compared to 18,923 of such lots at November 30, 2024. Our lots controlled under land option contracts and other similar contracts as a percentage of total lots was 46% at February 28, 2025, compared to 49% at November 30, 2024. Generally, this percentage fluctuates with our decisions to control (or abandon) lots under land option contracts and other similar contracts or to purchase (or sell owned) lots based on available opportunities and our investment return standards. Land Option Contracts and Other Similar Contracts. As discussed in Note 8 – Variable Interest Entities in the Notes to Consolidated Financial Statements in this report, our land option contracts and other similar contracts generally do not contain provisions requiring our specific performance. Our decision to exercise a particular land option contract or other similar contract depends on the results of our due diligence reviews and ongoing market and project feasibility analysis that we conduct after entering into such a contract. In some cases, our decision to exercise a land option contract or other similar contract may be conditioned on the land seller obtaining necessary entitlements, such as zoning rights and environmental and development approvals, and/or physically developing the underlying land by a pre-determined date. We typically have the ability not to exercise our rights to the underlying land for any reason and, if applicable, forfeit our deposits without further penalty or obligation to the sellers. If we were to acquire all the land we had under land option contracts and other similar contracts at February 28, 2025, we estimate the remaining purchase price to be paid would be as follows: 2025 – $902.6 million; 2026 – $1.09 billion; 2027 – $276.2 million; 2028 – $107.5 million; 2029 – $62.5 million; and thereafter – $0. 35 Liquidity. The table below summarizes our cash and cash equivalents, and total liquidity (in thousands): February 28, 2025 November 30, 2024 Cash and cash equivalents $ 267,833 $ 597,973 Credit Facility commitment 1,090,000 1,090,000 Borrowings outstanding under the Credit Facility (100,000) — Letters of credit outstanding under the Credit Facility (8,260) (8,260) Credit Facility availability 981,740 1,081,740 Total liquidity $ 1,249,573 $ 1,679,713 Capital Resources. Our notes payable consisted of the following (in thousands): February 28, 2025 November 30, 2024 Variance Credit Facility $ 100,000 $ — $ 100,000 Term Loan 358,994 358,826 168 Senior notes 1,330,164 1,329,704 460 Mortgages and land contracts due to land sellers and other loans 3,149 3,149 — Total $ 1,792,307 $ 1,691,679 $ 100,628 Our first quarter is typically when we have the lowest cash inflows and highest cash outflows of our fiscal year. As such, to support executing on our strategic priority of expanding our investments in land and land development for future growth, during the 2025 first quarter we utilized cash borrowings from the Credit Facility. As a result, our financial leverage, as measured by the ratio of debt to capital, increased 110 basis points to 30.5% at February 28, 2025, compared to 29.4% at November 30, 2024. On a year-over-year basis, our debt to capital ratio was nearly even with 30.4% at February 29, 2024. 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 13, 2028, we may issue up to $100.0 million of letters of credit. As of February 28, 2025 and November 30, 2024, we had letters of credit outstanding under the LOC Facility of $72.6 million and $73.3 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 $1.33 billion of performance bonds outstanding at February 28, 2025 and November 30, 2024, 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 February 28, 2025, we had $100.0 million of 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 36 fiscal quarter (though there is no reduction if there is a consolidated net loss in any fiscal quarter), plus (c) an amount equal to 50% of the cumulative net proceeds we receive from the issuance of our capital stock after November 30, 2021. • Leverage Ratio – We must also maintain a Leverage Ratio of less than or equal to .60 at the end of each fiscal quarter. The Leverage Ratio is calculated as the ratio of our consolidated total indebtedness to the sum of consolidated total indebtedness and consolidated tangible net worth, all as defined under the Credit Facility and the Term Loan. • Interest Coverage Ratio or liquidity – We are also required to maintain either (a) an Interest Coverage Ratio of greater than or equal to 1.50 at the end of each fiscal quarter; or (b) a minimum level of liquidity, but not both. The Interest Coverage Ratio is the ratio of our consolidated adjusted EBITDA to consolidated interest incurred, each as defined under the Credit Facility and the Term Loan, in each case for the previous 12 months. Our minimum liquidity is required to be greater than or equal to consolidated interest incurred, as defined under the Credit Facility and the Term Loan, for the four most recently ended fiscal quarters in the aggregate. In addition, under the Credit Facility and the Term Loan, our equity investments in joint ventures and non-guarantor subsidiaries and other unconsolidated entities as of the end of each fiscal quarter cannot exceed the sum of (a) $104.8 million and (b) 20% of consolidated tangible net worth. Further, for so long as we do not hold an investment grade rating, as defined under the Credit Facility and the Term Loan, the Credit Facility and the Term Loan do not permit our borrowing base indebtedness, which, subject to certain exceptions, is the aggregate principal amount of our and certain of our subsidiaries’ outstanding indebtedness for borrowed money and non-collateralized financial letters of credit, to be greater than our borrowing base (a measure relating to our inventory and unrestricted cash assets). The covenants and other requirements under the Credit Facility and the Term Loan represent the most restrictive covenants that we are subject to with respect to our notes payable. The following table summarizes the financial covenants and other requirements under the Credit Facility and the Term Loan, and our actual levels or ratios (as applicable) with respect to those covenants and other requirements, in each case as of February 28, 2025: Financial Covenants and Other Requirements Covenant Requirement Actual Consolidated tangible net worth > $3.18 billion $4.05 billion Leverage Ratio < .600 .308 Interest Coverage Ratio (a) > 1.500 10.640 Minimum liquidity (a) > $89.7 million $167.8 million Investments in joint ventures and non-guarantor subsidiaries < $915.1 million $410.0 million Borrowing base in excess of borrowing base indebtedness (as defined) n/a $2.69 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 February 28, 2025, we were in compliance with the applicable terms of all of our covenants and other requirements under the Credit Facility, the Term Loan, the senior notes, the indenture, the LOC Facility and the mortgages and land contracts due to land sellers and other loans. Our ability to access the Credit Facility for cash borrowings and letters of credit and our ability to secure future debt financing depend, in part, on our ability to remain in such compliance. Our ability to access the Credit Facility’s full borrowing capacity, as well as the LOC Facility’s full issuance capacity, also depends on the ability and willingness of the applicable lenders and financial institutions, including any substitute or additional lenders and financial institutions, to meet their commitments to fund loans, extend credit or provide payment guarantees to or for us under those instruments. There are no agreements that restrict our payment of dividends other than the Credit Facility and the Term Loan, which would restrict our payment of certain dividends, such as cash dividends on our common stock, if a default under the Credit Facility or the Term Loan exists at the time of any such payment, or if any such payment would result in such a default (other than dividends paid within 60 days after declaration, if there was no default at the time of declaration). Depending on available terms, we finance certain land acquisitions with purchase-money financing from land sellers or with other forms of financing from third parties. At February 28, 2025, we had outstanding mortgages and land contracts due to land 37 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 $16.5 million. Senior Unsecured Term Loan . We have a $360.0 million Term Loan with the lenders party thereto that will mature on August 25, 2026, or earlier if we secure borrowings under the Credit Facility without similarly securing the Term Loan (subject to certain exceptions). The Term Loan is further described in Note 14 – Notes Payable in the Notes to Consolidated Financial Statements in this report. Unconsolidated Joint Ventures. As discussed in Note 9 – Investments in Unconsolidated Joint Ventures in the Notes to Consolidated Financial Statements in this report, we have investments in unconsolidated joint ventures in various markets where our homebuilding operations are located. As of February 28, 2025, one of our unconsolidated joint ventures had borrowings outstanding under a term loan with a third-party lender and secured by the underlying property and related project assets. None of our other homebuilding unconsolidated joint ventures had outstanding debt at February 28, 2025. Consolidated Cash Flows . The following table presents a summary of net cash provided by (used in) our operating, investing and financing activities (in thousands): Three Months Ended February 28, 2025 February 29, 2024 Net cash provided by (used in): Operating activities $ (334,321) $ 28,518 Investing activities (10,664) (12,592) Financing activities 15,250 (74,973) Net decrease in cash and cash equivalents $ (329,735) $ (59,047) Operating Activities . Generally, our net operating cash flows fluctuate mainly based on changes in our inventories and our profitability. Our net cash used by operating activities for the three months ended February 28, 2025 mainly reflected a net increase in inventories of $416.4 million and a net decrease in accounts payable, accrued expenses and other liabilities of $99.0 million, partly offset by net income of $109.6 million and a net decrease in receivables of $39.3 million. In the three months ended February 29, 2024, our net cash provided by operating activities primarily reflected net income of $138.7 million and a net decrease in receivables of $10.1 million, partly offset by a net increase in inventories of $107.5 million and a net decrease in accounts payable, accrued expenses and other liabilities of $38.5 million. Investing Activities . In the three months ended February 28, 2025, our net cash used for investing activities reflected $11.2 million used for net purchases of property and equipment, partially offset by a $.6 million return of investments in unconsolidated joint ventures. In the three months ended February 29, 2024, the net cash used for investing activities included $9.5 million for net purchases of property and equipment and $3.1 million for contributions to unconsolidated joint ventures. Financing Activities . In the three months ended February 28, 2025, cash was provided by $100.0 million of net borrowings under the Credit Facility and $.4 million of issuances of common stock under employee stock plans. The cash provided was partly offset by stock repurchases of $50.0 million, dividend payments on our common stock of $19.3 million, and tax payments associated with stock-based compensation awards of $15.9 million. In the three months ended February 29, 2024, our uses of cash included stock repurchases of $50.0 million, tax payments associated with stock-based compensation awards of $16.5 million, dividend payments on our common stock of $16.4 million, and payments on mortgages and land contracts due to land sellers and other loans of $.9 million. The cash used was partially offset by $8.8 million of issuances of common stock under employee stock plans. Dividends. In the 2025 first quarter, our board of directors declared, and we paid, a quarterly cash dividend on our common stock of $.25 per share. In the 2024 first quarter, our board of directors declared, and we paid, a quarterly cash dividend on our common stock of $.20 per share. The declaration and payment of future cash dividends on our common stock, whether at current levels or at all, are at the discretion of our board of directors, and depend upon, among other things, our expected future earnings, cash flows, capital requirements, access to external financing, debt structure and any adjustments thereto, operational and financial investment strategy and general financial condition, as well as general business conditions. 38 Share Repurchase Program. On April 18, 2024, our board of directors authorized us to repurchase up to $1.00 billion of our outstanding common stock. As of November 30, 2024, there was $700.0 million of remaining availability under this share repurchase authorization. In the 2025 first quarter, we repurchased 753,939 shares of our common stock at a total cost of $50.0 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 February 28, 2025, there was $650.0 million of remaining availability under this share repurchase authorization. As of the date of this report, and as stated above, we believe we have adequate capital resources and sufficient access to external financing sources to satisfy our current and reasonably anticipated requirements for funds to conduct our operations and meet other needs in the ordinary course of our business. For the remainder of 2025, we expect to use or redeploy our cash resources or cash borrowings under the Credit Facility to support our business within the context of prevailing market conditions. During this time, we may also engage in capital markets, bank loan, project debt or other financial transactions, including the repurchase of debt or equity securities or potential new issuances of debt or equity securities to support our business needs. The amounts involved in these transactions, if any, may be material. In addition, as necessary or desirable, we may adjust or amend the terms of and/or expand the capacity of the Credit Facility or the LOC Facility, or enter into additional letter of credit facilities, or other similar facility arrangements, in each case with the same or other financial institutions, or allow any such facilities or loans to mature or expire. Our ability to engage in such transactions may be constrained by volatile or tight economic, capital, credit and/or financial market conditions or other factors, including those described below under “Outlook,” and/or our liquidity, leverage and net worth, and we can provide no assurance as to successfully completing, the costs of, or the operational limitations arising from any one or series of such transactions. Supplemental Guarantor Financial Information As of February 28, 2025, we had $1.34 billion in aggregate principal amount of outstanding senior notes, $100.0 million of borrowings outstanding under the Credit Facility and $360.0 million in aggregate principal amount of borrowings outstanding under the Term Loan. Our obligations to pay principal and interest on the senior notes and borrowings, if any, under the Credit Facility and the Term Loan are guaranteed on a joint and several basis by our Guarantor Subsidiaries. Our other subsidiaries, including all of our subsidiaries associated with our financial services operations, do not guarantee any such indebtedness (collectively, “Non-Guarantor Subsidiaries”), although we may cause a Non-Guarantor Subsidiary to become a Guarantor Subsidiary if we believe it to be in our or the relevant subsidiary’s best interest. See Note 14 – Notes Payable in the Notes to Consolidated Financial Statements in this report for additional information regarding the terms of our senior notes, the Credit Facility and the Term Loan. The guarantees are full and unconditional, and the Guarantor Subsidiaries are 100% owned by us. The guarantees are senior unsecured obligations of each of the Guarantor Subsidiaries and rank equally in right of payment with all unsecured and unsubordinated indebtedness and guarantees of such Guarantor Subsidiaries. The guarantees are effectively subordinated to any secured indebtedness of such Guarantor Subsidiaries to the extent of the value of the assets securing such indebtedness, and structurally subordinated to indebtedness and other liabilities of Non-Guarantor Subsidiaries. Pursuant to the terms of the indenture governing the senior notes and the terms of the Credit Facility and the Term Loan, if any of the Guarantor Subsidiaries ceases to be a “significant subsidiary” as defined by Rule 1-02 of Regulation S-X using a 5% rather than a 10% threshold (provided that the assets of our Non-Guarantor Subsidiaries do not in the aggregate exceed 10% of an adjusted measure of our consolidated total assets), it will be automatically and unconditionally released and discharged from its guaranty of the senior notes, the Credit Facility and the Term Loan so long as all guarantees by such Guarantor Subsidiary of any other of our or our subsidiaries’ indebtedness are terminated at or prior to the time of such release. The following tables present summarized financial information for KB Home and the Guarantor Subsidiaries on a combined basis, excluding unconsolidated joint ventures and after the elimination of (a) intercompany transactions and balances between KB Home and the Guarantor Subsidiaries and (b) equity in earnings from and investments in the Non-Guarantor Subsidiaries. See Note 9 – Investments in Unconsolidated Joint Ventures in the Notes to Consolidated Financial Statements in this report for additional information regarding our unconsolidated joint ventures. 39 February 28, 2025 November 30, 2024 Summarized Balance Sheet Data (in thousands) Assets Cash $ 215,887 $ 543,233 Inventories 5,342,657 4,981,097 Amounts due from Non-Guarantor Subsidiaries 549,192 500,321 Total assets 6,703,724 6,657,479 Liabilities and Stockholders’ Equity Notes payable $ 1,792,307 $ 1,691,679 Amounts due to Non-Guarantor Subsidiaries 395,192 382,356 Total liabilities 2,944,543 2,928,169 Stockholders’ equity 3,759,181 3,729,310 Three Months Ended February 28, 2025 Summarized Statement of Operations Data (in thousands) Revenues $ 1,278,293 Construction and land costs (1,012,166) Selling, general and administrative expenses (139,388) Interest income from Non-Guarantor Subsidiaries 7,833 Pretax income 136,405 Net income 106,805 Critical Accounting Policies and Estimates The preparation of our consolidated financial statements requires the use of judgment in the application of accounting policies and estimates of uncertain matters. There have been no significant changes to our critical accounting policies and estimates during the three months ended February 28, 2025 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, 2024. Recent Accounting Pronouncements There are no recent accounting pronouncements that are expected to have a material impact on our consolidated financial statements. Outlook Although certain longer-term housing market drivers remain largely positive, including favorable demographic trends, rising household formations and the undersupply of new and resale homes, we expect the softer market conditions, including ongoing elevated mortgage interest rates, housing affordability concerns and heightened macroeconomic and geopolitical uncertainties, that we experienced in the 2025 first quarter to persist for the remainder of the year. The negative impact of these conditions on consumer confidence has caused homebuyers to take longer in making their purchase decisions and demand at the start of the Spring selling season to be muted relative to the past few years. Reflecting this environment, despite a healthy level of traffic in our communities, we experienced year-over-year decreases in our 2025 first quarter net orders of 17%, ending backlog of 23% and ending backlog value of 21%. In mid-February 2025, we selectively reduced selling prices on a community-by-community basis at roughly one-half of our communities to stimulate demand, and in many cases, we lowered or eliminated homebuyer concessions, helping to offset the margin impact of those price changes. Consumers responded favorably to these steps, which were focused around offering the most compelling value, and we saw improved weekly net orders and a normalizing absorption pace at the end of the quarter. Although our net orders for the 2025 first quarter were below our expectations, we were encouraged by the net order and absorption rates we saw at the end of the 2025 first quarter, which have continued into the early weeks of our 2025 second quarter. While our net order trend has improved, we have revised our projections for 2025 due to our first quarter results, the relatively soft start to the Spring selling season and the selling price adjustments we implemented in mid-February 2025. We believe we 40 are well positioned to meet our present net order expectations for what is typically the seasonally strongest selling period of the year. At the same time, we intend to remain nimble in our approach to the Spring selling season, as we balance pace and price at the community level. We also expect to continue to employ targeted sales strategies during the remainder of 2025, as we have to varying degrees since the 2022 second half, including homebuyer concessions, particularly, mortgage-related concessions such as interest rate buydowns. Our use of such concessions 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. We anticipate our use of pricing adjustments and homebuyer concessions will continue to temper the average selling prices of homes delivered and housing gross profit margins for the remainder of the year, as reflected in our 2025 second quarter and full-year projections below. For the remainder of 2025, we intend to continue to invest in and develop land positions within attractive submarkets and acquire or control additional land that meets our investment standards, depending significantly on market conditions and available opportunities, though we anticipate a sequential decrease in our land-related investments in the 2025 second quarter. Additionally, we intend to prioritize capital efficiency, developing lots where possible in smaller phases and balancing development with our starts pace to manage our inventory of finished lots. At the same time, we plan to continue returning capital to our stockholders. As of February 28, 2025, we had $650.0 million of remaining availability under our current board of directors share repurchase authorization. This provides us the opportunity to repurchase our common stock in the remainder of 2025, with the pace, 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. Considering the foregoing, our present outlook for the 2025 second quarter and the 2025 full year as to certain metrics is as follows: 2025 Second Quarter • We expect to generate housing revenues in the range of $1.45 billion to $1.55 billion, compared to $1.70 billion for the corresponding 2024 period, and anticipate our average selling price to be approximately $488,000, compared to $483,000 in the year-earlier period. • We expect our homebuilding operating income margin to be approximately 8.5%, assuming no inventory-related charges, compared to 11.1% for the year-earlier quarter. • We expect our housing gross profit margin will be in the range of 19.1% to 19.5%, assuming no inventory-related charges, compared to 21.2% for the corresponding 2024 quarter. • We expect our selling, general and administrative expenses as a percentage of housing revenues will be in the range of 10.6% to 11.0%, compared to 10.1% for the 2024 second quarter. • We expect our effective tax rate will be approximately 24.0%, compared to 23.8% for the year-earlier quarter. • We expect our ending community count to be in the range of 250 to 260, compared to 247 for the corresponding 2024 quarter. 2025 Full Year • We expect our housing revenues to be in the range of $6.60 billion to $7.00 billion, compared to $6.90 billion for 2024. • We expect our average selling price to be in the range of $480,000 to $495,000, compared to $486,900 for 2024. • We expect our homebuilding operating income margin as a percentage of revenues to be approximately 9.4%, assuming no inventory-related charges, compared to 11.1% for 2024. • We expect our housing gross profit margin to be in the range of 19.2% to 20.0%, assuming no inventory-related charges, compared to 21.1% for 2024. • We expect our selling, general and administrative expenses as a percentage of housing revenues to be in the range of 10.0% to 10.4%, compared to 10.0% for 2024. • We expect our effective tax rate to be approximately 24.0%, compared to 23.0% for 2024. 41 • We expect our ending community count to be approximately 250, compared to 258 for 2024. 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). While the Federal Reserve reduced interest rates three times in 2024, and may lower rates further in 2025 or later periods, it has since December 2024 kept rates unchanged and 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. 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 2025 first quarter, should not be considered indicative of our future results on any metric or set of metrics, including, but not limited to, our net orders, backlog, revenues and returns. Forward-Looking Statements Investors are cautioned that certain statements contained in this report, as well as some statements by us in periodic press releases and other public disclosures and some oral statements by us to securities analysts, stockholders and others during presentations, are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 (the “Act”). Statements that are predictive in nature, that depend upon or refer to future events or conditions, or that include words such as “expect,” “anticipate,” “intend,” “plan,” “believe,” “estimate,” “hope,” and similar expressions constitute forward-looking statements. In addition, any statements that we may make or provide concerning future financial or operating performance (including without limitation future revenues, community count, homes delivered, net orders, selling prices, sales pace per new community, expenses, expense ratios, housing gross profits, housing gross profit margins, earnings or earnings per share, or growth or growth rates), future market conditions, future interest rates, and other economic conditions, ongoing business strategies or prospects, future dividends and changes in dividend levels, the value of our backlog (including amounts that we expect to realize upon delivery of homes included in our backlog and the timing of those deliveries), the value of our net orders, potential future asset acquisitions and the impact of completed acquisitions, future share issuances or repurchases, future debt issuances, repurchases or redemptions and other possible future actions are also forward-looking statements as defined by the Act. Forward-looking statements are based on our current expectations and projections about future events and are subject to risks, uncertainties, and assumptions about our operations, economic and market factors, and the homebuilding industry, among other things. These statements are not guarantees of future performance, and we have no specific policy or intention to update these statements. If we update or revise any such statement(s), no assumption should be made that we will further update or revise that statement(s) or update or revise any other such statement(s). In addition, forward-looking and other statements in this report and in other public or oral disclosures that express or contain opinions, views or assumptions about market or economic conditions; the success, performance, effectiveness and/or relative positioning of our strategies, initiatives or operational activities; and other matters, may be based in whole or in part on general observations of our management, limited or anecdotal evidence and/or business or industry experience without in-depth or any particular empirical investigation, inquiry or analysis. Actual events and results may differ materially from those expressed or forecasted in forward-looking statements due to a number of factors. The most important risk factors that could cause our actual performance and future events and actions to differ materially from such forward-looking statements include, but are not limited to, the following: • general economic, employment and business conditions; • population growth, household formations and demographic trends; • conditions in the capital, credit and financial markets; • our ability to access external financing sources and raise capital through the issuance of common stock, debt or other securities, and/or project financing, on favorable terms; • the execution of any securities repurchases pursuant to our board of directors’ authorization; • material and trade costs and availability, including 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 may increase to moderate inflation, as it did in 2022 and 2023, and those available in the capital markets or from financial institutions and other lenders, and applicable to mortgage loans; 42 • 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; • our obtaining adequate levels of affordable insurance for our business and our ability to cover any incurred costs, liabilities or losses that are not covered by the insurance we have procured; • 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; • regulatory instability associated with the current U.S. presidential administration, including from its government efficiency initiatives, and the impact on the economy or financial markets therefrom; • 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, and financial markets’ and businesses’ reactions to any such policies; • disruptions in world and regional trade flows, economic activity and supply chains due to the military conflict and other attacks in the Middle East region and military conflict in Ukraine, including those stemming from wide-ranging sanctions the U.S. and other countries have imposed or may further impose on Russian business sectors, financial organizations, individuals and raw materials, the impact of which may, among other things, increase our operational costs, exacerbate building materials and appliance shortages and/or reduce our revenues and earnings; • the adoption of new or amended financial accounting standards and the guidance and/or interpretations with respect thereto; • the availability and cost of land in desirable areas and our ability to timely and efficiently develop acquired land parcels and open new home communities; • impairment, land option contract abandonment or other inventory-related charges, including any stemming from decreases in the value of our land assets; • our warranty claims experience with respect to homes previously delivered and actual warranty costs incurred; • costs and/or charges arising from regulatory compliance requirements, including implementing 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; 43 • 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, and the costs and margin impact we incur from the incentives or concessions we may provide to buyers to do so; • 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 or afford 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, 2024 and other filings with the SEC for a further discussion of these and other risks and uncertainties applicable to our business.