UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
For the quarterly period ended August 31, 2024 .
or
For the transition period from [ ] to [ ].
Commission File No. 001-09195
(Exact name of registrant as specified in its charter)
| (State of incorporation) | (IRS employer identification number) | ||||
(310 ) 231-4000
(Address, including zip code, and telephone number of principal executive offices)
Securities registered pursuant to section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||||||||||||
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| ☒ | Accelerated filer | ☐ | |||||||||
| Non-accelerated filer | ☐ | Smaller reporting company | |||||||||
| Emerging growth company | |||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
There were 73,334,477 shares of the registrant’s common stock, par value $1.00 per share, outstanding on August 31, 2024. The registrant’s grantor stock ownership trust held an additional 6,705,247 shares of the registrant’s common stock on that date.
KB HOME
FORM 10-Q
INDEX
| Page Number | |||||
Consolidated Balance Sheets - August 31, 2024 and November 30, 2023 | |||||
Three Months and Nine Months Ended August 31, 2024 and 2023 | |||||
Nine Months Ended August 31, 2024 and 2023 | |||||
2
PART I. FINANCIAL INFORMATION
Item 1.Financial Statements
KB HOME
CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, Except Per Share Amounts – Unaudited)
| Three Months Ended August 31, | Nine Months Ended August 31, | |||||||||||||||||||||||||
| 2024 | 2023 | 2024 | 2023 | |||||||||||||||||||||||
| Total revenues | $ | $ | $ | $ | ||||||||||||||||||||||
| Homebuilding: | ||||||||||||||||||||||||||
| Revenues | $ | $ | $ | $ | ||||||||||||||||||||||
| Construction and land costs | ( | ( | ( | ( | ||||||||||||||||||||||
| Selling, general and administrative expenses | ( | ( | ( | ( | ||||||||||||||||||||||
| Operating income | ||||||||||||||||||||||||||
Interest income and other | ||||||||||||||||||||||||||
Equity in income (loss) of unconsolidated joint ventures | ( | ( | ||||||||||||||||||||||||
| Homebuilding pretax income | ||||||||||||||||||||||||||
| Financial services: | ||||||||||||||||||||||||||
| Revenues | ||||||||||||||||||||||||||
| Expenses | ( | ( | ( | ( | ||||||||||||||||||||||
Equity in income of unconsolidated joint venture | ||||||||||||||||||||||||||
| Financial services pretax income | ||||||||||||||||||||||||||
| Total pretax income | ||||||||||||||||||||||||||
| Income tax expense | ( | ( | ( | ( | ||||||||||||||||||||||
| Net income | $ | $ | $ | $ | ||||||||||||||||||||||
| Earnings per share: | ||||||||||||||||||||||||||
| Basic | $ | $ | $ | $ | ||||||||||||||||||||||
| Diluted | $ | $ | $ | $ | ||||||||||||||||||||||
| Weighted average shares outstanding: | ||||||||||||||||||||||||||
| Basic | ||||||||||||||||||||||||||
| Diluted | ||||||||||||||||||||||||||
See accompanying notes.
3
KB HOME
CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Shares – Unaudited)
| August 31, 2024 | November 30, 2023 | ||||||||||
| Assets | |||||||||||
| Homebuilding: | |||||||||||
Cash and cash equivalents | $ | $ | |||||||||
Receivables | |||||||||||
Inventories | |||||||||||
Investments in unconsolidated joint ventures | |||||||||||
Property and equipment, net | |||||||||||
Deferred tax assets, net | |||||||||||
Other assets | |||||||||||
| Financial services | |||||||||||
| Total assets | $ | $ | |||||||||
| Liabilities and stockholders’ equity | |||||||||||
| Homebuilding: | |||||||||||
Accounts payable | $ | $ | |||||||||
Accrued expenses and other liabilities | |||||||||||
Notes payable | |||||||||||
| Financial services | |||||||||||
| Stockholders’ equity: | |||||||||||
Common stock — | |||||||||||
| Paid-in capital | |||||||||||
Retained earnings | |||||||||||
Accumulated other comprehensive loss | ( | ( | |||||||||
Grantor stock ownership trust, at cost: | ( | ( | |||||||||
Treasury stock, at cost: | ( | ( | |||||||||
Total stockholders’ equity | |||||||||||
| Total liabilities and stockholders’ equity | $ | $ | |||||||||
See accompanying notes.
4
KB HOME
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In Thousands – Unaudited)
Three Months Ended August 31, 2024 and 2023 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Number of Shares | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Common Stock | Grantor Stock Ownership Trust | Treasury Stock | Common Stock | Paid-in Capital | Retained Earnings | Accumulated Other Comprehensive Loss | Grantor Stock Ownership Trust | Treasury Stock | Total Stockholders’ Equity | ||||||||||||||||||||||||||||||||||||||||||||||||||
Balance at May 31, 2024 | ( | ( | $ | $ | $ | $ | ( | $ | ( | $ | ( | $ | |||||||||||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Dividends on common stock | — | — | — | — | — | ( | — | — | — | ( | |||||||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||
Stock repurchases, including excise tax | — | — | ( | — | — | — | — | — | ( | ( | |||||||||||||||||||||||||||||||||||||||||||||||||
Balance at August 31, 2024 | ( | ( | $ | $ | $ | $ | ( | $ | ( | $ | ( | $ | |||||||||||||||||||||||||||||||||||||||||||||||
Balance at May 31, 2023 | ( | ( | $ | $ | $ | $ | ( | $ | ( | $ | ( | $ | |||||||||||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Dividends on common stock | — | — | — | — | — | ( | — | — | — | ( | |||||||||||||||||||||||||||||||||||||||||||||||||
| Employee stock options/other | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||
Stock repurchases, including excise tax | — | — | ( | — | — | — | — | — | ( | ( | |||||||||||||||||||||||||||||||||||||||||||||||||
Balance at August 31, 2023 | ( | ( | $ | $ | $ | $ | ( | $ | ( | $ | ( | $ | |||||||||||||||||||||||||||||||||||||||||||||||
Nine Months Ended August 31, 2024 and 2023 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Number of Shares | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Common Stock | Grantor Stock Ownership Trust | Treasury Stock | Common Stock | Paid-in Capital | Retained Earnings | Accumulated Other Comprehensive Loss | Grantor Stock Ownership Trust | Treasury Stock | Total Stockholders’ Equity | ||||||||||||||||||||||||||||||||||||||||||||||||||
Balance at November 30, 2023 | ( | ( | $ | $ | $ | $ | ( | $ | ( | $ | ( | $ | |||||||||||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Dividends on common stock | — | — | — | — | — | ( | — | — | — | ( | |||||||||||||||||||||||||||||||||||||||||||||||||
| Employee stock options/other | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Stock awards | — | — | — | ( | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Stock repurchases, including excise tax | — | — | ( | — | — | — | — | — | ( | ( | |||||||||||||||||||||||||||||||||||||||||||||||||
| Tax payments associated with stock-based compensation awards | — | — | ( | — | — | — | — | — | ( | ( | |||||||||||||||||||||||||||||||||||||||||||||||||
Balance at August 31, 2024 | ( | ( | $ | $ | $ | $ | ( | $ | ( | $ | ( | $ | |||||||||||||||||||||||||||||||||||||||||||||||
Balance at November 30, 2022 | ( | ( | $ | $ | $ | $ | ( | $ | ( | $ | ( | $ | |||||||||||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Dividends on common stock | — | — | — | — | — | ( | — | — | — | ( | |||||||||||||||||||||||||||||||||||||||||||||||||
| Employee stock options/other | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Stock awards | — | — | — | ( | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Stock repurchases, including excise tax | — | — | ( | — | — | — | — | — | ( | ( | |||||||||||||||||||||||||||||||||||||||||||||||||
| Tax payments associated with stock-based compensation awards | — | — | ( | — | — | — | — | — | ( | ( | |||||||||||||||||||||||||||||||||||||||||||||||||
Balance at August 31, 2023 | ( | ( | $ | $ | $ | $ | ( | $ | ( | $ | ( | $ | |||||||||||||||||||||||||||||||||||||||||||||||
5
KB HOME
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands – Unaudited)
| Nine Months Ended August 31, | |||||||||||
| 2024 | 2023 | ||||||||||
| Cash flows from operating activities: | |||||||||||
Net income | $ | $ | |||||||||
Adjustments to reconcile net income to net cash provided by operating activities: | |||||||||||
| Equity in income of unconsolidated joint ventures | ( | ( | |||||||||
Distributions of earnings from unconsolidated joint ventures | |||||||||||
| Amortization of debt issuance costs and premiums | |||||||||||
Depreciation and amortization | |||||||||||
Deferred income taxes | |||||||||||
| Gain on sale of investment | ( | ||||||||||
Stock-based compensation | |||||||||||
Inventory impairments and land option contract abandonments | |||||||||||
Changes in assets and liabilities: | |||||||||||
Receivables | ( | ||||||||||
Inventories | ( | ||||||||||
Accounts payable, accrued expenses and other liabilities | ( | ( | |||||||||
Other, net | ( | ( | |||||||||
Net cash provided by operating activities | |||||||||||
| Cash flows from investing activities: | |||||||||||
Contributions to unconsolidated joint ventures | ( | ( | |||||||||
Return of investments in unconsolidated joint ventures | |||||||||||
Proceeds from sale of investment | |||||||||||
Purchases of property and equipment, net | ( | ( | |||||||||
| Net cash used in investing activities | ( | ( | |||||||||
| Cash flows from financing activities: | |||||||||||
Borrowings under revolving credit facility | |||||||||||
Repayments under revolving credit facility | ( | ||||||||||
Payments on mortgages and land contracts due to land sellers and other loans | ( | ( | |||||||||
Issuance of common stock under employee stock plans | |||||||||||
| Stock repurchases | ( | ( | |||||||||
Tax payments associated with stock-based compensation awards | ( | ( | |||||||||
Payments of cash dividends | ( | ( | |||||||||
Net cash used in financing activities | ( | ( | |||||||||
Net increase (decrease) in cash and cash equivalents | ( | ||||||||||
| Cash and cash equivalents at beginning of period | |||||||||||
| Cash and cash equivalents at end of period | $ | $ | |||||||||
See accompanying notes.
6
KB HOME
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation and Significant Accounting Policies
Basis of Presentation. The accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and the rules and regulations of the Securities and Exchange Commission (“SEC”). Accordingly, they do not include all the information and footnotes required by GAAP for complete financial statements. These unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements for the year ended November 30, 2023, which are contained in our Annual Report on Form 10-K for that period. The consolidated balance sheet at November 30, 2023 has been taken from the audited consolidated financial statements as of that date. In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments (consisting of normal recurring adjustments) considered necessary for the fair presentation of our results for the interim periods presented. The results of our consolidated operations for the three months and nine months ended August 31, 2024 are not necessarily indicative of the results to be expected for the full year due to seasonal variations in operating results and other factors.
Unless the context indicates otherwise, the terms “we,” “our,” and “us” used in this report refer to KB Home, a Delaware corporation, and its subsidiaries.
Comprehensive Income. Our comprehensive income was $157.3 million for the three months ended August 31, 2024 and $149.9 million for the three months ended August 31, 2023. For the nine months ended August 31, 2024 and 2023, our comprehensive income was $464.4 million and $439.9 million, respectively. Our comprehensive income for each of the three-month and nine-month periods ended August 31, 2024 and 2023 was equal to our net income for the respective periods.
Recent Accounting Pronouncements Not Yet Adopted. In November 2023, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2023-07, “Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures” (“ASU 2023-07”), which is intended to improve reportable segment disclosure requirements, primarily through enhanced disclosures about significant segment expenses. The guidance is effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024. Early adoption is permitted. ASU 2023-07 is to be applied retrospectively to all prior periods presented in the financial statements. Upon transition, the segment expense categories and amounts disclosed in the prior periods should be based on the significant segment expense categories identified and disclosed in the period of adoption. We are currently evaluating the potential impact of adopting this new guidance on our consolidated financial statements and related disclosures.
In December 2023, the FASB issued Accounting Standards Update No. 2023-09, “Income Taxes (Topic 740): Improvements to Income Tax Disclosures” (“ASU 2023-09”), which modifies the rules on income tax disclosures to require entities to disclose (1) specific categories in the rate reconciliation, (2) the income or loss from continuing operations before income tax expense or benefit (separated between domestic and foreign) and (3) income tax expense or benefit from continuing operations (separated by federal, state and foreign). ASU 2023-09 also requires entities to disclose their income tax payments to international, federal, state and local jurisdictions, among other changes. The guidance is effective for annual periods beginning after December 15, 2024. Early adoption is permitted for annual financial statements that have not yet been issued or made available for issuance. ASU 2023-09 should be applied on a prospective basis, but retrospective application is permitted. We are currently evaluating the potential impact of adopting this new guidance on our consolidated financial statements and related disclosures.
7
2.Segment Information
We have identified five operating reporting segments, comprised of four homebuilding reporting segments and one financial services reporting segment. As of August 31, 2024, our homebuilding reporting segments conducted ongoing operations in the following states:
| West Coast: | California, Idaho and Washington | ||||
| Southwest: | Arizona and Nevada | ||||
| Central: | Colorado and Texas | ||||
| Southeast: | Florida and North Carolina | ||||
Our homebuilding reporting segments are engaged in the acquisition and development of land primarily for residential purposes and offer a wide variety of homes that are designed to appeal to first-time, first move-up and active adult homebuyers. Our homebuilding operations generate most of their revenues from the delivery of completed homes to homebuyers. They also earn revenues from the sale of land.
Our financial services reporting segment offers property and casualty insurance and, in certain instances, earthquake, flood and personal property insurance to our homebuyers in the same markets as our homebuilding reporting segments, and provides title services in the majority of our markets located within our Southwest, Central and Southeast homebuilding reporting segments. Our financial services reporting segment earns revenues primarily from insurance commissions and from the provision of title services.
We offer mortgage banking services, including residential consumer mortgage loan (“mortgage loan”) originations, to our homebuyers indirectly through KBHS Home Loans, LLC (“KBHS”), our unconsolidated joint venture with GR Alliance Ventures, LLC (“GR Alliance”), a subsidiary of Guaranteed Rate, Inc. We and GR Alliance each have a 50.0
Our reporting segments follow the same accounting policies used for our consolidated financial statements. The results of each reporting segment are not necessarily indicative of the results that would have occurred had the segment been an independent, stand-alone entity during the periods presented, nor are they indicative of the results to be expected in future periods.
The following tables present financial information relating to our homebuilding reporting segments (in thousands):
| Three Months Ended August 31, | Nine Months Ended August 31, | ||||||||||||||||||||||
| 2024 | 2023 | 2024 | 2023 | ||||||||||||||||||||
| Revenues: | |||||||||||||||||||||||
| West Coast | $ | $ | $ | $ | |||||||||||||||||||
| Southwest | |||||||||||||||||||||||
| Central | |||||||||||||||||||||||
| Southeast | |||||||||||||||||||||||
Total | $ | $ | $ | $ | |||||||||||||||||||
| Pretax income (loss): | |||||||||||||||||||||||
| West Coast | $ | $ | $ | $ | |||||||||||||||||||
| Southwest | |||||||||||||||||||||||
| Central | |||||||||||||||||||||||
| Southeast | |||||||||||||||||||||||
| Corporate and other | ( | ( | ( | ( | |||||||||||||||||||
| Total | $ | $ | $ | $ | |||||||||||||||||||
8
| Three Months Ended August 31, | Nine Months Ended August 31, | ||||||||||||||||||||||
| 2024 | 2023 | 2024 | 2023 | ||||||||||||||||||||
| Inventory impairment and land option contract abandonment charges: | |||||||||||||||||||||||
| West Coast | $ | $ | $ | $ | |||||||||||||||||||
| Southwest | |||||||||||||||||||||||
| Central | |||||||||||||||||||||||
| Southeast | |||||||||||||||||||||||
| Total | $ | $ | $ | $ | |||||||||||||||||||
| August 31, 2024 | November 30, 2023 | ||||||||||
| Assets: | |||||||||||
| West Coast | $ | $ | |||||||||
| Southwest | |||||||||||
| Central | |||||||||||
| Southeast | |||||||||||
| Corporate and other | |||||||||||
| Total | $ | $ | |||||||||
3. Financial Services
The following tables present financial information relating to our financial services reporting segment (in thousands):
| Three Months Ended August 31, | Nine Months Ended August 31, | ||||||||||||||||||||||
| 2024 | 2023 | 2024 | 2023 | ||||||||||||||||||||
| Revenues | |||||||||||||||||||||||
| Insurance commissions | $ | $ | $ | $ | |||||||||||||||||||
| Title services | |||||||||||||||||||||||
| Total | |||||||||||||||||||||||
| Expenses | |||||||||||||||||||||||
| General and administrative | ( | ( | ( | ( | |||||||||||||||||||
| Operating income | |||||||||||||||||||||||
Equity in income of unconsolidated joint venture | |||||||||||||||||||||||
| Pretax income | $ | $ | $ | $ | |||||||||||||||||||
| August 31, 2024 | November 30, 2023 | ||||||||||
| Assets | |||||||||||
| Cash and cash equivalents | $ | $ | |||||||||
| Receivables | |||||||||||
Investment in unconsolidated joint venture | |||||||||||
| Other assets (a) | |||||||||||
| Total assets | $ | $ | |||||||||
9
| August 31, 2024 | November 30, 2023 | ||||||||||
| Liabilities | |||||||||||
| Accounts payable and accrued expenses | $ | $ | |||||||||
| Total liabilities | $ | $ | |||||||||
(a)Other assets at August 31, 2024 and November 30, 2023 included $38.5 million and $34.4 million, respectively, of contract assets for estimated future renewal commissions.
4. Earnings Per Share
Basic and diluted earnings per share were calculated as follows (in thousands, except per share amounts):
| Three Months Ended August 31, | Nine Months Ended August 31, | ||||||||||||||||||||||
| 2024 | 2023 | 2024 | 2023 | ||||||||||||||||||||
| Numerator: | |||||||||||||||||||||||
| Net income | $ | $ | $ | $ | |||||||||||||||||||
Less: Distributed earnings allocated to participating securities | ( | ( | ( | ( | |||||||||||||||||||
Less: Undistributed earnings allocated to participating securities | ( | ( | ( | ( | |||||||||||||||||||
| Numerator for basic earnings per share | |||||||||||||||||||||||
| Effect of dilutive securities: | |||||||||||||||||||||||
Add: Undistributed earnings allocated to participating securities | |||||||||||||||||||||||
Less: Undistributed earnings reallocated to participating securities | ( | ( | ( | ( | |||||||||||||||||||
| Numerator for diluted earnings per share | $ | $ | $ | $ | |||||||||||||||||||
| Denominator: | |||||||||||||||||||||||
| Weighted average shares outstanding — basic | |||||||||||||||||||||||
| Effect of dilutive securities: | |||||||||||||||||||||||
| Share-based payments | |||||||||||||||||||||||
| Weighted average shares outstanding — diluted | |||||||||||||||||||||||
| Basic earnings per share | $ | $ | $ | $ | |||||||||||||||||||
| Diluted earnings per share | $ | $ | $ | $ | |||||||||||||||||||
We compute earnings per share using the two-class method, which is an allocation of earnings between the holders of common stock and a company’s participating security holders. Our outstanding nonvested shares of restricted stock contain non-forfeitable rights to dividends and, therefore, are considered participating securities for purposes of computing earnings per share pursuant to the two-class method. We had no other participating securities during the three-month and nine-month periods ended August 31, 2024 and 2023.
10
5. Receivables
Receivables consisted of the following (in thousands):
| August 31, 2024 | November 30, 2023 | ||||||||||
| Due from utility companies, improvement districts and municipalities | $ | $ | |||||||||
| Recoveries related to self-insurance and other legal claims | |||||||||||
| Refundable deposits and bonds | |||||||||||
| Income taxes receivable | |||||||||||
| Other | |||||||||||
Subtotal | |||||||||||
| Allowance for doubtful accounts | ( | ( | |||||||||
Total | $ | $ | |||||||||
6. Inventories
Inventories consisted of the following (in thousands):
| August 31, 2024 | November 30, 2023 | ||||||||||
| Homes completed or under construction | $ | $ | |||||||||
| Land under development | |||||||||||
| Total | $ | $ | |||||||||
Land under development at August 31, 2024 and November 30, 2023 included land held for future development of $10.5 million and $17.0 million, respectively.
Interest is capitalized to inventories while the related communities or land parcels are being actively developed and until homes are completed or the land is available for immediate sale. Capitalized interest is amortized to construction and land costs as the related inventories are delivered to homebuyers or land buyers (as applicable). In the case of land held for future development and land held for sale, applicable interest is expensed as incurred.
Our interest costs were as follows (in thousands):
| Three Months Ended August 31, | Nine Months Ended August 31, | ||||||||||||||||||||||
| 2024 | 2023 | 2024 | 2023 | ||||||||||||||||||||
| Capitalized interest at beginning of period | $ | $ | $ | $ | |||||||||||||||||||
| Interest incurred | |||||||||||||||||||||||
Interest amortized to construction and land costs (a) | ( | ( | ( | ( | |||||||||||||||||||
| Capitalized interest at end of period | $ | $ | $ | $ | |||||||||||||||||||
7. Inventory Impairments and Land Option Contract Abandonments
Each community or land parcel in our owned inventory is assessed on a quarterly basis to determine if indicators of potential impairment exist. We record an inventory impairment charge on a community or land parcel that is active or held for future development when indicators of potential impairment exist and the carrying value of the real estate asset is greater than the undiscounted future net cash flows the asset is expected to generate. These real estate assets are written down to fair value, which is primarily determined based on the estimated future net cash flows discounted for inherent risk associated with each such asset, or other valuation techniques. We record an inventory impairment charge on land held for
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We evaluated six active communities or land parcels for recoverability as of August 31, 2024 with a carrying value of $121.0 million. As of November 30, 2023, we evaluated five active communities or land parcels for recoverability with a carrying value of $89.3 million. In addition, we evaluated land held for future development for recoverability as of both August 31, 2024 and November 30, 2023. Based on the results of our evaluations, we recognized no
As of August 31, 2024, the aggregate carrying value of our inventory that had been impacted by previous inventory impairment charges was $48.4 million, representing five communities and various other land parcels. As of November 30, 2023, the aggregate carrying value of our inventory that had been impacted by previous inventory impairment charges was $73.9 million, representing five communities and various other land parcels.
Our inventory controlled under land option contracts and other similar contracts is assessed on a quarterly basis to determine whether it continues to meet our investment return standards. When a decision is made not to exercise certain land option contracts and other similar contracts due to market conditions and/or changes in our marketing strategy, we write off the related inventory costs, including non-refundable deposits and unrecoverable pre-acquisition costs. Based on the results of our assessments, we recognized land option contract abandonment charges of $1.2 million and $3.7 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, we recognized land option contract abandonment charges of $.6 million and $10.2 million, respectively.
Due to the judgment and assumptions applied in our inventory impairment and land option contract abandonment assessment processes, and in our estimations of the remaining operating lives of our inventory assets and the realization of our inventory balances, particularly as to land held for future development, it is possible that actual results could differ substantially from those estimated.
8. Variable Interest Entities
Unconsolidated Joint Ventures. We participate in joint ventures from time to time that conduct land acquisition, land development and/or other homebuilding activities in various markets where our homebuilding operations are located. Our investments in these joint ventures may create a variable interest in a variable interest entity (“VIE”), depending on the contractual terms of the arrangement. We analyze our joint ventures under the variable interest model to determine whether they are VIEs and, if so, whether we are the primary beneficiary. Based on our analyses, we determined that one
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The following table presents a summary of our interests in land option contracts and other similar contracts (in thousands):
| August 31, 2024 | November 30, 2023 | ||||||||||||||||||||||
| Cash Deposits | Aggregate Purchase Price | Cash Deposits | Aggregate Purchase Price | ||||||||||||||||||||
| Unconsolidated VIEs | $ | $ | $ | $ | |||||||||||||||||||
Other land option contracts and other similar contracts | |||||||||||||||||||||||
Total | $ | $ | $ | $ | |||||||||||||||||||
In addition to the cash deposits presented in the table above, our exposure to loss related to our land option contracts and other similar contracts with third parties and unconsolidated entities consisted of pre-acquisition costs of $26.0 million at August 31, 2024 and $18.5 million at November 30, 2023. These pre-acquisition costs and cash deposits were included in inventories in our consolidated balance sheets.
9. Investments in Unconsolidated Joint Ventures
Homebuilding. We have investments in unconsolidated joint ventures that conduct land acquisition, land development and/or other homebuilding activities in various markets where our homebuilding operations are located. We and our unconsolidated joint venture partners make initial and/or ongoing capital contributions to these unconsolidated joint ventures, typically on a pro rata basis, according to our respective equity interests. The obligations to make capital contributions are governed by each such unconsolidated joint venture’s respective operating agreement and related governing documents.
We had investments in six The following table presents combined condensed information from the statements of operations for our homebuilding unconsolidated joint ventures (in thousands):
| Three Months Ended August 31, | Nine Months Ended August 31, | ||||||||||||||||||||||
| 2024 | 2023 | 2024 | 2023 | ||||||||||||||||||||
| Revenues | $ | $ | $ | $ | |||||||||||||||||||
| Construction and land costs | ( | ( | ( | ||||||||||||||||||||
| Other expense, net | ( | ( | ( | ( | |||||||||||||||||||
Income (loss) | $ | $ | ( | $ | $ | ( | |||||||||||||||||
The combined revenues and construction and land costs for the three-month and nine-month periods ended August 31, 2024 primarily related to homes delivered by an unconsolidated joint venture in California. In the three-month and nine-month periods ended August 31, 2023, our unconsolidated joint ventures did not deliver any homes.
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The following table presents combined condensed balance sheet information for our homebuilding unconsolidated joint ventures (in thousands):
| August 31, 2024 | November 30, 2023 | ||||||||||
| Assets | |||||||||||
| Cash | $ | $ | |||||||||
Receivables | |||||||||||
Inventories | |||||||||||
Other assets | |||||||||||
| Total assets | $ | $ | |||||||||
| Liabilities and equity | |||||||||||
| Accounts payable and other liabilities | $ | $ | |||||||||
| Notes payable (a) | |||||||||||
| Equity | |||||||||||
| Total liabilities and equity | $ | $ | |||||||||
(a) As of both August 31, 2024 and November 30, 2023, one 70.0 million from $62.0 million, with the amount of all advances through October 2024 not to exceed $80.0 million. Principal repayments are made as homes are delivered, which began in May 2024. Pursuant to the amendment, the revolving line of credit will convert to a term loan and the aggregate commitment will be reduced to $55.0 million effective October 31, 2024, and then to $25.0 million by April 30, 2025. Borrowings under the line of credit are secured by the underlying property and related project assets. The line of credit is scheduled to mature on April 19, 2026 , unless extended or terminated pursuant to its applicable terms. None .
We provide certain guarantees and indemnities to the lender in connection with the above-described revolving line of credit, including a guaranty of interest and carry costs; a guaranty to complete the construction of phases of the improvements for the project as such phases are commenced; a guaranty against losses suffered due to certain bad acts or failures to act by the unconsolidated joint venture or its partners; and an indemnity from environmental issues. Except to the extent related to the foregoing guarantees and indemnities, we do not have a guaranty or any other obligation to repay borrowings under the line of credit or to support the value of the underlying collateral. However, various financial and non-financial covenants apply under the line of credit and with respect to the related guaranty and indemnity obligations, and a failure to comply with such covenants could result in a default and cause the lender to seek to enforce such guaranty and indemnity obligations. As of the date of this report, we were in compliance with the relevant covenants. We do not believe that our existing exposure under our guaranty and indemnity obligations related to outstanding borrowings under the line of credit is material to our consolidated financial statements.
Financial Services. The following table presents combined condensed information from the statements of operations for our financial services unconsolidated joint venture (in thousands):
| Three Months Ended August 31, | Nine Months Ended August 31, | ||||||||||||||||||||||
| 2024 | 2023 | 2024 | 2023 | ||||||||||||||||||||
| Revenues | $ | $ | $ | $ | |||||||||||||||||||
| Expenses | ( | ( | ( | ( | |||||||||||||||||||
| Income | $ | $ | $ | $ | |||||||||||||||||||
Revenues are primarily generated from fees earned on mortgage loan originations, interest earned for the period loans are held by KBHS, and gains on the sales of mortgage loans held for sale. Gains on the sales of mortgage loans held for sale include the realized and unrealized gains and losses associated with changes in the fair value of such loans and any related derivative financial instruments.
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The following table presents combined condensed balance sheet information for our financial services unconsolidated joint venture (in thousands):
| August 31, 2024 | November 30, 2023 | ||||||||||
| Assets | |||||||||||
| Cash and cash equivalents | $ | $ | |||||||||
| Mortgage loans held for sale | |||||||||||
| Other assets | |||||||||||
| Total assets | $ | $ | |||||||||
| Liabilities and equity | |||||||||||
| Accounts payable and other liabilities | $ | $ | |||||||||
| Funding facilities | |||||||||||
| Equity | |||||||||||
| Total liabilities and equity | $ | $ | |||||||||
Mortgage loans held for sale. Originated mortgage loans expected to be sold into the secondary market in the foreseeable future are reported as mortgage loans held for sale and carried in KBHS’ balance sheets at fair value, with changes in fair value recognized within revenues in KBHS’ statements of operations.
Interest Rate Lock Commitments (“IRLCs”). KBHS enters into IRLCs in connection with originating certain mortgage loans held for sale, at specified interest rates and within a specified period of time, with customers who have applied for a mortgage loan and meet certain credit and underwriting criteria. KBHS accounts for IRLCs as free-standing derivatives and does not designate any for hedge accounting. As a result, IRLCs are recognized in KBHS’ balance sheets at fair value, and gains or losses resulting from changes in fair value are recognized within revenues in KBHS’ statements of operations. The fair value of IRLCs is based on market prices, which includes an estimate of the fair value of the associated mortgage servicing rights, adjusted for estimated costs to originate the underlying mortgage loans as well as the probability that the mortgage loans will fund within the terms of the IRLCs. The fair value of IRLCs included in other assets in KBHS’ balance sheets was $17.6 million at August 31, 2024 and $13.9 million at November 30, 2023. The changes in the fair value of IRLCs, which were reported in revenues for the applicable periods, were a loss of $.4 million for the three months ended August 31, 2024, a gain of $3.8 million for the nine months ended August 31, 2024, and losses of $5.2 million and $9.4 million for the three-month and nine-month periods ended August 31, 2023, respectively.
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10.Other Assets
Other assets consisted of the following (in thousands):
| August 31, 2024 | November 30, 2023 | ||||||||||
| Cash surrender value of corporate-owned life insurance contracts | $ | $ | |||||||||
| Prepaid expenses | |||||||||||
| Lease right-of-use assets | |||||||||||
Other | |||||||||||
| Total | $ | $ | |||||||||
11.Accrued Expenses and Other Liabilities
Accrued expenses and other liabilities consisted of the following (in thousands):
| August 31, 2024 | November 30, 2023 | ||||||||||
| Self-insurance and other legal liabilities | $ | $ | |||||||||
| Employee compensation and related benefits | |||||||||||
| Warranty liability | |||||||||||
| Customer deposits | |||||||||||
| Inventory-related obligations (a) | |||||||||||
| Lease liabilities | |||||||||||
| Accrued interest payable | |||||||||||
| Real estate and business taxes | |||||||||||
| Federal and state taxes payable | |||||||||||
| Other | |||||||||||
| Total | $ | $ | |||||||||
(a)Represents liabilities for financing arrangements discussed in Note 8 – Variable Interest Entities, as well as liabilities for fixed or determinable amounts associated with tax increment financing entity (“TIFE”) assessments. As homes are delivered, our obligation to pay the remaining TIFE assessments associated with each underlying lot is transferred to the homebuyer. As such, these assessment obligations will be paid by us only to the extent we do not deliver homes on applicable lots before the related TIFE obligations mature.
12.Leases
We lease certain property and equipment for use in our operations. We recognize lease expense for these leases generally on a straight-line basis over the lease term and combine lease and non-lease components for all leases. Lease right-of-use assets and lease liabilities are recorded in our consolidated balance sheets for leases with an expected term at the commencement date of more than 12 months. Lease expense is included in selling, general and administrative expenses in our consolidated statements of operations and includes costs for leases with terms of more than 12 months as well as short-
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The following table presents our lease right-of-use assets and lease liabilities (in thousands):
| August 31, 2024 | November 30, 2023 | ||||||||||
| $ | $ | ||||||||||
13.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 | $ | $ | $ | $ | |||||||||||||||||||
Effective tax rate | % | % | % | % | |||||||||||||||||||
Our income tax expense and effective tax rate for the three months ended August 31, 2024 included the favorable impact of $3.9 million of Internal Revenue Code Section 45L (“Section 45L”) tax credits we recognized primarily from building energy-efficient homes, and a $2.4 million year-over-year decrease in state taxes, partly offset by $2.4 million of nondeductible executive compensation expense. Our income tax expense and effective tax rate for the three months ended August 31, 2023 reflected the favorable impact of $6.9 million of Section 45L tax credits and $1.9 million of excess tax benefits related to stock-based compensation, partly offset by $2.6 million of nondeductible executive compensation expense.
For the nine months ended August 31, 2024, our income tax expense and effective tax rate included the favorable impacts of $12.8 million of Section 45L tax credits we recognized primarily from building energy-efficient homes, $6.5 million of excess tax benefits related to stock-based compensation, and a $5.3 million year-over-year decrease in state income taxes, partly offset by $7.9 million of nondeductible executive compensation expense. Our income tax expense and effective tax rate for the nine months ended August 31, 2023 reflected the favorable impact of $19.4 million of Section 45L tax credits and $5.7 million of excess tax benefits related to stock-based compensation, partly offset by $9.2 million of nondeductible executive compensation expense.
Deferred Tax Asset Valuation Allowance. We evaluate our deferred tax assets quarterly to determine if adjustments to our valuation allowance are required based on the consideration of all available positive and negative evidence using a “more likely than not” standard with respect to whether deferred tax assets will be realized. Our evaluation considers, among other factors, our historical operating results, our expectation of future profitability, the duration of the applicable statutory carryforward periods, and conditions in the housing market and the broader economy. The ultimate realization of our deferred tax assets depends primarily on our ability to generate future taxable income during the periods in which the related deferred tax assets become deductible. The value of our deferred tax assets depends on applicable income tax rates.
Our deferred tax assets of $130.7 million as of August 31, 2024 and $136.4 million at November 30, 2023 were both partly offset by valuation allowances of $16.9 no adjustments to our deferred tax asset valuation allowance were needed for the nine months ended August 31, 2024.
We will continue to evaluate both the positive and negative evidence on a quarterly basis in determining the need for a valuation allowance with respect to our deferred tax assets. The accounting for deferred tax assets is based upon estimates
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of future results. Changes in positive and negative evidence, including differences between estimated and actual results, could result in changes in the valuation of our deferred tax assets that could have a material impact on our consolidated financial statements. Changes in existing federal and state tax laws and corporate income tax rates could also affect actual tax results and the realization of deferred tax assets over time.
14.Notes Payable
Notes payable consisted of the following (in thousands):
| August 31, 2024 | November 30, 2023 | ||||||||||
| Senior unsecured term loan due August 25, 2026 | $ | $ | |||||||||
| Mortgages and land contracts due to land sellers and other loans | |||||||||||
Total | $ | $ | |||||||||
The carrying amounts of our senior notes listed above are net of unamortized debt issuance costs, which totaled $12.1 million at August 31, 2024 and $13.9 million at November 30, 2023.
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 Credit Facility also contains a sublimit of $250.0 million for the issuance of letters of credit. Interest on amounts borrowed under the Credit Facility accrues at an adjusted term Secured Overnight Financing Rate (“SOFR”) or a base rate, plus a spread that depends on our consolidated leverage ratio (“Leverage Ratio”), as defined under the Credit Facility. Interest is payable quarterly (base rate) or each month or three months (adjusted term SOFR). The Credit Facility also requires the payment of a commitment fee at a per annum rate ranging from .15 % to .35 % of the unused commitment, based on our Leverage Ratio. Under the terms of the Credit Facility, we are required, among other things, to maintain compliance with various covenants, including financial covenants relating to our consolidated tangible net worth, Leverage Ratio, and either a consolidated interest coverage ratio (“Interest Coverage Ratio”) or minimum level of liquidity, each as defined therein. Our obligations to pay borrowings under the Credit Facility are guaranteed on a joint and several basis by our Guarantor Subsidiaries. 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. Therefore, as of August 31, 2024, we had $1.08 billion available for cash borrowings under the Credit Facility, with up to $241.7 million of that amount available for the issuance of letters of credit.
Senior Unsecured Term Loan. We have a $360.0 million Term Loan with the lenders party thereto. The Term Loan 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). Interest under the Term Loan accrues at an adjusted term SOFR or a base rate, plus a spread that depends on our Leverage Ratio. Interest is payable quarterly (base rate) or each month or three months (adjusted term SOFR). The Term Loan contains various covenants that are substantially the same as those under the Credit Facility. Proceeds drawn under the Term Loan are guaranteed on a joint and several basis by our Guarantor Subsidiaries. As of August 31, 2024, the weighted average annual interest rate on our outstanding borrowings under the Term Loan was 6.8 %.
Letter of Credit Facility. We maintain an unsecured letter of credit agreement with a financial institution (“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.
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Senior Notes. All the senior notes outstanding at August 31, 2024 and November 30, 2023 represent senior unsecured obligations that are guaranteed by our Guarantor Subsidiaries and rank equally in right of payment with all of our and our Guarantor Subsidiaries’ existing unsecured and unsubordinated indebtedness. All of our senior notes were issued in underwritten public offerings. Interest on each of these senior notes is payable semi-annually.
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 and 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 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.
Mortgages and Land Contracts Due to Land Sellers and Other Loans. As of August 31, 2024, inventories having a carrying value of $11.7 million were pledged to collateralize mortgages and land contracts due to land sellers and other loans.
15.Fair Value Disclosures
Fair value measurements of assets and liabilities are categorized based on the following hierarchy:
| Level 1 | Fair value determined based on quoted prices in active markets for identical assets or liabilities. | |||||||
| Level 2 | Fair value determined using significant observable inputs, such as quoted prices for similar assets or liabilities or quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability, or inputs that are derived principally from or corroborated by observable market data, by correlation or other means. | |||||||
| Level 3 | Fair value determined using significant unobservable inputs, such as pricing models, discounted cash flows, or similar techniques. | |||||||
The following table presents the fair value hierarchy, carrying values and estimated fair values of our financial instruments, except those for which the carrying values approximate fair values (in thousands):
| August 31, 2024 | November 30, 2023 | |||||||||||||||||||||||||||||||
| Description | Fair Value Hierarchy | Carrying Value (a) | Estimated Fair Value | Carrying Value (a) | Estimated Fair Value | |||||||||||||||||||||||||||
| Financial Liabilities: | ||||||||||||||||||||||||||||||||
Senior notes | Level 2 | $ | $ | $ | $ | |||||||||||||||||||||||||||
The fair values of our senior notes are generally estimated based on quoted market prices for these instruments. The carrying values reported for cash and cash equivalents, the Term Loan, and mortgages and land contracts due to land sellers
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16.Commitments and Contingencies
Commitments and contingencies include typical obligations of homebuilders for the completion of contracts and those incurred in the ordinary course of business.
Warranty. We provide a limited warranty on all of our homes. The specific terms and conditions of our limited warranty program vary depending upon the markets in which we do business. We generally provide a structural warranty of 10 years, a warranty on electrical, heating, cooling, plumbing and certain other building systems each varying from to five years based on geographic market and state law, and a warranty of one year for other components of the home. Our limited warranty program is ordinarily how we respond to and account for homeowners’ requests to local division offices seeking repairs of certain conditions or defects, including claims where we could have liability under applicable state statutes or tort law for a defective condition in or damages to a home. Our warranty liability covers our costs of repairs associated with homeowner claims made under our limited warranty program. These claims are generally made directly by a homeowner and involve their individual home.
The changes in our warranty liability were as follows (in thousands):
| Three Months Ended August 31, | Nine Months Ended August 31, | ||||||||||||||||||||||
| 2024 | 2023 | 2024 | 2023 | ||||||||||||||||||||
| Balance at beginning of period | $ | $ | $ | $ | |||||||||||||||||||
| Warranties issued | |||||||||||||||||||||||
| Payments | ( | ( | ( | ( | |||||||||||||||||||
| Balance at end of period | $ | $ | $ | $ | |||||||||||||||||||
Guarantees. In the normal course of our business, we issue certain representations, warranties and guarantees related to our home sales and land sales. Based on historical experience, we do not believe any potential liability with respect to these representations, warranties or guarantees would be material to our consolidated financial statements.
Self-Insurance. We maintain, and require the majority of our independent contractors to maintain, general liability insurance (including construction defect and bodily injury coverage) and workers’ compensation insurance. These insurance policies protect us against a portion of our risk of loss from claims related to our homebuilding activities, subject to certain self-insured retentions, deductibles and other coverage limits. We also maintain certain other insurance policies. Costs associated with our self-insurance programs are included in selling, general and administrative expenses. In Arizona, California, Colorado and Nevada, our contractors’ general liability insurance primarily takes the form of a wrap-up policy under a program where eligible independent contractors are enrolled as insureds on each community. Enrolled contractors generally contribute toward the cost of the insurance and agree to pay a contractual amount in the future if there is a claim related to their work. To the extent provided under the wrap-up program, we absorb the enrolled contractors’ general liability associated with the work performed on our homes within the applicable community as part of our overall general liability insurance and our self-insurance.
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We self-insure a portion of our overall risk through the use of a captive insurance subsidiary, which provides coverage for our exposure to construction defect, bodily injury and property damage claims and related litigation or regulatory actions, up to certain limits. Our self-insurance liability generally covers the costs of settlements and/or repairs, if any, as well as our costs to defend and resolve the following types of claims:
•Construction defect: Construction defect claims, which represent the largest component of our self-insurance liability, typically originate through a legal or regulatory process rather than directly by a homeowner and involve the alleged occurrence of a condition affecting two or more homes within the same community, or they involve a common area or homeowners’ association property within a community. These claims typically involve higher costs to resolve than individual homeowner warranty claims, and the rate of claims is highly variable.
•Bodily injury: Bodily injury claims typically involve individuals (other than our employees) who claim they were injured while on our property or as a result of our operations.
•Property damage: Property damage claims generally involve claims by third parties for alleged damage to real or personal property as a result of our operations. Such claims may occasionally include those made against us by owners of property located near our communities.
Our self-insurance liability at each reporting date represents the estimated costs of reported claims, claims incurred but not yet reported, and claim adjustment expenses. The amount of our self-insurance liability is based on an analysis performed by a third-party actuary that uses our historical claim and expense data, as well as industry data to estimate these overall costs. Key assumptions used in developing these estimates include claim frequencies, severities and resolution patterns, which can occur over an extended period of time. These estimates are subject to variability due to the length of time between the delivery of a home to a homebuyer and when a construction defect claim is made, and the ultimate resolution of such claim; uncertainties regarding such claims relative to our markets and the types of products we build; and legal or regulatory actions and/or interpretations, among other factors. Due to the degree of judgment involved and the potential for variability in these underlying assumptions, our actual future costs could differ from those estimated. In addition, changes in the frequency and severity of reported claims and the estimates to resolve claims can impact the trends and assumptions used in the actuarial analysis, which could be material to our consolidated financial statements. Though state regulations vary, construction defect claims are reported and resolved over a long period of time, which can extend for 10 years or more. As a result, the majority of the estimated self-insurance liability based on the actuarial analysis relates to claims incurred but not yet reported. Therefore, adjustments related to individual existing claims generally do not significantly impact the overall estimated liability. Adjustments to our liabilities related to homes delivered in prior years are recorded in the period in which a change in our estimate occurs.
The changes in our self-insurance liability were as follows (in thousands):
| Three Months Ended August 31, | Nine Months Ended August 31, | ||||||||||||||||||||||
| 2024 | 2023 | 2024 | 2023 | ||||||||||||||||||||
| Balance at beginning of period | $ | $ | $ | $ | |||||||||||||||||||
| Self-insurance provided | |||||||||||||||||||||||
| Payments | ( | ( | ( | ( | |||||||||||||||||||
| Adjustments (a) | ( | ( | ( | ||||||||||||||||||||
| Balance at end of period | $ | $ | $ | $ | |||||||||||||||||||
For most of our claims, there is no interaction between our warranty liability and self-insurance liability. Typically, if a matter is identified at its outset as either a warranty or self-insurance claim, it remains as such through its resolution.
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However, there can be instances of interaction between the liabilities, such as where individual homeowners in a community separately request warranty repairs to their homes to address a similar condition or issue and subsequently join together to initiate, or potentially initiate, a legal process with respect to that condition or issue and/or the repair work we have undertaken. In these instances, the claims and related repair work generally are initially covered by our warranty liability, and the costs associated with resolving the legal matter (including any additional repair work) are covered by our self-insurance liability.
The payments we make in connection with claims and related repair work, whether covered within our warranty liability and/or our self-insurance liability, may be recovered from our insurers to the extent such payments exceed the self-insured retentions or deductibles under our general liability insurance policies. Also, in certain instances, in the course of resolving a claim, we pay amounts in advance of and/or on behalf of an independent contractor(s) or their insurer(s) and believe we will be reimbursed for such payments. Estimates of all such amounts, if any, are recorded as receivables in our consolidated balance sheets when any such recovery is considered probable.
In addition to the risk that is effectively self-insured through our captive insurance subsidiary, we often obtain project-specific insurance coverage for construction defect risk on attached projects (e.g., condominiums or townhomes) with policy deductibles generally ranging from $50,000 to $250,000 . We record estimated liabilities and recoveries for projected losses related to these projects on a gross basis, including for known claims as well as estimates for claims incurred but not yet reported, to the extent such amounts are considered probable and estimable.
Florida Chapter 558 Actions. We and certain of our trade partners continue to receive claims from attorneys on behalf of individual owners of our homes and/or homeowners’ associations that allege, pursuant to Chapter 558 of the Florida Statutes, various construction defects, with most relating to stucco and water-intrusion issues. The claims primarily involve homes in our Jacksonville, Orlando, and Tampa operations. Under Chapter 558, homeowners must serve written notice of a construction defect(s) and provide the served construction and/or design contractor(s) with an opportunity to respond to the noticed issue(s) before they can file a lawsuit. Although we have resolved many of these claims without litigation, and a number of others have been resolved with applicable trade partners or their insurers covering the related costs, as of August 31, 2024, we had approximately 452 outstanding noticed claims, and some are scheduled for trial over the next few quarters and beyond. In addition, some of our trade partners’ insurers in some of these cases have informed us of their inability to continue to pay claims-related costs. At August 31, 2024, we had an accrual for our estimated probable loss for these matters and a receivable for estimated probable insurance recoveries, including an estimate for claims incurred but not reported. While it is reasonably possible that our losses could exceed the amounts accrued and our recoveries could be less than the amounts recorded, at this time, we are unable to estimate the total amount of the loss in excess of the accrued amount and/or associated with a shortfall in the recoveries that is reasonably possible as each of these is dependent on several factors, including the extent of additional claims to be reported in future periods; the nature of any specific claims; our evaluation of the particular facts surrounding each such claim; and actions of third parties over which we have no control.
Performance Bonds and Letters of Credit. We are often required to provide to various municipalities and other government agencies performance bonds and/or letters of credit to secure the completion of our projects and/or in support of obligations to build community improvements such as roads, sewers, water systems and other utilities, and to support similar development activities by certain of our unconsolidated joint ventures. At August 31, 2024, we had $1.31 billion of performance bonds and $78.9 million of letters of credit outstanding. At November 30, 2023, we had $1.32 billion of performance bonds and $19.1 million of letters of credit outstanding. If any such performance bonds or letters of credit are called, we would be obligated to reimburse the issuer of the performance bond or letter of credit. We do not believe that a material amount of any currently outstanding performance bonds or letters of credit will be called. Performance bonds do not have stated expiration dates. Rather, we are released from the performance bonds as the underlying performance is completed. The expiration dates of some letters of credit issued in connection with community improvements coincide with the expected completion dates of the related projects or obligations. Most letters of credit, however, are issued with an initial term of one year and are typically extended on a year-to-year basis until the related performance obligations are completed.
Land Option Contracts and Other Similar Contracts. In the ordinary course of our business, we enter into land option contracts and other similar contracts to acquire rights to land for the construction of homes. At August 31, 2024, we had total cash deposits of $77.5 million to purchase land having an aggregate purchase price of $2.12 billion. Our land option contracts and other similar contracts generally do not contain provisions requiring our specific performance.
Civil Subpoena. On October 2, 2023, we received a subpoena from the U.S. Department of Justice Civil Division, dated September 27, 2023, to produce certain documents and testimony with respect to the inspection, rating, marketing and advertising of our ENERGY STAR homes, including our contracts and/or communications with U.S. Environmental
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Protection Agency and third-party ENERGY STAR rating companies, real estate brokers, real estate appraisers, financial institutions and other parties, as well as inspection-related guidelines, instructions, methods, policies, processes and procedures. We are cooperating with the government, producing documents and information. As of the date of this report, we are unable to predict what actions the government will take, if any; the timing or nature of the ultimate outcome in this matter; or the impact, if any, such outcome may have on our business or consolidated financial statements. As a result, while a loss or penalty, if any, is reasonably possible in this matter, it is not considered to be probable or estimable.
17.Legal Matters
18.Stockholders’ Equity
On February 28, 2024, the management development and compensation committee of our board of directors approved the payout of 519,636 shares of our common stock in connection with the vesting of PSUs that were granted to certain employees on October 8, 2020. The shares paid out under the PSUs reflected our achievement of certain performance measures that were based on cumulative earnings per share, average return on invested capital, and revenue growth relative to a peer group of high-production public homebuilding companies over the three-year period from December 1, 2020 through November 30, 2023. Of the shares of common stock paid out, 248,157 shares, or $15.9 million, were purchased by us in the 2024 first quarter to satisfy the recipients’ withholding taxes on the vesting of the PSUs. The shares purchased were not considered repurchases under the authorizations described below.
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.
The Inflation Reduction Act of 2022, which was enacted into law on August 16, 2022, imposed a nondeductible 1% excise tax on the net value of certain stock repurchases made after December 31, 2022. In the three-month and nine-month
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periods ended August 31, 2024 and 2023, we reflected the applicable excise tax in treasury stock as part of the cost basis of the stock repurchased and recorded a corresponding liability for the excise taxes payable in accrued expenses and other liabilities on our consolidated balance sheet. All amounts presented in this report related to our share repurchases and our share repurchase authorization exclude such excise taxes, to the extent applicable, unless otherwise indicated.
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 .25 .20 .70 .50
19.Stock-Based Compensation
Stock Options. At August 31, 2024 and November 30, 2023, we had 493,641 and 1,109,567 stock options outstanding with a weighted average exercise price of $16.05 and $15.50 , respectively. We have not granted any stock option awards since 2016. During the nine months ended August 31, 2024, a total of 615,926 stock options with a weighted average exercise price of $15.05 were exercised. As of August 31, 2024, stock options outstanding and stock options exercisable each had a weighted average remaining contractual life of 2.0 no 33.4
Other Stock-Based Awards. From time to time, we grant restricted stock and PSUs to various employees as a compensation benefit. We recognized total compensation expense of $8.0 million and $9.2 million for the three months ended August 31, 2024 and 2023, respectively, related to restricted stock and PSUs. For the nine months ended August 31, 2024 and 2023, we recognized total compensation expense of $25.3 million and $23.9 million, respectively, related to restricted stock and PSUs.
20.Supplemental Disclosure to Consolidated Statements of Cash Flows
The following are supplemental disclosures to the consolidated statements of cash flows (in thousands):
| Nine Months Ended August 31, | |||||||||||
| 2024 | 2023 | ||||||||||
| Summary of cash and cash equivalents at end of period: | |||||||||||
| Homebuilding | $ | $ | |||||||||
| Financial services | |||||||||||
| Total | $ | $ | |||||||||
| Supplemental disclosures of cash flow information: | |||||||||||
| Interest paid, net of amounts capitalized | $ | $ | |||||||||
| Income taxes paid | |||||||||||
| Supplemental disclosures of non-cash activities: | |||||||||||
| Inventories acquired through seller financing | |||||||||||
Increase (decrease) in consolidated inventories not owned | ( | ||||||||||
| Increase in inventories due to distributions of land and land development from an unconsolidated joint venture | |||||||||||
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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,
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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 | % | |||||||||||||||
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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.
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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
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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.”
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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 | — | % | ||||||||||||||||||||||||||||
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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
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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.
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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) | % | |||||||||||||||||||||||
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| 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.
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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.
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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.
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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.
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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.
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•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.
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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
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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.
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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
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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.
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•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:
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•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;
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•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.
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Item 4.Controls and Procedures
We have established disclosure controls and procedures to ensure that information we are required to disclose in the reports we file or submit under the Securities Exchange Act of 1934, as amended (“Exchange Act”) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and accumulated and communicated to management, including our Chief Executive Officer (“Principal Executive Officer”) and Chief Financial Officer (“Principal Financial Officer”), as appropriate, to allow timely decisions regarding required disclosure. Under the supervision and with the participation of senior management, including our Principal Executive Officer and our Principal Financial Officer, we evaluated our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) promulgated under the Exchange Act. Based on this evaluation, our Principal Executive Officer and Principal Financial Officer concluded that our disclosure controls and procedures were effective as of August 31, 2024.
We have invested significant resources over the past few years to develop and implement a new custom enterprise resource planning (“ERP”) system designed to improve the efficiency of our internal operational and administrative activities. While the implementation is nearly completed, and the new ERP system has become an increasing component of our business, the related internal control over financial reporting has been designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes. We continue to rely upon a combination of our old and new ERP systems for financial statement reporting purposes. Other than the new ERP system implementation, there have been no changes in our internal control over financial reporting during the quarter ended August 31, 2024 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II.OTHER INFORMATION
Item 1.Legal Proceedings
For a discussion of our legal proceedings, see Note 17 – Legal Matters in the Notes to Consolidated Financial Statements in this report.
Item 1A.Risk Factors
There have been no material changes to the risk factors we previously disclosed in our Annual Report on Form 10-K for the year ended November 30, 2023. However, we cannot provide any assurance that any such risk factor will not materialize.
Item 2.Unregistered Sales of Equity Securities and Use of Proceeds
The following table summarizes purchases of our own equity securities during the three months ended August 31, 2024 (dollars in thousands, except per share amounts):
| Period | Total Number of Shares Purchased | Average Price Paid per Share | Dollar Value of Shares Purchased as Part of Publicly Announced Plans or Programs | Approximate Dollar Value of Shares That May Yet be Purchased Under the Plans or Programs (a) | ||||||||||||||||||||||
June 1-30 | — | $ | — | $ | — | $ | 950,000 | |||||||||||||||||||
July 1-31 | 1,239,699 | 80.66 | 100,000 | 850,000 | ||||||||||||||||||||||
August 1- 31 | 629,593 | 79.42 | 50,000 | 800,000 | ||||||||||||||||||||||
| Total | 1,869,292 | $ | 80.24 | $ | 150,000 | |||||||||||||||||||||
(a) 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 a prior board of directors authorization, which had $113.6 million of remaining availability. In the 2024 third quarter, we repurchased 1,869,292 shares of our common stock on the open market pursuant to this authorization at a total cost of $150.0 million. As of August 31, 2024, there was $800.0 million of remaining availability under this share repurchase authorization.
Item 5.Other Information
None of our directors or executive officers adopted terminated
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Item 6.Exhibits
Exhibits | ||||||||
| 22 | ||||||||
| 31.1 | ||||||||
| 31.2 | ||||||||
| 32.1 | ||||||||
| 32.2 | ||||||||
| 101.INS | XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. | |||||||
| 101.SCH | Inline XBRL Taxonomy Extension Schema Document | |||||||
| 101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document | |||||||
| 101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document | |||||||
| 101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document | |||||||
| 101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document | |||||||
| 104 | Cover Page Interactive Data File (embedded within the Inline XBRL document and included in Exhibit 101). | |||||||
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| KB HOME Registrant | |||||
| Dated | October 10, 2024 | By: | /s/ JEFF J. KAMINSKI | |||||||||||
| Jeff J. Kaminski Executive Vice President and Chief Financial Officer (Principal Financial Officer) | ||||||||||||||
| Dated | October 10, 2024 | By: | /s/ WILLIAM R. HOLLINGER | |||||||||||
| William R. Hollinger Senior Vice President and Chief Accounting Officer (Principal Accounting Officer) | ||||||||||||||
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