KB HOME - Quarter Report: 2023 May (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

For the quarterly period ended May 31, 2023.

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

For the transition period from [ ] to [ ].

Commission File No. 001-09195

KB HOME

(Exact name of registrant as specified in its charter)


Delaware			95-3666267
(State of incorporation)			(IRS employer identification number)

10990 Wilshire Boulevard

Los Angeles, California 90024

(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

Common Stock (par value $1.00 per share)

KBH

New York Stock Exchange

Rights to Purchase Series A Participating Cumulative Preferred Stock

New York Stock Exchange

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.


Large accelerated filer	☒	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 80,609,911 shares of the registrant’s common stock, par value $1.00 per share, outstanding on May 31, 2023. 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
PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

Consolidated Statements of Operations - Three Months and Six Months Ended May 31, 2023 and 2022			3

Consolidated Balance Sheets - May 31, 2023 and November 30, 2022			4

Consolidated Statements of Cash Flows - Six Months Ended May 31, 2023 and 2022			5

Notes to Consolidated Financial Statements			6

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			24

Item 3. Quantitative and Qualitative Disclosures About Market Risk			45

Item 4. Controls and Procedures			45

PART II. OTHER INFORMATION

Item 1. Legal Proceedings			45

Item 1A. Risk Factors			45

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			46

Item 6. Exhibits			47

SIGNATURES			48

PART I. FINANCIAL INFORMATION

Item 1.Financial Statements

KB HOME

CONSOLIDATED STATEMENTS OF OPERATIONS

(In Thousands, Except Per Share Amounts – Unaudited)


	Three Months Ended May 31,				Six Months Ended May 31,
	2023		2022		2023		2022
Total revenues	$	1,765,316	$	1,720,062	$	3,149,630	$	3,118,851
Homebuilding:
Revenues	$	1,757,846	$	1,714,826	$	3,136,383	$	3,108,980
Construction and land costs	(1,386,558)		(1,281,752)		(2,469,379)		(2,363,864)
Selling, general and administrative expenses	(169,186)		(168,614)		(308,413)		(311,094)
Operating income	202,102		264,460		358,591		434,022
Interest income	1,729		39		2,196		75

Equity in loss of unconsolidated joint ventures	(313)		(310)		(1,070)		(287)

Homebuilding pretax income	203,518		264,189		359,717		433,810
Financial services:
Revenues	7,470		5,236		13,247		9,871
Expenses	(1,472)		(1,362)		(2,830)		(2,709)
Equity in income of unconsolidated joint ventures	5,426		14,807		7,008		19,955
Financial services pretax income	11,424		18,681		17,425		27,117
Total pretax income	214,942		282,870		377,142		460,927
Income tax expense	(50,500)		(72,200)		(87,200)		(116,000)
Net income	$	164,442	$	210,670	$	289,942	$	344,927
Earnings per share:
Basic	$	2.00	$	2.39	$	3.49	$	3.90
Diluted	$	1.94	$	2.32	$	3.38	$	3.79
Weighted average shares outstanding:
Basic	81,764		87,858		82,607		88,069
Diluted	84,306		90,316		85,141		90,690

See accompanying notes.

KB HOME

CONSOLIDATED BALANCE SHEETS

(In Thousands – Unaudited)


	May 31, 2023		November 30, 2022
Assets
Homebuilding:
Cash and cash equivalents	$	557,037	$	328,517

Receivables	341,010		322,767
Inventories	5,128,841		5,543,176
Investments in unconsolidated joint ventures	53,427		46,785
Property and equipment, net	89,804		89,234
Deferred tax assets, net	150,268		160,868
Other assets	106,598		101,051
	6,426,985		6,592,398
Financial services	56,032		59,532
Total assets	$	6,483,017	$	6,651,930

Liabilities and stockholders’ equity
Homebuilding:
Accounts payable	$	360,585	$	412,525
Accrued expenses and other liabilities	668,084		736,971
Notes payable	1,686,663		1,838,511
	2,715,332		2,988,007
Financial services	1,203		3,128
Stockholders’ equity:
Common stock — 101,019,249 and 100,711,153 shares issued at May 31, 2023 and November 30, 2022, respectively	101,019		100,711
Paid-in capital	830,765		836,260
Retained earnings	3,407,813		3,143,578
Accumulated other comprehensive loss	(5,575)		(5,575)
Grantor stock ownership trust, at cost: 6,705,247 shares at May 31, 2023 and November 30, 2022	(72,718)		(72,718)
Treasury stock, at cost: 13,704,091 and 10,015,507 at May 31, 2023 and November 30, 2022, respectively	(494,822)		(341,461)
Total stockholders’ equity	3,766,482		3,660,795
Total liabilities and stockholders’ equity	$	6,483,017	$	6,651,930

See accompanying notes.

KB HOME

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In Thousands – Unaudited)


	Six Months Ended May 31,
	2023		2022
Cash flows from operating activities:
Net income	$	289,942	$	344,927
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Equity in income of unconsolidated joint ventures	(5,938)		(19,668)
Distributions of earnings from unconsolidated joint ventures	12,172		9,295
Amortization of debt issuance costs and premiums	1,673		1,137
Depreciation and amortization	17,760		15,534

Deferred income taxes	10,600		11,500

Stock-based compensation	14,686		15,888
Inventory impairments and land option contract abandonments	9,576		907
Changes in assets and liabilities:
Receivables	(18,460)		(11,112)
Inventories	413,774		(764,225)
Accounts payable, accrued expenses and other liabilities	(132,245)		84,259
Other, net	(4,810)		(3,254)
Net cash provided by (used in) operating activities	608,730		(314,812)
Cash flows from investing activities:
Contributions to unconsolidated joint ventures	(17,713)		(16,376)
Return of investments in unconsolidated joint ventures	5,100		1,255


Purchases of property and equipment, net	(18,324)		(22,122)
Net cash used in investing activities	(30,937)		(37,243)
Cash flows from financing activities:


Borrowings under revolving credit facility	170,000		1,075,000
Repayments under revolving credit facility	(320,000)		(675,000)

Issuance costs for unsecured revolving credit facility	—		(3,805)
Payments on mortgages and land contracts due to land sellers and other loans	(3,001)		(400)

Issuance of common stock under employee stock plans	5,010		—
Stock repurchases	(167,088)		(50,000)
Tax payments associated with stock-based compensation awards	(9,748)		(12,153)
Payments of cash dividends	(25,707)		(27,142)
Net cash provided by (used in) financing activities	(350,534)		306,500
Net increase (decrease) in cash and cash equivalents	227,259		(45,555)
Cash and cash equivalents at beginning of period	330,198		292,136
Cash and cash equivalents at end of period	$	557,457	$	246,581

See accompanying notes.

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, 2022, which are contained in our Annual Report on Form 10-K for that period. The consolidated balance sheet at November 30, 2022 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 six months ended May 31, 2023 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.

Use of Estimates. The preparation of financial statements in conformity with GAAP requires management to make estimates and judgments that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates.

Cash and Cash Equivalents. We consider all highly liquid short-term investments purchased with an original maturity of three months or less to be cash equivalents. Our cash equivalents totaled $372.6 million at May 31, 2023 and $15.8 million at November 30, 2022. At May 31, 2023 and November 30, 2022, the majority of our cash equivalents was invested in interest-bearing bank deposit accounts.

Comprehensive Income. Our comprehensive income was $164.4 million for the three months ended May 31, 2023 and $210.7 million for the three months ended May 31, 2022. For the six months ended May 31, 2023 and 2022, our comprehensive income was $289.9 million and $344.9 million, respectively. Our comprehensive income for each of the three-month and six-month periods ended May 31, 2023 and 2022 was equal to our net income for the respective periods.

2.Segment Information

We have identified five operating reporting segments, comprised of four homebuilding reporting segments and one financial services reporting segment. As of May 31, 2023, 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% ownership interest, with GR Alliance providing management oversight of KBHS’ operations.

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 May 31,				Six Months Ended May 31,
	2023		2022		2023		2022
Revenues:
West Coast	$	564,350	$	761,217	$	1,104,369	$	1,420,091
Southwest	335,828		290,924		575,415		500,691
Central	545,214		433,046		935,165		788,368
Southeast	312,454		229,639		521,434		399,830
Total	$	1,757,846	$	1,714,826	$	3,136,383	$	3,108,980

Pretax income (loss):
West Coast	$	55,099	$	137,518	$	114,649	$	247,552
Southwest	57,117		64,635		101,148		100,540
Central	78,985		66,200		137,818		104,316
Southeast	48,931		39,059		72,456		59,325
Corporate and other	(36,614)		(43,223)		(66,354)		(77,923)
Total	$	203,518	$	264,189	$	359,717	$	433,810




Inventory impairment and land option contract abandonment charges:
West Coast	$	3,079	$	157	$	3,948	$	157
Southwest	—		55		—		164
Central	1,128		520		2,079		586
Southeast	80		—		3,549		—
Total	$	4,287	$	732	$	9,576	$	907


	May 31, 2023		November 30, 2022
Assets:
West Coast	$	2,452,625	$	2,631,598
Southwest	965,223		1,074,912
Central	1,306,661		1,493,486
Southeast	895,182		929,208
Corporate and other	807,294		463,194
Total	$	6,426,985	$	6,592,398

3. Financial Services

The following tables present financial information relating to our financial services reporting segment (in thousands):


	Three Months Ended May 31,				Six Months Ended May 31,
	2023		2022		2023		2022
Revenues
Insurance commissions	$	4,010	$	2,596	$	7,384	$	5,114
Title services	3,460		2,637		5,863		4,738
Other	—		3		—		19
Total	7,470		5,236		13,247		9,871

Expenses
General and administrative	(1,472)		(1,362)		(2,830)		(2,709)
Operating income	5,998		3,874		10,417		7,162
Equity in income of unconsolidated joint ventures	5,426		14,807		7,008		19,955
Pretax income	$	11,424	$	18,681	$	17,425	$	27,117


	May 31, 2023		November 30, 2022
Assets
Cash and cash equivalents	$	420	$	1,681
Receivables	3,692		3,475
Investments in unconsolidated joint venture	21,664		26,678
Other assets (a)	30,256		27,698
Total assets	$	56,032	$	59,532

Liabilities
Accounts payable and accrued expenses	$	1,203	$	3,128
Total liabilities	$	1,203	$	3,128

(a)Other assets at May 31, 2023 and November 30, 2022 included $30.2 million and $27.6 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 May 31,				Six Months Ended May 31,
	2023		2022		2023		2022
Numerator:
Net income	$	164,442	$	210,670	$	289,942	$	344,927
Less: Distributed earnings allocated to nonvested restricted stock	(91)		(64)		(176)		(129)
Less: Undistributed earnings allocated to nonvested restricted stock	(1,119)		(957)		(1,866)		(1,539)
Numerator for basic earnings per share	163,232		209,649		287,900		343,259
Effect of dilutive securities:

Add: Undistributed earnings allocated to nonvested restricted stock	1,119		957		1,866		1,539
Less: Undistributed earnings reallocated to nonvested restricted stock	(1,085)		(931)		(1,811)		(1,495)
Numerator for diluted earnings per share	$	163,266	$	209,675	$	287,955	$	343,303


	Three Months Ended May 31,				Six Months Ended May 31,
	2023		2022		2023		2022
Denominator:
Weighted average shares outstanding — basic	81,764		87,858		82,607		88,069
Effect of dilutive securities:
Share-based payments	2,542		2,458		2,534		2,621
Weighted average shares outstanding — diluted	84,306		90,316		85,141		90,690
Basic earnings per share	$	2.00	$	2.39	$	3.49	$	3.90
Diluted earnings per share	$	1.94	$	2.32	$	3.38	$	3.79

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 at May 31, 2023 or 2022.

For the three-month and six-month periods ended May 31, 2023 and 2022, no outstanding stock options were excluded from the diluted earnings per share calculations. Contingently issuable shares associated with outstanding performance-based restricted stock units (each, a “PSU”) were not included in the basic earnings per share calculations for the periods presented, as the applicable vesting conditions had not been satisfied.

5. Receivables

Receivables consisted of the following (in thousands):


	May 31, 2023		November 30, 2022
Due from utility companies, improvement districts and municipalities	$	212,385	$	181,443
Recoveries related to self-insurance and other legal claims	68,632		76,581
Refundable deposits and bonds	16,967		17,610


Other	47,861		52,201
Subtotal	345,845		327,835
Allowance for doubtful accounts	(4,835)		(5,068)
Total	$	341,010	$	322,767

6. Inventories

Inventories consisted of the following (in thousands):


	May 31, 2023		November 30, 2022
Homes completed or under construction	$	2,094,058	$	2,414,675
Land under development	3,034,783		3,128,501
Total	$	5,128,841	$	5,543,176

Land under development at May 31, 2023 and November 30, 2022 included land held for future development or sale of $25.8 million and $21.6 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 May 31,				Six Months Ended May 31,
	2023		2022		2023		2022
Capitalized interest at beginning of period	$	147,162	$	159,649	$	145,494	$	161,119
Interest incurred	25,995		29,021		53,799		57,324

Interest amortized to construction and land costs	(31,932)		(34,005)		(58,068)		(63,778)
Capitalized interest at end of period	$	141,225	$	154,665	$	141,225	$	154,665

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 sale when the carrying value of a land parcel is greater than its fair value. These real estate assets are written down to fair value, less associated costs to sell. The estimated fair values of such assets are generally based on bona fide letters of intent from outside parties, executed sales contracts, broker quotes or similar information.

We evaluated one active community for recoverability as of May 31, 2023 with a carrying value of $15.9 million. As of November 30, 2022, we evaluated five active communities or land parcels for recoverability with a carrying value of $118.7 million. In addition, we evaluated land held for future development for recoverability as of both May 31, 2023 and November 30, 2022. Based on the results of our evaluations, we recognized no inventory impairment charges for the three-month and six-month periods ended May 31, 2023 and 2022.

As of May 31, 2023, the aggregate carrying value of our inventory that had been impacted by inventory impairment charges was $76.9 million, representing six communities and various other land parcels. As of November 30, 2022, the aggregate carrying value of our inventory that had been impacted by inventory impairment charges was $102.9 million, representing eight 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 $4.3 million for the three months ended May 31, 2023 and $9.6 million for the six months ended May 31, 2023. For the three-month and six-month periods ended May 31, 2022, we recognized land option contract abandonment charges of $.7 million and $.9 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 of our joint ventures at May 31, 2023 and November 30, 2022 was a VIE, but we were not the primary beneficiary of the VIE. Therefore, all of our joint ventures at May 31, 2023 and November 30, 2022 were unconsolidated and accounted for under the equity method because we did not have a controlling financial interest.

Land Option Contracts and Other Similar Contracts. In the ordinary course of our business, we enter into land option contracts and other similar contracts with third parties and unconsolidated entities to acquire rights to land for the construction of homes. Under these contracts, we typically make a specified option payment or earnest money deposit in consideration for the right to purchase land in the future, usually at a predetermined price. We analyze each of our land option contracts and other similar contracts under the variable interest model to determine whether the land seller is a VIE and, if so, whether we are the primary beneficiary. Although we do not have legal title to the underlying land, we are required to consolidate a VIE if we are the primary beneficiary. As a result of our analyses, we determined that as of May 31, 2023 and November 30, 2022, we were not the primary beneficiary of any VIEs from which we have acquired rights to land under land option contracts and other similar contracts. We perform ongoing reassessments of whether we are the primary beneficiary of a VIE.

The following table presents a summary of our interests in land option contracts and other similar contracts (in thousands):


	May 31, 2023				November 30, 2022
	Cash Deposits		Aggregate Purchase Price		Cash Deposits		Aggregate Purchase Price
Unconsolidated VIEs	$	16,471	$	609,927	$	22,399	$	635,502
Other land option contracts and other similar contracts	19,796		384,118		29,451		529,430
Total	$	36,267	$	994,045	$	51,850	$	1,164,932

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 $30.1 million at May 31, 2023 and $33.1 million at November 30, 2022. These pre-acquisition costs and cash deposits were included in inventories in our consolidated balance sheets.

For land option contracts and other similar contracts where the land seller entity is not required to be consolidated under the variable interest model, we consider whether such contracts should be accounted for as financing arrangements. Land option contracts and other similar contracts that may be considered financing arrangements include those we enter into with third-party land financiers or developers in conjunction with such third parties acquiring a specific land parcel(s) on our behalf, at our direction, and those with other landowners where we or our designee make improvements to the optioned land parcel(s) during the applicable option period. For these land option contracts and other similar contracts, we record the remaining purchase price of the associated land parcel(s) in inventories in our consolidated balance sheets with a corresponding financing obligation if we determine that we are effectively compelled to exercise the option to purchase the land parcel(s). As a result of our evaluations of land option contracts and other similar contracts for financing arrangements, we recorded inventories in our consolidated balance sheets, with a corresponding increase to accrued expenses and other liabilities, of $9.3 million at May 31, 2023 and $5.1 million at November 30, 2022.

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.

As of both May 31, 2023 and November 30, 2022, we had investments in six homebuilding unconsolidated joint ventures. The following table presents combined condensed information from the statements of operations for our homebuilding unconsolidated joint ventures (in thousands):


	Three Months Ended May 31,				Six Months Ended May 31,
	2023		2022		2023		2022
Revenues	$	1,171	$	1,108	$	1,171	$	3,958
Construction and land costs	(683)		(772)		(686)		(3,071)
Other expense, net	(960)		(918)		(2,410)		(1,348)
Loss	$	(472)	$	(582)	$	(1,925)	$	(461)

The following table presents combined condensed balance sheet information for our homebuilding unconsolidated joint ventures (in thousands):


	May 31, 2023		November 30, 2022
Assets
Cash	$	13,823	$	14,066
Receivables	2,886		3,394
Inventories	138,290		114,465
Other assets	554		633
Total assets	$	155,553	$	132,558

Liabilities and equity
Accounts payable and other liabilities	$	8,085	$	8,369

Notes payable (a)	47,457		34,396
Equity	100,011		89,793
Total liabilities and equity	$	155,553	$	132,558

(a) As of both May 31, 2023 and November 30, 2022, one of our unconsolidated joint ventures had borrowings outstanding under a revolving line of credit it entered into with a third-party lender in April 2022 to finance its land acquisition, development and construction activities. Borrowings under this line of credit, which has a maximum commitment of $62.0 million, 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 of our other unconsolidated joint ventures had outstanding debt at May 31, 2023 or November 30, 2022.

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 ventures (in thousands):


	Three Months Ended May 31,				Six Months Ended May 31,
	2023		2022		2023		2022
Revenues	$	28,450	$	50,224	$	48,640	$	80,200
Expenses	(17,599)		(20,607)		(34,624)		(40,287)
Income	$	10,851	$	29,617	$	14,016	$	39,913

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.

The following table presents combined condensed balance sheet information for our financial services unconsolidated joint venture (in thousands):


	May 31, 2023		November 30, 2022
Assets
Cash and cash equivalents	$	21,818	$	28,120
Mortgage loans held for sale	186,573		250,572
Other assets	28,173		33,176
Total assets	$	236,564	$	311,868

Liabilities and equity
Accounts payable and other liabilities	$	13,255	$	15,590
Funding facilities	179,981		242,944

Equity	43,328		53,334
Total liabilities and equity	$	236,564	$	311,868

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 $25.6 million at May 31, 2023 and $29.8 million at November 30, 2022. The changes in the fair value of IRLCs, which were reported in revenues for the applicable periods, were losses of $2.7 million and $4.2 million for the three-month and six-month periods ended May 31, 2023, respectively, and gains of $25.8 million and $33.4 million for the three-month and six-month periods ended May 31, 2022, respectively.

KBHS manages the interest rate and price risk associated with its outstanding IRLCs by entering into best efforts forward sale commitments under which mortgage loans locked with a borrower are simultaneously committed to a secondary market investor at a fixed price, subject to the underlying mortgage loans being funded. These best efforts forward sale commitments do not meet the definition of derivative financial instruments and are therefore not recorded in KBHS’ balance sheets. If the mortgage loans underlying the IRLCs do not fund, KBHS has no obligation to fulfill the secondary market investor commitments.

Funding facilities. KBHS maintains warehouse line of credit and master repurchase agreements with various financial institutions to fund its originated mortgage loans, with its mortgage loans held for sale pledged as collateral under these agreements. The agreements contain covenants which include certain financial requirements, including maintenance of minimum tangible net worth, minimum liquid assets, maximum debt to net worth ratio and positive net income, as defined in the agreements. KBHS was in compliance with these covenants as of May 31, 2023. In addition to its compliance with these covenants, KBHS also depends on the ability and willingness of the applicable lenders and financial institutions to extend such credit facilities to KBHS to fund its originated mortgage loans. KBHS intends to renew these facilities when they expire at various dates in 2023. The warehouse line of credit and master repurchase agreements are not guaranteed by us or any of the subsidiaries that guarantee our senior notes, unsecured revolving credit facility with various banks (“Credit Facility”) and senior unsecured term loan agreement (“Term Loan”), (collectively, “Guarantor Subsidiaries”).

10.Other Assets

Other assets consisted of the following (in thousands):


	May 31, 2023		November 30, 2022
Cash surrender value of corporate-owned life insurance contracts	$	54,858	$	55,591

Lease right-of-use assets	24,757		25,469
Prepaid expenses	23,157		15,645
Debt issuance costs associated with unsecured revolving credit facility, net	3,826		4,346
Total	$	106,598	$	101,051

11.Accrued Expenses and Other Liabilities

Accrued expenses and other liabilities consisted of the following (in thousands):


	May 31, 2023		November 30, 2022
Self-insurance and other legal liabilities	$	229,283	$	234,128
Employee compensation and related benefits	130,749		182,443
Warranty liability	99,142		101,890
Customer deposits	67,006		76,738
Accrued interest payable	28,891		29,989
Lease liabilities	26,787		27,494
Inventory-related obligations (a)	21,461		19,136
Federal and state taxes payable	15,449		3,671
Real estate and business taxes	11,125		17,557
Other	38,191		43,925
Total	$	668,084	$	736,971

(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-term leases with terms of 12 months or less. Our total lease expense for the three months ended May 31, 2023 and 2022 was $5.6 million and $4.9 million, respectively, and included short-term lease costs of $2.2 million and $1.8 million, respectively. For the six months ended May 31, 2023 and 2022, our total lease expense was $10.8 million and $9.2 million, respectively, and included short-term lease costs of $3.9 million and $3.0 million, respectively. Variable lease costs and external sublease income for the three-month and six-month periods ended May 31, 2023 and 2022 were immaterial.

The following table presents our lease right-of-use assets and lease liabilities (in thousands):


	May 31, 2023		November 30, 2022
Lease right-of-use assets (a)	$	24,768	$	25,545
Lease liabilities (a)	26,795		27,580

(a)Consists of amounts within both our homebuilding and financial services operations. The financial services amounts were nominal as of each date.

13.Income Taxes

Income Tax Expense. Our income tax expense and effective tax rates were as follows (dollars in thousands):


	Three Months Ended May 31,						Six Months Ended May 31,
	2023			2022			2023			2022
Income tax expense	$	50,500		$	72,200		$	87,200		$	116,000
Effective tax rate	23.5		%	25.5		%	23.1		%	25.2		%

Our income tax expense and effective tax rate for the three months ended May 31, 2023 included the favorable impact of $6.8 million of federal tax credits we recognized primarily from building energy-efficient homes and $1.1 million of excess tax benefits related to stock-based compensation, partly offset by $3.5 million of nondeductible executive compensation expense. Our income tax expense and effective tax rate for the three months ended May 31, 2022 reflected the favorable impact of $.6 million of federal tax credits we recognized primarily from building energy-efficient homes, which was more than offset by $2.2 million of nondeductible executive compensation expense.

For the six months ended May 31, 2023, our income tax expense and effective tax rate included the favorable impacts of $12.5 million of federal tax credits we recognized primarily from building energy-efficient homes and $3.8 million of excess tax benefits related to stock-based compensation, partly offset by $6.6 million of nondeductible executive compensation expense. Our income tax expense and effective tax rate for the six months ended May 31, 2022 reflected the favorable impacts of $2.2 million of excess tax benefits related to stock-based compensation and $.8 million of federal tax credits we recognized primarily from building energy-efficient homes, which were more than offset by $3.9 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 $167.4 million as of May 31, 2023 and $178.0 million as of November 30, 2022 were each partly offset by a valuation allowance of $17.1 million. The deferred tax asset valuation allowances as of May 31, 2023 and November 30, 2022 were primarily related to certain state net operating losses that had not met the “more likely than not” realization standard at those dates. Based on the evaluation of our deferred tax assets as of May 31, 2023, we determined that most of our deferred tax assets would be realized. Therefore, no adjustments to our deferred tax asset valuation allowance were needed for the six months ended May 31, 2023.

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 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):


	May 31, 2023		November 30, 2022
Unsecured revolving credit facility	$	—	$	150,000
Senior unsecured term loan due August 25, 2026	357,821		357,485
6.875% Senior notes due June 15, 2027	297,824		297,595
4.80% Senior notes due November 15, 2029	297,399		297,230
7.25% Senior notes due July 15, 2030	345,878		345,663
4.00% Senior notes due June 15, 2031	385,982		385,778
Mortgages and land contracts due to land sellers and other loans	1,759		4,760
Total	$	1,686,663	$	1,838,511

The carrying amounts of our senior notes listed above are net of unamortized debt issuance costs, which totaled $15.1 million at May 31, 2023 and $16.2 million at November 30, 2022.

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 May 31, 2023, we had no cash borrowings and $6.6 million of letters of credit outstanding under the Credit Facility. Therefore, as of May 31, 2023, we had $1.08 billion available for cash borrowings under the Credit Facility, with up to $243.4 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 May 31, 2023, the weighted average annual interest rate on our outstanding borrowings under the Term Loan was 6.4%.

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 13, 2025, we may issue up to $75.0 million of letters of credit. As of May 31, 2023 and November 30, 2022, we had letters of credit outstanding under the LOC Facility of $14.5 million and $36.4 million, respectively.

Senior Notes. All the senior notes outstanding at May 31, 2023 and November 30, 2022 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 May 31, 2023, we were in compliance with our covenants and other requirements under the Credit Facility, the Term Loan, the senior notes, the indenture, and the mortgages and land contracts due to land sellers and other loans. Our ability to access the Credit Facility for cash borrowings and letters of credit and our ability to secure future debt financing depend, in part, on our ability to remain in such compliance. Our ability to access the Credit Facility’s full borrowing capacity, as well as the LOC Facility’s full issuance capacity, also depends on the ability and willingness of the applicable lenders and financial institutions, including any substitute or additional lenders and financial institutions, to meet their commitments to fund loans, extend credit or provide payment guarantees to or for us under those instruments.

Mortgages and Land Contracts Due to Land Sellers and Other Loans. As of May 31, 2023, inventories having a carrying value of $23.6 million were pledged to collateralize mortgages and land contracts due to land sellers and other loans.

As of May 31, 2023, principal payments on our notes payable are due during each year ending November 30 as follows: 2023 – $.4 million; 2024 – $.8 million; 2025 – $.6 million ; 2026 – $360.0 million; 2027 – $300.0 million and thereafter – $1.04 billion.

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.

Fair value measurements are used for inventories on a nonrecurring basis when events and circumstances indicate that their carrying value is not recoverable. The following table presents the fair value hierarchy and our assets measured at fair value on a nonrecurring basis for the six months ended May 31, 2023 and the year ended November 30, 2022 (in thousands):


		May 31, 2023						November 30, 2022
Description	Fair Value Hierarchy	Pre-Impairment Value		Inventory Impairment Charges		Fair Value (a)		Pre-Impairment Value		Inventory Impairment Charges		Fair Value (a)

Inventories	Level 3	$	—	$	—	$	—	$	65,372	$	(24,077)	$	41,295

(a)Amounts represent the aggregate fair value for real estate assets impacted by inventory impairment charges during the applicable period, as of the date that the fair value measurements were made. The carrying value for these real estate assets may have subsequently increased or decreased from the fair value reflected due to activity that has occurred since the measurement date.

The fair values for inventories that were determined using Level 3 inputs were primarily based on the estimated future net cash flows discounted for inherent risk associated with each underlying asset.

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):


		May 31, 2023				November 30, 2022
Description	Fair Value Hierarchy	Carrying Value (a)		Estimated Fair Value		Carrying Value (a)		Estimated Fair Value
Financial Liabilities:
Senior notes	Level 2	$	1,327,083	$	1,263,000	$	1,326,266	$	1,205,875

(a)The carrying values for the senior notes, as presented, include unamortized debt issuance costs. Debt issuance costs are not factored into the estimated fair values of these notes.

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, outstanding borrowings under the Credit Facility and the Term Loan, and mortgages and land contracts due to land sellers and other loans approximate fair values. The carrying value of corporate-owned life insurance is based on the cash surrender value of the policies and, accordingly, approximates fair value.

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 two 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.

We estimate the costs that may be incurred under each limited warranty and record a liability in the amount of such costs at the time the revenue associated with the sale of each home is recognized. Our primary assumption in estimating the amounts we accrue for warranty costs is that historical claims experience is a strong indicator of future claims experience. Factors that affect our warranty liability include the number of homes delivered, historical and anticipated rates of warranty claims, and cost per claim. We periodically assess the adequacy of our accrued warranty liability, which is included in accrued expenses and other liabilities in our consolidated balance sheets, and adjust the amount as necessary based on our assessment. Our assessment includes the review of our actual warranty costs incurred to identify trends and changes in our warranty claims experience, and considers our home construction quality and customer service initiatives and outside events. While we believe the warranty liability currently reflected in our consolidated balance sheets to be adequate, unanticipated changes or developments in the legal environment, local weather, land or environmental conditions, quality of materials or methods used in the construction of homes or customer service practices and/or our warranty claims experience could have a significant impact on our actual warranty costs in future periods and such amounts could differ significantly from our current estimates.

The changes in our warranty liability were as follows (in thousands):


	Three Months Ended May 31,				Six Months Ended May 31,
	2023		2022		2023		2022
Balance at beginning of period	$	101,238	$	97,466	$	101,890	$	96,153
Warranties issued	10,653		9,678		18,643		17,568
Payments	(12,749)		(7,937)		(21,391)		(14,514)

Balance at end of period	$	99,142	$	99,207	$	99,142	$	99,207

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.

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.

Our self-insurance liability is presented on a gross basis for all periods without consideration of insurance recoveries and amounts we have paid on behalf of and expect to recover from other parties, if any. Estimated probable insurance and other recoveries of $30.3 million and $32.7 million are included in receivables in our consolidated balance sheets at May 31, 2023 and November 30, 2022, respectively. These self-insurance recoveries are principally based on actuarially determined amounts and depend on various factors, including, among other things, the above-described claim cost estimates, our insurance policy coverage limits for the applicable policy year(s), historical third-party recovery rates, insurance industry practices, the regulatory environment and legal precedent, and are subject to a high degree of variability from period to period. Because of the inherent uncertainty and variability in these assumptions, our actual insurance recoveries could differ significantly from amounts currently estimated.

The changes in our self-insurance liability were as follows (in thousands):


	Three Months Ended May 31,				Six Months Ended May 31,
	2023		2022		2023		2022
Balance at beginning of period	$	171,269	$	190,594	$	175,977	$	189,131
Self-insurance provided	3,977		5,773		7,818		10,512
Payments	(1,838)		(11,664)		(9,134)		(14,130)
Adjustments (a)	(1,185)		(16,028)		(2,438)		(16,838)
Balance at end of period	$	172,223	$	168,675	$	172,223	$	168,675

(a)Represents net changes in estimated probable recoveries related to self-insurance, which are recorded in receivables, to present our self-insurance liability on a gross basis.

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. 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.

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 May 31, 2023, we had approximately 465 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 May 31, 2023, we had an accrual for our estimated probable loss for these matters and a receivable for estimated probable insurance recoveries. While it is reasonably possible that our loss could exceed the amount accrued and our recoveries could be less than the amount 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. In addition, although we believe it is probable we will receive additional claims in future periods, we are unable to reasonably estimate the number of such claims or the amount or range of any potential losses associated with such claims as each of these is dependent on several factors, including the actions of third parties over which we have no control; the nature of any specific claims; and our evaluation of the particular facts surrounding each such claim.

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 May 31, 2023, we had $1.34 billion of performance bonds and $21.2 million of letters of credit outstanding. At November 30, 2022, we had $1.27 billion of performance bonds and $43.0 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 May 31, 2023, we had total cash deposits of $36.3 million to purchase land having an aggregate purchase price of $994.0 million. Our land option contracts and other similar contracts generally do not contain provisions requiring our specific performance.

17.Legal Matters

We are involved in litigation and regulatory proceedings incidental to our business that are in various procedural stages. We believe the accruals we have recorded for probable and reasonably estimable losses with respect to these proceedings are adequate and that, as of May 31, 2023, it was not reasonably possible that an additional material loss had been incurred in an amount in excess of the estimated amounts already recognized or disclosed in our consolidated financial statements. We evaluate our accruals for litigation and regulatory proceedings at least quarterly and, as appropriate, adjust them to reflect (a) the facts and circumstances known to us at the time, including information regarding negotiations, settlements, rulings and other relevant events and developments; (b) the advice and analyses of counsel; and (c) the assumptions and judgment of management. Similar factors and considerations are used in establishing new accruals for proceedings as to which losses have become probable and reasonably estimable at the time an evaluation is made. Our accruals for litigation and regulatory proceedings are presented on a gross basis without consideration of recoveries and amounts we have paid on behalf of and expect to recover from other parties, if any. Estimates of recoveries and amounts we have paid on behalf of and expect to recover from other parties, if any, are recorded as receivables when such recoveries are considered probable. Based on our experience, we believe the amounts that may be claimed or alleged against us in these proceedings are not a meaningful indicator of our potential liability. The outcome of any of these proceedings, including the defense and other litigation-related costs and expenses we may incur, however, is inherently uncertain and could differ significantly from the estimate reflected in a related accrual, if made. Therefore, it is possible that the ultimate outcome of any proceeding, if in excess of a related accrual or if an accrual had not been made, could be material to our consolidated financial statements. Pursuant to SEC rules, we will disclose any proceeding in which a governmental authority is a party and that arises under any federal, state or local provisions enacted or adopted regulating the discharge of materials into the environment or primarily for the purpose of protecting the environment only where we believe that such proceeding will result in monetary sanctions on us, exclusive of interest and costs, above $1.0 million or is otherwise material to our consolidated financial statements.

18.Stockholders’ Equity

A summary of changes in stockholders’ equity is presented below (in thousands):


	Three Months Ended May 31, 2023 and 2022
	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 February 28, 2023	100,783	(6,705)	(11,587)	$	100,783	$	819,904	$	3,256,602	$	(5,575)	$	(72,718)	$	(403,533)	$	3,695,463


Net income	—	—	—	—		—		164,442		—		—		—		164,442
Dividends on common stock	—	—	—	—		—		(13,231)		—		—		—		(13,231)
Employee stock options/other	236	—	—	236		3,640		—		—		—		—		3,876

Stock awards	—	—	46	—		(1,598)		—		—		—		1,598		—
Stock-based compensation	—	—	—	—		8,819		—		—		—		—		8,819
Stock repurchases	—	—	(2,163)	—		—		—		—		—		(92,887)		(92,887)

Balance at May 31, 2023	101,019	(6,705)	(13,704)	$	101,019	$	830,765	$	3,407,813	$	(5,575)	$	(72,718)	$	(494,822)	$	3,766,482

Balance at February 28, 2022	100,711	(6,705)	(5,384)	$	100,711	$	828,238	$	2,499,491	$	(19,119)	$	(72,718)	$	(202,287)	$	3,134,316


Net income	—	—	—	—		—		210,670		—		—		—		210,670
Dividends on common stock	—	—	—	—		—		(13,012)		—		—		—		(13,012)

Stock awards	—	—	64	—		(2,376)		—		—		—		2,376		—
Stock-based compensation	—	—	—	—		9,021		—		—		—		—		9,021
Stock repurchases	—	—	(1,520)	—		—		—		—		—		(50,000)		(50,000)

Balance at May 31, 2022	100,711	(6,705)	(6,840)	$	100,711	$	834,883	$	2,697,149	$	(19,119)	$	(72,718)	$	(249,911)	$	3,290,995


	Six Months Ended May 31, 2023 and 2022
	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, 2022	100,711	(6,705)	(10,016)	$	100,711	$	836,260	$	3,143,578	$	(5,575)	$	(72,718)	$	(341,461)	$	3,660,795

Net income	—	—	—	—		—		289,942		—		—		—		289,942
Dividends on common stock	—	—	—	—		—		(25,707)		—		—		—		(25,707)
Employee stock options/other	308	—	—	308		4,702		—		—		—		—		5,010
Stock awards	—	—	717	—		(24,883)		—		—		—		24,883		—
Stock-based compensation	—	—	—	—		14,686		—		—		—		—		14,686
Stock repurchases	—	—	(4,128)	—		—		—		—		—		(168,496)		(168,496)
Tax payments associated with stock-based compensation awards	—	—	(277)	—		—		—		—		—		(9,748)		(9,748)
Balance at May 31, 2023	101,019	(6,705)	(13,704)	$	101,019	$	830,765	$	3,407,813	$	(5,575)	$	(72,718)	$	(494,822)	$	3,766,482

Balance at November 30, 2021	100,711	(6,705)	(5,785)	$	100,711	$	848,620	$	2,379,364	$	(19,119)	$	(72,718)	$	(217,383)	$	3,019,475


Net income	—	—	—	—		—		344,927		—		—		—		344,927
Dividends on common stock	—	—	—	—		—		(27,142)		—		—		—		(27,142)

Stock awards	—	—	785	—		(29,625)		—		—		—		29,625		—
Stock-based compensation	—	—	—	—		15,888		—		—		—		—		15,888
Stock repurchases	—	—	(1,520)	—		—		—		—		—		(50,000)		(50,000)
Tax payments associated with stock-based compensation awards	—	—	(320)	—		—		—		—		—		(12,153)		(12,153)
Balance at May 31, 2022	100,711	(6,705)	(6,840)	$	100,711	$	834,883	$	2,697,149	$	(19,119)	$	(72,718)	$	(249,911)	$	3,290,995

On February 24, 2023, the management development and compensation committee of our board of directors approved the payout of 602,265 shares of our common stock in connection with the vesting of PSUs that were granted to certain employees on October 3, 2019. 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, 2019 through November 30, 2022. Of the shares of common stock paid out, 276,853 shares, or $9.7 million, were purchased by us in the 2023 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 April 7, 2022, our board of directors authorized us to repurchase up to $300.0 million of our outstanding common stock, excluding excise tax. As of November 30, 2022, there was $150.0 million of remaining availability under this share repurchase authorization, excluding excise tax. In the 2023 first quarter, we repurchased 1,965,442 shares of our common stock on the open market pursuant to this authorization at a total cost of approximately $75.0 million, excluding excise tax. On March 21, 2023, our board of directors authorized us to repurchase up to $500.0 million of our outstanding common stock, excluding excise tax. This authorization replaced the prior board of directors authorization, which had $75.0 million remaining, excluding excise tax. In the 2023 second quarter, we repurchased 2,162,882 shares of our common stock at a total cost of approximately $92.1 million, excluding excise tax, bringing our total repurchases for the six months ended May 31, 2023 to 4,128,324 shares of common stock at a total cost of approximately $167.1 million, excluding excise tax. Repurchases under the current 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 May 31, 2023, we were authorized to repurchase up to approximately $407.9 million of our outstanding common stock in additional transactions, excluding excise tax.

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 2023 first half, 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.

In the three-month periods ended May 31, 2023 and 2022, our board of directors declared, and we paid, a quarterly cash dividend on our common stock of $.15 per share. Quarterly dividends declared and paid during the six-month periods ended May 31, 2023 and 2022 totaled $.30 per share.

19.Stock-Based Compensation

Stock Options. At May 31, 2023 and November 30, 2022, we had 1,366,297 and 1,674,393 stock options outstanding with a weighted average exercise price of $15.40 and $15.56, respectively. We have not granted any stock option awards since 2016. In the 2023 first half, 308,096 stock options with a weighted average exercise price of $16.26 were exercised. As of May 31, 2023, stock options outstanding and stock options exercisable each had a weighted average remaining contractual life of 2.6 years. As all outstanding stock options have been fully vested since 2019, there was no stock-based compensation expense associated with stock options for the three-month and six-month periods ended May 31, 2023 and 2022. Stock options outstanding and stock options exercisable each had an aggregate intrinsic value of $38.2 million at May 31, 2023. (The intrinsic value of a stock option is the amount by which the market value of a share of the underlying common stock exceeds the exercise price of the stock option.)

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 $8.8 million and $9.0 million for the three months ended May 31, 2023 and 2022, respectively, related to restricted stock and PSUs. For the six months ended May 31, 2023 and 2022, we recognized total compensation expense of $14.7 million and $15.9 million, respectively.

Approval of the Amended and Restated KB Home 2014 Equity Incentive Plan. At our Annual Meeting of Stockholders held on April 20, 2023, our stockholders approved the Amended and Restated KB Home 2014 Equity Incentive Plan (“Amended and Restated 2014 Plan”), confirming, among other things, an aggregate share grant capacity for stock-based awards to our employees, non-employee directors and consultants of 18,200,000 shares through approving and incorporating the base amount of 12,300,000 shares under the predecessor Amended KB Home 2014 Equity Incentive Plan and adding 5,900,000 shares, plus any shares subject to outstanding awards under our 2010 Equity Incentive Plan (“2010 Plan”) that subsequently expire or are cancelled, forfeited, tendered or withheld to satisfy tax withholding obligations with respect to full value awards, or settled for cash. With no other shares available for grant under the 2010 Plan, the Amended and Restated 2014 Plan is our only active equity compensation plan. As with the Amended KB Home 2014 Equity Incentive Plan, under the Amended and Restated 2014 Plan, grants of stock options and other similar awards reduce the share grant capacity on a 1-for-1 basis, and grants of restricted stock and other similar “full value” awards reduce the share grant capacity on a 1.78-for-1 basis. The Amended and Restated 2014 Plan provides stock options and SARs may be awarded for periods of up to 10 years, and enables us to grant other stock-based awards and cash bonuses. As of the date of this report, no grants have been made under the Amended and Restated 2014 Plan following the date of its approval by our stockholders.

20.Supplemental Disclosure to Consolidated Statements of Cash Flows

The following are supplemental disclosures to the consolidated statements of cash flows (in thousands):


	Six Months Ended May 31,
	2023		2022
Summary of cash and cash equivalents at end of period:
Homebuilding	$	557,037	$	244,186
Financial services	420		2,395
Total	$	557,457	$	246,581

Supplemental disclosures of cash flow information:
Interest paid, net of amounts capitalized	$	1,098	$	(237)
Income taxes paid	64,824		97,654
Supplemental disclosures of non-cash activities:

Increase (decrease) in consolidated inventories not owned	4,264		(13,465)
Increase in inventories due to distributions of land and land development from an unconsolidated joint venture	4,896		4,967

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 May 31,						Six Months Ended May 31,
	2023		2022		Variance		2023		2022		Variance
Revenues:
Homebuilding	$	1,757,846	$	1,714,826	3	%	$	3,136,383	$	3,108,980	1	%
Financial services	7,470		5,236		43		13,247		9,871		34
Total revenues	$	1,765,316	$	1,720,062	3	%	$	3,149,630	$	3,118,851	1	%
Pretax income:
Homebuilding	$	203,518	$	264,189	(23)	%	$	359,717	$	433,810	(17)	%
Financial services	11,424		18,681		(39)		17,425		27,117		(36)
Total pretax income	214,942		282,870		(24)		377,142		460,927		(18)
Income tax expense	(50,500)		(72,200)		30		(87,200)		(116,000)		25
Net income	$	164,442	$	210,670	(22)	%	$	289,942	$	344,927	(16)	%
Diluted earnings per share	$	1.94	$	2.32	(16)	%	$	3.38	$	3.79	(11)	%

We generated solid financial results in the 2023 second quarter amid improving housing market conditions compared to the 2022 second half and 2023 first quarter, periods in which the combination of relatively high mortgage interest rates, elevated inflation and various other macroeconomic and geopolitical concerns significantly depressed demand. Though the business environment continues to be less favorable than during the 2022 first half, we achieved monthly sequential increases in our net orders in the current quarter, sustaining the trend we experienced in the first quarter, due to typical seasonal factors, buyers adjusting to the higher mortgage interest rates, and low resale home inventory. Our total net orders for the 2023 second quarter were slightly above the year-earlier quarter, and up 84% sequentially, as a 20% year-over-year increase in our average community count offset a slower monthly net order pace per community of 5.2. While this monthly pace is down from the year-ago period’s exceptional 6.2 level, it is generally in line with our second-quarter average, prior to the pandemic-driven volatility.

During the second quarter, we remained focused on balancing pace, price and construction starts at each community to optimize our return on each inventory asset. With market conditions having improved compared to the 2022 second half and 2023 first quarter, reflecting a stabilizing mortgage interest rate environment, we were able to raise or maintain selling prices in most of our communities compared to those earlier periods. On a more selective basis and to a lesser extent than in the first quarter, we implemented targeted sales strategies, including pricing adjustments and other homebuyer concessions (particularly, mortgage-related concessions such as interest rate buydown or lock programs), to drive order activity and minimize cancellations. These actions, together with product and geographic mix shifts, as discussed below under “Homebuilding” and “Homebuilding Reporting Segments,” contributed to our 2023 second quarter net orders increasing 1% year over year and net order value decreasing 11%, reflecting a lower average selling price for these net orders. These year-over-year comparisons improved significantly from the 2023 first quarter when our net orders and net order value were down 49% and 53%, respectively. However, we anticipate the pricing adjustments and other homebuyer concessions we have implemented, along with other factors discussed below under “Outlook,” will contribute to a year-over-year decrease in the average selling price of homes delivered in each of the remaining 2023 quarters.

Homebuilding revenues for the three months ended May 31, 2023 and 2022 were generated entirely from housing revenues. Housing revenues for the 2023 second quarter rose 3% from the year-earlier quarter due to a 6% increase in the number of homes delivered to 3,666, partly offset by a 3% decrease in their average selling price to $479,500. Approximately 48% of our homes delivered in the 2023 second quarter were to first-time homebuyers. Homebuilding operating income for the three months ended May 31, 2023 decreased 24% year over year to $202.1 million and, as a percentage of revenues, was down 390 basis points to 11.5%. Our homebuilding operating income margin for the 2023 second quarter reflected a decrease in our housing gross profit margin to 21.1%, compared to 25.3% for the year-ago quarter. Net income and diluted earnings per share for the three months ended May 31, 2023 decreased 22% and 16%, respectively. Our diluted earnings per share for the 2023

second quarter reflected the favorable impact of our common stock repurchases over the past several quarters, which are discussed in Note 18 – Stockholders’ Equity in the Notes to Consolidated Financial Statements in this report.

In the 2023 second quarter, we achieved a meaningful sequential improvement in our construction cycle times. This was driven by a normalizing supply chain and better construction services availability as well as our ongoing initiative to simplify our product offerings, alleviating to an extent the significant production challenges that have persisted to varying degrees since the 2020 second quarter, and resulted in cycle times that remain extended relative to our historical average, and delivery and community opening delays. We remain committed to further reducing build times and continue to work with our suppliers and trade partners to improve their performance and cost, which may help offset some of the impact of the above-described pricing adjustments and other homebuyer concessions we have implemented. While we are pleased with the production gains in the second quarter, ongoing supply chain-related challenges for certain items may continue to negatively affect our land development and home construction activities through the 2023 second half, and it is possible they will worsen in that and in later periods.

We believe our strong balance sheet and liquidity position provide us with the flexibility to operate effectively through evolving market conditions. In the 2023 first half, we generated $608.7 million of cash from operating activities, reflecting our reduced investments in land and land development as we continue to calibrate those investments to evolving market conditions. As a result, we ended the 2023 second quarter with total liquidity of $1.64 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 May 31, 2023.

Our ending backlog value at May 31, 2023 decreased 44% year over year to approximately $3.46 billion, largely due to our lower backlog at the beginning of the quarter, which reflected the slowdown in housing market demand that began in the 2022 second half and continued into the 2023 first quarter. Yet, we believe we are well-positioned to achieve solid results for the 2023 third 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 May 31,				Six Months Ended May 31,
	2023		2022		2023		2022
Revenues:
Housing	$	1,757,846	$	1,714,826	$	3,136,383	$	3,108,980
Land	—		—		—		—
Total	1,757,846		1,714,826		3,136,383		3,108,980
Costs and expenses:
Construction and land costs
Housing	(1,386,558)		(1,281,752)		(2,469,379)		(2,363,864)
Land	—		—		—		—
Total	(1,386,558)		(1,281,752)		(2,469,379)		(2,363,864)
Selling, general and administrative expenses	(169,186)		(168,614)		(308,413)		(311,094)
Total	(1,555,744)		(1,450,366)		(2,777,792)		(2,674,958)
Operating income	202,102		264,460		358,591		434,022
Interest income	1,729		39		2,196		75
Equity in loss of unconsolidated joint ventures	(313)		(310)		(1,070)		(287)

Homebuilding pretax income	$	203,518	$	264,189	$	359,717	$	433,810
			\


	Three Months Ended May 31,						Six Months Ended May 31,
	2023			2022			2023			2022
Homes delivered	3,666			3,469			6,454			6,337
Average selling price	$	479,500		$	494,300		$	486,000		$	490,600
Housing gross profit margin as a percentage of housing revenues	21.1		%	25.3		%	21.3		%	24.0		%
Adjusted housing gross profit margin as a percentage of housing revenues	21.4		%	25.3		%	21.6		%	24.0		%

Selling, general and administrative expenses as a percentage of housing revenues	9.6		%	9.8		%	9.8		%	10.0		%
Operating income as a percentage of revenues	11.5		%	15.4		%	11.4		%	14.0		%

Revenues. Homebuilding revenues for the three months and six months ended May 31, 2023 and 2022 were comprised solely of housing revenues. In the 2023 second quarter, housing revenues grew 3% from the year-earlier quarter, reflecting a 6% increase in the number of homes delivered, partly offset by a 3% decrease in their overall average selling price. The year-over-year growth in the number of homes delivered reflected increases of 23%, 17% and 14% in our Southeast, Central and Southwest homebuilding reporting segments, respectively, partly offset by a 22% decrease in our West Coast homebuilding reporting segment. The decline in our West Coast homebuilding reporting segment mainly resulted from a 48% year-over-year decrease in this segment’s backlog of homes at the beginning of the quarter. The lower overall average selling price primarily reflected product and geographic mix factors, and increased concessions we selectively extended to buyers within backlog prior to delivery in conjunction with our targeted sales strategies.

For the six months ended May 31, 2023, housing revenues were about the same as the corresponding 2022 period, as the number of homes delivered increased 2% and their overall average selling price was essentially even with the year-earlier period.

Operating Income. Our homebuilding operating income for the three months ended May 31, 2023 decreased 24% from the year-earlier period, primarily reflecting lower housing gross profits. Operating income for the 2023 second quarter included inventory-related charges of $4.3 million, compared to $.7 million in the year-earlier quarter. As a percentage of revenues, our operating income for the three months ended May 31, 2023 was 11.5%, compared to 15.4% for the corresponding 2022 period, reflecting a lower housing gross profit margin. Excluding inventory-related charges, our operating income as a percentage of revenues decreased 380 basis points to 11.7% for the 2023 second quarter from 15.5% for the year-earlier quarter.

For the six months ended May 31, 2023, our operating income decreased 17% from the prior-year period due to lower housing gross profits, partly offset by lower selling, general and administrative expenses. Operating income for the six months ended May 31, 2023 included inventory-related charges of $9.6 million, compared to $.9 million of such charges in the corresponding 2022 period. As a percentage of revenues, our operating income for the six months ended May 31, 2023 decreased 260 basis points year over year to 11.4%, reflecting a lower housing gross profit margin. Excluding inventory-related charges, our operating income as a percentage of revenues declined 230 basis points to 11.7% for the six months ended May 31, 2023 from 14.0% for the corresponding year-earlier period.

•Housing Gross Profits – Housing gross profits of $371.3 million for the three months ended May 31, 2023 declined 14% from $433.1 million for the year-earlier period, due to a decrease in our housing gross profit margin, partly offset by an increase in housing revenues. Our housing gross profit margin for the 2023 second quarter decreased 420 basis points year over year to 21.1%, mainly due to price decreases and other homebuyer concessions, together with higher construction costs, product and geographic mix shifts, and increased inventory-related charges. As a percentage of housing revenues, the amortization of previously capitalized interest associated with housing operations, which is included in construction and land costs, was 1.8% and 2.0% for the three months ended May 31, 2023 and 2022, respectively. Excluding the inventory-related charges associated with housing operations of $4.3 million in the current quarter and $.7 million in the year-earlier quarter, our adjusted housing gross profit margin for the 2023 second quarter decreased 390 basis points year over year.

For the six months ended May 31, 2023, our housing gross profits of $667.0 million decreased 10% from $745.1 million for the year-earlier period. Our housing gross profit margin for the six months ended May 31, 2023 declined 270 basis points to 21.3%, primarily due to the reasons described above with respect to the three months ended May 31, 2023. As a percentage of housing revenues, the amortization of previously capitalized interest associated with housing operations was 1.9% for the six months ended May 31, 2023, compared to 2.1% for the corresponding 2022 period. Excluding the inventory-related charges associated with housing operations of $9.6 million in the current period and $.9 million in the

year-earlier period, our adjusted housing gross profit margin of 21.6% for the six months ended May 31, 2023 decreased 240 basis points year over year.

The calculation of adjusted housing gross profit margin, which we believe provides a clearer measure of the performance of our business, is described below under “Non-GAAP Financial Measures.”

•Selling, General and Administrative Expenses – The following table presents the components of our selling, general and administrative expenses (dollars in thousands):


	Three Months Ended May 31,								Six Months Ended May 31,
	2023		% of Housing Revenues		2022		% of Housing Revenues		2023		% of Housing Revenues		2022		% of Housing Revenues
Marketing expenses	$	37,788	2.1	%	$	35,655	2.1	%	$	70,926	2.2	%	$	64,503	2.1	%
Commission expenses (a)	62,906		3.6		54,794		3.2		109,393		3.5		103,423		3.3
General and administrative expenses	68,492		3.9		78,165		4.5		128,094		4.1		143,168		4.6
Total	$	169,186	9.6	%	$	168,614	9.8	%	$	308,413	9.8	%	$	311,094	10.0	%

(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 May 31, 2023 were essentially even with the year-earlier quarter. As a percentage of housing revenues, our selling, general and administrative expenses for the 2023 second quarter improved 20 basis points, reflecting increased operating leverage due to our higher housing revenues as compared to the year-earlier quarter.

For the six months ended May 31, 2023, selling, general and administrative expenses decreased slightly year over year. As a percentage of housing revenues, selling, general and administrative expenses for the six months ended May 31, 2023 improved 20 basis points, reflecting the slight decrease in general and administrative expenses, and housing revenues that were about the same as the year-earlier period.

Interest Income/Expense. Interest income, which is generated from short-term investments, totaled $1.7 million and $2.2 million for the three-month and six-month periods ended May 31, 2023, respectively, and was nominal for the corresponding year-earlier periods. Generally, increases and decreases in interest income are attributable to changes in the interest-bearing average balances of short-term investments and fluctuations in interest rates.

We incur interest principally from our borrowings to finance land acquisitions, land development, home construction and other operating and capital needs. All interest incurred during the three-month and six-month periods ended May 31, 2023 and 2022 was capitalized as the average amount of our inventory qualifying for interest capitalization was higher than our average debt level for each period. Accordingly, we had no interest expense for these periods. Further information regarding our interest incurred and capitalized is provided in Note 6 – Inventories in the Notes to Consolidated Financial Statements in this report.

Equity in Loss of Unconsolidated Joint Ventures. Our equity in loss of unconsolidated joint ventures was nominal for the three months ended May 31, 2023 and 2022. For the six months ended May 31, 2023, our equity in loss of unconsolidated joint ventures was $1.1 million, compared to a nominal amount for the year-earlier period. Further information regarding our investments in homebuilding unconsolidated joint ventures is provided in Note 9 – Investments in Unconsolidated Joint Ventures in the Notes to Consolidated Financial Statements in this report.

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 May 31,						Six Months Ended May 31,
	2023			2022			2023			2022
Net orders	3,936			3,914			6,078			8,124
Net order value (a)	$	1,899,649		$	2,124,754		$	2,901,517		$	4,278,488
Cancellation rate (b)	22		%	17		%	28		%	14		%
Ending backlog — homes	7,286			12,331			7,286			12,331
Ending backlog — value	$	3,456,693		$	6,121,233		$	3,456,693		$	6,121,233
Ending community count	249			214			249			214
Average community count	253			211			250			213

(a) Net order value represents potential future housing revenues associated with net orders generated during the period, as well as homebuyer selections of lot and product premiums and design studio options and upgrades for homes in backlog during the same period.

(b) Cancellation rates represent the total number of contracts for new homes cancelled during a period divided by the total (gross) orders for new homes generated during the same period.

Net Orders. Net orders for the 2023 second quarter rose 1% from the year-earlier quarter, reflecting an increase in gross orders, partly offset by higher cancellations. Although the pace of monthly net orders per community slowed to 5.2 in the 2023 second quarter, compared to 6.2 in the corresponding quarter of 2022, overall net orders increased slightly due to a 20% increase in our average community count. The value of our net orders declined 11% year over year, due to the lower average selling price for those homes. Reflecting pricing adjustments and other homebuyer concessions, as well as a product and geographic mix shift, the average selling price of our net orders for the 2023 second quarter was $482,600, down 11% from the year-earlier period. The year-over-year net order and net order value comparisons for the 2023 second quarter improved from the declines of 49% and 53%, respectively, in the 2023 first quarter. In the 2023 second quarter, the year-over-year growth in our overall net orders reflected increases of 19% and 10% in our West Coast and Southwest homebuilding reporting segments, respectively, partly offset by a 20% decrease in our Central segment. Net orders in our Southeast segment were essentially even with the year-earlier quarter.

Our cancellation rate as a percentage of gross orders for the three months ended May 31, 2023 increased compared to the year-earlier period, reflecting elevated mortgage interest rates and ongoing economic uncertainty. On a sequential basis, the cancellation rate for the 2023 second quarter improved from 36% in the 2023 first quarter, reflecting a moderation back toward historical levels.

Backlog. The number of homes in our backlog at May 31, 2023 decreased 41% from May 31, 2022, mainly due to our substantially lower backlog at the beginning of the quarter and a year-over-year increase in homes delivered in the 2023 second quarter. The potential future housing revenues in our backlog at May 31, 2023 declined 44% from May 31, 2022 as a result of both the lower number of homes in backlog and a 4% decrease in their average selling price. The year-over-year decrease in our overall backlog value at May 31, 2023 reflected decreases in all of our homebuilding reporting segments, ranging from 36% in our Southwest segment to 55% in our Central segment. A portion of the homes in backlog will not result in homes delivered due to cancellations.

Community Count. We use the term “community count” to refer to the number of communities open for sale with at least five homes left to sell at the end of a reporting period. Our average community count for the three months ended May 31, 2023 expanded 20% from the year-earlier period, reflecting increases in each of our homebuilding reporting segments. Our ending community count for the 2023 second quarter rose 16% from the corresponding quarter of 2022. The year-over-year increases in our average and ending community counts primarily reflected new community openings and fewer communities selling out during the three months ended May 31, 2023. While maintaining a healthy supply of land owned or controlled under land option contracts and other similar contracts to fuel future community openings, we continued to moderate our land investments in the 2023 first half with evolving housing market conditions, as discussed below under “Liquidity and Capital Resources.”

HOMEBUILDING REPORTING SEGMENTS

Operational Data. The following tables present information about our homes delivered, net orders, cancellation rates as a percentage of gross orders, net order value, average community count and ending backlog (number of homes and value) by homebuilding reporting segment (dollars in thousands):


	Three Months Ended May 31,
	Homes Delivered				Net Orders			Cancellation Rates
Segment	2023		2022		2023		2022	2023		2022
West Coast	802		1,029		1,299		1,088	12	%	15	%
Southwest	778		685		789		719	16		11
Central	1,302		1,117		1,042		1,300	33		22
Southeast	784		638		806		807	24		16
Total	3,666		3,469		3,936		3,914	22	%	17	%




	Net Order Value						Average Community Count
Segment	2023		2022		Variance		2023	2022		Variance
West Coast	$	870,149	$	844,831	3	%	78	59		32	%
Southwest	345,340		341,240		1		44	36		22
Central	365,213		582,084		(37)		83	73		14
Southeast	318,947		356,599		(11)		48	43		12
Total	$	1,899,649	$	2,124,754	(11)	%	253	211		20	%


	Six Months Ended May 31,
	Homes Delivered				Net Orders			Cancellation Rates
Segment	2023		2022		2023		2022	2023		2022
West Coast	1,588		1,943		2,156		2,182	16	%	13	%
Southwest	1,314		1,201		1,259		1,467	20		9
Central	2,237		2,070		1,453		2,744	43		18
Southeast	1,315		1,123		1,210		1,731	29		12
Total	6,454		6,337		6,078		8,124	28	%	14	%



	Net Order Value						Average Community Count
Segment	2023		2022		Variance		2023	2022		Variance
West Coast	$	1,405,688	$	1,690,348	(17)	%	79	58		36	%
Southwest	522,732		668,809		(22)		44	36		22
Central	504,681		1,200,093		(58)		81	75		8
Southeast	468,416		719,238		(35)		46	44		5
Total	$	2,901,517	$	4,278,488	(32)	%	250	213		17	%


	May 31,
	Backlog – Homes				Backlog – Value
Segment	2023	2022	Variance		2023		2022		Variance
West Coast	1,855	2,680	(31)	%	$	1,224,334	$	2,035,168	(40)	%
Southwest	1,637	2,460	(33)		695,613		1,078,701		(36)
Central	2,205	4,585	(52)		889,379		1,960,299		(55)
Southeast	1,589	2,606	(39)		647,367		1,047,065		(38)
Total	7,286	12,331	(41)	%	$	3,456,693	$	6,121,233	(44)	%

The composition of our homes delivered, net orders and backlog shifts with the product and geographic mix of our active communities and the corresponding average selling prices of the homes ordered and/or delivered at these communities in any particular period, changing as new communities open and existing communities wind down or sell out in the ordinary course. In addition, with our Built to Order model, the selling prices of individual homes within a community may vary due to differing lot sizes and locations, home square footage, product premiums and the design studio options and upgrades buyers select in the community. These intrinsic variations in our business limit the comparability of our homes delivered, net orders and backlog, as well as their corresponding values, between sequential and year-over-year periods, in addition to the effect of prevailing economic or housing market conditions in or across any particular periods.

Financial Results. Below is a discussion of the financial results for each of our homebuilding reporting segments. Further information regarding these segments, including their pretax income (loss), is included in Note 2 – Segment Information in the Notes to Consolidated Financial Statements in this report. The difference between each homebuilding reporting segment’s operating income (loss) and pretax income (loss) is generally due to the equity in income (loss) of unconsolidated joint ventures and/or interest income and expense.

In addition to the results of our homebuilding reporting segments presented below, our consolidated homebuilding operating income includes the results of Corporate and other, a non-operating segment. Corporate and other had operating losses of $38.3 million and $43.3 million in the three months ended May 31, 2023 and 2022, respectively. For the six months ended May 31, 2023, Corporate and other had operating losses of $68.5 million, compared to $78.0 million for the corresponding year-earlier period.

Housing market conditions in the three-month and six-month periods ended May 31, 2023 were significantly more challenging than in the corresponding year-earlier periods. The financial results of our homebuilding reporting segments for each of the 2023 periods were negatively impacted to varying degrees by homebuyer concessions we selectively extended to buyers within backlog prior to delivery in conjunction with our targeted sales strategies, as well as product and geographic mix shifts of homes delivered. Segment financial results for three months and six months ended May 31, 2023 were also affected by construction services availability constraints and building material cost pressures, as well as ongoing supply chain disruptions and other production-related challenges.

West Coast. The following table presents financial information related to our West Coast segment (dollars in thousands, except average selling price):


	Three Months Ended May 31,								Six Months Ended May 31,
	2023			2022			Variance		2023			2022			Variance
Revenues	$	564,350		$	761,217		(26)	%	$	1,104,369		$	1,420,091		(22)	%
Construction and land costs	(465,158)			(575,709)			19		(906,344)			(1,083,174)			16
Selling, general and administrative expenses	(43,584)			(47,741)			9		(82,197)			(89,249)			8
Operating income	$	55,608		$	137,767		(60)	%	$	115,828		$	247,668		(53)	%

Homes delivered	802			1,029			(22)	%	1,588			1,943			(18)	%
Average selling price	$	703,700		$	739,800		(5)	%	$	695,400		$	730,900		(5)	%
Operating income as a percentage of revenues	9.9		%	18.1		%	(820)	bps	10.5		%	17.4		%	(690)	bps

This segment’s revenues for the three-month and six-month periods ended May 31, 2023 declined from the corresponding year-earlier periods due to decreases in both the number of homes delivered and their average selling price. Operating income for each of the three-month and six-month periods ended May 31, 2023 was down year over year, reflecting lower housing gross profits, partly offset by reduced selling, general and administrative expenses. Operating income as a percentage of revenues for the 2023 second quarter decreased from the year-earlier quarter, primarily due to a 680 basis-point decline in the housing gross profit margin to 17.6% and a 140 basis-point increase in selling, general and administrative expenses as a percentage of housing revenues to 7.7%. For the six months ended May 31, 2023, operating income as a percentage of revenues declined from the corresponding 2022 period, reflecting a 580 basis-point decrease in the housing gross profit margin to 17.9% and a 110 basis-point increase in selling, general and administrative expenses as a percentage of housing revenues to 7.4%.

The year-over-year decreases in the housing gross profit margins for the three-month and six-month periods ended May 31, 2023 primarily reflected price decreases and other homebuyer concessions, higher relative construction costs, a product and geographic mix shift of homes delivered, and reduced operating leverage from lower housing revenues, partially offset by lower relative amortization of previously capitalized interest. In addition, the housing gross profit margins for the three-month and six-month periods ended May 31, 2023 included $3.1 million and $3.9 million of inventory-related charges, respectively, compared to nominal inventory-related charges in each of the corresponding year-earlier periods. The year-over-year increases in selling, general and administrative expenses as a percentage of housing revenues for the three-month and six-month periods ended May 31, 2023 reflected reduced operating leverage from lower housing revenues, partly offset by a decrease in these expenses.

Southwest. The following table presents financial information related to our Southwest segment (dollars in thousands, except average selling price):


	Three Months Ended May 31,								Six Months Ended May 31,
	2023			2022			Variance		2023			2022			Variance
Revenues	$	335,828		$	290,924		15	%	$	575,415		$	500,691		15	%
Construction and land costs	(256,035)			(204,469)			(25)		(433,038)			(360,897)			(20)
Selling, general and administrative expenses	(22,728)			(21,764)			(4)		(41,194)			(39,088)			(5)
Operating income	$	57,065		$	64,691		(12)	%	$	101,183		$	100,706		—	%


Homes delivered	778			685			14	%	1,314			1,201			9	%
Average selling price	$	431,700		$	424,700		2	%	$	437,900		$	416,900		5	%
Operating income as a percentage of revenues	17.0		%	22.2		%	(520)	bps	17.6		%	20.1		%	(250)	bps

The year-over-year growth in this segment’s revenues for the three-month and six-month periods ended May 31, 2023 reflected increases in both the number of homes delivered and their average selling price. Operating income for the three months ended May 31, 2023 decreased from the corresponding year-earlier period due to lower housing gross profits and higher selling, general and administrative expenses. As a percentage of revenues, this segment’s operating income for the 2023 second quarter declined from the year-earlier quarter, reflecting a 590 basis-point decrease in the housing gross profit margin to 23.8% that was partly offset by a 70 basis-point improvement in selling, general and administrative expenses as a percentage of housing revenues to 6.8%. For the six months ended May 31, 2023, operating income was nearly even with the corresponding year-earlier period, while operating income as a percentage of revenues declined from the corresponding 2022 period, reflecting a 320 basis-point decrease in the housing gross profit margin to 24.7%, partially offset by a 70 basis-point improvement in selling, general and administrative expenses as a percentage of housing revenues to 7.1%.

The year-over-year decline in the housing gross profit margin for the three months ended May 31, 2023 primarily reflected price decreases and other homebuyer concessions, a product and geographic mix shift of homes delivered, and higher relative amortization of previously capitalized interest, partly offset by improved operating leverage from higher housing revenues. The year-over-year decrease in the housing gross profit margin for the six months ended May 31, 2023 was mainly due to the same reasons described for the three months ended May 31, 2023, except for the relative amortization of previously capitalized interest, which was the same year over year. The year-over-year improvement in selling, general and administrative expenses as a percentage of housing revenues for the three-month and six-month periods ended May 31, 2023 primarily reflected increased operating leverage from higher housing revenues as well as relatively lower general and administrative expenses.

Central. The following table presents financial information related to our Central segment (dollars in thousands, except average selling price):


	Three Months Ended May 31,								Six Months Ended May 31,
	2023			2022			Variance		2023			2022			Variance
Revenues	$	545,214		$	433,046		26	%	$	935,165		$	788,368		19	%
Construction and land costs	(424,628)			(330,473)			(28)		(721,914)			(615,333)			(17)
Selling, general and administrative expenses	(41,604)			(36,373)			(14)		(75,443)			(68,719)			(10)
Operating income	$	78,982		$	66,200		19	%	$	137,808		$	104,316		32	%

Homes delivered	1,302			1,117			17	%	2,237			2,070			8	%
Average selling price	$	418,800		$	387,700		8	%	$	418,000		$	380,900		10	%
Operating income as a percentage of revenues	14.5		%	15.3		%	(80)	bps	14.7		%	13.2		%	150	bps

This segment’s revenues for the three-month and six-month periods ended May 31, 2023 rose from the corresponding year-earlier periods, reflecting increases in both the number of homes delivered and their average selling price. Operating income for the 2023 second quarter and first half increased from the corresponding year-earlier periods due to higher housing gross profits, partly offset by higher selling, general and administrative expenses. This segment’s operating income as a percentage of revenues for the three months ended May 31, 2023 decreased from the year-earlier period primarily due to a 160 basis-point decline in the housing gross profit margin to 22.1%, partly offset by an 80 basis-point improvement in selling, general and administrative expenses as a percentage of housing revenues to 7.6%. For the six months ended May 31, 2023, operating income as a percentage of revenues increased from the corresponding 2022 period, reflecting a 90 basis-point increase in the housing gross profit margin to 22.8% and a 60 basis-point improvement in selling, general and administrative expenses as a percentage of housing revenues to 8.1%.

The year-over-year decrease in the housing gross profit margin for the three months ended May 31, 2023 primarily reflected higher construction costs, a product and geographic mix shift of homes delivered and increased homebuyer concessions, partly offset by improved operating leverage from higher housing revenues. For the six months ended May 31, 2023, the year-over-year increase in the housing gross profit margin mainly reflected a product and geographic mix shift of homes delivered and improved operating leverage on higher housing revenues, partly offset by increased inventory-related charges and homebuyer concessions. Inventory-related charges for the 2023 first half were $2.1 million, compared to $.6 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 six-month periods ended May 31, 2023 was primarily due to increased operating leverage from higher housing revenues.

Southeast. The following table presents financial information related to our Southeast segment (dollars in thousands, except average selling price):


	Three Months Ended May 31,								Six Months Ended May 31,
	2023			2022			Variance		2023			2022			Variance
Revenues	$	312,454		$	229,639		36	%	$	521,434		$	399,830		30	%
Construction and land costs	(238,348)			(168,905)			(41)		(403,404)			(301,135)			(34)
Selling, general and administrative expenses	(25,320)			(21,671)			(17)		(45,719)			(39,366)			(16)
Operating income	$	48,786		$	39,063		25	%	$	72,311		$	59,329		22	%


Homes delivered	784			638			23	%	1,315			1,123			17	%
Average selling price	$	398,500		$	359,900		11	%	$	396,500		$	356,000		11	%
Operating income as a percentage of revenues	15.6		%	17.0		%	(140)	bps	13.9		%	14.8		%	(90)	bps

This segment’s revenues for the three-month and six-month periods ended May 31, 2023 grew year over year from the corresponding 2022 periods as a result of increases in both the number of homes delivered and their average selling prices. Operating income for the 2023 second quarter and first half each increased year over year, reflecting higher housing gross

profits, partly offset by higher selling, general and administrative expenses. As a percentage of revenues, operating income for the 2023 second quarter declined from the year-earlier quarter mainly due to a 270 basis-point decrease in the housing gross profit margin to 23.7%, partly offset by a 130 basis-point improvement in selling, general and administrative expenses as a percentage of housing revenues to 8.1%. For the six months ended May 31, 2023, operating income as a percentage of revenues decreased from the corresponding 2022 period, reflecting a 210 basis-point decline in the housing gross profit margin to 22.6%, partly offset by a 120 basis-point improvement in selling, general and administrative expenses as a percentage of housing revenues to 8.7%.

The year-over-year decline in the housing gross profit margin for the three-month and six-month periods ended May 31, 2023 primarily reflected higher construction costs, a product and geographic mix shift of homes delivered and increased homebuyer concessions, partly offset by improved operating leverage from higher housing revenues. The year-over-year decrease in the housing gross profit margin for the six months ended May 31, 2023 was also due to inventory-related charges of $3.5 million in the current period, compared to no such charges in 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 six-month periods ended May 31, 2023 primarily reflected increased operating leverage from higher housing revenues.

FINANCIAL SERVICES REPORTING SEGMENT

The following table presents a summary of selected financial and operational data for our financial services reporting segment (dollars in thousands):


	Three Months Ended May 31,						Six Months Ended May 31,
	2023			2022			2023			2022
Revenues	$	7,470		$	5,236		$	13,247		$	9,871
Expenses	(1,472)			(1,362)			(2,830)			(2,709)
Equity in income of unconsolidated joint ventures	5,426			14,807			7,008			19,955
Pretax income	$	11,424		$	18,681		$	17,425		$	27,117

Total originations (a):
Loans	2,445			2,052			4,261			3,835
Principal	$	966,615		$	799,552		$	1,693,280		$	1,491,485
Percentage of homebuyers using KBHS	80		%	68		%	80		%	69		%
Average FICO score	736			734			735			733

Loans sold (a):
Loans sold to GR Alliance	2,383			1,830			4,211			3,357
Principal	$	948,471		$	733,838		$	1,689,939		$	1,329,797
Loans sold to third parties	89			265			180			617
Principal	$	31,122		$	89,809		$	63,364		$	202,000

(a)Loan originations and sales occurred within KBHS.

Revenues. Financial services revenues for the three-month and six-month periods ended May 31, 2023 grew from the corresponding 2022 periods due to increases in both title services revenues and insurance commissions.

Pretax income. Financial services pretax income for the three months ended May 31, 2023 declined 39% from the year-earlier period, as a decrease in the equity in income of unconsolidated joint ventures was partly offset by improved results from our insurance and title services businesses. In the 2023 second quarter, the equity in income of unconsolidated joint ventures decreased to $5.4 million, compared to $14.8 million in the year-earlier quarter, primarily as a result of a decline in KBHS’ income. The year-over-year decline in KBHS’ income mainly reflected losses of $2.7 million in the fair value of IRLCs in the current quarter, compared to gains of $25.8 million in the year-earlier quarter, due to a lower volume of new IRLCs in the 2023 second quarter. Partly offsetting this were the higher principal amount of loans originated in the current quarter, which primarily reflected increases in both the number of homes delivered and the percentage of homebuyers using KBHS. The significant gain in the 2022 second quarter resulted from a substantial increase in the fair value of IRLCs within the joint venture as a greater number of customers elected to lock their mortgage interest rates and for relatively extended periods, due to the sharp rise in such rates during that period. This substantial increase within KBHS resulted in a shift of some of our then-expected equity in income of KBHS from the 2022 second half to the 2022 first half.

For the six months ended May 31, 2023, our financial services pretax income declined 36% from the corresponding 2022 period, reflecting a decrease in the equity in income of unconsolidated joint ventures, partially offset by improved results from our insurance and title services businesses. In the 2023 first half, the equity in income of unconsolidated joint ventures decreased to $7.0 million, compared to $20.0 million in the year-earlier period, mainly as a result of a decline in KBHS’ income. The year-over-year decline in KBHS’ income was primarily due to losses of $4.2 million in the fair value of IRLCs in the current period, compared to gains of $33.4 million in the year-earlier period due to the factors described above for the three months ended May 31, 2023.

Further information regarding our investments in unconsolidated joint ventures is provided in Note 9 – Investments in Unconsolidated Joint Ventures in the Notes to Consolidated Financial Statements in this report.

INCOME TAXES

Income Tax Expense. Our income tax expense and effective tax rates were as follows (dollars in thousands):


	Three Months Ended May 31,						Six Months Ended May 31,
	2023			2022			2023			2022
Income tax expense	$	50,500		$	72,200		$	87,200		$	116,000
Effective tax rate	23.5		%	25.5		%	23.1		%	25.2		%

Our effective tax rate for the three months ended May 31, 2023 decreased from the year-earlier period, mainly due to a $6.2 million increase in the federal tax credits we recognized primarily from building energy-efficient homes and a $1.1 million increase in excess tax benefits related to stock-based compensation, partly offset by a $1.3 million increase in nondeductible executive compensation expense. For the six months ended May 31, 2023, our effective tax rate decreased from the year-earlier period, mainly due to a $11.7 million increase in the federal tax credits we recognized primarily from building energy-efficient homes and a $1.6 million increase in excess tax benefits related to stock-based compensation, partly offset by a $2.7 million increase in nondeductible executive compensation expense. The year-over-year increase in federal tax credits for the three months and six months ended May 31, 2023 reflected the enactment of the Inflation Reduction Act of 2022 on August 16, 2022, which extended the federal tax credit for building energy-efficient homes for homes delivered from January 1, 2022 (retroactively) through December 31, 2032, as well as modified and increased it starting in 2023. Previously, the federal tax credit expired for homes delivered after December 31, 2021.

Further information regarding our income taxes is provided in Note 13 – Income Taxes in the Notes to Consolidated Financial Statements in this report.

NON-GAAP FINANCIAL MEASURES

This report contains information about our adjusted housing gross profit margin, which is not calculated in accordance with GAAP. We believe this non-GAAP financial measure is relevant and useful to investors in understanding our operations and the leverage employed in our operations, and may be helpful in comparing us with other companies in the homebuilding industry to the extent they provide similar information. However, because it is not calculated in accordance with GAAP, this non-GAAP financial measure may not be completely comparable to other companies in the homebuilding industry and, thus, should not be considered in isolation or as an alternative to operating performance and/or financial measures prescribed by GAAP. Rather, this non-GAAP financial measure should be used to supplement the most directly comparable GAAP financial measure in order to provide a greater understanding of the factors and trends affecting our operations.

Adjusted Housing Gross Profit Margin. The following table reconciles our housing gross profit margin calculated in accordance with GAAP to the non-GAAP financial measure of our adjusted housing gross profit margin (dollars in thousands):


	Three Months Ended May 31,						Six Months Ended May 31,
	2023			2022			2023			2022
Housing revenues	$	1,757,846		$	1,714,826		$	3,136,383		$	3,108,980
Housing construction and land costs	(1,386,558)			(1,281,752)			(2,469,379)			(2,363,864)
Housing gross profits	371,288			433,074			667,004			745,116
Add: Inventory-related charges (a)	4,287			732			9,576			907
Adjusted housing gross profits	$	375,575		$	433,806		$	676,580		$	746,023

Housing gross profit margin as a percentage of housing revenues	21.1		%	25.3		%	21.3		%	24.0		%
Adjusted housing gross profit margin as a percentage of housing revenues	21.4		%	25.3		%	21.6		%	24.0		%

(a) Represents inventory impairment and land option contract abandonment charges associated with housing operations.

Adjusted housing gross profit margin is a non-GAAP financial measure, which we calculate by dividing housing revenues less housing construction and land costs excluding housing inventory impairment and land option contract abandonment charges (as applicable) recorded during a given period, by housing revenues. The most directly comparable GAAP financial measure is housing gross profit margin. We believe adjusted housing gross profit margin is a relevant and useful financial measure to investors in evaluating our performance as it measures the gross profits we generated specifically on the homes delivered during a given period. This non-GAAP financial measure isolates the impact that the housing inventory impairment and land option contract abandonment charges have on housing gross profit margins, and allows investors to make comparisons with our competitors that adjust housing gross profit margins in a similar manner. We also believe investors will find adjusted housing gross profit margin relevant and useful because it represents a profitability measure that may be compared to a prior period without regard to variability of housing inventory impairment and land option contract abandonment charges. This financial measure assists us in making strategic decisions regarding community location and product mix, product pricing and construction pace.

Liquidity and Capital Resources

Overview. We have funded our homebuilding and financial services activities over the last several years with:

•internally generated cash flows;

•public issuances of debt securities;

•borrowings under the Credit Facility;

•the Term Loan;

•land option contracts and other similar contracts and seller notes;

•public issuances of our common stock; and

•letters of credit and performance bonds.

We manage our use of cash in the operation of our business to support the execution of our primary strategic goals. Over the past several years, we have primarily used cash for:

•land acquisition and land development;

•home construction;

•operating expenses;

•principal and interest payments on notes payable;

•repayments of borrowings under the Credit Facility;

•dividends paid to stockholders; and

•repurchases of our common stock.

We ended the 2023 second quarter with total liquidity of $1.64 billion, including cash and cash equivalents and $1.08 billion of available capacity under the Credit Facility. Based on our financial position as of May 31, 2023, and our business forecast for the remainder of 2023 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. Though the financial industry and capital markets turmoil that began with regulatory authorities closing two U.S. banks in early March 2023 could also create a potential liquidity risk if it spreads, as discussed below under Part II, Item 1A – Risk Factors, as of the date of this report, we believe it will not impair our ability to access any cash and cash equivalents we have invested in

interest-bearing bank deposit accounts, or the full borrowing, credit extension and payment guarantee capacities available under our Credit Facility and the LOC Facility.

Cash Requirements. Other than the decrease in our notes payable presented in the table below, which reflects the repayment of all cash borrowings outstanding under the Credit Facility during the six months ended May 31, 2023, 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, 2022.

Investments in Land and Land Development. Our investments in land and land development for the six months ended May 31, 2023 decreased 46% to $763.2 million, compared to $1.40 billion for the year-earlier period, as we continued to calibrate our investments with evolving market conditions. In the six months ended May 31, 2023, our land acquisitions decreased 79% to $130.6 million from $624.0 million, reflecting a pivot in our land investment strategy beginning in the 2022 third quarter in response to then-softening housing market conditions, to emphasize developing land positions we already own or control under land option contracts and other similar contracts. We have also evaluated our transaction pipeline and renegotiated pricing and terms for many deals while abandoning others that no longer met our investment return standards. In addition, we have modified our land development strategy, electing where appropriate to build in smaller phases, and in some cases, defer the start of the next phase of lots in a community to align with expected demand. Reflecting these shifts in our land strategy, approximately 17% of our total investments for the six months ended May 31, 2023 related to land acquisitions, compared to approximately 44% in the prior-year period. While we made strategic investments in land and land development in each of our homebuilding reporting segments during the six months ended May 31, 2023 and 2022, approximately 55% and 52%, respectively, of these investments for each period were made in our West Coast homebuilding reporting segment.

For the remainder of 2023, 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, though we anticipate at a lower level than in the past two years. While we expect our land acquisition activity to increase during the 2023 second half as compared to the 2023 first half, 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):


	May 31, 2023			November 30, 2022			Variance
Segment	Lots	Carrying Value		Lots	Carrying Value		Lots	Carrying Value
West Coast	17,018	$	2,300,284	19,302	$	2,425,141	(2,284)	$	(124,857)
Southwest	7,806	891,751		8,841	993,059		(1,035)	(101,308)
Central	19,232	1,098,704		24,001	1,278,420		(4,769)	(179,716)
Southeast	13,876	838,102		16,651	846,556		(2,775)	(8,454)
Total	57,932	$	5,128,841	68,795	$	5,543,176	(10,863)	$	(414,335)

The number and carrying value of lots we owned or controlled under land option contracts and other similar contracts at May 31, 2023 decreased from November 30, 2022, reflecting homes delivered in the 2023 first half as well as the above-mentioned pivot in our land investment strategy, which included our abandonment of 6,179 previously controlled lots in the six months ended May 31, 2023. The number of lots in inventory as of May 31, 2023 included 3,448 lots under contract where the associated deposits were refundable at our discretion, compared to 5,543 of such lots at November 30, 2022. Our lots controlled under land option contracts and other similar contracts as a percentage of total lots was 25% at May 31, 2023, compared to 30% at November 30, 2022. Generally, this percentage fluctuates with our decisions to control (or abandon) lots under land option contracts and other similar contracts or to purchase (or sell owned) lots based on available opportunities and our investment return standards.

Land Option Contracts and Other Similar Contracts. As discussed in Note 8 – Variable Interest Entities in the Notes to Consolidated Financial Statements in this report, our land option contracts and other similar contracts generally do not contain provisions requiring our specific performance. Our decision to exercise a particular land option contract or other similar contract depends on the results of our due diligence reviews and ongoing market and project feasibility analysis that we conduct after entering into such a contract. In some cases, our decision to exercise a land option contract or other similar contract may be conditioned on the land seller obtaining necessary entitlements, such as zoning rights and environmental and development approvals, and/or physically developing the underlying land by a pre-determined date. We typically have the ability not to exercise our rights to the underlying land for any reason and forfeit our deposits without further penalty or obligation to the

sellers. If we were to acquire all the land we had under land option contracts and other similar contracts at May 31, 2023, we estimate the remaining purchase price to be paid would be as follows: 2023 – $361.2 million; 2024 – $295.1 million; 2025 – $151.8 million; 2026 – $175.8 million; 2027 – $6.3 million; and thereafter – $3.8 million.

Liquidity. The table below summarizes our cash and cash equivalents, and total liquidity (in thousands):


	May 31, 2023		November 30, 2022
Cash and cash equivalents	$	557,037	$	328,517
Credit Facility commitment	1,090,000		1,090,000
Borrowings outstanding under the Credit Facility	—		(150,000)
Letters of credit outstanding under the Credit Facility	(6,650)		(6,650)
Credit Facility availability	1,083,350		933,350
Total liquidity	$	1,640,387	$	1,261,867

The majority of our cash equivalents at May 31, 2023 and November 30, 2022 were invested in interest-bearing bank deposit accounts.

Capital Resources. Our notes payable consisted of the following (in thousands):


	May 31, 2023		November 30, 2022		Variance
Credit Facility	$	—	$	150,000	$	(150,000)
Term Loan	357,821		357,485		336
Senior notes	1,327,083		1,326,266		817
Mortgages and land contracts due to land sellers and other loans	1,759		4,760		(3,001)
Total	$	1,686,663	$	1,838,511	$	(151,848)

Our financial leverage, as measured by the ratio of debt to capital, was 30.9% at May 31, 2023, compared to 33.4% at November 30, 2022. The ratio of debt to capital is calculated by dividing notes payable by capital (notes payable plus stockholders’ equity).

LOC Facility. We maintain the LOC Facility to obtain letters of credit from time to time in the ordinary course of operating our business. Under the LOC Facility, which expires on February 13, 2025, we may issue up to $75.0 million of letters of credit. As of May 31, 2023 and November 30, 2022, we had letters of credit outstanding under the LOC Facility of $14.5 million and $36.4 million, respectively.

Performance Bonds. As discussed in Note 16 – Commitments and Contingencies in the Notes to Consolidated Financial Statements in this report, we had $1.34 billion and $1.27 billion of performance bonds outstanding at May 31, 2023 and November 30, 2022, respectively.

Under the terms of the Credit Facility and the Term Loan, as discussed below, we are required, among other things, to maintain compliance with various covenants, including financial covenants regarding our consolidated tangible net worth, Leverage Ratio, and either an Interest Coverage Ratio or minimum liquidity level, each as defined therein. Our compliance with these financial covenants is measured by calculations and metrics that are specifically defined or described by the terms of the Credit Facility and the Term Loan and can differ in certain respects from comparable GAAP or other commonly used terms. The financial covenant requirements under the Credit Facility and the Term Loan are set forth below:

•Consolidated tangible net worth – We must maintain a consolidated tangible net worth at the end of any fiscal quarter greater than or equal to the sum of (a) $2.09 billion, plus (b) an amount equal to 50% of the aggregate of the cumulative consolidated net income for each fiscal quarter commencing after November 30, 2021 and ending as of the last day of such fiscal quarter (though there is no reduction if there is a consolidated net loss in any fiscal quarter), plus (c) an amount equal to 50% of the cumulative net proceeds we receive from the issuance of our capital stock after November 30, 2021.

•Leverage Ratio – We must also maintain a Leverage Ratio of less than or equal to .60 at the end of each fiscal quarter. The Leverage Ratio is calculated as the ratio of our consolidated total indebtedness to the sum of consolidated total indebtedness and consolidated tangible net worth, all as defined under the Credit Facility.

•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 May 31, 2023:

Financial Covenants and Other Requirements

Covenant Requirement

Actual

Consolidated tangible net worth

$2.64 billion

$3.73 billion

Leverage Ratio

.600

.312

Interest Coverage Ratio (a)

1.500

10.316

Minimum liquidity (a)

$114.5 million

$557.0 million

Investments in joint ventures and non-guarantor subsidiaries

$849.9 million

$305.2 million

Borrowing base in excess of borrowing base indebtedness (as defined)

n/a

$2.64 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 May 31, 2023, we were in compliance with the applicable terms of all of our covenants and other requirements under the Credit Facility, the Term Loan, the senior notes, the indenture, and the mortgages and land contracts due to land sellers and other loans. Our ability to access the Credit Facility for cash borrowings and letters of credit and our ability to secure future debt financing depend, in part, on our ability to remain in such compliance. Our ability to access the Credit Facility’s full borrowing capacity, as well as the LOC Facility’s full issuance capacity, also depends on the ability and willingness of the applicable lenders and financial institutions, including any substitute or additional lenders and financial institutions, to meet their commitments to fund loans, extend credit or provide payment guarantees to or for us under those instruments.

There are no agreements that restrict our payment of dividends other than the Credit Facility and the Term Loan, which would restrict our payment of certain dividends, such as cash dividends on our common stock, if a default under the Credit Facility or 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 May 31, 2023, we had outstanding mortgages and land contracts due to land sellers and other loans payable in connection with such financing of $1.8 million, secured primarily by the underlying property, which had an aggregate carrying value of $23.6 million.

Senior Unsecured Term Loan. We have a $360.0 million Term Loan with the lenders party thereto that will mature on August 25, 2026, or earlier if we secure borrowings under the Credit Facility without similarly securing the Term Loan (subject to certain exceptions). The Term Loan is further described in Note 14 – Notes Payable in the Notes to Consolidated Financial Statements in this report.

Credit Ratings. Our credit ratings are periodically reviewed by rating agencies. In April 2023, S&P Global reaffirmed our BB credit rating and changed its rating outlook to stable from positive.

Consolidated Cash Flows. The following table presents a summary of net cash provided by (used in) our operating, investing and financing activities (in thousands):


	Six Months Ended May 31,
	2023		2022
Net cash provided by (used in):
Operating activities	$	608,730	$	(314,812)
Investing activities	(30,937)		(37,243)
Financing activities	(350,534)		306,500
Net increase (decrease) in cash and cash equivalents	$	227,259	$	(45,555)

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 six months ended May 31, 2023 primarily reflected a net decrease in inventories of $413.8 million and net income of $289.9 million, partly offset by a net decrease in accounts payable, accrued expenses and other liabilities of $132.2 million and a net increase in receivables of $18.5 million. In the six months ended May 31, 2022, our net cash used in operating activities mainly reflected a net increase in inventories of $764.2 million and a net increase in receivables of $11.1 million, partly offset by net income of $344.9 million and a net increase in accounts payable, accrued expenses and other liabilities of $84.3 million.

Investing Activities. In the six months ended May 31, 2023, our uses of cash included $18.3 million for net purchases of property and equipment and $17.7 million for contributions to unconsolidated joint ventures. These uses of cash were partially offset by a $5.1 million return of investments in unconsolidated joint ventures. In the six months ended May 31, 2022, the net cash used for investing activities reflected $22.1 million for net purchases of property and equipment and $16.4 million for contributions to unconsolidated joint ventures. These uses of cash were partially offset by a $1.3 million return of investments in unconsolidated joint ventures.

Financing Activities. In the six months ended May 31, 2023, our uses of cash included stock repurchases of $167.1 million, net repayments under the Credit Facility of $150.0 million, dividend payments on our common stock of $25.7 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 $3.0 million. The cash used was partly offset by $5.0 million of issuances of common stock under employee stock plans. In the six months ended May 31, 2022, cash was provided by net borrowings under the Credit Facility of $400.0 million. Partially offsetting the cash provided were $50.0 million of stock repurchases, $27.1 million of dividend payments on our common stock, $12.2 million of tax payments associated with stock-based compensation awards, $3.8 million of costs incurred for an amendment of the Credit Facility and $.4 million of payments on mortgages and land contracts due to land sellers and other loans.

Dividends. In the three-month periods ended May 31, 2023 and 2022, our board of directors declared, and we paid, a quarterly cash dividend on our common stock of $.15 per share. Quarterly dividends declared and paid during the six-month periods ended May 31, 2023 and 2022 totaled $.30 per share. The declaration and payment of future cash dividends on our common stock, whether at current levels or at all, are at the discretion of our board of directors and depend upon, among other things, our expected future earnings, cash flows, capital requirements, access to external financing, debt structure and any adjustments thereto, operational and financial investment strategy and general financial condition, as well as general business conditions.

As of the date of this report, we believe we have adequate capital resources and sufficient access to external financing sources to satisfy our current and reasonably anticipated requirements for funds to conduct our operations and meet other needs in the

ordinary course of our business. For the remainder of 2023, we expect to use or redeploy our cash resources or cash borrowings under the Credit Facility to support our business within the context of prevailing market conditions. During this time, we may also engage in capital markets, bank loan, project debt or other financial transactions, including the repurchase of debt or equity securities or potential new issuances of debt or equity securities to support our business needs. The amounts involved in these transactions, if any, may be material. In addition, as necessary or desirable, we may adjust or amend the terms of and/or expand the capacity of the Credit Facility or the LOC Facility, or enter into additional letter of credit facilities, or other similar facility arrangements, in each case with the same or other financial institutions, or allow any such facilities or loans to mature or expire. Our ability to engage in such transactions may be constrained by volatile or tight economic, capital, credit and/or financial market conditions or other factors, 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. The potential liquidity risks from the financial industry and capital markets turmoil that began in early March 2023 with the closing of two U.S. banks is discussed below under Part II, Item 1A – Risk Factors.

Supplemental Guarantor Financial Information

As of May 31, 2023, we had $1.34 billion in aggregate principal amount of outstanding senior notes, no borrowings outstanding under the Credit Facility and $360.0 million in aggregate principal amount of borrowings outstanding under the Term Loan. Our obligations to pay principal and interest on the senior notes and borrowings, if any, under the Credit Facility and the Term Loan are guaranteed on a joint and several basis by our Guarantor Subsidiaries. Our other subsidiaries, including all of our subsidiaries associated with our financial services operations, do not guarantee any such indebtedness (collectively, “Non-Guarantor Subsidiaries”), although we may cause a Non-Guarantor Subsidiary to become a Guarantor Subsidiary if we believe it to be in our or the relevant subsidiary’s best interest. See Note 14 – Notes Payable in the Notes to Consolidated Financial Statements in this report for additional information regarding the terms of our senior notes, the Credit Facility and the Term Loan.

The guarantees are full and unconditional, and the Guarantor Subsidiaries are 100% owned by us. The guarantees are senior unsecured obligations of each of the Guarantor Subsidiaries and rank equally in right of payment with all unsecured and unsubordinated indebtedness and guarantees of such Guarantor Subsidiaries. The guarantees are effectively subordinated to any secured indebtedness of such Guarantor Subsidiaries to the extent of the value of the assets securing such indebtedness, and structurally subordinated to indebtedness and other liabilities of Non-Guarantor Subsidiaries.

Pursuant to the terms of the indenture governing the senior notes and the terms of the Credit Facility and the Term Loan, if any of the Guarantor Subsidiaries ceases to be a “significant subsidiary” as defined by Rule 1-02 of Regulation S-X using a 5% rather than a 10% threshold (provided that the assets of our Non-Guarantor Subsidiaries do not in the aggregate exceed 10% of an adjusted measure of our consolidated total assets), it will be automatically and unconditionally released and discharged from its guaranty of the senior notes, the Credit Facility and the Term Loan so long as all guarantees by such Guarantor Subsidiary of any other of our or our subsidiaries’ indebtedness are terminated at or prior to the time of such release.

The following tables present summarized financial information for KB Home and the Guarantor Subsidiaries on a combined basis, excluding unconsolidated joint ventures and after the elimination of (a) intercompany transactions and balances between KB Home and the Guarantor Subsidiaries and (b) equity in earnings from and investments in the Non-Guarantor Subsidiaries. See Note 9 – Investments in Unconsolidated Joint Ventures in the Notes to Consolidated Financial Statements in this report for additional information regarding our unconsolidated joint ventures.


	May 31, 2023		November 30, 2022
Summarized Balance Sheet Data (in thousands)
Assets
Cash	$	521,705	$	265,916
Inventories	4,681,211		5,118,252
Amounts due from Non-Guarantor Subsidiaries	469,835		403,249
Total assets	6,305,162		6,404,755

Liabilities and Stockholders’ Equity
Notes payable	$	1,686,663	$	1,836,001
Amounts due to Non-Guarantor Subsidiaries	303,823		283,280
Total liabilities	2,790,451		2,977,348
Stockholders’ equity	3,514,711		3,427,407


	Six Months Ended May 31, 2023
Summarized Statement of Operations Data (in thousands)
Revenues	$	2,963,692
Construction and land costs	(2,323,069)
Selling, general and administrative expenses	(302,244)
Interest income from Non-Guarantor Subsidiaries	14,009
Pretax income	354,204
Net income	272,304

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 six months ended May 31, 2023 from those disclosed in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section of our Annual Report on Form 10-K for the year ended November 30, 2022.

Recent Accounting Pronouncements

There are no recent accounting pronouncements that are expected to have a material impact on our consolidated financial statements.

Outlook

We believe several long-term housing market fundamental factors remain positive, including favorable demographics, a decade-plus underproduction of new homes relative to population growth and low resale home inventory. In the current period, while mortgage interest rates and inflation remained elevated, demand strengthened compared to the 2022 second half and 2023 first quarter, with buyers adjusting to the higher mortgage interest rates and a stabilizing rate environment. Our 3,936 net orders for the 2023 second quarter were about even with the year-earlier quarter and we achieved a 5.2 monthly net orders per community pace, generally in line with our second-quarter average, prior to the pandemic-driven volatility. We anticipate a sequential decline in net orders in the 2023 third and fourth quarters, partly due to seasonality. This could be influenced up or down by inventory levels or movement in mortgage interest rates, among other supply and demand factors, including expected continued consumer caution from interest rate and economic uncertainties as well as affordability pressures.

With market conditions having improved compared to the 2022 second half and 2023 first quarter, we were able to raise or maintain selling prices in most of our communities in the 2023 second quarter as compared to those earlier periods. However, we anticipate the pricing adjustments and other homebuyer concessions we have selectively implemented since the 2022 second half and plan to use to a lesser extent in the 2023 second half, subject to market dynamics and the size and construction stage of the backlog within each community, as well as lower proportion of deliveries expected from higher-priced communities within our West Coast homebuilding reporting segment, will contribute to a year-over-year decrease in the average selling price of homes delivered in each of the remaining 2023 quarters. At the same time, we are continuing to pursue reductions in our direct construction costs and cycle times to help offset any such pricing adjustments and other homebuyer concessions. We are committed to reducing our build times to achieve deliveries within our normal historical period of between six and seven months from home order.

We believe we are in a strong position to operate effectively through changing market conditions, with a solid balance sheet and liquidity, and anticipated healthy operating cash flow for the 2023 fiscal year. While we expect our land acquisition activity to increase during the 2023 second half as compared to the 2023 first half, our investments in land and land development in the future will depend significantly on market conditions and available opportunities that meet our investment return standards.

We intend to maintain a balanced approach to capital allocation to maximize long-term stockholder value. In this regard, we ended the 2023 second quarter with approximately $407.9 million remaining under our current board of directors share repurchase authorization, which provides us flexibility to continue to repurchase our common stock.

We plan to continue to balance pace, price and construction starts at each community to optimize our return on each inventory asset within its market context, leveraging our differentiated, highly customer-centric Built to Order business model and operational capabilities to help effectively meet evolving consumer preferences and budgets. With our backlog value of $3.46 billion at May 31, 2023, we believe we can achieve our projected results for 2023, subject to the factors and risks described in this report. Based on the foregoing, our present outlook for the 2023 third quarter and full year is as follows:

2023 Third Quarter

•We expect to generate housing revenues in the range of $1.35 billion to $1.50 billion, a decrease from $1.84 billion in the corresponding 2022 period, and anticipate our average selling price to be approximately $470,000, compared to $508,700 in the year-earlier period.

•We expect our homebuilding operating income margin will be in the range of 9.5% to 10.1%, assuming no inventory-related charges, down from 18.1% for the year-earlier quarter.

•We expect our housing gross profit margin will be in the range of 20.4% to 21.0%, assuming no inventory-related charges, compared to 27.0% for the corresponding 2022 quarter.

•We expect our selling, general and administrative expenses as a percentage of housing revenues to be in the range of 10.6% to 11.2%, compared to 8.9% in the 2022 third quarter.

•We expect our effective tax rate will be approximately 23%. The effective tax rate for the year-earlier quarter was approximately 22%.

•We expect our average community count will be up approximately 10%, compared to the prior-year quarter, with a sequential decline in our quarter-end community count.

•We expect our net orders will range between 3,000 and 3,500, representing a 59% year-over-year increase at the mid-point.

2023 Full Year

•We expect our housing revenues to be in the range of $5.80 billion to $6.20 billion, a 13% decrease at the mid-point from $6.88 billion in 2022, and anticipate our average selling price will be approximately $485,000, a decrease from $500,800 for 2022.

•We expect our homebuilding operating income margin to be about 11.0%, assuming no inventory-related charges, compared to 15.6% for 2022.

•We expect our housing gross profit margin to be approximately 21.2%, assuming no inventory-related charges, compared to 24.8% for 2022.

•We expect our selling, general and administrative expenses as a percentage of housing revenues to be about 10.3%, compared to 9.2% in the prior year.

•We expect the effective tax rate will be approximately 23%, compared to approximately 24% for 2022.

•We expect our average community count will be up roughly 10%, and our ending community count flat, year over year.

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). The Federal Reserve’s aggressive raising of the federal funds interest rate and other measures during 2022 and into 2023 to moderate persistent U.S. inflation, and the further actions it may take, are expected to be an ongoing headwind for the housing market, as they have elevated mortgage interest rates and created macroeconomic uncertainty and financial market turbulence that, among other things, has tempered consumer demand for homes and disrupted credit and lending markets. In addition, while we experienced improvement with respect to ongoing supply chain disruptions, other production challenges and construction cost pressures described in this Management’s Discussion and Analysis of Financial Condition and Results of Operations, we believe they will generally persist for the 2023 second half. The potential extent and effect of these factors on our business is highly uncertain, unpredictable and outside our control, and our past performance, including in the 2023 second quarter and first half, should not be considered indicative of our future results on any metric or set of metrics, including, but not limited to, our net orders, backlog, revenues and returns.

Forward-Looking Statements

Investors are cautioned that certain statements contained in this report, as well as some statements by us in periodic press releases and other public disclosures and some oral statements by us to securities analysts, stockholders and others during presentations, are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 (the “Act”). Statements that are predictive in nature, that depend upon or refer to future events or conditions, or that include words such as “expect,” “anticipate,” “intend,” “plan,” “believe,” “estimate,” “hope,” and similar expressions constitute forward-

looking statements. In addition, any statements that we may make or provide concerning future financial or operating performance (including without limitation future revenues, community count, homes delivered, net orders, selling prices, sales pace per new community, expenses, expense ratios, housing gross profits, housing gross profit margins, earnings or earnings per share, or growth or growth rates), future market conditions, future interest rates, and other economic conditions, ongoing business strategies or prospects, future dividends and changes in dividend levels, the value of our backlog (including amounts that we expect to realize upon delivery of homes included in our backlog and the timing of those deliveries), the value of our net orders, potential future asset acquisitions and the impact of completed acquisitions, future share issuances or repurchases, future debt issuances, repurchases or redemptions and other possible future actions are also forward-looking statements as defined by the Act. Forward-looking statements are based on our current expectations and projections about future events and are subject to risks, uncertainties, and assumptions about our operations, economic and market factors, and the homebuilding industry, among other things. These statements are not guarantees of future performance, and we have no specific policy or intention to update these statements. If we update or revise any such statement(s), no assumption should be made that we will further update or revise that statement(s) or update or revise any other such statement(s). In addition, forward-looking and other statements in this report and in other public or oral disclosures that express or contain opinions, views or assumptions about market or economic conditions; the success, performance, effectiveness and/or relative positioning of our strategies, initiatives or operational activities; and other matters, may be based in whole or in part on general observations of our management, limited or anecdotal evidence and/or business or industry experience without in-depth or any particular empirical investigation, inquiry or analysis.

Actual events and results may differ materially from those expressed or forecasted in forward-looking statements due to a number of factors. The most important risk factors that could cause our actual performance and future events and actions to differ materially from such forward-looking statements include, but are not limited to, the following:

•general economic, employment and business conditions;

•population growth, household formations and demographic trends;

•conditions in the capital, credit and financial markets;

•our ability to access external financing sources and raise capital through the issuance of common stock, debt or other securities, and/or project financing, on favorable terms;

•the execution of any securities repurchases pursuant to our board of directors’ authorization;

•material and trade costs and availability, including building materials and appliances, and delays related to state and municipal construction, permitting, inspection and utility processes, which have been disrupted by key equipment shortages;

•consumer and producer price inflation;

•changes in interest rates, including those set by the Federal Reserve, which the Federal Reserve has increased sharply in the past few quarters 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, 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 to thereto;

•changes in U.S. trade policies, including the imposition of tariffs and duties on homebuilding materials and products, and related trade disputes with and retaliatory measures taken by other countries;

•disruptions in world and regional trade flows, economic activity and supply chains due to the military conflict in Ukraine, including those stemming from wide-ranging sanctions the U.S. and other countries have imposed or may further impose on Russian business sectors, financial organizations, individuals and raw materials, the impact of which may, among other things, increase our operational costs, exacerbate building materials and appliance shortages and/or reduce our revenues and earnings;

•the adoption of new or amended financial accounting standards and the guidance and/or interpretations with respect thereto;

•the availability and cost of land in desirable areas and our ability to timely and efficiently develop acquired land parcels and open new home communities;

•impairment, land option contract abandonment or other inventory-related charges, including any stemming from decreases in the value of our land assets;

•our warranty claims experience with respect to homes previously delivered and actual warranty costs incurred;

•costs and/or charges arising from regulatory compliance requirements or from legal, arbitral or regulatory proceedings, investigations, claims or settlements, including unfavorable outcomes in any such matters resulting in actual or potential monetary damage awards, penalties, fines or other direct or indirect payments, or injunctions, consent decrees or other voluntary or involuntary restrictions or adjustments to our business operations or practices that are beyond our current expectations and/or accruals;

•our ability to use/realize the net deferred tax assets we have generated;

•our ability to successfully implement our current and planned strategies and initiatives related to our product, geographic and market positioning, gaining share and scale in our served markets and in entering into new markets;

•our operational and investment concentration in markets in California;

•consumer interest in our new home communities and products, particularly from first-time homebuyers and higher-income consumers;

•our ability to generate orders and convert our backlog of orders to home deliveries and revenues, particularly in key markets in California;

•our ability to successfully implement our business strategies and achieve any associated financial and operational targets and objectives, including those discussed in this report or in any of our other public filings, presentations or disclosures;

•income tax expense volatility associated with stock-based compensation;

•the ability of our homebuyers to obtain homeowners insurance policies, which may depend on the ability and willingness of insurers to offer coverage in certain locations 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 or pandemic, and the control response measures that international, federal, state and local governments, agencies, law enforcement and/or health authorities implement to address it, which may precipitate or exacerbate one or more of the above-mentioned and/or other risks, and significantly disrupt or prevent us from operating our business in the ordinary course for an extended period; and

•other events outside of our control.

Please see our Annual Report on Form 10-K for the year ended November 30, 2022 and other filings with the SEC for a further discussion of these and other risks and uncertainties applicable to our business.

Item 3.Quantitative and Qualitative Disclosures About Market Risk

There have been no material changes in our market risk since November 30, 2022, other than our repayment of all $150.0 million of cash borrowings under the Credit Facility during the six months ended May 31, 2023. As of May 31, 2023, we had no cash borrowings outstanding under the Credit Facility. 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, 2022.

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 May 31, 2023.

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 new ERP system has become an increasing component of our business as most of our operating divisions have transitioned to it, 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. Accordingly, we continue to rely upon a combination of our existing 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 May 31, 2023 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

Except as set forth below, as of the date of this report, 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, 2022. However, we cannot provide any assurance that any such risk factor will not materialize.

Financial industry and capital markets turmoil may materially and adversely affect our liquidity and consolidated financial statements.

In early March 2023, federal and state banking regulators closed two U.S. banks, with which neither we nor KBHS had any banking, financing or other business relationships or dependencies, precipitating financial industry and capital markets turmoil centered on concerns about the stability and solvency of other banks and financial institutions and the attendant risk they may be closed and/or forced by governmental agencies into receivership or sale. The failure of other banks and financial institutions, if it occurs, could have a material adverse effect on our liquidity or consolidated financial statements if we have

placed cash and cash equivalent deposits at such banks or financial institutions, or if such banks or financial institutions, or any substitute or additional banks or financial institutions, participate in our Credit Facility or LOC Facility. Under our Credit Facility, non-defaulting lenders are not obligated to cover or acquire a defaulting lender’s respective commitment to fund loans or to issue letters of credit, and may not issue additional letters of credit if we do not enter into arrangements to address the risk with respect to the defaulting lender (which may include cash collateral). If the non-defaulting lenders are unable or unwilling to cover or acquire a defaulting lender’s respective commitment, potentially due to other demands they face under other credit instruments to which they are party, or because of regulatory restrictions, among other factors, we may not be able to access the Credit Facility’s full borrowing or letter of credit capacity to support our business needs. Similarly, if the applicable lender fails to meet its commitment to provide payment guarantees for us under the LOC Facility, we may not be able to access its full issuance capacity to carry out important operational processes. In addition, if a party to the warehouse line of credit and master repurchase agreements KBHS uses to fund mortgage originations fails, or is unable or unwilling to fulfill their obligations, KBHS may be limited in its ability, or unable, to provide mortgage loans to our homebuyers, which may prevent them from closing on their home at the time expected or at all. Also, if there is a failure of the lender of the revolving line of credit to one of our unconsolidated joint ventures for it to finance its land acquisition, development and construction activities, the unconsolidated joint venture may be delayed or unable to complete the project.

Based on our outreach to our, KBHS’ and the unconsolidated joint venture’s banking and financial institution partners, and steps we have taken to place deposits only with certain of those partners, as of the date of this report, we believe the above-described financial industry and capital markets turmoil will not impair our, KBHS’ or the unconsolidated joint venture’s ability to access any cash and cash equivalents on deposit or the full amounts available for borrowings or other credit extensions under the applicable financial instruments, in each case if and as needed in the ordinary course.

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 May 31, 2023 (dollars in thousands, except per share amounts):


Period	Total Number of Shares Purchased	Average Price Paid per Share (a)		Dollar Value of Shares Purchased as Part of Publicly Announced Plans or Programs (a)		Approximate Dollar Value of Shares That May Yet be Purchased Under the Plans or Programs (a) (b)
March 1-31	—	$	—	$	—	$	500,000
April 1-30	1,236,197	40.92		50,590		449,410
May 1-31	926,685	44.78		41,498		407,912
Total	2,162,882	$	42.58	$	92,088

(a) 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. All dollar amounts presented exclude such excise taxes, as applicable.

(b) On March 21, 2023, our board of directors authorized us to repurchase up to $500.0 million of our outstanding common stock, excluding excise tax. This authorization replaced a prior board of directors authorization, which had $75.0 million remaining, excluding excise tax. In the 2023 second quarter, we repurchased 2,162,882 shares of our common stock on the open market pursuant to the current authorization at a total cost of $92.1 million. As of May 31, 2023, we were authorized to repurchase up to $407.9 million of common stock in additional transactions, excluding excise tax.

Item 6.Exhibits


Exhibits

10.35						Amended and Restated KB Home 2014 Equity Incentive Plan, effective April 20, 2023.

22						List of Guarantor Subsidiaries, filed as an exhibit to our Annual Report on Form 10-K for the year ended November 30, 2022 (File No. 001-09195), is incorporated by reference herein.

31.1						Certification of Jeffrey T. Mezger, Chairman, President and Chief Executive Officer of KB Home Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2						Certification of Jeff J. Kaminski, Executive Vice President and Chief Financial Officer of KB Home Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1						Certification of Jeffrey T. Mezger, Chairman, President and Chief Executive Officer of KB Home Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2						Certification of Jeff J. Kaminski, Executive Vice President and Chief Financial Officer of KB Home Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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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

July 7, 2023

By:

/s/ JEFF J. KAMINSKI

Jeff J. Kaminski
Executive Vice President and Chief Financial Officer
(Principal Financial Officer)

Dated

July 7, 2023

By:

/s/ WILLIAM R. HOLLINGER

William R. Hollinger
Senior Vice President and Chief Accounting Officer
(Principal Accounting Officer)