KB HOME: Management Discussion and Analysis of Financial Position and Operating Results (Form 10-Q)

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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,
                                      2021                   2020               Variance                 2021                 2020                Variance
Revenues:
Homebuilding                  $    1,436,035             $ 910,280                     58   %       $ 2,574,043          $ 1,982,662                     30   %
Financial services                     4,857                 3,690                     32                 8,587                7,243                     19
Total revenues                $    1,440,892             $ 913,970                     58   %       $ 2,582,630          $ 1,989,905                     30   %
Pretax income:
Homebuilding                  $      163,016             $  60,185                    171   %       $   278,067          $   123,220                    126   %
Financial services                    10,648                 7,604                     40                19,148               13,417                     43
Total pretax income                  173,664                67,789                    156               297,215              136,637                    118
Income tax expense                   (30,300)              (15,800)                   (92)              (56,800)             (24,900)                  (128)
Net income                    $      143,364             $  51,989                    176   %       $   240,415          $   111,737                    115   %
Diluted earnings per share    $         1.50             $     .55                    173   %       $      2.52          $      1.19                    112   %


As the U.S. economy began to recover from the severe impacts of the COVID-19
pandemic that started in the 2020 second quarter, housing market conditions
remained generally healthy from the 2020 second half through the six months
ended May 31, 2021. Continued solid first-time buyer interest in homeownership,
underscoring the large millennial and Generation Z demographic groups that are
in or entering their prime homebuying years, along with a limited supply of new
and resale inventory and low mortgage interest rates, created a favorable
environment for our business throughout the period. First-time buyers accounted
for 64% of our homes delivered in the three months ended May 31, 2021.
Reflecting the robust demand in our served markets, the number and value of our
net orders for the 2021 second quarter rose 145% and 196%, respectively, from
the 2020 second quarter, when our net orders were adversely affected by the
outbreak of the COVID-19 pandemic as described below under "COVID-19 Pandemic
Impact."
In order to balance pace, price and construction starts to optimize the
performance of our inventory assets and improve returns amid the considerable
demand for our homes and steadily increasing construction labor and building
materials costs, particularly for lumber, we raised selling prices in the vast
majority of our communities and, in some instances, managed the pace of lot
releases during the 2021 second quarter. However, with the strong housing demand
and improving general economy, we experienced supply-chain disruptions that
created intermittent shortages of certain construction materials and other
products, as well as trade labor availability constraints and municipality
delays, with respect to permitting, inspections and utilities. These factors
extended our construction cycle times in the 2021 second quarter, and pushed
some expected deliveries and new community openings into the third quarter.
Along with the accelerated close-out of communities due to our exceptionally
strong monthly net order pace, we had year-over-year and sequential decreases in
our average and ending community counts for the quarter. We are closely
monitoring the risks to our construction cycle times and new community openings,
and believe the above-described unfavorable trends will generally persist for
the remainder of the year. Therefore, we have incorporated them into our 2021
third quarter and full-year performance expectations as presented below under
"Outlook."
Homebuilding revenues for the 2021 second quarter grew 58% from the year-earlier
quarter due to an increase in housing revenues that reflected 40% growth in the
number of homes delivered to 3,504, our highest second-quarter level since 2007,
and a 13% increase in the overall average selling price of those homes to
$409,800. Homebuilding operating income for the three months ended May 31, 2021
rose 216% year over year to $162.9 million and, as a percentage of revenues,
improved 560 basis points to 11.3%. The increase in our homebuilding operating
income margin was driven by meaningful improvements in both our housing gross
profit margin and selling, general and administrative expenses as a percentage
of housing revenues. Reflecting the strong performance of both our homebuilding
and financial services operations in the 2021 second quarter, our pretax income
margin improved 470 basis points to 12.1%, and net income and diluted earnings
per share increased 176% and
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173%, respectively, each as compared to the corresponding quarter of 2020.
COVID-19 Pandemic Impact. The COVID-19 pandemic and related governmental control
measures considerably disrupted global and national economies, the U.S. housing
market and our business during our 2020 second quarter. During that period, we
experienced a sizable reduction in net orders and backlog, as discussed below
under "Net Orders," as well as protracted supply chain delays and construction
cycle time extensions in most of our served markets that resulted in home
delivery delays. With the uncertainty surrounding the COVID-19 pandemic, and in
prioritizing cash preservation and liquidity, we limited our land investments
and curtailed our overhead expenditures, partly through workforce realignment
and reductions. As a result, our selling, general and administrative expenses
for the 2020 second quarter included severance charges of $6.7 million.
With the easing to varying degrees of restrictive public health orders in our
served markets beginning in May 2020, our net orders began to rebound
significantly following a low point in April 2020, as steadily increasing
housing demand drove our 2020 third- and fourth-quarter net orders to 15-year
highs and our 2021 first- and second-quarter net orders to 14-year highs. This
sharp rise in net orders over the past several quarters substantially expanded
the number of homes in our backlog as well as our backlog value. With our ending
backlog value at May 31, 2021 up a robust 126% year over year, representing
potential future revenues of approximately $4.29 billion, our highest
second-quarter level in 14 years, we expect to achieve significant
year-over-year growth in our scale, profitability and returns during 2021, as
described below under "Outlook." In addition, with the ongoing strong housing
demand in the 2021 first half, we continued to increase our land acquisition and
development investments, as we did in the latter part of 2020, to measurably
expand our lot pipeline and support future community count growth. Based on our
investments over the past several quarters, we expect double-digit
year-over-year community count growth for our 2022 full year.
Our favorable outlook could be materially affected by adverse developments, if
any, related to the COVID-19 pandemic, including new or more restrictive
"stay-at-home" orders and other new or revised public health requirements
recommended or imposed by federal, state and local authorities. Until the
COVID-19 pandemic has been resolved as a public health crisis, it retains the
potential to cause further and more severe disruption of global and national
economies, the U.S. housing market and our business, including our net orders,
backlog and revenues. In addition, as mentioned above, we are continuing to
experience trade labor and building materials cost pressures, particularly with
respect to lumber, as well as supply-chain issues and delays in state and
municipal construction permitting and approvals, that could negatively impact
our growth, margins and financial results in future periods. Despite these
challenges, and other factors, which may individually or in combination slow or
reverse the current housing recovery from the COVID-19 pandemic-induced
disruptions in the 2020 second quarter, we believe we are well-positioned to
operate effectively through the present environment.
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,
                                                    2021                     2020                 2021                  2020
Revenues:
Housing                                    $     1,436,032               $ 909,978          $   2,573,385          $ 1,981,788
Land                                                     3                     302                    658                  874
Total                                            1,436,035                 910,280              2,574,043            1,982,662
Costs and expenses:
Construction and land costs
Housing                                         (1,128,017)               (744,151)            (2,029,195)          (1,629,632)
Land                                                    (1)                   (302)                  (732)                (874)
Total                                           (1,128,018)               (744,453)            (2,029,927)          (1,630,506)
Selling, general and administrative
expenses                                          (145,115)               (114,238)              (267,120)            (240,372)
Total                                           (1,273,133)               (858,691)            (2,297,047)          (1,870,878)
Operating income                                   162,902                  51,589                276,996              111,784
Interest income                                        241                     442                    894                1,377
Equity in income (loss) of unconsolidated
joint ventures                                        (127)                  8,154                    177               10,059
Homebuilding pretax income                 $       163,016               $  60,185          $     278,067          $   123,220


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                                                        Three Months Ended May 31,                    Six Months Ended May 31,
                                                       2021                       2020                 2021                 2020
Homes delivered                                          3,504                    2,499                 6,368               5,251
Average selling price                            $     409,800                $ 364,100          $    404,100           $ 377,400
Housing gross profit margin as a percentage of
housing revenues                                          21.4   %                 18.2  %               21.1   %            17.8  %
Housing gross profit margin excluding
inventory-related charges as a percentage of
housing revenues                                          21.5   %                 18.7  %               21.3   %            18.3  %
Adjusted housing gross profit margin as a
percentage of housing revenues                            24.2   %                 21.9  %               24.1   %            21.5  %
Selling, general and administrative expenses as
a percentage of housing revenues                          10.1   %                 12.6  %               10.4   %            12.1  %
Operating income as a percentage of revenues              11.3   %                  5.7  %               10.8   %             5.6  %


Revenues. Homebuilding revenues of $1.44 billion for the three months ended
May 31, 2021 rose from the corresponding year-earlier period due to a 58%
increase in housing revenues. The year-over-year growth in housing revenues
reflected a 40% increase in the number of homes delivered and a 13% increase in
the overall average selling price of those homes. The higher volume of homes
delivered was largely due to our backlog of homes at the beginning of the
quarter ("beginning backlog") increasing 59% year over year as a result of our
strong net order growth over the past several quarters. In addition, homes
delivered in the 2020 second quarter were negatively impacted by the economic
disruptions during the early stages of the COVID-19 pandemic, as described above
under "COVID-19 Pandemic Impact." The overall average selling price of homes
delivered reflected the strong housing market conditions, which enabled us to
raise prices in the vast majority of our communities, as well as product and
geographic mix shifts of homes delivered.
For the six months ended May 31, 2021, homebuilding revenues grew 30% year over
year to $2.57 billion, reflecting growth in housing revenues. Housing revenues
for the six months ended May 31, 2021 increased from the corresponding 2020
period as a result of a 21% increase in the number of homes delivered and a 7%
rise in the overall average selling price of those homes.
Operating Income. The year-over-year growth in our operating income for the
three-month and six-month periods ended May 31, 2021 primarily reflected
increases in housing gross profits, partly offset by increases in selling,
general and administrative expenses.
Our operating income for the three months ended May 31, 2021 increased 216% from
the year-earlier period. Operating income for the 2021 second quarter included
$.5 million of inventory-related charges. For the 2020 second quarter, operating
income included inventory-related charges of $4.4 million and severance charges
of $6.7 million associated with workforce reductions made during that period. As
a percentage of revenues, our operating income for the three months ended
May 31, 2021 improved 560 basis points to 11.3%, compared to 5.7% for the
year-earlier quarter. Excluding inventory-related charges in both periods and
severance charges in the year-earlier period, our operating income as a
percentage of revenues increased 450 basis points to 11.4% for the 2021 second
quarter from 6.9% for the year-earlier quarter.
For the six months ended May 31, 2021, our operating income grew 148% from the
prior-year period. Operating income for the 2021 first half included
inventory-related charges of $4.5 million, compared to $10.1 million of such
charges in the corresponding 2020 period. As a percentage of revenues, our
operating income for the six months ended May 31, 2021 increased 520 basis
points year over year to 10.8%. Excluding inventory-related charges for both
periods and the above-mentioned severance charges in the 2020 period, our
operating income margin improved to 10.9% for the six months ended May 31, 2021,
compared to 6.5% for the six months ended May 31, 2020.
Housing Gross Profits. Housing gross profits of $308.0 million for the three
months ended May 31, 2021 grew 86% from $165.8 million for the year-earlier
period, reflecting increases in both our housing revenues and housing gross
profit margin. Our housing gross profit margin for the 2021 second quarter rose
320 basis points year over year to 21.4%, mainly as a result of an increase in
operating leverage due to higher housing revenues (approximately 130 basis
points); a favorable pricing environment that more than offset higher
construction costs (approximately 90 basis points); lower amortization of
previously capitalized interest as a percentage of housing revenues
(approximately 50 basis points); a decrease in inventory-related charges
(approximately 40 basis points); and other miscellaneous factors (approximately
10 basis points). As a percentage of housing revenues, the amortization of
previously capitalized interest associated with housing operations was 2.7% and
3.2% for the three months ended May 31, 2021 and 2020, respectively. Excluding
the amortization of previously capitalized interest
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associated with housing operations and the above-mentioned inventory-related
charges for the applicable periods, our adjusted housing gross profit margin for
the 2021 second quarter increased 230 basis points from the year-earlier quarter
to 24.2%.
For the six months ended May 31, 2021, our housing gross profits of $544.2
million increased 55% from $352.2 million for the year-earlier period. Housing
gross profits for the 2021 first half included $4.5 million of inventory-related
charges, compared to $10.1 million of such charges in the corresponding 2020
period. Our housing gross profit margin of 21.1% for the six months ended
May 31, 2021 increased 330 basis points year over year, primarily due to the
reasons described above with respect to the three months ended May 31, 2021. As
a percentage of housing revenues, the amortization of previously capitalized
interest associated with housing operations was 2.8% for the six months ended
May 31, 2021, compared to 3.2% for the corresponding 2020 period. Our adjusted
housing gross profit margin for the six months ended May 31, 2021 increased 260
basis points from the year-earlier period to 24.1%. 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,
                                                     % of Housing                             % of Housing                                   % of Housing                             % of Housing
                                2021                   Revenues               2020              Revenues                  2021                 Revenues               2020              Revenues
Marketing expenses      $      29,498                        2.1  %       $  28,917                   3.2  %       $     57,904                      2.3  %       $  61,977                   3.1  %
Commission expenses (a)        56,623                        3.9             38,830                   4.3               101,475                      3.9             80,277                   4.1
General and
administrative expenses        58,994                        4.1             46,491                   5.1               107,741                      4.2             98,118                   4.9
Total                   $     145,115                       10.1  %       $ 114,238                  12.6  %       $    267,120                     10.4  %       $ 240,372                  12.1  %


(a)Commission expenses include sales commissions on homes delivered paid to
internal sales counselors and external real estate brokers.
Selling, general and administrative expenses for the 2021 second quarter rose
27% from the year-earlier quarter, mainly due to an increase in commission
expenses associated with our higher housing revenues, and an increase in general
and administrative expenses. The year-over-year increase in general and
administrative expenses primarily reflected reduced expenses associated with
certain employee compensation plans in the 2020 second quarter, and higher
expenses in the 2021 second quarter to support current and expected growth,
partly offset by the above-mentioned severance charges in the year-earlier
period. As a percentage of housing revenues, our selling, general and
administrative expenses improved to 10.1% from 12.6%, primarily reflecting the
continued benefit of targeted actions we took in 2020 to reduce overhead costs
in the early stages of the COVID-19 pandemic; increased operating leverage due
to our higher housing revenues as compared to the year-earlier quarter; and the
above-noted severance charges in the year-earlier quarter. Excluding these
severance charges, the 2020 second quarter ratio was 11.8%.
For the 2021 first half, selling, general and administrative expenses increased
11% year over year, mainly due to the reasons described above with respect to
the three months ended May 31, 2021, partly offset by a decrease in marketing
expenses and a $4.3 million benefit from the ERC recognized during the current
period as discussed in Note 14 - Income Taxes in the Notes to Consolidated
Financial Statements in this report. The ERC favorably impacted each of our
homebuilding reporting segments for the six months ended May 31, 2021. As a
percentage of housing revenues, selling, general and administrative expenses for
the six months improved 170 basis points to 10.4%, largely due to the reasons
described above with respect to the three months ended May 31, 2021.
Interest Income/Expense. Interest income, which is generated from short-term
investments, totaled $.2 million for the three months ended May 31, 2021 and $.4
million for the three months ended May 31, 2020. For the six-month periods ended
May 31, 2021 and 2020, our interest income totaled $.9 million and $1.4 million,
respectively. 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,
2021 and 2020
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was capitalized due to the average amount of our inventory qualifying for
interest capitalization exceeding our average debt level for each period. As a
result, we had no interest expense for these periods. Further information
regarding our interest incurred and capitalized is provided in Note 6 -
Inventories in the Notes to Consolidated Financial Statements in this report.
Equity in Income (Loss) of Unconsolidated Joint Ventures. Our equity in loss of
unconsolidated joint ventures was $.1 million for the three months ended May 31,
2021, compared to equity in income of unconsolidated joint ventures of $8.2
million for the year-earlier period. For the six months ended May 31, 2021, our
equity in income of unconsolidated joint ventures decreased to $.2 million,
compared to $10.1 million for the corresponding 2020 period. The year-over-year
changes for both periods mainly resulted from a reduction in the number of homes
delivered from an unconsolidated joint venture in California to two and 10 homes
for the three months and six months ended May 31, 2021, respectively, compared
to 53 and 73 homes, respectively, for the corresponding year-earlier periods.
This unconsolidated joint venture delivered its last home in the 2021 second
quarter.
Further information regarding our investments in unconsolidated joint ventures
is provided in Note 9 - Investments in Unconsolidated Joint Ventures in the
Notes to Consolidated Financial Statements in this report.
Net Orders, Cancellation Rates, Backlog and Community Count. The following table
presents information concerning our net orders, cancellation rates, ending
backlog and community count (dollars in thousands):
                                   Three Months Ended May 31,             Six Months Ended May 31,
                                     2021               2020              2021               2020
  Net orders                           4,300             1,758             8,592              5,253
  Net order value (a)          $   2,036,837       $   688,444       $ 3,905,905        $ 2,071,098
  Cancellation rates (b)                   9  %             43  %             10   %             27   %
  Ending backlog - homes              10,034             5,080            10,034              5,080
  Ending backlog - value       $   4,294,923       $ 1,903,017       $ 4,294,923        $ 1,903,017
  Ending community count                 200               244               200                244
  Average community count                205               247               215                248


(a)  Net order value represents the 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.
Our net orders, net order value, cancellation rate, ending backlog and ending
backlog value for the three months and six months ended May 31, 2020 were
adversely impacted by the COVID-19 pandemic, as described above under "COVID-19
Pandemic Impact."
Net Orders. For the three months ended May 31, 2021, net orders from our
homebuilding operations increased 145% from the year-earlier period to their
highest second-quarter level since 2007, reflecting an increase in monthly net
orders per community to 7.0 from 2.4 in the year-earlier period, partly offset
by a decrease in our average community count. Monthly net orders per community
rose in each of our four homebuilding reporting segments, with increases ranging
from 119% in our Central segment to 431% in our Southeast segment. This higher
net order pace occurred even as we raised our home selling prices and paced lot
releases, and was largely fueled by factors described above under "Overview." In
addition, our low net order pace for the year-earlier period reflected the
significant moderation in activity and high cancellation rate we experienced at
the onset of the COVID-19 pandemic. We believe our Built-to-Order® homebuying
process, which provides personalization and choice, also was a key contributor
to our strong 2021 second quarter net orders.
The value of our net orders for the three months ended May 31, 2021 rose 196%
from the year-earlier period as a result of the growth in net orders and a 21%
increase in the overall average selling price of those orders that largely
reflected strong housing demand in most of our served markets. The
year-over-year increase in net orders and overall net order value reflected
improvements in all four of our homebuilding reporting segments, with net order
value increases ranging from 118% in our Central segment to 406% in our
Southeast segment.
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Our cancellation rate as a percentage of gross orders for the three months ended
May 31, 2021 improved significantly from the year-earlier period. The high
cancellation rate in the year-earlier period largely reflected our proactive
efforts to assure a backlog of qualified homebuyers amid the unprecedented
nationwide economic and employment disruptions resulting from the outbreak of
the COVID-19 pandemic.
Backlog. The number of homes in our backlog at May 31, 2021 increased 98% from
May 31, 2020, reflecting the year-over-year increase in our net orders in the
2021 second quarter and our substantially higher beginning backlog. The
potential future housing revenues in our backlog at May 31, 2021 rose 126% from
the prior year as a result of both the higher number of homes in our backlog and
a 14% increase in the overall average selling price of those homes. Each of our
four homebuilding reporting segments generated triple-digit increases in backlog
value, ranging from 105% in our Central segment to 155% in our Southeast
segment.
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 2021 second quarter
declined 17% from the year-earlier period, reflecting decreases in each of our
homebuilding reporting segments. Our ending community count was 200, compared to
244 in the year-earlier quarter. The year-over-year decreases in our overall
average and ending community counts primarily reflected the close-out of
communities earlier than anticipated due to our demand-driven net order pace
increasing 192% from the year-earlier quarter to 7.0 monthly net orders per
community; and delays in new community openings as described above under
"Overview." These factors also contributed to the current quarter ending
community count declining from 209 communities at the end of the 2021 first
quarter. As described above under "COVID-19 Pandemic Impact," we have
substantially increased our investments in land acquisition and land development
in 2021 to support future community count growth.
HOMEBUILDING REPORTING SEGMENTS
For reporting purposes, we organize our homebuilding operations into four
segments - West Coast, Southwest, Central and Southeast. As of May 31, 2021, our
homebuilding reporting segments conducted ongoing operations in the following
states to the extent permitted by applicable public health orders as part of
their respective COVID-19 control responses: West Coast - California and
Washington; Southwest - Arizona and Nevada; Central - Colorado and Texas; and
Southeast - Florida and North Carolina.
Operational Data. The following tables present 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 

Finished May 31st,

                              Homes Delivered                  Net Orders                   Cancellation Rates
        Segment             2021            2020            2021          2020             2021               2020
        West Coast            1,006            585         1,300           555                   9   %          37   %
        Southwest               715            552           924           305                   5              50
        Central               1,232            955         1,292           719                  12              36
        Southeast               551            407           784           179                  10              61
        Total                 3,504          2,499         4,300         1,758                   9   %          43   %

                                      Net Order Value                      

Average number of communities

        Segment             2021            2020          Variance        2021             2020             Variance
        West Coast      $   937,416      $ 324,936           188   %        58                      75         (23)  %
        Southwest           374,700         99,464           277            36                      37          (3)
        Central             463,746        212,445           118            73                      90         (19)
        Southeast           260,975         51,599           406            38                      45         (16)
        Total           $ 2,036,837      $ 688,444           196   %       205                     247         (17)  %


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Six months ended May 31st,

                                        Homes Delivered                               Net Orders                                  Cancellation Rates
Segment                            2021                 2020                  2021                   2020                     2021                      2020
West Coast                          1,890                1,379                  2,460                 1,534                            9  %                 23   %
Southwest                           1,249                1,155                  1,791                 1,070                            7                    27
Central                             2,243                1,923                  2,890                 1,936                           12                    25
Southeast                             986                  794                  1,451                   713                           11                    36
Total                               6,368                5,251                  8,592                 5,253                           10  %                 27   %

                                                    Net Order Value                                                  Average Community Count
Segment                            2021                 2020                Variance                 2021                     2020                    Variance
West Coast                    $ 1,716,967          $   923,352                     86   %                62                           75                   (17)  %
Southwest                         708,619              356,684                     99                    36                           38                    (5)
Central                         1,016,687              585,926                     74                    78                           89                   (12)
Southeast                         463,632              205,136                    126                    39                           46                   (15)
Total                         $ 3,905,905          $ 2,071,098                     89   %               215                          248                   (13)  %

                                                                                            May 31,
                                                    Backlog - Homes                                                      Backlog - Value
Segment                            2021                 2020                Variance                 2021                     2020                    Variance
West Coast                          2,594                1,198                    117   %       $ 1,729,370          $              705,357                145   %
Southwest                           2,063                1,153                     79               786,578                         380,454                107
Central                             3,684                2,001                     84             1,249,238                         609,156                105
Southeast                           1,693                  728                    133               529,737                         208,050                155
Total                              10,034                5,080                     98   %       $ 4,294,923          $            1,903,017                126   %


The composition of our homes delivered, net orders and backlog shifts with the
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, and changes as new communities open and existing communities wind down
or close out. In addition, with our Built-to-Order model, the selling prices of
homes within a community may vary due to differing lot sizes and locations, home
square footage, and option and upgrade selections. These intrinsic variations in
our business limit the effective 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.
The financial results for each of our homebuilding reporting segments for the
three months and six months ended May 31, 2020 were negatively affected by the
impacts from the onset of the COVID-19 pandemic, as discussed above under
"COVID-19 Pandemic Impact." In each of our homebuilding reporting segments, we
had lower net orders and delivered fewer homes in the 2020 second quarter
compared to the 2021 second quarter. With housing market conditions remaining
strong from the 2020 third quarter through the 2021 second quarter, we delivered
more homes at a higher overall average selling price and significantly expanded
our operating income as a percentage of revenues for the three months and six
months ended May 31, 2021, as compared to the corresponding year-earlier
periods.
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West Coast. The following table presents financial information related to our
West Coast segment for the periods indicated (dollars in thousands, except
average selling price):
                                                Three Months Ended May 31,                                       Six Months Ended May 31,
                                      2021                 2020               Variance                2021                2020               Variance
Revenues                         $    625,690          $ 331,882                   89    %       $ 1,140,206          $ 816,379                   40    %

Construction and land costs (507,276) (282,454)

      (80)              (928,331)          (699,111)                 (33)
Selling, general and
administrative expenses               (41,748)           (29,919)                 (40)               (77,006)           (65,773)                 (17)
Operating income                 $     76,666          $  19,509                  293    %       $   134,869          $  51,495                  162    %

Homes delivered                         1,006                585                   72    %             1,890              1,379                   37    %
Average selling price            $    622,000          $ 567,200                   10    %       $   603,300          $ 591,900                    2    %
Operating income as a percentage
of revenues                              12.3  %             5.9  %               640  bps              11.8  %             6.3  %               550  bps


This segment's revenues for the three-month and six-month periods ended May 31,
2021 were generated solely from housing operations. For the three months and six
months ended May 31, 2020, this segment generated revenues from housing
operations and nominal land sales. Housing revenues for the 2021 second quarter
and first half grew 89% and 40%, respectively, from the corresponding
year-earlier periods due to increases in both the number of homes delivered and
the average selling price of those homes. The year-over-year growth in the
number of homes delivered for the three-month and six-month periods ended
May 31, 2021 was attributable to our California and Washington operations. The
year-over-year increase in the average selling price of homes delivered for
these same periods reflected strong housing market conditions and a geographic
mix shift of homes delivered.
Operating income for the three months and six months ended May 31, 2021 grew
from the corresponding year-earlier periods, reflecting higher housing gross
profits, partly offset by higher selling, general and administrative expenses.
For the 2021 second quarter, this segment's operating income as a percentage of
revenues rose from the year-earlier quarter, primarily due to a 400 basis-point
increase in the housing gross profit margin to 18.9% and a 230 basis-point
improvement in selling, general and administrative expenses as a percentage of
housing revenues to 6.7%. The housing gross profit margin expansion was largely
driven by a favorable pricing environment, an increase in operating leverage due
to higher housing revenues, and lower amortization of previously capitalized
interest. The improvement in selling, general and administrative expenses as a
percentage of housing revenues mainly reflected increased operating leverage
from higher housing revenues, and the continued impact of targeted actions we
took in 2020 to reduce overhead costs in the early stages of the COVID-19
pandemic.
For the six months ended May 31, 2021, the year-over-year growth in this
segment's operating income as a percentage of revenues mainly reflected a 420
basis-point rise in the housing gross profit margin to 18.6% and an improvement
in selling, general and administrative expenses as a percentage of housing
revenues to 6.8% from 8.1%. These metrics improved from the year-earlier period
primarily for the reasons described above with respect to the three months ended
May 31, 2021. In addition, inventory-related charges decreased to $3.9 million
in the 2021 first half, compared to $5.1 million in the year-earlier period.
Southwest. The following table presents financial information related to our
Southwest segment for the periods indicated (dollars in thousands, except
average selling price):
                                                   Three Months Ended May 31,                                            Six Months Ended May 31,
                                         2021                    2020               Variance                  2021                  2020               Variance
Revenues                         $     258,061               $ 175,251                    47   %       $    445,746             $ 366,569                    22   %
Construction and land costs           (189,921)               (133,742)                  (42)              (328,602)             (276,641)                  (19)
Selling, general and
administrative expenses                (19,144)                (16,463)                  (16)               (34,969)              (32,632)                   (7)
Operating income                 $      48,996               $  25,046                    96   %       $     82,175             $  57,296                    43   %


                                       33
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                                            Three Months Ended May 31,                                      Six Months Ended May 31,
                                  2021                 2020               Variance               2021                2020               Variance
Homes delivered                       715                552                   30    %            1,249              1,155                    8    %
Average selling price        $    360,900          $ 317,100                   14    %       $  356,900          $ 316,700                   13    %
Operating income as a
percentage of revenues               19.0  %            14.3  %               470  bps             18.4  %            15.6  %               280  bps


This segment's revenues for the three-month and six-month periods ended May 31,
2021 were generated solely from housing revenues. For the three months and six
months ended May 31, 2020, revenues were generated from housing operations as
well as land sales. Housing revenues for the three months ended May 31, 2021
rose 47% year over year to $258.1 million from $175.0 million. For the six
months ended May 31, 2021, housing revenues increased 22% to $445.7 million. The
year-over- year growth in housing revenues for the 2021 second quarter and first
half reflected increases in both the number of homes delivered and the average
selling price of those homes. The higher number of homes delivered in the
current quarter reflected increases in deliveries from both our Arizona and
Nevada operations. The rise in the average selling price reflected strong
housing market conditions and a shift in product and geographic mix of homes
delivered.
Operating income for the three months and six months ended May 31, 2021 rose
from the corresponding 2020 period, primarily due to higher housing gross
profits, partially offset by higher selling, general and administrative
expenses. As a percentage of revenues, operating income for the three-month
period ended May 31, 2021 grew from the year-earlier period largely due to a 270
basis-point increase in the housing gross profit margin to 26.4% and a 200
basis-point improvement in selling, general and administrative expenses as a
percentage of housing revenues. The housing gross margin expansion was largely
driven by a favorable pricing environment, an increase in operating leverage due
to higher housing revenues, and lower amortization of previously capitalized
interest. The improvement in selling, general and administrative expenses as a
percentage of revenues was mainly due to increased operating leverage from
higher housing revenues, and the continued impact of targeted actions we took in
2020 to reduce overhead costs in the early stages of the COVID-19 pandemic.
The year-over-year growth in this segment's operating income as a percentage of
revenues for the six months ended May 31, 2021 mainly reflected a 170
basis-point increase in the housing gross profit margin to 26.3% and an
improvement in selling, general and administrative expenses as a percentage of
housing revenues to 7.8% from 8.9%. The housing gross profit margin increased
and selling, general and administrative expenses as a percentage of revenues
improved in the 2021 first half primarily for the reasons described above with
respect to the 2021 second quarter.
Central. The following table presents financial information related to our
Central segment for the periods indicated (dollars in thousands, except average
selling price):
                                                Three Months Ended May 31,                                      Six Months Ended May 31,
                                      2021                 2020               Variance               2021                2020               Variance
Revenues                         $    390,555          $ 284,193                   37    %       $  700,263          $ 567,706                   23    %

Construction and land costs (300,914) (227,291)

       (32)             (539,865)          (456,414)                 (18)
Selling, general and
administrative expenses               (33,359)           (30,018)                 (11)              (63,124)           (61,730)                  (2)
Operating income                 $     56,282          $  26,884                  109    %       $   97,274          $  49,562                   96    %

Homes delivered                         1,232                955                   29    %            2,243              1,923                   17    %
Average selling price            $    317,000          $ 297,600                    7    %       $  312,200          $ 295,200                    6    %
Operating income margin as a
percentage of revenues                   14.4  %             9.5  %               490  bps             13.9  %             8.7  %               520  bps


This segment's revenues for the three-month and six-month periods ended May 31,
2021 and 2020 were generated solely from housing operations. Housing revenues
for the three months and six months ended May 31, 2021 grew 37% and 23%,
respectively, from the corresponding year-earlier periods, reflecting increases
in both the number of homes delivered and the average selling price of those
homes. The year-over-year growth in the number of homes delivered in each period
was attributable to our Colorado and Texas operations. The increases in the
average selling price for each period reflected the strong housing market
conditions and shifts in the product and geographic mix of homes delivered.
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Operating income for the three months and six months ended May 31, 2021 rose
from the corresponding year-earlier periods due to growth in housing gross
profits, partially offset by higher selling, general and administrative
expenses. For the three months ended May 31, 2021, the increase in this
segment's operating income as a percentage of revenues reflected a 300
basis-point increase in the housing gross profit margin to 23.0%, and a 210
basis-point improvement in selling, general and administrative expenses as a
percentage of housing revenues to 8.5%. The expansion in the housing gross
profit margin was primarily driven by a favorable pricing environment, lower
inventory-related charges, improved operating leverage due to higher housing
revenues and lower amortization of previously capitalized interest.
Inventory-related charges for the three months ended May 31, 2021 were nominal,
compared to $3.5 million for the year-earlier period. The year-over-year
improvement in selling, general and administrative expenses as a percentage of
housing revenues mainly reflected increased operating leverage from higher
housing revenues, and the continued impact of targeted actions we took in 2020
to reduce overhead costs in the early stages of the COVID-19 pandemic.
For the six months ended May 31, 2021, the year-over-year expansion in this
segment's operating income as a percentage of revenues reflected a 330
basis-point increase in the housing gross profit margin to 22.9% and a 190
basis-point improvement in selling, general and administrative expenses as a
percentage of housing revenues to 9.0%. These year-over-year changes were
primarily due to the reasons described above with respect to the three months
ended May 31, 2021. Inventory-related charges for the six months ended May 31,
2021 were nominal, compared to $4.4 million in the year-earlier period.
Southeast. The following table presents financial information related to our
Southeast segment for the periods indicated (dollars in thousands, except
average selling price):
                                                Three Months Ended May 31,                                      Six Months Ended May 31,
                                      2021                 2020               Variance               2021                2020               Variance
Revenues                         $    161,729          $ 118,954                   36    %       $  287,828          $ 232,008                   24    %
Construction and land costs          (128,307)           (99,311)                 (29)             (229,540)          (194,921)                 (18)
Selling, general and
administrative expenses               (14,559)           (13,013)                 (12)              (27,311)           (27,827)                   2
Operating income                 $     18,863          $   6,630                  185    %       $   30,977          $   9,260                  235    %

Homes delivered                           551                407                   35    %              986                794                   24    %
Average selling price            $    293,500          $ 292,300                    -    %       $  291,200          $ 292,100                    -    %
Operating income as a percentage
of revenues                              11.7  %             5.6  %               610  bps             10.8  %             4.0  %               680  bps


This segment's revenues for the three-month and six-month periods ended May 31,
2021 and the six-month period ended May 31, 2020 were generated from both
housing operations and nominal land sales. For the three-month period ended
May 31, 2020, revenues were generated solely from housing operations. Housing
revenues for the three months ended May 31, 2021 increased 36% year over year to
$161.7 million from $119.0 million. For the six months ended May 31, 2021,
housing revenues grew 24% year over year to $287.2 million from $232.0 million.
The housing revenue growth in both periods primarily reflected increases in the
number of homes delivered from our Florida operations.
Operating income for the three months ended May 31, 2021 increased from the
corresponding year-earlier period, reflecting higher housing gross profits,
partly offset by higher selling, general and administrative expenses. For the
six months ended May 31, 2021, operating income rose from corresponding 2020
period due to higher housing gross profits. As a percentage of revenues,
operating income for the 2021 second quarter rose from the year-earlier period
due to a 420 basis-point increase in the housing gross profit margin to 20.7%
that mainly reflected a shift in geographic mix, increased operating leverage
due to higher housing revenues, and lower amortization of previously capitalized
interest. In addition, selling, general and administrative expenses as a
percentage of housing revenues improved 190 basis points from the year-earlier
period to 9.0%, primarily due to increased operating leverage as a result of
higher housing revenues, and the continued impact of targeted actions we took in
2020 to reduce overhead costs in the early stages of the COVID-19 pandemic.
For the six months ended May 31, 2021, the year-over-year increase in this
segment's operating income as a percentage of revenues reflected a 430
basis-point increase in the housing gross profit margin to 20.3% and a 250
basis-point improvement in selling, general and administrative expenses as a
percentage of housing revenues to 9.5%. These year-over-year changes were mainly
due to the reasons described above with respect to the three months ended
May 31, 2021.
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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,
                                                       2021                  2020                 2021                  2020
Revenues                                         $      4,857            $   3,690           $     8,587           $     7,243
Expenses                                               (1,253)                (883)               (2,453)               (1,845)
Equity in income of unconsolidated joint venture        7,044                4,797                13,014                 8,019
Pretax income                                    $     10,648            $   7,604           $    19,148           $    13,417

Total originations (a):
Loans                                                   2,357                1,715                 4,429                 3,479
Principal                                        $    810,515            $ 543,005           $ 1,521,439           $ 1,101,542
Percentage of homebuyers using KBHS                        75    %              76   %                77   %                74   %
Average FICO score                                        727                  720                   726                   721

Loans sold (a):
Loans sold to Stearns                                   2,131                1,760                 3,685                 4,049
Principal                                        $    741,776            $ 558,656           $ 1,265,681           $ 1,258,693
Loans sold to third parties                               200                  121                   636                   193
Principal                                        $     64,838            $  38,704           $   209,224           $    62,003


(a)Loan originations and sales occurred within KBHS.
Revenues. Financial services revenues for the three months and six months ended
May 31, 2021 rose from the corresponding periods of 2020 due to increases in
title services revenues and insurance commissions.
Pretax income. Our financial services pretax income for the three months ended
May 31, 2021 grew 40% from the year-earlier period largely due to an increase in
the equity in income of unconsolidated joint ventures. In the 2021 second
quarter, our equity in income of our unconsolidated joint venture, KBHS,
increased 47% year over year as a result of a substantial increase in the
principal amount of loan originations and improved margins. The higher principal
amount of loan originations primarily reflected a 40% rise in the number of
homes we delivered and a 13% increase in the average selling price of those
homes.
For the six months ended May 31, 2021, our financial services pretax income rose
43% from the corresponding 2020 period primarily due to a 62% increase in our
equity in income of KBHS that reflected a substantial increase in the principal
amount of loan originations and improved margins. The year-over-year increase in
the principal amount of loan originations was largely due to an increase in the
percentage of homebuyers using KBHS, a 21% increase in the number of homes we
delivered and a 7% rise in the average selling price of those homes.
On January 5, 2021, Guaranteed Rate, Inc. announced that it had reached an
agreement to acquire Stearns' parent company. This transaction closed on March
1, 2021. As of the date of this report, we are not aware of any significant
changes with respect to Stearns or its operations as a result of the transaction
being completed.
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,
                           2021                      2020              2021                   2020
Income tax expense   $      30,300                $ 15,800       $     56,800              $ 24,900
Effective tax rate            17.4   %                23.3  %            19.1   %              18.2  %


Our effective tax rate for the three months ended May 31, 2021 decreased from
the year-earlier period, mainly due to an $11.8 million increase in the federal
energy tax credits we earned from building energy-efficient homes.
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For the six months ended May 31, 2021, our effective tax rate increased slightly
from the corresponding 2020 period, primarily reflecting the increase in our
pretax income, which reduced the proportionate favorable impact of excess tax
benefits related to stock-based compensation and federal energy tax credits on
the overall rate, and a $1.7 million decrease in our excess tax benefits related
to stock-based compensation. These impacts were partly offset by a $10.5 million
increase in the federal energy tax credits we earned from building
energy-efficient homes.
The federal energy tax credits for the three months and six months ended May 31,
2021 resulted from legislation enacted in December 2020, which among other
things, extended the availability of a business tax credit for building new
energy-efficient homes through December 31, 2021. Prior to this legislation, the
tax credit expired on December 31, 2020. This extension is expected to benefit
our income tax provision in future periods.
In June 2020, California enacted tax legislation that approved the suspension of
California net operating loss deductions for tax years 2020, 2021 and 2022. The
suspension of California net operating loss deductions did not have an impact on
our income tax expense for the three months or six months ended May 31, 2021.
Further information regarding our income taxes is provided in Note 14 - 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
and ratio of net debt to capital, neither of which is calculated in accordance
with GAAP. We believe these non-GAAP financial measures are 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 they are not calculated in accordance with GAAP, these non-GAAP
financial measures 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, these non-GAAP financial measures should be used to supplement
their respective most directly comparable GAAP financial measures 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,
                                                           2021                  2020                2021                 2020
Housing revenues                                    $    1,436,032         

$ 909,978 $ 2,573,385 $ 1,981,788
Housing construction and land costs

                     (1,128,017)         

(744,151) (2,029,195) (1,629,632) Gross housing profit

                                      308,015             165,827              544,190              352,156
Add: Inventory-related charges (a)                             457               4,379                4,521               10,051
Housing gross profits excluding inventory-related
charges                                                    308,472             170,206              548,711              362,207
Add: Amortization of previously capitalized
interest (b)                                                39,600              28,746               72,096               63,321

Adjusted housing gross profits                      $      348,072          

$ 198,952 $ 620,807 $ 425,528

Housing gross profit margin as a percentage of
housing revenues                                              21.4   %            18.2  %              21.1  %              17.8  %
Housing gross profit margin excluding
inventory-related charges as a percentage of
housing revenues                                              21.5   %            18.7  %              21.3  %              18.3  %
Adjusted housing gross profit margin as a
percentage of housing revenues                                24.2   %            21.9  %              24.1  %              21.5  %


(a)  Represents inventory impairment and land option contract abandonment
charges associated with housing operations.
(b)  Represents the amortization of previously capitalized interest 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 (1) housing inventory impairment and land option contract abandonment
charges (as applicable) recorded during a given period and (2) amortization of
previously capitalized interest associated with housing
                                       37
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operations, 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, and the amortization of previously capitalized interest
associated with housing operations, 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, and amortization of previously capitalized interest associated with
housing operations. This financial measure assists us in making strategic
decisions regarding community location and product mix, product pricing and
construction pace.
Ratio of Net Debt to Capital. The following table reconciles our ratio of debt
to capital calculated in accordance with GAAP to the non-GAAP financial measure
of our ratio of net debt to capital (dollars in thousands):
                                       May 31,         November 30,
                                         2021              2020
Notes payable                       $ 1,747,447       $ 1,747,175
Stockholders' equity                  2,886,865         2,665,769
Total capital                       $ 4,634,312       $ 4,412,944
Ratio of debt to capital                   37.7  %           39.6  %

Notes payable                       $ 1,747,447       $ 1,747,175
Less: Cash and cash equivalents        (608,069)         (681,190)
Net debt                              1,139,378         1,065,985
Stockholders' equity                  2,886,865         2,665,769
Total capital                       $ 4,026,243       $ 3,731,754
Ratio of net debt to capital               28.3  %           28.6  %

The ratio of net debt to capital is a non-GAAP financial measure, which we calculate by dividing notes payable, net of cash and cash equivalents of housing construction, by capital (notes payable , net of cash and cash equivalents from home construction, plus equity). The most directly comparable GAAP financial measure is the debt-to-capital ratio. We believe that the ratio of net debt to capital is a relevant financial measure and useful for investors to understand the degree of leverage used in our operations.

                        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;
• 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; and
•repayments of borrowings under the Credit Facility.
We ended the 2021 second quarter with total liquidity of $1.40 billion,
including cash and cash equivalents and $787.6 million of available capacity
under the Credit Facility. Based on our financial position as of May 31, 2021,
and our positive business
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forecast for the remainder of 2021 as discussed below under "Outlook," we have
no material concerns related to our liquidity. While the ongoing COVID-19
pandemic creates potential liquidity risks, as discussed further below, 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 twelve months.
Our investments in land and land development increased 79% to $1.13 billion for
the six months ended May 31, 2021, compared to $633.5 million for the prior-year
period. Approximately 47% of our total investments for the six months ended
May 31, 2021 related to land acquisition, compared to approximately 41% in the
year-earlier period. While we made strategic investments in land and land
development in each of our homebuilding reporting segments during the first half
of 2021 and 2020, approximately 53% and 50%, respectively, of these investments
for each period were made in our West Coast homebuilding reporting segment.
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, 2021               November 30, 2020                 Variance
Segment           Lots             $            Lots             $            Lots            $
West Coast       21,176      $ 2,073,779       16,990      $ 1,928,500        4,186      $ 145,279
Southwest        12,687          776,456       12,290          688,807          397         87,649
Central          26,930          901,508       23,699          867,170        3,231         34,338
Southeast        16,665          520,823       14,059          413,005        2,606        107,818
Total            77,458      $ 4,272,566       67,038      $ 3,897,482       10,420      $ 375,084


The number and carrying value of lots we owned or controlled under land option
contracts and other similar contracts at May 31, 2021 increased from
November 30, 2020, primarily due to our investments in land and land development
in the 2021 first half and an increase in the number of homes under
construction. The number of lots in inventory as of May 31, 2021 included 12,024
lots under contract where the associated deposits were refundable at our
discretion, compared to 10,254 of such lots at November 30, 2020. Our lots
controlled under land option contracts and other similar contracts as a
percentage of total lots was 45% at May 31, 2021, compared to 40% at
November 30, 2020. 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.
Liquidity. The table below summarizes our total cash and cash equivalents, and
total liquidity (in thousands):
                                                                        May 31,            November 30,
                                                                          2021                 2020
Total cash and cash equivalents                                      $   608,069          $    681,190
Credit Facility commitment                                               800,000               800,000
Borrowings outstanding under the Credit Facility                               -                     -
Letters of credit outstanding under the Credit Facility                  (12,429)              (12,429)
Credit Facility availability                                             787,571               787,571
Total liquidity                                                      $ 1,395,640          $  1,468,761

The majority of our cash equivalents at May 31, 2021 and November 30, 2020 were invested in remunerated bank deposit accounts.

                                       39
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Capital Resources. Our notes payable consisted of the following (in thousands):
                                                      May 31,            November 30,
                                                        2021                 2020               Variance

Mortgages and land contracts due to land sellers
and other loans                                    $     4,067          $      4,667          $     (600)
Senior notes                                         1,743,380             1,742,508                 872
Total                                              $ 1,747,447          $  1,747,175          $      272


Our financial leverage, as measured by the ratio of debt to capital improved 190
basis points to 37.7% at May 31, 2021, compared to 39.6% at November 30, 2020.
Our ratio of net debt to capital (a calculation that is described above under
"Non-GAAP Financial Measures") at May 31, 2021 was 28.3%, compared to 28.6% at
November 30, 2020.
On June 9, 2021, we completed the underwritten public offering of $390.0 million
in aggregate principal amount of 4.00% Senior Notes due 2031 at 100% of their
aggregate principal amount and used a portion of the net proceeds to purchase,
pursuant to a tender offer that expired the previous day, $269.8 million in
aggregate principal amount of our outstanding $450.0 million of 7.00% Senior
Notes due 2021. We intend to use the remaining net proceeds together with cash
on hand to redeem the remainder of these notes at par value on September 15,
2021. We expect to recognize a charge of approximately $5.0 million for the
early extinguishment of debt in the 2021 third quarter. The recently completed
transactions, together with the planned redemption of the remaining $180.2
million in aggregate principal amount of 7.00% Senior Notes due 2021 on
September 15, 2021, will effectively extend the maturity of our senior notes by
more than two years and reduce our weighted average borrowing rate by
approximately 70 basis points. Further information regarding these transactions
is provided in Note 22 - Subsequent Events in the Notes to Consolidated
Financial Statements in this report.
LOC Facility. We had $42.4 million and $29.7 million of letters of credit
outstanding under the LOC Facility at May 31, 2021 and November 30, 2020,
respectively. Further information regarding our LOC Facility is provided in Note
15 - Notes Payable in the Notes to Consolidated Financial Statements in this
report.
Unsecured Revolving Credit Facility. We have an $800.0 million Credit Facility
that will mature on October 7, 2023. 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, 2021, we had no cash borrowings and $12.4 million of letters of credit
outstanding under the Credit Facility. We did not borrow under the Credit
Facility during the 2021 first half. The Credit Facility is further described in
Note 15 - Notes Payable in the Notes to Consolidated Financial Statements in
this report.
There have been no changes to the terms of the Credit Facility during the six
months ended May 31, 2021 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, 2020.
The covenants and other requirements under the Credit Facility 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 our actual levels or ratios (as
applicable) with respect to those covenants and other requirements, in each case
as of May 31, 2021:
Financial Covenants and Other Requirements                               Covenant Requirement                      Actual
Consolidated tangible net worth                                         >           $1.92 billion               $2.85 billion
Leverage Ratio                                                          <                .650                       .382
Interest Coverage Ratio (a)                                             >               1.500                       5.835
Minimum liquidity (a)                                                   >           $122.3 million             $608.1 million
Investments in joint ventures and non-guarantor
subsidiaries                                                            <           $675.5 million             $218.7 million

Borrowing base greater than the borrowing base debt (as defined)

                                                                             n/a                    $1.97 billion


(a)  Under the terms of the Credit Facility, we are required to maintain either
a minimum Interest Coverage Ratio or a minimum level of liquidity, but not both.
As of May 31, 2021, we met both the Interest Coverage Ratio and the minimum
liquidity requirements.
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
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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, 2021, we were in compliance with the applicable terms of all of
our covenants and other requirements under the Credit Facility, 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. There are no agreements that
restrict our payment of dividends other than the Credit Facility, which would
restrict our payment of certain dividends, such as cash dividends on our common
stock, if a default under the Credit Facility 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, 2021, we had outstanding mortgages and land contracts
due to land sellers and other loans payable in connection with such financing of
$4.1 million, secured primarily by the underlying property, which had an
aggregate carrying value of $13.2 million.
Credit Ratings. Our credit ratings are periodically reviewed by rating agencies.
In February 2021, Moody's Investors Service affirmed our corporate Ba3 credit
rating, and upgraded the rating outlook to positive from stable. In May 2021,
Moody's Investors Service upgraded our corporate rating to Ba2 from Ba3, and
changed the rating outlook to stable from positive.
Consolidated Cash Flows. The following table presents a summary of net cash used
in our operating, investing and financing activities (in thousands):
                                                                            

Six months ended May 31st,

                                                                             2021                    2020
Net cash provided by (used in):
Operating activities                                                 $     (18,067)              $  154,694
Investing activities                                                       (22,068)                 (18,310)
Financing activities                                                       (33,347)                 (15,209)
Net increase (decrease) in cash and cash equivalents                 $     (73,482)              $  121,175


Operating Activities. Generally, our net operating cash flows fluctuate
primarily based on changes in our inventories and our profitability. Our net
cash used in operating activities for the six months ended May 31, 2021 mainly
reflected a net increase in inventories of $379.9 million, partly offset by net
income of $240.4 million, a net increase in accounts payable, accrued expenses
and other liabilities of $44.8 million and a net decrease in receivables of $1.7
million. In the six months ended May 31, 2020, our net cash provided by
operating activities primarily reflected net income of $111.7 million, a $100.1
million net decrease in inventories and a $19.3 million net decrease in
receivables, partly offset by a net decrease in accounts payable, accrued
expenses and other liabilities of $117.3 million.
Investing Activities. In the six months ended May 31, 2021, our uses of cash
included $18.3 million for net purchases of property and equipment and $6.3
million for contributions to unconsolidated joint ventures. These uses of cash
were partially offset by a $2.5 million return of investments in unconsolidated
joint ventures. In the six months ended May 31, 2020, the net cash used for
investing activities reflected $15.2 million for net purchases of property and
equipment and $3.6 million for contributions to unconsolidated joint ventures.
These uses of cash were partially offset by a $.5 million return of investments
in unconsolidated joint ventures.
Financing Activities. In the six months ended May 31, 2021, net cash was used
for dividend payments on our common stock of $27.8 million, tax payments
associated with stock-based compensation awards of $8.5 million and payments on
mortgages and land contracts due to land sellers and other loans of $.6 million.
The cash used was partially offset by $3.5 million of issuances of common stock
under employee stock plans. In the six months ended May 31, 2020, net cash was
used for dividend payments on our common stock of $16.3 million, tax payments
associated with stock-based compensation awards of $6.2 million and payments on
mortgages and land contracts due to land sellers and other loans of $1.1
million. The cash used was partially offset by $8.4 million of issuances of
common stock under employee stock plans.
Dividends. In the three-month period ended May 31, 2021, our board of directors
declared, and we paid, a quarterly cash dividend on our common stock of $.15 per
share. In the three-month period ended May 31, 2020, our board of directors
declared, and we paid, a quarterly cash dividend on our common stock of $.09 per
share. Quarterly cash dividends declared and paid during the six-month periods
ended May 31, 2021 and 2020 totaled $.30 per share and $.18 per share of common
stock,
                                       41
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respectively. The declaration and payment of future cash dividends on our common
stock, whether at current levels or at all, are at the discretion of our board
of directors and depend upon, among other things, our expected future earnings,
cash flows, capital requirements, access to external financing, debt structure
and any adjustments thereto, operational and financial investment strategy and
general financial condition, as well as general business conditions.
While the ongoing COVID-19 pandemic has created uncertainty as to general
economic conditions for the remainder of 2021, 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 2021, 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 to mature or expire. However, with the uncertainty surrounding the
COVID-19 pandemic, which could materially and negatively affect our business and
the housing market, our ability to engage in such transactions may be
constrained by volatile or tight economic, capital, credit and/or financial
market conditions, as well as moderated investor and/or lender interest or
capacity 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. Further
discussion of the potential impacts from the COVID-19 pandemic on our capital
resources and liquidity is provided in the "Risk Factors" section of our Annual
Report on Form 10-K for the year ended November 30, 2020.
                  Supplemental Guarantor Financial Information
As of May 31, 2021, we had $1.75 billion in aggregate principal amount of
outstanding senior notes and no borrowings outstanding under the Credit
Facility. Our obligations to pay principal, premium, if any, and interest on the
senior notes and borrowings, if any, under the Credit Facility are guaranteed on
a joint and several basis by certain of our subsidiaries ("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 15 - Notes
Payable in the Notes to Consolidated Financial Statements in this report for
additional information regarding the terms of our senior notes and the Credit
Facility.
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, 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 and the Credit
Facility 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.
                                       42
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                                                     May 31,        November 30,
Summarized Balance Sheet Data (in thousands)           2021             2020
Assets
Cash                                               $  562,737      $     644,157
Inventories                                         3,737,116          3,464,674
Amounts due from Non-Guarantor Subsidiaries           491,551            

394,226

Total assets                                        5,353,202          

5 102 197

Liabilities and Stockholders' Equity
Notes payable                                       1,743,780          

1,743,508

Amounts due to Non-Guarantor Subsidiaries             241,642            221,330
Total liabilities                                   2,639,670          2,589,971
Stockholders' equity                                2,713,532          2,512,226


                                                                                  Six Months Ended
Summarized Statement of Operations Data (in thousands)                              May 31, 2021
Revenues                                                                          $   2,319,864
Construction and land costs                                                          (1,817,515)
Selling, general and administrative expenses                                           (247,412)
Interest income from non-guarantor subsidiary                                            16,188
Pretax income                                                                           272,018
Net income                                                                              221,018

     Off-Balance Sheet Arrangements, Contractual Obligations and Commercial
                                  Commitments
Unconsolidated Joint Ventures. As discussed in Note 9 - Investments in
Unconsolidated Joint Ventures in the Notes to Consolidated Financial Statements
in this report, we have investments in unconsolidated joint ventures in various
markets where our homebuilding operations are located. None of our
unconsolidated joint ventures had outstanding debt at May 31, 2021 or
November 30, 2020.
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, 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. 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, 2021, we estimate the remaining purchase price to be paid
during each year ending November 30 would be as follows: 2021 - $727.5 million;
2022 - $554.8 million; 2023 - $178.0 million; 2024 - $50.3 million; 2025 - $78.6
million; and thereafter - $0.
Contractual Obligations. There have been no significant changes in our
contractual obligations 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, 2020.

                                       43
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                          Critical Accounting Policies
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, 2021 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, 2020.
                        Recent Accounting Pronouncements

Recent accounting positions are discussed in Note 1 – Basis of presentation and main accounting policies of the notes to the consolidated financial statements of this report.

                                    Outlook
We believe long-term housing market fundamentals supporting demand remain
positive. Most notably, demographic trends are favorable especially with respect
to first-time homebuyers, with over 70 million millennials in their prime
homebuying years, followed by a large Generation Z segment now entering its
homebuying age. We believe our Built-to-Order model, which provides our buyers a
significant degree of personalization and choice, as well as the industry
leading energy efficiency of our homes, including our commitment to building
ENERGY STAR® certified homes and solar homes that help lower the total cost of
homeownership, gives us a meaningful and distinct competitive advantage over
other homebuilders, and both resale and rental homes, particularly in serving
first-time homebuyers. Mortgage interest rates are at relatively low levels and
housing affordability remains generally favorable.
For the remainder of 2021, we plan to continue to execute on our
customer-centric, personalized approach to homebuilding, which we believe
contributed to our robust year-over-year net orders in the 2021 first half, and
rebuild our community count to support future growth. In addition, we expect to
continue to focus on aligning our housing starts with our net orders, and
managing our construction cycle times, in order to deliver our homes in backlog
and meet our expected delivery volumes for the year. While we anticipate
continuing strong demand will lead to elevated levels of community close-outs in
the 2021 second half, we expect our increased investments in land and land
development in recent quarters and planned new community openings will lead to a
sequential increase in our ending community count in the remaining quarters of
2021. We expect double-digit year-over-year community count expansion for our
2022 full year. Our present outlook for the 2021 third quarter and full year is
as follows:
2021 Third Quarter
•We expect to generate housing revenues in the range of $1.50 billion to $1.58
billion, compared to $979.1 million in the year-earlier quarter, and anticipate
our average selling price to be approximately $420,000, representing a
year-over-year increase of 9%.
•We expect our homebuilding operating income as a percentage of revenues,
assuming no inventory-related charges, to range from 11.7% to 12.1%, compared to
9.6% for the prior-year quarter.
•We expect a sequential increase in our housing gross profit margin to
approximately 21.7%, assuming no inventory-related charges. This metric was
20.6% for the corresponding 2020 quarter.
•We expect our selling, general and administrative expenses as a percentage of
housing revenues to be approximately 9.8%, compared to 11.0% for the 2020 third
quarter.
•We expect to recognize a charge of approximately $5.0 million for the early
extinguishment of debt.
•We expect our ending community count will increase sequentially by
approximately 5%.
2021 Full Year
•We expect our full year deliveries to be between 14,000 and 14,500 homes.
•We expect our housing revenues to be in the range of $5.90 billion to $6.10
billion, compared to $4.15 billion in 2020, and anticipate our average selling
price will be in the range of $415,000 to $425,000, compared to $388,900 in
2020.
•We expect our homebuilding operating income as a percentage of revenues,
assuming no inventory-related charges, will be in the range of 11.5% to 12.0%,
compared to 8.4% for 2020, which excluded severance charges of $6.7 million
associated with pandemic-related workforce reductions.
                                       44
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•We expect our housing gross profit margin to be in the range of 21.5% to 22.0%,
assuming no inventory-related charges, versus 19.6% for 2020, representing a 215
basis-point improvement at the mid-point.
•We expect our selling, general and administrative expenses as a percentage of
housing revenues to be in the range of 9.8% to 10.2%, compared to 11.2%,
excluding severance charges, in the prior year.
•We expect an effective tax rate of approximately 20%.
•We expect our return on equity will be approximately 20%, an improvement of
more than 800 basis points compared to 11.8% for 2020.
We continue to believe we are well positioned for the remainder of 2021 due to,
among other things, our strong backlog, planned new community openings,
investments in land and land development and current positive economic and
demographic trends, to varying degrees in many of our served markets. However,
our industry continues to experience labor and supply constraints and rising and
volatile raw material prices, particularly for lumber. Demand for our products
could also be substantially diminished if the public health effort to contain
the virulence and spread of COVID-19 continues for a prolonged period during the
rest of the year or if there is a material rise in inflation. If these issues
worsen in the remainder of 2021, our business and our ability to generate
positive growth could be negatively impacted.
                           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. 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, particularly lumber;
•consumer and producer price inflation;
•changes in interest rates;
•our debt level, including our ratio of debt to capital, and our ability to
adjust our debt level and maturity schedule;
                                       45
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•our compliance with the terms of the Credit Facility;
•volatility in the market price of our common stock;
•home selling prices, including our homes' selling prices, increasing at a
faster rate than 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;
•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 CARES Act, relief provisions for outstanding
mortgage loans and any extensions or broadening thereof, 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;
•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
develop acquired land parcels and open new home communities;
•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 residential mortgage loans and mortgage
banking services;
•the performance of mortgage lenders to our homebuyers;
•the performance of KBHS;
•information technology failures and data security breaches;
•an epidemic or pandemic (such as the outbreak and worldwide spread of
COVID-19), and the control response measures that international, federal, state
and local governments, agencies, law enforcement and/or health authorities
implement to
                                       46

————————————————– ——————————

address it, which may (as with COVID-19) precipitate or exacerbate one or more
of the above-mentioned and/or other risks, and significantly disrupt or prevent
us from operating our business in the ordinary course for an extended period;
•widespread protests and civil unrest, whether due to political events, efforts
to institute law enforcement and other social and political reforms, and the
impacts of implementing or failing to implement any such reforms, or otherwise;
and
•other events outside of our control.
Please see our Annual Report on Form 10-K for the year ended November 30, 2020
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, 2020.
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, 2020.

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