SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

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

Name of each exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

There were ~~90,544,338~~92,143,095 shares of the registrant’s common stock, par value $1.00 per share, outstanding on ~~August~~May 31, ~~2020~~.2021. The registrant’s grantor stock ownership trust held an additional ~~7,317,336~~6,705,247 shares of the registrant’s common stock on that date.

KB HOME

FORM 10-Q

INDEX


			Page Number
PART I. FINANCIAL INFORMATION

			~~Page~~ ~~Number~~
~~PART I. FINANCIAL INFORMATION~~

Item 1. Financial Statements

Consolidated Statements of Operations - Three Months and ~~Nine~~Six Months Ended ~~August~~May 31, ~~2020~~2021 and ~~2019~~2020			3

Consolidated Balance Sheets - ~~August~~May 31, ~~2020~~2021 and November 30, ~~2019~~2020			4

Consolidated Statements of Cash Flows - ~~Nine~~ Six Months Ended ~~August~~May 31, ~~2020~~2021 and ~~2019~~2020			5

Notes to Consolidated Financial Statements			6

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			3326

Item 3. Quantitative and Qualitative Disclosures About Market Risk			5247

Item 4. Controls and Procedures			5247

PART II. OTHER INFORMATION

Item 1. Legal Proceedings			5347

Item 1A. Risk Factors			5347

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			5447

Item 6. Exhibits			5548

SIGNATURES			5649

PART I. FINANCIAL INFORMATION


~~Item 1.~~	~~Financial Statements~~

Item 1.Financial Statements

KB HOME

CONSOLIDATED STATEMENTS OF OPERATIONS

(In Thousands, Except Per Share Amounts – Unaudited)


	Three Months Ended August 31,						Nine Months Ended August 31,							Three Months Ended May 31,				Six Months Ended May 31,
	2020			2019			2020			2019				2021		2020		2021		2020
Total revenues	$	999,013		$	1,160,786		$	2,988,918		$	2,994,072		Total revenues	$	1,440,892	$	913,970	$	2,582,630	$	1,989,905
Homebuilding:													Homebuilding:
Revenues	$	995,148		$	1,156,855		$	2,977,810		$	2,984,314		Revenues	$	1,436,035	$	910,280	$	2,574,043	$	1,982,662
Construction and land costs	(798,495		)	(943,754		)	(2,429,001		)	(2,458,353		)	Construction and land costs	(1,128,018)		(744,453)		(2,029,927)		(1,630,506)
Selling, general and administrative expenses	(107,710		)	(127,626		)	(348,082		)	(357,048		)	Selling, general and administrative expenses	(145,115)		(114,238)		(267,120)		(240,372)
Operating income	88,943			85,475			200,727			168,913			Operating income	162,902		51,589		276,996		111,784
Interest income	786			201			2,163			1,745			Interest income	241		442		894		1,377

Equity in income (loss) of unconsolidated joint ventures	1,922			(384		)	11,981			(1,159		)	Equity in income (loss) of unconsolidated joint ventures	(127)		8,154		177		10,059
Homebuilding pretax income	91,651			85,292			214,871			169,499			Homebuilding pretax income	163,016		60,185		278,067		123,220
Financial services:													Financial services:
Revenues	3,865			3,931			11,108			9,758			Revenues	4,857		3,690		8,587		7,243
Expenses	(1,056		)	(1,003		)	(2,901		)	(3,067		)	Expenses	(1,253)		(883)		(2,453)		(1,845)
Equity in income of unconsolidated joint ventures	6,855			3,716			14,874			7,018			Equity in income of unconsolidated joint ventures	7,044		4,797		13,014		8,019
Financial services pretax income	9,664			6,644			23,081			13,709			Financial services pretax income	10,648		7,604		19,148		13,417
Total pretax income	101,315			91,936			237,952			183,208			Total pretax income	173,664		67,789		297,215		136,637
Income tax expense	(22,900		)	(23,800		)	(47,800		)	(37,600		)	Income tax expense	(30,300)		(15,800)		(56,800)		(24,900)
Net income	$	78,415		$	68,136		$	190,152		$	145,608		Net income	$	143,364	$	51,989	$	240,415	$	111,737
Earnings per share:													Earnings per share:
Basic	$	.86		$	.77		$	2.09		$	1.65		Basic	$	1.55	$	.57	$	2.60	$	1.23
Diluted	$	.83		$	.73		$	2.02		$	1.55		Diluted	$	1.50	$	.55	$	2.52	$	1.19
Weighted average shares outstanding:													Weighted average shares outstanding:
Basic	90,535			88,262			90,292			87,630			Basic	92,087		90,493		91,904		90,169
Diluted	94,105			92,842			93,788			94,032			Diluted	95,379		93,472		95,143		93,628

See accompanying notes.

(In Thousands – Unaudited)

See accompanying notes.

KB HOME

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. Basis of Presentation and Significant Accounting Policies

Basis of Presentation. The accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and the rules and regulations of the Securities and Exchange Commission (“SEC”). Accordingly, certain information and footnote disclosures normally included in the annual financial statements prepared in accordance with GAAP have been condensed or omitted.

In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments (consisting of normal recurring adjustments) necessary to present fairly our consolidated financial position as of ~~August~~May 31, ~~2020,~~2021, the results of our consolidated operations for the three months and ~~nine~~six months ended ~~August~~May 31, ~~2020~~2021 and ~~2019,~~2020, and our consolidated cash flows for the ~~nine~~six months ended ~~August~~May 31, ~~2020~~2021 and ~~2019.~~2020. The results of our consolidated operations for the three months and ~~nine~~six months ended ~~August~~May 31, ~~2020~~2021 are not necessarily indicative of the results to be expected for the full year due to seasonal variations in operating results and other factors. The consolidated balance sheet at November 30, ~~2019~~2020 has been taken from the audited consolidated financial statements as of that date. These unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements for the year ended November 30, ~~2019,~~2020, which are contained in our Annual Report on Form 10-K for that period.

Unless the context indicates otherwise, the terms “we,” “our,” and “us” used in this report refer to KB Home, a Delaware corporation, and its subsidiaries.

~~Impact of COVID-19 Pandemic on Consolidated Financial Statements.~~ The outbreak of the 2019 coronavirus disease (“COVID-19”), which was declared a global pandemic by the World Health Organization on March 11, 2020, and the related responses by public health and governmental authorities to contain and combat its outbreak and spread (“COVID-19 control responses”) severely impacted the global and national economies, the housing market and our business during our second quarter. Operationally, we temporarily closed our sales centers, model homes and design studios to the public in mid-March and shifted to virtual sales tools and appointment-only personalized home sales processes, where permitted. These steps, along with the negative prevailing business conditions due to the pandemic and restrictive COVID-19 control responses, moderated our order pace significantly in the second quarter. In addition, home purchase cancellations increased considerably, largely reflecting our proactive efforts to assure a backlog of qualified homebuyers amid the pandemic-induced economic downturn. These two factors contributed to a sizable reduction in our 2020 second quarter net orders, and we entered the third quarter with the number of homes in backlog at the beginning of the quarter (“beginning backlog”) down 14% year over year. Further, our construction activities were restricted in many jurisdictions, and completely shut down in some of them, and together with the reduced availability or capacity of some municipal and private services necessary to build and deliver homes, we experienced home delivery delays during most of the second quarter, which tempered our revenues for that period.

Since the easing of public health restrictions in our served markets beginning in May 2020, all of our communities have been open to walk-in traffic, following appropriate safety protocols and applicable public health guidelines, and our net orders started to rebound, improving significantly each month on a year-over-year basis as the third quarter progressed. This positive momentum resulted in our net orders for the 2020 third quarter increasing to their highest level of any quarter since 2007. Although housing market conditions in the 2020 third quarter improved significantly from the prior quarter, our deliveries and revenues for the period were tempered primarily by the negative impact that COVID-19 and the related COVID-19 control responses had on our 2020 second quarter.

While we limited our land investments during the 2020 second quarter and most of the 2020 third quarter to preserve cash and liquidity due to the uncertainty surrounding the COVID-19 pandemic, given the sustained strong housing demand in the third quarter, we have resumed land acquisition and development activities. In the 2020 second quarter, we also curtailed our overhead expenditures, partly through workforce realignment and reductions. As a result, our selling, general and administrative expenses for the nine months ended August 31, 2020 include severance charges of $6.7 million that we recorded in the 2020 second quarter. Our consolidated financial statements and the notes thereto in this report reflect the foregoing course of unprecedented events and the actions we took in the early stages of the pandemic.

Use of Estimates. The preparation of financial statements in conformity with GAAP requires management to make estimates and judgments that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from these estimates, particularly given the significant social and economic disruptions and uncertainties associated with the ongoing COVID-19 pandemic and the COVID-19 control responses, and such differences may be material.those estimates.

Cash and Cash Equivalents. We consider all highly liquid short-term investments purchased with an original maturity of three months or less to be cash equivalents. Our cash equivalents totaled ~~$594.5~~$378.5 million at ~~August~~May 31, ~~2020~~2021 and ~~$302.5~~$508.5 million at November 30, ~~2019~~.2020. At ~~August~~May 31, ~~2020~~2021 and November 30, ~~2019,~~2020, the majority of our cash and cash equivalents was invested in interest-bearing bank deposit accounts.

Comprehensive Income. Our comprehensive income was ~~$78.4~~$143.4 million for the three months ended ~~August~~May 31, ~~2020~~2021 and ~~$68.1~~$52.0 million for the three months ended ~~August~~May 31, ~~2019.~~2020. For the ~~nine~~six months ended ~~August~~May 31, ~~2020~~2021 and ~~2019,~~2020, our comprehensive income was ~~$190.2~~$240.4 million and ~~$145.6~~$111.7 million, respectively. Our comprehensive income for each of the three-month and ~~nine-month~~six-month periods ended ~~August~~May 31, ~~2020~~2021 and ~~2019~~2020 was equal to our net income for the respective periods.

Adoption of New Accounting ~~Pronouncements~~Pronouncement. In ~~February~~June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2016-02, “Leases (Topic 842)” (“ASU 2016-02”), which requires leases with original lease terms of more than 12 months to be recorded on the balance sheet. On December 1, 2019, we adopted ASU 2016-02 and its related amendments (collectively, “ASC 842”) using the modified retrospective method. Results for reporting periods beginning December 1, 2019 and after are presented under ASC 842, while results for prior reporting periods have not been adjusted and continue to be presented under the accounting guidance in effect for those periods. We elected the package of practical expedients permitted under the transition guidance, which allowed us to carry forward our original assessment of (1) whether contracts are or contain leases, (2) lease classification and (3) initial direct costs. We also elected the practical expedient that allows lessees the option to account for lease and non-lease components together as a single component for all classes of underlying assets. The adoption of ASC 842 resulted in our recording lease right-of-use assets and lease liabilities of $31.2 million on our consolidated balance sheet as of December 1, 2019. Lease right-of-use assets are classified within other assets on our consolidated balance sheet, and lease liabilities are classified within accrued expenses and other liabilities. At the December 1, 2019 adoption date, we also recorded a cumulative effect adjustment to increase beginning retained earnings by $1.5 million, net of tax, to recognize a previously deferred gain on our sale and leaseback of an office building in 2019. The adoption of ASC 842 did not materially impact our consolidated statements of operations or consolidated cash flows. Further information regarding our leases is provided in Note 13 – Leases.

In February 2018, the FASB issued Accounting Standards Update No. 2018-02, “Income Statement — Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income” (“ASU 2018-02”), which allows a reclassification from accumulated other comprehensive income (loss) to retained earnings for stranded tax effects resulting from the 2017 Tax Cuts and Jobs Act (“TCJA”), and requires certain disclosures about stranded tax effects. We adopted ASU 2018-02 effective December 1, 2019 and elected to reclassify the income tax effects of the TCJA from accumulated other comprehensive loss to retained earnings, which resulted in an increase of $1.6 million to both retained earnings and accumulated other comprehensive loss, with no impact on total stockholders’ equity. Amounts for prior reporting periods have not been adjusted and continue to be presented under the accounting guidance in effect for those periods.

~~Recent Accounting Pronouncements Not Yet Adopted. In June 2016, the FASB~~ issued Accounting Standards Update No. 2016-13, “Financial Instruments — Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” (“ASU 2016-13”), which changes the impairment model for most financial assets and certain other instruments from an incurred loss approach to a new expected credit loss methodology. On December 1, 2020, we adopted ASU 2016-13 ~~is effective~~using the modified retrospective method and recorded a cumulative effect adjustment to decrease beginning retained earnings by $.2 million, net of tax, to establish an allowance for ~~us beginning December 1, 2020. We are currently evaluating the potential impact of adopting this guidance~~credit losses for certain receivables on our consolidated ~~financial statements.~~balance sheet. The adoption of ASU 2016-13 did not materially impact our consolidated statements of operations or cash flows.

Recent Accounting Pronouncements Not Yet Adopted. In December 2019, the FASB issued Accounting Standards Update No. 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes” (“ASU 2019-12”), which simplifies the accounting for income taxes, eliminates certain exceptions within Accounting Standards Codification Topic 740, “Income Taxes” (“ASC 740”), and clarifies certain aspects of ASC 740 to promote consistency among reporting entities. ASU 2019-12 is effective for us beginning December 1, 2021, with early adoption permitted. Most amendments within ASU 2019-12 are required to be applied on a prospective basis, while certain amendments must be applied on a retrospective or modified retrospective basis. We are currently evaluating the potential impact of adopting this guidance on our consolidated financial statements.

Reclassifications. Certain amounts in our consolidated financial statements of prior years have been reclassified to conform to the current period presentation.


2.	~~Segment Information~~

2.Segment Information

We have identified 5 operating reporting segments, comprised of 4 homebuilding reporting segments and 1 financial services reporting segment. As of ~~August~~May 31, ~~2020~~,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~~2019 coronavirus disease (“COVID-19”) control responses:

~~West Coast: California and Washington~~

~~Southwest: Arizona and Nevada~~

~~Central: Colorado and Texas~~

~~Southeast:~~


West Coast:			California and Washington
Southwest:			Arizona and Nevada
Central:			Colorado and Texas
Southeast:			Florida and North Carolina

Our homebuilding reporting segments are engaged in the acquisition and development of land primarily for residential purposes and offer a wide variety of homes that are designed to appeal to first-time, first move-up and active adult homebuyers. Our homebuilding operations generate most of their revenues from the delivery of completed homes to homebuyers. They also earn revenues from the sale of land.

Our financial services reporting segment offers property and casualty insurance and, in certain instances, earthquake, flood and personal property insurance to our homebuyers in the same markets as our homebuilding reporting segments, and provides title services in the majority of our markets located within our Southwest, Central and Southeast homebuilding reporting segments. Our financial services reporting segment earns revenues primarily from insurance commissions and from the provision of title services.

We offer mortgage banking services, including residential consumer mortgage loan (“mortgage loan”) originations, to our homebuyers indirectly through KBHS Home Loans, LLC (“KBHS”), an unconsolidated joint venture we formed with Stearns Ventures, LLC (“Stearns”). We and Stearns each have a 50.0% ownership interest, with Stearns providing management oversight of KBHS’ operations. On March 1, 2021, Guaranteed Rate, Inc. acquired Stearns’ parent company. There have been no significant changes with respect to Stearns or its operations since the transaction was completed. The financial services reporting segment is separately reported in our consolidated financial statements.

Our reporting segments follow the same accounting policies used for our consolidated financial statements. The results of each reporting segment are not necessarily indicative of the results that would have occurred had the segment been an independent, stand-alone entity during the periods presented, nor are they indicative of the results to be expected in future periods.

The following tables present financial information relating to our homebuilding reporting segments (in thousands):


	Three Months Ended May 31,				Six Months Ended May 31,
	2021		2020		2021		2020
Revenues:
West Coast	$	625,690	$	331,882	$	1,140,206	$	816,379
Southwest	258,061		175,251		445,746		366,569
Central	390,555		284,193		700,263		567,706
Southeast	161,729		118,954		287,828		232,008
Total	$	1,436,035	$	910,280	$	2,574,043	$	1,982,662

Pretax income (loss):
West Coast	$	76,630	$	27,820	$	135,261	$	61,849
Southwest	48,909		24,891		81,964		57,003
Central	56,283		26,896		97,275		49,574
Southeast	18,861		6,629		30,976		9,259
Corporate and other	(37,667)		(26,051)		(67,409)		(54,465)
Total	$	163,016	$	60,185	$	278,067	$	123,220

Three Months Ended August 31, Nine Months Ended August 31,
2020 2019 2020 2019
Revenues:
West Coast $ 379,025
$ 497,654
$ 1,195,404
$ 1,194,728
Southwest 223,096
180,238
589,665
522,721
Central 297,022
326,058
864,728
874,730
Southeast 96,005
152,905
328,013
392,135
Total $ 995,148
$ 1,156,855
$ 2,977,810
$ 2,984,314

Pretax income (loss):
West Coast $ 34,353
$ 43,775
$ 96,202
$ 86,480
Southwest 39,295
26,366
96,298
76,433
Central 35,422
34,417
84,996
80,199
Southeast 5,986
5,272
15,245
5,316
Corporate and other (23,405 ) (24,538 ) (77,870 ) (78,929 )
Total $ 91,651
$ 85,292
$ 214,871
$ 169,499


	Three Months Ended May 31,				Six Months Ended May 31,
	2021		2020		2021		2020
Inventory impairment and land option contract abandonment charges:
West Coast	$	117	$	672	$	3,918	$	5,064
Southwest	165		0		293		171
Central	70		3,452		70		4,436
Southeast	105		255		240		380
Total	$	457	$	4,379	$	4,521	$	10,051


										May 31, 2021		November 30, 2020
	Three Months Ended August 31,				Nine Months Ended August 31,
	2020		2019		2020		2019
Inventory impairment and land option contract abandonment charges:
Assets:									Assets:
West Coast	$	5,546	$	5,065	$	10,610	$	12,148	West Coast	$	2,265,852	$	2,057,362
Southwest	0		126		171		408		Southwest	854,193		738,765
Central	1,084		0		5,520		366		Central	1,053,215		998,612
Southeast	258		60		638		221		Southeast	555,716		448,388
Corporate and other									Corporate and other	852,111		1,077,113
Total	$	6,888	$	5,251	$	16,939	$	13,143	Total	$	5,581,087	$	5,320,240

3. Financial Services

August 31,
2020 November 30,
2019
Assets:
West Coast $ 1,916,237
$ 1,925,192
Southwest 699,777
674,310
Central 977,535
1,035,563
Southeast 417,349
441,451
Corporate and other 1,131,768
900,570
Total $ 5,142,666
$ 4,977,086

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


	Three Months Ended May 31,				Six Months Ended May 31,
	2021		2020		2021		2020
Revenues
Insurance commissions	$	2,432	$	2,030	$	4,280	$	3,983
Title services	2,425		1,660		4,307		3,260

Total	4,857		3,690		8,587		7,243

Expenses
General and administrative	(1,253)		(883)		(2,453)		(1,845)
Operating income	3,604		2,807		6,134		5,398
Equity in income of unconsolidated joint ventures	7,044		4,797		13,014		8,019
Pretax income	$	10,648	$	7,604	$	19,148	$	13,417

Three Months Ended August 31, Nine Months Ended August 31,
2020 2019 2020 2019
Revenues
Insurance commissions $ 2,150
$ 2,224
$ 6,133
$ 5,342
Title services 1,715
1,707
4,975
4,410
Interest income 0
0
0
6
Total 3,865
3,931
11,108
9,758
Expenses
General and administrative (1,056 ) (1,003 ) (2,901 ) (3,067 )
Operating income 2,809
2,928
8,207
6,691
Equity in income of unconsolidated joint ventures 6,855
3,716
14,874
7,018
Pretax income $ 9,664
$ 6,644
$ 23,081
$ 13,709


	May 31, 2021		November 30, 2020
Assets
Cash and cash equivalents	$	978	$	1,339
Receivables	1,581		1,988
Investments in unconsolidated joint ventures	12,492		10,978
Other assets (a)	22,795		21,897
Total assets	$	37,846	$	36,202
Liabilities
Accounts payable and accrued expenses	$	1,942	$	2,629
Total liabilities	$	1,942	$	2,629

August 31,
2020 November 30,
2019
Assets
Cash and cash equivalents $ 1,093
$ 1,044
Receivables 1,414
2,232
Investments in unconsolidated joint ventures 10,298
14,374
Other assets (a) 21,956
20,746
Total assets $ 34,761
$ 38,396
Liabilities
Accounts payable and accrued expenses $ 2,065
$ 2,058
Total liabilities $ 2,065
$ 2,058

(a)Other assets at May 31, 2021 and November 30, 2020 included $22.5 million and $21.5 million, respectively, of contract assets for estimated future renewal commissions.

4. Earnings Per Share

Basic and diluted earnings per share were calculated as follows (in thousands, except per share amounts):

Three Months Ended August 31, Nine Months Ended August 31,
2020 2019 2020 2019
Numerator:
Net income $ 78,415
$ 68,136
$ 190,152
$ 145,608
Less: Distributed earnings allocated to nonvested restricted stock (42 ) (48 ) (129 ) (76 )
Less: Undistributed earnings allocated to nonvested restricted stock (360 ) (365 ) (875 ) (825 )
Numerator for basic earnings per share 78,013
67,723
189,148
144,707
Effect of dilutive securities:
Interest expense and amortization of debt issuance costs associated with convertible senior notes, net of taxes 0
0
0
541
Add: Undistributed earnings allocated to nonvested restricted stock 360
365
875
825
Less: Undistributed earnings reallocated to nonvested restricted stock (346 ) (354 ) (843 ) (769 )
Numerator for diluted earnings per share $ 78,027
$ 67,734
$ 189,180
$ 145,304

Denominator:
Weighted average shares outstanding — basic 90,535
88,262
90,292
87,630
Effect of dilutive securities:
Share-based payments 3,570
4,580
3,496
4,501
Convertible senior notes 0
0
0
1,901
Weighted average shares outstanding — diluted 94,105
92,842
93,788
94,032
Basic earnings per share $ .86
$ .77
$ 2.09
$ 1.65
Diluted earnings per share $ .83
$ .73
$ 2.02
$ 1.55


	Three Months Ended May 31,				Six Months Ended May 31,
	2021		2020		2021		2020
Numerator:
Net income	$	143,364	$	51,989	$	240,415	$	111,737
Less: Distributed earnings allocated to nonvested restricted stock	(63)		(43)		(126)		(87)
Less: Undistributed earnings allocated to nonvested restricted stock	(587)		(231)		(968)		(511)
Numerator for basic earnings per share	142,714		51,715		239,321		111,139
Effect of dilutive securities:

Add: Undistributed earnings allocated to nonvested restricted stock	587		231		968		511
Less: Undistributed earnings reallocated to nonvested restricted stock	(567)		(223)		(935)		(492)
Numerator for diluted earnings per share	$	142,734	$	51,723	$	239,354	$	111,158



Denominator:
Weighted average shares outstanding — basic	92,087		90,493		91,904		90,169
Effect of dilutive securities:
Share-based payments	3,292		2,979		3,239		3,459
Weighted average shares outstanding — diluted	95,379		93,472		95,143		93,628
Basic earnings per share	$	1.55	$	.57	$	2.60	$	1.23
Diluted earnings per share	$	1.50	$	.55	$	2.52	$	1.19

We compute earnings per share using the two-class method, which is an allocation of earnings between the holders of common stock and a company’s participating security holders. Our outstanding nonvested shares of restricted stock contain non-forfeitable rights to dividends and, therefore, are considered participating securities for purposes of computing earnings per share pursuant to the two-class method. We had no other participating securities at ~~August~~May 31, ~~2020~~2021 or ~~2019.~~2020.

For the three-month and ~~nine-month~~six-month periods ended ~~August~~May 31, 2021 and 2020, 0 outstanding stock options were excluded from the diluted earnings per share calculation. For the three-month and nine-month periods ended August 31, 2019, outstanding stock options to purchase .6 million shares of our common stock were excluded from the diluted earnings per share calculation because the effect of their inclusion would be antidilutive. The diluted earnings per share calculation for the nine months ended August 31, 2019 included the dilutive effect of the $230.0 million in aggregate principal amount of our 1.375% convertible senior notes due 2019 (“1.375% Convertible Senior Notes due 2019”) based on the number of days they were outstanding during the period. We repaid these notes at their February 1, 2019 maturity.

calculations. Contingently issuable shares associated with outstanding performance-based restricted stock units (each, a “PSU”) were not included in the basic earnings per share calculations for the periods presented as the applicable vesting conditions had not been satisfied.

Receivables consisted of the following (in thousands):


	August 31, 2020			November 30, 2019				May 31, 2021		November 30, 2020
Due from utility companies, improvement districts and municipalities	$	122,472		$	128,047		Due from utility companies, improvement districts and municipalities	$	124,002	$	105,700
Recoveries related to self-insurance and other legal claims	69,694			80,729			Recoveries related to self-insurance and other legal claims	80,346		82,018
Refundable deposits and bonds							Refundable deposits and bonds	12,477		10,897
Income taxes receivable	39,311			0			Income taxes receivable	2,012		41,323
Refundable deposits and bonds	9,419			10,925

Other	36,439			37,846			Other	57,511		40,020
Subtotal	277,335			257,547			Subtotal	276,348		279,958
Allowance for doubtful accounts	(7,684		)	(8,492		)	Allowance for doubtful accounts	(5,268)		(7,299)
Total	$	269,651		$	249,055		Total	$	271,080	$	272,659

Inventories consisted of the following (in thousands):

August 31,
2020 November 30,
2019
Homes completed or under construction $ 1,316,467
$ 1,340,412
Land under development 2,234,992
2,213,713
Land held for future development or sale (a) 119,670
150,477
Total $ 3,671,129
$ 3,704,602


	May 31, 2021		November 30, 2020
Homes completed or under construction	$	1,840,982	$	1,437,911
Land under development	2,431,584		2,459,571
Total	$	4,272,566	$	3,897,482

~~(a)~~ Land under development included land held for future development and land held for sale ~~totaled~~of $46.5 million and $.6 million, respectively, at May 31, 2021 and $74.0 million and $1.3 million, ~~at August 31, 2020 and $19.3 million~~respectively, at November 30, ~~2019.~~2020.

Interest is capitalized to inventories while the related communities or land parcels are being actively developed and until homes are completed or the land is available for immediate sale. Capitalized interest is amortized to construction and land costs as the related inventories are delivered to homebuyers or land buyers (as applicable). ~~For~~In the case of land held for future development orand land held for sale, applicable interest is expensed as incurred.

Our interest costs were as follows (in thousands):


	Three Months Ended May 31,				Six Months Ended May 31,
	2021		2020		2021		2020
Capitalized interest at beginning of period	$	188,555	$	192,125	$	190,113	$	195,738
Interest incurred	31,110		31,055		62,202		62,017

Interest amortized to construction and land costs (a)	(39,600)		(28,746)		(72,250)		(63,321)
Capitalized interest at end of period (b)	$	180,065	$	194,434	$	180,065	$	194,434

Three Months Ended August 31, Nine Months Ended August 31,
2020 2019 2020 2019
Capitalized interest at beginning of period $ 194,434
$ 212,160
$ 195,738
$ 209,129
Interest incurred 31,054
36,024
93,071
107,356
Interest amortized to construction and land costs (a) (30,628 ) (38,558 ) (93,949 ) (106,859 )
Capitalized interest at end of period (b) $ 194,860
$ 209,626
$ 194,860
$ 209,626
(a)Interest amortized to construction and land costs for the six months ended May 31, 2021 included $.2 million related to land sales during the period. There was no such interest amortized for the three months ended May 31, 2021 or the three months and six months ended May 31, 2020.

(b)Capitalized interest amounts reflect the gross amount of capitalized interest, as inventory impairment charges recognized, if any, are not generally allocated to specific components of inventory.

~~(a)~~

Interest amortized to construction and land costs for the three months and nine months ended August 31, 2020 included $.4 million related to land sales during the periods. Interest amortized to construction and land costs for the nine months ended August 31, 2019 included $.6 million related to land sales during the period. There was no such interest amortized for the three months ended August 31, 2019.


~~(b)~~	~~Capitalized interest amounts reflect the gross amount of capitalized interest, as inventory impairment charges recognized, if any, are not generally allocated to specific components of inventory.~~

7. Inventory Impairments and Land Option Contract Abandonments

Each community or land parcel in our owned inventory is assessed on a quarterly basis to determine if indicators of potential impairment exist. We record an inventory impairment charge on a community or land parcel that is active or held for future development when indicators of potential impairment exist and the carrying value of the real estate asset is greater than the undiscounted future net cash flows the asset is expected to generate. These real estate assets are written down to fair value, which is primarily determined based on the estimated future net cash flows discounted for inherent risk associated with each such asset, or other valuation techniques. We record an inventory impairment charge on land held for sale when the carrying value of a land parcel is greater than its fair value. These real estate assets are written down to fair value, less associated costs to sell. The estimated fair values of such assets are generally based on bona fide letters of intent from outside parties, executed sales contracts, broker quotes or similar information.

When an indicator of potential impairment is identified for a community or land parcel, we test the asset for recoverability by comparing the carrying value of the asset to the undiscounted future net cash flows expected to be generated by the asset. The undiscounted future net cash flows are impacted by then-current conditions and trends in the market in which the asset is located as well as factors known to us at the time the cash flows are calculated. These factors may include recent trends in our orders, backlog, cancellation rates and volume of homes delivered, as well as our expectations related to the following: product offerings; market supply and demand, including estimated average selling prices and related price appreciation; and land development, home construction and overhead costs to be incurred and related cost inflation. With respect to the three months ended August 31, 2020, these expectations considered that our net orders, ending backlog and cancellation rates for the 2020 third quarter improved from both the year-earlier quarter and the 2020 second quarter when the early stages of the COVID-19 pandemic and related COVID-19 control responses in our served markets caused a significant contraction in economic activity and adversely affected our ability to conduct normal operations, as described in Note 1 – Basis of Presentation and Significant Accounting Policies. Our impairment assessments also considered that while the number of homes delivered in the 2020 third quarter decreased from the year-earlier quarter, the average selling price of those homes increased slightly and our housing gross profit margin improved significantly over the same period. Moreover, the average selling price of our net orders generated during the 2020 third quarter increased from the year-earlier period. Taken together, and notwithstanding the significant disruptions associated with the COVID-19 pandemic during the 2020 second quarter, our inventory assessments as of August 31, 2020 determined that market conditions for each of our assets in inventory where impairment indicators were identified were expected to be sufficiently stable, with a solid net order pace and a steady average selling price for the remainder of 2020 and into 2021 relative to the performance in recent quarters, to support such assets’ recoverability. Our inventory is assessed for potential impairment on a quarterly basis, and the assumptions used are reviewed and adjusted, as necessary, to reflect the market conditions and trends and our expectations at the time each assessment is performed.

We evaluated 226 and 3111 communities or land parcels for recoverability ~~during the nine months ended August~~as of May 31, 2021 and November 30, 2020, ~~and 2019, respectively, including certain communities or land parcels previously held for future development that were reactivated as part of our ongoing efforts to improve asset efficiency.~~respectively. The carrying values of ~~the~~those communities or land parcels evaluated as of May 31, 2021 and November 30, 2020 were ~~$191.8~~$78.5 million ~~at August 31, 2020~~ and ~~$219.2~~$123.4 million, at August 31, 2019. Some of the communities or land parcels evaluated during the nine months ended August 31, 2020 and 2019 were evaluated in more than one quarterly period. Communities or land parcels evaluated for recoverability in more than one quarterly period were counted only once for each

~~nine-month period.~~respectively. In addition, we evaluated land held for future development for recoverability ~~during the nine months ended August~~as of May 31, ~~2020~~2021 and ~~2019.~~November 30, 2020.

Based on the results of our evaluations, we recognized 0 inventory impairment charges ~~of $6.5 million~~ for the ~~three months~~three-month periods ended ~~August~~May 31, ~~2020~~2021 and ~~$11.6 million for the nine months ended August 31,~~ 2020. For the ~~three months and nine~~six months ended ~~August~~May 31, ~~2019,~~2021 and 2020, we recognized inventory impairment charges of ~~$4.8~~$3.6 million and ~~$11.5~~$5.1 million, respectively. The inventory impairment charges for ~~the three-month and nine-month periods ended August 31, 2020 and 2019~~each six-month period reflected our decisions to make changes in our operational strategies aimed at more quickly monetizing our investment in certain communities by accelerating the overall pace for selling, building and delivering homes therein, including communities on land previously held for future development.

The following table summarizes significant quantitative unobservable inputs we utilized in our fair value measurements with respect to the impaired communities written down to fair value during the periods presented:


	Three Months Ended May 31,		Six Months Ended May 31,
Unobservable Input (a)	2021	2020	2021	2020
Average selling price	$0	$0	$471,000	$302,700 - $915,500
Deliveries per month	0	0	5	1 - 4
Discount rate	0%	0%	19%	17% - 18%

Three Months Ended August 31, Nine Months Ended August 31,
Unobservable Input (a) 2020 2019 2020 2019
Average selling price $301,600 - $1,010,100 $325,300 - $957,200 $301,600 - $1,010,100 $315,000 - $1,045,400
Deliveries per month 2 2 - 4 1 - 4 1 - 4
Discount rate 17% - 18% 17% 17% - 18% 17%

As of ~~August~~May 31, 2021, the aggregate carrying value of our inventory that had been impacted by inventory impairment charges was $90.2 million, representing 13 communities and various other land parcels. As of November 30, 2020, the aggregate carrying value of our inventory that had been impacted by inventory impairment charges was ~~$89.4~~$113.1 million, representing 16 communities and various other land parcels. As of November 30, 2019, the aggregate carrying value of our inventory that had been impacted by inventory impairment charges was $115.6 million, representing 19 communities and various other land parcels.

Our inventory controlled under land option contracts and other similar contracts is assessed on a quarterly basis to determine whether it continues to meet our investment return standards. When a decision is made not to exercise certain land option contracts and other similar contracts due to market conditions and/or changes in our marketing strategy, we write off the related inventory costs, including non-refundable deposits and unrecoverable pre-acquisition costs. Based on the results of our assessments, we recognized land option contract abandonment charges of ~~$.4~~$.5 million for the three months ended ~~August~~May 31, ~~2020~~2021 and ~~$5.4~~$.9 million for the ~~nine~~six months ended ~~August~~May 31, ~~2020.~~2021. For the ~~three-month~~three months and ~~nine-month periods~~six months ended ~~August~~May 31, ~~2019,~~2020, we recognized land option contract abandonment charges of ~~$.4~~$4.4 million and ~~$1.7~~$4.9 million, respectively.

If conditions in our served markets are or are expected to be adversely affected for a prolonged period due to the COVID-19 control responses or otherwise, we may determine through our community and land parcel evaluations in future quarters that we need to take impairment charges, and such charges could be material. In addition, dueDue to the judgment and assumptions applied in our inventory impairment and land option contract abandonment assessment processes, and in our estimations of the remaining operating lives of our inventory assets and the realization of our inventory balances, particularly as to land held for future development, it is possible that actual results could differ substantially from those estimated.

8. Variable Interest Entities

Unconsolidated Joint Ventures. We participate in joint ventures from time to time that conduct land acquisition, land development and/or other homebuilding activities in various markets where our homebuilding operations are located. Our investments in these joint ventures may create a variable interest in a variable interest entity (“VIE”), depending on the

contractual terms of the arrangement. We analyze our joint ventures under the variable interest model to determine whether they are VIEs and, if so, whether we are the primary beneficiary. Based on our analyses, we determined that 1 of our joint ventures at ~~August~~May 31, ~~2020~~2021 and November 30, ~~2019~~2020 was a VIE, but we were not the primary beneficiary of the VIE. Therefore, all of our joint ventures at ~~August~~May 31, ~~2020~~2021 and November 30, ~~2019~~2020 were unconsolidated and accounted for under the equity method because we did not have a controlling financial interest.

Land Option Contracts and Other Similar Contracts. In the ordinary course of our business, we enter into land option contracts and other similar contracts with third parties and unconsolidated entities to acquire rights to land for the construction of homes. Under these contracts, we typically make a specified option payment or earnest money deposit in consideration for the right to purchase land in the future, usually at a predetermined price. We analyze each of our land option contracts and other similar contracts under the variable interest model to determine whether the land seller is a VIE and, if so, whether we are the primary

beneficiary. Although we do not have legal title to the underlying land, we are required to consolidate a VIE if we are the primary beneficiary. As a result of our analyses, we determined that as of ~~August~~May 31, ~~2020~~2021 and November 30, ~~2019~~,2020, we were not the primary beneficiary of any VIEs from which we have acquired rights to land under land option contracts and other similar contracts. We perform ongoing reassessments of whether we are the primary beneficiary of a VIE.

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

August 31, 2020 November 30, 2019

Cash
Deposits

Aggregate
Purchase Price

Cash
Deposits

Aggregate
Purchase Price
Unconsolidated VIEs $ 25,856
$ 844,801
$ 34,595
$ 823,427
Other land option contracts and other similar contracts 39,171
511,796
40,591
600,092
Total $ 65,027
$ 1,356,597
$ 75,186
$ 1,423,519


	May 31, 2021				November 30, 2020
	Cash Deposits		Aggregate Purchase Price		Cash Deposits		Aggregate Purchase Price
Unconsolidated VIEs	$	31,851	$	985,435	$	20,962	$	910,495
Other land option contracts and other similar contracts	36,110		671,708		33,672		507,934
Total	$	67,961	$	1,657,143	$	54,634	$	1,418,429

In addition to the cash deposits presented in the table above, our exposure to loss related to our land option contracts and other similar contracts with third parties and unconsolidated entities consisted of pre-acquisition costs of ~~$28.8~~$42.0 million at ~~August~~May 31, ~~2020~~2021 and ~~$32.8~~$31.1 million at November 30, ~~2019~~.2020. These pre-acquisition costs and cash deposits were included in inventories in our consolidated balance sheets.

For land option contracts and other similar contracts where the land seller entity is not required to be consolidated under the variable interest model, we consider whether such contracts should be accounted for as financing arrangements. Land option contracts and other similar contracts that may be considered financing arrangements include those we enter into with third-party land financiers or developers in conjunction with such third parties acquiring a specific land parcel(s) on our behalf, at our direction, and those with other landowners where we or our designee make improvements to the optioned land parcel(s) during the applicable option period. For these land option contracts and other similar contracts, we record the remaining purchase price of the associated land parcel(s) in inventories in our consolidated balance sheets with a corresponding financing obligation if we determine that we are effectively compelled to exercise the option to purchase the land parcel(s). As a result of our evaluations of land option contracts and other similar contracts for financing arrangements, we recorded inventories in our consolidated balance sheets, with a corresponding increase to accrued expenses and other liabilities, of ~~$17.2 million~~ at ~~August 31, 2020~~ ~~and $12.2~~$14.2 million at May 31, 2021 and $19.4 million at November 30, ~~2019~~2020.

9. .Investments in Unconsolidated Joint Ventures

We have investments in unconsolidated joint ventures that conduct land acquisition, land development and/or other homebuilding activities in various markets where our homebuilding operations are located. We and our unconsolidated joint venture partners make initial and/or ongoing capital contributions to these unconsolidated joint ventures, typically on a pro rata basis, according to our respective equity interests. The obligations to make capital contributions are governed by each such unconsolidated joint venture’s respective operating agreement and related governing documents.

As of both May 31, 2021 and November 30, 2020, we had investments in 5 unconsolidated joint ventures. The following table presents combined condensed information from the statements of operations offor our unconsolidated joint ventures (in thousands):

Three Months Ended August 31, Nine Months Ended August 31,
2020 2019 2020 2019
Revenues $ 21,473
$ 5,729
$ 115,893
$ 21,707
Construction and land costs (15,960 ) (5,686 ) (84,228 ) (21,704 )
Other expense, net (1,606 ) (708 ) (7,455 ) (1,946 )
Income (loss) $ 3,907
$ (665 ) $ 24,210
$ (1,943 )


	Three Months Ended May 31,				Six Months Ended May 31,
	2021		2020		2021		2020
Revenues	$	3,148	$	66,873	$	12,839	$	94,420
Construction and land costs	(2,819)		(46,725)		(10,944)		(68,268)
Other expense, net	(530)		(3,742)		(1,409)		(5,849)
Income (loss)	$	(201)	$	16,406	$	486	$	20,303

The ~~higher~~lower combined revenues and ~~income~~construction and land costs for the three months and ~~nine~~six months ended ~~August~~May 31, ~~2020,~~2021, as compared to the corresponding year-earlier periods, mainly reflected fewer homes delivered from an unconsolidated joint venture in California. ~~In the three months and nine months ended August 31, 2019, our unconsolidated joint ventures did not deliver any homes.~~

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


	May 31, 2021		November 30, 2020
Assets
Cash	$	39,517	$	38,837
Receivables	116		96
Inventories	58,791		65,233
Other assets	466		593
Total assets	$	98,890	$	104,759

Liabilities and equity
Accounts payable and other liabilities	$	12,094	$	14,037


Equity	86,796		90,722
Total liabilities and equity	$	98,890	$	104,759

August 31,
2020 November 30,
2019
Assets
Cash $ 35,674
$ 23,965
Inventories 71,911
139,536
Other assets 713
792
Total assets $ 108,298
$ 164,293

Liabilities and equity
Accounts payable and other liabilities $ 12,073
$ 13,282
Notes payable (a) 0
40,672
Equity 96,225
110,339
Total liabilities and equity $ 108,298
$ 164,293

10. Property and Equipment, Net

Property and equipment, net consisted of the following (in thousands):


	May 31, 2021		November 30, 2020
Computer software and equipment	$	36,494	$	32,902

Model furnishings and sales office improvements	88,420		83,882
Leasehold improvements, office furniture and equipment	17,218		17,245
Subtotal	142,132		134,029
Less accumulated depreciation	(72,796)		(68,482)
Total	$	69,336	$	65,547

August 31,
2020 November 30,
2019
Computer software and equipment $ 31,901
$ 27,091
Model furnishings and sales office improvements 80,642
82,117
Leasehold improvements, office furniture and equipment 17,167
16,173
Subtotal 129,710
125,381
Less accumulated depreciation (65,091 ) (60,338 )
Total $ 64,619
$ 65,043


~~11.~~	~~Other Assets~~

Other assets consisted of the following (in thousands):


	May 31, 2021		November 30, 2020
Cash surrender value and benefit receivable from corporate-owned life insurance contracts	$	69,292	$	73,227

Lease right-of-use assets	32,322		35,967
Prepaid expenses	11,643		13,916
Debt issuance costs associated with unsecured revolving credit facility, net	1,976		2,400
Total	$	115,233	$	125,510

August 31,
2020 November 30,
2019
Cash surrender value and benefit receivable from corporate-owned life insurance contracts $ 73,310
$ 73,849
Lease right-of-use assets 32,992
0
Prepaid expenses 16,328
5,944
Debt issuance costs associated with unsecured revolving credit facility, net 2,612
3,248
Total $ 125,242
$ 83,041

12. Accrued Expenses and Other Liabilities

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


	May 31, 2021		November 30, 2020
Self-insurance and other legal liabilities	$	230,449	$	232,556
Employee compensation and related benefits	148,564		165,342
Warranty liability	95,853		91,646
Customer deposits	52,878		26,243
Lease liabilities	34,252		37,668
Accrued interest payable	31,805		31,641
Inventory-related obligations (a)	25,647		31,094
Real estate and business taxes	10,087		14,249
Other	36,155		37,062
Total	$	665,690	$	667,501

August 31,
2020 November 30,
2019
Self-insurance and other legal liabilities $ 225,775
$ 229,483
Employee compensation and related benefits 136,003
163,646
Warranty liability 94,347
88,839
Accrued interest payable 36,051
32,507
Lease liabilities 34,525
0
Inventory-related obligations (a) 29,491
26,264
Customer deposits 21,360
22,382
Real estate and business taxes 14,967
14,872
Other 38,010
40,790
Total $ 630,529
$ 618,783

We lease certain property and equipment for use in our operations. We recognize lease expense for these leases generally on a straight-line basis over the lease term and combine lease and non-lease components for all leases. Lease right-of-use assets and lease liabilities are recorded on our consolidated balance sheets for leases with an expected term at the commencement date of more than 12 ~~months.~~months in accordance with Accounting Standards Codification Topic 842, “Leases” (“ASC 842”). Some of our leases include one or more renewal options, the exercise of which is generally at our discretion. Such options are excluded from the expected term of the lease unless we determine it is reasonably certain the option will be exercised. Lease liabilities are equal to the present value of the remaining lease payments while the amount of lease right-of-use assets is based on the lease liabilities, subject to adjustment, such as for lease incentives. Our leases do not provide a readily determinable implicit interest rate; therefore, we estimate our incremental borrowing rate to calculate the present value of remaining lease payments. In determining our incremental borrowing rate, we considered the lease term, market interest rates, current interest rates on our senior notes and the effects of collateralization. Our lease population at ~~August~~May 31, ~~2020~~2021 was comprised of operating leases where we are the lessee, primarily real estate leases for our corporate ~~office,~~offices, division offices and design studios, as well as certain equipment leases. Our lease agreements do not contain any residual value guarantees or material restrictive covenants.

Lease expense is included in selling, general and administrative expenses in our consolidated statements of operations and includes costs for leases with terms of more than 12 months as well as short-term leases with terms of 12 months or less. ~~For~~Our total lease expense for the three months ended ~~August~~May 31, 2021 and 2020 was $4.3 million and $4.4 million, respectively, and included short-term lease costs of $1.2 million and $1.4 million, respectively. For the six months ended May 31, 2021 and 2020, our total lease expense was ~~$4.2~~$8.6 million ~~which~~and $9.4 million, respectively, and included short-term lease costs of ~~$1.1 million. For the nine months ended August 31, 2020, our total lease expense was $13.6~~$2.5 million ~~which included short-term lease costs of $4.8 million.~~and $3.5 million, respectively. Variable lease costs and external sublease income for the three-month and ~~nine-month~~six-month periods ended ~~August~~May 31, 2021 and 2020 were immaterial.

The following table presents our lease right-of-use assets, lease liabilities and the weighted-average remaining lease term and weighted-average discount rate (incremental borrowing rate) used in calculating the lease liabilities (dollars in thousands):


	May 31, 2021			November 30, 2020
Lease right-of-use assets (a)	$	32,567		$	36,270
Lease liabilities (b)	34,524			38,000
Weighted-average remaining lease term	4.1 years			4.5 years
Weighted-average discount rate (incremental borrowing rate)	5.1		%	5.1		%

August 31,
2020
Lease right-of-use assets (a) $ 33,291
Lease liabilities (b) 34,849
Weighted-average remaining lease term 4.5 years
Weighted-average discount rate (incremental borrowing rate) 5.1 %
(a)Represents lease right-of-use assets within our homebuilding operations and financial services operations of $32.3 million and $.3 million, respectively, at May 31, 2021, and $36.0 million and $.3 million, respectively, at November 30, 2020.

(b)Represents lease liabilities within our homebuilding operations and financial services operations of $34.3 million and $.3 million, respectively, at May 31, 2021, and $37.7 million and $.3 million, respectively, at November 30, 2020.

The following table presents additional information about our leases (in thousands):

Three Months Ended
August 31, 2020

Nine Months Ended
August 31, 2020
Lease right-of-use assets obtained in exchange for new lease liabilities $ 2,977
$ 9,045
Cash payments on lease liabilities 2,831
8,468


	Three Months Ended May 31,				Six Months Ended May 31,
	2021		2020		2021		2020


Lease right-of-use assets obtained in exchange for new lease liabilities	$	1,411	$	2,428	$	1,499	$	6,068

Cash payments on lease liabilities	2,916		2,894		5,669		5,637

As of ~~August~~May 31, ~~2020,~~2021, the future minimum lease payments required under our leases are as follows (in thousands):


Years Ending November 30,
2021	$	5,936
2022	10,538
2023	8,270
2024	6,130
2025	4,500
Thereafter	3,111
Total lease payments	38,485
Less: Interest	(3,961)
Present value of lease liabilities	$	34,524

Years Ending November 30,
2020 $ 2,737
2021 10,178
2022 8,921
2023 6,704
2024 4,637
Thereafter 6,099
Total lease payments 39,276
Less: Interest (4,427 )
Present value of lease liabilities $ 34,849


~~14.~~	~~Income Taxes~~

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

Three Months Ended August 31, Nine Months Ended August 31,
2020 2019 2020 2019
Income tax expense $ 22,900
$ 23,800
$ 47,800
$ 37,600
Effective tax rate 22.6 % 25.9 % 20.1 % 20.5 %


	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 income tax expense and effective tax rate for the three months ended ~~August~~May 31, ~~2020 included~~2021 reflected the favorable ~~effect~~impacts of ~~$3.1~~$14.8 million of federal energy tax credits ~~that~~ we earned from building energy-efficient homes and $.4 million of excess tax benefits related to stock-based compensation, partially offset by ~~$1.2~~$1.9 million of non-deductible executive compensation expense under Internal Revenue Code Section 162(m). Our income tax expense and effective tax rate for the three months ended ~~August~~May 31, ~~2019 reflected $1.4~~2020 included the favorable impact of $3.0 million of federal energy tax credits we earned from building energy-efficient homes, partly offset by $1.0 million of non-deductible executive compensation expense.

Our income tax expense and effective tax rate for the ~~nine~~six months ended ~~August~~May 31, ~~2020 included~~2021 reflected the favorable ~~effects~~impacts of ~~$10.1~~$17.5 million of federal energy tax credits that we earned from building energy-efficient homes and $3.9 million of excess tax benefits related to stock-based compensation, partially offset by $3.3 million of non-deductible executive compensation expense under Internal Revenue Code Section 162(m). For the six months ended May 31, 2020, our income tax expense and effective tax rate included the favorable impacts of $7.0 million of federal energy tax credits we earned from building energy-efficient homes and $5.6 million of excess tax benefits related to stock-based compensation, partially offset by $3.2 million of non-deductible executive compensation expense. For the nine months ended August 31, 2019, our income tax expense and effective tax rate included the favorable effects of $4.3 million of federal energy tax credits, a $3.3 million reversal of a deferred tax asset valuation allowance related to refundable alternative minimum tax (“AMT”) credits and $2.9 million of excess tax benefits related to stock-based compensation, partly offset by ~~$2.6~~$2.0 million of non-deductible executive compensation expense.

The federal energy tax credits for the three months and ~~nine~~six months ended ~~August~~May 31, ~~2020~~2021 resulted from legislation enacted in December ~~2019,~~2020, which among other things, extended the availability of a business tax credit for building new ~~energy-~~

~~efficient~~energy-efficient homes through December 31, ~~2020.~~2021. Prior to this legislation, the tax credit expired on December 31, ~~2017.~~2020. This extension is expected to benefit our income tax provision in future periods.

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) was enacted to provide economic and other relief as a result of the COVID-19 pandemic. Among other things, the CARES Act ~~provides various income and payroll tax provisions that we do not expect to have a material impact on our income tax expense or effective tax rate for 2020. The CARES Act also~~ accelerated the timetable for ~~AMT~~alternative minimum tax (“AMT”) credit refunds. As a result, in the 2020 second quarter, we filed a superseding 2019 federal income tax return claiming ~~an additional~~a refund of $39.3 million of AMT credits and reclassified this amount from deferred tax assets to receivables. These credits were in addition to the $43.3 million of AMT tax credits that we reclassified from deferred tax assets to receivables in the 2020 first quarter when we filed a preliminary 2019 federal income tax return. We received ~~the $43.3 million~~this AMT credit refund in the 2021 first quarter.

The CARES Act also provided an Employee Retention Credit (“ERC”), which is a refundable payroll tax credit that encouraged businesses to keep employees on the payroll during the COVID-19 pandemic. Eligible employers could qualify for up to $5,000 of credit for each employee based on certain wages paid after March 12, 2020 ~~third~~and before January 1, 2021. Based on our evaluation of this provision and the significant pandemic-related impacts on our operations in 2020, we recognized an ERC of $4.3 million as an offset to payroll tax expenses within selling general and administrative expenses in our consolidated statements of operations upon filing for the refund in the 2021 first quarter.

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 ~~nine~~six months ended ~~August~~May 31, ~~2020.~~2021.

Deferred Tax Asset Valuation Allowance. We evaluate our deferred tax assets quarterly to determine if adjustments to our valuation allowance are required based on the consideration of all available positive and negative evidence using a “more likely than not” standard with respect to whether deferred tax assets will be realized. Our evaluation considers, among other factors, our historical operating results, our expectation of future profitability, the duration of the applicable statutory carryforward periods, and conditions in the housing market and the broader economy. The ultimate realization of our deferred tax assets depends primarily on our ability to generate future taxable income during the periods in which the related deferred tax assets become deductible. The value of our deferred tax assets depends on applicable income tax rates.

Our deferred tax assets of ~~$260.5~~$217.4 million as of ~~August~~May 31, ~~2020~~2021 and ~~$383.7~~$249.1 million as of November 30, ~~2019~~2020 were both partly offset by valuation allowances of $19.3 million and $19.2 million, respectively. Our deferred tax assets as of August 31, 2020 reflected the above-mentioned AMT credit reclassifications totaling $82.6 million from deferred tax assets to receivables in the 2020 first and second quarters.$18.0 million. The deferred tax asset valuation allowances as of ~~August~~May 31, ~~2020~~2021 and November 30, ~~2019~~2020 were primarily related to certain state net operating losses that had not met the “more likely than not” realization standard at those dates. ~~As a result of an adjustment to our state net operating losses, we increased the valuation allowance by $.1 million in the 2020 third quarter.~~ Based on the evaluation of our deferred tax assets as of ~~August~~May 31, ~~2020,~~2021, we determined

that most of our deferred tax assets would be realized. Therefore, ~~other than the slight increase mentioned above,~~ 0 adjustments to our deferred tax valuation allowance were needed for the ~~nine~~six months ended ~~August~~May 31, ~~2020.~~2021.

We will continue to evaluate both the positive and negative evidence on a quarterly basis in determining the need for a valuation allowance with respect to our deferred tax assets. The accounting for deferred tax assets is based upon estimates of future results. Changes in positive and negative evidence, including differences between estimated and actual results, could result in changes in the valuation of our deferred tax assets that could have a material impact on our consolidated financial statements. Changes in existing federal and state tax laws and corporate income tax rates could also affect actual tax results and the realization of deferred tax assets over time.

Unrecognized Tax Benefits. As of ~~August~~May 31, ~~2020~~2021 and November 30, ~~2019,~~2020, we had 0 gross unrecognized tax benefits. The fiscal years ending 2017 and later remain open to federal examinations, while ~~2015~~2016 and later remain open to state examinations.

Notes payable consisted of the following (in thousands):

August 31,
2020 November 30,
2019
Mortgages and land contracts due to land sellers and other loans $ 5,620
$ 7,889
7.00% Senior notes due December 15, 2021 448,807
448,164
7.50% Senior notes due September 15, 2022 348,697
348,267
7.625% Senior notes due May 15, 2023 351,400
351,748
6.875% Senior notes due June 15, 2027 296,660
296,379
4.80% Senior notes due November 15, 2029 296,520
296,300
Total $ 1,747,704
$ 1,748,747


	May 31, 2021		November 30, 2020


Mortgages and land contracts due to land sellers and other loans	$	4,067	$	4,667
7.00% Senior notes due December 15, 2021	449,486		449,029
7.50% Senior notes due September 15, 2022	349,153		348,846
7.625% Senior notes due May 15, 2023	351,038		351,281
6.875% Senior notes due June 15, 2027	296,955		296,757
4.80% Senior notes due November 15, 2029	296,748		296,595
Total	$	1,747,447	$	1,747,175

The carrying amounts of our senior notes listed above are net of unamortized debt issuance costs ~~premiums~~ and ~~discounts,~~premiums, which totaled ~~$7.9~~$6.6 million at ~~August~~May 31, ~~2020~~2021 and ~~$9.1~~$7.5 million at November 30, ~~2019.~~2020.

Unsecured Revolving Credit Facility. We have an $800.0 million unsecured revolving credit facility with various banks (“Credit Facility”) that will mature on October 7, ~~2023~~.2023. The Credit Facility contains an uncommitted accordion feature under which its aggregate principal amount of available loans can be increased to a maximum of $1.00 billion under certain conditions, including obtaining additional bank commitments. The Credit Facility also contains a sublimit of $250.0 million for the issuance of letters of credit. Interest on amounts borrowed under the Credit Facility is payable at least quarterly in arrears at a rate based on either a Eurodollar or a base rate, plus a spread that depends on our consolidated leverage ratio (“Leverage Ratio”), as defined under the Credit Facility. The Credit Facility also requires the payment of a commitment fee at a per annum rate ranging from .20% to .35% of the unused commitment, based on our Leverage Ratio. Under the terms of the Credit Facility, we are required, among other things, to maintain compliance with various covenants, including financial covenants relating to our consolidated tangible net worth, Leverage Ratio, and either a consolidated interest coverage ratio (“Interest Coverage Ratio”) or minimum level of liquidity, each as defined therein. The amount of the Credit Facility available for cash borrowings orand the issuance of letters of credit depends on the total cash borrowings and letters of credit outstanding under the Credit Facility and the maximum available amount under the terms of the Credit Facility. As of ~~August~~May 31, ~~2020,~~2021, we had 0 cash borrowings and $12.4 million of letters of credit outstanding under the Credit Facility. Therefore, as of ~~August~~May 31, ~~2020,~~2021, we had $787.6 million available for cash borrowings under the Credit Facility, with up to $237.6 million of that amount available for the issuance of letters of credit.

Letter of Credit Facility. We ~~have~~maintain an unsecured letter of credit agreement with a financial institution (“LOC Facility”). to obtain letters of credit from time to time in the ordinary course of operating our business. Under the LOC Facility, which expires on February 13, 2022, we may issue up to $50.0 million of letters of credit. ~~We maintain the LOC Facility to obtain letters of credit from time to time in the ordinary course of operating our business.~~ As of ~~August~~May 31, 2021 and November 30, 2020,, we had ~~$29.3 million of letters of credit outstanding under the LOC Facility. We had $15.8 million~~ letters of credit outstanding under the LOC Facility as of ~~November 30, 2019.~~$42.4 million and $29.7 million, respectively.

Mortgages and Land Contracts Due to Land Sellers and Other Loans. As of ~~August~~May 31, ~~2020~~,2021, inventories having a carrying value of ~~$49.2~~$13.2 million were pledged to collateralize mortgages and land contracts due to land sellers and other loans.

Shelf ~~Registration.~~Registration Statement. ~~On July 9, 2020, we filed~~We have an automatically effective universal shelf registration statement that was filed with the SEC on July 9, 2020 (“2020 Shelf Registration”) ~~with the SEC.~~. The 2020 Shelf Registration registers the offering of securities that we may issue from time to time in amounts to be determined. ~~Issuances of securities under our 2020 Shelf Registration require the filing of a prospectus supplement identifying the amount and terms of the securities to be issued.~~ Our ability to issue securities is subject to market conditions and, with respect to debt securities, other factors impacting our borrowing capacity. The 2020 Shelf Registration replaced our previously effective universal shelf registration statement filed with the SEC on July 14, 2017. We have not made any offerings of securities under the 2020 Shelf Registration.conditions.

Senior Notes. All of the senior notes outstanding at ~~August~~May 31, ~~2020~~2021 and November 30, ~~2019~~2020 represent senior unsecured obligations that are guaranteed by certain of our subsidiaries and rank equally in right of payment with all of our and our guarantor subsidiaries’ existing unsecured and unsubordinated indebtedness. All of our senior notes were issued in underwritten public offerings. Interest on each of these senior notes is payable semi-annually.

The indenture governing our senior notes does not contain any financial covenants. Subject to specified exceptions, the indenture contains certain restrictive covenants that, among other things, limit our ability to incur secured indebtedness, or engage in sale and leaseback transactions involving property above a certain specified value. In addition, ~~the indenture contains~~our senior notes contain certain limitations related to mergers, consolidations, and sales of assets.

As of ~~August~~May 31, ~~2020~~,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.

As of ~~August~~May 31, ~~2020,~~2021, principal payments on senior notes, mortgages and land contracts due to land sellers and other loans are due during each year ending November 30 as follows: ~~2020 – $4.6 million;~~ 2021 – ~~$1.0~~$1.1 million; 2022 – ~~$800.0~~$801.1 million; 2023 – ~~$350.0~~$351.2 million; 2024 – $.7 million; 2025 – $0; and thereafter – $600.0 million.

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 (“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 (“7.00% Senior Notes due 2021”). Further information regarding these transactions is provided in Note 22 – Subsequent Events.

16. Fair Value Disclosures

Fair value measurements of assets and liabilities are categorized based on the following hierarchy:



Level 1						Fair value determined based on quoted prices in active markets for identical assets or liabilities.

Level 2						Fair value determined using significant observable inputs, such as quoted prices for similar assets or liabilities or quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability, or inputs that are derived principally from or corroborated by observable market data, by correlation or other means.

Level 3						Fair value determined using significant unobservable inputs, such as pricing models, discounted cash flows, or similar techniques.

Fair value measurements are used for inventories on a nonrecurring basis when events and circumstances indicate that their carrying value is not recoverable. The following table presents the fair value hierarchy and our assets measured at fair value on a nonrecurring basis for the ~~nine~~six months ended ~~August~~May 31, ~~2020~~2021 and the year ended November 30, ~~2019~~2020 (in thousands):


		May 31, 2021						November 30, 2020
Description	Fair Value Hierarchy	Pre-Impairment Value		Inventory Impairment Charges		Fair Value (a)		Pre-Impairment Value		Inventory Impairment Charges		Fair Value (a)

Inventories	Level 3	$	8,505	$	(3,626)	$	4,879	$	69,211	$	(22,723)	$	46,488

August 31, 2020 November 30, 2019
Description Fair Value Hierarchy Pre-Impairment Value Inventory Impairment Charges Fair Value (a) Pre-Impairment Value Inventory Impairment Charges Fair Value (a)
Inventories Level 3 $ 28,598
$ (11,589 ) $ 17,009
$ 41,160
$ (14,031 ) $ 27,129
(a)Amounts represent the aggregate fair value for real estate assets impacted by inventory impairment charges during the applicable period, as of the date that the fair value measurements were made. The carrying value for these real estate assets may have subsequently increased or decreased from the fair value reflected due to activity that has occurred since the measurement date.

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

The following table presents the fair value hierarchy, carrying value and estimated fair value of our financial instruments, except those for which the carrying values approximate fair values (in thousands):


		May 31, 2021				November 30, 2020
Description	Fair Value Hierarchy	Carrying Value (a)		Estimated Fair Value		Carrying Value (a)		Estimated Fair Value
Financial Liabilities:
Senior notes	Level 2	$	1,743,380	$	1,883,500	$	1,742,508	$	1,924,250

August 31, 2020 November 30, 2019
Description
Fair Value
Hierarchy

Carrying
Value (a)

Estimated
Fair Value

Carrying
Value (a)

Estimated
Fair Value
Financial Liabilities:
Senior notes Level 2 $ 1,742,084
$ 1,912,750
$ 1,740,858
$ 1,921,563

The fair values of our senior notes are generally estimated based on quoted market prices for these instruments.

The carrying values reported for cash and cash equivalents, and mortgages and land contracts due to land sellers and other loans approximate fair values. The carrying value of corporate-owned life insurance is based on the cash surrender value of the policies and, accordingly, approximates fair value.

17. Commitments and Contingencies

Commitments and contingencies include typical obligations of homebuilders for the completion of contracts and those incurred in the ordinary course of business.

Warranty. We provide a limited warranty on all of our homes. The specific terms and conditions of our limited warranty program vary depending upon the markets in which we do business. We generally provide a structural warranty of 10 years,, a warranty on electrical, heating, cooling, plumbing and certain other building systems each varying from two ~~years~~ to five years based on geographic market and state law, and a warranty of one year for other components of the home. Our limited warranty program is ordinarily how we respond to and account for homeowners’ requests to local division offices seeking repairs of certain conditions or defects, including claims where we could have liability under applicable state statutes or tort law for a defective condition in or damages to a home. Our warranty liability covers our costs of repairs associated with

homeowner claims made under our limited warranty program. These claims are generally made directly by a homeowner and involve their individual home.

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

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

Three Months Ended August 31, Nine Months Ended August 31,
2020 2019 2020 2019
Balance at beginning of period $ 92,844
$ 83,030
$ 88,839
$ 82,490
Warranties issued 6,326
9,067
21,960
23,500
Payments (4,823 ) (5,925 ) (16,452 ) (17,018 )
Adjustments 0
0
0
(2,800 )
Balance at end of period $ 94,347
$ 86,172
$ 94,347
$ 86,172


	Three Months Ended May 31,				Six Months Ended May 31,
	2021		2020		2021		2020
Balance at beginning of period	$	92,687	$	90,213	$	91,646	$	88,839
Warranties issued	9,378		7,271		16,835		15,634
Payments	(6,212)		(4,640)		(12,628)		(11,629)
Adjustments	0		0		0		0
Balance at end of period	$	95,853	$	92,844	$	95,853	$	92,844

Guarantees. In the normal course of our business, we issue certain representations, warranties and guarantees related to our home sales and land sales. Based on historical experience, we do not believe any potential liability with respect to these representations, warranties or guarantees would be material to our consolidated financial statements.

Self-Insurance. We maintain, and require the majority of our independent subcontractors to maintain, general liability insurance (including construction defect and bodily injury coverage) and workers’ compensation insurance. These insurance policies protect us against a portion of our risk of loss from claims related to our homebuilding activities, subject to certain self-insured retentions, deductibles and other coverage limits. We also maintain certain other insurance policies. Costs associated with our self-insurance programs are included in selling, general and administrative expenses. In Arizona, California, Colorado and Nevada, our subcontractors’ general liability insurance primarily takes the form of a wrap-up policy under a program where eligible independent subcontractors are enrolled as insureds on each community. Enrolled subcontractors contribute toward the cost of the insurance and agree to pay a contractual amount in the future if there is a claim related to their work. To the extent provided under the wrap-up program, we absorb the enrolled subcontractors’ general liability associated with the work performed on our homes within the applicable community as part of our overall general liability insurance and our self-insurance.

We self-insure a portion of our overall risk through the use of a captive insurance subsidiary, which provides coverage for our exposure to construction defect, bodily injury and property damage claims and related litigation or regulatory actions, up to certain limits. Our self-insurance liability generally covers the costs of settlements and/or repairs, if any, as well as our costs to defend and resolve the following types of claims:

•Construction defect: Construction defect claims, which represent the largest component of our self-insurance liability, typically originate through a legal or regulatory process rather than directly by a homeowner and involve the alleged occurrence of a condition affecting 2 or more homes within the same community, or they involve a common area or homeowners association property within a community. These claims typically involve higher costs to resolve than individual homeowner warranty claims, and the rate of claims is highly variable.

•Bodily injury: Bodily injury claims typically involve individuals (other than our employees) who claim they were injured while on our property or as a result of our operations.

•: Construction defect claims, which represent the largest component of our self-insurance liability, typically originate through a legal or regulatory process rather than directly by a homeowner and involve the alleged occurrence of a condition affecting 2 or more homes within the same community, or they involve a common area or homeowners association property within a community. These claims typically involve higher costs to resolve than individual homeowner warranty claims, and the rate of claims is highly variable.

~~Bodily injury: Bodily injury claims typically involve individuals (other than our employees) who claim they were injured while on our property or as a result of our operations.~~

Property damage: Property damage claims generally involve claims by third parties for alleged damage to real or personal property as a result of our operations. Such claims may occasionally include those made against us by owners of property located near our communities.

Our self-insurance liability at each reporting date represents the estimated costs of reported claims, claims incurred but not yet reported, and claim adjustment expenses. The amount of our self-insurance liability is based on an analysis performed by a third-party actuary that uses our historical claim and expense data, as well as industry data to estimate these overall costs. Key assumptions used in developing these estimates include claim frequencies, severities and resolution patterns, which can occur over an extended period of time. These estimates are subject to variability due to the length of time between the delivery of a home to a homebuyer and when a construction defect claim is made, and the ultimate resolution of such claim; uncertainties regarding such claims relative to our markets and the types of product we build; and legal or regulatory actions and/or interpretations, among other factors. Due to the degree of judgment involved and the potential for variability in these underlying assumptions, our actual future costs could differ from those estimated. In addition, changes in the frequency and severity of reported claims and the estimates to resolve claims can impact the trends and assumptions used in the actuarial analysis, which could be material to our consolidated financial statements. Though state regulations vary, construction defect claims are reported and resolved over a long period of time, which can extend for 10 years or more. As a result, the majority of the estimated self-insurance liability based on the actuarial analysis relates to claims incurred but not yet reported. Therefore, adjustments related to individual existing claims generally do not significantly

impact the overall estimated liability. Adjustments to our liabilities related to homes delivered in prior years are recorded in the period in which a change in our estimate occurs.

Our self-insurance liability is presented on a gross basis for all periods without consideration of insurance recoveries and amounts we have paid on behalf of and expect to recover from other parties, if any. Estimated probable insurance and other recoveries of ~~$51.0~~$65.1 million and ~~$50.6~~$60.0 million are included in receivables in our consolidated balance sheets at ~~August~~May 31, ~~2020~~2021 and November 30, ~~2019,~~2020, respectively. These self-insurance recoveries are principally based on actuarially determined amounts and depend on various factors, including, among other things, the above-described claim cost estimates, our insurance policy coverage limits for the applicable policy year(s), historical third-party recovery rates, insurance industry practices, the regulatory environment and legal precedent, and are subject to a high degree of variability from period to period. Because of the inherent uncertainty and variability in these assumptions, our actual insurance recoveries could differ significantly from amounts currently estimated.

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


	Three Months Ended May 31,				Six Months Ended May 31,
	2021		2020		2021		2020
Balance at beginning of period	$	193,445	$	181,481	$	194,180	$	177,765
Self-insurance provided	5,928		1,343		10,511		5,977
Payments	(10,097)		(1,825)		(15,597)		(2,972)
Adjustments (a)	4,993		(2,918)		5,175		(2,689)
Balance at end of period	$	194,269	$	178,081	$	194,269	$	178,081

Three Months Ended August 31, Nine Months Ended August 31,
2020 2019 2020 2019
Balance at beginning of period $ 178,081
$ 170,978
$ 177,765
$ 176,841
Self-insurance expense (a) 3,545
4,802
9,522
12,844
Payments (b) 2,483
(5,162 ) (3,178 ) (19,067 )
Balance at end of period $ 184,109
$ 170,618
$ 184,109
$ 170,618
(a)Represents net changes in estimated probable recoveries related to self-insurance, which are recorded in receivables, to present our self-insurance liability on a gross basis.

For most of our claims, there is no interaction between our warranty liability and self-insurance liability. Typically, if a matter is identified at its outset as either a warranty or self-insurance claim, it remains as such through its resolution. However, there can be instances of interaction between the liabilities, such as where individual homeowners in a community separately request warranty repairs to their homes to address a similar condition or issue and subsequently join together to initiate, or potentially initiate, a legal process with respect to that condition or issue and/or the repair work we have undertaken. In these instances, the claims and related repair work generally are initially covered by our warranty liability, and the costs associated with resolving the legal matter (including any additional repair work) are covered by our self-insurance liability.

The payments we make in connection with claims and related repair work, whether covered within our warranty liability and/or our self-insurance liability, may be recovered from our insurers to the extent such payments exceed the self-insured retentions or deductibles under our general liability insurance policies. Also, in certain instances, in the course of resolving a claim, we pay amounts in advance of and/or on behalf of a subcontractor(s) or their insurer(s) and believe we will be reimbursed for such payments. Estimates of all such amounts, if any, are recorded as receivables in our consolidated balance sheets when any such recovery is considered probable.

Florida Chapter 558 Actions ~~(Individual and Homeowner Association Claims)~~. We and certain of our subcontractors have received a growing number of claims from attorneys on behalf of individual owners of our homes and/or homeowners’ associations that allege, pursuant to Chapter 558 of the Florida Statutes, various construction defects, with most relating to stucco and water-intrusion issues. The claims primarily involve homes in our Jacksonville, Orlando, and Tampa operations. Under Chapter 558, homeowners must serve written notice of a construction defect(s) and provide the served construction and/or design contractor(s) with an opportunity to respond to the noticed issue(s) before they can file a lawsuit. Although we have resolved many of these claims without litigation, and a number of others have been resolved with applicable subcontractors or their insurers covering the related costs, as of ~~August~~May 31, ~~2020,~~2021, we had approximately ~~583~~686 outstanding noticed claims, and some are scheduled for trial over the next few quarters and beyond. In addition, some of our subcontractors’ insurers in some of these cases have informed us of their inability to continue to pay claims-related costs. At ~~August~~May 31, ~~2020,~~2021, we had an accrual for our estimated probable loss for these matters and a receivable for estimated probable insurance recoveries. While it is reasonably possible that our loss could exceed the amount accrued and our recoveries could be less than the amount recorded, at this time, we are unable to estimate the total amount of the loss in excess of the accrued amount and/or associated with a shortfall in the recoveries that is reasonably possible.

Townhome Community Construction Defect Claims. In the 2016 fourth quarter, we received claims from a homeowners association alleging there were construction defects, primarily involving roofing and stucco issues, at a completed townhome community in Northern California totaling approximately $25.0 million. We, along with our outside consultants, have continued to investigate these allegations, and ~~we currently expect it may take additional quarters to fully evaluate them. At August~~at May 31, ~~2020,~~2021, we had an accrual for our estimated probable loss in this matter and a receivable for estimated probable insurance recoveries that reflected the status of our investigation to such date. At this stage of our investigation into these allegations, it is reasonably possible that our loss could exceed the amount accrued by an estimated range of $0 to ~~$5.0~~$3.0 million. Our investigation ~~will~~has also ~~involve~~involved identifying potentially responsible parties, including insurers, to pay for or perform any necessary repairs. We are in discussions with the homeowners association regarding the claims and their resolution.

Performance Bonds and Letters of Credit. We are often required to provide to various municipalities and other government agencies performance bonds and/or letters of credit to secure the completion of our projects and/or in support of obligations to build community improvements such as roads, sewers, water systems and other utilities, and to support similar development activities by certain of our unconsolidated joint ventures. At ~~August~~May 31, ~~2020~~,2021, we had ~~$818.0~~$960.1 million of performance bonds and ~~$41.7~~$54.8 million of letters of credit outstanding. At November 30, ~~2019,~~2020, we had ~~$793.9~~$897.6 million of performance bonds and ~~$34.7~~$42.1 million of letters of credit outstanding. If any such performance bonds or letters of credit are called, we would be obligated to reimburse the issuer of the performance bond or letter of credit. We do not believe that a material amount of any currently outstanding performance bonds or letters of credit will be called. Performance bonds do not have stated expiration dates. Rather, we are released from the performance bonds as the underlying performance is completed. The expiration dates of some letters of credit issued in connection with community improvements coincide with the expected completion dates of the related projects or obligations. Most letters of credit, however, are issued with an initial term of one year and are typically extended on a year-to-year basis until the related performance obligations are completed.

Land Option Contracts and Other Similar Contracts. In the ordinary course of our business, we enter into land option contracts and other similar contracts to acquire rights to land for the construction of homes. At ~~August~~May 31, ~~2020~~,2021, we had total cash deposits of ~~$65.0~~$68.0 million to purchase land having an aggregate purchase price of ~~$1.36~~$1.66 billion. Our land option contracts and other similar contracts generally do not contain provisions requiring our specific performance.

We are involved in litigation and regulatory proceedings incidental to our business that are in various procedural stages. We believe that the accruals we have recorded for probable and reasonably estimable losses with respect to these proceedings are adequate and that, as of ~~August~~May 31, ~~2020,~~2021, it was not reasonably possible that an additional material loss had been incurred in an amount in excess of the estimated amounts already recognized or disclosed in our consolidated financial statements. We evaluate our accruals for litigation and regulatory proceedings at least quarterly and, as appropriate, adjust them to reflect (a) the facts and circumstances known to us at the time, including information regarding negotiations, settlements, rulings and other relevant events and developments; (b) the advice and analyses of counsel; and (c) the assumptions and judgment of management. Similar factors and considerations are used in establishing new accruals for proceedings as to which losses have become probable and reasonably estimable at the time an evaluation is made. Our accruals for litigation and regulatory proceedings are presented on a gross basis without consideration of recoveries and amounts we have paid on behalf of and expect to recover from other parties, if any. Estimates of recoveries and amounts we have paid on behalf of and expect to recover from other parties, if any, are recorded as receivables when such recoveries are considered probable. Based on our experience, we believe that the amounts that may be claimed or alleged against us in these proceedings are not a meaningful indicator of our potential liability. The outcome of any of these proceedings, including the defense and other litigation-related

costs and expenses we may incur, however, is inherently uncertain and could differ significantly from the estimate reflected in a related accrual, if made. Therefore, it is possible that the ultimate outcome of any proceeding, if in excess of a related accrual or if an accrual had not been made, could be material to our consolidated financial statements. Pursuant to SEC rules, we will disclose any proceeding in which a governmental authority is a party and that arises under any federal, state or local provisions enacted or adopted regulating the discharge of materials into the environment or primarily for the purpose of protecting the environment only where we believe that such proceeding will result in monetary sanctions on us, exclusive of interest and costs, above $1.0 million or is otherwise material to our consolidated financial statements.


~~19.~~	~~Stockholders’ Equity~~

19. Stockholders’ Equity

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


	Three Months Ended May 31, 2021 and 2020
	Number of Shares
	Common Stock	Grantor Stock Ownership Trust	Treasury Stock	Common Stock		Paid-in Capital		Retained Earnings		Accumulated Other Comprehensive Loss		Grantor Stock Ownership Trust		Treasury Stock		Total Stockholders’ Equity
Balance at February 28, 2021	100,042	(6,705)	(1,305)	$	100,042	$	827,456	$	1,951,657	$	(22,276)	$	(72,718)	$	(35,977)	$	2,748,184


Net income	—	—	—	—		—		143,364		—		—		—		143,364
Dividends on common stock	—	—	—	—		—		(13,733)		—		—		—		(13,733)
Employee stock options/other	65	—	—	65		903		—		—		—		—		968

Stock awards	44	—	2	44		(88)		—		—		—		44		0
Stock-based compensation	—	—	—	—		8,082		—		—		—		—		8,082


Balance at May 31, 2021	100,151	(6,705)	(1,303)	$	100,151	$	836,353	$	2,081,288	$	(22,276)	$	(72,718)	$	(35,933)	$	2,886,865

Balance at February 29, 2020	122,291	(7,317)	(24,526)	$	122,291	$	803,420	$	2,211,851	$	(17,149)	$	(79,359)	$	(597,950)	$	2,443,104


Net income	—	—	—	—		—		51,989		—		—		—		51,989
Dividends on common stock	—	—	—	—		—		(8,098)		—		—		—		(8,098)
Employee stock options/other	11	—	—	11		167		—		—		—		—		178
Stock awards	68	—	—	68		(68)		—		—		—		—		0
Stock-based compensation	—	—	—	—		3,181		—		—		—		—		3,181

Balance at May 31, 2020	122,370	(7,317)	(24,526)	$	122,370	$	806,700	$	2,255,742	$	(17,149)	$	(79,359)	$	(597,950)	$	2,490,354



	Six Months Ended May 31, 2021 and 2020
	Number of Shares
	Common Stock	Grantor Stock Ownership Trust	Treasury Stock	Common Stock		Paid-in Capital		Retained Earnings		Accumulated Other Comprehensive Loss		Grantor Stock Ownership Trust		Treasury Stock		Total Stockholders’ Equity
Balance at November 30, 2020	99,869	(7,124)	(1,107)	$	99,869	$	824,306	$	1,868,896	$	(22,276)	$	(77,265)	$	(27,761)	$	2,665,769
Cumulative effect of adoption of ASU 2016-13	—	—	—	—		—		(226)		—		—		—		(226)
Net income	—	—	—	—		—		240,415		—		—		—		240,415
Dividends on common stock	—	—	—	—		—		(27,797)		—		—		—		(27,797)
Employee stock options/other	238	—	0	238		3,268		—		—		—		0		3,506
Stock awards	44	419	12	44		(4,875)		—		—		4,547		284		0
Stock-based compensation	—	—	—	—		13,654		—		—		—		—		13,654
Tax payments associated with stock-based compensation awards	—	—	(208)	—		—		—		—		—		(8,456)		(8,456)
Balance at May 31, 2021	100,151	(6,705)	(1,303)	$	100,151	$	836,353	$	2,081,288	$	(22,276)	$	(72,718)	$	(35,933)	$	2,886,865

Balance at November 30, 2019	121,593	(7,631)	(24,356)	$	121,593	$	793,954	$	2,157,183	$	(15,506)	$	(82,758)	$	(591,344)	$	2,383,122
Cumulative effect of adoption of ASC 842	—	—	—	—		—		1,510		—		—		—		1,510
Reclassification of stranded tax effects	—	—	—	—		—		1,643		(1,643)		—		—		—
Net income	—	—	—	—		—		111,737		—		—		—		111,737
Dividends on common stock	—	—	—	—		—		(16,331)		—		—		—		(16,331)
Employee stock options/other	709	—	—	709		7,695		—		—		—		—		8,404
Stock awards	68	314	(15)	68		(3,080)		—		—		3,399		(387)		0
Stock-based compensation	—	—	—	—		8,131		—		—		—		—		8,131
Tax payments associated with stock-based compensation awards	—	—	(155)	—		—		—		—		—		(6,219)		(6,219)
Balance at May 31, 2020	122,370	(7,317)	(24,526)	$	122,370	$	806,700	$	2,255,742	$	(17,149)	$	(79,359)	$	(597,950)	$	2,490,354

Three Months Ended August 31, 2020 and 2019
Number of Shares

Common
Stock

Grantor
Stock
Ownership
Trust

Treasury
Stock
Common Stock Paid-in Capital Retained Earnings Accumulated Other Comprehensive Loss
Grantor Stock
Ownership Trust
Treasury Stock Total Stockholders’ Equity
Balance at May 31, 2020 122,370
(7,317 ) (24,526 ) $ 122,370
$ 806,700
$ 2,255,742
$ (17,149 ) $ (79,359 ) $ (597,950 ) $ 2,490,354
Net income —
—
—
—
—
78,415
—
—
—
78,415
Dividends on common stock —
—
—
—
—
(8,097 ) —
—
—
(8,097 )
Employee stock options/other 0
—
17
0
(421 ) —
—
—
421
0
Stock-based compensation —
—
—
—
4,636
—
—
—
—
4,636
Balance at August 31, 2020 122,370
(7,317 ) (24,509 ) $ 122,370
$ 810,915
$ 2,326,060
$ (17,149 ) $ (79,359 ) $ (597,529 ) $ 2,565,308

Balance at May 31, 2019 120,350
(7,860 ) (24,264 ) $ 120,350
$ 775,693
$ 1,981,795
$ (9,565 ) $ (85,246 ) $ (587,817 ) $ 2,195,210
Net income —
—
—
—
—
68,136
—
—
—
68,136
Dividends on common stock —
—
—
—
—
(7,897 ) —
—
—
(7,897 )
Employee stock options/other 173
—
—
173
2,094
—
—
—
—
2,267
Stock-based compensation —
—
—
—
4,513
—
—
—
—
4,513
Balance at August 31, 2019 120,523
(7,860 ) (24,264 ) $ 120,523
$ 782,300
$ 2,042,034
$ (9,565 ) $ (85,246 ) $ (587,817 ) $ 2,262,229

Nine Months Ended August 31, 2020 and 2019
Number of Shares

Common
Stock

Grantor
Stock
Ownership
Trust

Treasury
Stock
Common Stock Paid-in Capital Retained Earnings Accumulated Other Comprehensive Loss
Grantor Stock
Ownership Trust
Treasury Stock Total Stockholders’ Equity
Balance at November 30, 2019 121,593
(7,631 ) (24,356 ) $ 121,593
$ 793,954
$ 2,157,183
$ (15,506 ) $ (82,758 ) $ (591,344 ) $ 2,383,122
Cumulative effect of adoption of ASC 842 —
—
—
—
—
1,510
—
—
—
1,510
Reclassification of stranded tax effects (ASU 2018-02) —
—
—
—
—
1,643
(1,643 ) —
—
—
Net income —
—
—
—
—
190,152
—
—
—
190,152
Dividends on common stock —
—
—
—
—
(24,428 ) —
—
—
(24,428 )
Employee stock options/other 709
—
17
709
7,274
—
—
—
421
8,404
Stock awards 68
314
(15 ) 68
(3,080 ) —
—
3,399
(387 ) 0
Stock-based compensation —
—
—
—
12,767
—
—
—
—
12,767
Tax payments associated with stock-based compensation awards —
—
(155 ) —
—
—
—
—
(6,219 ) (6,219 )
Balance at August 31, 2020 122,370
(7,317 ) (24,509 ) $ 122,370
$ 810,915
$ 2,326,060
$ (17,149 ) $ (79,359 ) $ (597,529 ) $ 2,565,308

Balance at November 30, 2018 119,196
(8,157 ) (24,113 ) $ 119,196
$ 753,570
$ 1,897,168
$ (9,565 ) $ (88,472 ) $ (584,397 ) $ 2,087,500
Cumulative effect of adoption of ASC 606 —
—
—
—
—
11,610
—
—
—
11,610
Net income —
—
—
—
—
145,608
—
—
—
145,608
Dividends on common stock —
—
—
—
—
(12,352 ) —
—
—
(12,352 )
Employee stock options/other 1,271
—
—
1,271
17,458
—
—
—
—
18,729
Stock awards 56
297
(4 ) 56
(3,207 ) —
—
3,226
(75 ) 0
Stock-based compensation —
—
—
—
14,479
—
—
—
—
14,479
Tax payments associated with stock-based compensation awards —
—
(147 ) —
—
—
—
—
(3,345 ) (3,345 )
Balance at August 31, 2019 120,523
(7,860 ) (24,264 ) $ 120,523
$ 782,300
$ 2,042,034
$ (9,565 ) $ (85,246 ) $ (587,817 ) $ 2,262,229

On February ~~20, 2020,~~18, 2021, the management development and compensation committee of our board of directors approved the payout of ~~313,246~~419,070 shares of our common stock in connection with the vesting of PSUs that were granted to certain employees on October ~~6, 2016.~~5, 2017. The shares paid out under the PSUs reflected our achievement of certain performance measures that were based on cumulative earnings per share, average return on invested capital, and revenue growth relative to a peer group of high-production public homebuilding companies over the three-year period from December 1, ~~2016~~2017 through November 30, ~~2019.~~2020. Of the shares of common stock paid out, ~~155,307~~207,775 shares, or ~~$6.2~~$8.5 million, were purchased by us in the ~~2020~~2021 first quarter to satisfy the recipients’ withholding taxes on the vesting of the PSUs. The shares purchased were not considered repurchases under the authorizations described below.

As of ~~August~~May 31, ~~2020,~~2021, we were authorized to repurchase 2,193,947 shares of our common stock under a board of directors approved share repurchase program. We did not repurchase any of our common stock under this program in the ~~nine~~six months ended ~~August~~May 31, ~~2020.~~2021.

Unrelated to the share repurchase program, our board of directors authorized in 2014 the repurchase of not more than 680,000 shares of our outstanding common stock, and also authorized potential future grants of up to 680,000 stock payment awards under the KB Home 2014 Equity Incentive Plan (“2014 Plan”), in each case solely as necessary for director elections in respect of outstanding stock appreciation rights awards granted under our Non-Employee Directors Compensation Plan. The 2014 Plan was amended in April 2016. As of ~~August~~May 31, ~~2020,~~2021, we have not repurchased any shares and no stock payment awards have been granted under the 2014 Plan, as amended, pursuant to the respective board of directors’ authorizations.

~~During each~~On April 8, 2021, we entered into an Amended Rights Agreement with Computershare Inc., as rights agent, following its approval by our stockholders at our 2021 Annual Meeting held on April 8, 2021. The Amended Rights Agreement amends the Amended and Restated Rights Agreement, dated as of April 12, 2018 (“Prior Rights Agreement”). As with the Prior Rights Agreement, the Amended Rights Agreement is intended to continue to help protect our net operating losses and other deferred tax assets from an ownership change under Section 382 of the Internal Revenue Code. The Amended Rights Agreement extended the latest possible expiration date of the rights issued pursuant to the Prior Rights Agreement to the close of business on April 30, 2024, and made certain other related changes. Otherwise, the Amended Rights Agreement’s terms are substantively the same as those of the Prior Rights Agreement, which were disclosed in the Notes to Consolidated Financial Statements in our Annual Report on Form 10-K for the year ended November 30, 2020.

In the three-month ~~periods~~period ended ~~August~~May 31, ~~2020 and 2019,~~2021, our board of directors declared, and we paid, a quarterly cash ~~dividends~~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 $.09 per share. Quarterly cash dividends declared and paid ~~during~~on our common stock in the ~~nine-month~~six-month periods ended ~~August~~May 31, 2021 and 2020 ~~and 2019~~ totaled ~~$.27~~$.30 per share and ~~$.14~~$.18 per share of common stock, respectively. Subsequent to the end of the 2020 third quarter, on October 8, 2020, our board of directors approved an increase in the quarterly cash dividend on our common stock to $.15 per share from $.09 per share, and declared the next quarterly dividend, at the new rate, payable on November 26, 2020 to stockholders of record on November 12, 2020.


~~20.~~	~~Stock-Based Compensation~~

20. Stock-Based Compensation

Stock Options. We estimate the grant-date fair value of stock options using the Black-Scholes option-pricing model. The following table summarizes stock option transactions for the ~~nine~~six months ended ~~August~~May 31, ~~2020:~~2021:

Options
Weighted
Average Exercise
Price
Options outstanding at beginning of period 4,163,481
$ 13.00
Granted 0
0
Exercised (708,372 ) 11.77
Cancelled (6,000 ) 45.16
Options outstanding at end of period 3,449,109
$ 13.20
Options exercisable at end of period 3,449,109
$ 13.20


	Options	Weighted Average Exercise Price
Options outstanding at beginning of period	2,462,714	$	15.32
Granted	0	0
Exercised	(228,651)	15.35
Cancelled	0	0
Options outstanding at end of period	2,234,063	$	15.32
Options exercisable at end of period	2,234,063	$	15.32

We have not granted any ~~new~~ stock option awards since 2016. As of ~~August~~May 31, ~~2020~~,2021, stock options outstanding and stock options exercisable each had a weighted average remaining contractual life of ~~3.9~~4.1 years. ~~At August 31, 2020,~~As all outstanding stock options have been fully vested since 2019, there was 0 unrecognized compensation expense related to stock option awards ~~as all these awards were fully vested. For the three-month~~at May 31, 2021 and ~~nine-month periods ended~~ ~~August 31, 2020, there was~~ 0 stock-based compensation expense associated with stock ~~options. For~~options for the three-month and ~~nine-month~~six-month periods ended ~~August~~May 31, ~~2019, stock-based compensation expense associated with stock options was nominal.~~2021 and 2020. Stock options outstanding and stock options exercisable each had an aggregate

intrinsic value of ~~$77.8~~$70.3 million at ~~August~~May 31, ~~2020.~~2021. (The intrinsic value of a stock option is the amount by which the market value of a share of the underlying common stock exceeds the exercise price of the stock option.)

Other Stock-Based Awards. From time to time, we grant restricted stock and PSUs to various employees as a compensation benefit. We recognized total compensation expense of ~~$4.6~~$8.1 million and ~~$4.5~~$3.1 million for the three months ended ~~August~~May 31, ~~2020~~2021 and ~~2019,~~2020, respectively, related to restricted stock and PSUs. For the ~~nine~~six months ended ~~August~~May 31, ~~2020~~2021 and ~~2019,~~2020, we recognized total compensation expense of ~~$12.7~~$13.7 million and ~~$14.4~~$8.1 million, respectively, related to restricted stock and PSUs.

21. Supplemental Disclosure to Consolidated Statements of Cash Flows


~~21.~~	~~Supplemental Disclosure to Consolidated Statements of Cash Flows~~

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


	Six Months Ended May 31,
	2021		2020
Summary of cash and cash equivalents at end of period:
Homebuilding	$	608,069	$	575,006
Financial services	978		1,027
Total	$	609,047	$	576,033
Supplemental disclosures of cash flow information:
Interest paid, net of amounts capitalized	$	(164)	$	249
Income taxes paid	26,295		1,078
Supplemental disclosures of non-cash activities:
Reclassification of federal tax refund from deferred tax assets to receivables	0		82,617
Increase in operating lease right-of-use assets and lease liabilities due to adoption of ASC 842	0		31,199
Inventories acquired through seller financing	0		18,045
Decrease in consolidated inventories not owned	(5,223)		(10,414)
Increase in inventories due to distributions of land and land development from an unconsolidated joint venture	4,905		5,360

Nine Months Ended August 31,
2020 2019
Summary of cash and cash equivalents at end of period:
Homebuilding $ 722,033
$ 183,794
Financial services 1,093
1,043
Total $ 723,126
$ 184,837
Supplemental disclosures of cash flow information:
Interest paid, net of amounts capitalized $ (3,544 ) $ (13,311 )
Income taxes paid 8,436
3,962
Supplemental disclosures of non-cash activities:
Reclassification of federal tax refund from deferred tax assets to receivables $ 82,617
$ 0
Increase in operating lease right-of-use assets and lease liabilities due to adoption of ASC 842 31,199
—
Inventories acquired through seller financing 18,045
8,967
Increase (decrease) in consolidated inventories not owned 4,992
(20,048 )
Increase in inventories due to distributions of land and land development from an unconsolidated joint venture 6,996
6,288
Decrease in inventories due to adoption of ASC 606 —
(35,288 )
Increase in property and equipment, net due to adoption of ASC 606 —
31,194

22. Subsequent Events


~~22.~~	~~Supplemental Guarantor Information~~

~~Our~~On June 9, 2021, pursuant to the 2020 Shelf Registration, 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. The 4.00% Senior Notes due 2031 represent senior unsecured obligations ~~to pay principal, premium, if any,~~of ours and ~~interest~~rank equally in right of payment with all of our existing unsecured and unsubordinated indebtedness. Interest on the ~~senior notes~~4.00% Senior Notes due 2031 is payable semi-annually in arrears on June 15 and ~~borrowings, if any, under~~December 15, commencing on December 15, 2021. The 4.00% Senior Notes due 2031 will mature on June 15, 2031.

We used a portion of the ~~Credit Facility are guaranteed~~net proceeds from the issuance of the 4.00% Senior Notes due 2031 to purchase, pursuant to a tender offer that expired on ~~a joint and several basis by certain~~June 8, 2021, $269.8 million in aggregate principal amount of our ~~subsidiaries (“Guarantor Subsidiaries”). The guarantees are full and unconditional, and~~outstanding $450.0 million of 7.00% Senior Notes due 2021. We intend to use the ~~Guarantor Subsidiaries are~~ ~~100%~~ ~~owned by us. Pursuant~~remaining net proceeds together with cash on hand to redeem the ~~terms~~remaining $180.2 million of 7.00% Senior Notes due 2021 at par value on September 15, 2021. We expect to recognize a charge of approximately $5.0 million for the ~~indenture governing~~early extinguishment of debt in the ~~senior notes and the terms~~2021 third quarter.

On July 8, 2021, our board of ~~the Credit Facility, if any~~directors authorized us to repurchase a total of ~~the Guarantor Subsidiaries ceases~~up 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~~5,000,000 shares of our ~~non-guarantor subsidiaries do~~outstanding common stock. This authorization reaffirmed and incorporated the then-current balance of 2,193,947 shares that remained under a prior board-approved share repurchase program. Repurchases under this 5,000,000 share repurchase authorization may occur periodically through open market purchases, privately negotiated transactions or otherwise, with the timing and amount at management’s discretion and dependent on market and business conditions and other factors. This share repurchase authorization will continue in effect until fully used or earlier terminated or suspended by our board of directors, and does 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 ofobligate us to purchase any other of our or our subsidiaries’ indebtedness are terminated at or prior to the time of such release. We have determined that separate, full financial statements of the Guarantor Subsidiaries would not be material to investors and, accordingly, supplemental financial information for the Guarantor Subsidiaries is presented.shares.

~~The supplemental financial information for all periods presented below reflects the relevant subsidiaries that were Guarantor Subsidiaries as of~~ ~~August 31, 2020~~.

~~Condensed Consolidating Statements of Operations (in thousands)~~

Three Months Ended August 31, 2020

KB Home
Corporate

Guarantor
Subsidiaries

Non-Guarantor
Subsidiaries

Consolidating
Adjustments
Total
Total revenues $ 0
$ 908,657
$ 90,356
$ 0
$ 999,013
Homebuilding:
Revenues $ 0
$ 908,657
$ 86,491
$ 0
$ 995,148
Construction and land costs 0
(725,215 ) (73,280 ) 0
(798,495 )
Selling, general and administrative expenses (22,699 ) (80,978 ) (4,033 ) 0
(107,710 )
Operating income (loss) (22,699 ) 102,464
9,178
0
88,943
Interest income 784
0
2
0
786
Interest expense (29,552 ) (15 ) (1,487 ) 31,054
0
Intercompany interest 78,222
(43,112 ) (4,056 ) (31,054 ) 0
Equity in income of unconsolidated joint ventures 0
1,922
0
0
1,922
Homebuilding pretax income 26,755
61,259
3,637
0
91,651
Financial services pretax income 0
0
9,664
0
9,664
Total pretax income 26,755
61,259
13,301
0
101,315
Income tax expense (6,700 ) (13,300 ) (2,900 ) 0
(22,900 )
Equity in net income of subsidiaries 58,360
0
0
(58,360 ) 0
Net income $ 78,415
$ 47,959
$ 10,401
$ (58,360 ) $ 78,415

Three Months Ended August 31, 2019

KB Home
Corporate

Guarantor
Subsidiaries

Non-Guarantor
Subsidiaries

Consolidating
Adjustments
Total
Total revenues $ 0
$ 1,061,698
$ 99,088
$ 0
$ 1,160,786
Homebuilding:
Revenues $ 0
$ 1,061,698
$ 95,157
$ 0
$ 1,156,855
Construction and land costs 0
(859,733 ) (84,021 ) 0
(943,754 )
Selling, general and administrative expenses (23,619 ) (95,376 ) (8,631 ) 0
(127,626 )
Operating income (loss) (23,619 ) 106,589
2,505
0
85,475
Interest income 140
20
41
0
201
Interest expense (34,488 ) (175 ) (1,361 ) 36,024
0
Intercompany interest 84,880
(45,826 ) (3,030 ) (36,024 ) 0
Equity in loss of unconsolidated joint ventures 0
(384 ) 0
0
(384 )
Homebuilding pretax income (loss) 26,913
60,224
(1,845 ) 0
85,292
Financial services pretax income 0
0
6,644
0
6,644
Total pretax income 26,913
60,224
4,799
0
91,936
Income tax expense (6,900 ) (14,900 ) (2,000 ) 0
(23,800 )
Equity in net income of subsidiaries 48,123
0
0
(48,123 ) 0
Net income $ 68,136
$ 45,324
$ 2,799
$ (48,123 ) $ 68,136

Nine Months Ended August 31, 2020

KB Home
Corporate

Guarantor
Subsidiaries

Non-Guarantor
Subsidiaries

Consolidating
Adjustments
Total
Total revenues $ 0
$ 2,735,339
$ 253,579
$ 0
$ 2,988,918
Homebuilding:
Revenues $ 0
$ 2,735,339
$ 242,471
$ 0
$ 2,977,810
Construction and land costs 0
(2,218,683 ) (210,318 ) 0
(2,429,001 )
Selling, general and administrative expenses (75,129 ) (257,460 ) (15,493 ) 0
(348,082 )
Operating income (loss) (75,129 ) 259,196
16,660
0
200,727
Interest income 2,075
12
76
0
2,163
Interest expense (88,648 ) (73 ) (4,350 ) 93,071
0
Intercompany interest 238,780
(133,637 ) (12,072 ) (93,071 ) 0
Equity in income of unconsolidated joint ventures 0
11,981
0
0
11,981
Homebuilding pretax income 77,078
137,479
314
0
214,871
Financial services pretax income 0
0
23,081
0
23,081
Total pretax income 77,078
137,479
23,395
0
237,952
Income tax expense (16,500 ) (26,200 ) (5,100 ) 0
(47,800 )
Equity in net income of subsidiaries 129,574
0
0
(129,574 ) 0
Net income $ 190,152
$ 111,279
$ 18,295
$ (129,574 ) $ 190,152

Nine Months Ended August 31, 2019

KB Home
Corporate

Guarantor
Subsidiaries

Non-Guarantor
Subsidiaries

Consolidating
Adjustments
Total
Total revenues $ 0
$ 2,739,096
$ 254,976
$ 0
$ 2,994,072
Homebuilding:
Revenues $ 0
$ 2,739,096
$ 245,218
$ 0
$ 2,984,314
Construction and land costs 0
(2,226,829 ) (231,524 ) 0
(2,458,353 )
Selling, general and administrative expenses (76,507 ) (268,506 ) (12,035 ) 0
(357,048 )
Operating income (loss) (76,507 ) 243,761
1,659
0
168,913
Interest income 1,549
20
176
0
1,745
Interest expense (102,763 ) (630 ) (3,963 ) 107,356
0
Intercompany interest 245,090
(130,142 ) (7,592 ) (107,356 ) 0
Equity in loss of unconsolidated joint ventures 0
(1,159 ) 0
0
(1,159 )
Homebuilding pretax income (loss) 67,369
111,850
(9,720 ) 0
169,499
Financial services pretax income 0
0
13,709
0
13,709
Total pretax income 67,369
111,850
3,989
0
183,208
Income tax expense (10,400 ) (21,300 ) (5,900 ) 0
(37,600 )
Equity in net income of subsidiaries 88,639
0
0
(88,639 ) 0
Net income (loss) $ 145,608
$ 90,550
$ (1,911 ) $ (88,639 ) $ 145,608

~~Condensed Consolidating Balance Sheets (in thousands)~~

August 31, 2020

KB Home
Corporate

Guarantor
Subsidiaries

Non-Guarantor
Subsidiaries

Consolidating
Adjustments
Total
Assets
Homebuilding:
Cash and cash equivalents $ 649,859
$ 43,395
$ 28,779
$ 0
$ 722,033
Receivables 39,475
166,454
63,722
0
269,651
Inventories 0
3,340,657
330,472
0
3,671,129
Investments in unconsolidated joint ventures 0
48,821
0
0
48,821
Property and equipment, net 29,066
32,337
3,216
0
64,619
Deferred tax assets, net 83,027
159,543
(1,399 ) 0
241,171
Other assets 95,964
22,625
6,653
0
125,242
897,391
3,813,832
431,443
0
5,142,666
Financial services 0
0
34,761
0
34,761
Intercompany receivables 3,486,621
0
213,647
(3,700,268 ) 0
Investments in subsidiaries 129,869
0
0
(129,869 ) 0
Total assets $ 4,513,881
$ 3,813,832
$ 679,851
$ (3,830,137 ) $ 5,177,427
Liabilities and stockholders’ equity
Homebuilding:
Accounts payable, accrued expenses and other liabilities $ 143,912
$ 434,064
$ 284,374
$ 0
$ 862,350
Notes payable 1,716,974
5,620
25,110
0
1,747,704
1,860,886
439,684
309,484
0
2,610,054
Financial services 0
0
2,065
0
2,065
Intercompany payables 87,687
3,312,907
299,674
(3,700,268 ) 0
Stockholders’ equity 2,565,308
61,241
68,628
(129,869 ) 2,565,308
Total liabilities and stockholders’ equity $ 4,513,881
$ 3,813,832
$ 679,851
$ (3,830,137 ) $ 5,177,427

November 30, 2019

KB Home
Corporate

Guarantor
Subsidiaries

Non-Guarantor
Subsidiaries

Consolidating
Adjustments
Total
Assets
Homebuilding:
Cash and cash equivalents $ 357,966
$ 65,434
$ 30,414
$ 0
$ 453,814
Receivables 1,934
181,047
66,074
0
249,055
Inventories 0
3,400,307
304,295
0
3,704,602
Investments in unconsolidated joint ventures 0
57,038
0
0
57,038
Property and equipment, net 24,250
37,539
3,254
0
65,043
Deferred tax assets, net 96,301
237,877
30,315
0
364,493
Other assets 78,686
2,666
1,689
0
83,041
559,137
3,981,908
436,041
0
4,977,086
Financial services 0
0
38,396
0
38,396
Intercompany receivables 3,624,081
0
186,022
(3,810,103 ) 0
Investments in subsidiaries 115,753
0
0
(115,753 ) 0
Total assets $ 4,298,971
$ 3,981,908
$ 660,459
$ (3,925,856 ) $ 5,015,482
Liabilities and stockholders’ equity
Homebuilding:
Accounts payable, accrued expenses and other liabilities $ 139,137
$ 453,929
$ 288,489
$ 0
$ 881,555
Notes payable 1,715,748
7,889
25,110
0
1,748,747
1,854,885
461,818
313,599
0
2,630,302
Financial services 0
0
2,058
0
2,058
Intercompany payables 60,964
3,520,090
229,049
(3,810,103 ) 0
Stockholders’ equity 2,383,122
0
115,753
(115,753 ) 2,383,122
Total liabilities and stockholders’ equity $ 4,298,971
$ 3,981,908
$ 660,459
$ (3,925,856 ) $ 5,015,482

~~Condensed Consolidating Statements of Cash Flows (in thousands)~~

Nine Months Ended August 31, 2020

KB Home
Corporate

Guarantor
Subsidiaries

Non-Guarantor
Subsidiaries

Consolidating
Adjustments
Total
Net cash provided by operating activities $ 62,684
$ 253,483
$ 13,044
$ 0
$ 329,211
Cash flows from investing activities:
Contributions to unconsolidated joint ventures 0
(6,048 ) 0
0
(6,048 )
Return of investments in unconsolidated joint ventures 0
8,816
0
0
8,816
Purchases of property and equipment, net (5,148 ) (12,344 ) (3,662 ) 0
(21,154 )
Intercompany 256,600
0
0
(256,600 ) 0
Net cash provided by (used in) investing activities 251,452
(9,576 ) (3,662 ) (256,600 ) (18,386 )
Cash flows from financing activities:
Payments on mortgages and land contracts due to land sellers and other loans 0
(20,314 ) 0
0
(20,314 )
Issuance of common stock under employee stock plans 8,404
0
0
0
8,404
Tax payments associated with stock-based compensation awards (6,219 ) 0
0
0
(6,219 )
Payments of cash dividends (24,428 ) 0
0
0
(24,428 )
Intercompany 0
(245,632 ) (10,968 ) 256,600
0
Net cash used in financing activities (22,243 ) (265,946 ) (10,968 ) 256,600
(42,557 )
Net increase (decrease) in cash and cash equivalents 291,893
(22,039 ) (1,586 ) 0
268,268
Cash and cash equivalents at beginning of period 357,966
65,434
31,458
0
454,858
Cash and cash equivalents at end of period $ 649,859
$ 43,395
$ 29,872
$ 0
$ 723,126

Nine Months Ended August 31, 2019

KB Home
Corporate

Guarantor
Subsidiaries

Non-Guarantor
Subsidiaries

Consolidating
Adjustments
Total
Net cash provided by (used in) operating activities $ 92,935
$ (335,428 ) $ 90,349
$ 0
$ (152,144 )
Cash flows from investing activities:
Contributions to unconsolidated joint ventures 0
(7,656 ) 0
0
(7,656 )
Return of investments in unconsolidated joint ventures 0
5,001
0
0
5,001
Proceeds from sale of building 0
5,804
0
0
5,804
Purchases of property and equipment, net (4,728 ) (18,252 ) (9,231 ) 0
(32,211 )
Intercompany (274,010 ) 0
0
274,010
0
Net cash used in investing activities (278,738 ) (15,103 ) (9,231 ) 274,010
(29,062 )
Cash flows from financing activities:
Proceeds from issuance of debt 405,250
0
0
0
405,250
Payment of debt issuance costs (5,209 ) 0
0
0
(5,209 )
Repayment of senior notes (630,000 ) 0
0
0
(630,000 )
Borrowings under revolving credit facility 460,000
0
0
0
460,000
Repayments under revolving credit facility (410,000 ) 0
0
0
(410,000 )
Payments on mortgages and land contracts due to land sellers and other loans 0
(32,149 ) 0
0
(32,149 )
Issuance of common stock under employee stock plans 18,729
0
0
0
18,729
Tax payments associated with stock-based compensation awards (3,345 ) 0
0
0
(3,345 )
Payments of cash dividends (12,352 ) 0
0
0
(12,352 )
Intercompany 0
372,454
(98,444 ) (274,010 ) 0
Net cash provided by (used in) financing activities (176,927 ) 340,305
(98,444 ) (274,010 ) (209,076 )
Net decrease in cash and cash equivalents (362,730 ) (10,226 ) (17,326 ) 0
(390,282 )
Cash and cash equivalents at beginning of period 429,977
114,269
30,873
0
575,119
Cash and cash equivalents at end of period $ 67,247
$ 104,043
$ 13,547
$ 0
$ 184,837


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

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

Results of Operations

OVERVIEW

Revenues are generated from our homebuilding and financial services operations. The following table presents a summary of our consolidated results of operations (dollars in thousands, except per share amounts):


	Three Months Ended May 31,						Six Months Ended May 31,
	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	%

Three Months Ended August 31, Nine Months Ended August 31,
2020 2019 Variance 2020 2019 Variance
Revenues:
Homebuilding $ 995,148
$ 1,156,855
(14) % $ 2,977,810
$ 2,984,314
— %
Financial services 3,865
3,931
(2 ) 11,108
9,758
14
Total revenues $ 999,013
$ 1,160,786
(14) % $ 2,988,918
$ 2,994,072
— %
Pretax income:
Homebuilding $ 91,651
$ 85,292
7 % $ 214,871
$ 169,499
27 %
Financial services 9,664
6,644
45
23,081
13,709
68
Total pretax income 101,315
91,936
10
237,952
183,208
30
Income tax expense (22,900 ) (23,800 ) 4
(47,800 ) (37,600 ) (27 )
Net income $ 78,415
$ 68,136
15 % $ 190,152
$ 145,608
31 %
Basic earnings per share $ .86
$ .77
12 % $ 2.09
$ 1.65
27 %
Diluted earnings per share $ .83
$ .73
14 % $ 2.02
$ 1.55
30 %

~~During~~As the ~~first nine months~~U.S. economy began to recover from the severe impacts of the COVID-19 pandemic that started in the 2020 ~~we, like many companies worldwide, experienced significant variability in~~second quarter, housing market conditions ~~starting~~remained generally healthy from the 2020 second half through the six months ended May 31, 2021. Continued solid first-time buyer interest in ~~mid-March~~homeownership, underscoring the large millennial and Generation Z demographic groups that ~~produced stark differences~~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 ~~results between~~business throughout the ~~first, second and third quarters. Our 2020 first quarter was particularly strong, as we generated~~period. First-time buyers accounted for 64% of our homes delivered in the ~~highest revenues, net orders, ending backlog and ending backlog value for any first quarter since 2007 and increased our net income 99% year over year.~~

~~In mid-March 2020,~~three months ended May 31, 2021. Reflecting the ~~outbreak of COVID-19 was declared a pandemic, and related COVID-19 control responses~~robust demand in our served markets, ~~including quarantines, “stay-at-home”~~the number and value of our net orders for the 2021 second quarter rose 145% and ~~similar mandates~~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 ~~many individuals~~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 ~~substantially restrict daily activities~~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 ~~many businesses~~the quarter. We are closely monitoring the risks to ~~curtail or cease normal~~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 ~~severely impacted~~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

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 second quarter. The combination of an unprecedented steep drop in employment and economic activity in March that caused the United States to enter into a recession, which continues up to the date of this report; significant stock market and secondary mortgage market volatility; ongoing uncertainty about the virulence of COVID-19 and the availability of generally effective therapeutics or a vaccine; and weakened consumer confidence drastically decreased demand for new homes (including homes ordered in the first quarter) for most of our 2020 second quarter. ~~Operationally,~~During that period, we temporarily closed our sales centers, model homes and design studios to the public and shifted to virtual sales tools and appointment-only personalized home sales processes, where permitted. These steps along with the negative prevailing business conditions due to the pandemic and restrictive COVID-19 control responses moderated our order pace significantly. In addition, home purchase cancellations increased considerably, largely reflecting our proactive efforts to assure a backlog of qualified homebuyers amid the pandemic-induced economic downturn. These two factors contributed toexperienced 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 ~~net orders, and we entered the third quarter with the number~~included severance charges of homes in beginning backlog down 14% year over year. Further, our construction activities were restricted in many jurisdictions, and completely shut down in some of them, and together with the reduced availability or capacity of some municipal and private services necessary to build and deliver homes, we experienced home delivery delays during most of the second quarter, which tempered our revenues for the period.$6.7 million.

~~Since~~With the easing to varying degrees of restrictive public health ~~restrictions~~orders in our served markets beginning in May 2020, all of our communities have been open to walk-in traffic, following appropriate safety protocols and applicable public health guidelines. We have also continued to engage with customers using our robust virtual selling capability, including enhanced online tools such as virtual home tours, interactive floor plans, live chats with sales counselors and online consultations with our design studios. Reflecting the shift in operating conditions, our net orders began to rebound significantly ~~in May 2020~~ 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 ~~upward trajectory continued into~~past several quarters substantially expanded the ~~2020 third quarter and accelerated as the quarter progressed. This positive momentum resulted~~number of homes in our ~~net orders~~

~~for~~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 2020 third quarter increasing to their highest level of any quarter since 2007. Although housing market conditions in the 2020 third quarter improved significantly from the prior quarter, our deliveries and revenues for the period were tempered primarily by the negative impact that COVID-19 and the related COVID-19 control responses had on our 2020 second quarter.

While we limited our land investments during the second quarter and most of the third quarter to preserve cash and liquidity due to the uncertainty surrounding the COVID-19 pandemic, given the sustainedongoing strong housing demand in the ~~2020 third quarter,~~2021 first half, we ~~have resumed~~continued to increase our land acquisition and development ~~activities~~investments, as we did in the latter part of 2020, to ~~bolster~~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 infor our 2022 full year.

Our favorable outlook could be materially affected by adverse developments, if any, related to the ~~future.~~

~~Although~~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 ~~trajectory~~COVID-19 pandemic has been resolved as a public health crisis, it retains the potential to cause further and ~~strength~~more severe disruption of global and national economies, the ~~current recovery remains uncertain,~~U.S. housing market and our business, including our net orders, backlog and revenues. In addition, as mentioned above, we are ~~seeing some~~continuing to experience trade labor and building ~~material~~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 ~~fourth~~second quarter, and future periods, and the recovery could be slowed or reversed by a number of factors, including a possible widespread resurgence in COVID-19 infections combined with the seasonal flu and others discussed below under Part II, Item 1A – Risk Factors, we believe we are well-positioned to operate effectively through the present environment.

~~Financial and Operational Highlights.~~ Reflecting the above-described impact from the COVID-19 pandemic and related COVID-19 control responses during our 2020 second quarter, housing revenues for the 2020 third quarter decreased 15% from the year-earlier quarter due to a 16% decline in the number of homes delivered to 2,545, partly offset by a slight increase in the overall average selling price of those homes to $384,700. Homebuilding operating income for the three months ended August 31, 2020 increased 4% year over year to $88.9 million. At the same time, homebuilding operating income as a percentage of related revenues improved 150 basis points to 8.9%. Excluding inventory-related charges of $6.9 million in the current quarter and $5.3 million in the year-earlier quarter, this metric improved 180 basis points to 9.6%. Our housing gross profits for the quarter decreased compared to the year-earlier period, mainly due to lower housing revenues, partly offset by a 140-basis point improvement in our housing gross profit margin to 19.9%.

The year-over-year increase in our housing gross profit margin in the 2020 third quarter primarily reflected a mix shift of homes delivered, lower relative amortization of previously capitalized interest, workforce realignment and reductions in the 2020 second quarter in response to the significant negative impact from the pandemic on our business, and a favorable pricing environment that enabled us to increase selling prices in many of our communities during the period. Our selling, general and administrative expense ratio improved 10 basis points to 11.0% of housing revenues, primarily due to our targeted actions, including workforce reductions in the 2020 second quarter, to reduce overhead costs, partly offset by reduced operating leverage from lower housing revenues.

The following table presents information concerning our net orders, cancellation rates, ending backlog and community count for the three-month and nine-month periods ended August 31, 2020 and 2019 (dollars in thousands):

Three Months Ended August 31, Nine Months Ended August 31,
2020 2019 2020 2019
Net orders 4,214
3,325
9,467
10,064
Net order value (a) $ 1,643,760
$ 1,276,242
$ 3,714,858
$ 3,831,017
Cancellation rates (b) 17 % 20 % 23 % 18 %
Ending backlog — homes 6,749
6,230
6,749
6,230
Ending backlog — value $ 2,567,664
$ 2,296,797
$ 2,567,664
$ 2,296,797
Ending community count 232
254
232
254
Average community count 238
255
244
249


~~(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.~~

~~Net Orders.~~ With housing market conditions strengthening in the 2020 third quarter as discussed above, net orders from our homebuilding operations increased 27% from the year-earlier period to their highest third-quarter level since 2005, reflecting an increase in monthly net orders per community to 5.9 from 4.3 in the year-earlier period, partly offset by a decrease in our average community count. Our net order comparisons improved significantly as the quarter progressed, with monthly net orders up 11% in June, 23% in July and 50% in August, each on a year-over-year basis. This higher net order pace was fueled by the combination

of historically low mortgage interest rates, a limited supply of resale inventory, an underproduction of new homes over the past decade, favorable demographic trends, and consumers’ desire to own a single-family home. We believe our Built-to-Order Model, which provides personalization and choice, also was a key factor that contributed to our strong 2020 third quarter net orders.

The value of our net orders for the three months ended August 31, 2020 rose 29% from the year-earlier period as a result of the growth in net orders and a 2% increase in the overall average selling price of those orders. The year-over-year increase in net orders and overall net order value reflected improvements in all of our homebuilding reporting segments, with net order value increases ranging from 2% in our Southeast segment to 34% in our West Coast segment. In our West Coast segment, net order value rose due to a 39% increase in net orders, reflecting the segment’s higher monthly net orders per community, partly offset by a 4% decrease in the average selling price of those orders. In our Southeast segment, the year-over-year improvement in net order value reflected 5% growth in net orders as a result of the segment’s higher monthly net orders per community, partly offset by a 3% decrease in the average selling price of those orders. Our cancellation rate as a percentage of gross orders for the three months ended August 31, 2020 improved from the year-earlier quarter.

While our year-over-year net order comparison improved in the 2020 third quarter, the year-over-year decrease in our 2020 second quarter net orders is expected to reduce our deliveries and revenues for the 2020 fourth quarter and full year compared to the corresponding year-earlier periods.

~~Backlog~~. The number of homes in our backlog at August 31, 2020 increased 8% from August 31, 2019, mainly due to the substantial increase in our net orders during the 2020 third quarter, as our beginning backlog was down 14% year over year. The potential future housing revenues in our backlog at August 31, 2020 rose 12% from the prior-year period, reflecting both the higher number of homes in our backlog and a 3% increase in the overall average selling price of those homes.

~~Community Count.~~ We use the term “community count” to refer to the number of communities with at least five homes/lots left to sell at the end of a reporting period. Our average community count for the 2020 third quarter declined 7% from the year-earlier period, reflecting decreases of 19% in our Southwest homebuilding reporting segment, 4% in our Central segment and 16% in our Southeast segment, partly offset by an increase of 4% in our West Coast segment. Our ending community count was down 9% from the prior-year quarter. The year-over-year decreases in our overall average and ending community counts primarily reflected the close-out of communities earlier than planned due to our accelerated net order pace, a decline in the number of active communities that were previously classified as land held for future development, our moderated investments in land development in the 2020 second and third quarters, and delays in community openings due in part to the COVID-19 pandemic.

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

Three Months Ended August 31, Nine Months Ended August 31,
2020 2019 2020 2019
Revenues:
Housing $ 979,113
$ 1,152,618
$ 2,960,901
$ 2,968,588
Land 16,035
4,237
16,909
15,726
Total 995,148
1,156,855
2,977,810
2,984,314
Costs and expenses:
Construction and land costs
Housing (784,427 ) (939,538 ) (2,414,059 ) (2,443,937 )
Land (14,068 ) (4,216 ) (14,942 ) (14,416 )
Total (798,495 ) (943,754 ) (2,429,001 ) (2,458,353 )
Selling, general and administrative expenses (107,710 ) (127,626 ) (348,082 ) (357,048 )
Total (906,205 ) (1,071,380 ) (2,777,083 ) (2,815,401 )
Operating income $ 88,943
$ 85,475
$ 200,727
$ 168,913


	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

Three Months Ended August 31, Nine Months Ended August 31,
2020 2019 2020 2019
Homes delivered 2,545
3,022
7,796
7,942
Average selling price $ 384,700
$ 381,400
$ 379,800
$ 373,800
Housing gross profit margin as a percentage of housing revenues 19.9 % 18.5 % 18.5 % 17.7 %
Housing gross profit margin excluding inventory-related charges as a percentage of housing revenues 20.6 % 18.9 % 19.0 % 18.1 %
Adjusted housing gross profit margin as a percentage of housing revenues 23.7 % 22.3 % 22.2 % 21.7 %
Selling, general and administrative expenses as a percentage of housing revenues 11.0 % 11.1 % 11.8 % 12.0 %
Operating income as a percentage of homebuilding revenues 8.9 % 7.4 % 6.7 % 5.7 %
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,
	2021		% of Housing Revenues		2020		% of Housing Revenues		2021		% of Housing Revenues		2020		% of Housing 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

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.

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 ~~August~~May 31, ~~2020~~,2021, our homebuilding reporting segments ~~consisted of~~conducted ongoing operations ~~located~~ 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 Ended May 31,
	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 Community Count
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)	%


	Three Months Ended August 31,												Six Months Ended May 31,
	Homes Delivered				Net Orders			Cancellation Rates					Homes Delivered				Net Orders				Cancellation Rates
Segment	2020		2019		2020		2019	2020		2019		Segment	2021		2020		2021		2020		2021			2020
West Coast	626		838		1,329		957	12	%	20	%	West Coast	1,890		1,379		2,460		1,534		9		%	23	%
Southwest	628		566		857		706	13		14		Southwest	1,249		1,155		1,791		1,070		7			27
Central	958		1,098		1,469		1,132	22		22		Central	2,243		1,923		2,890		1,936		12			25
Southeast	333		520		559		530	19		22		Southeast	986		794		1,451		713		11			36
Total	2,545		3,022		4,214		3,325	17	%	20	%	Total	6,368		5,251		8,592		5,253		10		%	27	%


	Net Order Value						Average Community Count						Net Order Value						Average Community Count
Segment	2020		2019		Variance		2020	2019		Variance		Segment	2021		2020		Variance		2021		2020			Variance
West Coast	$	761,742	$	570,531	34	%	74	71		4	%	West Coast	$	1,716,967	$	923,352	86	%	62		75			(17)	%
Southwest	285,917		219,930		30		35	43		(19	)	Southwest	708,619		356,684		99		36		38			(5)
Central	438,697		331,635		32		88	92		(4	)	Central	1,016,687		585,926		74		78		89			(12)
Southeast	157,404		154,146		2		41	49		(16	)	Southeast	463,632		205,136		126		39		46			(15)
Total	$	1,643,760	$	1,276,242	29	%	238	255		(7)	%	Total	$	3,905,905	$	2,071,098	89	%	215		248			(13)	%

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

Nine Months Ended August 31,
Homes Delivered Net Orders Cancellation Rates
Segment 2020 2019 2020 2019 2020 2019
West Coast 2,005
2,015
2,863
2,797
18 % 18 %
Southwest 1,783
1,615
1,927
2,007
21
13
Central 2,881
2,989
3,405
3,556
24
20
Southeast 1,127
1,323
1,272
1,704
29
20
Total 7,796
7,942
9,467
10,064
23 % 18 %

Net Order Value Average Community Count
Segment 2020 2019 Variance 2020 2019 Variance
West Coast $ 1,685,094
$ 1,655,423
2 % 74
66
12 %
Southwest 642,601
632,498
2
37
41
(10 )
Central 1,024,623
1,054,203
(3 ) 89
93
(4 )
Southeast 362,540
488,893
(26 ) 44
49
(10 )
Total $ 3,714,858
$ 3,831,017
(3) % 244
249
(2) %

August 31,
Backlog – Homes Backlog – Value
Segment 2020 2019 Variance 2020 2019 Variance
West Coast 1,901
1,497
27 % $ 1,088,096
$ 883,765
23 %
Southwest 1,382
1,318
5
458,681
412,391
11
Central 2,512
2,281
10
750,831
674,614
11
Southeast 954
1,134
(16 ) 270,056
326,027
(17 )
Total 6,749
6,230
8 % $ 2,567,664
$ 2,296,797
12 %
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.

~~Revenues~~Financial Results. ~~Homebuilding~~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.

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	%


	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 ~~August~~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.

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 ~~decreased 14%~~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 ~~decline in housing revenues, partly offset by an~~420 basis-point increase in ~~land sale revenues.~~

~~Housing revenues for~~ the three months ended August 31, 2020 declined 15% year over year, reflecting a 16% decrease in the number of homes delivered, partly offset by a slight increase in the overall average selling price of those homes. Deliveries for the quarter were tempered primarily by the negative impacts associated with the COVID-19 pandemic and related COVID-19 control responses, including a 14% year-over-year decrease in the number of homes in our beginning backlog for the 2020 third quarter, as discussed above under “Overview.”

Land sale revenues for the quarter ended August 31, 2020 totaled $16.0 million, compared to $4.2 million in the year-earlier quarter. Generally, land sale revenues fluctuate with our decisions to maintain or decrease our land ownership position in certain markets based upon the volume of our holdings, our business strategy, the strength and number of developers and other land buyers in particular markets at given points in time, the availability of opportunities to sell land at acceptable prices and prevailing market conditions.

Homebuilding revenues for the nine months ended August 31, 2020 were relatively even with the corresponding period of 2019, primarily due to housing revenues remaining essentially flat, as a 2% decrease in the number of homes delivered was mostly offset by a 2% rise in the overall average selling price to $379,800.

Land sale revenues totaled $16.9 million for the nine months ended August 31, 2020 and $15.7 million for the nine months ended August 31, 2019, reflecting the factors discussed above with respect to our 2020 third quarter land sale revenues.

~~Operating Income~~. Our homebuilding operating income for the three months ended August 31, 2020 increased 4% from the year-earlier period. Homebuilding operating income for the 2020 third quarter included total inventory-related charges of $6.9 million, compared to $5.3 million in the 2019 third quarter. As a percentage of homebuilding revenues, our homebuilding operating income

for the three months ended August 31, 2020 increased 150 basis points year over year to 8.9%. Excluding inventory-related charges, our homebuilding operating income margin improved 180 basis points to 9.6% for the 2020 third quarter compared to 7.8% for the year-earlier quarter.

For the nine months ended August 31, 2020, our homebuilding operating income increased 19% from the corresponding 2019 period. Homebuilding operating income for the first nine months of 2020 included total inventory-related charges of $16.9 million and severance charges of $6.7 million. The severance charges were associated with workforce reductions made during the 2020 second quarter, as discussed above under “Overview,” and were estimated at implementation to yield annualized savings of approximately $40 million allocated between construction and land costs and selling, general and administrative expenses. In the nine months ended August 31, 2019, homebuilding operating income included $13.1 million of inventory-related charges. As a percentage of homebuilding revenues, our homebuilding operating income for the nine months ended August 31, 2020 improved 100 basis points year over year to 6.7%. Excluding inventory-related charges for both periods and the above-mentioned severance charges in the 2020 period, our homebuilding operating income margin improved 140 basis points to 7.5% for the nine months ended August 31, 2020 from 6.1% for the nine months ended August 31, 2019.

The year-over-year change in our homebuilding operating income for the three months ended August 31, 2020 largely reflected lower selling, general and administrative expenses and higher land sale profits, partly offset by lower housing gross profits. For the nine months ended August 31, 2020, the year-over-year growth in our homebuilding operating income was primarily due to an increase in housing gross profits and a decrease in selling, general and administrative expenses.

Housing gross profits of $194.7 million for the three months ended August 31, 2020 declined 9% from $213.1 million for the year-earlier period, reflecting a decrease in housing revenues, partly offset by an increase in our housing gross profit margin. Our housing gross profit margin ~~for the 2020 third quarter rose 140 basis points year over year~~ to ~~19.9%,~~20.7% that mainly ~~as a result of~~reflected a shift in ~~the~~geographic mix, ~~of homes delivered~~increased operating leverage due to higher housing revenues, and ~~a favorable pricing environment (approximately 110 basis points);~~ lower amortization of previously capitalized ~~interest~~interest. In addition, selling, general and administrative expenses as a percentage of housing revenues (approximately 30 basis points); and workforce realignment and reductions (approximately 30 basis points). These items were partly offset by an increase in inventory-related charges (approximately 30 basis points).

We incur interest principally from our borrowings to finance land acquisitions, land development, home construction and other operating and capital needs. Interest incurred totaled $31.1 million for the three months ended August 31, 2020, decreasing from $36.0 million for the year-earlier period, mainly due to our lower average debt level. All interest incurred during the three-month periods ended August 31, 2020 and 2019 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.

Interest amortized to construction and land costs associated with housing operations was $30.2 million and $38.6 million for the three-month periods ended August 31, 2020 and 2019, respectively. As a percentage of housing revenues, the amortization of previously capitalized interest associated with housing operations was 3.1% and 3.4% for the three months ended August 31, 2020 and 2019, respectively.

Excluding the amortization of previously capitalized interest associated with housing operations and the above-mentioned inventory-related charges for the three months ended August 31, 2020 and 2019, our adjusted housing gross profit margin increased 140 basis points from the year-earlier quarter to 23.7%. 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 for the 2020 third quarter decreased 16% from the year-earlier quarter, mainly due to the lower volume of homes delivered and our targeted actions, including the above-mentioned workforce reductions, to reduce overhead costs. As a percentage of housing revenues, our selling, general and administrative expenses improved ~~10 basis points, reflecting the lower expenses, partly offset by decreased operating leverage due to lower housing revenues as compared to the year-earlier quarter.~~

~~Land sales generated profits of $2.0 million for the three months ended August 31, 2020, compared to a nominal amount for the year-earlier period.~~

Our housing gross profits of $546.8 million for the nine months ended August 31, 2020 increased from $524.7 million for the year-earlier period. Housing gross profits for the first nine months of 2020 included $16.9 million of inventory-related charges, compared to $13.1 million of such charges in the year-earlier period. Our housing gross profit margin of 18.5% for the nine months ended August 31, 2020 increased 80 basis points year over year, primarily due to a decrease in construction and land costs, and lower amortization of previously capitalized interest as a percentage of housing revenues.

For the nine months ended August 31, 2020, interest incurred decreased to $93.1 million from $107.4 million for the year-earlier period, primarily due to our lower average debt level. All interest incurred during the nine-month periods ended August 31, 2020

~~and 2019 was capitalized as the average amount of our inventory qualifying for interest capitalization was higher than our average debt level for the period.~~

Interest amortized to construction and land costs associated with housing operations was $93.5 million for the nine months ended August 31, 2020, compared to $106.3 million for the nine months ended August 31, 2019. As a percentage of housing revenues, the amortization of previously capitalized interest associated with housing operations was 3.2% and 3.6% for the nine months ended August 31, 2020 and 2019, respectively.

Excluding the amortization of previously capitalized interest associated with housing operations and the above-mentioned inventory-related charges in the nine months ended August 31, 2020 and 2019, our adjusted housing gross profit margin increased 50190 basis points from the year-earlier period to ~~22.2%.~~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.

~~Selling,~~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 for the nine months ended August 31, 2020 decreased to $348.1 million from $357.0 million for the year-earlier period, primarily reflecting the lower number of homes delivered and our targeted actions to reduce overhead costs, partly offset by the above-mentioned severance charges of $6.7 million we recorded in the 2020 second quarter. Asas a percentage of housing revenues ~~selling, general~~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.

FINANCIAL SERVICES REPORTING SEGMENT

The following table presents a summary of selected financial and ~~administrative expenses improved 20 basis points~~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 ~~prior-year period~~corresponding periods of 2020 due to ~~11.8%.~~

~~Land sales generated profits of $2.0 million for the nine months ended August 31, 2020, compared to $5.5 million for the year-earlier period.~~increases in title services revenues and insurance commissions.

~~Interest Income~~Pretax income.~~. Interest~~ Our financial services pretax income ~~which is generated from short-term investments, totaled $.8 million~~ for the three months ended ~~August~~May 31, ~~2020 and $.2 million for~~2021 grew 40% from the three months ended August 31, 2019. For the nine-month periods ended August 31, 2020 and 2019, our interest income totaled $2.2 million and $1.7 million, respectively. Generally, increases and decreases in interest income are attributableyear-earlier period largely due to ~~changes~~an increase in the ~~interest-bearing average balances of short-term investments and fluctuations in interest rates.~~

~~Equity in Income (Loss) of Unconsolidated Joint Ventures. Our~~ equity in income of unconsolidated joint ~~ventures~~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 ~~$1.9 million~~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 ~~August~~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.

For the six months ended May 31, 2021, our effective tax rate increased slightly from the corresponding 2020 ~~compared~~period, primarily reflecting the increase in our pretax income, which reduced the proportionate favorable impact of excess tax benefits related to ~~equity~~stock-based compensation and federal energy tax credits on the overall rate, and a $1.7 million decrease in ~~loss of unconsolidated joint ventures of $.4~~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 ~~ended August 31, 2019. For the nine~~and six months ended ~~August~~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 ~~equity~~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 ~~of unconsolidated joint ventures was $12.0 million, compared to equity in loss of unconsolidated joint ventures of $1.2 million~~tax expense for ~~the corresponding 2019 period. The improved results in both periods of 2020 primarily reflected 17 homes and 90 homes delivered from an unconsolidated joint venture in California during~~ the three months ~~and nine~~or six months ended ~~August~~May 31, ~~2020, respectively, compared to no homes delivered from unconsolidated joint ventures in the corresponding 2019 periods.~~2021.

Further information regarding our ~~investments in unconsolidated joint ventures~~income taxes is provided in Note 914 – ~~Investments in Unconsolidated Joint Ventures~~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)
Housing gross profits	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.

Three Months Ended August 31, Nine Months Ended August 31,
2020 2019 2020 2019
Housing revenues $ 979,113
$ 1,152,618
$ 2,960,901
$ 2,968,588
Housing construction and land costs (784,427 ) (939,538 ) (2,414,059 ) (2,443,937 )
Housing gross profits 194,686
213,080
546,842
524,651
Add:    Inventory-related charges (a) 6,888
5,251
16,939
13,143
Housing gross profits excluding inventory-related charges 201,574
218,331
563,781
537,794
Add:    Amortization of previously capitalized interest (b) 30,186
38,558
93,507
106,260
Adjusted housing gross profits $ 231,760
$ 256,889
$ 657,288
$ 644,054
Housing gross profit margin as a percentage of housing revenues 19.9 % 18.5 % 18.5 % 17.7 %
Housing gross profit margin excluding inventory-related charges as a percentage of housing revenues 20.6 % 18.9 % 19.0 % 18.1 %
Adjusted housing gross profit margin as a percentage of housing revenues 23.7 % 22.3 % 22.2 % 21.7 %
(b)    Represents the amortization of previously capitalized interest associated with housing operations.


~~(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

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):


	August 31, 2020			November 30, 2019				May 31, 2021			November 30, 2020
Notes payable	$	1,747,704		$	1,748,747		Notes payable	$	1,747,447		$	1,747,175
Stockholders’ equity	2,565,308			2,383,122			Stockholders’ equity	2,886,865			2,665,769
Total capital	$	4,313,012		$	4,131,869		Total capital	$	4,634,312		$	4,412,944
Ratio of debt to capital	40.5		%	42.3		%	Ratio of debt to capital	37.7		%	39.6		%

Notes payable	$	1,747,704		$	1,748,747		Notes payable	$	1,747,447		$	1,747,175
Less: Cash and cash equivalents	(722,033		)	(453,814		)	Less: Cash and cash equivalents	(608,069)			(681,190)
Net debt	1,025,671			1,294,933			Net debt	1,139,378			1,065,985
Stockholders’ equity	2,565,308			2,383,122			Stockholders’ equity	2,886,865			2,665,769
Total capital	$	3,590,979		$	3,678,055		Total capital	$	4,026,243		$	3,731,754
Ratio of net debt to capital	28.6		%	35.2		%	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 homebuilding cash and cash equivalents, by capital (notes payable, net of homebuilding cash and cash equivalents, plus stockholders’ equity). The most directly comparable GAAP financial measure is the ratio of debt to capital. We believe the ratio of net debt to capital is a relevant and useful financial measure to investors in understanding the degree of leverage employed in our operations.

~~HOMEBUILDING REPORTING SEGMENTS~~

Below is a discussion of the financial results of 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 nine months ended August 31, 2020 were negatively affected by the impacts from the COVID-19 pandemic, as discussed above under “Overview.” In three of our four homebuilding reporting segments, we delivered fewer homes in the 2020 third quarter compared to the corresponding year-earlier quarter largely as a result of our lower beginning backlog, as discussed above under “Homebuilding – Revenues.”

~~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 August 31, Nine Months Ended August 31,
2020 2019 Variance 2020 2019 Variance
Revenues $ 379,025
$ 497,654
(24 ) % $ 1,195,404
$ 1,194,728
—
Construction and land costs (318,272 ) (414,914 ) 23
(1,017,383 ) (1,009,032 ) (1 )
Selling, general and administrative expenses (28,424 ) (38,744 ) 27
(94,197 ) (98,647 ) 5
Operating income $ 32,329
$ 43,996
(27 ) % $ 83,824
$ 87,049
(4 ) %

Homes delivered 626
838
(25 ) % 2,005
2,015
—
Average selling price $ 605,400
$ 588,800
3 % $ 596,200
$ 588,700
1 %
Housing gross profit margin 16.0 % 16.8 % (80 )bps 14.9 % 15.7 % (80 )bps

This segment’s revenues for the three months and nine months ended August 31, 2020 and 2019 were generated from both housing operations and land sales. Housing revenues for the 2020 third quarter declined 23% year over year to $379.0 million from $493.4 million, reflecting a lower number of homes delivered, partly offset by an increase in the average selling price of those homes. For the nine months ended August 31, 2020, housing revenues rose to $1.20 billion from $1.19 billion due to a slight increase in the average selling price of homes delivered as the number of homes delivered was essentially even with the year-earlier period. The year-over-year increase in the average selling price of homes delivered for the three months and nine months ended August 31, 2020 was primarily due to product and geographic mix shifts of homes delivered.

Operating income for the three months ended August 31, 2020 declined from the year-earlier period, reflecting a decrease in housing gross profits, partly offset by lower selling, general and administrative expenses. The year-over-year decrease in housing gross profits reflected lower housing revenues and a lower housing gross profit margin. The decline in the housing gross profit margin was primarily driven by an increase in inventory-related charges and a mix shift of homes delivered. Inventory-related charges totaled $5.5 million in the 2020 third quarter, compared to $5.1 million in the year-earlier quarter. Selling, general and administrative expenses as a percentage of housing revenues for the 2020 third quarter improved from the year-earlier quarter largely due to our targeted actions to reduce overhead costs and lower legal fees in the current period, partly offset by reduced operating leverage as a result of lower housing revenues.

For the nine months ended August 31, 2020, operating income decreased 4% from the year-earlier period reflecting lower housing gross profits, partly offset by lower selling, general and administrative expenses. The year-over-year decline in housing gross profits was primarily due to a decrease in the housing gross profit margin as a result of a mix shift of homes delivered, partly offset by a decrease in inventory-related charges and lower relative amortization of previously capitalized interest. Inventory-related charges impacting the housing gross profit margin totaled $10.6 million and $12.1 million for the nine-month periods ended August 31, 2020 and 2019, respectively. Selling, general and administrative expenses as a percentage of housing revenues for the nine months ended August 31, 2020 improved from the corresponding 2019 period primarily due to overhead cost reductions and lower legal fees in the current 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 August 31, Nine Months Ended August 31,
2020 2019 Variance 2020 2019 Variance
Revenues $ 223,096
$ 180,238
24 % $ 589,665
$ 522,721
13 %
Construction and land costs (167,572 ) (137,635 ) (22 ) (444,213 ) (399,445 ) (11 )
Selling, general and administrative expenses (16,128 ) (16,078 ) —
(48,760 ) (46,257 ) (5 )
Operating income $ 39,396
$ 26,525
49 % $ 96,692
$ 77,019
26 %

Homes delivered 628
566
11 % 1,783
1,615
10 %
Average selling price $ 330,700
$ 318,400
4 % $ 321,700
$ 323,700
(1 ) %
Housing gross profit margin 25.8 % 23.6 % 220 bps 25.0 % 23.6 % 140 bps

This segment’s revenues for the three-month and nine-month periods ended August 31, 2020 were from both housing operations and land sales. For the three months and nine months ended August 31, 2019, revenues were generated solely from housing operations. Housing revenues for the three months ended August 31, 2020 increased 15% year over year to $207.7 million, due to increases in both the number of homes delivered and the average selling price of those homes. The increase in the number of homes delivered was mainly due to higher net orders in the 2020 third quarter, as the beginning backlog in this segment was down 2% from the year-earlier quarter. The year-over-year rise in the average selling price for the three months ended August 31, 2020 primarily reflected a shift in product and geographic mix as well as a favorable pricing environment in this segment. For the nine months ended August 31, 2020, housing revenues rose 10% year over year to $573.5 million, reflecting an increase in the number of homes delivered, partially offset by a slight decrease in the average selling price of those homes.

Operating income for the three months ended August 31, 2020 increased from the corresponding 2019 period due to higher housing gross profits as selling, general and administrative expenses remained flat. The year-over-year increase in housing gross profits primarily reflected higher housing revenues and a higher housing gross profit margin compared with the year-earlier period. The housing gross profit margin for the three months ended August 31, 2020 reflected increased operating leverage due to higher housing revenues, a shift in the mix of homes delivered, a favorable pricing environment, and lower relative amortization of previously capitalized interest. Land sales generated profits of $2.0 million for the three months ended August 31, 2020. Selling, general and administrative expenses as a percentage of housing revenues for the 2020 third quarter improved from the corresponding 2019 quarter mainly as a result of increased operating leverage due to higher housing revenues, overhead cost reductions, legal recoveries in the current quarter, and higher marketing expenses in the year-earlier quarter to support new community openings.

For the nine months ended August 31, 2020, operating income increased from the corresponding 2019 period due to higher housing gross profits, partly offset by higher selling, general and administrative expenses. Housing gross profits for the first nine months of 2020 increased from the year-earlier period mainly due to higher housing revenues and a higher housing gross profit margin. The improvement in the housing gross profit margin was primarily due to lower relative amortization of previously capitalized interest, partly offset by favorable warranty adjustments in the first nine months of 2019. Land sales generated profits of $2.0 million for the nine months ended August 31, 2020. Selling, general and administrative expenses as a percentage of housing revenues for the first nine months of 2020 improved from the corresponding 2019 period primarily for the reasons described above with respect to the three months ended August 31, 2020.

~~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 August 31, Nine Months Ended August 31,
2020 2019 Variance 2020 2019 Variance
Revenues $ 297,022
$ 326,058
(9 ) % $ 864,728
$ 874,730
(1 ) %
Construction and land costs (232,269 ) (259,195 ) 10
(688,683 ) (705,641 ) 2
Selling, general and administrative expenses (29,331 ) (32,446 ) 10
(91,061 ) (88,890 ) (2 )
Operating income $ 35,422
$ 34,417
3 % $ 84,984
$ 80,199
6 %

Three Months Ended August 31, Nine Months Ended August 31,
2020 2019 Variance 2020 2019 Variance
Homes delivered 958
1,098
(13 ) % 2,881
2,989
(4 ) %
Average selling price $ 310,000
$ 297,000
4 % $ 300,100
$ 290,200
3 %
Housing gross profit margin 21.8 % 20.5 % 130 bps 20.4 % 19.3 % 110 bps

This segment’s revenues for the three months and nine months ended August 31, 2020 and the three months ended August 31, 2019 were generated solely from housing operations. Revenues for the nine months ended August 31, 2019 were generated from both housing operations and land sales. Housing revenues for the 2020 third quarter declined 9% from the year-earlier quarter, reflecting a decrease in the number of homes delivered, partly offset by an increase the average selling price of those homes. For the nine months ended August 31, 2020, housing revenues decreased slightly from $867.5 million in the year-earlier period, reflecting a decline in the number of homes delivered, largely offset by an increase in the average selling price of those homes. The year-over-year increases in the average selling prices for three-month and nine-month periods ended August 31, 2020 were due to shifts in the product and geographic mix of homes delivered.

Operating income for the three months ended August 31, 2020 increased slightly from the year-earlier period, mainly due to lower selling, general and administrative expenses, partly offset by a decrease in housing gross profits. The year-over-year decrease in housing gross profits reflected a decline in housing revenues, partially offset by an increase in the housing gross profit margin. The housing gross profit margin increased mainly as a result of a shift in the mix of homes delivered, a favorable pricing environment and workforce reductions, partially offset by higher inventory-related charges and reduced operating leverage due to lower housing revenues. Inventory-related charges impacting the housing gross profit margin for the three months ended August 31, 2020 were $1.1 million. There were no inventory-related charges in the prior-year quarter. Selling, general and administrative expenses as a percentage of housing revenues for the 2020 third quarter improved from the year-earlier quarter mainly as a result of overhead cost reductions, partly offset by reduced operating leverage from lower housing revenues.

For the nine months ended August 31, 2020, operating income increased 6% from the year-earlier period mainly due to an increase in housing gross profits, partly offset by higher selling, general and administrative expenses and the absence of land sale profits in the current period. The increase in housing gross profits was mainly due to a higher gross profit margin, partly offset by a slight decrease in housing revenues. The housing gross profit margin increased primarily due to a shift in the mix of homes delivered and a favorable pricing environment, partly offset by an increase in inventory-related charges. Inventory-related charges impacting the housing gross profit margin for the nine months ended August 31, 2020 and 2019 were $5.5 million and $.4 million, respectively. Land sales generated profits of $1.8 million for the nine months ended August 31, 2019. Selling, general and administrative expenses as a percentage of housing revenues for the first nine months of 2020 increased from the corresponding 2019 period, reflecting decreased operating leverage due to lower housing revenues.

~~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 August 31, Nine Months Ended August 31,
2020 2019 Variance 2020 2019 Variance
Revenues $ 96,005
$ 152,905
(37 ) % $ 328,013
$ 392,135
(16 ) %
Construction and land costs (78,851 ) (129,998 ) 39
(273,772 ) (338,636 ) 19
Selling, general and administrative expenses (11,168 ) (17,634 ) 37
(38,995 ) (48,182 ) 19
Operating income $ 5,986
$ 5,273
14 % $ 15,246
$ 5,317
187 %

Homes delivered 333
520
(36 ) % 1,127
1,323
(15 ) %
Average selling price $ 286,500
$ 294,000
(3 ) % $ 290,500
$ 296,400
(2 ) %
Housing gross profit margin 18.0 % 15.0 % 300 bps 16.6 % 13.6 % 300 bps

This segment’s revenues for the three-month and nine-month periods ended August 31, 2020 were generated from housing operations and nominal land sales. Revenues for the three months and nine months ended August 31, 2019 were generated solely from housing operations. The year-over-year decline in housing revenues for the three months and nine months ended August 31, 2020 reflected decreases in both the number of homes delivered and the average selling price of those homes. The year-over-year

decrease in the average selling price for the three months and nine months ended August 31, 2020 was mainly due to shifts in the product and geographic mix of homes delivered, with a lower proportion of homes delivered from higher-priced communities.

Operating income for the three months ended August 31, 2020 increased from the year-earlier period due to a decrease in selling, general and administrative expenses, partly offset by lower housing gross profits. The year-over-year decrease in housing gross profits reflected a decline in housing revenues, partly offset by an increase in the housing gross profit margin. The housing gross profit margin increased primarily due to a shift in the mix of homes delivered and lower relative amortization of previously capitalized interest, partly offset by reduced operating leverage due to lower housing revenues. Selling, general and administrative expenses as a percentage of housing revenues for the 2020 third quarter increased from the year-earlier period, primarily due to decreased operating leverage as a result of lower housing revenues, partly offset by our overhead reduction efforts and favorable legal settlements.

For the nine months ended August 31, 2020, operating income grew from the prior-year period due to a decrease in selling, general and administrative expenses and slightly higher housing gross profits. Housing gross profits increased due to an increase in the housing gross profit margin that was mostly offset by a decline in housing revenues. The housing gross profit margin increased for the reasons described above for the three months ended August 31, 2020. Selling, general and administrative expenses as a percentage of housing revenues improved in the first nine months of 2020 from the year-earlier period primarily for the reasons described above with respect to the three months ended August 31, 2020.

~~FINANCIAL SERVICES REPORTING SEGMENT~~

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

Three Months Ended August 31, Nine Months Ended August 31,
2020 2019 2020 2019
Revenues $ 3,865
$ 3,931
$ 11,108
$ 9,758
Expenses (1,056 ) (1,003 ) (2,901 ) (3,067 )
Equity in income of unconsolidated joint ventures 6,855
3,716
14,874
7,018
Pretax income $ 9,664
$ 6,644
$ 23,081
$ 13,709

Total originations:
Loans 1,808
1,938
5,287
4,826
Principal $ 621,674
$ 573,017
$ 1,723,216
$ 1,393,088
Percentage of homebuyers using KBHS 79 % 72 % 75 % 69 %
Average FICO score 725
721
722
719

Loans sold:
Loans sold to Stearns 1,936
1,590
5,985
4,147
Principal $ 618,770
$ 467,700
$ 1,877,463
$ 1,198,346
Loans sold to third parties 26
258
219
732
Principal $ 9,157
$ 65,892
$ 71,160
$ 189,432

~~Revenues~~. Financial services revenues for the three months ended August 31, 2020 were essentially even with the year-earlier period. For the nine months ended August 31, 2020, financial services revenues rose from the corresponding period of 2019 due to increases in both title services revenues and insurance commissions.

~~Expenses~~. General and administrative expenses for the three months ended August 31, 2020 increased slightly from the year-earlier period. For the nine months ended August 31, 2020, general and administrative expenses decreased slightly from corresponding period of 2019.

~~Equity in Income of Unconsolidated Joint Ventures~~. The equity in income of unconsolidated joint ventures increased on a year-over-year basis in the three-month period ended August 31, 2020 due to an increase in the principal amount of loan originations and improved margins, partly offset by a 16% decline in the number of homes we delivered. For the nine-month period ended August 31, 2020, the year-over-year increase reflected a substantial increase in the percentage of homebuyers using KBHS, partly offset by a 2% decrease in the number of homes we delivered.

~~INCOME TAXES~~

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

Three Months Ended August 31, Nine Months Ended August 31,
2020 2019 2020 2019
Income tax expense $ 22,900
$ 23,800
$ 47,800
$ 37,600
Effective tax rate 22.6 % 25.9 % 20.1 % 20.5 %

Our income tax expense and effective tax rate for the three months ended August 31, 2020 included the favorable effect of $3.1 million of federal energy tax credits that we earned from building energy-efficient homes, partially offset by $1.2 million of non-deductible executive compensation expense under Internal Revenue Code Section 162(m). Our income tax expense and effective tax rate for the three months ended August 31, 2019 reflected $1.4 million of non-deductible executive compensation expense.

Our income tax expense and effective tax rate for the nine months ended August 31, 2020 included the favorable effects of $10.1 million of federal energy tax credits that we earned from building energy-efficient homes and $5.6 million of excess tax benefits related to stock-based compensation, partially offset by $3.2 million of non-deductible executive compensation expense. For the nine months ended August 31, 2019, our income tax expense and effective tax rate included the favorable effects of $4.3 million of federal energy tax credits, a $3.3 million reversal of a deferred tax asset valuation allowance related to refundable AMT credits and $2.9 million of excess tax benefits related to stock-based compensation, partly offset by $2.6 million of non-deductible executive compensation expense.

The federal energy tax credits for the three months and nine months ended August 31, 2020 resulted from legislation enacted in December 2019, which among other things, extended the availability of a business tax credit for building new energy-efficient homes through December 31, 2020. Prior to this legislation, the tax credit expired on December 31, 2017. This extension is expected to benefit our income tax provision in future periods.

~~Further information regarding our income taxes is provided in Note 14 – Income Taxes in the Notes to Consolidated Financial Statements in this report.~~

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.

~~In response~~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

forecast for the remainder of 2021 as discussed below under “Outlook,” we have no material concerns related to our liquidity. While the ~~economic disruption and uncertainty resulting from the~~ongoing COVID-19 pandemic creates potential liquidity risks, as ~~described above~~discussed further below, we believe that our existing cash and cash equivalents, our anticipated cash flows from operations and amounts available under ~~“Overview,” in~~our Credit Facility will be sufficient to fund our anticipated operating and land-related investment needs for at least the 2020 second quarter and most of the 2020 third quarter, we proceeded in a carefully targeted manner with investments in land and land development. This is expected to reduce the growth or, as in the 2020 second and third quarters, cause a decline in our lot count and the volume of homes delivered in the 2020 fourth quarter.next twelve months.

Our investments in land and land development ~~decreased 15%~~increased 79% to ~~$1.04~~$1.13 billion for the ~~nine~~six months ended ~~August~~May 31, ~~2020,~~2021, compared to ~~$1.22 billion~~$633.5 million for the prior-year period. Approximately ~~46%~~47% of our total investments infor the ~~nine~~six months ended ~~August~~May 31, ~~2020~~

2021 related to land acquisition, compared to approximately ~~40%~~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 ~~nine months~~half of 2021 and 2020, approximately 53% and ~~2019, approximately 51% and 54%~~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):


	August 31, 2020			November 30, 2019			Variance						May 31, 2021			November 30, 2020			Variance
Segment	Lots	$		Lots	$		Lots		$			Segment	Lots	$		Lots	$		Lots	$
West Coast	15,352	$	1,795,106	15,186	$	1,795,088	166		$	18		West Coast	21,176	$	2,073,779	16,990	$	1,928,500	4,186	$	145,279
Southwest	10,450	646,929		11,191	629,811		(741	)	17,118			Southwest	12,687	776,456		12,290	688,807		397	87,649
Central	22,527	843,490		25,871	889,179		(3,344	)	(45,689		)	Central	26,930	901,508		23,699	867,170		3,231	34,338
Southeast	11,949	385,604		12,662	390,524		(713	)	(4,920		)	Southeast	16,665	520,823		14,059	413,005		2,606	107,818
Total	60,278	$	3,671,129	64,910	$	3,704,602	(4,632	)	$	(33,473	)	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 ~~August~~May 31, ~~2020 decreased slightly~~2021 increased from November 30, ~~2019. Over the same period, the number of lots decreased 7% mainly~~2020, primarily due to ~~a lower number of lots under~~our investments in land ~~option contracts~~ and ~~other similar contracts with refundable deposits, reflecting ordinary course fluctuations~~land development in the 2021 first half and an increase in the number of ~~such contracts.~~homes under construction. The number of lots in inventory as of ~~August~~May 31, ~~2020~~2021 included ~~7,802~~12,024 lots under contract where the associated deposits were refundable at our discretion, compared to ~~9,212~~10,254 of such lots at November 30, ~~2019.~~2020. Our lots controlled under land option contracts and other similar contracts as a percentage of total lots was ~~37%~~45% at ~~August~~May 31, ~~2020 and 41%~~2021, compared to 40% at November 30, ~~2019.~~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, 2021		November 30, 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

August 31,
2020 November 30,
2019
Total cash and cash equivalents $ 722,033
$ 453,814
Credit Facility commitment 800,000
800,000
Borrowings outstanding under the Credit Facility —
—
Letters of credit outstanding under the Credit Facility (12,429 ) (18,884 )
Credit Facility availability 787,571
781,116
Total liquidity $ 1,509,604
$ 1,234,930

The majority of our cash equivalents at ~~August~~May 31, ~~2020~~2021 and November 30, ~~2019~~2020 were invested in interest-bearing bank deposit accounts.



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


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


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



Large Accelerated Filer	☒	Accelerated filer	☐
Non-accelerated filer	☐	Smaller reporting company	☐
		Emerging growth company	☐


1.	~~Basis of Presentation and Significant Accounting Policies~~


~~(a)~~	Other assets at August 31, 2020 and November 30, 2019 included $21.6 million and $20.6 million, respectively, of contract assets for estimated future renewal commissions related to then-existing insurance policies.


7.	~~Inventory Impairments and Land Option Contract Abandonments~~


~~(a)~~	~~The ranges of inputs used in each period primarily reflect differences between the housing markets where each impacted community is located, rather than fluctuations in prevailing market conditions.~~



	August 31, 2020
Lease right-of-use assets (a)	$	33,291
Lease liabilities (b)	34,849
Weighted-average remaining lease term	4.5 years
Weighted-average discount rate (incremental borrowing rate)	5.1		%


~~(a)~~	~~Represents lease right-of-use assets of $33.0 million within our homebuilding operations and $.3 million within our financial services operations.~~


~~(b)~~	~~Represents lease liabilities of $34.5 million within our homebuilding operations and $.3 million within our financial services operations.~~


3.	~~Financial Services~~


4.	~~Earnings Per Share~~


5.	~~Receivables~~


6.	~~Inventories~~



	Three Months Ended August 31, 2020		Nine Months Ended August 31, 2020
Lease right-of-use assets obtained in exchange for new lease liabilities	$	2,977	$	9,045
Cash payments on lease liabilities	2,831		8,468



Years Ending November 30,
2020	$	2,737
2021	10,178
2022	8,921
2023	6,704
2024	4,637
Thereafter	6,099
Total lease payments	39,276
Less: Interest	(4,427		)
Present value of lease liabilities	$	34,849


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


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


~~(a)~~	~~These expenses are included in selling, general and administrative expenses and are largely offset by contributions from subcontractors participating in the wrap-up policy.~~


~~(b)~~	Includes net changes in estimated probable insurance and other recoveries, which are recorded in receivables, to present our self-insurance liability on a gross basis. The amount for the three months ended August 31, 2020 reflects an increase in the actuarially estimated probable insurance and other recoveries that exceeded the payments made.



	Three Months Ended August 31, 2020
	KB Home Corporate			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Consolidating Adjustments			Total
Total revenues	$	0		$	908,657		$	90,356		$	0		$	999,013
Homebuilding:
Revenues	$	0		$	908,657		$	86,491		$	0		$	995,148
Construction and land costs	0			(725,215		)	(73,280		)	0			(798,495		)
Selling, general and administrative expenses	(22,699		)	(80,978		)	(4,033		)	0			(107,710		)
Operating income (loss)	(22,699		)	102,464			9,178			0			88,943
Interest income	784			0			2			0			786
Interest expense	(29,552		)	(15		)	(1,487		)	31,054			0
Intercompany interest	78,222			(43,112		)	(4,056		)	(31,054		)	0
Equity in income of unconsolidated joint ventures	0			1,922			0			0			1,922
Homebuilding pretax income	26,755			61,259			3,637			0			91,651
Financial services pretax income	0			0			9,664			0			9,664
Total pretax income	26,755			61,259			13,301			0			101,315
Income tax expense	(6,700		)	(13,300		)	(2,900		)	0			(22,900		)
Equity in net income of subsidiaries	58,360			0			0			(58,360		)	0
Net income	$	78,415		$	47,959		$	10,401		$	(58,360	)	$	78,415



	Three Months Ended August 31, 2019
	KB Home Corporate			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Consolidating Adjustments			Total
Total revenues	$	0		$	1,061,698		$	99,088		$	0		$	1,160,786
Homebuilding:
Revenues	$	0		$	1,061,698		$	95,157		$	0		$	1,156,855
Construction and land costs	0			(859,733		)	(84,021		)	0			(943,754		)
Selling, general and administrative expenses	(23,619		)	(95,376		)	(8,631		)	0			(127,626		)
Operating income (loss)	(23,619		)	106,589			2,505			0			85,475
Interest income	140			20			41			0			201
Interest expense	(34,488		)	(175		)	(1,361		)	36,024			0
Intercompany interest	84,880			(45,826		)	(3,030		)	(36,024		)	0
Equity in loss of unconsolidated joint ventures	0			(384		)	0			0			(384		)
Homebuilding pretax income (loss)	26,913			60,224			(1,845		)	0			85,292
Financial services pretax income	0			0			6,644			0			6,644
Total pretax income	26,913			60,224			4,799			0			91,936
Income tax expense	(6,900		)	(14,900		)	(2,000		)	0			(23,800		)
Equity in net income of subsidiaries	48,123			0			0			(48,123		)	0
Net income	$	68,136		$	45,324		$	2,799		$	(48,123	)	$	68,136



	Nine Months Ended August 31, 2020
	KB Home Corporate			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Consolidating Adjustments			Total
Total revenues	$	0		$	2,735,339		$	253,579		$	0		$	2,988,918
Homebuilding:
Revenues	$	0		$	2,735,339		$	242,471		$	0		$	2,977,810
Construction and land costs	0			(2,218,683		)	(210,318		)	0			(2,429,001		)
Selling, general and administrative expenses	(75,129		)	(257,460		)	(15,493		)	0			(348,082		)
Operating income (loss)	(75,129		)	259,196			16,660			0			200,727
Interest income	2,075			12			76			0			2,163
Interest expense	(88,648		)	(73		)	(4,350		)	93,071			0
Intercompany interest	238,780			(133,637		)	(12,072		)	(93,071		)	0
Equity in income of unconsolidated joint ventures	0			11,981			0			0			11,981
Homebuilding pretax income	77,078			137,479			314			0			214,871
Financial services pretax income	0			0			23,081			0			23,081
Total pretax income	77,078			137,479			23,395			0			237,952
Income tax expense	(16,500		)	(26,200		)	(5,100		)	0			(47,800		)
Equity in net income of subsidiaries	129,574			0			0			(129,574		)	0
Net income	$	190,152		$	111,279		$	18,295		$	(129,574	)	$	190,152



	Nine Months Ended August 31, 2019
	KB Home Corporate			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Consolidating Adjustments			Total
Total revenues	$	0		$	2,739,096		$	254,976		$	0		$	2,994,072
Homebuilding:
Revenues	$	0		$	2,739,096		$	245,218		$	0		$	2,984,314
Construction and land costs	0			(2,226,829		)	(231,524		)	0			(2,458,353		)
Selling, general and administrative expenses	(76,507		)	(268,506		)	(12,035		)	0			(357,048		)
Operating income (loss)	(76,507		)	243,761			1,659			0			168,913
Interest income	1,549			20			176			0			1,745
Interest expense	(102,763		)	(630		)	(3,963		)	107,356			0
Intercompany interest	245,090			(130,142		)	(7,592		)	(107,356		)	0
Equity in loss of unconsolidated joint ventures	0			(1,159		)	0			0			(1,159		)
Homebuilding pretax income (loss)	67,369			111,850			(9,720		)	0			169,499
Financial services pretax income	0			0			13,709			0			13,709
Total pretax income	67,369			111,850			3,989			0			183,208
Income tax expense	(10,400		)	(21,300		)	(5,900		)	0			(37,600		)
Equity in net income of subsidiaries	88,639			0			0			(88,639		)	0
Net income (loss)	$	145,608		$	90,550		$	(1,911	)	$	(88,639	)	$	145,608



Financial Covenants and Other Requirements	Covenant Requirement		Actual
Consolidated tangible net worth	>	$1.74 billion	$2.57 billion
Leverage Ratio	<	.650	.406
Interest Coverage Ratio (a)	>	1.500	4.717
Minimum liquidity (a)	>	$126.6 million	$722.0 million
Investments in joint ventures and non-guarantor subsidiaries	<	$617.9 million	$117.4 million
Borrowing base in excess of borrowing base indebtedness (as defined)		n/a	$1.55 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 August 31, 2020, we met both the Interest Coverage Ratio and the minimum liquidity requirements.


	May 31, 2021		November 30, 2020
Summarized Balance Sheet Data (in thousands)
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 May 31, 2021
Summarized Statement of Operations Data (in thousands)
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


•	•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; •


•	•consumer interest in our new home communities and products, particularly from first-time homebuyers andhigher-income consumers; •our ability to generate orders andconvert our backlog of orders to home deliveries and revenues, particularly in key markets in California; •~~higher-income consumers;~~


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


~~Item 3.~~	~~Quantitative and Qualitative Disclosures About Market Risk~~


Exhibits

~~Exhibits~~
4.22						Amended Rights Agreement, effective as of April 8, 2021, made by and between KB Home and Computershare Inc., as Rights Agent, filed as Exhibit 4.1 to our Amended Registration Statement on Form 8-A/A dated April 13, 2021 (File No. 01-9195), is incorporated by reference herein.

~~31.1~~22						List of Guarantor Subsidiaries, filed as an exhibit to our Annual Report on Form 10-K (File No. 001-09195), is incorporated by reference herein.

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

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

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

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

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104						Cover Page Interactive Data File (embedded within the Inline XBRL document and included in Exhibit 101).