KB HOME

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Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

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Our discussion and analysis below is focused on our 2023 and 2022 financial results, including comparisons of our year-over-year performance between these years. Discussion and analysis of our 2021 fiscal year specifically, as well as the year-over-year comparison of our 2022 financial performance to 2021, are located under Part II, Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the fiscal year ended November 30, 2022, filed with the SEC on January 20, 2023, which is available on our investor relations website at investor.kbhome.com and the SEC website at www.sec.gov.

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Our discussion and analysis below is focused on our 2024 and 2023 financial results, including comparisons of our year-

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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):

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Overview. Revenues are generated from our homebuilding and financial services operations. The following table presents

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We generated solid financial results in 2023, as we remained focused on balancing pace, price and construction starts at each community to optimize our return on each inventory asset within its market context amid a mixed operating environment over the course of the year.

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environment, we focused on balancing pace, price and construction starts at each community to optimize our return on each

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We began the year navigating challenging housing market conditions, stemming from the combination of rising mortgage interest rates, elevated inflation and various other macroeconomic and geopolitical concerns. These factors significantly depressed housing demand during the 2022 second half and into the 2023 first quarter. Demand began to improve in the 2023 second quarter due to, among other things, constrained resale home inventory, favorable demographic trends, buyer interest in homes at our price points and our selective implementation of targeted sales strategies, including pricing adjustments and other homebuyer concessions (particularly, mortgage-related concessions such as interest rate buydown or lock programs), throughout the year to help drive order activity and minimize cancellations. As a result, our total net orders for 2023 of 11,084 were up 2% compared to 2022, with year-over-year net order comparisons improving each quarter as the year progressed. The positive sales trends continued in our 2023 fourth quarter, with net orders and net order value increasing 176% and 157%, respectively, compared to the depressed levels in the year-earlier quarter. Though they increased on a year-over-year basis, our 2023 fourth quarter net orders were lower than expected, reflecting the significant negative impact on demand from mortgage interest rates rising each week from late September through the end of October. Our cancellation rate as a percentage of gross orders for the 2023 fourth quarter improved to 28%, from a historically high 68% for the 2022 fourth quarter. While we believe they were beneficial to our selling efforts, the pricing adjustments and other homebuyer concessions we utilized in 2023 contributed to year-over-year decreases in both the average selling price of homes delivered and our housing gross profit margin.

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homebuyer concessions (particularly, mortgage-related concessions such as interest rate buydowns), to help drive order activity

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Homebuilding revenues for 2023 were comprised of housing revenues and $10.7 million of land sale revenues. In 2022, homebuilding revenues were generated entirely from housing revenues. Housing revenues of $6.37 billion were down 7% from the previous year, due to a 4% decrease in the number of homes delivered to 13,236 and a 4% decline in the overall average selling price of those homes to $481,300. Approximately 49% of our homes delivered in 2023 were to first-time homebuyers. Homebuilding operating income for 2023 was $718.7 million, compared to $1.04 billion for 2022 and, as a percentage of homebuilding revenues was 11.3%, compared to 15.1%. Our homebuilding operating income margin for 2023 reflected a decrease in our housing gross profit margin to 21.2%, compared to 24.3% for the previous year, and a 70 basis-point increase in selling, general and administrative expenses as a percentage of housing revenues to 9.9%. Net income and diluted earnings per share for 2023 were down 28% and 23%, respectively, each as compared to 2022. Our diluted earnings per share for 2023 reflected the favorable impact of our common stock repurchases over the past several quarters.

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Homebuilding revenues for 2024 and 2023 were comprised of housing revenues and land sale revenues. Housing revenues

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Our return on equity (“ROE”) for 2023 was 15.7%, compared to 24.6% for 2022. ROE is calculated as net income for the year divided by average stockholders’ equity, where average stockholders’ equity is based on the ending stockholders’ equity balances of the trailing five quarters.

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Our return on equity (“ROE”) for 2024 was 16.6%, compared to 15.7% for 2023. ROE is calculated as net income for the

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We believe our strong balance sheet and liquidity position helped provide us with the flexibility to operate effectively through the evolving market conditions during the year, and expect they will continue to do so in 2024. In 2023, we generated $1.08 billion of cash from operating activities, reflecting in part our reduced investments in land acquisition and land development in 2023 which decreased 25% year over year to $1.80 billion. Our investments declined in the 2023 first half as a result of pivoting our land investment strategy beginning in the 2022 third quarter in response to then-softening housing market conditions, to emphasize developing the land positions we already owned or controlled under land option contracts and other similar contracts. With the improving business environment as described above, we increased our investments in land and land development in the 2023 second half. Our investments in land and land development for the 2023 second half were up 36% from the 2023 first half and up 4% from the corresponding year-earlier period. Reflecting our balanced approach to capital allocation, in 2023, we repurchased approximately 9.2 million shares of our common stock at a total cost of $411.4 million. As of November 30, 2023, we had $163.6 million remaining under our current common stock repurchase authorization. Additionally, in July 2023, our board of directors increased the quarterly cash dividend on our common stock by approximately 33% to $.20 per share, from $.15 per share. We ended 2023 with total liquidity of $1.81 billion, comprised of $727.1 million of cash and cash equivalents and $1.08 billion of available capacity under our Credit Facility. With net repayments of $150.0 million under the Credit Facility in 2023, we had no cash borrowings outstanding under the Credit Facility at November 30, 2023.

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We believe our strong balance sheet and liquidity position helped provide us with the flexibility to operate effectively

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Although the number of homes in our ending backlog at November 30, 2023 was down 28% year over year to 5,510, we believe we are well-positioned for 2024, as described below under “Outlook.”

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year over year. Although the number of homes in our ending backlog at November 30, 2024 was down 20% year over year to

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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):

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Financial Results. The following table presents a summary of certain financial and operational data for our homebuilding

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Revenues. Homebuilding revenues of $6.38 billion for 2023 were down 7% from the prior year due to a decrease in housing revenues, partly offset by an increase in land sale revenues.

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Revenues. Homebuilding revenues of$6.90 billion for 2024 grew 8% from the prior year due to an increase in housing

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In 2023, housing revenues were down 7% from the previous year, due to decreases of 4% in both the number of homes delivered and their overall average selling price. The year-over-year decline in the number of homes delivered reflected a 20% decrease in our West Coast homebuilding reporting segment, partly offset by increases of 4%, 4% and 2% in our Southwest, Central and Southeast segments, respectively. The decline in our West Coast homebuilding reporting segment mainly resulted from a 47% year-over-year decrease in this segment’s backlog of homes at the beginning of the year. The lower average selling price primarily reflected product and geographic mix factors, mainly the reduced deliveries from our higher-priced West Coast homebuilding reporting segment, and pricing adjustments and other concessions we selectively extended to buyers within backlog prior to delivery in conjunction with our targeted sales strategies.

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a slight increase in their overall average selling price. The year-over-year growth in the number of homes delivered reflected

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We generated $10.7 million of land sale revenues in 2023, compared to no such revenues in 2022. 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.

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land sale revenues fluctuate with our decisions to maintain or decrease our land ownership position in certain markets based

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Operating Income. Our homebuilding operating income was down 31% in 2023, as compared to the previous year, primarily due to lower housing gross profits. In 2023 and 2022, homebuilding operating income included total inventory-related charges of $11.4 million and $37.3 million, respectively, as discussed in Note 7 – Inventory Impairments and Land Option Contract Abandonments in the Notes to Consolidated Financial Statements in this report. As a percentage of homebuilding revenues, our homebuilding operating income for 2023 decreased 380 basis points year over year to 11.3%. Excluding inventory-related charges for both periods, our homebuilding operating income margin declined 420 basis points to 11.4% in 2023 from 15.6% in 2022.

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Operating Income. Our homebuilding operating income increased 6% in 2024, as compared to the previous year, primarily

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•Housing Gross Profits – In 2023, housing gross profits of $1.35 billion declined 19% from the previous year, reflecting decreases in both our housing revenues and housing gross profit margin. Housing gross profits for 2023 and 2022 included inventory-related charges associated with housing operations of $11.4 million and $34.8 million, respectively.

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increase in housing revenues, partly offset by a decrease in our housing gross profit margin. Housing gross profits for

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Our housing gross profit margin for 2023 was 21.2%, down 310 basis points from the previous year, primarily due to pricing adjustments and other homebuyer concessions, higher construction costs, and product and geographic mix shifts, partly offset by a decrease in inventory-related charges. As a percentage of housing revenues, the amortization of previously capitalized interest associated with housing operations was 1.9% for 2023 and 2.0% for 2022. Excluding the inventory-related charges associated with housing operations described above, our adjusted housing gross profit margin was 21.4% in 2023, compared to 24.8% in 2022. 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.”

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amortization of previously capitalized interest associated with housing operations was 1.7% for 2024 and 1.9% for

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

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•Selling, General and Administrative Expenses – The following table presents the components of our selling, general

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(a)Commission expenses include sales commissions on homes delivered paid to internal sales counselors and external real estate brokers.

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(a)Commission expenses include sales commissions on homes delivered paid to internal sales counselors and

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Selling, general and administrative expenses for 2023 were nearly even with the prior year as higher marketing and commission expenses were largely offset by lower general and administrative expenses. Marketing expenses in 2023 rose from the prior year primarily due to higher costs to support our higher average community count. Our selling, general and administrative expenses as a percentage of housing revenues increased 70 basis points in 2023, mainly reflecting reduced operating leverage due to our lower housing revenues as compared to the previous year.

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Selling, general and administrative expenses for 2024 increased 9% from the prior year. As a percentage of housing

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Interest Income/Expense. Interest income, which is generated from short-term investments, increased to $13.8 million in 2023, compared to $.7 million in 2022 due to our higher average balance of cash equivalents and a higher average interest rate in 2023. 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.

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balance of cash equivalents anda higher average interest rate in 2024. Generally, increases and decreases in interest income are

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We incur interest principally from our borrowings to finance land acquisitions, land development, home construction and other operating and capital needs. The amount of interest incurred generally fluctuates based on the average amount of debt outstanding for the period and the interest rate on that debt. In 2023, total interest incurred of $107.1 million decreased from $120.9 million incurred in 2022 due to our lower average debt level, partly offset by our higher average interest rate. All interest incurred during 2023 and 2022 was capitalized as the average amount of our inventory qualifying for interest capitalization was higher than our average debt level for each period. As a result, we had no interest expense for 2023 or 2022. Further information regarding our interest incurred and capitalized is provided in Note 6 – Inventories in the Notes to Consolidated Financial Statements in this report.

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We incur interest principally from our borrowings to finance land acquisitions, land development, home construction and

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Equity in Loss of Unconsolidated Joint Ventures. Our equity in loss of unconsolidated joint ventures was nominal for both 2023 and 2022. 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.

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Equity in Income (Loss) of Unconsolidated Joint Ventures. Our equity in income of unconsolidated joint ventures was

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Net Orders, Backlog and Community Count. The following table presents information about our net orders, cancellation rate, ending backlog, and community count for the years ended November 30, 2023 and 2022 (dollars in thousands):

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Net Orders, Backlog and Community Count. The following table presents information about our net orders, cancellation

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

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(a)Net order value represents potential future housing revenues associated with net orders generated during the period, as well

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

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(b)Cancellation rate represents the total number of contracts for new homes cancelled during a period divided by the total

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Net Orders. Net orders from our homebuilding operations rose 2% from 2022, as a 10% increase in our average community count was largely offset by a slower pace of monthly net orders per community of 3.8 in 2023, compared to 4.1 in 2022. The value of our 2023 net orders was down 5% year over year due to a 7% decline in the overall average selling price of net orders to $482,400, partially offset by the increase in net orders. In 2023, the year-over-year growth in our overall net orders reflected increases of 19% and 14% in our West Coast and Southwest homebuilding reporting segments, respectively, largely offset by decreases of 19% and 1% in our Central and Southeast segments, respectively.

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Net Orders. Net orders from our homebuilding operations for the year ended November 30, 2024 grew 18% from the

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Backlog. The number of homes in our backlog at November 30, 2023 decreased 28% from the previous year. The potential future housing revenues in our backlog at November 30, 2023 were also down 28% year over year, reflecting fewer homes in our backlog and an average selling price of those homes that was essentially even with the previous year. The number of homes in backlog and backlog value decreased in three of our four homebuilding reporting segments, with decreases in value ranging from 18% in our Southwest segment to 65% in our Central segment. Backlog value in our West Coast segment increased 11% year over year due to a 20% increase in the number of homes in backlog, partly offset by a 7% decline in the average selling price of those homes. Substantially all the homes in our backlog at November 30, 2023 are expected to be delivered during the year ending November 30, 2024.

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Backlog. The number of homes in our backlog at November 30, 2024 decreased 20% from the previous year mainly due to

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Community Count. Our average community count for 2023 increased 10% from the previous year, and our ending community count decreased 2%. The slight year-over-year decrease in our ending community count primarily reflected the number of communities selling out over the past 12 months exceeding the number of new community openings. On a sequential basis, our ending community count increased 5% from the 2023 third quarter as the number of new community openings exceeded the number of communities selling out during the three months ended November 30, 2023. Our community count during the year largely reflected our reduced investments in land and land development in the 2023 first half relative to the second half, as discussed below under “Liquidity and Capital Resources.”

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Community Count. Our average community count for 2024 expanded slightly from the previous year, and our ending

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

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percentage of gross orders, net order value, average community count, and ending backlog (number of homes and value) by

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As discussed above under Item 1 – Business in this report, the composition of our homes delivered, net orders and backlog shifts with the product and geographic mix of our active communities and the corresponding average selling prices of the homes ordered and/or delivered at these communities in any particular period, changing as new communities open and existing communities wind down or sell out in the ordinary course. In addition, with our Built to Order model, the selling prices of individual homes within a community may vary due to differing lot sizes and locations, home square footage, product premiums and the design studio options and upgrades buyers select in the community. These intrinsic variations in our business limit the comparability of our homes delivered, net orders and backlog, as well as their corresponding values, between sequential and year-over-year periods, in addition to the effect of prevailing economic or housing market conditions in or across any particular periods.

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As discussed above under Item 1 – Business in this report, the composition of our homes delivered, net orders and backlog

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Financial Results. 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, which is also presented in Note 2 – Segment Information in the Notes to Consolidated Financial Statements in this report, and/or interest income and expense.

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Financial Results. Below is a discussion of the financial results of each of our homebuilding reporting segments. Further

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In addition to the results of our homebuilding reporting segments presented below, our consolidated homebuilding operating income includes the results of Corporate and other, a non-operating segment described in Note 2 – Segment Information in the Notes to Consolidated Financial Statements in this report. Corporate and other had operating losses of $142.6 million in 2023, $145.3 million in 2022 and $148.9 million in 2021.

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In addition to the results of our homebuilding reporting segments presented below, our consolidated homebuilding

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The financial results of our homebuilding reporting segments for 2023 were negatively impacted to varying degrees by homebuyer concessions we selectively extended to buyers in conjunction with our targeted sales strategies, as well as product and geographic mix shifts of homes delivered. Segment financial results for 2023 were also affected by construction services availability constraints and building material cost pressures, as well as supply chain disruptions and other production-related challenges, though these impacts lessened in the 2023 second half compared to the 2023 first half and the 2022 second half periods, as described above under “Overview.”

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The financial results of our homebuilding reporting segments for 2024 and 2023 were impacted to varying degrees by

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

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West Coast. The following table presents financial information related to our West Coast homebuilding reporting segment

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In 2023, this segment’s revenues were comprised of housing revenues and $4.7 million of land sale revenues. In 2022, revenues were generated solely from housing operations. Housing revenues for 2023 improved 4% from the prior year to $1.83 billion, reflecting increases in both the number of homes delivered and the average selling price of those homes. Operating income decreased from 2022, mainly due to higher selling, general and administrative expenses. As a percentage of revenues, operating income declined from the previous year, reflecting a 110 basis-point decrease in the housing gross profit margin to 22.5% and a 40 basis-point increase in selling, general and administrative expenses as a percentage of housing revenues to 8.4%. The year-over-year decline in the housing gross profit margin was mainly driven by higher construction costs, product and geographic mix shifts of homes delivered, and increased homebuyer concessions, partly offset by increased operating leverage from higher housing revenues. The housing gross margin for 2023 included inventory-related charges of $2.5 million, compared to $3.3 million in 2022. The year-over-year increase in this segment’s selling, general and administrative expenses as a percentage of housing revenues was primarily due to increased sales commissions and higher costs to support our higher average community count, partly offset by increased operating leverage from higher housing revenues.

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In 2024, this segment’s revenues were comprised of housing revenues and nominal land sale revenues. In 2023, revenues

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This segment’s revenues for 2023 declined 24% from 2022 due to decreases in both the number of homes delivered and their average selling price. Operating income for 2023 was also down year over year, reflecting lower housing gross profits, partially offset by reduced selling, general and administrative expenses and the absence of a $2.6 million land sale loss included in the prior year. As a percentage of revenues, this segment’s 2023 operating income decreased from the previous year, reflecting a 460 basis-point decline in the housing gross profit margin to 18.6%, and a 100 basis-point increase in selling, general and administrative expenses as a percentage of housing revenues to 7.1%. The housing gross profit margin decline was primarily driven by pricing adjustments and other homebuyer concessions, higher relative construction costs, product and geographic mix shifts of homes delivered and reduced operating leverage from lower housing revenues, partly offset by a decrease in inventory-related charges and lower relative amortization of previously capitalized interest. In 2023, inventory-related charges associated with housing operations decreased to $4.9 million in 2023, compared to $24.8 million in 2022. The year-over-year increase in selling, general and administrative expenses as a percentage of housing revenues was mainly due to higher costs to support our higher average community count, reduced operating leverage, and higher sales commissions.

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number of homes delivered, partly offset by a decrease in their average selling price. Operating income for 2024 was also up

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This segment’s revenues in 2023 were comprised of both housing revenues and land sale revenues. Revenues for 2022 were generated solely from housing operations. Housing revenues for 2023 rose 5% year over year to $1.16 billion, reflecting increases in both the number of homes delivered and their average selling price. Land sale revenues totaled $6.0 million in 2023. Operating income was down from the previous year, primarily due to lower housing gross profits and higher selling, general and administrative expenses, partially offset by a land sale gain of $1.1 million. As a percentage of revenues, operating income decreased from 2022, primarily due to a 550 basis-point decrease in the housing gross profit margin to 23.4%, partially offset by a 10 basis-point improvement in selling, general and administrative expenses as a percentage of housing revenues to 7.3%. The year-over-year decline in the housing gross profit margin mainly reflected pricing adjustments and other homebuyer concessions, and product and geographic mix shifts of homes delivered, partly offset by increased operating leverage from higher housing revenues.

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concessions and product and geographic mix shifts of homes delivered. Inventory-related charges associated with housing

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Southwest. The following table presents financial information related to our Southwest homebuilding reporting segment for the years indicated (dollars in thousands, except average selling price):

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Southwest. The following table presents financial information related to our Southwest homebuilding reporting segment

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Central. The following table presents financial information related to our Central homebuilding reporting segment for the years indicated (dollars in thousands, except average selling price):

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Central. The following table presents financial information related to our Central homebuilding reporting segment for the

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Southeast. The following table presents financial information related to our Southeast homebuilding reporting segment for the years indicated (dollars in thousands, except average selling price):

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Southeast. The following table presents financial information related to our Southeast homebuilding reporting segment for