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 February 28, 2022 2021 Variance Revenues: Homebuilding$ 1,394,154 $ 1,138,008 23 % Financial services 4,635 3,730 24 Total revenues$ 1,398,789 $ 1,141,738 23 % Pretax income: Homebuilding$ 169,621 $ 115,051 47 % Financial services 8,436 8,500 (1) Total pretax income 178,057 123,551 44 Income tax expense (43,800) (26,500) (65) Net income$ 134,257 $ 97,051 38 % Diluted earnings per share $ 1.47$ 1.02 44 % Housing market conditions were favorable through the three months endedFebruary 28, 2022 , with solid demand driven by healthy demographic trends, particularly from millennial and Generation Z groups, a limited supply of new and resale inventory, and steady employment and wage growth. Considerable demand for our homes enabled us to lift selling prices in the vast majority of our communities and, in combination with our focus on balancing pace, price and construction starts at each community, helped us to enhance our inventory assets' performance and improve returns, despite significant persistent supply chain challenges and higher construction costs, as described further below. The value of our net orders for the 2022 first quarter increased 15% from the year-earlier quarter due to a 17% increase in their overall average selling price, partly offset by a 2% decline in net orders. The decrease in net orders was due to our lower average community count in the current period, partly offset by slightly higher monthly net orders per community. Our lower average community count reflected the accelerated sell-out of communities as a result of our strong monthly net order pace over the past few quarters and supply chain-related delays in new community openings. The strong housing demand in our served markets lifted our monthly net orders per community slightly to 6.6 from 6.4, even as we raised selling prices and strategically paced lot releases to enhance margins and help align with current production capacity. Since the outbreak of COVID-19 in 2020, we have experienced intensifying building material cost pressures, particularly for lumber, and production capacity constraints affecting our product suppliers driven by sustained high levels of homebuilding and renovation activity, combined with supply chain disruptions stemming largely from international and domestic COVID-19 control responses and economy-wide labor shortages in theU.S. In the 2022 first quarter, these continuing supply chain disruptions, as well as ongoing restricted construction services availability and delays with respect to state and municipal construction permitting, inspection and utility processes, were exacerbated by a resurgence of COVID-19 infections with the Omicron variant. Consequently, our construction cycle times were extended by approximately two weeks, primarily affecting the finishing stages, as compared to the 2021 fourth quarter, and many deliveries and new community openings expected for the 2022 first quarter were delayed. We have adapted to the extent possible to these changing conditions, re-sequencing construction when necessary, and, in some cases, ordering items in advance of starting homes to mitigate delays. We believe these challenging circumstances affecting our land development and home construction activities will generally persist throughout the year. We continue to be proactive and, as feasible, aim to address issues as they arise to mitigate the impact on our business going forward. We have incorporated these trends into our performance expectations, as presented below under "Outlook." However, it is possible that supply chain disruptions will worsen in the coming periods due to the military conflict inUkraine that began in lateFebruary 2022 and the wide-ranging sanctions theU.S. and other countries have imposed or may further impose on Russian business sectors, financial organizations, individuals and raw materials. Homebuilding revenues for the 2022 first quarter grew 23% due to an increase in housing revenues, driven by a 22% increase in the overall average selling price of homes delivered to$486,100 , as the number of homes delivered was essentially even with 23 -------------------------------------------------------------------------------- the year-earlier quarter. Homebuilding operating income for the three months endedFebruary 28, 2022 rose 49% year over year to$169.6 million and, as a percentage of revenues, improved 220 basis points to 12.2%. The increase in our homebuilding operating income margin reflected improvements in both our housing gross profit margin and selling, general and administrative expenses as a percentage of housing revenues. Our pretax income margin improved 190 basis points to 12.7%, and net income and diluted earnings per share increased 38% and 44%, respectively, each as compared to the corresponding quarter of 2021. COVID-19 Pandemic Impact. The COVID-19 pandemic and related COVID-19 control responses have adversely affected many economic sectors, significantly disrupted the global supply chain and fueled producer price and consumer inflation. Our business was impacted by these issues during the three months endedFebruary 28, 2022 , as we experienced, among other things, supply chain bottlenecks and the other production-related challenges during the quarter described above that, to various degrees, extended our construction cycle times, delayed home deliveries and community openings and raised our costs. They could negatively impact our growth, margins and financial results in future periods, as could additional significant COVID-19-related disruptions, if they emerge. At the same time, we continue to experience strong demand for our products and believe we are well-positioned to operate effectively through the present environment. Our ending backlog value atFebruary 28, 2022 grew 55% to approximately$5.71 billion , our highest first-quarter level since 2007. With this robust backlog, we expect to achieve significant year-over-year growth in our scale, profitability and returns in the 2022 second quarter and full year, as described below under "Outlook." In addition, with the ongoing strong housing demand in the first quarter of 2022, we continued to increase our land acquisition and development investments, as we did in 2021, to measurably expand our lot pipeline and support future community count growth.
HOMEBUILDING
Financial Results. The following table presents a summary of certain financial and operational data for our homebuilding operations (dollars in thousands, except average selling price):
Three Months Ended February 28, 2022 2021 Revenues: Housing$ 1,394,154 $ 1,137,353 Land - 655 Total 1,394,154 1,138,008 Costs and expenses: Construction and land costs Housing (1,082,112) (901,178) Land - (731) Total (1,082,112) (901,909) Selling, general and administrative expenses (142,480) (122,005) Total (1,224,592) (1,023,914) Operating income 169,562 114,094 Interest income 36 653 Equity in income of unconsolidated joint ventures 23 304 Homebuilding pretax income$ 169,621 $ 115,051 Homes delivered 2,868 2,864 Average selling price$ 486,100 $ 397,100 Housing gross profit margin as a percentage of housing revenues 22.4 % 20.8 %
Adjusted housing gross profit margin as a percentage of housing revenues
22.4 % 21.1 %
Selling, general and administrative expenses as a percentage of housing revenues
10.2 % 10.7 % Operating income as a percentage of revenues 12.2 % 10.0 % 24 -------------------------------------------------------------------------------- Revenues. Homebuilding revenues for the 2022 first quarter grew from the year-earlier quarter mainly due to a 23% increase in housing revenues. The year-over-year growth in housing revenues was driven by a 22% increase in the overall average selling price of homes delivered that reflected strong housing market conditions as well as product and geographic mix shifts of homes delivered. Although our backlog of homes at the beginning of the quarter ("beginning backlog") increased 35% year over year, the number of homes delivered in the 2022 first quarter was essentially flat primarily due to the supply chain disruptions and other production-related issues that intensified during the quarter, as described above under "Overview." These operational challenges extended our construction cycle times by two weeks, as compared to the 2021 fourth quarter, and delayed many expected deliveries. Reflecting these challenges, the number of homes delivered as a percentage of beginning backlog decreased to 27% in the 2022 first quarter, compared to 37% in the year-earlier period. Operating Income. Our operating income for the three months endedFebruary 28, 2022 grew 49% from the year-earlier period, reflecting higher housing gross profits, partly offset by an increase in selling, general and administrative expenses. Operating income for the 2022 first quarter included inventory-related charges of$.2 million , compared to$4.1 million in the year-earlier quarter. As a percentage of revenues, our operating income for the three months endedFebruary 28, 2022 improved 220 basis points to 12.2%, compared to 10.0% for the corresponding 2021 period. Excluding inventory-related charges, our operating income as a percentage of revenues increased 180 basis points to 12.2% for the 2022 first quarter from 10.4% for the year-earlier quarter. •Housing Gross Profits - Housing gross profits of$312.0 million for the three months endedFebruary 28, 2022 grew 32% from$236.2 million for the year-earlier period due to increases in both our housing revenues and housing gross profit margin. Our housing gross profit margin for the 2022 first quarter rose 160 basis points year over year to 22.4%, mainly as a result of a favorable pricing environment that more than offset higher construction costs (approximately 80 basis points), lower amortization of previously capitalized interest as a percentage of housing revenues (approximately 80 basis points), a decrease in inventory-related charges (approximately 30 basis points) and other miscellaneous factors (approximately 30 basis points). These favorable impacts were partly offset by increased expenses to support current operations and expected growth (approximately 60 basis points). As a percentage of housing revenues, the amortization of previously capitalized interest associated with housing operations was 2.1% and 2.9% for the three months endedFebruary 28, 2022 and 2021, respectively. Excluding the above-mentioned inventory-related charges for the applicable periods, our adjusted housing gross profit margin for the 2022 first quarter increased 130 basis points from the year-earlier period. The calculation of adjusted housing gross profit margin, which we believe provides a clearer measure of the performance of our business, is described below under "Non-GAAP Financial Measures."
•Selling, General and Administrative Expenses - The following table presents the components of our selling, general and administrative expenses (dollars in thousands):
Three Months Ended
% of Housing % of Housing 2022 Revenues 2021 Revenues Marketing expenses$ 28,848 2.1 %$ 28,406 2.5 % Commission expenses (a) 48,629 3.5 44,852 3.9 General and administrative expenses 65,003 4.6 48,747 4.3 Total$ 142,480 10.2 %$ 122,005 10.7 %
(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 2022 first quarter rose 17% 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 higher costs associated with performance-based employee compensation plans, as well as expenses incurred to support current operations and expected growth. In addition, general and administrative expenses in the year-earlier quarter benefited from a$4.3 million ERC, which is described in Note 13 - Income Taxes in the Notes to Consolidated Financial Statements in this report. As a percentage of housing revenues, our selling, general and administrative expenses for the 2022 first quarter improved 50 basis points, largely reflecting increased operating leverage due to our higher housing revenues as compared to the year-earlier quarter, partly offset by the above-mentioned higher expenses. 25 -------------------------------------------------------------------------------- Interest Income/Expense. Interest income, which is generated from short-term investments, was nominal for the three months endedFebruary 28, 2022 and$.7 million for the year-earlier period. Generally, increases and decreases in interest income are attributable to changes in the interest-bearing average balances of short-term investments and fluctuations in interest rates. We incur interest principally from our borrowings to finance land acquisitions, land development, home construction and other operating and capital needs. All interest incurred during the three-month periods endedFebruary 28, 2022 and 2021 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 ofUnconsolidated Joint Ventures . Our equity in income of unconsolidated joint ventures was nominal for each of the three-month periods endedFebruary 28, 2022 and 2021. Further information regarding our investments in unconsolidated joint ventures is provided in Note 9 - Investments inUnconsolidated Joint Ventures in the Notes to Consolidated Financial Statements in this report.
Three Months Ended February 28, 2022 2021 Net orders 4,210 4,292 Net order value (a)$ 2,153,734 $ 1,869,068
Cancellation rates (b) 11 % 10 % Ending backlog - homes 11,886 9,238 Ending backlog - value$ 5,711,305 $
3,694,118
Ending community count 208 209 Average community count 213 223 (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 . For the three months endedFebruary 28, 2022 , net orders from our homebuilding operations decreased 2% year over year, reflecting our lower average community count described further below, partly offset by a slight increase in monthly net orders per community to 6.6 from 6.4 in the year-earlier period. Along with the healthy housing demand, particularly from millennial and Generation Z demographic groups, we believe our Built-to-Order® homebuying process, which provides personalization and choice, continues to be a key contributor to our strong monthly net order pace. Though we experienced a slight decrease in net orders for the 2022 first quarter, compared to our strong 2021 first-quarter net orders, which reached a 14-year high, the value of our net orders rose 15% due to a 17% increase in the overall average selling price of net orders that largely reflected robust housing demand in most of our served markets as well as a product and geographic mix shift. The year-over-year growth in overall net order value resulted from improvements in three of our four homebuilding reporting segments, with net order value increases ranging from 8% in ourWest Coast segment to 79% in our Southeast segment. Net order value from our Southwest homebuilding reporting segment decreased 2%.
Our cancellation rate as a percentage of gross orders for the three months ended
Backlog. The number of homes in our backlog atFebruary 28, 2022 increased 29% fromFebruary 28, 2021 , reflecting our substantially higher backlog at the beginning of the quarter, partly offset by a slight year-over-year decrease in our net orders for the three months endedFebruary 28, 2022 . The potential future housing revenues in our backlog atFebruary 28, 2022 grew 55% fromFebruary 28, 2021 as a result of both the higher number of homes in our backlog and a 20% increase in the overall average selling price of those homes. Each of our four homebuilding reporting segments generated year-over-year increases in backlog value, ranging from 38% in ourWest Coast segment to 114% in our Southeast segment. 26 -------------------------------------------------------------------------------- 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 2022 first quarter decreased 4% from the year-earlier period, and our ending community count was essentially flat at 208. The year-over-year decreases in our overall average and ending community counts primarily reflected communities selling out earlier than anticipated due to both an increase in our demand-driven net order pace and delays in new community openings during the three months endedFebruary 28, 2022 , as described above under "Overview." We substantially increased our investments in land acquisition and land development in the 2022 first quarter, as we did in 2021, to support future community count growth.
HOMEBUILDING REPORTING SEGMENTS
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
Homes Delivered Net Orders Cancellation Rates Segment 2022 2021 2022 2021 2022 2021 West Coast 914 884 1,094 1,160 11 % 9 % Southwest 516 534 748 867 7 8 Central 953 1,011 1,444 1,598 14 12 Southeast 485 435 924 667 9 12 Total 2,868 2,864 4,210 4,292 11 % 10 % Net Order Value Average Community Count Segment 2022 2021 Variance 2022 2021 Variance West Coast$ 845,517 $ 779,551 8 % 57 65 (12) % Southwest 327,569 333,919 (2) 34 36 (6) Central 618,009 552,941 12 75 82 (9) Southeast 362,639 202,657 79 47 40 18 Total$ 2,153,734 $ 1,869,068 15 % 213 223 (4) % February 28, Backlog - Homes Backlog - Value Segment 2022 2021 Variance 2022 2021 Variance West Coast 2,621 2,300 14 %$ 1,951,554 $ 1,417,644 38 % Southwest 2,426 1,854 31 1,028,385 669,939 54 Central 4,402 3,624 21 1,811,261 1,176,047 54 Southeast 2,437 1,460 67 920,105 430,488 114 Total 11,886 9,238 29 %$ 5,711,305 $ 3,694,118 55 % 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 sell out. 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, and option and upgrade selections. These intrinsic variations in our business limit the comparability of our homes delivered, net orders and backlog, as well as their corresponding values, between sequential and year-over-year periods, in addition to the effect of prevailing economic or housing market conditions in or across any particular periods. Financial Results. Below is a discussion of the financial results for each of our homebuilding reporting segments. Further information regarding these segments, including their pretax income (loss), is included in Note 2 - Segment Information in the Notes to Consolidated Financial Statements in this report. The difference between each homebuilding reporting segment's 27 -------------------------------------------------------------------------------- operating income (loss) and pretax income (loss) is generally due to the equity in income (loss) of unconsolidated joint ventures and/or interest income and expense. In addition to the results of our homebuilding reporting segments presented below, our consolidated homebuilding operating income includes the results of Corporate and other, a non-operating segment. Corporate and other had operating losses of$34.7 million in the three months endedFebruary 28, 2022 and$30.4 million in the three months endedFebruary 28, 2021 . The year over year increase reflected higher selling, general and administrative expenses, mainly due to higher costs associated with performance-based employee compensation plans, as well as expenses to support current operations and expected growth. The financial results of our homebuilding reporting segments for the three months endedFebruary 28, 2022 were negatively affected by intensifying building material cost pressures, as well as the supply chain disruptions and other production-related challenges during the quarter that are described above under "Overview."
Three Months Ended
2022 2021 Variance Revenues$ 658,874 $ 514,516 28 % Construction and land costs (507,465) (421,055) (21) Selling, general and administrative expenses (41,508) (35,258) (18) Operating income$ 109,901 $ 58,203 89 % Homes delivered 914 884 3 % Average selling price$ 720,900 $ 582,000 24 % Operating income as a percentage of revenues 16.7 % 11.3 % 540 bps
This segment's revenues grew year over year due to increases in both the number of homes delivered and the average selling price of those homes. The higher average selling price of homes delivered reflected strong housing market conditions and product and geographic mix shifts of homes delivered.
Operating income grew from the year-earlier period, reflecting higher housing gross profits, partly offset by higher selling, general and administrative expenses. As a percentage of revenues, operating income increased from the year-earlier quarter, primarily due to a 480 basis-point expansion in the housing gross profit margin to 23.0% and a 60 basis-point improvement in selling, general and administrative expenses as a percentage of housing revenues to 6.3%. The higher housing gross profit margin was largely driven by a favorable pricing environment and lower relative amortization of previously capitalized interest. In addition, this segment had no inventory-related charges in the 2022 first quarter, compared to$3.8 million of such charges in the year-earlier period. The improvement in selling, general and administrative expenses as a percentage of housing revenues mainly reflected increased operating leverage from higher housing revenues, partly offset by higher expenses incurred to support current operations and expected growth.
Southwest. The following table presents financial information related to our Southwest segment (dollars in thousands, except average selling price):
Three Months Ended
2022 2021 Variance Revenues$ 209,767 $ 187,685 12 % Construction and land costs (156,428) (138,681) (13) Selling, general and administrative expenses (17,324) (15,825) (9) Operating income$ 36,015 $ 33,179 9 % Homes delivered 516 534 (3) % Average selling price$ 406,500 $ 351,500 16 % Operating income as a percentage of revenues 17.2 % 17.7 % (50) bps 28 -------------------------------------------------------------------------------- The year-over-year growth in this segment's revenues reflected an increase in the average selling price of homes delivered, partly offset by a slight decrease in the number of homes delivered. The higher average selling price reflected strong housing market conditions and a shift in product and geographic mix of homes delivered. Operating income increased from the corresponding 2021 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 endedFebruary 28, 2022 decreased from the year-earlier period largely due to a 70 basis-point decline in the housing gross profit margin to 25.4%, partly offset by a 20 basis-point improvement in selling, general and administrative expenses as a percentage of housing revenues to 8.2%.
Central. The following table presents financial information related to our Central segment (dollars in thousands, except average selling price):
Three Months Ended
2022 2021 Variance Revenues$ 355,322 $ 309,708 15 % Construction and land costs (284,860) (238,951) (19) Selling, general and administrative expenses (32,346) (29,765) (9) Operating income$ 38,116 $ 40,992 (7) % Homes delivered 953 1,011 (6) % Average selling price$ 372,800 $ 306,300 22 % Operating income margin as a percentage of revenues 10.7 % 13.2 % (250) bps This segment's revenues grew from the corresponding year-earlier period due to an increase in the average selling price of homes delivered, partly offset by a decrease in the number of homes delivered. The higher average selling price reflected strong housing market conditions and shifts in the product and geographic mix of homes delivered. Operating income decreased from the corresponding year-earlier period mainly due to higher selling, general and administrative expenses. For the three months endedFebruary 28, 2022 , the decrease in this segment's operating income as a percentage of revenues primarily reflected a 300 basis-point decrease in the housing gross profit margin to 19.8%, partly offset by a 50 basis-point decrease in selling, general and administrative expenses as a percentage of housing revenues to 9.1%. The decline in the housing gross profit margin was largely due to higher construction and land costs and increased expenses to support current operations and expected growth, partly offset by lower relative amortization of 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.
Southeast. The following table presents financial information related to our Southeast segment (dollars in thousands, except average selling price):
Three Months Ended
2022 2021 Variance Revenues$ 170,191 $ 126,099 35 % Construction and land costs (132,230) (101,233) (31) Selling, general and administrative expenses (17,695) (12,752) (39) Operating income$ 20,266 $ 12,114 67 % Homes delivered 485 435 11 % Average selling price$ 350,900 $ 288,400 22 % Operating income as a percentage of revenues 11.9 % 9.6 % 230 bps
This segment's revenues for the three months ended
29 --------------------------------------------------------------------------------
from growth in the number of homes delivered and an increase in the overall average selling price of those homes, which reflected strong housing market conditions and shifts in the product and geographic mix of homes delivered.
Operating income increased from the corresponding year-earlier period, reflecting higher housing gross profits, partly offset by higher selling, general and administrative expenses. As a percentage of revenues, operating income for the 2022 first quarter rose from the year-earlier period due to a 240 basis-point increase in the housing gross profit margin to 22.3% that mainly reflected a shift in geographic mix, lower relative amortization of previously capitalized interest and reduced sales incentives. Selling, general and administrative expenses as a percentage of housing revenues increased 20 basis points from the year-earlier period to 10.4%.
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
2022 2021 Revenues$ 4,635 $ 3,730 Expenses (1,347) (1,200) Equity in income of unconsolidated joint venture 5,148 5,970 Pretax income$ 8,436 $ 8,500 Total originations (a): Loans 1,783 2,072 Principal$ 691,933 $ 710,924 Percentage of homebuyers using KBHS 71 % 79 % Average FICO score 732 724 Loans sold (a): Loans sold to Stearns/GR Alliance 1,527 1,554 Principal$ 595,959 $ 523,905 Loans sold to third parties 352 436 Principal$ 112,192 $ 144,387
(a)Loan originations and sales occurred within KBHS.
Revenues. Financial services revenues for the three months endedFebruary 28, 2022 grew from the corresponding period of 2021 due to increases in both title services revenues and insurance commissions. Pretax income. Financial services pretax income for the three months endedFebruary 28, 2022 was essentially even with the year-earlier period, as a decrease in our equity in income of unconsolidated joint ventures was offset by an increase in income from title services and insurance commissions. In the 2022 first quarter, the equity in income of our unconsolidated joint venture, KBHS, decreased 14% year over year due to a lower principal amount of loan originations combined with lower margins, reflecting increased competition in the primary mortgage market, partly offset by an increase in the fair value of interest rate lock commitments. The lower principal amount of loan originations was mainly due to a decrease in the percentage of homebuyers using KBHS, partly offset by a 22% increase in the average selling price of homes delivered.
INCOME TAXES
Income Tax Expense. Our income tax expense and effective tax rates were as follows (dollars in thousands):
Three Months Ended February 28, 2022 2021 Income tax expense$ 43,800 $ 26,500 Effective tax rate 24.6 % 21.4 % 30
-------------------------------------------------------------------------------- Our effective tax rate for the three months endedFebruary 28, 2022 increased from the year-earlier period, mainly due to a$2.5 million decrease in the federal tax credits we earned primarily from building energy-efficient homes, reflecting the expiration of these credits for homes delivered afterDecember 31, 2021 . Also contributing to the higher effective tax rate were a$1.3 million decrease in excess tax benefits related to stock-based compensation, and an increase of$.3 million in non-deductible executive compensation expense. InJune 2020 ,California enacted tax legislation that approved the suspension of California NOL deductions for tax years 2020, 2021 and 2022. OnFebruary 9, 2022 ,California enacted legislation restoring the NOL deduction for tax years beginning on or afterJanuary 1, 2022 , which would be effective for our 2023 fiscal year. Although the suspension of California NOL deductions did not have an impact on our income tax expense for the three months endedFebruary 28, 2022 , it contributed to the year-over-year increase in the amount of taxes we paid in the period.
Further information regarding our income taxes is provided in Note 13 - Income Taxes in the Notes to Consolidated Financial Statements in this report.
NON-GAAP FINANCIAL MEASURES
This report contains information about our adjusted housing gross profit margin, which is not calculated in accordance with GAAP. We believe this non-GAAP financial measure is relevant and useful to investors in understanding our operations and the leverage employed in our operations, and may be helpful in comparing us with other companies in the homebuilding industry to the extent they provide similar information. However, because it is not calculated in accordance with GAAP, this non-GAAP financial measure may not be completely comparable to other companies in the homebuilding industry and, thus, should not be considered in isolation or as an alternative to operating performance and/or financial measures prescribed by GAAP. Rather, this non-GAAP financial measure should be used to supplement the most directly comparable GAAP financial measure in order to provide a greater understanding of the factors and trends affecting our operations. Adjusted Housing Gross Profit Margin. The following table reconciles our housing gross profit margin calculated in accordance with GAAP to the non-GAAP financial measure of our adjusted housing gross profit margin (dollars in thousands):
Three Months Ended
2022 2021 Housing revenues$ 1,394,154 $ 1,137,353 Housing construction and land costs (1,082,112) (901,178) Housing gross profits 312,042 236,175 Add: Inventory-related charges (a) 175 4,064 Adjusted housing gross profits$ 312,217 $ 240,239 Housing gross profit margin as a percentage of housing revenues 22.4 % 20.8 %
Adjusted housing gross profit margin as a percentage of housing revenues
22.4 % 21.1 %
(a) Represents inventory impairment and land option contract abandonment charges associated with housing operations.
Adjusted housing gross profit margin is a non-GAAP financial measure, which we calculate by dividing housing revenues less housing construction and land costs excluding housing inventory impairment and land option contract abandonment charges (as applicable) recorded during a given period, by housing revenues. The most directly comparable GAAP financial measure is housing gross profit margin. We believe adjusted housing gross profit margin is a relevant and useful financial measure to investors in evaluating our performance as it measures the gross profits we generated specifically on the homes delivered during a given period. This non-GAAP financial measure isolates the impact that the housing inventory impairment and land option contract abandonment charges have on housing gross profit margins, and allows investors to make comparisons with our competitors that adjust housing gross profit margins in a similar manner. We also believe investors will find adjusted housing gross profit margin relevant and useful because it represents a profitability measure that may be compared to a prior period without regard to variability of housing inventory impairment and land option contract abandonment charges. This financial measure assists us in making strategic decisions regarding community location and product mix, product pricing and construction pace. 31 -------------------------------------------------------------------------------- Liquidity and Capital Resources
Overview. We have funded our homebuilding and financial services activities over the last several years with:
• internally generated cash flows; • public issuances of debt securities; • borrowings under the Credit Facility; • land option contracts and other similar contracts and seller notes; • public issuances of our common stock; and • letters of credit and performance bonds.
We manage our use of cash in the operation of our business to support the execution of our primary strategic goals. Over the past several years, we have primarily used cash for:
•land acquisition and land development; •home construction; •operating expenses; •principal and interest payments on notes payable; and •repayments of borrowings under the Credit Facility. We ended the 2022 first quarter with total liquidity of$1.07 billion , including cash and cash equivalents and$831.4 million of available capacity under the Credit Facility. Based on our financial position as ofFebruary 28, 2022 , and our generally positive business forecast for the remainder of 2022 as discussed below under "Outlook," we have no material concerns related to our liquidity. While the ongoing COVID-19 pandemic creates potential liquidity risks, as discussed further below, we believe that our existing cash and cash equivalents, our anticipated cash flows from operations and amounts available under our Credit Facility will be sufficient to fund our anticipated operating and land-related investment needs for at least the next 12 months. Cash Requirements. There have been no significant changes in our cash requirements from those reported in the "Management's Discussion and Analysis of Financial Condition and Results of Operations" section of our Annual Report on Form 10-K for the year endedNovember 30, 2021 . Investments in Land andLand Development . Our investments in land and land development increased 27% to$704.7 million for the three months endedFebruary 28, 2022 , compared to$556.0 million for the year-earlier period. Approximately 52% of our total investments for the three months endedFebruary 28, 2022 related to land acquisition, compared to approximately 49% in the prior-year period. While we made strategic investments in land and land development in each of our homebuilding reporting segments during the three months endedFebruary 28, 2022 and 2021, approximately 57% and 53%, respectively, of these investments for each period were made in ourWest Coast homebuilding reporting segment. Our investments in land and land development in the future will depend significantly on market conditions and available opportunities that meet our investment return standards to support home delivery and revenue growth in the remainder of 2022 and beyond.
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):
February 28, 2022 November 30, 2021 Variance Segment Lots $ Lots $ Lots $ West Coast 24,142$ 2,473,942 23,539$ 2,300,096 603$ 173,846 Southwest 12,279 925,913 12,339 875,438 (60) 50,475 Central 29,439 1,102,216 28,961 995,811 478 106,405 Southeast 22,352 695,762 21,929 631,484 423 64,278 Total 88,212$ 5,197,833 86,768$ 4,802,829 1,444$ 395,004 The number and carrying value of lots we owned or controlled under land option contracts and other similar contracts atFebruary 28, 2022 increased fromNovember 30, 2021 , primarily due to our investments in land and land development in the three months endedFebruary 28, 2022 and an increase in the number of homes under construction. The number of lots in inventory as ofFebruary 28, 2022 included 11,365 lots under contract where the associated deposits were refundable at our discretion, compared to 10,254 of such lots atNovember 30, 2021 . Our lots controlled under land option contracts and other similar contracts as a percentage of total lots was 42% atFebruary 28, 2022 , compared to 44% atNovember 30, 2021 . 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. 32 -------------------------------------------------------------------------------- Land Option Contracts and Other Similar Contracts. As discussed in Note 8 - Variable Interest Entities in the Notes to Consolidated Financial Statements in this report, our land option contracts and other similar contracts generally do not contain provisions requiring our specific performance. Our decision to exercise a particular land option contract or other similar contract depends on the results of our due diligence reviews and ongoing market and project feasibility analysis that we conduct after entering into such a contract. In some cases, our decision to exercise a land option contract or other similar contract may be conditioned on the land seller obtaining necessary entitlements, such as zoning rights and environmental and development approvals, and/or physically developing the underlying land by a pre-determined date. We typically have the ability not to exercise our rights to the underlying land for any reason and forfeit our deposits without further penalty or obligation to the sellers. If we were to acquire all the land we had under land option contracts and other similar contracts atFebruary 28, 2022 , we estimate the remaining purchase price to be paid would be as follows: 2022 -$1.06 billion ; 2023 -$449.9 million ; 2024 -$66.2 million ; 2025 -$79.7 million ; 2026 -$15.0 million ; and thereafter -$0 .
Liquidity. The table below summarizes our total cash and cash equivalents, and total liquidity (in thousands):
2022 2021 Total cash and cash equivalents$ 240,688 $ 290,764 Credit Facility commitment 1,090,000 800,000 Borrowings outstanding under the Credit Facility (250,000) - Letters of credit outstanding under the Credit Facility (8,618) (8,618) Credit Facility availability 831,382 791,382 Total liquidity$ 1,072,070 $ 1,082,146
The majority of our cash equivalents at
Capital Resources. Our notes payable consisted of the following (in thousands): February 28, November 30, 2022 2021 Variance Credit Facility$ 250,000 $ -$ 250,000 Mortgages and land contracts due to land sellers and other loans 4,927 5,327 (400) Senior notes 1,680,021 1,679,700 321 Total$ 1,934,948 $ 1,685,027 $ 249,921 Our financial leverage, as measured by the ratio of debt to capital, was 38.2% atFebruary 28, 2022 , compared to 35.8% atNovember 30, 2021 . The ratio of debt to capital is calculated by dividing notes payable by capital (notes payable plus stockholders' equity). LOC Facility. We maintain an 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 onFebruary 13, 2025 , we may issue up to$75.0 million of letters of credit. As ofFebruary 28, 2022 andNovember 30, 2021 , we had letters of credit outstanding under the LOC Facility of$36.7 million and$34.6 million , respectively. Performance Bonds. As discussed in Note 16 - Commitments and Contingencies in the Notes to Consolidated Financial Statements in this report, we had$1.15 billion and$1.11 billion of performance bonds outstanding atFebruary 28, 2022 andNovember 30, 2021 , respectively. Unsecured Revolving Credit Facility. OnFebruary 18, 2022 , we entered into an amendment to our Credit Facility that increased its borrowing capacity from$800.0 million to$1.09 billion and extended its maturity fromOctober 7, 2023 toFebruary 18, 2027 . The Credit Facility contains an uncommitted accordion feature under which its aggregate principal amount of available loans can be increased to a maximum of$1.29 billion under certain conditions, including obtaining additional bank commitments. The amount of the Credit Facility available for cash borrowings and the issuance of letters of credit depends on the total cash borrowings and letters of credit outstanding under the Credit Facility and the maximum available amount under the terms of the Credit Facility. As ofFebruary 28, 2022 , we had$250.0 million of cash borrowings and$8.6 million of letters 33 -------------------------------------------------------------------------------- of credit outstanding under the Credit Facility, with the outstanding borrowings reflecting a focus to operate with a more efficient cash balance as we continue to drive returns-focused growth. The Credit Facility is further described in Note 14 - Notes Payable in the Notes to Consolidated Financial Statements in this report. Under the terms of the Credit Facility, we are required, among other things, to maintain compliance with various covenants, including financial covenants regarding our consolidated tangible net worth, Leverage Ratio, and either an Interest Coverage Ratio or minimum liquidity level, each as defined therein. Our compliance with these financial covenants is measured by calculations and metrics that are specifically defined or described by the terms of the Credit Facility and can differ in certain respects from comparable GAAP or other commonly used terms. The financial covenant requirements under the Credit Facility, as amended, are set forth below: •Consolidated TangibleNet Worth - We must maintain a consolidated tangible net worth at the end of any fiscal quarter greater than or equal to the sum of (a)$2.09 billion , plus (b) an amount equal to 50% of the aggregate of the cumulative consolidated net income for each fiscal quarter commencing afterNovember 30, 2021 and ending as of the last day of such fiscal quarter (though there is no reduction if there is a consolidated net loss in any fiscal quarter), plus (c) an amount equal to 50% of the cumulative net proceeds we receive from the issuance of our capital stock afterNovember 30, 2021 . •Leverage Ratio - We must also maintain a Leverage Ratio of less than or equal to .60 at the end of each fiscal quarter. The Leverage Ratio is calculated as the ratio of our consolidated total indebtedness to the sum of consolidated total indebtedness and consolidated tangible net worth, all as defined under the Credit Facility. •Interest Coverage Ratio or Liquidity - We are also required to maintain either (a) an Interest Coverage Ratio of greater than or equal to 1.50 at the end of each fiscal quarter; or (b) a minimum level of liquidity, but not both. The Interest Coverage Ratio is the ratio of our consolidated adjusted EBITDA to consolidated interest incurred, each as defined under the Credit Facility, in each case for the previous 12 months. Our minimum liquidity is required to be greater than or equal to consolidated interest incurred, as defined under the Credit Facility, for the four most recently ended fiscal quarters in the aggregate. In addition, under the Credit Facility, our investments in joint ventures and non-guarantor subsidiaries (which are shown, respectively, in Note 9 - Investments inUnconsolidated Joint Ventures in the Notes to Consolidated Financial Statements in this report and under "Supplemental Guarantor Financial Information" below) as of the end of each fiscal quarter cannot exceed the sum of (a)$104.8 million and (b) 20% of consolidated tangible net worth. Further, for so long as we do not hold an investment grade rating, as defined under the Credit Facility, the Credit Facility does not permit our borrowing base indebtedness, which generally is the aggregate principal amount of our and certain of our subsidiaries' outstanding indebtedness for borrowed money and non-collateralized financial letters of credit, to be greater than our borrowing base (a measure relating to our inventory and unrestricted cash assets). The covenants and other requirements under the Credit Facility represent the most restrictive covenants that we are subject to with respect to our notes payable. The following table summarizes the financial covenants and other requirements under the Credit Facility, and our actual levels or ratios (as applicable) with respect to those covenants and other requirements, in each case as ofFebruary 28, 2022 : Financial Covenants and Other Requirements Covenant Requirement Actual Consolidated tangible net worth >$2.16 billion $3.10 billion Leverage Ratio < .600 .386 Interest Coverage Ratio (a) > 1.500 8.009 Minimum liquidity (a) >$117.3 million $(9.3) million Investments in joint ventures and non-guarantor subsidiaries <$724.4 million $237.4 million Borrowing base in excess of borrowing base indebtedness (as defined) n/a$2.16 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.
The indenture governing our senior notes does not contain any financial covenants. Subject to specified exceptions, the indenture contains certain restrictive covenants that, among other things, limit our ability to incur secured indebtedness, or engage in sale and leaseback transactions involving property above a certain specified value. In addition, the indenture contains certain limitations related to mergers, consolidations, and sales of assets. 34 -------------------------------------------------------------------------------- As ofFebruary 28, 2022 , we were in compliance with the applicable terms of all of our covenants and other requirements under the Credit Facility, the senior notes, the indenture, and the mortgages and land contracts due to land sellers and other loans. Our ability to access the Credit Facility for cash borrowings and letters of credit and our ability to secure future debt financing depend, in part, on our ability to remain in such compliance. There are no agreements that restrict our payment of dividends other than the Credit Facility, which would restrict our payment of certain dividends, such as cash dividends on our common stock, if a default under the Credit Facility exists at the time of any such payment, or if any such payment would result in such a default (other than dividends paid within 60 days after declaration, if there was no default at the time of declaration). Depending on available terms, we finance certain land acquisitions with purchase-money financing from land sellers or with other forms of financing from third parties. AtFebruary 28, 2022 , we had outstanding mortgages and land contracts due to land sellers and other loans payable in connection with such financing of$4.9 million , secured primarily by the underlying property, which had an aggregate carrying value of$18.5 million . Credit Ratings. Our credit ratings are periodically reviewed by rating agencies. InJanuary 2022 ,Standard and Poor's Financial Services reaffirmed our BB credit rating and changed its rating outlook to positive from stable. Consolidated Cash Flows. The following table presents a summary of net cash provided by (used in) our operating, investing and financing activities (in thousands): Three Months Ended February 28, 2022 2021 Net cash provided by (used in): Operating activities$ (251,035) $ (79,265) Investing activities (17,876) (11,723) Financing activities 219,512 (20,582) Net decrease in cash and cash equivalents$ (49,399)
Operating Activities. Generally, our net operating cash flows fluctuate primarily based on changes in our inventories and our profitability. Our net cash used in operating activities for the three months endedFebruary 28, 2022 mainly reflected a net increase in inventories of$405.9 million and a net increase in receivables of$8.6 million , partly offset by net income of$134.3 million and a net increase in accounts payable, accrued expenses and other liabilities of$2.1 million . In the three months endedFebruary 28, 2021 , our net cash used in operating activities mainly reflected a net increase in inventories of$229.1 million and a net decrease in accounts payable, accrued expenses and other liabilities of$10.1 million , partially offset by net income of$97.1 million and a net decrease in receivables of$23.3 million . Investing Activities. In the three months endedFebruary 28, 2022 , our uses of cash included$10.6 million for net purchases of property and equipment and$8.6 million for contributions to unconsolidated joint ventures. These uses of cash were partially offset by a$1.3 million return of investments in unconsolidated joint ventures. In the three months endedFebruary 28, 2021 , the net cash used for investing activities reflected$9.1 million for net purchases of property and equipment and$2.6 million for contributions to unconsolidated joint ventures. Financing Activities. In the three months endedFebruary 28, 2022 , cash was provided by net borrowings under the Credit Facility of$250.0 million . Partially offsetting the cash provided were$14.1 million of dividend payments on our common stock,$12.2 million of tax payments associated with stock-based compensation awards,$3.8 million of costs incurred for the Credit Facility amendment and$.4 million of payments on mortgages and land contracts due to land sellers and other loans. In the three months endedFebruary 28, 2021 , net cash was used for dividend payments on our common stock of$14.1 million , tax payments associated with stock-based compensation awards of$8.5 million and payments on mortgages and land contracts due to land sellers and other loans of$.6 million . The cash used was partially offset by$2.5 million of issuances of common stock under employee stock plans. Dividends. In the three-month periods endedFebruary 28, 2022 and 2021, our board of directors declared, and we paid, a quarterly cash dividend on our common stock of$.15 per share. The declaration and payment of future cash dividends on our common stock, whether at current levels or at all, are at the discretion of our board of directors and depend upon, among other things, our expected future earnings, cash flows, capital requirements, access to external financing, debt structure and any adjustments thereto, operational and financial investment strategy and general financial condition, as well as general business conditions. 35 -------------------------------------------------------------------------------- As of the date of this report, we believe we have adequate capital resources and sufficient access to external financing sources to satisfy our current and reasonably anticipated requirements for funds to conduct our operations and meet other needs in the ordinary course of our business. For the remainder of 2022, we expect to use or redeploy our cash resources or cash borrowings under the Credit Facility to support our business within the context of prevailing market conditions. During this time, we may also engage in capital markets, bank loan, project debt or other financial transactions, including the repurchase of debt or equity securities or potential new issuances of debt or equity securities to support our business needs. The amounts involved in these transactions, if any, may be material. In addition, as necessary or desirable, we may adjust or amend the terms of and/or expand the capacity of the Credit Facility or the LOC Facility, or enter into additional letter of credit facilities, or other similar facility arrangements, in each case with the same or other financial institutions, or allow any such facilities to mature or expire. However, with the uncertainty surrounding the COVID-19 pandemic and international and domestic COVID-19 control responses, including inChina , as well as the ongoing global supply chain disruptions, which may be exacerbated by the military conflict inUkraine and the associated wide-ranging sanctions imposed on Russian business sectors, financial organizations, individuals and raw materials, each of which could materially and negatively affect our business and the housing market, our ability to engage in such transactions may be constrained by volatile or tight economic, capital, credit and/or financial market conditions, as well as moderated investor and/or lender interest or capacity and/or our liquidity, leverage and net worth, and we can provide no assurance as to successfully completing, the costs of, or the operational limitations arising from any one or series of such transactions. Further discussion of the potential impacts from the COVID-19 pandemic on our capital resources and liquidity is provided in the "Risk Factors" section of our Annual Report on Form 10-K for the year endedNovember 30, 2021 . Supplemental Guarantor Financial Information As ofFebruary 28, 2022 , we had$1.69 billion in aggregate principal amount of outstanding senior notes and$250.0 million of borrowings outstanding under the Credit Facility. Our obligations to pay principal, premium, if any, and interest on the senior notes and borrowings, if any, under the Credit Facility are guaranteed on a joint and several basis by certain of our subsidiaries ("Guarantor Subsidiaries"). Our other subsidiaries, including all of our subsidiaries associated with our financial services operations, do not guarantee any such indebtedness (collectively, "Non-Guarantor Subsidiaries"), although we may cause a Non-Guarantor Subsidiary to become a Guarantor Subsidiary if we believe it to be in our or the relevant subsidiary's best interest. See Note 14 - Notes Payable in the Notes to Consolidated Financial Statements in this report for additional information regarding the terms of our senior notes and the Credit Facility. The guarantees are full and unconditional, and the Guarantor Subsidiaries are 100% owned by us. The guarantees are senior unsecured obligations of each of the Guarantor Subsidiaries and rank equally in right of payment with all unsecured and unsubordinated indebtedness and guarantees of such Guarantor Subsidiaries. The guarantees are effectively subordinated to any secured indebtedness of such Guarantor Subsidiaries to the extent of the value of the assets securing such indebtedness, and structurally subordinated to indebtedness and other liabilities of Non-Guarantor Subsidiaries. Pursuant to the terms of the indenture governing the senior notes and the terms of the Credit Facility, if any of the Guarantor Subsidiaries ceases to be a "significant subsidiary" as defined by Rule 1-02 of Regulation S-X using a 5% rather than a 10% threshold (provided that the assets of our Non-Guarantor subsidiaries do not in the aggregate exceed 10% of an adjusted measure of our consolidated total assets), it will be automatically and unconditionally released and discharged from its guaranty of the senior notes and the Credit Facility so long as all guarantees by such Guarantor Subsidiary of any other of our or our subsidiaries' indebtedness are terminated at or prior to the time of such release. The following tables present summarized financial information forKB Home and the Guarantor Subsidiaries on a combined basis, excluding unconsolidated joint ventures and after the elimination of (a) intercompany transactions and balances betweenKB Home and the Guarantor Subsidiaries and (b) equity in earnings from and investments in the Non-Guarantor Subsidiaries. See Note 9 - Investments inUnconsolidated Joint Ventures in the Notes to Consolidated Financial Statements in this report for additional information regarding our unconsolidated joint ventures. February 28, November 30, Summarized Balance Sheet Data (in thousands) 2022 2021 Assets Cash$ 209,674 $ 250,118 Inventories 4,774,770 4,425,531 Amounts due from Non-Guarantor Subsidiaries 372,975 323,549 Total assets 5,948,818 5,581,883 36
--------------------------------------------------------------------------------February 28 ,November 30 , Summarized Balance Sheet Data (in thousands) 2022
2021
Liabilities and Stockholders' Equity Notes payable$ 1,932,438 $
1,682,517
Amounts due to Non-Guarantor Subsidiaries 266,401 254,717 Total liabilities 3,013,568 2,755,817 Stockholders' equity 2,935,250 2,826,066 Three Months Ended Summarized Statement of Operations Data (in thousands) February 28, 2022 Revenues $ 1,316,340 Construction and land costs (1,015,252) Selling, general and administrative expenses
(137,085)
Interest income from non-guarantor subsidiary 5,881 Pretax income 169,920 Net income 127,820 Critical Accounting Policies The preparation of our consolidated financial statements requires the use of judgment in the application of accounting policies and estimates of uncertain matters. There have been no significant changes to our critical accounting policies and estimates during the three months endedFebruary 28, 2022 from those disclosed in the "Management's Discussion and Analysis of Financial Condition and Results of Operations" section of our Annual Report on Form 10-K for the year endedNovember 30, 2021 . Recent Accounting Pronouncements
Recent accounting pronouncements are discussed in Note 1 - Basis of Presentation and Significant Accounting Policies in the Notes to Consolidated Financial Statements in this report.
Outlook We believe several long-term housing market fundamental factors will remain positive in 2022, including favorable demographics, a housing supply-demand imbalance resulting from a decade-plus underproduction of new homes in relation to population growth, a limited supply of resale homes available for sale, and steady employment and job growth. We believe our highly customer-centric, personalized approach to homebuilding and operational capabilities will enable us to address evolving buyer preferences and needs and, together with an expected year-over-year increase in our community count, drive further growth in our results in 2022, subject to business conditions and other factors described in this report, including the risks described below. Our present outlook for the 2022 second quarter and full year is as follows:
2022 Second Quarter
•We expect to generate housing revenues in the range of$1.55 billion to$1.65 billion , an increase from$1.44 billion in the corresponding 2021 period, and anticipate our average selling price to be approximately$490,000 , compared to$409,800 in the year-earlier period. •We expect our homebuilding operating income margin will be in the range of 14.3% to 14.7%, assuming no inventory-related charges, up from 11.4% for the year-earlier quarter. •We expect our housing gross profit margin to be in the range of 24.4% to 25.0%, assuming no inventory-related charges, compared to 21.5% for the corresponding 2021 quarter. •We expect our selling, general and administrative expenses as a percentage of housing revenues to be in the range of 10.0% to 10.5%, compared to 10.1% in the 2021 second quarter. 37 -------------------------------------------------------------------------------- •We expect our effective tax rate will be approximately 25%. The effective tax rate for the year-earlier quarter was approximately 17%, reflecting the favorable effect of then-available federal tax credits we earned primarily from building energy-efficient homes.
•We expect a small sequential increase in our ending community count, and a low-to-mid single-digit percentage increase year over year in our average community count.
2022 Full Year
•We expect our housing revenues to be in the range of$7.20 billion to$7.60 billion , an increase of 30% at the mid-point of the range, from$5.69 billion in 2021, and anticipate our average selling price to be in the range of$490,000 to$500,000 , an increase of between 16% and 18% from 2021.
•We expect our homebuilding operating income margin to be in the range of 16.0% to 16.6%, assuming no inventory-related charges, compared to 11.8% for 2021.
•We expect our housing gross profit margin to be in the range of 25.5% to 26.3%, assuming no inventory-related charges, compared to 21.8% for 2021, reflecting sequential expansion beginning in the second quarter. •We expect our selling, general and administrative expenses as a percentage of housing revenues to be in the range of 9.2% to 9.8%, compared to 10.1% in the prior year. •We expect the effective tax rate will be approximately 25%. The effective tax rate for 2021 was approximately 19%, which reflected the favorable effect of then-available federal tax credits we earned primarily from building energy-efficient homes.
•We expect our ending community count to be approximately 255.
•We expect our return on equity to be in excess of 27%, an improvement of more than 700 basis points compared to 19.9% for 2021.
We believe we are well-positioned to achieve our targets for the 2022 second quarter and full year due to, among other things, our strong backlog, planned new community openings, investments in land and land development, and current positive economic and demographic trends, to varying degrees in many of our served markets. However, our future performance and the strategies we implement (and adjust or refine as necessary or appropriate) will depend significantly on prevailing economic, homebuilding industry and capital, credit and financial market conditions and on a fairly stable and constructive political and regulatory environment (particularly regarding housing and mortgage loan financing policies). In particular, we and other residential construction firms continue to experience services and supply constraints and rising and volatile raw material prices, particularly for lumber, that were exacerbated in the 2022 first quarter by a resurgence of COVID-19 infections with the Omicron variant. Although we continue to work with our suppliers and trade partners to resolve these land development and home construction issues, we believe they will generally persist throughout the year. Ongoing supply chain disruptions and other production-related challenges described above under "Overview," which may worsen in the coming periods due to the military conflict inUkraine and the associated wide-ranging sanctions imposed on Russian business sectors, financial organizations, individuals and raw materials, could further extend our construction cycle times, delay our new community openings and intensify construction-related cost pressures beyond our experience in the 2022 first quarter or in 2021. In addition, consumer demand for our homes and our ability to grow our scale, revenues, net orders, backlog and returns in 2022 could be materially and negatively affected by persistent inflation in theU.S. economy and theFederal Reserve's raising of the federal funds interest rate and other actions to moderate inflation, the severity of the ongoing COVID-19 pandemic and related international and domestic COVID-19 control responses, including inChina , and/or other factors that cause mortgage loan interest rates to increase or that temper mortgage loan availability, employment or income levels or consumer confidence in theU.S. or in our served markets. The potential effect of these factors on our business is highly uncertain, unpredictable and outside our control, and our past performance should not be considered indicative of our future results on any metric or set of metrics. Forward-Looking Statements Investors are cautioned that certain statements contained in this report, as well as some statements by us in periodic press releases and other public disclosures and some oral statements by us to securities analysts, stockholders and others during presentations, are "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995 (the "Act"). Statements that are predictive in nature, that depend upon or refer to future events or conditions, or that include words such as "expect," "anticipate," "intend," "plan," "believe," "estimate," "hope," and similar expressions constitute forward- 38 -------------------------------------------------------------------------------- looking statements. In addition, any statements that we may make or provide concerning future financial or operating performance (including without limitation future revenues, community count, homes delivered, net orders, selling prices, sales pace per new community, expenses, expense ratios, housing gross profits, housing gross profit margins, earnings or earnings per share, or growth or growth rates), future market conditions, future interest rates, and other economic conditions, ongoing business strategies or prospects, future dividends and changes in dividend levels, the value of our backlog (including amounts that we expect to realize upon delivery of homes included in our backlog and the timing of those deliveries), the value of our net orders, potential future asset acquisitions and the impact of completed acquisitions, future share issuances or repurchases, future debt issuances, repurchases or redemptions and other possible future actions are also forward-looking statements as defined by the Act. Forward-looking statements are based on our current expectations and projections about future events and are subject to risks, uncertainties, and assumptions about our operations, economic and market factors, and the homebuilding industry, among other things. These statements are not guarantees of future performance, and we have no specific policy or intention to update these statements. In addition, forward-looking and other statements in this report and in other public or oral disclosures that express or contain opinions, views or assumptions about market or economic conditions; the success, performance, effectiveness and/or relative positioning of our strategies, initiatives or operational activities; and other matters, may be based in whole or in part on general observations of our management, limited or anecdotal evidence and/or business or industry experience without in-depth or any particular empirical investigation, inquiry or analysis. Actual events and results may differ materially from those expressed or forecasted in forward-looking statements due to a number of factors. The most important risk factors that could cause our actual performance and future events and actions to differ materially from such forward-looking statements include, but are not limited to, the following:
•general economic, employment and business conditions;
•population growth, household formations and demographic trends;
•conditions in the capital, credit and financial markets;
•our ability to access external financing sources and raise capital through the issuance of common stock, debt or other securities, and/or project financing, on favorable terms;
•the execution of any securities repurchases pursuant to our board of directors' authorization;
•material and trade costs and availability, including building materials, especially lumber, and appliances;
•consumer and producer price inflation;
•changes in interest rates;
•our debt level, including our ratio of debt to capital, and our ability to adjust our debt level and maturity schedule;
•our compliance with the terms of the Credit Facility;
•volatility in the market price of our common stock;
•home selling prices, including our homes' selling prices, increasing at a faster rate than consumer incomes;
•weak or declining consumer confidence, either generally or specifically with respect to purchasing homes;
•competition from other sellers of new and resale homes;
•weather events, significant natural disasters and other climate and environmental factors;
•any failure of lawmakers to agree on a budget or appropriation legislation to fund the federal government's operations, and financial markets' and businesses' reactions to any such failure; •government actions, policies, programs and regulations directed at or affecting the housing market (including the tax benefits associated with purchasing and owning a home, and the standards, fees and size limits applicable to the purchase or insuring of mortgage loans by government-sponsored enterprises and government agencies), the homebuilding industry, or construction activities; •changes in existing tax laws or enacted corporate income tax rates, including those resulting from regulatory guidance and interpretations issued with respect to thereto;
•changes in
39 -------------------------------------------------------------------------------- •disruptions in world and regional trade flows, economic activity and supply chains due to the military conflict inUkraine , including those stemming from wide-ranging sanctions theU.S. and other countries have imposed or may further impose on Russian business sectors, financial organizations, individuals and raw materials, the impact of which may, among other things, increase our operational costs, exacerbate building materials and appliance shortages and/or reduce our revenues and earnings;
•the adoption of new or amended financial accounting standards and the guidance and/or interpretations with respect thereto;
•the availability and cost of land in desirable areas and our ability to timely develop acquired land parcels and open new home communities;
•our warranty claims experience with respect to homes previously delivered and actual warranty costs incurred;
•costs and/or charges arising from regulatory compliance requirements or from legal, arbitral or regulatory proceedings, investigations, claims or settlements, including unfavorable outcomes in any such matters resulting in actual or potential monetary damage awards, penalties, fines or other direct or indirect payments, or injunctions, consent decrees or other voluntary or involuntary restrictions or adjustments to our business operations or practices that are beyond our current expectations and/or accruals;
•our ability to use/realize the net deferred tax assets we have generated;
•our ability to successfully implement our current and planned strategies and initiatives related to our product, geographic and market positioning, gaining share and scale in our served markets and in entering into new markets;
•our operational and investment concentration in markets in
•consumer interest in our new home communities and products, particularly from first-time homebuyers and higher-income consumers;
•our ability to generate orders and convert our backlog of orders to home
deliveries and revenues, particularly in key markets in
•our ability to successfully implement our business strategies and achieve any associated financial and operational targets and objectives, including those discussed in this report or in any of our other public filings, presentations or disclosures;
•income tax expense volatility associated with stock-based compensation;
•the ability of our homebuyers to obtain residential mortgage loans and mortgage banking services;
•the performance of mortgage lenders to our homebuyers;
•the performance of KBHS;
•information technology failures and data security breaches;
•an epidemic or pandemic (such as the outbreak and worldwide spread of COVID-19), and the control response measures that international (includingChina ), federal, state and local governments, agencies, law enforcement and/or health authorities implement to address it, which may (as with COVID-19) precipitate or exacerbate one or more of the above-mentioned and/or other risks, and significantly disrupt or prevent us from operating our business in the ordinary course for an extended period; and
•other events outside of our control.
Please see our Annual Report on Form 10-K for the year endedNovember 30, 2021 and other filings with theSEC for a further discussion of these and other risks and uncertainties applicable to our business.
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