Housing Experts Expect Conditions To Worsen

The company's third-quarter operating results reflected the ongoing deterioration in the housing market. Quarterly revenues dropped 32%, hurt by a 28% decline in unit deliveries and a 7% reduction in average selling price.

Q3 Results

The Los Angeles, California-based company's net loss for the quarter was $35.61 million, or $0.46 per share, compared to a net income of $153.21 million, or $1.90 per share in the year-ago quarter. The quarterly net loss included an after-tax gain of $438.1 million from the sale of its 49% equity interest in its French subsidiary Kaufman & Broad SA for total gross proceeds of $807.2 million.

The French discontinued operations generated third-quarter after-tax income of $443 million, or $5.73 per share, including the gain realized on the sale of the operations, up from $23.97 million, or $0.30 per share in the third quarter of 2006.

The company also reported a loss from continuing operations, net of an income tax benefit, of $478.62 million, or $6.19 per share, compared to a profit from continuing operations of $129.34 million, or $1.60 per share last year. The company attributed the current-year quarter loss from continuing operations to pre-tax, non-cash charges of $690.1 million related to inventory and joint venture impairments and the abandonment of land option contracts, along with a goodwill impairment of $107.9 million.

On average, 10 analysts polled by First Call/Thomson Financial expected a loss of $0.72 per share in the third quarter.

The company's second-quarter net loss was $148.69 million, or $1.93 per share, while loss from continuing operations totaled $174.2 million, or $2.26 per share.

KB Home said the third-quarter results reflected the challenging market conditions that continue for homebuilders across the nation. While commenting on the quarterly performance, Jeffrey Mezger, president and chief executive officer of KB Home, said, "The oversupply of unsold new and resale homes and downward pressure on new home values has worsened in many of our markets as tighter lending standards, low affordability and greater buyer caution suppress demand, while higher foreclosure activity combined with heightened builder and investor efforts to monetize their real estate investments boost supply." The adverse conditions also had a negative impact on the company's selling prices and gross margins, Mezger noted.

During the third quarter, KB Home's revenue dropped 32% to $1.54 billion from $2.28 billion in the same quarter of last year. Wall Street analysts projected revenues of $1.50 billion. For the preceding quarter, the company recorded revenues of $1.41 billion.

The company's housing revenues for the third quarter were $1.53 billion, a 33% decline from $2.27 billion a year earlier. Land sale revenues, however, rose to $14.74 million from $6.63 million in the third quarter of 2006.

The company's construction business generated an operating loss of $766.9 million in the quarter, compared to an operating income of $192.1 million last year, hurt by losses from homebuilding operations and land sales.

KB Home also said that the year-over-year decrease in housing revenues reflected a 28% fall in unit deliveries and a 7% reduction in average selling price. Unit deliveries for the quarter were 5,699, compared to 7,893 a year earlier. The company's average selling price declined to $267,700 from $288,000 in the prior-year quarter.

During the quarter, the company fetched 3,907 net orders, 6% lower than last year, as only the Southeast region had a positive year-over-year net order comparison in the quarter. Nonetheless, third-quarter cancellation rate of 50% was lower than the 60% rate in the prior-year quarter.

As of August 31, 2007, the company's backlog totaled 11,880 units, down from 7,198 units a year ago. Potential future housing revenues from the backlog are estimated to be $3.07 billion, lower than a backlog value of $4.95 billion a year ago, due to negative net order comparisons over the past several quarters and the reduction in average selling prices.

Peer Performance

On September 25, Lennar Corp. (LEN, LEN.B) posted a loss in its third quarter, hurt by a one-time charge in addition to a 44% decline in revenues. The Miami, Florida-based company's net loss for the quarter was $513.85 million, or $3.25 per share, compared to net earnings of $206.68 million, or $1.30 per share a year ago. Lennar's third-quarter revenues came in at $2.34 billion, down from $4.18 billion in the prior-year quarter.

DR Horton Inc., a Fort Worth, Texas-based homebuilder, reported a net loss of $823.8 million, or $2.62 per share in the third quarter, compared to a net income of $292.8 million, or $0.93 per share a year ago. DR Horton's homebuilding revenues totaled $2.5 billion, down from $3.6 billion in the same quarter of 2006.

Another peer, Pulte Homes Inc. is slated to announce its third-quarter results on October 24. The Street analysts are of the view that the company's loss per share will be $0.30, on revenues of $2.49 billion.

Nine-Month Highlights

KB Home posted a net loss of $156.76 million, or $2.03 per share for the nine-month period, in comparison with a profit of $531.99 million, or $6.36 per share in the prior-year period. The company said the net loss for the period included the French discontinued operations.

Loss from continuing operations was $642.12 million, or $8.32 per share, compared to an income from continuing operations of $472.89 million, or $5.65 per share last year.

The company's revenues for period plunged to $4.34 billion from $6.37 billion in the same period of 2006.

Outlook

Moving forward, KB Home expects the housing industry conditions to continue to worsen through the end of the year and into 2008. The company also sees a further reduction in home price, as higher foreclosure rates are leading to surplus inventory. "At this time, we see no signs that the housing market is stabilizing and believe it will be some time before a recovery begins," Mezger stated.