KB Home Reports Third Quarter 2008 Financial Results

KB Home (NYSE:KBH), one of America’s largest homebuilders, today reported financial results for its third quarter ended August 31, 2008. Results include:

• Revenues totaled $681.6 million for the third quarter ended August 31, 2008, down from $1.54 billion for the third quarter of 2007, largely due to lower housing revenues. Third-quarter housing revenues totaled $668.3 million, down from $1.53 billion in the year-earlier quarter, reflecting a 51% decrease in homes delivered and a 10% decline in the average selling price. The Company delivered 2,788 homes at an average selling price of $239,700 in the third quarter of 2008 compared to 5,699 homes at an average selling price of $267,700 in the third quarter of 2007.
• The Company posted a net loss of $144.7 million, or $1.87 per diluted share, for the third quarter of 2008 compared to a net loss of $35.6 million, or $.46 per diluted share, for the third quarter of 2007. Excluding income of $443.0 million, or $5.73 per diluted share, generated by the Company’s French discontinued operations and the sale of these operations in the period, the Company reported a loss from continuing operations of $478.6 million, or $6.19 per diluted share, for the third quarter of 2007. The 2008 third quarter results included a pretax, non-cash charge of $82.2 million for inventory and joint venture impairments and a charge of $58.1 million to record a valuation allowance against net deferred tax assets generated during the quarter. The 2007 third quarter loss from continuing operations included pretax charges of $798.0 million associated with asset impairments and abandonments.
• The Company’s cash balance at August 31, 2008 totaled $942.5 million, up 46% from $645.9 million at August 31, 2007. The Company’s debt balance at the end of the current quarter was $1.88 billion, down $284.1 million from $2.16 billion at the end of the 2007 third quarter, largely due to the redemption of debt. The Company’s ratio of debt to total capital at August 31, 2008 was 62.3% compared to 44.8% at August 31, 2007. Net of cash, the ratio was 45.2% compared to 36.3% a year ago.
• In July, the Company redeemed all $300.0 million of its 7 3/4% senior subordinated notes due in 2010. The redemption price was 101.938% of the principal amount, plus accrued interest to the date of redemption. The early redemption of these notes resulted in a charge of $7.1 million for the call premium and unamortized original issue discount.
• In August, the Company entered into an amendment to the unsecured revolving credit facility it maintains with various banks. The amendment reduced the aggregate commitment under the facility from $1.30 billion to $800.0 million and modified the minimum level of consolidated tangible net worth and certain financial ratios the Company is required to maintain. The amendment did not change the facility’s November 2010 maturity date. The Company wrote off $3.3 million of unamortized costs in connection with the amendment. There were no borrowings outstanding under the facility at August 31, 2008. Including its cash balance, the Company’s liquidity at the end of the third quarter exceeded $1.5 billion.

"Continued deterioration in new home demand, new and existing home prices, excessive inventories and mortgage credit availability prevailed across most U.S. housing markets in the third quarter,” said Jeffrey Mezger, president and chief executive officer. "These difficult conditions have now been exacerbated by the recent, unprecedented turmoil in financial and credit markets, and it is too early to assess whether the federal government’s proposed interventions will be effective. As our industry navigates a housing market decline now subsumed by a larger global financial crisis, we at KB Home continue to focus on three integrated strategic objectives: maintaining a strong financial position, restoring operational profitability and positioning ourselves to capitalize on a housing market recovery when it occurs.”

Total revenues of $681.6 million in the third quarter ended August 31, 2008 decreased 56% from $1.54 billion in the third quarter of 2007, mainly due to lower housing revenues. Housing revenues fell 56% to $668.3 million from $1.53 billion in the year-earlier quarter on a 51% decrease in homes delivered, to 2,788 from 5,699, and a 10% decrease in the average selling price, to $239,700 from $267,700. Homes delivered fell sharply as a result of the reduction in net orders the Company has experienced over the past several quarters due to declining demand and the Company’s strategy to operate from significantly fewer active communities. Land sale revenues in the third quarter of 2008 totaled $10.8 million, down from $14.7 million in the third quarter of 2007.

The Company’s homebuilding business generated an operating loss of $107.8 million in the third quarter of 2008 due to pretax, non-cash inventory impairment charges of $38.5 million, continued pressure on operating margins, and higher overhead costs relative to currently depressed sales prices and volumes. In the third quarter of 2007, the homebuilding operations recorded an operating loss of $766.9 million, including inventory impairment and abandonment charges of $639.0 million and goodwill impairment charges of $107.9 million. The Company’s housing gross margin, including inventory impairment charges, improved to 3.9% in the third quarter of 2008, up from a negative 17.5% in the second quarter of 2008 and a negative 28.0% in the third quarter of 2007. Excluding inventory-related charges, the housing gross margin would have been 9.6% in the current quarter, 8.7% in the second quarter of 2008 and 13.9% in the third quarter of 2007. Land sales produced a loss of $.4 million in the third quarter of 2008, including $.6 million of impairment charges related to planned future land sales. That compares to a loss of $34.9 million in the third quarter of 2007, including $34.0 million of similar impairment charges. Selling, general and administrative expenses were reduced by 32% in the current quarter to $133.2 million from $197.2 million in the third quarter of 2007. The Company achieved this reduction primarily by consolidating certain of its homebuilding operations and reducing its workforce. Since the beginning of the year, the Company has reduced its headcount by 40%, including 18% in the current quarter. The continued steep decline in revenues, however, coupled with charges incurred during the quarter to consolidate operations and implement workforce reductions, outpaced the decline in overall overhead costs. As a result, selling, general and administrative expenses remained elevated as a percentage of housing revenues. The Company’s equity in loss of unconsolidated joint ventures in the third quarter of 2008 totaled $46.2 million, including $43.1 million of impairment charges. In the third quarter of 2007, the Company’s equity in loss of unconsolidated joint ventures was $21.0 million, including $17.1 million of impairment charges.

The Company’s financial services business generated pretax income of $6.0 million in the third quarter of 2008 compared to $6.5 million in the prior year’s quarter. This segment includes the Company’s mortgage banking joint venture, which has remained profitable throughout the turmoil in the credit markets. During the third quarter of 2008, the mortgage banking joint venture experienced a 46% decline in mortgages originated and a 12% decrease in the average loan size compared to the third quarter of 2007, reflecting the Company’s reduced number of new home deliveries and lower average selling prices. However, the percentage of the Company’s homebuyers obtaining mortgage financing from the joint venture increased to 80% in the third quarter of 2008 from 73% in the third quarter of 2007.

The Company reported a net loss of $144.7 million, or $1.87 per diluted share, for the quarter ended August 31, 2008, including a $58.1 million charge to record a valuation allowance against the net deferred tax assets generated from the third quarter loss. As of August 31, 2008, the Company’s valuation allowance on net deferred tax assets totaled $779.9 million. To the extent the Company generates taxable income in the future, it expects to reverse the valuation allowance and reduce its effective tax rate on that future income. In the third quarter of 2007, the Company reported a net loss of $35.6 million, or $.46 per diluted share, which reflected income of $443.0 million, or $5.73 per diluted share, from its French discontinued operations, including the gain on the July 2007 sale of these operations. Excluding the French discontinued operations, the Company recorded a loss from continuing operations of $478.6 million, or $6.19 per diluted share, in the third quarter of 2007.

"The sharp decline in net orders we experienced in the third quarter reflects the broader dynamics of the housing market and our strategic responses to these conditions – reducing our active community count, implementing a comprehensive product transition and executing a more disciplined pricing strategy,” said Mezger. "Market fundamentals appear unlikely to improve significantly in the near term, as foreclosures continue to rise, housing inventory overhang remains at historically high levels and mortgages have become more difficult to obtain. In this environment, we will continue to pursue opportunities to optimize our financial results while operating conditions in our markets across the country move, at varying rates, towards a long-term supply and demand equilibrium.”

Company-wide net orders for new homes in the third quarter of 2008 decreased 66% to 1,329 from 3,907 in the third quarter of 2007, largely due to a 38% decrease in the number of active communities. Net orders also were curtailed as a result of the Company reducing its use of sales incentives and price discounts as part of a comprehensive, community-by-community review of pricing strategies, and winding down certain communities and product types as it prepares to roll out new, value-engineered product with smaller, more affordable standard features and a lower base selling price. The Company’s cancellation rate based on gross orders continues to exhibit volatility, increasing to 51% in the third quarter of 2008 from 27% in the second quarter of 2008. The cancellation rate was 50% in the third quarter of 2007. As a percentage of beginning backlog, however, the cancellation rate improved to 22% in the third quarter of 2008 from 29% in the year-earlier quarter. The number of homes in backlog at August 31, 2008 declined 60% from the year-earlier quarter to 4,774 with decreases ranging from 53% to 66% in the Company’s geographic operating regions. Backlog value fell 63% from the third quarter of 2007 to approximately $1.13 billion, reflecting decreases in both the number of homes in backlog and the Company’s average selling prices.

"Maintaining a strong balance sheet continues to be a high priority,” noted Mezger. "The early redemption of our senior subordinated notes and the amendment of our unsecured revolving credit facility during the quarter substantially reduced our debt level, improved our financial flexibility and further solidified our capital position. With more than $1.5 billion in liquidity, we are well-positioned to weather this prolonged downturn and to take advantage of investment opportunities as they arise. As we work to restore profitability, we intend to remain conservative in our spending and investment decisions until there are reasonable signs that markets are stabilizing.”

For the nine months ended August 31, 2008, revenues totaled $2.11 billion, decreasing 51% from $4.35 billion for the nine months ended August 31, 2007. Homes delivered in the first nine months of fiscal 2008 decreased 45% to 8,526 and the average selling price declined 11% to $238,300. The Company posted a net loss of $668.8 million, or $8.63 per diluted share, in the first nine months of fiscal 2008, including pretax, non-cash charges of $482.7 million for inventory and joint venture impairments and land option contract abandonments and $24.6 million for goodwill impairment. The net loss was increased by a $257.0 million valuation allowance charge against the deferred tax assets generated during the period. For the first nine months of fiscal 2007, the Company generated a net loss of $156.8 million, or $2.03 per diluted share, including pretax, non-cash charges of $1.01 billion for inventory and joint venture impairments and land option contract abandonments, and $107.9 million for goodwill impairments. The net loss for the first nine months of 2007 also reflected income of $485.4 million, or $6.29 per diluted share, from the Company’s French discontinued operations, including the gain on the July 2007 sale of these operations.

KB Home, one of the nation's largest homebuilders, has been building quality homes for families for more than 50 years. Headquartered in Los Angeles, the Company has operating divisions in nine states, building communities from coast to coast. KB Home, ranked the #1 homebuilder in FORTUNE magazine’s 2008 list of America’s Most Admired Companies®, is a Fortune 500 company listed on the New York Stock Exchange under the ticker symbol "KBH." For more information about any of KB Home's new home communities or complete mortgage services offered through Countrywide KB Home Loans, call 888-KB-HOMES or visit kbhome.com.

Certain matters discussed in this press release, including any statements that are predictive in nature or concern future market and economic conditions, business and prospects, our future financial and operational performance, or our future actions and their expected results are "forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are based on current expectations and projections about future events and are not guarantees of future performance. We do not have a specific policy or intent of updating or revising forward-looking statements. 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: general economic and business conditions; adverse market conditions that could result in additional inventory impairments, abandonment charges or goodwill impairments, including an oversupply of unsold homes and declining home prices, among other things; material prices and availability; labor costs and availability; changes in interest rates; our debt level; declines in consumer confidence; increases in competition; weather conditions, significant natural disasters and other environmental factors; government regulations; the availability and cost of land in desirable areas; government investigations and shareholder lawsuits regarding our past stock option grant practices and the restatement of certain of our financial statements; other legal or regulatory proceedings or claims; conditions in the capital, credit (including consumer mortgage lending standards, the availability of consumer mortgage financing and mortgage foreclosure rates) and homebuilding markets; the ability and/or willingness of participants in our unconsolidated joint ventures to fulfill their obligations; our ability to access our available capacity under our unsecured revolving credit facility; and other events outside of our control. Please see our periodic reports and other filings with the Securities and Exchange Commission for a further discussion of these and other risks and uncertainties applicable to our business.