Majestic Research

Reuters

KB Home Posts Loss, Sees Tough '08 for Industry

By David Bailey
Published: January 08, 2008

CHICAGO, Jan 8 - KB Home posted a quarterly loss of nearly $773 million on Tuesday with abandonment and impairment charges as the U.S. housing market braced for another rough year in 2008.

KB Home, whose shares were off 5.3 percent, also said it expects to reach an agreement with bank partners to amend its credit facility covenants by the end of the first quarter of 2008.

“Obviously things remain very depressed,” Majestic Research analyst John Tomlinson said. “The weakness in orders and deliveries they posted, given the decline in average sales prices, was quite eye-popping.”

The No. 5 U.S. home builder reported a net loss of $9.99 per share for the fourth quarter ended Nov. 30, compared with a year-earlier loss of 64 cents per share, or $49.6 million. Loss from continuing operations before income taxes was $399 million.

The company recorded an after-tax noncash charge of $514.2 million to establish a valuation allowance related to deferred tax assets.

KB Home also recorded $305.5 million in charges for inventory impairments, land option contract abandonments and impairments on future land sales. Joint venture impairments totaled $97.9 million.

Excluding the valuation allowance for deferred tax assets, KB Home reported a loss of $3.34 per share in the quarter, while analysts expected a loss of $1.34 per share, according to Reuters Estimates.

Revenue fell to $2.07 billion in the quarter, from $3.01 billion a year earlier mainly due to a drop in housing revenue in all of its regions, KB Home said.

The U.S. housing market has been in a tailspin for more than two years, hounded by falling prices and evaporating demand. Sales of U.S. single-family homes in November dropped 9 percent and fell to its lowest rate since 1995, according to the U.S. Commerce Department’s most recent report.

In response, U.S. home builders have switched their focus from profit and growth to survival and have bolstered their balance sheets and credit quality in order to do so.

“Cancellation rates in the industry have gone up since last quarter, pricing is getting weaker and inventories are still elevated,” Tomlinson said of the sector. “It’s tough to get a read on what is going to happen.”

The company said it had reassessed certain projects during the quarter due to the slowing sales rates and downward pressure on home prices and gross margins that had led to the impairment and abandonment charges.

New home deliveries fell 22 percent to 8,132 in the quarter from a year earlier and the average selling price fell 11.5 percent to $247,800, KB Home said.

For the just-completed quarter, net orders for new homes, an indicator of future sales, were off 32 percent at 2,574. Net orders were down in each geographic region.

The cancellation rate for the quarter was unchanged at 58 percent from the year-earlier quarter, but up from the 50 percent reported in the third quarter of 2007.

The backlog at the end of the quarter was down 40 percent at 6,322 units from a year earlier and potential revenue from the backlog was down 47 percent at about $1.5 billion due to drops in net orders and average selling prices.

KB, based in Los Angeles, ended the quarter with no borrowings outstanding on its $1.5 billion bank revolving credit and $1.33 billion in cash, more than $300 million above its prior forecasts.

KB Home shares fell 98 cents, or 5.3 percent, to $17.50 on the New York Stock Exchange, while the benchmark Dow Jones U.S. Home Construction Index .DJUSHB was down 0.9 percent. (Additional reporting by Ilaina Jonas, editing by Dave Zimmerman)