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KB Home First Quarter Earnings Call
Author: Albena Toncheva
123jump.com
Last Update: 9:30 AM EDT April 02 2008

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The leading homebuilder of the US reported revenue of $794.2 million, down 43% from $1.39 billion in the previous year. The quarterly earnings include a $223.9 million write down charges related to decline in home prices. During the quarter, the company delivered 2,928 homes, down 43% from the prior year, largely due to the firm’s efforts to resize its operations and reduce community counts. KB Home proposes to exit the markets in mid-Atlantic, Chicago and Albuquerque, New Mexico.


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This summary is based on the first quarter fiscal 2008 earnings call conducted by KB Home (KBH) on March 28, 2008.

President, Chief Executive Officer, Director: Jeffrey T. Mezger
Chief Financial Officer, Executive Vice President: Domenico Cecere
Senior Vice President, Chief Accounting Officer: William R. Hollinger
Senior Vice President, Treasurer: Kelly Masuda

Key Investors Issues

- The net loss was $3.47 per share as against a profit of 34 cents per share in prior year.
- Quarterly revenue dropped from $1.39 billion to $794.2 million.
- During the quarter, the company impaired approximately 88 projects.
- Fortune Magazine published its 2008 list of America’s most admired companies, ranking KB Home number one among homebuilders.

First Quarter Fiscal 2008 Financial Highlights

In the first quarter of 2008, the firm incurred a net loss of $268 million, or $3.47 per diluted share.

This compares to a net income of $27.5 million, or 34 cents per share in the first quarter of 2007, which included $16.8 million, or 21 cents per diluted share from French discontinued operations. The loss resulted primarily from a 43% decrease in revenues, $224 million pretax non-cash charge from impairments and abandonments, and a $100 million charge for deferred tax asset valuation allowance.

Excluding the impairment and abandonment charges, and evaluation allowance, the firm would have reported a net loss of $27.6 million, or 36 cents per diluted share.

The firm delivered 2,928 homes in the first quarter of 2008, down 43% from the year earlier quarter.

This was largely due to its efforts to resize its operations and reduce community counts. Each region delivered fewer homes compared to the year earlier quarter. The firm anticipates operating from significantly less communities for the remainder of 2008 as compared to the prior year.

The average sales price of the homes delivered in the first quarter of 2008 decreased 7% to $248,200 from $267,400 in the first quarter of 2007.

Year over year, sales prices were down 17% in the West Coast, 14% in the Southwest, and 4% in the Southeast. Sales prices were up 4% in central region. The firm believes that its average selling price will continue to decrease in the short-term as it continues to address affordability challenges and tougher lending requirements and continue to operate in an environment against a backdrop of significant decline in the resale prices. The firm has and continues to work diligently to offset these pricing pressures by reducing costs with a series of strategic measures that include re-evaluating spec levels, fine-tuning and value-engineering its home designs, and renegotiating supplier contracts for improved terms.

The housing gross margin in the quarter fell to negative 6.2% from negative 4.3% in the fourth quarter of 2007, and a positive 15.5% in the first quarter of 2007.

Excluding impairments and abandonment charges, housing gross margin in the first quarter of 2008 was 9% compared to 10.1% in the fourth quarter of 2007, and 15.9% in the first quarter of 2007, reflecting lower sales prices and an increased use of incentives and discounts to sell homes.

Selling, general, and administrative expenses in the first quarter decreased $78 million, or 38% from a year ago.

As a percentage of housing revenues, however, these expenses rose to 17.6% from 14.9% in the year earlier quarter, mainly due to the substantial decrease in housing revenues reflecting the community count reductions.

The homebuilding pretax loss was $276 million for the first quarter of 2008.

This included $217 million of inventory and joint venture impairment charges and $7 million of option abandonment charges related to about 700 lots under option contract. Approximately $36 million of the impairment charges were against the investment in the unconsolidated joint ventures.

During the quarter, the company impaired approximately 88 projects, some of which were active and some of which were not.

The impairments were mainly driven by price reductions made in certain markets due to increasing levels of housing inventory in the marketplace and tighter consumer mortgage underwriting standards and the firm is monetizing properties in certain markets where it decided not to make additional investments.
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