Centex Corporation, the industry's 4th-largest builder, stumbled out of 2007, as its homebuilding business for the three months ended Dec. 31 continued to erode. The Dallas-based company's revenue fell 30 percent, to $1.91 billion, and its orders declined 10 percent to 5,537 units. The builder closed 20,120 homes over the past nine months, a 20.1 percent decline from the same period a year earlier. In that period, its average selling price fell by 8.1 percent to $279,909.

Centex lost $975.2 million during the quarter, compared to a loss of $228.1 million in the same period a year ago. Through the first nine months of its fiscal year, Centex's sales dropped 27 percent to $6.06 billion, and it recorded an earnings loss of $1.75 billion, compared to a net gain of $69.5 million in the same nine months a year earlier. Centex took a non-cash charge of $500 million in its latest quarter to establish a valuation allowance related to deferred tax assets.

Tim Eller, the builder's chairman and CEO, told analysts this morning during a conference call the housing market continues to "correct," and that he anticipates more foreclosures. However, he insisted that his company is taking the necessary steps to "build a better Centex" by "structuring the company for profitability" and "positioning ourselves to take advantage of opportunities for the highest future growth." Centex currently has 12,133 homes under construction, and in the latest quarter introduced a common construction organization structure to streamline its homebuilding activities. The builder decreased the number of house plans it builds to 700 from 4,500 a year ago. The company also reduced its operating expenses by 31 percent. Eller and Cathy Smith, Centex's CFO, pointed to the company's $100 million in positive cash flow during the latest quarter, and said the company is on track to generate $500 million in cash flow for its full fiscal year.

However, several analysts questioned how Centex can sustain its cash flow and profits as it moves toward what Eller calls "transparent pricing," which lowers the selling prices of its homes without resorting to "giveaways and gimmicks." So, for example, instead of marketing a house at $400,000 and then knocking off $100,000 from the price to entice buyers, Centex will now offer that house at $300,000.

Eller said that tightening credit restrictions are forcing his company to lower prices to levels more in line with the mortgages available to its buyers. (Forty-five percent of Centex's backlog is financed with FHA loans, versus 7 percent a year ago.) This is how Centex is pricing all of its homes going forward, and Eller expects this pricing policy will allow his company to sell its backlog with greater predictability over the next several quarters. "This is a step towards something normal; pricing that reflects value." Smith admits, however, that pricing transparency could have a negative impact on Centex's margins for a while.

In its latest quarter, Centex managed to pare its inventory of unsold homes by 33 percent to 4,259 units, and whittle its cancellation rate 5.5 percentage points to 33 percent. One-third of Centex's divisions reported positive sales growth, and Smith pointed specifically to markets like Las Vegas and California's Inland Empire as being among those that produced encouraging results. Eller says that he expects "a fairly dramatic decrease in our unsold inventory" over the next three months.

Centex recorded more than $554 million in impairment charges and writedowns during the quarter (nearly one-and-a-half times its impairments in the third quarter a year ago). Through nine months its impairment charges nearly tripled, to $1.73 billion. During this timeframe, Centex also reduced the number of lots it owns by 16 percent to 87,601, and the lots it controlled fell by 62 percent to 31,061. However, Centex continues to invest in land purchases. "The best way to get normalized margins," says Smith, "is to get through the land" Centex currently owns and to buy new property at more attractive prices.