With home prices continuing to slide and existing- and new-home sales stubbornly sluggish, Wall Street expected that continuing impairment charges would contribute to a significant loss for KB Home for 1Q2008. And although the company's $267.9 million loss for the quarter overshot analysts' estimates, it was the drastic 75% plunge in new orders during the quarter that shocked analysts and stakeholders alike.

The company netted 1,449 new orders during the quarter, down from 5,744 from a year ago. Both a 38% reduction in the number of actively selling communities and an elevated cancellation rate contributed to the severe decline. While the can rate had improved 500 basis points from the previous quarter, it hovered well above historical rates at 53%.

"We are not pleased with our sales results," CEO Jeffrey Mezger told listeners during an earnings-related conference call Friday March 28.

While Mezger was disappointed with the company's sales performance, he said the nosedive in new orders was linked to the company's strategy to hold pricing steady in an effort to preserve margins. Rather than continuing to drop prices to attract bargain-hunter buyers, he said the company had been "in a position to be more patient and wait for another day." With that strategy backfiring during the quarter, Mezger said management moved quickly in February to reposition some communities, a shift leading to some price cutting that at the end of the quarter was rolled into $223.9 million in pre-tax impairment charges on 88 projects. The charges, in turn, shrunk gross margins to--6.2%.

With concern over builders' hidden exposure to joint ventures reaching a frenzy, CFO Dom Cecere pointed out that 16%--or roughly $36 million--of the company's impairment charges were related to unconsolidated JVs. He said the company was "winding down" its investment in the off-balance sheet vehicles; the company's total investment in JVs at the end of the quarter was approximately $281 million, down from $413 million a year ago.

However, when asked whether any of the JVs would be subject to any re-margin obligations, Cecere said there would always be some degree of that, although "the majority of JVs are still performing." He went on to detail that out of the company's 38 JVs, only 10 had investments that topped $50 million. He added that when he did the math that meant roughly five JVs made up 75% of KB's total JV investment.

"Our portfolio of JVs is not onerous," Cecere concluded.

Unsurprisingly, backlog numbers tumbled in concert with new-home orders. Unit figures were down 57% year-over-year while the value of homes in backlog eroded 59% to $1.2 billion.

Revenues for the quarter were hardly better off. The company generated $794.2 million for 1Q2008, a 43% drop from a year ago. The weakening traced back to both few new-home deliveries and a lower average selling price. Deliveries were off 43% from 5,136 homes in 1Q2007 while home prices fell 7% to $248,200 from the same period last year.

If there was any good news to be had, it was that the company was still sitting on a boatload of cash. KB's cash position held steady at $1.3 billion from the previous quarter. And Mezger said he believed the company would be cash positive for the remainder of 2008. Net of that cash, KB's ratio of debt to total capital was 35.1%--slightly up from 31.1% last quarter, largely due to impairments and an additional $100 million in deferred tax charges.

Management amended provisions on its unsecured revolving credit facility, lowering the minimum tangible net worth covenant and reducing the total facility amount.

Management also continued to strategically evaluate its land position, shortening KB's lot pipeline by 68% since the market peak in 1Q2006. Cecere said the company controls 59,500 lots, of which 42,000 lots--or roughly a three-year supply--are owned.

Moreover, management will shut down operations in Illinois, Maryland, New Mexico, and Virginia, effectively shrinking the company's geographic footprint with the intent to redeploy resources to better performing geographic markets. The company entered Chicago in 2003 with the acquisition of Zale Homes but never became a Top 10 player in the market. A 2005 Mid-Atlantic start-up division proved to have poor timing. And Albuquerque failed to become the big-time housing market that the company had hoped for when it acquired Oppel Jenkins in 1995.

The exiting of less profitable markets plays right into Mezger's strategy to continue to reduce the company's community count. KB currently has 224 actively selling communities. Although the rightsizing of operations necessarily will limit to a degree the company's ability to perform, management will have to find a way to improve orders in 2Q2008 or face serious backlash from Wall Street.

Mezger said the company would continue to push some of its major sales and marketing initiatives, including reducing the square footage of its homes to keep its pricing competitive and offering price protection and rate lock programs to boost buyer confidence. However, he ceded that 2Q2008 would likely also result in additional price cuts of 2% to 5% in communities in troubled coastal markets.