KB Home early Friday reported a net loss of $144.7 million, or $1.87 per diluted share, for its fiscal third quarter as revenues declined 56% to$668.3 million on a 51% decrease in homes delivered, to 2,788, and a 10% decrease in the average selling price, to $239,700. Analysts were expecting a loss of $1.22 per share.

The loss 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.

Revenues totaled $681.6 million for quarter ended August 31, 2008, down from$1.54 billion the same quarter last year, largely due to a drop to $668.3 million in home building revenues from $1.53 billion in the year-earlier quarter. In its earnings release, the company attributed the falloff to "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."

KB president and CEO Jeffrey Mezger sounded a somber note in a statement."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," he said . "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."

There were several positives in the earnings report. The company ended the quarter with $942.5 million in case, up 46% from $645.9 million at August 31, 2007. It drew down debt by $284.1 million during the quarter to a balance of $1.88 billion. Its ratio of debt to total capital at quarter's end, however, 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.

The 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. Selling, general and administrative expenses were reduced by 32% in the current quarter to $133.2 million from $197.2 million in last year's third quarter, which the company attributed to consolidation of operations and a 40% year-to-date reduction in workforce.

The Company's equity in loss of unconsolidated joint ventures totaled $46.2 million, including $43.1 million of impairment charges.

Net new home orders decreased 66% to 1,329. The company said the decline was due in part to a 38% decrease in the number of active communities and to a reduction in 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 cancellation rate shot up to 51% in the third quarter from 27% in the second quarter. 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 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."

Homes in backlog at August 31, 2008 declined 60% from the year-earlier quarter to 4,774. 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.

In July, KB redeemed all $300.0 million of its 7 3/4% senior subordinated notes due in 2010. In August, KB entered into an amendment to the unsecured revolving credit facility that 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 amendment did not change the facility's November 2010 maturity date. There were no borrowings outstanding under the facility at August 31, 2008.