KB Home CEO Jeffrey Mezger does not like what he sees in the federal plan to address the crisis in the financial markets.

During the company's 3Q2008 earnings call Friday morning, Mezger told investors that he was disappointed with the package as it was being put together in Washington. "We welcome any steps that help stabilize the mortgage markets and increase consumer confidence," he said. "However, the current proposal provides no relief for housing...housing's the cornerstone for any economic recovery."

But the government's bailout plan wasn't the only disappointment during the call. The Los Angeles-based company posted worse-than-expected results for the quarter despite slowing impairment charges. The company posted a net loss of $144.7 million, or $1.97 per diluted share, this quarter on revenues of $681.6 million.

Revenues were down roughly $858.4 million from last year thanks mostly to a 52% year-over-year decline in home deliveries and a 10% drop in average selling price. The company finished the quarter with 2,788 closings at an average selling price of $239,700. New orders also plummeted, falling 66% to 1,329 from 3,907 in 3Q2007. Moreover, a cancellation rate of 51% inched the company's standing inventory numbers up to roughly two specs per community.

Mezger said the company's underperformance was a result of both macroeconomic factors beyond management's control and some strategic leadership decisions. He pointed to a hold on pricing and a decrease in sales incentives, continued reduction of community count, and an accelerated product transition strategy as drivers of the poor sales figures. The latter, he said, would likely contribute to continued downward pressures in net orders in the fourth quarter.

At the heart of the new product strategy is a downsizing and down spec-ing of homes to get them to lower price points where they will be more competitive against the glut of for-sale existing homes and foreclosures. Mezger said in early-adopter markets such as California's Inland Empire, response to the new product has been largely positive.

The national rollout of the new, more affordably priced homes requires that some communities are temporarily shut down, which will create a lag in new orders. Mezger said he estimated that 25% of the company's communities will be involved in the new product launch.

SG&A also was a big issue for the quarter. CFO Dom Cecere said that at 19.9% of revenues, "reducing overhead is a major priority." However, he noted that management already had taken some measures to reduce SG&A, including consolidating roughly seven divisions and trimming headcount by another 18% during the quarter, but their positive effects had yet to hit the balance sheet.

But arguably the biggest uncertainty surrounding the company's results was what it means for cash flow down the line. Some analysts were concerned that as the company continued to exit markets and reduce community count, cash generation could be hindered. And there was question of whether the company would move any part of its land portfolio to capture a carry back tax refund on taxes paid against fiscal 2006 profits.

However, Mezger said a carry back-motivated deal was not in the works for the fourth quarter and offered that company had already recovered roughly $220 million in tax refunds, which will go to pay off $200 million in debt due in 2009. Management projected that the company would be cash flow neutral in fiscal 2009.

The company also reduced its JV exposure during the quarter and redeemed $300 million in senior subordinated notes due in 2010, a fact that reduced the company's cash position to $942.5 million from $1.3 billion a year ago.

Learn more about markets featured in this article: Los Angeles, CA.