With KB Home releasing what one home building analyst deemed "shockingly disappointing" results for its fiscal 1Q2011, with losses per share more than five times Wall Street's expectations, company executives had few bright spots to talk about during the company's related earnings call Tuesday.

The short list included: Traffic trends improved in March, giving hope for a better second quarter; the company was on track to have 70 new communities open by the end of next quarter, which management hoped would benefit orders and backlog later in the year; and year-over-year sales comparisons would be more favorable in the back half of the year since volume nose-dived following the expiration of the federal home buyer tax credit last April.

Most of the company's underperformance for the quarter was tied to $76.5 million in write-downs and losses related to its joint venture South Edge, which was formed with several home builder peers to develop the master-planned community of Inspirada in Las Vegas. In February, a Nevada bankruptcy judge allowed a consortium of banks, led by J.P.Morgan Chase, to force the venture into involuntary bankruptcy in an effort to recoup investment.

KB Home CEO Jeffrey Mezger said management was "surprised and disappointed by the court's ruling."

Although the company wrote down the last of its remaining equity in the venture, it's unclear whether there will be additional negative financial implications for the company. Executive vice president and CFO Jeff Kaminski said the company could potentially avoid having to take a large hit to its $735.8 million in unrestricted cash, if the company is required to meet additional obligations related to the venture, by pursuing other financial strategies such as working with a financial partner, among other options. However, one thing executives were clear on was the fact that management remained committed to the Inspirada development.

"Our Las Vegas division is performing well," said Mezger. "It's got some of the highest sales rates per community in the company."

Moreover, the company's joint venture with Bank of America for home buyer financing services also is threatening to unravel. Executives announced the company had been informally advised by the bank that it would like to move away from joint ventures in general. Although there are nine years remaining on the mortgage joint-venture contract, KB executives said they are working to renegotiate the contract. Although Mezger said management was only "in the first few innings of discussion," he said he expected there to be some resolution in the third quarter.

But all joint venture drama aside, the company's results also reflected struggles in the field. Revenues were down 25% year over year to $196.9 million as deliveries decreased 28% to 949 units. Net orders plummeted 32% from 1Q2010 to 1,302 contracts while its cancellation rate, as a percentage of beginning backlog, shot up to 39% versus 26% during the same period the prior year.

However, management said it preferred to evaluate its cancellation rate as a percentage of gross sales, which made the quarter's can rate look much better at 29%. Executives reasoned that low backlog numbers distort the cancellation rate; moreover, many of the company's cancellations are happening before homes are started, which makes cancellations as a percentage of gross orders a more appropriate measure, they said. At quarter end, the company had 1,689 homes in backlog, down 38% year over year.

Similarly, executives said the low-volume environment was clouding the company's community counts; consequently, the company refrained from giving quarter-end community counts, focusing instead on the 33 communities the company ordered during the quarter versus the 18 it closed out. The company historically has counted a community as actively selling when it has at least five sales per quarter; however, anemic new-home demand has made making that threshold difficult to meet in a number of communities.

Given the number of operational issues, gross margins consequently took a beating during the quarter. Excluding impairments, margins fell from 18.8% a year ago to 13.4% even as SG&A dropped 31% to $49.6 million. Executives attributed about 150 basis points of margin erosion to the closeout of some of the company's best-selling communities, 50 basis points to pricing pressures, and the balance to a shift in regional product mix.

Given the company's weak first-quarter performance, executives have some challenges to address going forward to impress investors. As Fort Ticonderoga housing analyst Stephen East wrote in a research note, "In sum, there are no excuses to be had here. The operations were bad top to bottom. If Inspirada charges are behind KBH, that is the only saving grace this quarter."