KB Home, Inc., Los Angeles (NYSE:KBH) on Wednesday reported a net loss of$68.5 million, or $.89 per diluted share, for its fiscal second quarter ended May 31, 2011.

The loss, which compared to a net loss of $30.7 million, or $.40 per diluted share, for the same period in 2010 included impairments and option abandonment charges of $20.6 million and a loss on loan guaranty of $14.6 million related to the company's South Edge, LLC residential development joint venture at Inspirada in Henderson, Nevada. It also included an after-tax charge of $25.7 million to record a valuation allowance against the net deferred tax assets generated from the quarter's loss.

Analysts were expecting a loss of 31 cents per share minus the charges.Shares of KB were down nearly 16% at $10.03 late in the trading session Wednesday.

Revenues fell 27% to $271.7 million for the quarter on a 29% decrease in the number of homes closed to 1,265, partly offset by a 3% increase in the average selling price to $213,400.

New orders dropped 11% to 1,998 in the quarter but were up 53% from the first quarter, which compared to a 17% sequential increase in net orders from the first to the second quarter of 2010.

At quarter's end, backlog was 2,422 homes with a value of $501.5 million, down from 3,175 homes worth $648.2 million at the close of last year's quarter.

Housing gross margin decreased to 7.3% from 17.7% in last year's quarter on the charges. Excluding charges, the housing gross margin was 14.9%, down from 17.7%. SG&A was down 25% in dollars to $62.5 million but up to 23.2% of housing revenues from 22.4% in last year's quarter.

The financial services segment posted pretax pretax income of $1.6 million in the quarter, down from $4.2 million in the year-earlier quarter. On June 27, KB and Bank of America, which had operated an unconsolidated joint venture mortgage unit, parted ways as KB joined up with MetLife Home Loans, a division of MetLife Bank, N.A., under which MetLife Home Loans became KB Home's preferred mortgage lender.

KB ended the quarter with had $735.3 million in cash, cash equivalents and restricted cash, of which $621.3 million was unrestricted. Debt was down from Nov. 30, 2010 by $83.9 million to $1.69 billion due to the repayment of secured debt. The net debt-to-capital ration rose to 68.3% from 54.5% on Nov. 30, 2010.

"Although a broad-based housing recovery remains stalled, it appears that the worst of the crisis is behind the homebuilding industry as select markets for new homes are showing signs of stability," said Jeffrey Mezger, president and chief executive officer. "Uncertainty and caution about the economy are keeping many qualified homebuyers from entering the market, even though historically high housing affordability makes this a good time to buy. We believe the current housing market conditions will likely continue until there are meaningful and sustained improvements in job growth and consumer confidence."

Analyst reactions were mixed. Michael Rehaut at J.P. Morgan said in a research note, "While these results were modestly below our estimates, at the same time, we point to a fair degree of sequential improvement from 1Q results as well as fairly low expectations on the stock, as reflected by significant discount to its peers."

Stephen East at Ticonderoga Securities said in his note, "KBH reported a quarter with some gives and takes, but generally it was a fairly mediocre quarter. We believe the shares should be modestly weak based on the results and will need a good conference call to keep the shares at that level. To us, the operating leverage story espoused last quarter appears to be partially true, but land impairment charges jumping up again is a bit disconcerting given the relatively asset light model."

Adam Rudiger at Wells Fargo was more blunt. "This was a weak quarter for KBH, with impairments, orders, gross margins, and SG&A margins all coming in worse than expected. In addition, the company's balance sheet has weakened dramatically in 2011, in our view with its net debt-to-total-capitalization ratio rising from 54% as of the end of FY10 to 68% in the current quarter. Further, with $100MM in debt due in August 2011 and the expected $216MM-$240MM payment to the lenders of the SouthEdge JV later in the year, we expect further deterioration in liquidity."