KB Home this morning (June 28) reported a $172.4 million loss from continuing operations for the fiscal second quarter of the year, the second big builder to post a loss in what has proved a bust of a spring selling season. The net loss was cut to $148.7 million when results from its overseas unit, Kaufman & Broad, which it is now treating as discontinued operations, were factored in.
KB said the loss was due "largely" to a pretax, non-cash charge of $308.2 million related to inventory and joint venture impairments and the abandonment of land option contracts. It said it generated income from continuing operations of $184.4 million ($2.20 per diluted share), and posted a net loss, including the overseas operations, of $148.7 million($1.93 per diluted share), compared to net income of $205.4 million ($2.45 per diluted share) generated in the second quarter of 2006.
KB announced in May its intention to sell its entire 49% equity interest in its French subsidiary, Kaufman & Broad SA. The transaction is expected to close in the third quarter of 2007 and generate $800 million. The French operations were thus presented as discontinued operations and the financial results of prior periods have been reclassified. Income from the French discontinued operations, net of taxes, totaled $25.5 million ($.33 per diluted share) in the second quarter of 2007, compared with $21.0 million($.25 per diluted share) in the second quarter of 2006.
Revenues were down 36% to $1.41 billion, down from $2.20 billion in the year-earlier quarter, due to a decline in housing revenues that was partly offset by an increase in land-sale revenues. Housing revenues of $1.30 billion were down 41% from the prior year's second quarter, the result of a 36% year-over-year decline in unit deliveries to 4,776 and an 8% year-over-year decrease in the average selling price to $271,600. Land sale revenues in the second quarter increased to $112.6 million, up from $11.5 million in the year-earlier quarter.
The Company's construction business generated an operating loss of $263.0 million in the second quarter of 2007, a decrease of $556.5 million from operating income of $293.5 million in the second quarter of 2006, reflecting losses from both homebuilding operations and land sales. The Company's 2007 second-quarter housing gross margin fell to -3.9% from 25.6% in the year-earlier period, largely the result of pretax, non-cash charges of$244.5 million for inventory impairments and land option contract abandonments during the quarter, and greater use of price concessions and sales incentives to meet competition. Excluding the non-cash charges, the Company's second-quarter housing gross margin would have been 14.9%.
Net orders were down 3% to 7,265 in the second quarter. Cancellations remained steady at 34%, essentially unchanged from the first quarter of 2007 but down from the 58% rate posted in the fourth quarter of 2006. Unit backlog at May 31, 2007 totaled 13,672 units compared to 20,924 units a year earlier. The Company's backlog value decreased 39% to approximately $3.74 billion at May 31, 2007 from approximately $6.12 billion at May 31, 2006.
KB reported a loss of $18.5 million on land sales in the second quarter, including $22.4 million of impairment charges related to future land sales.In addition, the company's equity in unconsolidated joint ventures generated a pretax loss in the current quarter reflecting an impairment charge of$41.3 million. The company said impairment and abandonment charges resulted from "marked price reductions in housing markets across the country during the spring selling season."
"Our second quarter results reflect the current oversupply of new and resale housing inventory, a difficult situation compounded by aggressive competition and continued weak demand," said Jeffrey Mezger, president and CEO. "Housing affordability challenges and tighter credit conditions in the subprime and near-prime mortgage market have also exacerbated current market dynamics, keeping prospective buyers out of the market, slowing the absorption of excess supply and further delaying a housing market recovery.Pricing pressure intensified in many of our markets during the second quarter, compressing margins and requiring inventory impairment charges in certain of our communities."
For the six months ended May 31, 2007, revenues totaled $2.80 billion, down 31% from $4.08 billion in the six months ended May 31, 2006. Unit deliveries in the first six months of fiscal 2007 declined 28% year-over-year to 9,912, and the average selling price decreased 8% year-over-year to $269,400. For the current six-month period, the Company generated a loss from continuing operations of $163.5 million ($2.12 per diluted share), including a pretax, non-cash charge of $316.9 million for impairments and abandonments. In the same period a year ago, the Company reported income from continuing operations of $343.5 million ($4.04 per diluted share). The Company's net loss in the first half of 2007 (including the French discontinuedoperations) totaled $121.1 million ($1.57 per diluted share), compared to net income of $378.8 million or $4.45 per diluted share in the first half of 2006. For the six-month period ended May 31, 2007, income from the French discontinued operations, net of taxes, totaled $42.3 million ($.55 per diluted share), up from $35.2 million ($.41 per diluted share) in the year-earlier period.
"Year-over-year net order comparisons have shown improvement since the end of last year as we have adjusted our strategy in view of the difficult market conditions to drive inventory turns and generate cash," said Mezger."Our cancellation rate, which returned to a more historically normal level last quarter, continues to hold steady. Halfway into our year and at present backlog levels, we now expect to deliver between 22,000 and 23,500 homes in 2007, excluding our French operations. However, given current market conditions, we are not able to provide an earnings estimate for the year. If the sale of our French operations closes as expected, we anticipate that the associated gain will result in KB Home reporting positive earnings in both the 2007 second half and full year, despite the impairment charges taken in the first half."