KB Home this morning (Sept. 27) released its results for the third quarter, and, like other big builders, they were not pretty, although KB did report good news on the debt front.

The net loss was only $35.6 million, or $0.46 a share, when the proceeds from the sale of KB's 49% equity interest in its French subsidiary, Kaufman &Broad SA, is taken into account. Absent that deal, the company posted a $476.8 million loss ($6.19 per diluted share) on revenues of $1.54 billion, down 32% from last year's third quarter, as it took $690.1 million in inventory impairments. The company also took a $107.9 million charge to goodwill.

Housing revenues fell 33% from last year to $1.53 billion, 33% lower than in the same period last year, reflecting a 28% decrease in unit deliveries to5,699 from 7,893 and a 7% decrease in the average selling price to $267,700 from $288,000. KB reported 3,907 net orders in the third quarter, down 6% from the year-earlier quarter. The cancellation rate rose to 50% from 34% in the second quarter of 2007 but was lower than the 60% rate in the third quarter last year.

On a brighter note, the company completed the sale of its entire 49% equity interest in its French subsidiary, Kaufman &Broad SA, generating total gross proceeds of $807.2 million and an after-tax gain of $438.1 million. The one-time gain cut the net loss to $35.6 million, or $0.46 a share. The company redeemed $650 million in debut during the quarter, including all $250 million of the Company's 9 1/2% Senior Subordinated Notes due in2011 and an unsecured $400 million term loan scheduled to mature on April 11, 2011.

As a result, KB, based in Los Angeles, had $646 million in cash at the end of the quarter and a debt to total capital ratio of 45% (36% net of cash), down from 54% (53% net of cash) at August 31, 2006.

"Our third quarter results reflect the seriously challenging market conditions that prevail for homebuilders across most of the nation," said Jeffrey Mezger, KB's president and CEO. "The oversupply of unsold new and resale homes and downward pressure on new home values has worsened in many of our markets as tighter lending standards, low affordability and greater buyer caution suppress demand, while higher foreclosure activity combined with heightened builder and investor efforts to monetize their real estate investments boost supply. At this time, we see no signs that the housing market is stabilizing and believe it will be some time before a recovery begins."

Backlog totaled 11,880 units, representing potential future revenues of$3.07 billion, down 31% and 38%, respectively, from the levels of August 31, 2006. Company-wide net orders for the third quarter of 2007 totaled 3,907, down 6% from 4,167 in the year-earlier quarter.

KB's construction business generated an operating loss of $766.9 million in the third quarter, a decrease of $959.0 million from last year's third quarter, due to losses from both homebuilding operations and land sales. The operating loss from homebuilding was primarily due to charges of $639.0 million for inventory impairments and land option contract abandonments, $34.0 million for impairments related to future land losses, and $107.9 million for goodwill impairment, as well as the greater use of price concessions and sales incentives to meet competition. The inventory-related charges resulted in KB's housing gross margin falling to a negative 28.0% from 21.1% in the year-earlier quarter.

"As of August 31, our leverage ratio was the lowest it has been in several years, while our cash position totaled $646 million with no borrowings outstanding under our $1.5 billion revolving credit facility," Mezger said. "We believe the approach we have taken in managing our financial position during these difficult times is yielding tangible benefits as we have now reduced our debt by approximately $1.4 billion, or nearly 40% from a year ago. We expect to use the anticipated positive cash flows in the fourth quarter to further increase our cash position."

He added, "We expect housing industry conditions to continue to worsen through the end of the year and into 2008. Rising foreclosure rates are intensifying the problem of surplus inventory and will likely drive further home-price reductions."

In a note to investors, Michael Rehaut, the lead home building analyst at J.P. Morgan Securities, pointed out that the level of impairments puts KB (NYSE:KBH) in a lessar equity position than Lennar (NYSE:LEN) , which reported similarly disappointing results earlier this week. "While the magnitude of these charges is somewhat less surprising given LEN's $848 million reported earlier this week, as an after-tax percent of equity, KBH's charges represent a 17.5% hit vs. LEN's 9.3% hit, bringing its total charges to date as an after-tax percent of equity to 34.9%, also well above LEN's 21.1%," he wrote.

Carl Reichardt, the home building analyst at Wachovia Securities, pointed out in a research note that "the lower-than-forecast orders, significant impairment charge and elevated cancellation rate indicate to us that KBH's low-end focus and quicker-turning communities did less than we expected to push out-performance relative to peers. On the bright side, however, KBH completed the sale of the French subsidiary in the third quarter for gross proceeds of $807mm. The company's balance sheet improved significantly."