Results of Operations
OVERVIEW
Revenues are generated from our homebuilding operations and our financial
services operations. The following table presents a summary of our results for
the six months and three months ended May 31, 2009 and 2008 (in thousands,
except per share amounts):

                                          Six Months Ended May 31,           Three Months Ended May 31,
                                           2009              2008              2009               2008
Revenues:
Homebuilding                           $     688,666      $ 1,428,402      $     382,925       $   637,094
Financial services                             3,165            4,887              1,545             1,971


Total                                  $     691,831      $ 1,433,289      $     384,470       $   639,065


Pretax income (loss):
Homebuilding                           $    (149,211 )    $  (534,159 )    $     (87,938 )     $  (258,342 )
Financial services                             6,056           10,957              4,355             3,012


Total pretax loss                           (143,155 )       (523,202 )          (83,583 )        (255,330 )
Income tax benefit (expense)                   6,700             (900 )            5,200              (600 )


Net loss                               $    (136,455 )    $  (524,102 )    $     (78,383 )     $  (255,930 )


Basic and diluted loss per share       $       (1.78 )    $     (6.77 )    $       (1.03 )     $     (3.30 )

Operating conditions remained turbulent throughout the second quarter of 2009, the result of both the prolonged housing market downturn and the broader-based economic recession. As in the first quarter of 2009, a general oversupply of new and resale homes, rising foreclosure activity, and tight mortgage lending standards continued to exert downward pressure on home selling prices and land values, and job market weakness constrained consumer demand for housing. At the same time, however, historically low home prices compared to median income levels and low interest rates pushed housing affordability to an all-time high in the second quarter of 2009 and there are indications that this may be moderating the imbalance of supply and demand in certain housing markets. In certain of our served markets during the second quarter, overall inventory levels fell, prices began to show signs of stabilizing and consumer confidence rose. Against these mixed market signals, we experienced lower year-over-year revenues, homes delivered and net orders in the 2009 second quarter, but narrowed our net loss for the quarter considerably from the year-earlier quarter. These results reflect the actions we have taken in pursuit of our three primary strategic goals: generating cash and maintaining a strong balance sheet; restoring our homebuilding operations to profitability; and positioning our business to capitalize on an eventual housing market recovery when it occurs. The timing of a sustained housing market recovery remains uncertain, however, and we cannot predict whether or to what extent any of the positive trends in the second quarter will continue for the third and fourth quarters of 2009. Looking forward, we currently anticipate that continued difficult market conditions will result in our reporting a lower number of homes delivered and lower revenues on a year-over-year basis through the remainder of our 2009 fiscal year.
Our total revenues of $384.5 million for the quarter ended May 31, 2009 decreased 40% from $639.1 million for the quarter ended May 31, 2008, due to a decline in housing revenues. Housing revenues totaled $380.8 million in the second quarter of 2009, down 40% from $636.7 million in the year-earlier quarter, due to a 37% decrease in homes delivered and a 5% decline in the average selling price. We use the term "home" in this discussion and analysis to refer to a single-family residence, whether it is a single-family home or other type of residential property. We delivered 1,761 homes at an average selling price of $216,200 in the second quarter of 2009 compared with 2,810 homes delivered at an average selling price of $226,600 in the second quarter of 2008. Each of our homebuilding segments experienced year-over-year decreases in both homes delivered and average selling prices during the second quarter.

The number of homes we delivered in the second quarter of 2009 decreased from the year-earlier quarter, mainly due to a 38% reduction in the number of active communities we operated. "Active communities" are those that deliver five or more homes in a particular reporting period. We have strategically reduced our overall active community count over the past several quarters to align our business operations with the significantly reduced home sales activity we have experienced relative to the peak levels of a few years ago. We have done this primarily by exiting underperforming markets, operating fewer communities in weaker markets and curtailing land acquisitions and development activities. As a result of these efforts, our inventory balance of $1.89 billion at May 31, 2009 was 27% lower than the $2.61 billion balance at May 31, 2008. Our ongoing strategic transition to the new The Open Series™product line, which is described further below under "Outlook," also contributed to our lower year-over-year active community count in the second quarter of 2009 as it temporarily reduced the number of homes delivered in some transitioning communities.
Our average selling prices declined in the second quarter of 2009 relative to the year-earlier quarter due to targeted price reductions we implemented in response to intense competition, and to our roll-out of product at lower price points compared to our pre-existing product.
Included in our total revenues were financial services revenues of $1.6 million in the three months ended May 31, 2009 and $2.0 million in the three months ended May 31, 2008. Financial services revenues decreased in the second quarter of 2009 primarily due to the lower number of homes we delivered in the period compared to a year ago, which reduced the title and insurance services revenue generated by our financial services segment.
We generated a net loss of $78.4 million, or $1.03 per diluted share, for the three months ended May 31, 2009, compared to a net loss of $255.9 million, or $3.30 per diluted share, for the year-earlier period. The improvement in our financial results reflected a significant reduction in our total charges for inventory and joint venture impairments and land option contract abandonments, an increase in our housing gross profit margin, and lower selling, general and administrative expenses. Our net loss for the quarter ended May 31, 2009 included pretax, noncash charges of $49.5 million for inventory and joint venture impairments and land option contract abandonments. In the year-earlier quarter, our net loss included $176.5 million of similar charges, as well as a $24.6 million goodwill impairment charge. Our housing gross profit margin, excluding inventory impairment and land option contract abandonment charges, improved year-over-year to 12.7% from 8.7%, mainly due to our ongoing implementation of initiatives to roll-out more cost-effective product, reduce direct construction costs and increase operating efficiencies, consistent with the principles of our KBnxt operational business model. Our selling, general and administrative expenses decreased 39% to $72.6 million in the second quarter of 2009, down from $119.1 million in the year-earlier quarter, reflecting the operational consolidations and workforce reductions that we have implemented over the past several quarters to reduce our overhead costs. For the six months ended May 31, 2009, our Company-wide revenues totaled $691.8 million, down 52% from $1.43 billion for the six months ended May 31, 2008. Included in our total revenues were financial services revenues of $3.2 million in the first six months of 2009 and $4.9 million in the year-earlier period. Our net loss for the six months ended May 31, 2009 totaled $136.5 million, or $1.78 per diluted share, including pretax, noncash charges of $81.8 million for inventory and joint venture impairments and land option contract abandonments, and an after-tax $54.4 million valuation allowance charge against net deferred tax assets to fully reserve the tax benefits generated from our pretax loss in the period. For the six months ended May 31, 2008, we reported a net loss of $524.1 million, or $6.77 per diluted share, including pretax, noncash charges of $400.5 million for inventory and joint venture impairments and land option contract abandonments, and $24.6 million for goodwill impairment, and an after-tax $198.9 million valuation charge against the net deferred tax assets generated during the period.
Consistent with our operational goal of maintaining a strong cash position and balance sheet, we ended the 2009 second quarter with $1.10 billion of cash and cash equivalents and restricted cash, no cash borrowings under the Credit Facility and no public debt maturities until 2011. Our debt balance at May 31, 2009 was $1.71 billion, down $229.8 million from the end of our 2008 fiscal year, mainly due to the maturity and repayment of our $200 Million Senior Subordinated Notes on December 15, 2008.
Our backlog at May 31, 2009 comprised of 3,804 new home orders, representing projected future housing revenues of approximately $796.9 million, compared to a backlog at May 31, 2008 of 6,233 new home orders representing potential future housing revenues of approximately $1.47 billion. Our lower backlog at the end of the second quarter of 2009 compared to the year-earlier quarter primarily reflected lower inventory levels, a lower active community count, lower net orders and lower average selling prices.

Our homebuilding operations generated 2,910 net orders in the second quarter of 2009, down 31% from 4,200 net orders in the year-earlier quarter. However, our net orders rose 59% from the 1,827 net orders generated in the first quarter of 2009. This sequential increase reflected a seasonal increase in demand and strong sales of the new The Open Series product in communities where we have introduced it. The positive response we have received to The Open Series in the first six months of 2009 has exceeded our preliminary internal expectations, and we believe the sales momentum generated by this product will help us achieve favorable year-over-year net order comparisons in the third and fourth quarters of 2009. As a percentage of gross orders, our second-quarter cancellation rate improved to 20% from 28% in the first quarter of 2009 and 27% in the second quarter of 2008. Our cancellation rates as a percentage of gross orders improved in each of our homebuilding segments in the second quarter of 2009. As a percentage of beginning backlog, the cancellation rate also improved to 27% in the second quarter of 2009 from 31% in the first quarter of 2009 and 33% in the second quarter of 2008.

HOMEBUILDING
We have grouped our homebuilding activities into four reportable segments, which
we refer to as West Coast, Southwest, Central and Southeast. As of May 31, 2009,
these segments consisted of ongoing operations located in the following states:
West Coast - California; Southwest - Arizona and Nevada; Central - Colorado and
Texas; and Southeast - Florida, North Carolina and South Carolina.
The following table presents a summary of certain financial and operational data
for our homebuilding operations (dollars in thousands, except average selling
price):

                                          Six Months Ended May 31,           Three Months Ended May 31,
                                           2009              2008              2009               2008
Revenues:
Housing                                $     685,260      $ 1,363,433      $     380,806       $   636,719
Land                                           3,406           64,969              2,119               375


Total                                        688,666        1,428,402            382,925           637,094


Costs and expenses:
Construction and land costs
Housing                                      662,876        1,520,091            373,453           748,098
Land                                           4,892          148,390              3,357             7,742

Total                                        667,768        1,668,481            376,810           755,840
Selling, general and administrative
expenses                                     133,769          246,703             72,594           119,065
Goodwill impairment                                -           24,570                  -            24,570


Total                                        801,537        1,939,754            449,404           899,475


Operating loss                         $    (112,871 )    $  (511,352 )    $     (66,479 )     $  (262,381 )


Homes delivered                                3,206            5,738              1,761             2,810
Average selling price                  $     213,700      $   237,600      $     216,200       $   226,600
Housing gross margin                             3.3 %          -11.5 %              1.9 %           -17.5 %

Selling, general and administrative
expenses as a percent of housing
revenues                                        19.5 %           18.1 %             19.1 %            18.7 %

Operating loss as a percent of
homebuilding revenues                          -16.4 %          -35.8 %            -17.4 %           -41.2 %

The following tables present homes delivered, net orders and cancellation rates (based on gross orders) by reporting segment and with respect to our unconsolidated joint ventures for the three-month and six-month periods ended May 31, 2009 and 2008, and ending backlog at May 31, 2009 and 2008:

                                                     Three Months Ended May 31,
                             Homes Delivered              Net Orders               Cancellation Rates
Segment                     2009         2008         2009         2008          2009              2008
West Coast                     569          603          928          977             16 %              29 %
Southwest                      241          534          359          760             18                21
Central                        525          863        1,048          964             20                31
Southeast                      426          810          575        1,499             26                26

Total                        1,761        2,810        2,910        4,200             20 %              27 %

Unconsolidated joint
ventures                        55           74           45          131             31 %              24 %




                                                      Six Months Ended May 31,
                             Homes Delivered              Net Orders               Cancellation Rates
Segment                     2009         2008         2009         2008          2009              2008
West Coast                     920        1,217        1,387        1,516             20 %              34 %
Southwest                      508        1,274          581          946             22                32
Central                        972        1,762        1,670        1,195             23                45
Southeast                      806        1,485        1,099        1,992             27                34

Total                        3,206        5,738        4,737        5,649             23 %              36 %

Unconsolidated joint
ventures                        78          149           73          179             39 %              31 %




                                                           May 31,
                                                                    Backlog - Value
                                        Backlog - Homes             (In Thousands)
      Segment                           2009        2008         2009           2008
      West Coast                         1,048       1,489     $ 334,600     $   516,073
      Southwest                            421         978        72,429         222,279
      Central (a)                        1,419       1,444       228,723         260,404
      Southeast                            916       2,322       161,104         467,141

      Total                              3,804       6,233     $ 796,856     $ 1,465,897

      Unconsolidated joint ventures         62         239     $  24,118     $   101,748

(a) The ending backlog amounts at May 31, 2009 have been adjusted to reflect the consolidation of a previously unconsolidated joint venture in the second quarter of 2009.

Revenues. Homebuilding revenues decreased by $254.2 million, or 40%, to $382.9 million in the three months ended May 31, 2009 from $637.1 million in the year-earlier quarter, due to a decrease in housing revenues. Housing revenues of $380.8 million for the three months ended May 31, 2009 decreased by $255.9 million, or 40%, from $636.7 million in the year-earlier quarter, due to a 37% decrease in homes delivered and a 5% decline in the average selling price. We delivered 1,761 homes in the second quarter of 2009, down from 2,810 homes delivered in the year-earlier quarter, largely due to a 38% reduction in our active community count. We have strategically reduced our community count over the past several quarters to align our business operations with the significantly reduced home sales activity we have experienced relative to the peak levels of a few years ago. We expect our lower active community count to reduce the number of homes

we deliver and the amount of revenues we generate from our housing operations on a year-over-year basis for the remainder of our 2009 fiscal year.
Our overall average selling price of $216,200 for the three months ended May 31, 2009 decreased from $226,600 in the year-earlier period. Year-over-year, average selling prices declined 4% in our West Coast segment, 23% in our Southwest segment, 8% in our Central segment and 15% in our Southeast segment, due to downward pricing pressures. These pressures included - to varying degrees depending on local market circumstances - difficult economic and job market conditions, intense competition from homebuilders and sellers of existing and foreclosed homes, and our roll-out of product at lower price points compared to pre-existing product to meet consumer demand for more affordable homes. We expect our overall average selling price to decrease further in 2009 as these downward pricing pressures are likely to continue.
Homebuilding revenues for the six months ended May 31, 2009 decreased by $739.7 million, or 52%, to $688.6 million from $1.43 billion for the year-earlier period, due to lower housing and land sale revenues. Housing revenues for the six months ended May 31, 2009 totaled $685.3 million, down 50% from $1.36 billion in the year-earlier period, reflecting a 44% decrease in the number of homes delivered and a 10% decline in our average selling price. Our total number of homes delivered decreased to 3,206 in the first six months of 2009 from 5,738 in the first six months of 2008, largely due to the reduction in the number of active communities we operated between periods. Reflecting the downward pricing pressures described above, our average selling price decreased to $213,700 in the first six months of 2009 from $237,600 in the corresponding period of 2008.
Revenues from land sales totaled $2.1 million in the three months ended May 31, 2009, compared to $.4 million in the year-earlier period. For the six months ended May 31, 2009, revenues from land sales totaled $3.4 million compared to $65.0 million for the corresponding period of 2008. Generally, land sale revenues fluctuate with our decisions to maintain or decrease our land ownership position in certain markets based upon the volume of our holdings, our marketing strategy, the strength and number of competing developers entering particular markets at given points in time, the availability of land in markets we serve and prevailing market conditions. Land sale revenues for the six months ended May 31, 2009 decreased substantially compared to the six months ended May 31, 2008 as we sold a greater volume of land in the year-earlier period that no longer fit our marketing strategy, rather than hold it for future development. Operating Loss. Our homebuilding business generated operating losses of $66.5 million for the three months ended May 31, 2009 and $262.4 million for the three months ended May 31, 2008, mainly due to losses from housing operations. Our homebuilding operating losses represented negative 17.4% of homebuilding revenues in the second quarter of 2009 and negative 41.2% of homebuilding revenues in the year-earlier quarter. The homebuilding operating loss improved on a percentage basis in the three months ended May 31, 2009 compared to the year-earlier period due to an increase in our housing gross margin, partly offset by an increase in our selling, general and administrative expenses as a percent of revenues.
Within our housing operations, the second quarter 2009 operating loss decreased from the year-earlier quarter, largely due to lower pretax, noncash charges for inventory impairments and land option contract abandonments, an improved gross margin and lower selling, general and administrative expenses. Inventory impairment and land option contract abandonment charges totaled $42.3 million in the second quarter of 2009, down from $174.4 million in the second quarter of 2008. Of the inventory-related charges recorded in the 2009 second quarter, 68% related to our West Coast segment, 3% related to our Southwest segment, 4% related to our Central segment and 25% related to our Southeast segment. The inventory impairments we recorded in the second quarters of 2009 and 2008 reflected declining asset values in certain markets due to the difficult economic and housing market conditions in both periods, including a persistent oversupply of new and resale homes, rising foreclosure activity, heightened competition for sales, and turmoil and tightening in the consumer mortgage lending and other credit markets. The charges for land option contract abandonments reflected our termination of land option contracts on projects that no longer met our investment standards. Our housing gross margin, including inventory-related charges, improved 19.4 percentage points to positive 1.9% in the second quarter of 2009 from negative 17.5% in the year-earlier quarter. Excluding the inventory-related charges of $41.0 million in the second quarter of 2009 and $167.1 million in the second quarter of 2008, our housing gross margin would have been positive 12.7% in 2009 and positive 8.7% in 2008. This improvement reflects the combined impact of our initiatives to roll-out more cost-effective product, such as the new The Open Series product line, reduce direct construction

costs and increase operating efficiencies, consistent with the principles of our KBnxt operational business model. To a lesser extent, our margins were favorably impacted by the inventory-related charges we took in prior quarters. Company-wide land sales generated a loss of $1.2 million in the three months ended May 31, 2009, including $1.3 million of pretax, noncash impairment charges related to planned future land sales. In the three months ended May 31, 2008, land sales produced a loss of $7.4 million, which included $7.3 million of similar impairment charges.
As of May 31, 2009, the aggregate carrying value of inventory that had been impacted by pretax, noncash impairment charges was $888.4 million, representing 148 communities and various other land parcels. As of November 30, 2008, the aggregate carrying value of inventory that had been impacted by pretax, noncash impairment charges was $1.01 billion, representing 163 communities and various other land parcels.
Selling, general and administrative expenses in the three months ended May 31, 2009 decreased by $46.5 million, or 39%, to $72.6 million from $119.1 million in the year-earlier quarter. The year-over-year decrease was driven by the operational consolidations and workforce reductions we have implemented over the past several quarters to adjust our operations to the significantly reduced home sales activity we have experienced relative to the peak levels of a few years ago. Most of the cost reductions in the second quarter of 2009 were related to salaries and other payroll-related expenses, stemming from a 42% decrease in our personnel from the year-earlier quarter. As a percent of housing revenues, selling, general and administrative expenses increased to 19.1% in the three months ended May 31, 2009 from 18.7% in the corresponding 2008 period, largely due to the sharp year-over-year decline in our housing revenues. Our selling, general and administrative expenses as a percent of housing revenues in the second quarter of 2009 decreased by one percentage point compared to the first quarter of 2009. We expect, however, that our selling, general and administrative expenses as a percent of housing revenues in 2009 will remain above year-earlier and historical levels in part due to our strategic decision to maintain an operational platform that can effectively respond to the long-term growth opportunities that we expect will arise as housing markets stabilize.
Our homebuilding operations posted operating losses of $112.9 million for the first six months of 2009 and $511.4 million for the first six months of 2008, due to losses from both housing operations and land sales. As a percentage of homebuilding revenues, the operating loss improved to negative 16.4% in the first six months of 2009 compared to negative 35.8% in the first six months of 2008, largely due to an increase in our housing gross margin to positive 3.3% in the first six months of 2009 from negative 11.5% for the corresponding period of 2008. Our housing gross margin improved in 2009 primarily due to a decrease in pretax, noncash charges for inventory impairments and land option contract abandonments, and the favorable impact of our operational initiatives designed to reduce direct construction costs and increase operating efficiencies. In the six months ended May 31, 2009, the housing gross margin reflected $65.7 million of inventory impairment and land option contract abandonment charges compared to $277.4 million of similar charges in the year-earlier period. Company-wide land sales generated a loss of $1.5 million in the first six months of 2009, including $1.3 million of impairment charges related to future land sales. In the first six months of 2008, land sales produced losses of $83.4 million, including $84.5 million of similar impairment charges.
Selling, general and administrative expenses decreased by $112.9 million, or 46%, to $133.8 million in the six months ended May 31, 2009 from $246.7 million in the corresponding period of 2008. As a percentage of housing revenues, selling, general and administrative expenses increased to 19.5% in the first six months of 2009 from 18.1% in the year-earlier period, primarily due to the substantial year-over-year decline in our housing revenues.
Interest Income. Interest income, which is generated from short-term investments and mortgages receivable, totaled $1.8 million in the three months ended May 31, 2009 and $9.5 million in the three months ended May 31, 2008. For the six months ended May 31, 2009, interest income totaled $5.3 million compared to $22.6 million in the year-earlier period. Generally, increases and decreases in . . .