Business Context and Reporting Period
Beazer Homes USA, Inc. filed an unaudited Form 10-Q for the three months ended December 31, 2012, the first quarter of fiscal 2013. The company operates homebuilding businesses through West, East and Southeast segments across 16 states. Results from title services and exited markets are reported as discontinued operations.
Management described improving housing conditions, including stronger demand, consumer confidence, affordability and home prices, while pursuing a “path-to-profitability” focused on sales per community, community growth, gross margins and fixed-cost leverage.
Key Financial Metrics
| Metric | Q1 FY2013 | Q1 FY2012 | Change |
|---|---|---|---|
| Total revenue | $246.9 million | $188.5 million | Up 31.0% |
| Homebuilding revenue | $244.4 million | $186.9 million | Up 30.8% |
| Gross profit | $36.1 million | $22.3 million | Up $13.8 million |
| Total gross margin | 14.6% | 11.8% | Up 280 basis points |
| Operating loss | $(3.6) million | $(16.7) million | Improved $13.1 million |
| Loss from continuing operations | $(18.9) million | Income of $0.7 million | Worsened $19.6 million |
| Net loss | $(20.4) million | Net income of $0.7 million | Declined $21.1 million |
| Basic loss per share | $(0.84) | $0.05 earnings | Declined $0.89 |
| Cash flow from operations | $(87.5) million | $(71.1) million | More cash used |
Homebuilding gross margin excluding impairments, abandonments and interest amortized to cost of sales was 18.1%, compared with 20.2% reported in the prior-year quarter. Excluding the prior-year $11.0 million warranty recovery, management stated that the comparable margin improved from 14.3% to 18.1%.
- Net new orders increased 28.7% to 932 units; cancellation rates were 35.1% versus 26.4%.
- Closings increased 19.7% to 1,038 homes, while average selling price increased 9.3% to $235,500.
- Backlog increased 39.0% to 1,817 homes, with backlog value up 51.5% to $478.3 million.
- Trailing four-quarter sales per community per month improved to approximately 2.5 from 1.9, and performing communities increased to 86% from 70%.
- General and administrative expense declined to $26.3 million from $28.2 million; G&A as a percentage of revenue fell to 10.7% from 15.0%.
- Inventory increased to $1.15 billion from $1.11 billion, including $90.0 million spent on land and land development during the quarter.
Balance Sheet, Debt and Liquidity
| Metric | December 31, 2012 | September 30, 2012 |
|---|---|---|
| Cash and cash equivalents | $396.7 million | $487.8 million |
| Restricted cash | $251.5 million | $253.3 million |
| Total cash and restricted cash | $648.2 million | $741.1 million |
| Total debt | $1.497 billion | $1.498 billion |
| Stockholders’ equity | $242.6 million | $262.2 million |
- Operating cash use was driven principally by land and development spending, payments of liabilities and interest obligations.
- Capital expenditures were $1.8 million, compared with $8.6 million in the prior-year quarter.
- The company had no borrowings under its $150 million secured revolving credit facility and reported $150 million of available capacity.
- Letters of credit outstanding were $23.0 million, supported by restricted cash; performance bonds totaled approximately $151.5 million.
- The $227.4 million cash-secured loan is fully collateralized and therefore does not provide incremental liquidity. The company also had $1.2 billion of senior notes, $52.1 million of junior subordinated notes and other debt.
- Consolidated tangible net worth was $216.7 million, above the $85 million threshold that could trigger specified senior-note repurchase obligations after two consecutive quarters below that level.
Material Changes Versus the Prior Comparable Period
- Revenue, orders, closings, backlog and average selling prices improved substantially year over year, reflecting stronger markets and operational initiatives.
- Gross profit increased despite the absence of the prior-year $11.0 million warranty recovery; the prior-year reported results also included $3.5 million of inventory impairments and option abandonments versus $0.2 million in the current quarter.
- Operating loss narrowed, but the company moved from prior-year continuing-operations income to a current-quarter loss because of substantially lower tax benefits and ongoing interest expense.
- Interest expense not eligible for capitalization declined to $16.2 million from $19.1 million.
- Cash and stockholders’ equity declined primarily because of operating cash use and the quarterly net loss.
- Active communities totaled 150 at December 31, 2012. Six communities were added and 14 were closed during the quarter; management expected community count to remain pressured while newly acquired land is developed.
Guidance, Outlook, Risks and Unusual Items
Management expressed increased confidence in a sustained housing recovery and expected housing starts to improve over the next several years, particularly in Florida, California, Texas, North Carolina and Arizona. Newly acquired land is generally expected to become available for homebuilding in late fiscal 2013 or early fiscal 2014. No quantitative earnings or revenue guidance was provided.
- Key operating risks include mortgage availability and processing delays, higher labor and material costs, competition from distressed homes, regulatory requirements, weather, construction delays and changing consumer demand.
- Backlog remains subject to cancellations and may be affected by the reduced community count, construction cycle times and mortgage availability.
- Inventory valuations depend on assumptions regarding selling prices, absorption rates and market recovery. Additional impairment charges could be material if conditions deteriorate.
- The company had a $495.8 million valuation allowance against deferred tax assets and recognized only a $0.3 million tax benefit in the current quarter, compared with a $35.7 million benefit in the prior-year quarter.
- Discontinued operations produced a $1.4 million after-tax loss, including approximately $1.5 million of legal fees and potential liability related to matters in Denver.
- The company remained subject to Chinese drywall litigation, construction-defect claims and potential mortgage repurchase claims. The Chinese drywall settlement had preliminary court approval, no Beazer homeowners had opted out, and the recorded expected liability was immaterial as of quarter-end.
- Under its deferred prosecution agreement and related settlements, future obligations may total up to $55.0 million; $16.0 million had been paid as of December 31, 2012. Future payments are linked partly to adjusted EBITDA.
- The company was in compliance with debt covenants, but its below-investment-grade credit ratings and high leverage could constrain access to capital and increase borrowing costs.
Important Facts for Investors to Verify
- Whether order and backlog growth converts into closings and cash generation, given the 35.1% cancellation rate and mortgage-processing constraints.
- The sustainability of the 18.1% adjusted homebuilding gross margin after accounting for mix, impairment turns and the absence of unusual recoveries.
- Liquidity after continued land spending, seasonal operating cash requirements and the August 2013 and January 2013 debt-related maturities or conversions.
- Potential future inventory impairments if home prices, absorption rates or housing-market recovery assumptions weaken.
- The final resolution and cost of Chinese drywall, construction-defect, environmental and other litigation matters.
- The company’s ability to restore profitability while carrying approximately $1.5 billion of debt and no available retained earnings for dividends under debt covenants.