Beazer Homes USA, Inc. — Form 10-Q Summary
Business context and reporting period
Beazer Homes is a U.S. homebuilder operating through West, East and Southeast segments across 16 states. This unaudited Form 10-Q covers the quarter and nine months ended June 30, 2012, compared with the corresponding periods ended June 30, 2011. Certain exit-market and title-services results are presented as discontinued operations.
Financial performance and key metrics
| Metric | Three months ended June 30 | Nine months ended June 30 |
|---|---|---|
| Total revenue | $254.6 million, versus $172.8 million | $634.7 million, versus $407.5 million |
| Gross profit | $21.2 million, versus $13.8 million | $63.7 million, versus $23.8 million |
| Total gross margin | 8.3%, versus 8.0% | 10.0%, versus 5.8% |
| Operating loss | $21.2 million, versus $35.2 million | $55.5 million, versus $108.1 million |
| Loss from continuing operations | $38.1 million, versus $55.8 million | $75.2 million, versus $157.8 million |
| Net loss | $39.9 million, versus $59.1 million | $79.1 million, versus $161.7 million |
| Total diluted loss per share | $0.40, versus $0.80 | $0.94, versus $2.19 |
Homebuilding revenue increased 49.6% in the quarter and 57.6% year to date, driven by higher closings and average selling prices. Homebuilding closings increased 40.2% to 1,109 in the quarter and 50.6% to 2,820 year to date. Average selling price increased 6.7% to $227,300 in the quarter and 4.6% to $222,900 year to date.
Homebuilding gross margin was 8.2% for the quarter and 9.8% year to date, compared with 7.1% and 5.0%, respectively, in the prior-year periods. Excluding inventory impairments, option abandonments and interest amortized to cost of sales, management reported homebuilding gross margins of 16.7% for the quarter and 18.0% year to date. These are non-GAAP measures.
General and administrative expense declined to $27.9 million in the quarter and $82.4 million year to date, from $38.6 million and $107.1 million, respectively, reflecting prior headcount, office-space and management cost reductions. Year-to-date gross profit included an $11.0 million recovery related to prior water-intrusion warranty and legal expenses.
Cash flow, balance sheet, debt and liquidity
- Cash and cash equivalents were $231.6 million at June 30, 2012, down from $370.4 million at September 30, 2011. Restricted cash was $271.8 million; combined cash and restricted cash totaled $503.4 million.
- Operating cash flow was negative $106.4 million for the nine months, an improvement from negative $277.6 million in the prior year.
- Investing cash flow was negative $11.5 million, including $15.1 million of capital expenditures. Financing cash flow was negative $20.9 million, including $15.9 million paid in connection with the Inspirada/South Edge reorganization.
- Total debt, net of discounts, was $1.442 billion, compared with $1.489 billion at September 30, 2011. No borrowings were outstanding under the secured revolving credit facility.
- The Company was in compliance with its debt covenants at June 30, 2012. Consolidated tangible net worth was $141.2 million versus an $85 million threshold relevant to certain senior-note repurchase provisions.
- Variable-rate debt totaled approximately $247.4 million. Management stated that a one-percentage-point interest-rate change would not be material to the financial statements.
Material changes versus the prior comparable period
- Net orders increased 28.0% in the quarter and 29.8% year to date. Backlog increased 33.0% to 2,421 homes with an aggregate value of $572.8 million at June 30, 2012.
- Trailing-four-quarter sales per community per month improved to approximately 2.2 from 1.7 a year earlier, and the proportion of communities generating fewer than three quarterly sales declined to 10% from 27%.
- Inventory impairment and option-abandonment charges declined to $5.8 million in the quarter and $10.5 million year to date, from $6.9 million and $25.3 million, respectively.
- Owned inventory was approximately $1.187 billion, broadly unchanged from September 30, 2011. Spec homes declined to 137, valued at $28.5 million, from 334 homes valued at $59.3 million.
- During the first quarter, the Company exchanged substantial portions of its Mandatory Convertible Subordinated Notes and Tangible Equity Units for common stock, reducing debt and increasing the weighted-average share count. The transactions generated a $2.7 million year-to-date loss on extinguishment of debt.
- Effective May 3, 2012, the Company contributed its pre-owned rental-home business to an unconsolidated REIT investment, increasing its ownership to 25% after vesting of restricted units.
Guidance, outlook, commentary and unusual items
Management reported improving traffic, orders, closings and backlog and expected housing starts to increase over the following several years, particularly in Florida, California, Texas, North Carolina and Arizona. The Company planned to pursue new community acquisitions more aggressively while maintaining a cautious land strategy and focusing on operational efficiency. Management cautioned that visibility into fiscal 2013 remained limited and did not provide specific earnings or revenue guidance.
Subsequent to quarter-end, Beazer completed offerings of 22 million common shares at $2.90 per share, 4.6 million 7.50% tangible equity units and $300 million of 6.625% senior secured notes. Expected net proceeds were approximately $466 million. The Company used approximately $300 million to redeem its $250 million of 12% senior secured notes due 2017 and repay $20 million of its cash-secured term loan. Management expected annualized interest expense to decline by approximately $15 million and intended to use remaining proceeds for community expansion, debt repayment and general corporate purposes. A proposed $150 million secured revolving credit facility was also under negotiation.
Key risks include continued housing-market weakness, mortgage-financing constraints, cancellations, additional inventory impairments, land and construction-cost inflation, liquidity and refinancing needs, covenant compliance, credit-rating downgrades, litigation and warranty claims, mortgage-loan repurchase claims, and obligations under the deferred prosecution agreement. The Company had $154.2 million of performance bonds, $23.8 million of letters of credit and $197.3 million of remaining purchase commitments under lot-option contracts, against deposits and non-refundable costs of approximately $24.7 million.
Chinese-drywall matters remained outstanding. The Company identified 60 affected Florida homes and had completed repairs on approximately 97%; future inspections or repair costs could increase reserves. The Company also faced a Flagstar mortgage litigation claim of approximately $8.7 million and additional requests involving fewer than 100 loans, for which no material additional liability had been recorded because the exposure was not reasonably estimable.
Most important facts for investors to verify
- Whether higher orders and backlog convert into profitable closings, particularly given mortgage-processing delays and cancellation rates of 24.5% in the quarter and 26.0% year to date.
- The sustainability of reported margins after excluding the $11.0 million warranty recovery, impairment-related effects and other unusual items.
- Post-quarter-end debt, cash, interest expense and covenant metrics after the July 2012 equity and debt transactions.
- The pace and returns of planned new-community expansion and the resulting land and liquidity requirements.
- Potential additional inventory impairments based on home prices, absorption assumptions and discount rates.
- Final outcomes and potential costs of Chinese-drywall litigation, mortgage repurchase claims, construction-defect matters, environmental proceedings and the deferred prosecution agreement.