Beazer Homes USA, Inc. — Fiscal 2012 Form 10-K Summary
Business context and reporting period
Beazer Homes is a geographically diversified U.S. homebuilder operating in 16 states across the West, East and Southeast regions. This filing covers the fiscal year ended September 30, 2012; quarterly data includes the fourth quarter ended September 30, 2012. Results exclude exited markets and prior title-services and mortgage operations, which are presented as discontinued operations.
Management’s strategy focused on increasing sales per community, gradually expanding active communities, improving gross margins and leveraging or reducing fixed costs. Management reported improving housing conditions in many markets but continued constraints from mortgage availability and elevated cancellation rates.
Key financial and operating metrics
| Metric | Fiscal 2012 | Fiscal 2011 |
|---|---|---|
| Total revenue | $1.006 billion | $742.4 million |
| Homebuilding revenue | $996.1 million | $712.7 million |
| Gross profit | $105.1 million | $48.1 million |
| Gross margin | 10.4% | 6.5% |
| Operating loss | $(62.1) million | $(132.2) million |
| Loss from continuing operations | $(135.6) million | $(200.2) million |
| Net loss | $(145.3) million | $(204.9) million |
| Continuing-operations EPS | $(7.34) | $(13.53) |
| Adjusted EBITDA | $21.8 million | $(24.9) million |
| Net cash used in operating activities | $(20.8) million | $(178.9) million |
| Total debt | $1.498 billion | $1.489 billion |
| Cash and restricted cash | $741.1 million | $647.5 million |
Continuing-operations new orders increased 24.8% to 4,901, closings increased 36.3% to 4,428, and average selling price increased 2.5% to $224.9 thousand. Ending backlog increased 32.6% to 1,923 homes, with a dollar value of $479.1 million. The company reported a fiscal 2012 cancellation rate of 27.3%, including discontinued operations.
Homebuilding gross margin excluding interest, impairments and abandonments improved to 17.7% from 17.2%. General and administrative expense declined to 11.0% of homebuilding revenue from 19.3% in the prior year. Fiscal 2012 gross profit included an $11 million insurance recovery related to prior water-intrusion warranty expenditures; excluding warranty recoveries, total gross profit was $94.1 million.
At September 30, 2012, inventory was $1.112 billion, stockholders’ equity was $262.2 million and total debt as a percentage of total debt and equity was 85.1%. The company controlled 24,147 lots, including 19,942 owned lots and 4,205 lots under option.
Material changes versus the prior comparable period
- Revenue, closings, orders and backlog improved substantially, reflecting stronger demand in several markets, higher sales productivity and a larger beginning backlog.
- The West and Southeast regions reported significant order and operating improvements; all three homebuilding segments generated positive segment operating income in fiscal 2012.
- Gross profit and operating loss improved, primarily due to higher volume, lower inventory impairment charges, cost reductions and improved community performance. The company nevertheless remained unprofitable on a GAAP basis.
- Inventory impairment and lot-option abandonment charges declined to $12.2 million from $32.5 million. Fiscal 2012 included $9.5 million of inventory impairments and $2.4 million of lot-option abandonment charges.
- G&A expense declined by approximately $27.3 million, reflecting prior headcount, office-space and management changes.
- Operating cash use improved by approximately $158.1 million year over year, but operations still consumed cash.
- Fiscal 2012 financing activity included approximately $171.4 million of net proceeds from common stock and tangible equity unit offerings, a $300 million issuance of 6.625% senior secured notes, redemption of $250 million of 12% senior secured notes, and expansion of the secured revolving credit facility from $22 million to $150 million.
- These financing actions were expected to reduce annualized interest expense by approximately $15 million and strengthen liquidity, although total debt remained approximately $1.5 billion.
- In the fourth quarter, revenue was $370.9 million, gross profit was $41.4 million, operating loss was $6.5 million and loss from continuing operations was $60.4 million. The fourth quarter included a $42.4 million loss on debt extinguishment.
Outlook, commentary, risks and unusual items
Management expects to continue its path-to-profitability strategy in fiscal 2013, emphasizing sales productivity, community expansion, higher gross margins and fixed-cost leverage. New land acquisitions accelerated during the fourth quarter, but many newly acquired or reactivated communities were not expected to contribute to homebuilding operations until late fiscal 2013 or early fiscal 2014. Management therefore expected community count to decline temporarily before new communities become active.
Management believed the company had adequate liquidity for fiscal 2013 based on cash, restricted cash, expected operating cash flows and financing availability. However, cash secured against the term loan and letters of credit is restricted and does not represent fully available operating liquidity. No borrowings were outstanding under the secured revolving credit facility at year-end.
- Housing demand remains sensitive to employment, consumer confidence, home prices, mortgage rates, financing availability, resale and foreclosure inventory, and competition.
- Backlog is subject to cancellation risk; fiscal 2012 cancellation rates remained high at 27.3% for the year and 31.1% in the fourth quarter.
- Additional inventory impairments remain possible because valuations depend heavily on projected home prices, construction costs, absorption rates and discount rates.
- The company had $198.5 million of remaining obligations under lot-option contracts, with approximately $24.9 million of deposits and other non-refundable amounts at risk.
- Unconsolidated entities had $64.9 million of borrowings; Beazer had one repayment guarantee with estimated exposure of $0.7 million, which was accrued.
- Outstanding performance bonds were approximately $157.0 million and letters of credit were approximately $24.7 million.
- Total contractual commitments were approximately $2.439 billion, including $1.541 billion of debt principal, $688.8 million of debt interest commitments and $198.5 million of lot-option obligations.
- The Deferred Prosecution Agreement and related settlements require future payments based on adjusted EBITDA, with total obligations capped at $55 million; $16 million had been paid by September 30, 2012.
- Chinese drywall litigation had received preliminary settlement approval, and no Beazer homeowners opted out; final court approval remained relevant. The company had not recorded a liability for those claims because exposure was not both probable and reasonably estimable.
- Additional construction-defect, warranty, mortgage-repurchase, environmental and other litigation risks remain. The company accrued $19.4 million for litigation and other matters, excluding warranty, at year-end.
- Substantially all deferred tax assets remained subject to a valuation allowance. Gross deferred tax assets were $551.1 million, offset by a $488.2 million valuation allowance; Section 382 limitations restrict use of certain tax attributes.
- No dividends were paid, and debt covenants prohibited dividends or share repurchases from available retained earnings at year-end.
Most important facts for investors to verify
- Whether improvements in orders, backlog and gross margins continue after fiscal 2012, particularly as active community counts decline before new communities open.
- Whether the company can convert positive adjusted EBITDA into sustained positive GAAP earnings and operating cash flow.
- The maturity, refinancing and covenant profile of approximately $1.5 billion of debt, including the 2015 and 2016 maturities and restrictions tied to tangible net worth.
- The amount of unrestricted versus restricted cash and the availability of the $150 million revolving credit facility under changing collateral and covenant conditions.
- Potential additional inventory impairments, option abandonment charges and the sensitivity of land values to home prices and absorption rates.
- The final resolution and cash cost of Chinese drywall, construction-defect, warranty, environmental, DPA and other legal matters.
- The potential dilution from tangible equity units and mandatory convertible notes, including securities scheduled to convert into common stock.
- The recoverability and Section 382 limitations of deferred tax assets and net operating loss carryforwards.