Beazer Homes USA, Inc. 2011 Form 10-K Summary
Business context and reporting period
Beazer Homes is a geographically diversified U.S. homebuilder operating in 16 states through West, East and Southeast homebuilding segments. The fiscal year ended September 30, 2011; fourth-quarter information is included in the annual filing. The company also launched a Pre-Owned Homes rental division in Arizona and Nevada and exited Northwest Florida, which is reported as discontinued operations.
Key financial metrics
| Metric | Fiscal 2011 | Fiscal 2010 |
|---|---|---|
| Continuing-operations revenue | $742.4 million | $991.2 million |
| Gross profit | $48.1 million | $83.6 million |
| Gross margin | 6.5% | 8.4% |
| Operating loss | $132.2 million | $113.4 million |
| Loss from continuing operations | $200.2 million | $29.6 million |
| Net loss | $204.9 million | $34.0 million |
| Continuing-operations diluted EPS | $(2.71) | $(0.49) |
| Operating cash flow | $(178.9) million | $69.7 million |
| Cash, cash equivalents and restricted cash | $647.5 million | $576.3 million |
| Total debt, net | $1.489 billion | $1.212 billion |
| Stockholders’ equity | $198.4 million | $397.1 million |
- Continuing-operations home closings declined 26.5% to 3,249, while average selling price declined 1.2% to approximately $219,400.
- Net new orders declined 2.9% to 3,927. Year-end backlog increased 87.8% to 1,450 homes valued at $334.5 million, partly because mortgage-provider audit processes delayed more than 100 closings into fiscal 2012.
- Cancellation rates were 26.9% for the full fiscal year and 34.5% in the fourth quarter, including discontinued operations.
- Inventory was $1.204 billion, substantially unchanged from 2010. Fiscal 2011 included $32.5 million of continuing-operations inventory impairment and lot-option abandonment charges, down from $49.6 million.
- Adjusted EBITDA, a non-GAAP measure, was negative $27.8 million, compared with positive $60.2 million in 2010.
Material changes versus the prior comparable period
- Revenue fell 25.1%, primarily because fiscal 2010 benefited from federal and state homebuyer tax credits that expired in June 2010, as well as stronger prior-year closings.
- Gross margin declined from 8.4% to 6.5% because lower volume increased the burden of relatively fixed indirect construction costs, although cost reductions and lower impairment charges provided partial relief.
- The net loss widened materially, reflecting the revenue decline, lower margins, $73.4 million of interest expense not eligible for capitalization, and a $2.9 million loss on debt extinguishment. Fiscal 2010 had a $43.9 million debt-extinguishment gain and a $118.4 million tax benefit.
- Operating cash flow shifted from a $69.7 million source to a $178.9 million use, driven partly by a $54.4 million increase in inventory and the absence of large prior-year federal tax refunds.
- Debt increased by approximately $277.3 million, primarily due to a $247.4 million cash-secured loan. The related cash is restricted, so the loan did not provide incremental economic liquidity.
- The company completed a $250 million senior note offering, repurchased or redeemed $209.5 million of senior notes, and pushed its next scheduled senior-note principal repayment to July 2015.
Guidance, outlook, risks and unusual items
Management provided no specific fiscal 2012 revenue, earnings or unit guidance. Management said visibility into fiscal 2012 remained limited but expected eventual benefits from population growth and higher housing starts. It intends to preserve significant liquidity, maintain cost discipline, control land spending and pursue a return to profitability.
- Management expects approximately $20 million of annual savings from cost reductions implemented during the second half of fiscal 2011, but acknowledged that preserving liquidity may slow investment and the recovery in profitability.
- The housing market remained pressured by high unemployment, weak consumer confidence, distressed-home inventory, limited mortgage credit, aggressive pricing and sales incentives.
- Additional inventory impairments remain possible. Fiscal 2011 included $30.0 million of inventory impairments and $5.4 million of lot-option abandonment charges, with further exposure dependent on home prices, absorption rates, construction costs and discount rates.
- Total debt represented 88.2% of total debt plus equity; net debt represented 81.5% of net debt plus equity. Debt agreements contain restrictive covenants, including limits on dividends and share repurchases. No retained earnings were available for cash dividends at year-end.
- The company had $28.9 million of letters of credit and $174.7 million of performance bonds. It controlled 26,669 lots, including $225.2 million of future purchase commitments under lot-option contracts and $25.9 million of potentially forfeitable deposits and related amounts.
- Unconsolidated joint ventures had $394.4 million of borrowings, including $327.9 million related to South Edge. Beazer accrued $16.4 million for probable joint-venture guarantee obligations and estimated a South Edge settlement payment of $15.7 million to $17.2 million.
- Under its Deferred Prosecution Agreement and related settlements, the company had paid $16 million of a maximum potential $55 million by September 30, 2011. Future payments are generally linked to adjusted EBITDA.
- Material contingencies include construction-defect and Chinese drywall claims, mortgage repurchase demands involving the former Beazer Mortgage business, securities and homeowner litigation, and proposed New Jersey environmental fines. The filing states that potential losses for certain pending matters cannot presently be estimated.
- The company maintained an unqualified audit opinion and management concluded that disclosure controls and internal control over financial reporting were effective as of September 30, 2011.
Most important facts for an investor to verify
- Whether the increased backlog converts to closings, given the 26.9% annual cancellation rate and financing-related delays.
- Whether home prices, sales incentives and absorption rates support the carrying value of the $1.204 billion inventory balance without significant additional impairments.
- Liquidity available after excluding restricted cash and the company’s ability to fund operations while operating cash flow remains negative.
- Debt maturities, covenant compliance, credit ratings and refinancing capacity, particularly ahead of the 2015 and 2016 maturities.
- Final cash requirements and land rights associated with the South Edge settlement and related joint-venture guarantees.
- Potential changes in warranty reserves, Chinese drywall remediation costs, mortgage repurchase exposure and unresolved litigation.
- The recoverability of deferred tax assets, given the $479.3 million valuation allowance and Section 382 limitation on pre-ownership-change tax attributes.