Business Context and Reporting Period
Beazer Homes USA, Inc. filed its Form 10-K for the fiscal year ended September 30, 2013, filed November 7, 2013. The company is a geographically diversified U.S. homebuilder operating in 16 states across the West, East and Southeast regions. The filing includes fourth-quarter results for the quarter ended September 30, 2013.
Key Financial Metrics
| Metric | FY2013 | FY2012 | Change |
|---|---|---|---|
| Total revenue | $1.288 billion | $1.006 billion | +28.0% |
| Gross profit | $214.1 million | $105.1 million | +103.8% |
| Gross margin | 16.6% | 10.4% | +620 bps |
| Operating income | $27.3 million | $(62.1) million | Improved by $89.3 million |
| Loss from continuing operations | $(32.2) million | $(135.6) million | Improved by $103.5 million |
| Net loss | $(33.9) million | $(145.3) million | Improved by $111.5 million |
| Adjusted EBITDA | $86.3 million | $21.8 million | +295% |
| Cash flow from operating activities | $(174.6) million | $(20.8) million | More cash used, primarily for land investment |
Fourth-quarter revenue was $438.3 million, gross profit was $80.0 million, operating income was $22.1 million and net income from continuing operations was $11.3 million. This was the company’s first quarterly net income in fiscal 2013.
- Continuing-operations home closings increased 14.2% to 5,056, while average selling price increased 12.5% to $253,000.
- Net new orders increased 2.6% to 5,026, despite a 15% decline in active communities.
- Year-end backlog was 1,893 homes valued at $528.1 million, compared with 1,923 homes valued at $479.1 million in 2012.
- Homebuilding gross margin excluding interest, impairments and abandonments improved to 20.0% from 17.7%.
- General and administrative expense declined to 9.4% of revenue from 10.9%.
- Cash and cash equivalents were $504.5 million; total cash and restricted cash were $553.4 million.
- Total debt was $1.512 billion, compared with $1.498 billion at September 30, 2012. Total debt to total capital was 86.3%, and net debt to net capital was 80.4%.
- Inventory increased to $1.314 billion from $1.112 billion, reflecting significant land and development spending.
Material Changes Versus the Prior Comparable Period
- Revenue growth was broad-based: West homebuilding revenue increased 40.6%, East increased 20.1% and Southeast increased 21.9%.
- Operating performance improved substantially, reflecting higher closings, higher selling prices, improved absorption, reduced impairments and better fixed-cost leverage.
- Inventory impairments and option abandonments declined to $2.6 million from $12.2 million; no impairments resulted from the fiscal 2013 community-level discounted cash flow analyses.
- Land and land-development spending increased to approximately $475.2 million from $185.5 million, positioning the company for future community growth but materially increasing operating cash use.
- The company issued $200 million of 7.25% Senior Notes due 2023 and $200 million of 7.50% Senior Notes due 2021. Proceeds supported debt refinancing, land acquisition and general corporate purposes.
- The company repaid $205 million of cash-secured term loans and redeemed its 2015 Senior Notes. Debt extinguishment losses were $4.6 million versus $45.1 million in 2012.
- Restricted cash declined to $49.0 million from $253.3 million, primarily because of the release of collateral associated with the cash-secured term loan.
Guidance, Outlook, Risks and Unusual Items
Management stated that fiscal 2013 made significant progress toward its path-to-profitability plan, which focuses on increasing sales per community, expanding active communities, leveraging fixed costs and improving gross margins. Based on its housing-market and economic expectations, management believed fiscal 2014 would be the company’s first full year of profitability since fiscal 2006.
- Management expected active communities, orders and backlog to increase as recently acquired land and communities under development became active.
- Operating cash flow was negative because of aggressive land acquisition and development. Continued land spending and the timing of home closings remain important liquidity considerations.
- The company had $150 million of available capacity under its secured revolving credit facility and no borrowings under that facility at year-end. It was in compliance with its debt covenants.
- Contractual commitments included $1.564 billion of principal payments on senior and other notes, $820.5 million of related interest commitments and $288.6 million of remaining obligations under lot-option contracts.
- Lot-option exposure was supported by approximately $37.3 million of deposits and other nonrefundable amounts; the company’s liability is generally limited to those amounts if options are abandoned.
- Key risks include the cyclical housing market, mortgage availability and interest rates, land and construction-cost inflation, labor shortages, competition, inventory impairment, cancellation risk, leverage, refinancing needs and debt-covenant compliance.
- The company continued to maintain a valuation allowance against substantially all deferred tax assets. Gross deferred tax assets were $546.8 million, offset by a $487.3 million valuation allowance.
- Under the deferred prosecution agreement and related settlements, future payments are generally based on 4% of defined adjusted EBITDA, subject to a maximum liability of $55.0 million. Approximately $16.6 million had been paid and $3.6 million was accrued at September 30, 2013.
- Construction-defect, warranty, environmental and other litigation matters remain contingencies. The Chinese drywall class settlement was approved in 2013 and the required payment was not material.
- The financial statements and internal control over financial reporting received unqualified audit opinions from Deloitte & Touche LLP.
Most Important Facts for Investors to Verify
- Whether the projected fiscal 2014 profitability was achieved and whether higher active-community counts translated into sustained order and backlog growth.
- Whether gross-margin improvements persist after considering the effect of prior inventory impairments and related impairment “flow-back.”
- Cash generation after the unusually high fiscal 2013 land and development program, including the pace of inventory conversion.
- Debt maturities, interest expense, refinancing requirements and compliance with tangible-net-worth and other debt covenants.
- The recoverability of inventory, joint-venture investments and deferred tax assets if housing-market conditions weaken.
- Potential cash requirements related to the DPA, litigation, warranty claims, performance bonds, letters of credit and lot-option commitments.
- The effect of mortgage rates, credit availability, cancellation rates, labor availability and construction-cost inflation on future closings and margins.