Business Context and Reporting Period
Beazer Homes USA, Inc. filed an unaudited Form 10-Q for the quarter and six months ended March 31, 2013, representing fiscal 2013 second-quarter results. The company operates homebuilding segments in the West, East and Southeast across 16 states. Results of the former Pre-Owned Homes business and certain exited markets are reported as discontinued operations.
Key Financial Metrics
| Metric | Three Months Ended March 31, 2013 | Three Months Ended March 31, 2012 | Six Months Ended March 31, 2013 | Six Months Ended March 31, 2012 |
|---|---|---|---|---|
| Total revenue | $287.9 million | $191.6 million | $534.8 million | $380.2 million |
| Gross profit | $43.9 million | $20.2 million | $80.0 million | $42.5 million |
| Total gross margin | 15.2% | 10.5% | 15.0% | 11.2% |
| Operating income (loss) | $0.3 million | $(17.7) million | $(3.3) million | $(34.4) million |
| Net loss | $(19.6) million | $(39.9) million | $(40.0) million | $(39.2) million |
| Basic loss per share | $(0.80) | $(2.54) | $(1.64) | $(2.57) |
| Net cash used in operating activities | Not separately presented | Not separately presented | $(76.3) million | $(80.0) million |
Homebuilding revenue increased 50.6% in the quarter and 40.8% year to date. Closings increased 33.5% in the quarter and 26.5% year to date, while average selling price increased 12.7% and 11.3%, respectively. Homebuilding gross margin excluding inventory impairments, abandonments and interest amortized to cost of sales was 19.1% for the quarter, compared with 17.5% in the prior-year quarter.
At March 31, 2013, cash and cash equivalents were $425.7 million and restricted cash was $246.7 million. Total debt, net of discounts, was $1.507 billion, compared with $1.498 billion at September 30, 2012. Stockholders’ equity declined to $233.2 million from $262.2 million, and accumulated deficit increased to $611.8 million.
The company used $76.3 million in operating cash during the first six months, including a $40.4 million increase in inventory. Investing activities provided $2.7 million, while financing activities provided $11.5 million. Capital expenditures were $3.9 million. The company spent $152.6 million on land and land development during the first six months.
Material Changes Versus the Prior Comparable Period
- Quarterly revenue increased 50.2% and year-to-date revenue increased 40.7%, primarily from higher closings and selling prices.
- Quarterly operating results improved to near break-even from a $17.7 million operating loss; the year-to-date operating loss narrowed by $31.1 million.
- General and administrative expense declined to 10.0% of revenue from 13.7% in the prior-year quarter; the year-to-date ratio declined to 10.3% from 14.3%.
- Quarterly net orders were broadly flat at 1,521 versus 1,512, despite a 20% reduction in active communities. Sales per active community per month increased to 3.4 from 2.7.
- Year-to-date net orders increased 9.7%, cancellation rates declined to 21.8% from 27.1%, and backlog increased 11.9% to 2,211 homes. Backlog value increased 25.6% to $584.2 million.
- Inventory impairment and option abandonment charges declined to $2.2 million year to date from $4.7 million. No community-level discounted cash flow impairment was recorded in the current quarter.
- In February 2013, the company issued $200 million of 7.25% senior notes due 2023. Proceeds were used in part to redeem all $172.5 million of 6.875% senior notes due 2015 and repurchase $2 million of 9.125% senior notes. These transactions produced a $3.6 million loss on extinguishment of debt.
- The remaining $9.4 million of mandatory convertible subordinated notes converted into approximately 0.4 million common shares in January 2013.
Guidance, Outlook, Risks and Unusual Items
Management reported improving housing demand, home prices, consumer confidence and affordability, and expects housing starts and the company’s active community count to increase over time. Its stated path to profitability focuses on increasing sales per community, gradually expanding community count, generating higher gross margins and leveraging fixed costs. No formal quantitative earnings or revenue guidance was provided.
Management added 18 active communities and closed out 20 during the quarter; the active community count was 148 at March 31, 2013. Recently acquired land generally will not be available for homebuilding until late fiscal 2013 or early fiscal 2014, so management expects near-term comparisons for orders and closings to remain challenging. A March 2013 land-banking arrangement provides up to $150 million of capacity for incremental land acquisitions.
- Liquidity is exposed to operating cash burn, substantial land spending, seasonal working-capital needs, refinancing requirements and adverse housing conditions. Management stated that it expected available liquidity to meet fiscal 2013 needs.
- The company had $150 million of undrawn secured revolving credit capacity and was in compliance with debt covenants. Its consolidated tangible net worth was $206.6 million, above the $85 million covenant threshold applicable to the 2016 notes.
- Cash-secured loans of $222.4 million do not provide economic liquidity because they are fully collateralized by restricted cash; lenders may put the balances to the company in November 2014.
- Land option commitments totaled $206.9 million of remaining purchase obligations, supported by approximately $25.0 million of deposits and non-refundable preacquisition costs.
- Outstanding performance bonds were approximately $148.3 million, and letters of credit were approximately $23.2 million.
- Risks include mortgage availability and interest rates, labor and material inflation, construction delays, competition from distressed homes, inventory impairments, warranty and construction-defect claims, litigation, debt covenant compliance, credit-rating changes and the recoverability of deferred tax assets.
- The company had a $503.0 million valuation allowance against deferred tax assets. Its ability to use certain pre-change net operating losses is limited by Section 382 of the Internal Revenue Code.
- A Chinese drywall class settlement was approved in February 2013; the expected company payment was described as immaterial. The deferred prosecution agreement and related settlements could require additional payments tied to future adjusted EBITDA, subject to a stated maximum liability of $55.0 million, of which $16.6 million had been paid by March 31, 2013.
- An unresolved SEC staff comment concerned the treatment of shares issuable upon conversion of Tangible Equity Units in basic earnings per share. The company could not predict the resolution or potential impact.
Important Facts for Investors to Verify
- Whether improving orders, backlog and sales productivity translate into sustained positive operating income and ultimately net income.
- The pace and returns of the company’s $152.6 million year-to-date land and land-development investment and the timing of newly acquired communities becoming active.
- Debt maturities, refinancing capacity, interest expense and compliance with tangible net worth and other restrictive covenants.
- The availability and restrictions on cash, including $246.7 million of restricted cash and the fully collateralized $222.4 million cash-secured loan.
- Whether gross-margin improvements persist after considering construction-cost inflation, incentives, product mix and impairment-related flow-back effects.
- Potential additional inventory impairments, land-option abandonments, warranty costs, litigation losses, mortgage repurchase claims and DPA-related payments.
- The eventual resolution of the SEC comment regarding Tangible Equity Unit shares and any resulting effect on reported basic earnings per share.