BZH

Business Context and Reporting Period

Company: Beazer Homes USA, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2002
Business Overview: Beazer designs, sells, and builds single-family homes across the Southeast, West, Central, Mid-Atlantic, and Midwest regions. The company also operates ancillary businesses including mortgage origination and title services.

Key Financial Metrics

Liquidity: The company had $179.2 million available under its $250 million revolving credit facility with no outstanding borrowings at June 30, 2002.

Material Changes vs. Prior Period

• Revenue Growth: Revenue increased 66% for the three months and 46% for the nine months ended June 30, 2002, compared to the prior year. This growth is primarily driven by the acquisition of Crossmann Communities, Inc. (effective April 17, 2002).
• Profitability: Net income rose 76% for the quarter and 60% for the nine-month period year-over-year.
• Balance Sheet Expansion: Total assets increased from $995.3 million to $1.74 billion, largely due to a $236.1 million increase in goodwill from the Crossmann acquisition and a significant rise in inventory ($1.34 billion vs. $844.7 million).
• Debt Structure: The company issued $350 million in 8 3/8% Senior Notes due 2012 to fund the Crossmann acquisition and repay Crossmann debt. Total senior notes outstanding increased to $650 million.
• Operational Metrics: New orders increased 47% for the quarter and 28% for the nine months. Backlog units increased 64.5% to 7,627 units.

Guidance, Outlook, and Risks

Management Commentary and Outlook

• Fiscal 2002 Guidance: Management expects earnings per share (EPS) for fiscal 2002 to be at least $10.25, representing a 25% increase over fiscal 2001.
• Fiscal 2003 Target: The company has established a target EPS of $12.00 for fiscal 2003, based on achieving over $3 billion in revenue.
• Market Drivers: Outlook is supported by strong demographic trends, particularly in the first-time homebuyer segment, and low housing inventory levels.

Unusual Items and Adjustments

• Acquisition Accounting: The Crossmann acquisition resulted in a $10.8 million charge to cost of sales due to purchase accounting adjustments (write-up of inventory to fair value).
• Cost Allocation Error: A $2.6 million charge was recorded to cost of sales to correct misallocations of land and home costs by the Fort Myers, Florida division dating back to 1999.
• Accounting Changes: The company adopted SFAS No. 142, discontinuing the amortization of goodwill, which previously reduced net income by approximately $0.8 million annually.

Risks and Contingencies

• Integration Risk: Risks associated with effectively integrating Crossmann Communities.
• Market Risks: Exposure to economic changes, mortgage interest rate volatility, and increased competition.
• Land Options: The company holds options on 39,655 lots with aggregate commitments of approximately $993.9 million. While most are without specific performance obligations, market conditions could impact the ability to exercise these options profitably.

Investor Verification Checklist

• Acquisition Integration: Verify the progress of integrating Crossmann operations and the realization of projected synergies.
• Inventory Valuation: Review the $1.34 billion inventory balance, specifically the impact of the $27 million write-up for Crossmann assets and the $2.6 million correction for the Florida division.
• Debt Covenants: Confirm continued compliance with financial covenants on the $650 million Senior Notes and $100 million Term Loan.
• Backlog Conversion: Monitor the conversion rate of the $1.45 billion backlog into revenue, noting the average price decrease in the total backlog due to the lower-priced Crossmann portfolio.
• Land Option Exposure: Assess the financial impact of the $973.7 million in land options without specific performance obligations if market conditions deteriorate.