BEAZER HOMES USA INC quarterly report, Q2 FY2012

Beazer Homes USA, Inc. — Form 10-Q Summary

Reporting period: Fiscal second quarter and six months ended March 31, 2012; filed May 2, 2012. The filing presents unaudited interim GAAP results. Beazer operates homebuilding segments in the West, East and Southeast, plus a developing pre-owned homes business.

Financial performance and key metrics

Metric	Q2 FY2012	Q2 FY2011	Six months FY2012	Six months FY2011
Total revenue	$191.6 million	$125.7 million	$380.2 million	$234.7 million
Gross profit (loss)	$20.2 million	$(1.3) million	$42.5 million	$9.9 million
Total gross margin	10.5%	(1.1)%	11.2%	4.2%
Operating loss	$(17.7) million	$(44.7) million	$(34.4) million	$(72.8) million
Net loss	$(39.9) million	$(53.8) million	$(39.2) million	$(102.6) million
Loss per share	$(0.51)	$(0.73)	$(0.51)	$(1.39)

Homebuilding revenue increased 55.7% in the quarter and 63.4% year to date, primarily from higher closings and average selling prices. Quarterly closings increased 49.9% to 844; year-to-date closings increased 58.1% to 1,711.
Net new orders increased 29.0% in the quarter and 31.1% year to date. March 31 backlog was 1,975 homes valued at $465.0 million, up 41.5% in units and 38.7% in value year over year.
Homebuilding gross margin was 10.3% for the quarter and 10.8% year to date, compared with (2.2)% and 3.6%, respectively, in the prior-year periods.
General and administrative expense fell to $26.3 million for the quarter and $54.5 million year to date, from $36.1 million and $68.6 million, respectively, reflecting prior headcount, office-space and management cost reductions.
Reported results benefited from an $11.0 million year-to-date recovery related to prior water-intrusion warranty and legal expenses and approximately $3.2 million of quarterly bond reimbursements and improved product liability and warranty experience. Excluding the $11.0 million recovery, year-to-date gross profit was $31.5 million.

Cash flow, balance sheet, debt and liquidity

Six-month operating cash flow was negative $80.0 million, an improvement from negative $186.7 million in the prior year. Investing cash flow was negative $13.2 million, primarily reflecting $12.5 million of capital expenditures, including $7.9 million for pre-owned homes.
Financing cash flow was negative $20.1 million, including $15.9 million paid to settle obligations associated with the South Edge joint venture reorganization.
Cash and cash equivalents were $257.0 million at March 31, 2012, compared with $370.4 million at September 30, 2011. Restricted cash was $277.4 million, including $247.4 million securing the cash-secured loan. Combined cash and restricted cash totaled $534.4 million.
Total debt, net of discounts, was $1.434 billion, down from $1.489 billion at September 30, 2011. There were no borrowings under the $22 million secured revolving credit facility, and the company reported compliance with applicable debt covenants.
The company exchanged $48.1 million of mandatory convertible subordinated notes and 2.8 million tangible equity units for approximately 24.8 million common shares. The transactions reduced annual interest expense by approximately $4.0 million and generated a $2.7 million loss on extinguishment of debt.
Stockholders’ equity was $218.4 million, while consolidated tangible net worth was $179.0 million. Debt covenants could require a $62.5 million senior-note repurchase if tangible net worth falls below specified thresholds for two consecutive quarters.

Material changes versus the prior comparable period

Revenue, orders, closings, backlog and gross margins improved substantially year over year, led by the West and Southeast segments. West quarterly revenue rose to $77.9 million from $36.8 million; East revenue rose to $75.2 million from $58.4 million; Southeast revenue rose to $38.1 million from $30.5 million.
Inventory impairment and option-abandonment charges declined to $1.2 million in the quarter and $4.7 million year to date, compared with $17.8 million and $18.5 million in the prior-year periods.
Despite improved operating results, the company remained unprofitable because of corporate costs, approximately $18.3 million of quarterly other expense, primarily non-capitalized interest, and the debt-extinguishment loss.
Owned inventory was approximately $1.192 billion, essentially unchanged from September 30, 2011. Spec homes declined to 210, valued at $43.7 million, from 334 valued at $59.3 million.
The company’s pre-owned homes business owned 190 homes, of which 183 were leased. It generated $0.5 million of quarterly revenue and a $62,000 operating loss.

Outlook, management commentary, risks and unusual items

Management reported increased community traffic, very low interest rates and strong affordability, but continued constraints from high unemployment, uncertain economic conditions, difficult mortgage origination processes and limited financing availability. Management is pursuing higher sales per community, gradual community growth, improved contribution margins and controlled overhead.

For fiscal 2012, management expected to replace consumed land without materially increasing lot count, while retaining flexibility to increase land spending if market improvement persisted. Management also intended to preserve liquidity, reduce debt and interest expense, and explore additional debt or equity transactions. No quantitative earnings or revenue guidance was provided.

Inventory valuations remain sensitive to home prices, absorption rates, discount rates and local market conditions. The company recorded $4.7 million of impairment and abandonment charges year to date and warned that additional material charges are possible.
At March 31, 2012, lot-option deposits and nonrefundable costs totaled $25.3 million, with $205.7 million of remaining purchase-price obligations. The company controlled 25,617 lots, representing approximately 6.5 years of supply based on trailing closings.
Joint-venture investments totaled $21.4 million, with joint-venture borrowings of $65.5 million and Beazer’s estimated maximum repayment-guarantee exposure of $0.7 million. Future infrastructure and development obligations for Inspirada cannot currently be quantified.
Warranty reserves were $16.1 million. The company continued addressing defective Chinese drywall in Florida; approximately 95% of identified affected homes had been repaired, but further inspections and costs could require additional reserves.
Active mortgage repurchase requests covered fewer than 100 loans. No additional liability was recorded, and management stated that the exposure was not reasonably estimable.
The Deferred Prosecution Agreement and related settlements could require additional payments tied to future adjusted EBITDA. Total obligations are capped at $55.0 million, of which $16.0 million had been paid by March 31, 2012.
Outstanding performance bonds were approximately $159.5 million, and letters of credit were approximately $24.6 million. The company also identified construction-defect, litigation, environmental and regulatory risks.

Investor verification points

Verify whether higher orders and backlog convert into closings and cash flow given elevated cancellation rates and mortgage-processing constraints.
Reconcile reported gross-margin improvement for the $11.0 million warranty recovery, $3.2 million of quarterly reimbursements and other nonrecurring items.
Monitor operating cash burn, restricted-cash availability, debt maturities, covenant thresholds and the August 2012 revolving-facility maturity.
Assess the sustainability of inventory carrying values and the sensitivity of future impairment charges to home prices and absorption rates.
Track potential Chinese-drywall costs, mortgage repurchase claims, litigation, DPA obligations and Inspirada development commitments.
Confirm whether management’s anticipated annual interest savings and debt-reduction initiatives are realized.