Business Context and Reporting Period
Company: Beazer Homes USA, Inc.
Filing Type: Form 10-K (Annual Report)
Period Ended: September 30, 2010
Industry: Residential Homebuilding
Operations: Geographically diversified homebuilder operating in 15 states across three segments: West, East, and Southeast. The company exited homebuilding operations in Jacksonville, Florida, and Albuquerque, New Mexico, during the fiscal year, classifying these as discontinued operations. The company also discontinued its title services operations effective September 30, 2010.
Key Financial Metrics
| Metric | Fiscal 2010 | Fiscal 2009 | Fiscal 2008 |
|---|---|---|---|
| Total Revenue | $1,010 million | $972 million | $1,737 million |
| Gross Profit | $86 million | $16 million | ($247 million) |
| Gross Margin | 8.5% | 1.6% | (14.2%) |
| Operating Loss | ($114 million) | ($241 million) | ($618 million) |
| Net Loss | ($34 million) | ($189 million) | ($952 million) |
| Diluted EPS (Continuing Ops) | ($0.50) | ($4.54) | ($20.23) |
| Cash from Operating Activities | $70 million | $94 million | $316 million |
| Total Debt (Net of Discounts) | $1,212 million | $1,509 million | $1,747 million |
| Cash and Cash Equivalents | $537 million | $507 million | $585 million |
| Stockholders' Equity | $397 million | $197 million | $375 million |
Material Changes vs. Prior Period
- Revenue and Closings: Total revenue increased 3.9% to $1.01 billion, driven by a 7.6% increase in home closings (4,513 homes) compared to 2009. However, the average selling price decreased 3.9% to $221,700 due to a shift toward entry-level homes and price reductions to compete with foreclosures.
- Profitability Improvement: The company significantly reduced its net loss from $189 million in 2009 to $34 million in 2010. This improvement was driven by a reduction in inventory impairments (from $95.2 million to $50.0 million) and a $43.9 million gain on the extinguishment of debt.
- Capital Structure: The company raised $166.7 million in common equity and $128.2 million in equity-linked capital while issuing $300 million in Senior Notes. Concurrently, it repaid $585.4 million of Senior Notes, reducing total debt by approximately $300 million year-over-year.
- Backlog: Backlog decreased 33.4% to 780 units ($186.2 million) from 1,171 units ($275.3 million) in 2009, attributed to the acceleration of closings in the third quarter due to expiring government tax credits.
Guidance, Outlook, and Risks
Management Commentary: Management expects the homebuilding environment to improve slowly in fiscal 2011, benefiting from increases in housing starts and employment. The company remains focused on generating liquidity, reducing debt, and increasing shareholder net worth. They continue to control the supply of unsold homes and align inventory with demand expectations.
Key Risks and Contingencies:
- Market Conditions: Continued high unemployment, excess inventory of new and resale homes, and aggressive competition from foreclosures pose significant risks to pricing and demand.
- Legal Proceedings: The company is subject to a Deferred Prosecution Agreement (DPA) with the U.S. Attorney, requiring payments to a restitution fund up to $50 million. As of September 30, 2010, $15 million had been paid. The company faces ongoing litigation regarding construction defects, including claims related to Chinese drywall.
- Inventory Impairments: Future market deterioration could necessitate additional inventory impairment charges. The company recorded $51.0 million in inventory impairments and $0.9 million in lot option abandonment charges in 2010.
- Joint Ventures: One unconsolidated joint venture is in default under its debt agreement, with the company holding a repayment guarantee of approximately $15.1 million.
- Tax Limitations: An "ownership change" under Section 382 of the Internal Revenue Code limits the annual utilization of net operating loss carryforwards to approximately $11.4 million.
Investor Verification Checklist
- Inventory Valuation: Verify the assumptions used in discounted cash flow models for inventory impairment testing, specifically regarding future sales prices and absorption rates.
- Debt Covenants: Confirm compliance with tangible net worth covenants, which require an offer to repurchase 10% of Senior Notes if tangible net worth falls below $85 million (Current tangible net worth: $349.4 million).
- Deferred Prosecution Agreement: Monitor future payments to the restitution fund, which are tied to 4% of adjusted EBITDA.
- Joint Venture Exposure: Assess the status of the defaulting joint venture and the likelihood of the company being called upon to fulfill its $15.1 million repayment guarantee.
- Backlog Cancellations: Review cancellation rates (25.5% for fiscal 2010) to gauge the reliability of the remaining backlog as a revenue indicator.