Business Context and Reporting Period
Beazer Homes USA, Inc. filed an unaudited Form 10-Q for the quarter and nine months ended June 30, 2013. The company operates homebuilding businesses in three segments—West, East and Southeast—across 16 states. Certain exited markets and the former Pre-Owned Homes business are presented as discontinued operations.
Key Financial Metrics
| Metric | Three months ended June 30 | Nine months ended June 30 |
|---|---|---|
| Revenue | $314.4 million, up 23.5% | $849.2 million, up 33.8% |
| Gross profit | $54.1 million, versus $21.2 million | $134.1 million, versus $63.7 million |
| Gross margin | 17.2%, versus 8.3% | 15.8%, versus 10.0% |
| Operating income (loss) | $8.5 million, versus $(21.2) million | $5.2 million, versus $(55.5) million |
| Net loss | $(5.8) million, versus $(39.9) million | $(45.8) million, versus $(79.1) million |
| Loss per share | $(0.23), versus $(2.01) | $(1.86), versus $(4.71) |
Homebuilding revenue increased 24.2% in the quarter and 34.1% year to date. Closings increased 11.3% in the quarter and 20.5% year to date, while average selling prices increased 11.7% and 11.3%, respectively.
Homebuilding gross margin was 17.1% in the quarter and 15.7% year to date, compared with 8.2% and 9.8% in the prior-year periods. Excluding inventory impairments, option abandonments and interest amortized to cost of sales, quarterly homebuilding gross margin was 20.3%, versus 16.7%.
Net cash used in operating activities was $198.2 million for the nine months, compared with $106.4 million in the prior year, primarily reflecting $314.4 million of land and land-development spending. Capital expenditures were $6.6 million. Cash and cash equivalents were $298.3 million at June 30, 2013, compared with $487.8 million at September 30, 2012.
Total debt was $1.506 billion at June 30, 2013, compared with $1.498 billion at September 30, 2012. The company had no borrowings under its $150 million secured revolving credit facility and had $246.0 million of restricted cash, including $222.4 million securing cash-secured loans. Outstanding letters of credit totaled $22.7 million.
Material Changes Versus the Prior Comparable Period
- Revenue and closings grew substantially, supported by higher selling prices, improved demand and increased production from existing communities.
- Net new orders declined 11.2% in the quarter because active communities were down 17% year over year; year-to-date orders increased 1.1%.
- Sales per active community per month increased to 3.2 in the quarter from 2.9, and to 2.9 year to date from 2.3.
- Backlog units declined 2.6% to 2,358, but backlog value increased 12.8% to $646.1 million and average backlog selling price increased 15.8% to $274,000.
- No inventory impairments or option-abandonment charges were recorded in the quarter, compared with $5.8 million in the prior-year quarter. Year-to-date charges declined to $2.2 million from $10.5 million.
- Gross-margin improvement reflected improved pricing, lower incentives, better absorption and operational efficiencies, partly offset by higher labor and material costs.
- The company issued $200 million of 7.25% senior notes due 2023 and used proceeds in part to redeem its 6.875% senior notes due 2015. It also repurchased $2 million of 9.125% senior notes, producing a $3.6 million year-to-date loss on debt extinguishment.
Guidance, Outlook, Commentary and Risks
Management expects the U.S. housing recovery to continue, citing improving consumer confidence, job growth, constrained housing supply, rental-rate growth and household formation. Its path to profitability focuses on increasing sales per community, gradually expanding the community count, improving gross margins and leveraging fixed costs.
The company added 17 communities and closed out 21 during the quarter. It had 144 active communities and 50 communities under development at June 30, 2013. Management expected active communities to decline modestly in the following quarter before turning higher in early fiscal 2014 as development is completed.
Key risks include higher mortgage rates, reduced mortgage availability, labor and material-cost inflation, competitive pressure from distressed homes, construction delays, local housing-market weakness, inventory impairments, land-development obligations, debt-covenant compliance and access to capital. Backlog is subject to cancellation risk.
The company controlled 26,966 lots, including 5,546 lots under option contracts. Deposits and other non-refundable option costs totaled approximately $30.3 million, with remaining option obligations of $284.6 million. Unconsolidated entities had $66.6 million of borrowings, but Beazer reported no repayment guarantees outstanding at June 30, 2013.
The deferred prosecution agreement and related settlements may require payments equal to 4% of adjusted EBITDA for specified future periods, subject to a maximum aggregate liability of $55.0 million; $16.6 million had been paid by June 30, 2013. The company also reported construction-defect, warranty, litigation and potential mortgage-repurchase exposures, although management did not expect current matters to have a material adverse effect.
Important Facts for Investors to Verify
- Whether the planned increase in active communities converts land spending into higher orders, closings and cash flow.
- Whether gross-margin gains persist after excluding impairment reversals, mix effects and other nonrecurring items.
- The company’s ability to fund substantial land-development spending while operating cash flow remains negative.
- Debt maturities, refinancing needs, covenant headroom and the liquidity value of restricted cash that secures borrowings.
- The potential dilution from approximately 8.1 million shares issuable upon maximum settlement of outstanding tangible equity units.
- Exposure to future inventory impairments, construction-defect claims, warranty costs, DPA payments and mortgage-repurchase claims.
- The recoverability of deferred tax assets, which remain subject to a $505.3 million valuation allowance and Section 382 limitations.