10-Q 1 a06-2780_110q.htm QUARTERLY REPORT PURSUANT TO SECTIONS 13 OR 15(D)

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C.  20549

 

FORM 10-Q

 

ý QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)

OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the Quarterly Period Ended December 31, 2005

 

or

 

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)

OF THE SECURITIES EXCHANGE ACT OF 1934

 

Commission File Number 001-12822

 

BEAZER HOMES USA, INC.

(Exact name of registrant as specified in its charter)

 

DELAWARE

 

58-2086934

(State or other jurisdiction of

 

(I.R.S. employer

incorporation or organization)

 

Identification no.)

 

 

 

1000 Abernathy Road, Suite 1200, Atlanta, Georgia 30328

(Address of principal executive offices)(Zip Code)

 

(770) 829-3700

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to the filing requirements for the past 90 days.

YES            ý

NO          o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act (Check One):

Large accelerated filer          ý

Accelerated filer          o

Non-accelerated filer         o

 

Indicate by check mark whether the registrant is shell company (as defined in Rule 12b-2 of the Exchange Act).

YES          ý

NO         o

 

Class

 

Outstanding at January 13, 2006

 

 

 

Common Stock, $0.001 par value

 

41,140,916 shares

 

 



 

BEAZER HOMES USA, INC.

FORM 10-Q

 

INDEX

 

PART I. FINANCIAL INFORMATION

 

 

 

Item 1. Financial Statements

 

 

 

Unaudited Condensed Consolidated Balance Sheets, December 31, 2005 and September 30, 2005

 

Unaudited Condensed Consolidated Statements of Operations, Three Months Ended December 31, 2005 and 2004

 

Unaudited Condensed Consolidated Statements of Cash Flows, Three Months Ended December 31, 2005 and 2004

 

Unaudited Consolidated Statements of Comprehensive Income, Three Months Ended December 31, 2005 and 2004

 

Notes to Unaudited Condensed Consolidated Financial Statements

 

 

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

 

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk

 

 

 

Item 4. Controls and Procedures

 

 

 

PART II. OTHER INFORMATION

 

 

 

Item 1. Legal Proceedings

 

 

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

 

 

Item 6. Exhibits

 

 

 

SIGNATURES

 

 

2



 

PART I. FINANCIAL INFORMATION

 

Item 1.  Financial Statements

 

BEAZER HOMES USA, INC.

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except per share data)

 

 

 

December 31,
2005

 

September 30,
2005

 

 

 

 

 

 

 

ASSETS

 

 

 

 

 

Cash and cash equivalents

 

$

12,149

 

$

297,098

 

Accounts receivable

 

127,257

 

161,880

 

Inventory

 

 

 

 

 

Owned inventory

 

2,917,235

 

2,671,082

 

Consolidated inventory not owned

 

346,444

 

230,083

 

Total inventory

 

3,263,679

 

2,901,165

 

Investments in and advances to unconsolidated joint ventures

 

98,192

 

78,571

 

Deferred tax asset

 

92,009

 

101,329

 

Property, plant and equipment, net

 

30,605

 

28,367

 

Goodwill

 

121,368

 

121,368

 

Other assets

 

107,460

 

80,738

 

Total assets

 

$

3,852,719

 

$

3,770,516

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

Trade accounts payable

 

$

156,629

 

$

141,623

 

Other payables and accrued liabilities

 

530,804

 

636,106

 

Obligations related to consolidated inventory not owned

 

247,791

 

166,163

 

Revolving credit facility

 

50,000

 

 

Senior notes (net of discounts of $4,000 and $4,118 respectively)

 

1,276,000

 

1,275,882

 

Other notes payable

 

53,487

 

46,054

 

Total liabilities

 

2,314,711

 

2,265,828

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

Preferred stock (par value $.01 per share, 5,000,000 shares authorized, no shares issued)

 

 

 

Common stock (par value $.001 per share, 80,000,000 shares authorized, 42,174,369 and
 41,844,414 issued and 41,137,559 and 41,701,955 outstanding, respectively)

 

42

 

42

 

Paid-in capital

 

530,086

 

534,523

 

Retained earnings

 

1,076,147

 

990,341

 

Treasury stock (1,036,810 and 142,459 shares, respectively)

 

(68,267

)

(8,092

)

Unearned compensation

 

 

(12,126

)

Total stockholders’ equity

 

1,538,008

 

1,504,688

 

Total liabilities and stockholders’ equity

 

$

3,852,719

 

$

3,770,516

 

 

See Notes to Unaudited Condensed Consolidated Financial Statements

 

3



 

BEAZER HOMES USA, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)

 

 

 

Three Months Ended
December 31,

 

 

 

2005

 

2004

 

 

 

 

 

 

 

Total revenue

 

$

1,105,616

 

$

911,827

 

Costs and expenses:

 

 

 

 

 

Home construction and land sales

 

832,786

 

696,355

 

Selling, general and administrative

 

133,078

 

104,594

 

Operating income

 

139,752

 

110,878

 

Equity in income (loss) of unconsolidated joint ventures

 

352

 

(102

)

Other income, net

 

4,103

 

2,564

 

Income before income taxes

 

144,207

 

113,340

 

Provision for income taxes

 

54,294

 

43,636

 

Net income

 

$

89,913

 

$

69,704

 

 

 

 

 

 

 

Weighted average number of shares:

 

 

 

 

 

Basic

 

40,958

 

40,295

 

Diluted

 

45,607

 

45,301

 

 

 

 

 

 

 

Net income per common share:

 

 

 

 

 

Basic

 

$

2.20

 

$

1.73

 

Diluted

 

$

2.00

 

$

1.57

 

 

 

 

 

 

 

Cash dividends per share

 

$

0.10

 

$

0.03

 

 

See Notes to Unaudited Condensed Consolidated Financial Statements

 

4



 

BEAZER HOMES USA, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

 

 

 

Three Months Ended
December 31,

 

 

 

2005

 

2004

 

Cash flows from operating activities:

 

 

 

 

 

Net income

 

$

89,913

 

$

69,704

 

Adjustments to reconcile net income to net cash used in operating activities:

 

 

 

 

 

Depreciation and amortization

 

2,442

 

2,289

 

Amortization of unearned compensation

 

2,268

 

2,204

 

Deferred income tax provision

 

9,320

 

 

Tax benefit from stock transactions

 

(6,169

)

 

Equity in (earnings) loss of unconsolidated joint ventures

 

(352

)

102

 

Cash distributions of income from unconsolidated joint ventures

 

 

1,300

 

Changes in operating assets and liabilities:

 

 

 

 

 

Decrease in accounts receivable

 

34,623

 

36,340

 

Increase in inventory

 

(273,153

)

(245,669

)

Increase in other assets

 

(26,722

)

(16,266

)

Decrease in trade accounts payable

 

(17,390

)

(30,073

)

Decrease in other liabilities

 

(100,125

)

(15,975

)

Other changes

 

170

 

1,063

 

Net cash used in operating activities

 

(285,175

)

(194,981

)

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

Capital expenditures

 

(4,732

)

(3,106

)

Investments in unconsolidated joint ventures

 

(19,528

)

(22,231

)

Distributions from unconsolidated joint ventures

 

1,280

 

192

 

Net cash used in investing activities

 

(22,980

)

(25,145

)

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

Net change in book overdraft

 

32,396

 

 

Treasury stock purchases

 

(67,005

)

 

Repayment of other notes payable

 

(329

)

(9,443

)

Borrowings under revolving credit facility

 

164,000

 

 

Repayment of revolving credit facility

 

(114,000

)

 

Proceeds from stock option exercises

 

6,082

 

1,180

 

Tax benefit from stock transactions

 

6,169

 

 

Dividends paid

 

(4,107

)

(1,384

)

Net cash provided/(used) by financing activities

 

23,206

 

(9,647

)

 

 

 

 

 

 

Decrease in cash and cash equivalents

 

(284,949

)

(229,773

)

Cash and cash equivalents at beginning of period

 

297,098

 

320,880

 

Cash and cash equivalents at end of period

 

$

12,149

 

$

91,107

 

 

 

 

 

 

 

Supplemental cash flow information:

 

 

 

 

 

Interest paid

 

$

35,348

 

$

36,765

 

Income taxes paid

 

$

55,128

 

$

15,156

 

 

 

 

 

 

 

Supplemental disclosures of non-cash activities:

 

 

 

 

 

Consolidated inventory not owned

 

$

81,628

 

$

 

Land purchased through issuance of notes payable

 

$

7,762

 

$

1,777

 

 

See Notes to Unaudited Condensed Consolidated Financial Statements

 

5



 

BEAZER HOMES USA, INC.

UNAUDITED CONSOLIDATED STATEMENTS

OF COMPREHENSIVE INCOME

(in thousands)

 

 

 

Three Months Ended
December 31,

 

 

 

2005

 

2004

 

 

 

 

 

 

 

Net income

 

$

89,913

 

$

69,704

 

 

 

 

 

 

 

Other comprehensive income:

 

 

 

 

 

Unrealized gain on interest rate swaps, net of related taxes

 

 

610

 

 

 

 

 

 

 

Comprehensive income

 

$

89,913

 

$

70,314

 

 

See Notes to Unaudited Condensed Consolidated Financial Statements

 

6



 

BEAZER HOMES USA, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

(1) Basis of Presentation

 

The accompanying unaudited condensed consolidated financial statements of Beazer Homes USA, Inc. (“Beazer Homes” or “the Company”) have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X.  Such financial statements do not include all of the information and disclosures required by accounting principles generally accepted in the United States of America for complete financial statements.  In the Company’s opinion, all adjustments (consisting solely of normal recurring accruals) necessary for a fair presentation have been included in the accompanying financial statements.  Certain items in prior period financial statements have been reclassified to conform to the current presentation.  For further information, refer to the Company’s audited consolidated financial statements appearing in the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2005.

 

In February 2005, the Company’s Board of Directors approved a three-for-one stock split.  The stock split was effected in the form of a stock dividend paid on March 22, 2005 to stockholders of record at the close of business on March 10, 2005.  All share and per share amounts (except par value) have been retroactively adjusted to reflect the split.  There was no net effect on stockholders’ equity as a result of the stock split.

 

(2)           Summary of Significant Accounting Policies

 

A discussion of the Company’s significant accounting policies other than those discussed below is included in the notes to the consolidated financial statements included in Beazer Homes’ Consolidated Financial Statements for the fiscal year ended September 30, 2005 as filed with the Securities and Exchange Commission in the Annual Report on Form 10-K.

 

Stock-Based Compensation

 

In the first quarter of fiscal 2006, the Company adopted Statement of Financial Accounting Standards (“SFAS”) 123R, Share-Based Payments, which revises SFAS 123, Accounting for Stock-Based Compensation.  Prior to fiscal year 2006, the Company accounted for stock awards granted to employees under the recognition and measurement principles of Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations.  As a result, no compensation expense was previously recognized for stock options granted to employees because all stock options granted had exercise prices not less than the market value of Beazer Homes’ stock on the date of the grant in periods prior to fiscal year 2006.

 

SFAS 123R applies to new awards and to awards modified, repurchased, or cancelled after the required effective date, as well as to the unvested portion of awards outstanding as of the required effective date.  The Company uses the Black-Scholes model to value its new stock option grants under SFAS 123R, applying the “modified prospective method” for existing grants which requires the Company to value stock options prior to its adoption of SFAS 123R under the fair value method and expense the unvested portion over the remaining vesting period.  SFAS 123R also requires the Company to estimate forfeitures in calculating the expense related

 

7



 

to stock-based compensation.  In addition, SFAS 123R requires the Company to reflect the benefits of tax deductions in excess of recognized compensation cost to be reported as both a financing cash inflow and an operating cash outflow upon adoption.

 

Nonvested stock granted to employees is valued based on the market price of the common stock on the date of the grant. The Company accounts for stock awards issued to non-employees under the recognition and measurement principles of SFAS 123R and Emerging Issues Task Force Issue No. 96-18: Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services.  Stock options issued to non-employees are valued using the Black-Scholes option pricing model.  Nonvested stock granted to non-employees is initially valued based on the market price of the common stock on the date of the grant and is adjusted to fair value until vested.  During the three months ended December 31, 2005, the Company issued 120,249 shares of nonvested stock at a grant date price of $62.02 with a weighted average vesting period of 4.4 years.

 

Compensation cost arising from nonvested stock granted to employees and from non-employee stock awards is recognized as expense using the straight-line method over the vesting period. Unearned compensation is included in paid-in capital beginning in the first quarter of fiscal 2006 upon adoption of SFAS 123R.  As of December 31, 2005, there was $18.3 million of total unrecognized compensation cost related to nonvested stock.  That cost is expected to be recognized over a weighted average period of 3.8 years.  For the three months ended December 31, 2005, the Company’s total stock-based compensation expense was $2.3 million ($1.4 million net of tax).  Included in this total stock-based compensation expense was incremental expense for stock options of $1.1 million ($710,000 net of tax) for the quarter ended December 31, 2005.

 

The following table illustrates the effect (in thousands, except per share amounts) on net income and earnings per share for the three months ended December 31, 2004 as if the Company’s stock-based compensation had been determined based on the fair value at the grant dates for awards made prior to fiscal 2006, under those plans and consistent with SFAS 123R:

 

Three Months Ended December 31, 2004

 

Net income, as reported

 

$

69,704

 

Add: Stock-based employee compensation included in reported net income, net of related tax effects

 

1,349

 

Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects

 

(2,292

)

Pro forma net income

 

$

68,761

 

 

 

 

 

Earnings per share:

 

 

 

Basic - as reported

 

$

1.73

 

Basic - pro forma

 

$

1.71

 

 

 

 

 

Diluted - as reported

 

$

1.57

 

Diluted - pro forma

 

$

1.55

 

 

 

 

 

 

8



 

The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions used for grants issued in the first quarter of fiscal 2006 and 2005:

 

 

 

Q1 2006

 

Q1 2005

 

Risk free interest rate

 

4.51

%

3.39

%

Expected life

 

5.0 years

 

5.0 years

 

Expected volatility

 

43.14

%

43.64

%

Expected dividend yield

 

0.33

%

0.33

%

 

Expected life of the options granted is computed using the mid-point between the vesting period and contractual life of the options granted.  Expected volatilities are based on the historical volatility of the Company’s stock and other factors.

 

The following table summarizes stock options outstanding as of December 31, 2005 as well as activity during the three months then ended:

 

 

 

Shares

 

Weighted-
Average
Exercise Price

 

 

 

 

 

 

 

Outstanding at September 30, 2005

 

1,654,751

 

$

23.91

 

Granted

 

221,727

 

62.02

 

Exercised

 

(329,599

)

18.45

 

Forfeited

 

(12,445

)

37.19

 

Outstanding at December 31, 2005

 

1,534,434

 

30.48

 

Exercisable at December 31, 2005

 

738,092

 

17.68

 

 

At December 31, 2005, the weighted-average remaining contractual life of options outstanding and exercisable was 5.7 years and 5.8 years, respectively.

 

At December 31, 2005, the aggregate intrinsic value of options outstanding and options exercisable was $65.0 million and $40.7 million, respectively.  (The intrinsic value of a stock options is the amount by which the market value of the underlying stock exceeds the exercise price of the option.)  The weighted-average grant date fair value of stock options granted during the three months ended December 31, 2005 and 2004 was $26.08 and $14.94, respectively.  The intrinsic value of stock options exercised during the three months ended December 31, 2005 and 2004 were $16.0 million and $5.9 million, respectively.

 

New Accounting Pronouncements

 

In November 2004, the FASB issued SFAS 151, Inventory Costs, an Amendment of ARB No. 43, Chapter 4. SFAS 151 provides clarification of the accounting for abnormal amounts of freight, handling costs, and wasted material and requires that these items be recognized as current period charges.  SFAS 151 is effective for inventory costs incurred beginning in the first quarter of fiscal 2006.  The adoption of SFAS 151 did not have a material impact on our consolidated results of operations or financial position for the quarter ended December 31, 2005.

 

In May 2005, the FASB issued SFAS 154, Accounting Changes and Error Corrections, which will be effective in the first quarter of fiscal year 2007. This statement addresses the retrospective application of such changes

 

9



 

and corrections and will be followed if and when necessary.  The Company will follow the provisions of this standard in the event of any future accounting changes.

 

(3) Inventory

 

Inventory consists of (in thousands):

 

 

 

December 31,
2005

 

September 30,
2005

 

Homes under construction

 

$

1,277,524

 

$

1,040,193

 

Development projects in progress

 

1,547,756

 

1,519,554

 

Unimproved land held for future development

 

46,049

 

44,809

 

Model homes

 

45,906

 

66,526

 

Consolidated inventory not owned

 

346,444

 

230,083

 

 

 

$

3,263,679

 

$

2,901,165

 

 

Homes under construction includes homes finished and ready for delivery and homes in various stages of construction.  Excluding model homes, Beazer Homes had 514 completed homes (valued at $106.4 million) and 414 completed homes (valued at $72.2 million) at December 31, 2005 and September 30, 2005, respectively, that were not subject to a sales contract.

 

Development projects in progress consist principally of land and land improvement costs.  Certain of the fully developed lots in this category are reserved by a deposit or sales contract.

 

The Company acquires certain lots by means of option contracts.   Option contracts generally require the payment of cash for the right to acquire lots during a specified period of time at a certain price.  Under option contracts, both with and without specific performance provisions, purchase of the properties is contingent upon satisfaction of certain requirements by us and the sellers.  Beazer Homes’ obligation with respect to options with specific performance provisions is included on the Company’s consolidated balance sheets in other liabilities.  Under option contracts without specific performance obligations, the Company’s liability is generally limited to forfeiture of the non-refundable deposits, letters of credit and other non-refundable amounts incurred, which aggregated approximately $365.9 million at December 31, 2005.  This amount includes letters of credit of approximately $49.6 million. Below is a summary of amounts, net of cash deposits, committed under all options at December 31, 2005 (in thousands):

 

 

 

Aggregate
Exercise Price of
Options

 

Options with specific performance

 

$

13,677

 

Options without specific performance

 

2,900,689

 

Total options

 

$

2,914,366

 

 

Certain of the Company’s option contracts are with sellers who are deemed to be Variable Interest Entities (“VIE”s) under FASB Interpretation No. 46, Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51 (“FIN 46”).  FIN 46 defines a VIE as an entity with insufficient equity investment to finance its planned activities without additional financial support or an entity in which the equity investors lack certain characteristics of a controlling financial interest.  Pursuant to FIN 46, an enterprise that absorbs a majority of the

 

10



 

expected losses or receives a majority of the expected residual returns of a VIE is deemed to be the primary beneficiary of the VIE and must consolidate the VIE.

 

The Company has determined that Beazer Homes is the primary beneficiary of certain of these option contracts.  The Company’s risk is generally limited to the option deposits that it pays, and creditors of the sellers generally have no recourse to the general credit of the Company.  Although Beazer Homes does not have legal title to the optioned land, for those option contracts for which the Company is the primary beneficiary, Beazer Homes is required to consolidate the land under option at fair value.  The Company believes that the exercise prices of its option contracts approximate their fair value.  The Company’s consolidated balance sheets at December 31, 2005 and September 30, 2005 reflect consolidated inventory not owned of $346.4 million and $230.1 million, respectively.  Obligations related to consolidated inventory not owned totaled $247.8 million at December 31, 2005 and $166.2 million at September 30, 2005.  The difference between the balances of consolidated inventory not owned and obligations related to consolidated inventory not owned represents cash deposits paid under the option agreements.   The above disclosures of amounts committed under options include Beazer Homes’ obligations related to consolidated inventory not owned.

 

(4) Investments in and Advances to Unconsolidated Joint Ventures

 

The Company participates in a number of land development joint ventures in which Beazer Homes has less than a controlling interest.  The Company’s joint ventures are typically entered into with developers, other homebuilders and financial partners to develop finished lots for sale to the joint venture’s members and other third parties.  Beazer Homes accounts for its interest in these joint ventures under the equity method.  The Company recognizes its share of profits from the sale of lots to other buyers.  Beazer Homes’ share of profits from lots purchased from the joint ventures are deferred and treated as a reduction of the cost of the land purchased from the joint venture.  Such profits are subsequently recognized at the time the home closes and title passes to the homebuyer.

 

The Company’s joint ventures typically obtain secured acquisition and development financing.  In some instances, Beazer Homes and its joint venture partners have provided varying levels of guarantees of debt of the Company’s unconsolidated joint ventures.  At December 31, 2005 and September 30, 2005, the Company had repayment guarantees of $10.7 million and $10.4 million, respectively, and loan-to-value maintenance guarantees of $70.7 million and $84.6 million, respectively, of debt of unconsolidated joint ventures.  Repayment guarantees require Beazer Homes to repay the Company’s share of debt of unconsolidated joint ventures in the event the joint venture defaults on its obligations under the borrowings.  Loan-to-value maintenance guarantees require the Company to repay the Company’s share of the venture’s borrowings to the extent such borrowings exceed a specified percentage of the value of the property securing the loan.

 

11



 

(5) Interest

 

The following table sets forth certain information regarding interest (in thousands):

 

 

 

Three Months Ended
Decmber 31,

 

 

 

2005

 

2004

 

 

 

 

 

 

 

Capitalized interest in inventory, beginning of period

 

$

51,411

 

$

44,121

 

Interest incurred and capitalized

 

25,533

 

20,389

 

Capitalized interest amortized to cost of sales

 

(18,175

)

(15,959

)

Capitalized interest in inventory, end of period

 

$

58,769

 

$

48,551

 

 

(6) Earnings Per Share

 

Basic and diluted earnings per share were calculated as follows (in thousands, except per share amounts):

 

 

 

Three Months Ended
December 31,

 

 

 

2005

 

2004

 

Basic:

 

 

 

 

 

Net income

 

$

89,913

 

$

69,704

 

Weighted average number of common shares outstanding

 

40,958

 

40,295

 

Basic earnings per share

 

$

2.20

 

$

1.73

 

 

 

 

 

 

 

Diluted:

 

 

 

 

 

Net income

 

$

89,913

 

$

69,704

 

Interest on convertible debt - net of taxes

 

1,344

 

1,325

 

Net income available to common shareholders

 

$

91,257

 

$

71,029

 

Weighted average number of common  shares outstanding

 

40,958

 

40,295

 

Effect of dilutive securities:

 

 

 

 

 

Shares issuable upon conversion of convertible debt

 

3,499

 

3,499

 

Options to acquire common stock

 

594

 

535

 

Restricted stock

 

556

 

972

 

Diluted weighted average common  shares outstanding

 

45,607

 

45,301

 

Diluted earnings per share

 

$

2.00

 

$

1.57

 

 

Basic and diluted earnings per share amounts and weighted average shares outstanding for December 31, 2004 have been retroactively restated to reflect the effect of the Company’s March 2005 three-for-one stock split.

 

Emerging Task Force Issue No. 04-8: The Effect of Contingently Convertible Debt on Diluted Earnings Per Share (“EITF 04-8”) requires that shares issuable upon conversion of contingently convertible debt instruments (“Co-Cos”) be included in diluted earnings per share computations using the “if-converted method” regardless of whether the issuer’s stock price exceeds the contingent conversion price.  EITF 04-8, which applies to the Company’s 45/8% Convertible Senior Notes issued in June 2004, was effective beginning with the first quarter of Beazer Homes’ 2005 fiscal year.

 

12



 

(7) Borrowings

 

At December 31, 2005 we had the following borrowings (in thousands):

 

Debt

 

Due

 

Amount

 

Revolving Credit Facility

 

August 2009

 

$

50,000

 

8 5/8% Senior Notes

 

May 2011

 

200,000

 

8 3/8% Senior Notes

 

April 2012

 

350,000

 

6 1/2% Senior Notes

 

November 2013

 

200,000

 

6 7/8% Senior Notes

 

July 2015

 

350,000

 

4 5/8% Convertible Senior Notes

 

June 2024

 

180,000

 

Other Notes Payable

 

Various Dates

 

53,487

 

Unamortized debt discounts

 

 

 

(4,000

)

Total

 

 

 

$

1,379,487

 

 

Revolving Credit Facility - In August 2005 we entered into a new $750 million (expandable up to $1 billion), four-year unsecured revolving credit facility (the “Revolving Credit Facility”) with a group of banks that matures in August 2009. The Revolving Credit Facility replaced our former $550 million revolving credit facility and $200 million Term Loan.  The Revolving Credit Facility includes a $50 million swing line commitment and has a $350 million sublimit for the issuance of standby letters of credit.  Substantially all of the Company’s significant subsidiaries are guarantors of the obligations under the Revolving Credit Facility (see Note 10).  The Revolving Credit Facility contains various operating and financial covenants.  The Company was in compliance with such covenants at December 31, 2005.  The Company has the option to elect two types of loans under the Revolving Credit Facility which incur interest as applicable based on either the Alternative Base Rate or the Applicable Eurodollar Margin (both as defined in the Revolving Credit Facility).

 

Available borrowings under the Revolving Credit Facility are limited to certain percentages of homes under contract, unsold homes, substantially improved lots, lots under development, raw land and accounts receivable.  At December 31, 2005, we had $50.0 million borrowings outstanding, and had available borrowings of $585.6 million under the Revolving Credit Facility.  The borrowings outstanding under the Revolving Credit Facility bore interest at 5.5% as of December 31, 2005.  There were no borrowings outstanding under the Revolving Credit Facility at September 30, 2005.

 

Senior Notes - The Senior Notes are unsecured obligations ranking pari passu with all other existing and future senior indebtedness.  All of our significant subsidiaries are full and unconditional guarantors of the Senior Notes and our obligations under the Revolving Credit Facility, and are jointly and severally liable for obligations under the Senior Notes, and the Revolving Credit Facility.  Each guarantor subsidiary is a 100% owned subsidiary of Beazer Homes.

 

The indentures under which the Senior Notes were issued contain certain restrictive covenants, including limitations on payment of dividends.  At December 31, 2005, under the most restrictive covenants of each indenture, approximately $314.7 million of our retained earnings was available for cash dividends and for share repurchases.  Each indenture provides that, in the event of defined changes in control or if our consolidated tangible net worth falls below a specified level or in certain circumstances upon a sale of assets, we are required to offer to repurchase certain specified amounts of outstanding Senior Notes.

 

13



 

We periodically acquire land through the issuance of notes payable.  As of December 31, 2005 and September 30, 2005, we had outstanding notes payable of $53.5 million and $46.1 million related to land acquisitions, respectively.  These notes payable expire at various times through 2010 at variable rates ranging from 5.0% to 8.8% at December 31, 2005.

 

Mortgage Warehouse Credit Facility – Through December 31, 2005, Beazer Mortgage provided mortgage origination services only, and did not retain or service the mortgages that it originated.  These mortgages were funded by a network of mortgage lenders.  Effective January 11, 2006, Beazer Mortgage entered into a 364-day credit agreement with a number of banks to fund the origination of residential mortgage loans (the “Warehouse Line”).  This Warehouse Line provides for a maximum available borrowing capacity of $250 million to $350 million based on commitment periods as defined in the Warehouse Line and will be secured by certain mortgage loan sales and related property.  The Warehouse Line is neither guaranteed by Beazer Homes USA, Inc. nor any of its subsidiaries that are guarantors of the Senior Notes or Revolving Credit Facility.  Beginning in the second quarter of fiscal 2006, Beazer Mortgage will finance certain of our mortgage lending activities with borrowings under the Warehouse Line.  The Warehouse Line contains various operating and financial covenants, including covenants to the effect that Beazer Mortgage will (i) maintain minimum tangible net worth and adjusted tangible net worth, (ii) maintain a total debt to adjusted tangible net worth ratio of not more than 12 to 1, and (iii) have net income of at least $1.00 during each fiscal quarter (as defined in the Warehouse Line).

 

(8) Contingencies

 

Trinity Claims – Beazer Homes and certain of its subsidiaries have been and continue to be named as defendants in various construction defect claims, complaints and other legal actions that include claims related to moisture intrusion and mold.  The Company has experienced a significant number of such claims in its Midwest region and particularly with respect to homes built by Trinity Homes LLC, a subsidiary which was acquired in the Crossmann acquisition in 2002.

 

As of December 31, 2005, there were eleven pending lawsuits related to such complaints received by Trinity.  All eleven suits are by individual homeowners, and the cost to resolve these matters is not expected to be material, either individually or in the aggregate.  Additionally, a class action suit was filed in the State of Indiana in August 2003 against Trinity Homes LLC.  The parties in the class action reached a settlement agreement which was approved by the court on October 20, 2004.

 

The settlement class includes, with certain exclusions, the current owners of all Trinity homes that have brick veneer, where the closing of Trinity’s initial sale of the home took place between June 1, 1998 and October 31, 2002.  The settlement agreement establishes an agreed protocol and process for assessment and remediation of any external water intrusion issues at the homes which includes, among other things, that the homes will be repaired at Trinity’s expense.  The settlement agreement also provides for payment of plaintiffs’ attorneys’ fees and for Trinity to pay an agreed amount for engineering inspection costs for each home for which a claim is filed under the settlement.

 

Under the settlement, subject to Trinity’s timely performance of the specified assessments and remediation activities for homeowners who file claims, each homeowner releases Trinity, Beazer Homes Investment Corp. and other affiliated companies, including Beazer Homes, from the claims asserted in the class action lawsuit, claims arising out of external water intrusion, claims of improper brick installation, including property damage

 

14



 

claims, loss or diminution of property value claims, and most personal injury claims, among others.  No appeals of the court’s order approving the settlement were received by the court within the timeframe established by the court.  The Company sent out the claims notices on December 17, 2004, and the class members had until February 15, 2005 to file claims.  A total of 1,312 valid claims were filed (of the 2,161 total class members), of which 613 complaints had been received prior to the Company’s receipt of the claim notices.  Class members who did not file a claim by February 15, 2005 are no longer able to file a class action claim under the settlement or pursue an individual claim against Trinity.

 

Beazer Homes’ warranty reserves at December 31, 2005 and September 30, 2005 include accruals for the Company’s estimated costs to assess and remediate all homes for which Trinity had received complaints related to moisture intrusion and mold, including a provision for legal fees.  Warranty reserves also include accruals for class action claims received, pursuant to the settlement discussed above, from class members who had not previously contacted Trinity with complaints.

 

The following is a rollforward of total complaints received as of December 31, 2005 and 2004:

 

 

 

Three Months Ended
December 31,

 

 

 

2005

 

2004

 

Complaints outstanding at beginning of period

 

1,543

 

887

 

Complaints received during the period

 

3

 

51

(1)

Complaints resolved during the period

 

(14

)

(34

)

Complaints outstanding at end of the period

 

1,532

 

904

 

 


(1) Excludes 251 class claims for which remediation costs were accrued at December 31, 2004, which were received after December 31, 2004, but prior to issuance of our December 31, 2004 financial statements.

 

The cost to assess and remediate a home depends on the extent of moisture damage, if any, that the home has incurred.  Homes for which the Company receives complaints are classified into one of three categories: 1) homes with no moisture damage, 2) homes with isolated moisture damage or 3) homes with extensive moisture damage.

 

As of December 31, 2005 and September 30, 2005, the Company accrued for its estimated cost to remediate homes that it had assessed and assigned to one of the above categories, as well as the Company’s estimated cost to remediate those homes for which a complaint had not been received, and for which an assessment had not yet been performed.  For purposes of the Company’s accrual, the Company has historically assigned homes not yet assessed to categories based on its expectations about the extent of damage and trends observed from the results of assessments performed to date.  In addition, the Company refined its cost estimation process to consider the subdivision of the claimant along with the categorization discussed above.  Once a home is categorized, detailed budgets are used as the basis to prepare the Company’s estimated costs to remediate such home.

 

During fiscal 2004, the Company initiated a program under which it offered to repurchase a limited number of homes from specific homeowners.  The program was concluded during the first quarter of fiscal 2005.  The Company has repurchased a total of 54 homes under the program.  During the three months ended December 31, 2005, the Company sold two of the repurchased homes.  The remaining 46 homes were acquired for an

 

15



 

aggregate purchase price of $15.2 million.  The accrual at December 31, 2005 includes the estimated costs to sell homes that the Company has repurchased, and the Company’s estimated losses on the sale of those homes, if any.

 

Changes in the accrual for Trinity moisture intrusion and related mold issues during the period were as follows (in thousands):

 

 

 

Three Months Ended
December 31,

 

 

 

2005

 

2004

 

Balance at beginning of period

 

$

80,708

 

$

42,173

 

Provisions

 

 

10,000

 

Payments

 

(2,652

)

(6,273

)

Balance at end of period

 

$

78,056

 

$

45,900

 

 

The accruals at December 31, 2005 represent the Company’s best estimates of the costs to resolve all asserted complaints.  Actual costs to assess and remediate homes in each category and subdivision, the extent of damage to homes not yet assessed, estimates of costs to sell repurchased homes, and losses on such sales could differ from the Company’s estimates.  As a result, the costs to resolve existing complaints could differ from the Company’s recorded accruals and have a material adverse effect on the Company’s earnings in the periods in which the matters are resolved.   Additionally, it is possible that the Company will incur additional losses related to these matters, including additional losses related to homes for which the Company has not yet received complaints.  However, the amount or range of such losses cannot be determined at this time.

 

Warranty Reserves – Beazer Homes provides a limited warranty (ranging from one to two years) of workmanship and materials with each of its homes. Such warranty covers defects in plumbing, electrical, heating, cooling and ventilating systems and construction defects. In addition, the Company provides a limited warranty (generally ranging from a minimum of ten years up to the period covered by the applicable statute of repose) with each home, covering only certain defined construction defects. Since Beazer Homes subcontracts its homebuilding work to subcontractors who generally provide the Company with an indemnity and a certificate of insurance prior to receiving payments for their work, many claims relating to workmanship and materials are the primary responsibility of the subcontractors.

 

As noted above, the Company’s warranty reserves at December 31, 2005 and September 30, 2005 include accruals for Trinity moisture intrusion and related mold issues.  Warranty reserves are included in other payables and accrued liabilities in the condensed consolidated balance sheets.  The Company records reserves covering anticipated warranty expense for each home closed.  Management reviews the adequacy of warranty reserves each reporting period based on historical experience and management’s estimate of the costs to remediate the claims and adjusts these provisions accordingly.  While the Company believes that its warranty reserves are adequate, historical data and trends may not accurately predict actual warranty costs, or future developments could lead to a significant change in the reserve.

 

Changes in the Company’s warranty reserves, which include amounts related to the Trinity moisture intrusion and mold issues discussed above,  during the period are as follows (in thousands):

 

16



 

 

 

Three Months Ended
December 31,

 

 

 

2005

 

2004

 

Balance at beginning of period

 

$

138,033

 

$

86,163

 

Provisions

 

5,858

 

18,315

 

Payments

 

(12,086

)

(10,847

)

Balance at end of period

 

$

131,805

 

$

93,631

 

 

Other Contingencies - The Company and certain of its subsidiaries have been named as defendants in various claims, complaints and other legal actions, including matters relating to moisture intrusion and related mold claims, construction defects and product liability.  Certain of the liabilities resulting from these actions are covered in whole or part by insurance.  With respect to certain general liability exposures, including construction defect, moisture intrusion and related mold claims and product liability claims, interpretation of underlying current and future trends, assessment of claims and the related liability and reserve estimation process is highly judgmental due to the complex nature of these exposures, with each exposure exhibiting unique circumstances.  In particular, for construction defect liability there is a high degree of uncertainty relating to the extent of insurance coverage, when losses occur, the size of each loss, expectations for future interpretive rulings concerning contract provisions and the extent to which the assertion of these claims will expand geographically.  In the Company’s opinion, based on its current assessment, the ultimate resolution of these matters will not have a material adverse effect on Beazer Homes’ financial condition, results of operations, or cash flows.

 

We had outstanding letters of credit and performance bonds of approximately $61.0 million and $517.4 million, respectively, at December 31, 2005 related principally to our obligations to local governments to construct roads and other improvements in various developments in addition to the letters of credit of approximately $60.3 million relating to our land option contracts discussed in Note 3. We do not believe that any such letters of credit or bonds are likely to be drawn upon.

 

(9)  Stock Repurchase Program

 

On November 18, 2005, as part of an acceleration of Beazer’s comprehensive plan to enhance stockholder value, the Company’s Board of Directors authorized an increase in the Company’s stock repurchase plan to ten million shares of the Company’s common stock.  Shares may be purchased for cash in the open market, on the NYSE or in privately negotiated transactions.  During the three months ended December 31, 2005, the Company repurchased 1,014,600 shares for an aggregate purchase price of $67.0 million or approximately $66 per share pursuant to the plan.  The Company has recently entered into a plan under Rule 10b5-1 of the Securities Act of 1934 to execute a portion of the share repurchase program, and may also make opportunistic purchases in the open market or in privately negotiated transactions.

 

(10)  Supplemental Guarantor Information

 

As discussed in Note 7, Beazer Homes’ obligations to pay principal, premium, if any, and interest under certain debt are guaranteed on a joint and several basis by substantially all of its subsidiaries.  The guarantees are full and unconditional and the guarantor subsidiaries are 100% owned by Beazer Homes USA, Inc.  The Company

 

17



 

has determined that separate, full financial statements of the guarantors would not be material to investors and, accordingly, supplemental financial information for the guarantors is presented.

 

Beazer Homes USA, Inc.

Condensed Consolidating Balance Sheet

December 31, 2005

(in thousands)

 

 

 

Beazer Homes
USA, Inc.

 

Guarantor
Subsidiaries

 

Beazer
Mortgage
Corp (a)

 

Non-Guarantor
Subsidiaries

 

Eliminating
Entries

 

Consolidated
Beazer Homes
USA, Inc.

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

109,649

 

$

(98,379

)

$

141

 

$

738

 

$

 

$

12,149

 

Accounts receivable

 

 

124,569

 

2,274

 

414

 

 

127,257

 

Owned inventory

 

 

2,909,877

 

 

 

7,358

 

2,917,235

 

Consolidated inventory not owned

 

 

346,444

 

 

 

 

346,444

 

Investments in and advances to unconsolidated joint ventures

 

 

98,192

 

 

 

 

98,192

 

Deferred tax asset

 

92,009

 

 

 

 

 

92,009

 

Property, plant and equipment, net

 

 

29,735

 

870

 

 

 

30,605

 

Goodwill

 

 

121,368

 

 

 

 

121,368

 

Investments in subsidiaries

 

1,650,533

 

 

 

 

(1,650,533

)

 

Intercompany

 

1,033,812

 

(1,111,409

)

53,214

 

24,383

 

 

 

Other assets

 

32,181

 

64,097

 

180

 

11,002

 

 

107,460

 

Total assets

 

$

2,918,184

 

$

2,484,494

 

$

56,679

 

$

36,537

 

$

(1,643,175

)

$

3,852,719

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

 

 

Trade accounts payable

 

$

32,396

 

$

124,090

 

$

66

 

$

77

 

$

 

$

156,629

 

Other payables and accured liabilities

 

24,902

 

488,174

 

1,752

 

13,206

 

2,770

 

530,804

 

Intercompany

 

(3,122

)

 

 

3,122

 

 

 

Obligations related to consolidated inventory not owned

 

 

247,791

 

 

 

 

247,791

 

Revolving credit facility

 

50,000

 

 

 

 

 

50,000

 

Senior notes (net of discounts of $4,000)

 

1,276,000

 

 

 

 

 

1,276,000

 

Other notes payable

 

 

53,487

 

 

 

 

53,487

 

Total liabilities

 

1,380,176

 

913,542

 

1,818

 

16,405

 

2,770

 

2,314,711

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stockholders’ equity

 

1,538,008

 

1,570,952

 

54,861

 

20,132

 

(1,645,945

)

1,538,008

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total liabilities and stockholders’ equity

 

$

2,918,184

 

$

2,484,494

 

$

56,679

 

$

36,537

 

$

(1,643,175

)

$

3,852,719

 

 


(a) Prior to August 2005, Beazer Mortgage Corp. (“BMC”) was a guarantor of the Senior Notes and Revolving Credit Facility.  Effective August 2005, BMC is no longer a guarantor of the Revolving Credit Facility and effective January 2006, BMC is no longer a guarantor of the Senior Notes.

 

18



 

Beazer Homes USA, Inc.

Condensed Consolidating Balance Sheet

September 30, 2005

(in thousands)

 

 

 

Beazer Homes
USA, Inc.

 

Guarantor
Subsidiaries

 

Beazer
Mortgage
Corp. (a)

 

Non-Guarantor
Subsidiaries

 

Eliminating
Entries

 

Consolidated
Beazer Homes
USA, Inc.

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

386,423

 

$

(90,238

)

$

230

 

$

683

 

$

 

$

297,098

 

Accounts receivable

 

 

157,523

 

2,775

 

1,582

 

 

161,880

 

Owned inventory

 

 

2,663,792

 

 

 

7,290

 

2,671,082

 

Consolidated inventory not owned

 

 

230,083

 

 

 

 

230,083

 

Investments in and advances to unconsolidated joint ventures

 

 

78,571

 

 

 

 

78,571

 

Deferred tax asset

 

101,329

 

 

 

 

 

101,329

 

Property, plant and equipment, net

 

 

27,550

 

817

 

 

 

28,367

 

Goodwill

 

 

121,368

 

 

 

 

121,368

 

Investments in subsidiaries

 

1,639,405

 

 

 

 

(1,639,405

)

 

Intercompany

 

745,018

 

(820,519

)

53,074

 

22,427

 

 

 

Other assets

 

20,123

 

49,473

 

293

 

10,849

 

 

80,738

 

Total assets

 

$

2,892,298

 

$

2,417,603

 

$

57,189

 

$

35,541

 

$

(1,632,115

)

$

3,770,516

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

 

 

Trade accounts payable

 

$

 

$

141,312

 

$

242

 

$

69

 

$

 

$

141,623

 

Other payables and accrued liabilities

 

115,023

 

503,352

 

2,162

 

12,827

 

2,742

 

636,106

 

Intercompany

 

(3,295

)

 

 

3,295

 

 

 

Obligations related to consolidated inventory not owned

 

 

166,163

 

 

 

 

166,163

 

Senior notes (net of discounts of $4,118)

 

1,275,882

 

 

 

 

 

1,275,882

 

Other notes payable

 

 

46,054

 

 

 

 

46,054

 

Total liabilities

 

1,387,610

 

856,881

 

2,404

 

16,191

 

2,742

 

2,265,828

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stockholders’ equity

 

1,504,688

 

1,560,722

 

54,785

 

19,350

 

(1,634,857

)

1,504,688

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total liabilities and stockholders’ equity

 

$

2,892,298

 

$

2,417,603

 

$

57,189

 

$

35,541

 

$

(1,632,115

)

$

3,770,516

 

 

19



 

Beazer Homes USA, Inc.

Condensed Consolidating Statement of Income

Three Months Ended December 31, 2005

(in thousands)

 

 

 

Beazer Homes
USA, Inc.

 

Guarantor
Subsidiaries

 

Beazer
Mortgage
Corp. (a)

 

Non-Guarantor
Subsidiaries

 

Eliminating
Entries

 

Consolidated
Beazer Homes
USA, Inc.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total revenue

 

$

 

$

1,092,904

 

$

10,978

 

$

1,734

 

$

 

$

1,105,616

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Costs and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

Home construction and land sales

 

18,175

 

821,969

 

 

 

(7,358

)

832,786

 

Selling, general and administrative

 

 

121,915

 

10,683

 

480

 

 

133,078

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating income (loss)

 

(18,175

)

149,020

 

295

 

1,254

 

7,358

 

139,752

 

Equity in income of unconsolidated joint ventures

 

 

352

 

 

 

 

352

 

Royalty and management fee expense

 

20,626

 

(20,453

)

(173

)

 

 

 

Other income, net

 

 

4,103

 

 

 

 

4,103

 

Income (loss) before income taxes

 

2,451

 

133,022

 

122

 

1,254

 

7,358

 

144,207

 

Provision for income taxes

 

923

 

50,083

 

46

 

472

 

2,770

 

54,294

 

Equity in income of subsidiaries

 

88,385

 

 

 

 

(88,385

)

 

Net income

 

$

89,913

 

$

82,939

 

$

76

 

$

782

 

$

(83,797

)

$

89,913

 

 

Beazer Homes USA, Inc.

Condensed Consolidating Statement of Income

Three Months Ended December 31, 2004

(in thousands)

 

 

 

Beazer Homes
USA, Inc.

 

Guarantor
Subsidiaries

 

Beazer
Mortgage
Corp. (a)

 

Non-Guarantor
Subsidiaries

 

Eliminating
Entries

 

Consolidated
Beazer Homes
USA, Inc.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total revenue

 

$

 

$

899,347

 

$

10,867

 

$

1,613

 

$

 

$

911,827

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Costs and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

Home construction and land sales

 

20,389

 

680,396

 

 

 

(4,430

)

696,355

 

Selling, general and administrative

 

 

95,548

 

8,624

 

422

 

 

104,594

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating income (loss)

 

(20,389

)

123,403

 

2,243

 

1,191

 

4,430

 

110,878

 

Equity in loss of unconsolidated joint ventures

 

 

(102

)

 

 

 

(102

)

Other income, net

 

 

2,564

 

 

 

 

2,564

 

Income (loss) before income taxes

 

(20,389

)

125,865

 

2,243

 

1,191

 

4,430

 

113,340

 

Provision for income taxes

 

(7,850

)

48,458

 

863

 

459

 

1,706

 

43,636

 

Equity in income of subsidiaries

 

82,243

 

 

 

 

(82,243

)

 

Net income

 

$

69,704

 

$

77,407

 

$

1,380

 

$

732

 

$

(79,519

)

$

69,704

 

 

20



 

Beazer Homes USA, Inc.

Condensed Consolidating Statement of Cash Flows

Three Months Ended December 31, 2005

(in thousands)

 

 

 

Beazer Homes
USA, Inc.

 

Guarantor
Subsidiaries

 

Beazer
Mortgage
Corp. (a)

 

Non-Guarantor
Subsidiaries

 

Consolidated
Beazer Homes
USA, Inc.

 

Net cash (used in)/provided by operating activities

 

$

(91,331

)

$

(196,230

)

$

202

 

$

2,184

 

$

(285,175

)

 

 

 

 

 

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

 

 

 

Capital expenditures

 

 

(4,581

)

(151

)

 

(4,732

)

Investments in unconsolidated joint ventures

 

 

(19,528

)

 

 

(19,528

)

Distributions from unconsolidated joint ventures

 

 

1,280

 

 

 

1,280

 

Net cash used in investing activities

 

 

(22,829

)

(151

)

 

(22,980

)

 

 

 

 

 

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

 

 

 

 

 

Net change in book overdraft

 

32,396

 

 

 

 

32,396

 

Treasury stock purchases

 

(67,005

)

 

 

 

(67,005

)

Repayment of other notes payable

 

 

(329

)

 

 

(329

)

Borrowings under revolving credit facility

 

164,000

 

 

 

 

164,000

 

Repayment of revolving credit facility

 

(114,000

)

 

 

 

(114,000

)

Proceeds from stock option exercises

 

6,082

 

 

 

 

6,082

 

Tax benefit from stock transactions

 

6,169

 

 

 

 

6,169

 

Dividends paid

 

(4,107

)

 

 

 

(4,107

)

Advances to/from subsidiaries

 

(208,978

)

211,247

 

(140

)

(2,129

)

 

Net cash provided/(used) by financing activities

 

(185,443

)

210,918

 

(140

)

(2,129

)

23,206

 

(Decrease)/increase in cash and cash equivalents

 

(276,774

)

(8,141

)

(89

)

55

 

(284,949

)

Cash and cash equivalents at beginning of period

 

386,423

 

(90,238

)

230

 

683

 

297,098

 

Cash and cash equivalents at end of period

 

$

109,649

 

$

(98,379

)

$

141

 

$

738

 

$

12,149

 

 

21



 

Beazer Homes USA, Inc.

Condensed Consolidating Statement of Cash Flows

Three Months Ended December 31, 2004

(in thousands)

 

 

 

Beazer Homes
USA, Inc.

 

Guarantor
Subsidiaries

 

Beazer
Mortgage
Corp. (a)

 

Non-Guarantor
Subsidiaries

 

Consolidated
Beazer Homes
USA, Inc.

 

Net cash provided by/(used in) operating activities

 

$

17,210

 

$

(227,961

)

$

(427

)

$

16,197

 

$

(194,981

)

 

 

 

 

 

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

 

 

 

Capital expenditures

 

 

(2,970

)

(136

)

 

(3,106

)

Investments in unconsolidated joint ventures

 

 

(22,231

)

 

 

(22,231

)

Distributions from unconsolidated joint ventures

 

 

192

 

 

 

192

 

Net cash used in investing activities

 

 

(25,009

)

(136

)

 

(25,145

)

 

 

 

 

 

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

 

 

 

 

 

Repayment of other notes payable

 

 

(9,443

)

 

 

(9,443

)

Proceeds from stock option exercises

 

1,180

 

 

 

 

1,180

 

Dividends paid

 

(1,384

)

 

 

 

(1,384

)

Advances to/from subsidiaries

 

(250,524

)

266,881

 

 

(16,357

)

 

Net cash provided/(used) by financing activities

 

(250,728

)

257,438

 

 

(16,357

)

(9,647

)

(Decrease)/increase in cash and cash equivalents

 

(233,518

)

4,468

 

(563

)

(160

)

(229,773

)

Cash and cash equivalents at beginning of period

 

392,110

 

(72,262

)

693

 

339

 

320,880

 

Cash and cash equivalents at end of period

 

$

158,592

 

$

(67,794

)

$

130

 

$

179

 

$

91,107

 

 

22



 

Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

OVERVIEW:

 

Homebuilding:  We design, sell and build single-family homes in the following regions and states:

 

Southeast

 

West

 

Central

 

Mid-Atlantic

 

Midwest

 

 

 

 

 

 

 

 

 

Florida

 

Arizona

 

Texas

 

Maryland / Delaware

 

Indiana

Georgia

 

California

 

 

 

New Jersey

 

Kentucky

Mississippi

 

Colorado

 

 

 

New York

 

Ohio

North Carolina

 

Nevada

 

 

 

Pennsylvania

 

 

South Carolina

 

New Mexico

 

 

 

Virginia / West Virginia

 

Tennessee

 

 

 

 

 

 

 

 

 

We intend, subject to market conditions, to expand in our current markets through focused product expansion and price point diversification and to consider entering new markets either through expansion from existing markets or through acquisitions of established homebuilders.  Our business strategy emphasizes further increasing our market penetration in those markets in which we currently operate most profitably, while continuously reviewing opportunities to curtail or limit investment in less profitable markets.

 

Our homes are designed to appeal to homeowners at various price points across various demographic segments, and are generally offered for sale in advance of their construction.  Our objective is to provide our customers at each price-point with homes that incorporate exceptional value and quality while seeking to maximize our return on invested capital. To achieve this objective, we have developed a business strategy which focuses on the following elements:

 

Geographic Diversity and Growth Markets.  We compete in a large number of geographically diverse markets in an attempt to reduce our exposure to any particular regional economy.  Within these markets, we build homes in a variety of projects.  Our business strategy entails further increasing our market penetration and investing in our most profitable markets.

 

Leverage of National Brand.  Our national branding strategy presents us as one company with one name, one logo, one message and one purpose. We feel that this strengthened, national brand identity better positions us to consistently address the needs of our customers across all of our markets.

 

Leverage Size, Scale and Capabilities to Achieve Optimal Efficiencies.  We have implemented specific profitability initiatives which focus on leveraging our size, scale and capabilities in order to achieve enhanced gross profit and operating profit margins.  These initiatives include:

 

      leveraging our size to create economies of scale in purchasing and construction;

      standardizing best practices and product designs;

      using branding and increased market penetration to maximize efficiency of land use; and

•     leveraging our fixed cost infrastructure by selectively increasing depth and breadth in markets where we have an established presence.

 

Quality Homes at Various Price-Points to Meet the Needs of Increasingly Diverse Homebuyers.  We seek to maximize customer satisfaction by offering homes which incorporate quality materials, distinctive

 

23



 

design features, convenient locations and competitive prices.  During the first quarter of fiscal year 2006, the average sales price of our homes closed was approximately $280,300.  Our product strategy entails addressing the needs of an increasingly diverse profile of buyers as evidenced by demographic trends including, among others, increased immigration, changing profiles of households, the aging of the baby-boomers, and the rise of the echo-boomers (children of the baby-boomers) into the ranks of homeownership.  Our product offering is broken down into the following product categories:

 

Economy.  These homes are targeted primarily at entry-level buyers, are generally 1,500 square feet or less in size, and are intended to meet the needs of those buyers for whom price is the most important factor in the buying decision.

 

Value.  These homes are targeted at entry-level and move-up buyers, generally range from 1,500 to 2,500 square feet in size, and are intended to appeal to buyers who are more interested in style and features, but are still somewhat price-focused.

 

Style.  These homes are targeted at more affluent move-up buyers, are generally greater than 2,500 square feet in size, and are intended to appeal to buyers in the more luxurious segment of the market, who place greater emphasis on style and features.

 

In addition, we also offer homes to the ‘active adult’ segment which are targeted to buyers over 55 years of age, in communities with special amenities.  We offer these homes within the Economy, Value and Style categories described above.  Within each product category, we seek to provide exceptional value and to ensure an enjoyable customer experience.

 

Seasonal and Quarterly Variability:  Our homebuilding operating cycle generally reflects escalating new order activity in the second and third fiscal quarters and increased closings in the third and fourth fiscal quarters.

 

Additional Products and Services for HomebuyersIn order to maximize our profitability and provide our customers with the additional products and services that they desire, we have incorporated design centers and mortgage origination operations into our business.  Recognizing that our customers want to choose certain components of their new home, we offer limited customization through the use of design studios in most of our markets.  These design studios allow the customer to select certain non-structural customizations for their homes such as cabinetry, flooring, fixtures, appliances and wall coverings.  Additionally, recognizing the homebuyer’s desire to simplify the financing process, we originate mortgages on behalf of our customers through our subsidiary Beazer Mortgage Corporation, or Beazer Mortgage. Beazer Mortgage originates, processes and brokers mortgages to third party investors. Beazer Mortgage does not retain or service the mortgages that it brokers. Beginning in the second quarter of fiscal year 2006, Beazer Mortgage will finance certain of our mortgage lending activities under its new warehouse line of credit or from general corporate funds prior to selling the loans and their servicing rights to third-party investors shortly after origination.  We also provide title services to our customers in many of our markets.

 

Critical Accounting Policies:  Some of our critical accounting policies require the use of judgment in their application or require estimates of inherently uncertain matters. Although our accounting policies are in compliance with accounting principles generally accepted in the United States of America, a change in the facts and circumstances of the underlying transactions could significantly change the application of the

 

24



 

accounting policies and the resulting financial statement impact.  Listed below are those policies that we believe are critical and require the use of complex judgment in their application.

 

Inventory Valuation

 

Housing projects and land held for development and sale are stated at cost (including direct construction costs, capitalized indirect costs, capitalized interest and real estate taxes) unless facts and circumstances indicate that the carrying value of the assets may be impaired. We assess these assets for recoverability in accordance with the provisions of Statement of Financial Accounting Standards (“SFAS”) 144, Accounting for the Impairment or Disposal of Long-Lived Assets. SFAS 144 requires that long-lived assets be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets is measured by comparing the carrying amount of an asset to future undiscounted net cash flows expected to be generated by the asset.  If these assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets.

 

These evaluations for impairment are significantly impacted by estimates of revenues, costs and expenses and other factors.  Due to uncertainties in the estimation process, it is reasonably possible that actual results could differ from those estimates.  Our assumptions about future home sales prices and volumes require significant judgment because the residential homebuilding industry is cyclical and is highly sensitive to changes in economic conditions. We continue to evaluate the carrying value of our inventory and, based on historical results, believe that our existing estimation process is accurate and do not anticipate the process to materially change in the future.

 

Goodwill

 

We test goodwill for impairment annually or more frequently if an event occurs or circumstances change that more likely than not reduce the value of a reporting unit below its carrying value. For purposes of goodwill impairment testing, we compare the fair value of each reporting unit with its carrying amount, including goodwill. Each of our operating divisions is considered a reporting unit. The fair value of each reporting unit is determined based on expected discounted future cash flows.   If the carrying amount of a reporting unit exceeds its fair value, goodwill is considered impaired.  If goodwill is considered impaired, the impairment loss to be recognized is measured by the amount by which the carrying amount of the goodwill exceeds implied fair value of that goodwill.

 

Inherent in our fair value determinations are certain judgments and estimates, including projections of future cash flows, the discount rate reflecting the risk inherent in future cash flows, the interpretation of current economic indicators and market valuations and our strategic plans with regard to our operations.  A change in these underlying assumptions would cause a change in the results of the tests, which could cause the fair value of one or more reporting units to be less than their respective carrying amounts.  In addition, to the extent that there are significant changes in market conditions or overall economic conditions or our strategic plans change, it is possible that a future goodwill impairment charge could result, which could have a material effect on our financial position and results of operations.

 

Our goodwill has been assigned to reporting units in different geographic locations.  Therefore, potential goodwill impairment charges resulting from changes in local market and/or local economic conditions or changes in our strategic plans may be isolated to one or a few of our reporting units.   However, our business is concentrated in the homebuilding industry and, as such, a widespread decline in the

 

25



 

homebuilding industry or a significant deterioration of economic conditions could have a negative impact on the estimated fair value of a larger number of our reporting units.

 

While we believe that no impairment existed as of December 31, 2005, future economic or financial developments, including general interest rate increases or poor performance in either the national economy or individual local economies, could lead to impairment of goodwill, prospectively.

 

Homebuilding Revenues and Costs

 

Revenue from the sale of a home is recognized when the closing has occurred and the risk of ownership is transferred to the buyer.  All associated homebuilding costs are charged to cost of sales in the period when the revenues from home closings are recognized.  Homebuilding costs include land and land development costs (based upon an allocation of such costs, including costs to complete the development, or specific lot costs), home construction costs (including an estimate of costs, if any, to complete home construction), previously capitalized indirect costs (principally for construction supervision), capitalized interest and estimated warranty costs.  Sales commissions are included in selling, general and administrative expense when the closing has occurred.  All other costs are expensed as incurred.

 

Warranty Reserves

 

We provide a limited warranty (ranging from one to two years) of workmanship and materials with each of our homes. Such warranty covers defects in plumbing, electrical, heating, cooling and ventilating systems and construction defects. In addition, we provide a limited warranty (generally ranging from a minimum of ten years up to the period covered by the applicable statute of repose) with each of our homes, covering only certain defined construction defects. Since we typically subcontract our homebuilding work to subcontractors who generally provide us with an indemnity and a certificate of insurance prior to receiving payments for their work, many claims relating to workmanship and materials are the primary responsibility of our subcontractors.

 

Warranty reserves are included in other liabilities in the consolidated balance sheets.  We record reserves covering our anticipated warranty expense for each home closed.  Management reviews the adequacy of warranty reserves each reporting period, based on historical experience and management’s estimate of the costs to remediate the claims, and adjusts these provisions accordingly.  Factors that affect our warranty liability include the number of homes sold, historical and anticipated rates of warranty claims, and cost per claim. Based on historical results, we believe that our existing estimation process is accurate and do not anticipate the process to materially change in the future.  Our warranty reserves at December 31, 2005 and September 30, 2005 include accruals for certain moisture intrusion issues.  Our estimation process for such accruals is discussed in Note 8 to the Condensed Consolidated Financial Statements.  While we believe that our warranty reserves at December 31, 2005 are adequate, there can be no assurances that historical data and trends will accurately predict our actual warranty costs or that future developments might not lead to a significant change in the reserve.

 

26



 

RESULTS OF OPERATIONS:

 

The following presents certain operating and financial data for Beazer Homes (dollars in thousands):

 

 

 

Three Months Ended December 31,

 

 

 

2005

 

Change

 

2004

 

Number of new orders, net of cancellations:

 

 

 

 

 

 

 

Southeast region

 

1,564

 

31.3

%

1,191

 

West region

 

1,206

 

(9.3

)

1,329

 

Central region

 

357

 

50.6

 

237

 

Mid-Atlantic region

 

283

 

(44.2

)

507

 

Midwest region

 

462

 

64.4

 

281

 

Total

 

3,872