UNITED STATESSECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549
FORM 10-Q
Commission File Number 001-12822
BEAZER HOMES USA, INC. (Exact name of registrant as specified in its charter)
(404) 250-3420 (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.
Page 1 of 16 PagesExhibit Index Appears on Page 15
BEAZER HOMES USA, INC.FORM 10-Q
INDEX
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Part I. Financial Information
BEAZER HOMES USA, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (dollars in thousands, except per share data)
See Notes to Condensed Consolidated Financial Statements
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BEAZER HOMES USA, INC. UNAUDITED CONDENSED CONSOLIATED STATEMENTS OF OPERATIONS (in thousands, except per share amounts)
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BEAZER HOMES USA, INC. UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (dollar in thousands)
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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") have been prepared in accordance with generally accepted accounting principles 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 generally accepted accounting principles for complete financial statements. In our opinion, all adjustments (consisting of normal recurring accruals) necessary for a fair presentation have been included in the accompanying condensed financial statements. Certain items in prior period financial statements have been reclassified to conform to the current presentation. For further information, refer to our audited consolidated financial statements incorporated by reference in our Annual Report on Form 10-K for the year ended September 30, 2000.
(2) New Accounting Pronouncement
Effective October 1, 2000 we adopted Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"), as amended. SFAS 133 establishes accounting and reporting standards for derivative instruments and for hedging activities by requiring that all derivatives be recognized in the balance sheet and measured at fair value. Gains or losses resulting from changes in the fair value of derivatives are recognized in earnings or recorded in other comprehensive income, and recognized in the income statement when the hedged item affects earnings, depending on the purpose of the derivatives and whether they qualify for hedge accounting treatment.
Our policy is to designate at inception that derivatives hedge risks associated with specific assets, liabilities, or future commitments and monitor the derivatives to determine if they remain effective hedges. The effectiveness of a derivative as a hedge is based on high correlation between changes in its value and changes in the value of the underlying hedged item. We recognize gains or losses for amounts received or paid when the underlying transaction settles. We do not enter into or hold derivatives for trading or speculative purposes.
On December 22, 2000 we entered into an interest rate swap agreement (the "Swap Agreement") to effectively fix the variable interest rate on our $75 million four-year term loan (Note 6). The Swap Agreement has been designated as a cash flow hedge and accordingly, is reflected at fair value in our consolidated balance sheet and the related loss is deferred in stockholders' equity as other comprehensive loss. Amounts to be received or paid as a result of the Swap Agreement are accrued and recognized as an adjustment to interest related to the designated debt. The net effect of this accounting on our operating results is that interest on the portion of variable-rate debt being hedged is generally recorded based on fixed interest rates. The effect of the Swap Agreement for the quarter ended December 31, 2000 was to record after-tax other comprehensive loss of $72 thousand.
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(3) Inventory
A summary of inventory is as follows (in thousands):
Homes under construction includes homes finished and ready for delivery and homes in various stages of construction. We had 298 completed homes ($46.8 million) and 296 completed homes ($41.8 million) at December 31, 2000 and September 30, 2000, respectively, that were not subject to a sales contract, excluding model homes.
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.
(4) Interest
The following table sets forth certain information regarding interest:
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(5) Earnings Per Share
Basic and diluted earnings per share were calculated as follows (in thousands, except per share amounts):
(6) Term Loan
Effective December 19, 2000 we entered into a new $75 million four-year term loan with a group of banks (the "Term Loan"). The Term Loan matures in December 2004 and bears interest at a fluctuating rate based on LIBOR or the lead bank's corporate base rate of interest. The Term Loan contains various operating and financial covenants. Each of our significant subsidiaries is a guarantor under the Term Loan. The proceeds from the Term Loan were used to pay down then outstanding borrowings under our $250 million revolving credit facility.
As discussed in Note 2, we entered into the Swap Agreement on December 22, 2000, to manage interest costs and hedge against risks associated with fluctuating interest rates. We effectively fixed the rate of the Term Loan at 7.55% by hedging it with the Swap Agreement.
(7) Treasury Stock Repurchase Program
In November 1999, our Board of Directors approved a stock repurchase plan authorizing the purchase of up to 500,000 shares of our outstanding common stock. During the first two quarters of fiscal 2000, we completed the plan and repurchased 500,000 shares on the open market for an aggregate purchase price of $9.2 million (average price of $18.38 per share).
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BEAZER HOMES USA, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations
OVERVIEW:
Homebuilding: We design, build and sell single-family homes in the following regions and states:
We intend, subject to market conditions, to expand in our current markets and to consider entering new markets either through expansion from existing markets or through acquisitions of established regional homebuilders. We seek to be one of the five largest builders in each of the markets that we serve.
Most of our homes are designed to appeal to entry-level and first time move-up homebuyers, and are generally offered for sale in advance of their construction. Once a sales contract has been signed, we classify the transaction as a "new order." Such sales contracts are usually subject to certain contingencies such as the buyer's ability to qualify for financing. Homes covered by these sales contracts are considered "backlog." We do not recognize revenue on homes in backlog until the sales are closed and the risk of ownership has been transferred to the buyer.
Ancillary Businesses: We have established several businesses to support our core homebuilding operations. We operate design centers in the majority of our markets. Through design centers, homebuyers can choose non-structural upgrades and options for their new home. We also provide mortgage origination services for our homebuyers through Beazer Mortgage Corp. Beazer Mortgage originates, processes and sells mortgages to third party investors. Beazer Mortgage does not retain or service the mortgages that it originates. We also provide title services and homeowners' and other insurance in many of our markets. We will continue to evaluate opportunities to provide other ancillary services to our homebuyers.
Value Created: We evaluate our financial performance using Value Created, a variation of economic profit or economic value added. Value Created measures the extent to which we exceed our cost of capital. Most of our employees receive incentive compensation based upon a combination of Value Created and the change in Value Created. We believe that our Value Created system encourages managers to act like owners, rewards profitable growth and focuses attention on long-term loyalty and performance.
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The following presents certain operating and financial data for Beazer (dollars in thousands):
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New Orders and Backlog: New orders increased by 19% during the three month period ended December 31, 2000, with only a 6% increase in the number of active subdivisions at December 31, 2000. The increase reflects order strength in all four of our regions. We believe that the increase in new orders in our markets benefited from the reduction of mortgage interest rates and three other significant factors. These factors are strong population growth, especially in markets we serve, gains in market share by large, public homebuilders, and the benefits of the internet, which increasing numbers of homebuyers are actively using in their home purchase process. Demand was especially strong in our Central region where we have increased our presence in the first-time buyer segment.
The aggregate dollar value of homes in backlog at December 31, 2000 increased 21% from December 31, 1999, reflecting an 18% increase in the number of homes in backlog and a 3% increase in the average price of homes in backlog, from $192,400 at December 31, 1999 to $198,500 at December 31, 2000. The increased average price of homes in backlog reflects our continued ability to raise prices in most of our markets, as well as increased sales of options and upgrades on homes through our design centers.
The following table provides additional details of revenues and certain expenses and shows certain items expressed as a percentage of certain components of revenues (dollars in thousands):
Revenues: Revenues increased by 18% for the three months ended December 31, 2000 compared to the same period in the prior year, reflecting a 4% increase in the average sales price of homes closed
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and a 14% increase in the number of homes closed. We also experienced an increase in mortgage origination revenue.
Cost of Home Construction: The cost of home construction as a percentage of home sales decreased for the three months ended December 31, 2000, compared to the same period of the prior year, as a result of our ability to both raise prices and reduce costs. In addition the increase in our sales of options and upgrades has contributed to the improvement in gross profit margin. Such options and upgrades generally have gross margins approximately double that of our base homes.
Selling, General and Administrative Expense: Our selling, general and administrative ("SG&A") expense decreased as a percentage of total revenues for the three months ended December 31, 2000, compared to the same period of the prior year, as a result of higher revenues, giving us greater leverage and operating efficiency on the fixed portion of such expense.
Mortgage Origination Operations: Revenues increased for Beazer Mortgage during the three months ended December 31, 2000, compared to the same period of the prior year, primarily as a result of the increase in homebuilding revenues.
Investment in Unconsolidated Joint Venture: We have a non-controlling 49% interest in Premier Communities, a joint venture with Corporacion GEO S.A. de C.V., a Mexican homebuilder, to build affordable housing in the United States. The joint venture has experienced losses since its inception in 1997 and is now in the process of winding down. During fiscal 2000 we recognized charges to write-off our remaining, impaired investment in the joint venture and to record our expected obligation to fund certain of the letters of credit we have issued to guarantee our share of the outstanding indebtedness of the joint venture. Other expense includes our share of the joint venture's operating losses of $1.3 million for the three months ended December 31, 1999. At December 31, 2000 we had $2.7 million accrued for the winding down of the joint venture. We currently do not expect to record further charges relating to the winding down of the joint venture in the future.
Income Taxes: Our effective income tax rate was 39.0% for both the three month periods ended December 31, 2000 and December 31, 1999.
New Accounting Pronouncement: Effective October 1, 2000 we adopted Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"), as amended. SFAS 133 establishes accounting and reporting standards for derivative instruments and for hedging activities by requiring that all derivatives be recognized in the balance sheet and measured at fair value. Gains or losses resulting from changes in the fair value of derivatives are recognized in earnings or recorded in other comprehensive income, and recognized in the income statement when the hedged item affects earnings, depending on the purpose of the derivatives and whether they qualify for hedge accounting treatment.
Our policy is to designate at inception that derivatives hedge risks associated with specific assets, liabilities, or future commitments and monitor the derivatives to determine if they remain effective hedges. The effectiveness of a derivative as a hedge is based on high correlation between changes in its value and changes in the value of the underlying hedged item. We recognize gains or losses for amounts received or paid when the underlying transaction settles. We do not enter or hold derivatives for trading or speculative purposes.
On December 22, 2000 we entered into an interest rate swap agreement (the "Swap Agreement") to effectively fix the variable interest rate on our $75 million four-year term loan (Note 6). The Swap Agreement has been designated as a cash flow hedge and accordingly, is reflected at fair value in our consolidated balance sheet and the related loss is deferred in stockholders' equity as other comprehensive loss. Amounts to be received or paid as a result of the Swap Agreement are accrued and recognized as an adjustment to interest related to the designated debt. The net effect of this accounting on our operating results is that interest on the portion of variable-rate debt being hedged is
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generally recorded based on fixed interest rates. The effect of the Swap Agreement for the quarter ended December 31, 2000 was to record after-tax other comprehensive loss of $72 thousand.
FINANCIAL CONDITION AND LIQUIDITY:
We fulfill our short-term cash requirements with cash generated from operations and unused funds available from an unsecured revolving credit facility (the "Credit Facility") with a group of banks. In December 1999, we amended the Credit Facility, adding two banks (now eight banks) and increasing the facility from $200 million to $250 million. Available borrowings under the facility are limited to certain percentages of homes under contract, unsold homes, substantially improved lots, raw land and accounts receivable. At December 31, 2000, we had $20 million outstanding and additional available borrowings of $140 million under the Credit Facility.
Effective December 19, 2000 we entered into a new $75 million four-year term loan with a group of banks. The Term Loan matures in December 2004 and bears interest at a fluctuating rate based on LIBOR or the lead bank's corporate base rate of interest. The Term Loan contains various operating and financial covenants. Each of our significant subsidiaries is a guarantor under the Term Loan. The proceeds from the Term Loan were used to pay down then outstanding borrowings under our $250 million revolving credit facility.
We have $215 million of outstanding senior debt, which is comprised of $100 million of 87/8% Senior Notes due in April 2008 and $115 million of 9% Senior Notes due in March 2004 (collectively, the "Senior Notes"). All of our significant subsidiaries are guarantors of the Senior Notes and are jointly and severally liable for obligations under the Senior Notes. Separate financial statements and other disclosures concerning each of the significant subsidiaries are not included, as the aggregate assets, liabilities, earnings and equity of the subsidiaries equal such consolidated amounts and separate subsidiary financial statements are not considered material to investors. The total assets, revenues and operating profit of the non-guarantor subsidiaries are in the aggregate immaterial on a consolidated basis. Neither the Credit Facility, Term Loan nor the Senior Notes restrict distributions to Beazer Homes USA, Inc. by its subsidiaries.
We have utilized, and will continue to utilize, land options as a method of controlling and subsequently acquiring land. At December 31, 2000, we had 14,876 lots under option. At December 31, 2000, we had commitments with respect to option contracts with specific performance obligations of approximately $25 million. We expect to exercise all of our option contracts with specific performance obligations and, subject to market conditions, substantially all of our options contracts without specific performance obligations.
In January 2000, we filed a $300 million universal shelf registration statement on Form S-3 with the Securities and Exchange Commission. Pursuant to the filing, the Company may, from time to time over an extended period, offer new debt and/or equity securities. This shelf registration will allow the Company to expediently access capital markets periodically in the future. The timing and amount of offerings, if any, will depend on market and general business conditions.
We believe that our current borrowing capacity, together with anticipated cash flows from operations, is sufficient to meet liquidity needs for the foreseeable future. There can be no assurance, however, that amounts available in the future from our sources of liquidity will be sufficient to meet future capital needs. The amount and types of indebtedness that we may incur may be limited by the terms of the Indenture governing our Senior Notes, Term Loan and Credit Facility. We continually evaluate expansion opportunities through acquisition of established regional homebuilders and such
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opportunities may require us to seek additional capital in the form of equity or debt financing from a variety of potential sources, including additional bank financing and/or securities offerings.
OUTLOOK:
We are optimistic about our prospects for fiscal 2001 and confident about our long-term prospects. We understand the uncertainties surrounding the economy may reduce this optimism in the future. At this time, however, our increased earnings for the three months ended December 31, 2000 and our current higher level of backlog give us strong indications of increased earnings in fiscal 2001 compared to fiscal 2000. We believe that our earnings per share for fiscal 2001 are likely to be in the $6.25 to $6.50 range, up 24% to 29% over fiscal 2000. In addition, we believe that the factors we discussed earlier (positive demographic trends, gains in market share by larger public homebuilders and the benefits of the internet) will allow us to continue to report increased earnings in fiscal 2002 and beyond. Our five-year plan, introduced in fiscal 1999, targets delivering 15,000 home closings and earning $9.00 per diluted share by fiscal 2004.
Cautionary Statement Pursuant to Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995:
This quarterly report on Form 10-Q contains "forward-looking statements" within the meaning of the federal securities laws. These forward-looking statements include, among others, statements concerning the Company's outlook for future quarters including projected earnings per share for fiscal 2001, overall and market specific volume trends, pricing trends and forces in the industry, cost reduction strategies and their results, the Company's expectations as to funding its capital expenditures and operations during 2001, and other statements of expectations, beliefs, future plans and strategies, anticipated events or trends, and similar expressions concerning matters that are not historical facts. The forward-looking statements in this report are subject to risks and uncertainties that could cause actual results to differ materially from those expressed in or implied by the statements. The most significant factors that could cause actual results to differ materially from those expressed in the forward-looking statements include, but are not limited to, the following:
Item 3: Quantitative and Qualitative Disclosures About Market Risk
We entered into the Swap Agreement on December 22, 2000, to manage interest costs and hedge against risks associated with fluctuating interest rates with respect to our $75 million term loan maturing in December 2004. We do not enter into or hold derivatives for trading or speculative purposes.
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PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
On February 1, 2001, we held our annual meeting of shareholders. At the annual meeting, the shareholders elected seven members to the Board of Directors to serve until the next annual meeting. The results of voting were as follows (based on 8,202,787 outstanding shares entitled to vote):
Election of Directors
Item 6. Exhibits and Reports on Form 8-K
10.12 Second Amended and Restated Credit Agreement dated as of December 29, 1999 between the Company and Bank One, NA, as Agent, and Comerica Bank and Guaranty Federal Bank, F.S.B as Managing Agents (filed herewith)
10.13 1999 Stock Incentive Plan (filed herewith).
10.14 Employment Agreement effective as of November 7, 2000—C. Lowell Ball (filed herewith).
10.15 Change of Control Agreement effective as of November 7, 2000-C. Lowell Ball (filed herewith).
On December 29, 2000 we filed a form 8-K related to our new $75 million four-year term loan.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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