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Beazer Homes USA Inc. Reports Operating Results (10-Q)
Posted by: gurufocus (IP Logged)
Date: February 9, 2009 10:12PM

Beazer Homes USA Inc. (BZH) filed Quarterly Report for the period ended 2008-12-31. Beazer Homes USA Inc. designs builds and sells single family homes. The company designs homes to appeal primarily to entry-level and first move-uphome buyers. Their objective is to provide customers with homes thatincorporate quality and value. The company's subsidiary Beazer Mortgage originates the mortgages for the company's home buyers. Beazer Homes USA Inc. has a market cap of $40.46 million; its shares were traded at around $1.19 with and P/S ratio of 0.02.

Highlight of Business Operations:

In addition, the size of our Secured Revolving Credit Facility, which has recently been reduced to $250 million, is subject to further reduction to $100 million if our consolidated tangible net worth (defined in the agreement as stockholders’ equity less intangible assets as defined) falls below $250 million. At December 31, 2008, our consolidated tangible net worth for purposes of this covenant was $255 million. If our consolidated tangible net worth falls below $100 million, we would be in default of the Secured Revolving Credit Facility. Under such circumstances, the lenders could terminate the facility, accelerate our obligations thereunder or require us to post cash collateral to support our existing letters of credit. At December 31, 2008, we had letters of credit outstanding of $56.0 million under the Secured Revolving Credit Facility. An acceleration of this facility may also result in cross defaults under our senior notes.

Decreased levels of stockholders’ equity may also trigger our obligations to consummate offers to purchase 10% of our non-convertible senior notes at par if our consolidated tangible net worth is less than $85 million at the end of any two consecutive fiscal quarters. If triggered and fully subscribed, this could result in our having to purchase $134.5 million of notes, based on amounts outstanding at December 31, 2008.

Our cash and cash equivalents at December 31, 2008 was $436.9 million. Although we expect to incur a net loss during the remainder of fiscal 2009, we received cash tax refunds of approximately $168 million in January 2009 which, we believe together with our cash and cash equivalents as of December 31, 2008, cash generated from our operations during the remainder of fiscal 2009 and availability, if any, under our Secured Revolving Credit Facility will be adequate to meet our liquidity needs during fiscal 2009. Additionally, we may be able to reduce our investment in land and homes to generate further liquidity. However, if we are required to fund all of the potential obligations associated with lower levels of stockholders’ equity and joint venture defaults, we would have cash requirements, not including any fines or penalties associated with the government investigations, totaling approximately $275 million which would significantly reduce our overall liquidity.

Gross Profit (Loss). Gross margin for three months ended December 31, 2008 was 5.9% compared to a gross margin of -20.8% for the comparable period of the prior year. Gross margins continued to be negatively impacted by weakness in the homebuilding industry. The increase in gross margin was directly related to non-cash pre-tax inventory impairments and option contract abandonments of $12.7 million for the three months ended December 31, 2008 compared to $168.5 million for the three months ended December 31, 2007. During the quarter ended December 31, 2008, given the significant turmoil in the general economy and the mortgage markets in particular and the general hesitancy of consumers to make a significant investment in a home, we purposefully did not reduce the sales price of homes to increase sales absorptions, and, therefore, impairments for the quarter may not be indicative of an improving trend. In an effort to redeploy assets to more profitable endeavors, we executed several land sales in the comparable period of the prior year. We realized a gain on land sales of $0.2 million and $2.3 million for the three months ended December 31, 2008 and 2007, respectively. Selling, General and Administrative Expense. Selling, general and administrative expense (“SG&A”) totaled $56.2 million in the quarter ended December 31, 2008 and $88.2 million in the quarter ended December 31, 2007. The 36.2% decrease in SG&A expense during the periods presented is primarily related to cost reductions realized as a result of our comprehensive review and realignment of our overhead structure in light of our reduced volume expectations, lower sales commissions from decreased revenues and decreased investigation-related costs and severance costs. SG&A expense for the quarters ended December 31, 2008 and 2007 included $0.9 million and $3.2 million, respectively, in severance costs and $2.2 million and $7.0 million, respectively, of investigation related costs. As of December 31, 2008, we had reduced our overall number of employees by 609 or 32% as compared to December 31, 2007, or a cumulative reduction of 70% since September 30, 2006. In January 2009, in an effort to further manage operating expenses in this challenging environment, we reduced our personnel by an additional 300 employees. We anticipate approximately $4.0 million of severance and other costs related to these January 2009 layoffs.

As a percentage of total revenue, SG&A expenses were 24.2% and 17.6% in the quarters ended December 31, 2008 and 2007, respectively. The increase in SG&A costs as a percentage of total revenue is primarily related to the impact of fixed overhead expenses on reduced revenues. Depreciation and Amortization. Depreciation and amortization (“D&A”) totaled $3.8 million and $6.0 million for the three months ended December 31, 2008 and 2007, respectively. The decrease in D&A during the periods presented is related to reduced spending on model furnishings and sales office improvements as a result of our strategic review of our communities and reduced depreciation related to the consolidation of divisional offices and the discontinuation of our mortgage services in fiscal 2008.

Joint Venture Impairment Charges. As of December 31, 2008, we participated in 19 land development joint ventures in which we had less than a controlling interest. Our 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. As a result of the further deterioration of the housing market in fiscal 2008 and the first quarter of fiscal 2009, we wrote down our investment in certain of our joint ventures reflecting $1.3 million and $12.8 million of impairments of inventory held within those joint ventures during the quarters ended December 31, 2008 and 2007, respectively. If these adverse market conditions continue or worsen, we may have to take further writedowns of our investments in these joint ventures that may have a material adverse effect on our financial position and results of operations.

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BZH is in the portfolios of Bill Miller.


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