News Column

BEAZER HOMES USA INC - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations Executive Overview and Outlook

January 31, 2014

Executive Overview and Outlook: The fundamentals of the homebuilding industry remain favorable, despite some softening in demand in recent months. We believe that this leveling of demand will prove temporary as homebuyers adjust to the prospects of higher monthly payments due to increased home prices and mortgage rates, especially since new home ownership still provides value compared to renting and in relation to incomes. In November 2013 , we introduced our multi-year "2B-10" plan, which provides our expected roadmap to achieve $2 billion in revenue with a 10% Adjusted EBITDA margin. Reaching these objectives depends primarily on our ability to grow our active community count, increase sales per community per month, raise our average selling prices (ASP) and expand homebuilding gross margins, all while keeping a tight watch on costs as a percentage of revenue. We anticipate achieving the objectives outlined in the "2B-10" plan in the next 2 to 3 years. During the first quarter of fiscal 2014, we made improvements on all of our "2B-10" metrics. We continued our resolute land acquisition efforts during the quarter in an effort to grow our community count in future quarters. For the quarter ended December 31, 2013 , we spent $123.8 million on land and land development and moved $3.4 million of land from Land Held For Future Development to active development. A significant majority of this land, as well as the land that we purchased during fiscal 2013, requires development and will become active either later in fiscal 2014 or in fiscal 2015. As a result, our active community count at the end of December 2013 increased only slightly over September 30, 2013 but was down 9% compared with a year ago. Despite a year-over-year decline in active community count, our sales per active community per month improved from 2.1 during the first quarter of fiscal 2013 to 2.2 this quarter. ASP also rose during the quarter to $279,300 , up 18.6% over the first quarter of fiscal 2013. Homebuilding gross margins excluding impairments, abandonments and interest improved 310 basis points to 21.2% for our fiscal first quarter. And selling, general and administrative expenses improved to 13.7% of revenue this quarter from 15.0% for the same period last year. We expect to focus on our 2B-10 plan during fiscal 2014, and based on our current expectations of the housing market and general economic conditions, we continue to believe that fiscal 2014 will be the Company's first full year of profitability since fiscal 2006. Critical Accounting Policies: Some of our critical accounting policies require the use of judgment in their application or require estimates of inherently uncertain matters. Although our accounting policies are in compliance with accounting principles generally accepted in the United States of America (GAAP), a change in the facts and circumstances of the underlying transactions could significantly change the application of the accounting policies and the resulting financial statement impact. As disclosed in our 2013 Annual Report, our most critical accounting policies relate to inventory valuation (inventory held for development and land held for sale), homebuilding revenues and costs, warranty reserves, investments in unconsolidated entities and income tax valuation allowances. Since September 30, 2013 , there have been no significant changes to those critical accounting policies. Seasonal and Quarterly Variability: Our homebuilding operating cycle generally reflects escalating new order activity in the second and third fiscal quarters and increased closings in the third and fourth fiscal quarters. 28 -------------------------------------------------------------------------------- Table of Contents RESULTS OF CONTINUING OPERATIONS: Three Months Ended December 31, ($ in thousands) 2013 2012 Revenues: Homebuilding $ 289,958 $ 244,425 Land sales and other 3,212 2,477 Total $ 293,170 $ 246,902 Gross profit: Homebuilding $ 54,450 $ 35,630 Land sales and other 220 454 Total $ 54,670 $ 36,084 Gross margin: Homebuilding 18.8 % 14.6 % Land sales and other 6.8 % 18.3 % Total 18.6 % 14.6 % Commissions $ 11,821 $ 10,642 General and administrative expenses (G&A) $ 28,410 $ 26,328 SG&A (commissions plus G&A) as a percentage of total revenue 13.7 % 15.0 % G&A as a percentage of total revenue 9.7 % 10.7 % Depreciation and amortization $ 2,907 $ 2,715 Operating income (loss) $ 11,532 $ (3,601 ) Operating income (loss) as a percentage of total revenue 3.9 % (1.5 )% Effective Tax Rate (1.1 )% 1.3 % Equity in income of unconsolidated entities $ 319 $ 36 Homebuilding Operations Data Three Months Ended December 31, New Orders, net Cancellation Rates 2013 2012 13 v 12 2013 2012 West 351 424 (17.2 )% 21.1 % 29.6 % East 308 309 (0.3 )% 22.2 % 25.7 % Southeast 236 199 18.6 % 22.4 % 19.8 % Total 895 932 (4.0 )% 21.8 % 26.4 % Sales per active community per month increased approximately 5% to 2.2 for the quarter ended December 31, 2013 from 2.1 for the quarter ended December 31, 2012 as we balanced our absorption rates with the desire to capture additional margin. As expected and communicated in prior quarters, our average active communities for the quarter ended December 31, 2013 was up slightly compared to the quarter ended September 30, 2013 , but decreased 9% as compared to the prior year, driving the 4.0% decline in net new orders year-over-year. We anticipate that our active community count will increase later in fiscal 2014 as recently purchased land and communities under development become active. Our West segment was especially impacted by the lower average active communities for the quarter, experiencing a 20% decline from the prior year while our Southeast segment experienced a 10% increase driven by new community openings in certain markets. 29 -------------------------------------------------------------------------------- Table of Contents As of December 31, 2013 2012 13 v 12 Backlog Units: West 654 764 (14.4 )% East 631 703 (10.2 )% Southeast 465 350 32.9 % Total 1,750 1,817 (3.7 )% Aggregate dollar value of homes in backlog (in millions) $ 500.0 $ 478.3 4.5 % ASP in backlog (in thousands) $ 285.7 $ 263.2 8.5 % Backlog above reflects the number of homes for which the Company has entered into a sales contract with a customer but has not yet delivered the home. Our backlog may be impacted in the short-term due to our reduced number of active communities or by increased cycle times due to labor and/or supply shortages. During the housing downturn, many skilled workers left construction for other industries, and in certain of our markets, the smaller workforce and higher demand for trade labor has created shortages of certain skilled workers, driving up costs and/or extending land development and home construction schedules. Our ending unit backlog as of December 31, 2013 was impacted by our expected decrease in active communities. We expect new orders and backlog units to increase over time as our active communities increase. Homebuilding Revenues and Average Selling Price The table below summarizes homebuilding revenues, the average selling prices (ASP) of our homes and closings by reportable segment: Three Months Ended December 31, Homebuilding Revenues Average Selling Price Closings ($ in thousands) 2013 2012 13 v 12 2013 2012 13 v 12 2013 2012 13 v 12 West $ 120,212 $ 109,753 9.5 % $ 276.3 $ 219.9 25.6 % 435 499 (12.8 )% East 106,879 96,464 10.8 % 316.2 273.3 15.7 % 338 353 (4.2 )% Southeast 62,867 38,208 64.5 % 237.2 205.4 15.5 % 265 186 42.5 % Total $ 289,958 $ 244,425 18.6 % $ 279.3 $ 235.5 18.6 % 1,038 1,038 - % Improved operational strategies, product mix and market conditions in our markets enhanced our ability to generate higher ASP. We have been able to modestly increase prices or reduce incentives in response to market conditions in the majority of our markets in our West segment and to a lesser extent in select markets or communities in our East and Southeast segments. The increase in ASP for the three months ended December 31, 2013 was also impacted by a change in mix in closings between products and among communities as compared to the prior year. 30 -------------------------------------------------------------------------------- Table of Contents Homebuilding Gross Profit The following table sets forth our homebuilding gross profit and gross margin by reportable segment and total homebuilding gross profit and gross margin, and such amounts excluding inventory impairments and abandonments and interest amortized to cost of sales for the three months ended December 31, 2013 and 2012. Homebuilding gross profit is defined as homebuilding revenues less home cost of sales (which includes land and land development costs, home construction costs, capitalized interest, indirect costs of construction, estimated warranty costs, closing costs and inventory impairment and lot option abandonment charges). ($ in thousands) Three Months Ended December 31, 2013 Impairments & HB Gross HB Gross Interest HB Gross Profit HB Gross Margin HB Gross HB Gross Abandonments Profit w/o Margin w/o Amortized to w/o I&A and w/o I&A and Profit (Loss) Margin (I&A) I&A I&A COS Interest Interest West $ 27,798 23.1 % $ - $ 27,798 23.1 % $ - $ 27,798 23.1 % East 19,416 18.2 % 31 19,447 18.2 % - 19,447 18.2 % Southeast 12,533 19.9 % - 12,533 19.9 % - 12,533 19.9 % Corporate & unallocated (5,297 ) - (5,297 ) 7,135 1,838 Total homebuilding $ 54,450 18.8 % $ 31 $ 54,481 18.8 % $ 7,135 $ 61,616 21.2 % ($ in thousands) Three Months Ended December 31, 2012 Impairments & HB Gross HB Gross Interest HB Gross Profit HB Gross Margin HB Gross HB Gross Abandonments Profit w/o Margin w/o Amortized to w/o I&A and w/o I&A and Profit (Loss) Margin (I&A) I&A I&A COS Interest Interest West $ 19,653 17.9 % $ 120 $ 19,773 18.0 % $ - $ 19,773 18.0 % East 16,969 17.6 % 35 17,004 17.6 % - 17,004 17.6 % Southeast 6,967 18.2 % 49 7,016 18.4 % - 7,016 18.4 % Corporate & unallocated (7,959 ) - (7,959 ) 8,475 516 Total homebuilding $ 35,630 14.6 % $ 204 $ 35,834 14.7 % $ 8,475 $ 44,309 18.1 % Our overall homebuilding gross profit increased to $54.5 million for the three months ended December 31, 2013 from $35.6 million in the prior year. The increase was due primarily to improved operational efficiencies and improved market conditions in many of our markets which enabled us to increase prices and decrease sales incentives offered to homebuyers partially offset by increases in material, labor and land costs in certain of our markets. For the three months ended December 31, 2013 , the $18.8 million increase in homebuilding gross profit was due primarily to the 18.6% increase in homebuilding revenues, driven by an 18.6% increase in ASP and a $1.3 million decrease in interest amortized to cost of sales, offset partially by increases in material and labor costs. Total homebuilding gross profit and gross margin excluding inventory impairments and abandonments and interest amortized to cost of sales are not GAAP financial measures. These measures should not be considered alternatives to homebuilding gross profit determined in accordance with GAAP as an indicator of operating performance. The magnitude and volatility of non-cash inventory impairment and abandonment charges for the Company, and for other home builders, have been significant in recent periods and, as such, have made financial analysis of our industry more difficult. Homebuilding metrics excluding these charges, and other similar presentations by analysts and other companies, is frequently used to assist investors in understanding and comparing the operating characteristics of home building activities by eliminating many of the differences in companies' respective level of impairments and levels of debt. Management believes these non-GAAP measures enable holders of our securities to better understand the cash implications of our operating performance and our ability to service our debt obligations as they currently exist and as additional indebtedness is incurred in the future. These measures are also useful internally, helping management compare operating results and as a measure of the level of cash which may be available for discretionary spending. In a given quarter, our reported gross margins arise from both communities previously impaired and communities not previously impaired. In addition as indicated above, certain gross margin amounts arise from recoveries of prior period costs, including warranty items that are not directly tied to communities generating revenue in the period. Home closings from communities previously impaired would, in most instances, generate very low or negative gross margins prior to the impact of the previously recognized impairment. Gross margins at each home closing are higher for a particular community after an impairment because the carrying value of the underlying land was previously reduced to the present value of future cash flows as a result of the impairment, leading to lower cost of sales at the home closing. This improvement in gross margin resulting from one or more prior impairments is frequently referred to in the aggregate as the "impairment turn" or "flow-back" of impairments within the reporting period. The amount of this impairment turn may exceed the gross margin for an individual impaired asset if the gross margin for 31 -------------------------------------------------------------------------------- Table of Contents that asset prior to the impairment would have been negative. The extent to which this impairment turn is greater than the reported gross margin for the individual asset is related to the specific historical cost basis of that individual asset. The asset valuations which result from our impairment calculations are based on discounted cash flow analyses and are not derived by simply applying prospective gross margins to individual communities. As such, impaired communities may have gross margins that are somewhat higher or lower than the gross margin for unimpaired communities. The mix of home closings in any particular quarter varies to such an extent that comparisons between previously impaired and never impaired communities would not be a reliable way to ascertain profitability trends or to assess the accuracy of previous valuation estimates. In addition, since any amount of impairment turn is tied to individual lots in specific communities it will vary considerably from period to period. As a result of these factors, we review the impairment turn impact on gross margins on a trailing 12-month basis rather than a quarterly basis as a way of considering whether our impairment calculations are resulting in gross margins for impaired communities that are comparable to our unimpaired communities. For the trailing 12-month period, the homebuilding gross margin from our continuing operations was 17.4% and excluding interest and inventory impairments, it was 20.6%. For the same trailing 12-month period, homebuilding gross margins were as follows in those communities that have previously been impaired and which represented 22.7% of total closings during this period: Homebuilding Gross Margin from previously impaired communities: Pre-impairment turn gross margin (1.2 )% Impact of interest amortized to COS related to these communities 3.4 % Pre-impairment turn gross margin, excluding interest amortization 2.2 % Impact of impairment turns 18.8 % Gross margin (post impairment turns), excluding interest amortization 21.0 % Land Sales and Other Revenues and Gross Profit. The table below summarizes land sales and other revenues and gross profit by reportable segment for the three months ended December 31, 2013 and 2012: Land Sales & Other Revenues Land Sales and Other Gross Profit Three Months Ended December 31, Three Months Ended December 31, (In thousands) 2013 2012 13 v 12 2013 2012 13 v 12 West $ 2,364 $ 373 533.8 % $ 75 $ 23 226.1 % East 710 75 846.7 % 7 7 - % Southeast 138 2,029 (93.2 )% 138 424 (67.5 )% Total $ 3,212 $ 2,477 29.7 % $ 220 $ 454 (51.5 )% Land sales relate to land and lots sold that did not fit within our homebuilding programs and strategic plans in these markets. Other revenues include net fees we received for general contractor services we performed on behalf of a third party and broker fees. Operating Income. The table below summarizes operating income (loss) by reportable segment for the three months ended December 31, 2013 and 2012: (In thousands) Three Months Ended December 31, 2013 2012 13 v 12 West $ 15,762 $ 8,358 $ 7,404 East 8,235 6,188 2,047 Southeast 5,628 2,330 3,298 Corporate and Unallocated (18,093 ) (20,477 ) 2,384 Operating Income (Loss) $ 11,532 $ (3,601 ) $ 15,133 Our operating income improved by $15.1 million to $11.5 million for the three months ended December 31, 2013 , compared to an operating loss of $3.6 million in fiscal 2013. This improvement reflects higher homebuilding gross profits and decreased general and administrative expenses as a percentage of revenue, as we were able to better leverage our fixed costs with the increased revenue. As a percentage of revenue, our operating income (loss) was 3.9% for the three months ended December 31, 2013 compared to -1.5% for the comparable period of fiscal 2013. The year-over-year improvement reflects operational efficiencies and modest market improvements. 32 -------------------------------------------------------------------------------- Table of Contents Income taxes. Our income tax assets and liabilities and related effective tax rate are affected by various factors, the most significant of which is the valuation allowance recorded against substantially all of our deferred tax assets. Due to the effect of our valuation allowance adjustments beginning in fiscal 2008, a comparison of our annual effective tax rates must consider the changes in our valuation allowance. Our overall effective tax rates from continuing operations were -1.1% for the three months ended December 31, 2013 , compared to 1.3% for the three months ended December 31, 2012 . The tax benefit recognized during the three months ended December 31, 2012 , and the related effective tax rate primarily reflected our release of the estimated liability for previously uncertain tax positions. Three months ended December 31, 2013 as compared to 2012 West Segment: Homebuilding revenues increased 9.5% for the three months ended December 31, 2013 , compared to the prior year, due to an increase in ASP in the majority of our markets offset partially by decreased closings. The 12.8% decrease in the number of closings was primarily driven by a 12% lower beginning backlog and a 20% decline in average active communities for the quarter ended December 31, 2013 . As compared to the prior year, our homebuilding gross profit increased $8.1 million and homebuilding gross margins increased from 17.9% to 23.1% primarily due to decreased incentives, product mix and modest price appreciation in most of our submarkets in the West which enabled us to better absorb increases in direct material, labor and land costs. The increase in land costs is primarily attributable to a product and community mix including a shift to newer communities in certain markets. The $7.4 million increase in operating income resulted from the aforementioned increase in homebuilding gross margins. East Segment: Homebuilding revenues increased 10.8% for the three months ended December 31, 2013 , compared to the prior year, primarily due to a 15.7% increase in ASP. Closings were down slightly compared to the prior year driven by the expected decrease in active communities. Sales per active community were relatively flat year-over-year in the East Segment. As compared to the prior year, our homebuilding gross profit increased $2.4 million and homebuilding gross margins increased from 17.6% to 18.2% primarily due to changes in product mix and our ability to raise prices to offset increases in material, labor and land costs. The $2.0 million increase in operating income resulted from the aforementioned increase in homebuilding gross margins. Southeast Segment: As compared to the prior year, our homebuilding gross profit in the Southeast Segment increased $5.6 million driven primarily by a 64.5% increase in homebuilding revenues, offset partially by increases in material, labor and land costs. The 10% increase in average active communities and improving market conditions contributed to this increased revenue, a 42.5% increase in closings and a 15.5% increase in ASP. Homebuilding gross margins increased from 18.2% to 19.9%. Our fiscal 2014 and fiscal 2013 land sales and other revenue and gross profit in our Southeast Segment include net fees received for general contractor services we performed on behalf of a third party. The $3.3 million increase in operating income resulted from the aforementioned increase in homebuilding gross profit offset by a $1.4 million increase in commissions and general and administrative expenses related to the increase in homebuilding revenues and active communities, respectively. Corporate and Unallocated: Corporate and unallocated includes amortization of capitalized interest and numerous shared services functions that benefit all segments, including information technology, national sourcing and purchasing, treasury, corporate finance, legal, branding and other national marketing costs. The costs of these shared services are not allocated to the operating segments. Corporate and unallocated charges included in operating income increased slightly from the prior year due to an increase in personnel related expenses including an increase in headcount and variable compensation plans related to our actual and anticipated revenue growth offset partially by a $1.3 million decrease in interest amortized to cost of sales. The decrease in interest amortized to cost of sales is the result of a decrease in inventory capitalized per unit. Derivative Instruments and Hedging Activities. We are exposed to fluctuations in interest rates. From time to time, we enter into derivative agreements to manage interest costs and hedge against risks associated with fluctuating interest rates. As of December 31, 2013 , we were not a party to any such derivative agreements. We do not enter into or hold derivatives for trading or speculative purposes. Liquidity and Capital Resources. Our sources of liquidity include, but are not limited to, cash from operations, proceeds from Senior Notes, our Secured Revolving Credit Facility, and other bank borrowings, the issuance of equity and equity-linked securities and other external sources of funds. Our short-term and long-term liquidity depends primarily upon our level of net income, working capital management (cash, accounts receivable, accounts payable and other liabilities) and available credit facilities. As of December 31, 2013 , our liquidity position consisted of $382.6 million in cash and cash equivalents, $150 million of capacity under our Secured Revolving Credit Facility, plus $49.2 million of restricted cash, $22.4 million of which related to our cash secured term loan.We expect to be able to meet our liquidity needs in the remainder of fiscal 2014 and to maintain a significant liquidity position, subject to changes in market conditions that would alter our expectations for land and land development expenditures or capital market transactions which could increase or decrease our cash balance on a quarterly basis. 33 -------------------------------------------------------------------------------- Table of Contents We spent $123.8 million on land and land development activities during the three months ended December 31, 2013 , as we continue to strive to replace close out communities and position the Company to increase our active community count. We spent $90.0 million on land and land development for the three months ended December 31, 2012 . This spending on land and land development had a significant impact on our net cash used in operating activities in both years bringing net cash used in operating activities to $113.9 million for the three months ended December 31, 2013 and $87.5 million for the three months ended December 31, 2012 . Also impacting cash used in operations in both years were the payment of accounts payable, other liabilities and interest obligations. Net cash used in investing activities was $5.5 million for the three months ended December 31, 2013 primarily related to capital expenditures for model homes and additional investments in unconsolidated entities. Net cash used in investing activities was $0.1 million for the three months ended December 31, 2012 . Net cash used in financing activities was $2.5 million for the three months ended December 31, 2013 primarily related to principal payments made on the 2015 TEU notes. Net cash used in financing activities was $3.6 million for the three months ended December 31, 2012 primarily related to the repayment of of debt and payment of costs related to our amended credit facility (see Note 7 to the unaudited condensed consolidated financial statements). In September 2013 , Fitch reaffirmed the Company's long-term debt rating of B-. In January 2013 , Moody's increased the Company's long-term debt rating to Caa1. In December 2012 , S&P reaffirmed the Company's long-term debt rating for the Company of B-. In September 2012 , Fitch upgraded its rating of our debt one notch to B-. These ratings and our current credit condition affect, among other things, our ability to access new capital. Negative changes to these ratings may result in more stringent covenants and higher interest rates under the terms of any new debt. Our credit ratings could be lowered or rating agencies could issue adverse commentaries in the future, which could have a material adverse effect on our business, results of operations, financial condition and liquidity. In particular, a weakening of our financial condition, including any further increase in our leverage or decrease in our profitability or cash flows, could adversely affect our ability to obtain necessary funds, could result in a credit rating downgrade or change in outlook, or could otherwise increase our cost of borrowing. We generally fulfill our short-term cash requirements with cash generated from our operations and available borrowings. While we believe we possess sufficient liquidity to participate in a housing recovery, we are mindful of potential short-term, or seasonal, requirements for enhanced liquidity that may arise, especially as we increase our land and land development spending to grow our business. To facilitate this objective, we maintain our Secured Revolving Credit Facility at $150 million . We have also entered into a number of stand-alone, cash secured letter of credit agreements with banks. These combined facilities will provide for letter of credit needs collateralized by either cash or assets of the Company. We currently have $24.7 million outstanding letters of credit under these facilities, secured with cash collateral which is maintained in restricted accounts totaling $25.9 million . In the future, we may from time to time seek to continue to retire or purchase our outstanding debt through cash repurchases or in exchange for other debt securities, in open market purchases, privately negotiated transactions or otherwise. In an effort to accelerate our path to profitability, we may seek to expand our business through acquisition, which may be funded through cash, additional debt or equity. In addition, any material variance from our projected operating results could require us to obtain additional equity or debt financing. There can be no assurance that we will be able to complete any of these transactions in the future on favorable terms or at all. Stock Repurchases and Dividends Paid - The Company did not repurchase any shares in the open market during the three months ended December 31, 2013 or 2012. Any future stock repurchases, as allowed by our debt covenants, must be approved by the Company's Board of Directors or its Finance Committee . The indentures under which our Senior Notes were issued contain certain restrictive covenants, including limitations on the payment of dividends. At December 31, 2013 , under the most restrictive covenants of each indenture, none of our retained earnings was available for cash dividends. Hence, there were no dividends paid during the three months ended December 31, 2013 or 2012. Off-Balance Sheet Arrangements and Aggregate Contractual Commitments. At December 31, 2013 , we controlled 28,978 lots (a 5.7-year supply based on our trailing twelve months of closings). We owned 79.0%, or 22,886 lots, and 6,092 lots, or 21.0%, were under option contracts which generally require the payment of cash or the posting of a letter of credit for the right to acquire lots during a specified period of time at a certain price. We historically have attempted to control a portion of our land supply through options. As a result of the flexibility that these options provide us, upon a change in market conditions we may renegotiate the terms of the options prior to exercise or terminate the agreement. Under option contracts, purchase of the properties is contingent upon satisfaction of certain requirements by us and the sellers and our liability is generally limited to forfeiture of the non-refundable deposits and other non-refundable amounts incurred, which aggregated approximately $44.3 million at December 31, 2013 . The total remaining purchase price, net of cash deposits, committed under all options was $362.0 million as of December 31, 2013 . 34 -------------------------------------------------------------------------------- Table of Contents We expect to exercise, subject to market conditions and seller satisfaction of contract terms, most of our option contracts. Various factors, some of which are beyond our control, such as market conditions, weather conditions and the timing of the completion of development activities, will have a significant impact on the timing of option exercises or whether lot options will be exercised. We have historically funded the exercise of lot options through a combination of operating cash flows. We expect these sources to continue to be adequate to fund anticipated future option exercises. Therefore, we do not anticipate that the exercise of our lot options will have a material adverse effect on our liquidity. We participate in several land development joint ventures and have investments in other entities in which we have less than a controlling interest. We enter into investments in joint ventures and other unconsolidated entities in order to acquire attractive land positions, to manage our risk profile and to leverage our capital base. Excluding our investment in a pre-owned rental homes REIT, the remainder of our investments in our unconsolidated entities have historically been entered into with developers, other homebuilders and financial partners to develop finished lots for sale to the unconsolidated entity's members and other third parties. We account for our interest in our unconsolidated entities under the equity method. Our unaudited condensed consolidated balance sheets include investments in unconsolidated entities totaling $47.4 million and $45.0 million at December 31, 2013 and September 30, 2013 , respectively. Our unconsolidated entities periodically obtain secured acquisition and development financing. At December 31, 2013 , our unconsolidated entities had borrowings outstanding totaling $96.5 million . Historically, we and our partners have provided varying levels of guarantees of debt or other obligations of our unconsolidated entities. At December 31, 2013 , we had no repayment guarantees outstanding related to the debt of our unconsolidated entities. See Note 3 to the unaudited condensed consolidated financial statements for further information. We had outstanding performance bonds of approximately $176.5 million at December 31, 2013 related principally to our obligations to local governments to construct roads and other improvements in various developments. Recently Adopted Accounting Pronouncements See Note 1 to the Unaudited Condensed Consolidated Financial Statements included elsewhere in this Form 10-Q.


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