Beazer Homes USA, Inc. — Fiscal 2022 Second-Quarter 10-Q Summary
Business context and reporting period
Beazer Homes is a geographically diversified U.S. homebuilder operating in 13 states across the West, East and Southeast regions. The filing covers the three and six months ended March 31, 2022, representing the second quarter and first six months of fiscal 2022. The financial statements are unaudited and prepared under U.S. GAAP.
Financial performance and key metrics
| Metric | Three months ended March 31, 2022 | Prior year | Six months ended March 31, 2022 | Prior year |
|---|---|---|---|---|
| Total revenue | $508.5 million | $549.9 million | $962.7 million | $978.4 million |
| Gross profit | $119.8 million | $97.9 million | $217.2 million | $173.2 million |
| Operating income | $54.6 million | $33.6 million | $95.6 million | $51.3 million |
| Net income | $44.7 million | $24.5 million | $79.6 million | $36.5 million |
| Diluted EPS | $1.45 | $0.81 | $2.59 | $1.21 |
| Operating margin | 10.7% | 6.1% | 9.9% | 5.2% |
| Homebuilding gross margin | 23.5% | 17.8% | 22.3% | 17.7% |
| Adjusted EBITDA | $77.4 million | $64.2 million | $138.5 million | $107.8 million |
Revenue declined 7.5% in the quarter and 1.6% year to date, primarily because closings fell 22.3% and 16.2%, respectively. Higher average selling prices partly offset lower volume: quarterly home closing ASP increased 19.3% to $470.5 thousand, while six-month ASP increased 17.2% to $454.9 thousand.
Homebuilding gross margin excluding impairments, abandonments and interest amortized to cost of sales was 26.8% for the quarter and 25.6% year to date, compared with 22.2% in both prior-year periods. Management attributed the improvement primarily to pricing increases and lower sales incentives, while noting cost and labor pressures.
Net cash used in operating activities was $58.1 million for the six months ended March 31, 2022, compared with $50.1 million of cash provided in the prior-year period. The use of cash was primarily driven by a $174.2 million increase in inventory from land acquisition, land development and home construction spending. Capital expenditures were $6.2 million, and financing cash outflows were $12.7 million.
At March 31, 2022, cash and cash equivalents were $163.9 million, restricted cash was $33.3 million, and total cash, cash equivalents and restricted cash were $197.2 million. Owned inventory was $1.677 billion, up from $1.502 billion at September 30, 2021. Total debt, net of issuance costs and accretion, was $1.050 billion, compared with $1.054 billion at September 30, 2021. The $250.0 million secured revolving facility had no borrowings or letters of credit outstanding.
Material changes versus the prior comparable period
- Net new orders declined 30.4% in the quarter to 1,291 and 26.2% for the six-month period to 2,432. Sales per community per month declined to 3.6 from 4.7, and average active communities declined to 119 from 131.
- Backlog units declined 5.5% to 3,121, but backlog dollar value increased 14.2% to $1.584 billion. Backlog ASP increased 20.9% to $507.4 thousand.
- Controlled lots increased 24.7% year over year to 23,516, including 22,728 active lots. Approximately 50.8% of active lots were controlled under option contracts.
- SG&A increased to 12.2% of revenue from 11.0% in the quarter, primarily because construction delays reduced closings and revenue while personnel costs increased.
- Cash declined by $76.9 million during the first six months, versus a $31.2 million increase in the prior year, reflecting substantially higher inventory investment.
- The company repurchased $6.0 million principal amount of its 2027 Senior Notes, recording a $0.2 million loss on extinguishment of debt. No share repurchases or dividends occurred during the period.
- Stockholders’ equity increased to $802.4 million from $724.9 million, primarily due to $79.6 million of net income.
Guidance, outlook, management commentary, risks and unusual items
Management did not provide formal quantified earnings or revenue guidance in the filing. It expects demand to remain robust through fiscal 2022 by historical standards, but expects affordability pressures from higher home prices and mortgage rates to affect demand in the future. The company is managing sales pace and lot releases to align with production capacity and intends to grow its community count through increased land investment.
Supply-chain disruptions, labor shortages and the Omicron-related operating environment extended construction cycle times by approximately two to three months and reduced backlog conversion. Management does not expect these conditions to improve significantly in the near term. Pricing power has allowed the company to pass on most cost increases, but management cautioned that labor availability and cost pressures may temper future margin expansion.
The company’s fiscal 2022 priorities include increasing land spending and option usage, improving profitability, reducing total debt below $1.0 billion, improving customer experience and supporting employee well-being. On April 27, 2022, after quarter-end, Beazer agreed to acquire substantially all assets of Imagine Homes, a San Antonio-based builder in which Beazer previously held a one-third ownership interest.
Unusual or notable items included $0.9 million of inventory impairment and abandonment charges, energy-efficiency tax credits of $6.2 million for the six-month period, and a $0.2 million loss on debt extinguishment. The company had $8.5 million of litigation accruals, $12.7 million of warranty reserves, $34.6 million of outstanding letters of credit and $272.6 million of surety bonds at March 31, 2022.
Key risks include higher mortgage rates and reduced affordability, housing-market cyclicality, supply-chain and labor constraints, construction delays, inventory and land-option impairment risk, liquidity and refinancing requirements, credit-rating changes, construction-defect litigation, warranty claims, insurance and surety-bond availability, regulatory and permitting issues, natural disasters, cybersecurity events and the potential non-recoverability of deferred tax assets.
Important facts for investors to verify
- Whether higher mortgage rates and affordability pressures reduce orders, increase cancellations or weaken backlog conversion.
- Whether construction cycle times, labor availability and material costs improve sufficiently to support expected closings and margins.
- Whether inventory growth and the $772.6 million net remaining obligation under lot option agreements can be funded without materially increasing leverage.
- Whether management achieves its objective of reducing total debt below $1.0 billion, including the $50.0 million term-loan maturity in September 2022.
- The terms, purchase price and expected financial impact of the post-quarter-end Imagine Homes acquisition.
- Potential changes in inventory impairment, warranty and litigation reserves, including the adequacy of insurance and subcontractor indemnification.
- The effect of energy-efficiency tax credits and other discrete tax items on future effective tax rates.