Beazer Homes USA, Inc. — Fiscal 2017 First-Quarter Form 10-Q
Reporting period: Three months ended December 31, 2016; comparative period ended December 31, 2015. Beazer is a geographically diversified homebuilder operating in 13 states across the West, East and Southeast regions. The filing was dated February 9, 2017.
Financial performance and position
| Metric | Q1 FY2017 | Q1 FY2016 | Change |
|---|---|---|---|
| Total revenue | $339.2 million | $344.4 million | Down 1.5% |
| Homebuilding revenue | $336.1 million | $336.6 million | Down 0.1% |
| Gross profit | $53.7 million | $57.6 million | Down 6.8% |
| Gross margin | 15.8% | 16.7% | Down 90 bps |
| Operating income | $1.3 million | $9.1 million | Down $7.9 million |
| Net income (loss) | $(1.4) million | $1.0 million | Decline of $2.4 million |
| Diluted EPS | $(0.04) | $0.03 | Declined $0.07 |
| Adjusted EBITDA | $21.7 million | $29.5 million | Down $7.8 million |
| Adjusted EBITDA excluding unusual items | $24.4 million | $25.9 million | Down $1.5 million |
| Cash flow from operations | $(62.8) million | $(77.8) million | Improved $15.0 million |
Closings decreased 5.1% to 995, while average selling price increased 5.3% to $337.8 thousand. Net orders increased 8.9% to 1,005, and cancellation rates improved to 21.2% from 25.8%. Ending backlog increased 0.7% to 1,926 homes, with backlog value of $666.1 million and average selling price of $345.8 thousand.
Cash and cash equivalents were $158.6 million at December 31, 2016, compared with $228.9 million at September 30, 2016. Restricted cash was $16.0 million. Owned inventory increased to $1.62 billion from $1.57 billion. Total debt was $1.34 billion, compared with $1.33 billion at fiscal year-end, and stockholders’ equity was $643.2 million.
The secured revolving credit facility had $180.0 million of total commitments, $37.5 million of outstanding letters of credit and $142.5 million of remaining capacity. The Company reported compliance with applicable debt covenants. Variable-rate debt totaled approximately $158 million; management estimated that a one-percentage-point rate increase would increase interest expense by approximately $1.4 million over the following 12 months.
Material changes versus the prior comparable period
- Revenue was broadly stable because the higher average selling price substantially offset fewer closings and lower land-sale revenue.
- Reported profitability weakened. General and administrative expense increased $4.7 million to $36.4 million, including a $2.7 million write-off of a deposit on a legacy development-site investment deemed uncollectible.
- Prior-year results benefited from a $3.6 million net insurance recovery related to Florida stucco and water-intrusion claims and included $1.4 million of inventory impairment and abandonment charges. The current quarter included no inventory impairment or abandonment charges.
- Interest amortized to cost of sales increased $2.3 million to $15.6 million, pressuring reported gross profit. Excluding impairments, abandonments, interest and specified unusual items, homebuilding gross margin was 20.5%, compared with 20.4% in the prior year.
- Segment performance diverged: West operating income increased to $21.0 million from $16.8 million; East declined to $1.6 million from $4.1 million; Southeast declined to $5.0 million from $10.7 million.
- Operating cash use improved year over year, but the Company continued to consume cash because of inventory investment and land and land-development spending of $103.2 million.
Outlook, commentary, risks and unusual items
Management continued to pursue its “2B-10” plan, targeting $2 billion of revenue and a 10% Adjusted EBITDA margin. Trailing twelve-month Adjusted EBITDA excluding specified unusual items was $154.8 million. Management increased its targeted average selling price range to $340 thousand–$350 thousand, while maintaining targets of 2.8–3.2 sales per community per month, 170–175 active communities, 21%–22% homebuilding gross margin excluding specified items and 11%–12% SG&A as a percentage of revenue.
Average active communities declined 7.9% to 156, but management expects increased land and land-development spending to support community-count growth in fiscal 2018 and beyond. The Company plans to reduce debt by at least another $100 million through fiscal 2018 while using land options and developed-lot transactions to manage capital efficiency.
Florida stucco and water-intrusion matters remain material. The Company recorded $4.6 million of additional warranty expense in the quarter and $3.9 million of probable insurance recoveries. As of December 31, 2016, 705 homes were identified as likely to require repairs, 510 had been repaired, and the remaining related accrual was $17.2 million. Estimated repair costs for additional homes not currently reserved were approximately $4.2 million. Management stated that the ultimate liability may change as inspections and claims develop.
Other risks include housing-market cyclicality, consumer confidence, mortgage availability and rates, labor and material costs, land valuation and inventory impairment, construction defects, litigation, weather, regulation, water availability, access to capital and debt covenant compliance. The Company also identified potential U.S. tax reform as a risk because lower corporate tax rates could reduce the value of its $312.7 million net deferred tax asset; the valuation allowance was $66.3 million at December 31, 2016.
The Company controlled 23,300 lots, including 6,004 under option contracts. Deposits and nonrefundable pre-acquisition costs were approximately $78.0 million, with $412.9 million of remaining option obligations. Performance bonds totaled approximately $220.5 million. No repayment guarantees related to unconsolidated entities were outstanding.
The filing states that January 2017 included the final payment under the Company’s Deferred Prosecution Agreement and related HUD agreement. Management concluded that disclosure controls were effective as of December 31, 2016 and that there were no material changes to internal control over financial reporting.
Important facts for investors to verify
- Whether higher backlog, orders and average selling prices translate into increased closings and margins as community count expands.
- The sustainability of reported and adjusted gross margins after excluding prior-period insurance recoveries, impairment effects and capitalized-interest amortization.
- Actual cash generation relative to planned $103.2 million quarterly land and land-development spending and the objective of reducing debt by at least $100 million through fiscal 2018.
- The ultimate cost, timing and insurance or subcontractor recoveries associated with the Florida stucco and water-intrusion claims.
- Liquidity and covenant headroom, particularly in light of $1.34 billion of debt, the March 2018 term-loan maturity and the June 2019 senior-note maturity.
- Potential changes to the deferred tax asset caused by tax-law changes, as well as the realizability of the recorded deferred tax asset.