Beazer Homes USA, Inc. — Fiscal 2017 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. This unaudited Form 10-Q covers the three and six months ended March 31, 2017, compared with the corresponding 2016 periods. Homebuilding results are seasonal, with generally higher orders in the second and third fiscal quarters and higher closings in the third and fourth quarters.
Key financial metrics
| Metric | Three months ended March 31 | Six months ended March 31 |
|---|---|---|
| Total revenue | $425.5 million, versus $385.6 million | $764.7 million, versus $730.1 million |
| Gross profit | $67.4 million, versus $59.6 million | $121.1 million, versus $117.1 million |
| Total gross margin | 15.8%, versus 15.4% | 15.8%, versus 16.0% |
| Operating income | $7.5 million, versus $3.0 million | $8.8 million, versus $12.2 million |
| Net loss | $7.5 million, or $0.23 per diluted share | $9.0 million, or $0.27 per diluted share |
| Adjusted EBITDA | $33.2 million, versus $26.2 million | $54.9 million, versus $55.7 million |
| Cash used in operating activities | $72.1 million, versus $59.9 million |
Homebuilding revenue increased 11.8% in the quarter and 6.2% year to date. Quarterly closings increased 7.7% to 1,239, while average selling price increased 3.8% to $340.5 thousand. Homebuilding gross margin excluding impairments, abandonments and interest improved to 20.7% from 20.2% in the prior-year quarter. Selling, general and administrative expense was 13.3% of total revenue, compared with 13.9%.
At March 31, 2017, cash and cash equivalents were $138.8 million, restricted cash was $14.7 million, owned inventory was $1.63 billion and total assets were $2.18 billion. Total debt, net of premiums and issuance costs, was $1.33 billion, compared with $1.33 billion at September 30, 2016. Stockholders’ equity was $638.0 million.
Material changes versus the prior comparable periods
- Quarterly revenue and operating income improved because of higher closings, higher selling prices and stronger homebuilding margins.
- Six-month operating income declined $3.4 million despite higher homebuilding gross profit, primarily because of higher general and administrative costs, commissions and a $2.7 million write-off of a deposit on a legacy development investment.
- Net loss increased largely because the Company recorded a $15.6 million loss on extinguishment of debt, compared with $1.6 million in the prior-year quarter.
- The Company issued $250 million of 6.75% senior notes due 2025 and used the proceeds and cash on hand to redeem $198 million of 2021 senior notes and repay the remaining $55 million term-loan balance. Management reported approximately $3 million of net debt reduction.
- New orders were broadly stable in the quarter, increasing 0.7% to 1,549, while the average active community count declined 7.6% to 154. Ending backlog declined 2.8% to 2,236 units, but backlog dollar value increased 0.4% to $776.4 million and backlog average selling price increased 3.3% to $347.2 thousand.
- Owned inventory increased $61.8 million from September 30, 2016, while land held for future development declined approximately $60 million as certain parcels were activated.
Guidance, outlook, commentary and unusual items
- Management expects housing fundamentals to remain supportive, citing household formation, tight housing supply, job and wage growth and historically low mortgage rates, but noted risks from inconsistent consumer confidence, political and legislative uncertainty, rising interest rates and mortgage reform.
- The Company continues to pursue its “2B-10” objectives: $2 billion of revenue and a 10% Adjusted EBITDA margin. It targets 2.8 to 3.2 sales per community per month, an average selling price of $340 thousand to $350 thousand, 170 to 175 active communities, homebuilding gross margin of 21% to 22% and SG&A of 11% to 12% of revenue.
- Management expects higher land and land-development spending during the remainder of fiscal 2017, with community-count growth expected in fiscal 2018 and beyond. It plans to reduce debt by at least another $100 million through fiscal 2018.
- Trailing twelve-month Adjusted EBITDA excluding specified unusual items was $161.8 million, up 1.1% year over year. Reported trailing twelve-month homebuilding gross margin excluding impairments and interest was 21.5%, although management stated it would have been 20.7% excluding a prior-period $15.5 million insurance recovery.
- Florida stucco and water-intrusion matters remained material. Cumulative charges through March 31, 2017 were $84.7 million. The Company identified 705 homes likely to require repairs, repaired 550, and recorded a remaining related accrual of $11.4 million. It estimated approximately $4.1 million of additional potential repair costs for other homes not currently reserved. Insurance recoveries of $2.3 million in the quarter fully offset current-period Florida stucco expense.
- The Company recorded $282 thousand of impairment and abandonment charges in the quarter, compared with $1.8 million in the prior-year quarter. Six communities were on the current-quarter watch list, but none required further impairment analysis.
- Liquidity at March 31, 2017 included $138.8 million of cash, $140.7 million of available capacity under the revolving facility and $14.7 million of restricted cash. The Company was in compliance with its debt covenants.
- Outstanding letters of credit and performance bonds were approximately $52.4 million and $210.5 million, respectively. Lot-option agreements carried $435.6 million of remaining obligations against $92.2 million of deposits and nonrefundable pre-acquisition costs.
Principal risks and contingencies
Key risks include housing-market cyclicality, weaker consumer demand, higher mortgage rates, reduced mortgage availability, land and construction-cost inflation, labor and material shortages, inventory impairments, backlog cancellations, weather and regulatory delays, liquidity and refinancing risk, debt-covenant compliance, competition, construction defects, warranty claims, insurance recoverability, litigation, cybersecurity incidents and water-availability restrictions. A reduction in U.S. corporate tax rates could materially reduce the value of the Company’s $317.3 million net deferred tax asset. The filing states that disclosure controls were effective as of March 31, 2017.
Important facts for investors to verify
- Whether stronger closings and selling prices persist as the Company expands its community count and land spending.
- Underlying homebuilding margins excluding interest, impairment effects and unusual insurance recoveries, particularly as land and labor costs rise.
- Progress toward the stated debt-reduction objective and the Company’s ability to fund land investments while maintaining liquidity.
- The ultimate cost, timing and insurance recoveries associated with Florida stucco and other construction-defect claims.
- Backlog conversion, cancellation rates, active-community growth and regional performance, especially the West segment’s Houston exposure and Southeast growth.
- Potential impairment charges on owned inventory and the exercise or termination of $435.6 million of lot-option obligations.
- The effect of possible tax-law changes on the deferred tax asset and future earnings.