Beazer Homes USA, Inc. — Fiscal 2015 Second-Quarter Form 10-Q
Reporting period: Three and six months ended March 31, 2015; filed April 30, 2015. Beazer is a geographically diversified U.S. homebuilder operating in 15 states across the West, East and Southeast regions. Results are unaudited and subject to seasonal variability.
Financial results and key metrics
| Metric | Three months ended Mar. 31, 2015 | Three months ended Mar. 31, 2014 | Six months ended Mar. 31, 2015 | Six months ended Mar. 31, 2014 |
|---|---|---|---|---|
| Total revenue | $299.4 million | $270.0 million | $565.1 million | $563.2 million |
| Gross profit | $53.9 million | $52.2 million | $89.1 million | $106.8 million |
| Total gross margin | 18.0% | 19.3% | 15.8% | 19.0% |
| Operating income (loss) | $6.4 million | $5.6 million | $(3.1) million | $17.1 million |
| Net loss | $(2.0) million | $(8.0) million | $(24.3) million | $(13.1) million |
| Loss per diluted share | $(0.08) | $(0.31) | $(0.92) | $(0.52) |
| Adjusted EBITDA | $20.1 million | $18.5 million | $18.8 million | $40.2 million |
Second-quarter homebuilding revenue increased 7.6% despite a 4.2% decline in closings, reflecting a 12.3% increase in average selling price to $305.8 thousand. Land sales and other revenue increased to $13.1 million from $3.9 million. Six-month revenue was essentially flat because lower closings, particularly in the West, offset higher selling prices and land sales.
Second-quarter operating results benefited from improved selling, general and administrative leverage, with SG&A equal to 14.9% of revenue versus 16.2% in the prior-year quarter. Six-month results were adversely affected by Florida warranty charges and lower closings. Interest expense remained significant: cash interest payments were $59.7 million during the six months.
Cash flow, balance sheet, debt and liquidity
- Cash and cash equivalents were $146.3 million at March 31, 2015, down from $324.2 million at September 30, 2014. Restricted cash was $43.2 million.
- Six-month operating cash flow was negative $202.9 million, compared with negative $188.1 million in the prior-year period, primarily due to a $181.8 million inventory increase and $247.6 million of land and land-development spending.
- Investing cash flow was positive $34.8 million, including $24.2 million of proceeds from the sale of American Homes 4 Rent securities and a $22.3 million decrease in restricted cash.
- Total debt was $1.535 billion, essentially unchanged from September 30, 2014. The company had no borrowings under its $150 million secured revolving credit facility, $26.6 million of letters of credit outstanding under that facility, and $123.4 million of remaining capacity.
- Additional stand-alone letter-of-credit facilities had $16.0 million outstanding and were cash collateralized. The company was in compliance with its debt covenants, and consolidated tangible net worth was $238.1 million versus an $85 million covenant threshold applicable to the 2016 notes.
- Owned inventory increased to $1.757 billion from $1.557 billion. The company controlled 27,794 lots, including 5,921 lots under option contracts with $438.4 million of remaining purchase obligations and $54.8 million of deposits and nonrefundable pre-acquisition costs.
Material changes versus the prior comparable period
- Net new orders increased 22.2% in the quarter to 1,698, while sales per active community per month increased to 3.5 from 3.3. Backlog increased 17.1% to 2,533 homes, with an aggregate value of $814.1 million.
- Backlog average selling price increased 9.1% to $321.4 thousand, and active communities increased to 163.
- West revenue declined 8.6% in the quarter and West operating income declined $3.7 million, while East and Southeast operating income increased $2.8 million and $2.9 million, respectively.
- Six-month gross margin declined to 15.8% from 19.0%, principally due to warranty costs related to Florida stucco issues, lower closings and mix.
- No inventory impairment or lot-option-abandonment charges were recorded in the current quarter or six-month period, compared with $0.9 million and $0.9 million, respectively, in the prior-year periods.
- In March 2015, the company sold its American Homes 4 Rent shares and recorded a $1.8 million loss, including $1.1 million previously recognized in other comprehensive loss.
Guidance, outlook, risks and unusual items
Management described the housing recovery as slow but steady, supported by demographics, affordability and employment growth but constrained by mortgage availability, employment insecurity and limited wage growth. The company continued to target its “2B-10” plan: $2 billion of revenue and a 10% Adjusted EBITDA margin, with fiscal 2016 as the target date. Management stated that redirecting capital away from New Jersey may modestly delay those objectives but is expected to improve fiscal 2016 gross margins and fiscal 2017 return on capital. The company also activated a $41 million Sacramento land parcel and plans to reopen its Sacramento division.
- Florida stucco and water-intrusion matters were the principal unusual items. Cumulative charges through March 31, 2015 were $22.8 million, including $17.9 million in the first six months. The remaining Florida warranty accrual was $17.2 million for 436 identified homes, of which 65 had been repaired. The assessment remains ongoing.
- The company recorded $5.7 million of probable insurance recoveries during the quarter, including $4.3 million related to the incremental Florida charge. No subcontractor recoveries had been recorded.
- Discontinued operations included a $3.7 million probable liability related to alleged construction defects in Denver, resulting in a six-month discontinued-operations loss of $4.2 million.
- The company has accrued $8.4 million for litigation and other matters, excluding warranty liabilities. It also had $217.4 million of performance bonds and $42.6 million of letters of credit outstanding.
- The Deferred Prosecution Agreement and related HUD obligations require payments equal to 4% of defined Adjusted EBITDA through the earlier of September 30, 2016 or $48.0 million paid. Cumulative payments were $24.9 million, with $0.8 million accrued at March 31, 2015.
- Substantially all deferred tax assets remained subject to a valuation allowance; gross deferred tax assets were $477.1 million and the valuation allowance was $433.5 million. Future tax benefits depend on sustained profitability and realization of the assets.
- Key industry and company risks include housing-market cyclicality, mortgage availability and interest rates, land and construction costs, inventory impairments, backlog cancellations, liquidity and refinancing needs, debt covenants, construction defects, litigation, insurance recoveries and execution of the growth plan.
Important facts for investors to verify
- Reconcile the $146.3 million cash balance and $123.4 million revolver availability against expected seasonal land, construction and debt-service needs.
- Monitor the Florida warranty population, remaining $17.2 million accrual, repair costs, insurance collections and potential subcontractor recoveries.
- Assess whether higher orders, backlog and selling prices convert into closings and cash flow, given negative six-month operating cash flow.
- Evaluate leverage, the June 2016 maturity of $172.9 million of senior notes, the July 2015 TEU settlement potentially requiring approximately 5.3 million shares, and covenant headroom.
- Review the assumptions supporting the $1.757 billion inventory balance, $438.4 million of land-option obligations and the absence of current-period impairment charges.
- Determine whether the “2B-10” targets remain achievable after the New Jersey exit, Sacramento reinvestment and continuing warranty and litigation exposures.