Beazer Homes USA, Inc. — Fiscal 2015 First-Quarter 10-Q Summary
Business context and reporting period
Beazer Homes is a U.S. residential homebuilder operating through West, East and Southeast segments across 16 states. The filing covers the three months ended December 31, 2014, compared with the three months ended December 31, 2013. Results are seasonal, with generally stronger orders in the second and third fiscal quarters and more closings in the third and fourth quarters.
Key financial metrics
| Metric | Q1 FY2015 | Q1 FY2014 | Change |
|---|---|---|---|
| Total revenue | $265.8 million | $293.2 million | Down 9.4% |
| Homebuilding revenue | $261.6 million | $290.0 million | Down 9.8% |
| Gross profit | $35.2 million | $54.7 million | Down 35.6% |
| Total gross margin | 13.3% | 18.6% | Down 530 bps |
| Operating income (loss) | $(9.5) million | $11.5 million | Declined $21.0 million |
| Loss from continuing operations | $(18.1) million | $(3.9) million | Worsened $14.1 million |
| Net loss | $(22.3) million | $(5.1) million | Worsened $17.2 million |
| Loss per diluted share | $(0.84) | $(0.21) | Worsened $0.63 |
| Cash flow from operations | $(172.5) million | $(113.9) million | Greater use of cash |
Home closings fell 14.7% to 885, while average selling price increased 5.8% to $295.6 thousand. Net new orders increased 7.9% to 966, and cancellation rates were 21.4% versus 21.8% in the prior-year quarter. Backlog increased 1.2% to 1,771 homes, with backlog value up 12.1% to $560.5 million and backlog average selling price up 10.8% to $316.5 thousand.
Reported homebuilding gross margin was 13.5%, versus 18.8% in the prior-year quarter. Excluding impairments, abandonments and interest amortized to cost of sales, homebuilding gross margin was 16.6% versus 21.2%. Management reported a 21.8% homebuilding gross margin excluding impairments, abandonments, interest and the $13.6 million Florida warranty charge.
Cash and cash equivalents declined to $138.7 million from $324.2 million at September 30, 2014. Restricted cash was $64.1 million. Total debt was $1.537 billion, essentially unchanged from $1.535 billion at September 30, 2014. The company had $150 million available under its secured revolving credit facility, with no borrowings outstanding, and $38.6 million of letters of credit outstanding.
Total assets were $2.0 billion and stockholders’ equity was $258.2 million at December 31, 2014. Owned inventory increased to $1.678 billion from $1.557 billion at September 30, 2014. The company invested $145.4 million in land and land development during the quarter.
Material changes versus the prior comparable period
- Revenue and closings declined primarily because the company entered the quarter with a lower beginning backlog, partially offset by higher average selling prices and increased new orders.
- Gross profit and operating performance were materially reduced by a $13.6 million warranty charge related to Florida stucco and water-intrusion issues.
- Florida operating performance deteriorated sharply: Southeast homebuilding gross margin declined to 2.8% from 19.9%, but would have been 21.3% excluding the warranty charge.
- General and administrative expense increased to $31.4 million from $28.4 million, and selling, general and administrative expense rose to 15.9% of revenue from 13.7%, reflecting costs associated with new community openings.
- Operating cash use increased because of higher land and land-development spending, seasonal accounts-payable payments, interest payments and bonus payments.
- No inventory impairment charges were recorded in either comparative quarter. Two West-segment communities were on the quarterly watch list at December 31, 2014, compared with one a year earlier.
Guidance, outlook, commentary and risks
Management believes the housing recovery should continue for at least several years, supported by demographic trends, affordability and employment growth, but expects a slower recovery because of mortgage constraints, employment insecurity, limited wage growth and economic and geopolitical uncertainty.
The company continues to pursue its “2B-10” plan, targeting $2 billion of revenue and a 10% Adjusted EBITDA margin by the end of fiscal 2016. For the trailing 12 months ended December 31, 2014, revenue was $1.436 billion and Adjusted EBITDA was $105.4 million. Management expects continued emphasis on increasing active communities, improving average selling prices and achieving SG&A leverage. These are management targets, not guarantees.
Management expects fiscal 2015 and fiscal 2016 liquidity needs to be met, subject to market conditions and land spending. The company had 156 active communities at December 31, 2014, versus its 2B-10 target of 170, and expects future closings and average selling prices to improve as recently opened communities mature.
- Florida stucco and water-intrusion exposure expanded materially. The company identified 387 potentially affected homes through December 31, 2014, had repaired 42, and carried $16.2 million of warranty liability for remaining and potentially additional repairs. Potential insurance and subcontractor recoveries had not been recorded because they were not yet estimable as probable.
- The company had $27.2 million of accrued warranty liabilities, including the Florida exposure, and $15.6 million of other liabilities related to litigation and other matters, excluding warranty.
- Discontinued operations generated a $4.3 million loss, including a $4.0 million accrual related to alleged past construction defects in a discontinued Denver operation.
- The company remains subject to construction-defect, moisture-intrusion and product-liability claims. Certain pending matters lack a reasonably estimable loss range, and adverse outcomes could be material.
- The company had $219.2 million of performance bonds and $380.7 million of remaining purchase obligations under lot-option contracts, supported by $44.7 million of deposits and non-refundable preacquisition costs.
- The 2016 Senior Notes include a tangible-net-worth covenant. Consolidated tangible net worth was $235.6 million at quarter-end, above the $85 million threshold that could require an offer to repurchase notes if breached for two consecutive quarters.
- Approximately 5.2 million shares could be issued upon settlement of outstanding prepaid stock purchase contracts scheduled for July 15, 2015, creating potential dilution.
Most important facts for investors to verify
- Whether Florida warranty claims, affected-home counts and repair costs continue to expand, and whether recoveries from insurers or subcontractors become probable and recordable.
- Whether closings convert the $560.5 million backlog into revenue and cash flow, including the impact of cancellations and seasonal timing.
- Whether land and land-development spending can support community growth without creating additional liquidity pressure or inventory impairments.
- Progress toward the 2B-10 targets, particularly active communities, gross margin, average selling price, SG&A leverage and Adjusted EBITDA.
- Cash generation, refinancing requirements and covenant headroom given $1.537 billion of debt, the June 2016 Senior Notes maturity and restricted access to additional indebtedness under certain indentures.
- Potential dilution from the July 2015 TEU settlement and the company’s ability to maintain compliance with debt covenants.