Beazer Homes USA, Inc. — Fiscal 2021 Second-Quarter 10-Q Summary
Reporting period: Quarterly and six-month periods ended March 31, 2021, compared with the corresponding periods ended March 31, 2020. Beazer is a geographically diversified homebuilder operating in 13 states across the West, East and Southeast regions.
Financial performance
| Metric | Three months ended March 31, 2021 | Prior year | Six months ended March 31, 2021 | Prior year |
|---|---|---|---|---|
| Total revenue | $549.9 million | $489.4 million | $978.4 million | $907.2 million |
| Gross profit | $97.9 million | $78.8 million | $173.2 million | $142.0 million |
| Operating income | $33.6 million | $16.4 million | $51.3 million | $20.4 million |
| Income from continuing operations | $24.6 million | $10.6 million | $36.7 million | $13.4 million |
| Net income | $24.5 million | $10.6 million | $36.5 million | $13.4 million |
| Diluted EPS | $0.81 | $0.35 | $1.21 | $0.45 |
| Operating margin | 6.1% | 3.4% | 5.2% | 2.2% |
Margins: Homebuilding gross margin increased to 17.8% in the quarter from 16.1% and to 17.7% for the six-month period from 15.7%. Excluding impairments, abandonments and interest amortized to cost of sales, homebuilding gross margin was 22.2% in both periods, compared with 20.8% and 20.3%, respectively. SG&A was 11.0% of revenue in the quarter and 11.8% year to date, versus 12.0% and 12.6%.
Adjusted EBITDA: Adjusted EBITDA was $64.2 million for the quarter and $107.8 million for the six months, compared with $43.9 million and $73.3 million, respectively. This is a non-GAAP measure.
Cash flow, liquidity and debt
- Operating cash flow was $50.1 million for the six months ended March 31, 2021, versus cash used of $45.9 million in the prior-year period. Inventory increased $31.2 million to support land, development and construction activity.
- Cash, cash equivalents and restricted cash totaled $373.7 million at March 31, 2021, including $355.5 million of cash and cash equivalents, compared with $342.5 million at September 30, 2020.
- Total debt, net of issuance costs, was $1.123 billion, down from $1.131 billion at September 30, 2020. The company repurchased $9.7 million of its 2027 Senior Notes and recorded a $0.6 million extinguishment loss.
- The $250.0 million secured revolving credit facility had no borrowings or letters of credit outstanding, leaving $250.0 million of capacity. Management stated that all debt covenants were satisfied.
- Outstanding letters of credit and surety bonds were approximately $37.1 million and $249.9 million, respectively. Restricted cash was $18.2 million.
- Capital expenditures were $6.5 million for the six months. No common-stock repurchases or dividends were made during the period.
Material changes versus the prior comparable periods
- Quarterly revenue increased 12.4%, while six-month revenue increased 7.9%. Quarterly net income increased approximately 131%; six-month net income increased approximately 173%.
- Quarterly net new orders increased 11.6% to 1,854, and the six-month total increased 13.2% to 3,296. Sales per community per month increased to 4.7 from 3.3, while the cancellation rate declined to 10.0% from 15.8%.
- Backlog increased 48.1% to 3,303 homes, and backlog value increased 54.9% to $1.386 billion. Backlog average selling price increased 4.6% to $419.7 thousand.
- Quarterly closings increased 8.7% to 1,388, and average selling price increased 3.2% to $394.4 thousand. Six-month closings increased 4.7% to 2,502.
- Owned inventory increased to $1.384 billion from $1.351 billion. Spec homes declined to 87 from 133, reflecting strong demand.
- The company expanded its use of lot options: 8,381 active lots, or 46.0% of the active lot position, were controlled through options versus 5,554 lots, or 29.6%, a year earlier. Remaining purchase obligations under lot options were $567.4 million, supported by $93.3 million of deposits and non-refundable costs.
- No project-in-progress or land-held-for-sale impairment charges were recorded in the quarter. A $0.5 million abandonment charge was recorded in the first quarter of fiscal 2021.
Outlook, commentary and risks
Management reported strong demand supported by low mortgage rates, limited housing supply, household formation and continued consumer interest in suburban housing. The company expects these conditions to support demand through fiscal 2021 and anticipates near-term average selling price increases based on current backlog. It is investing more capital to expand its lot position and pursue higher-margin homes while seeking to maintain overhead leverage and reduce leverage.
Management cautioned that mortgage rates have increased, and that labor, lumber and other direct-material cost pressures could limit future margin expansion. The company also stated that the duration and magnitude of COVID-19 effects remain uncertain. Potential consequences include lower orders, closings, revenue, cash flow and profitability; supply-chain and subcontractor disruptions; and future material inventory, goodwill or land-option abandonment charges.
- Inventory recoverability depends on highly judgmental assumptions regarding home prices, absorption rates, costs and local market conditions. Future impairment charges could be material.
- Housing demand is sensitive to employment, wages, consumer confidence, mortgage financing, affordability, inflation, competition and interest rates.
- Variable-rate debt was approximately $69.2 million; a one-percentage-point rate increase would raise estimated annual interest expense by approximately $1.0 million.
- The company faces construction-defect, warranty and other litigation risks. Warranty reserves were $12.4 million and litigation-related accruals were $4.2 million at March 31, 2021. Management stated that current matters are not expected to have a material adverse effect, but outcomes cannot be predicted.
- Deferred tax asset realization remains dependent on future earnings and could be affected by prolonged COVID-19-related weakness.
- Moody’s reaffirmed a B3 corporate family rating and revised its outlook to positive in March 2021. S&P had previously revised its outlook to positive while maintaining a B- rating.
The company committed to making each home Net Zero Energy Ready by the end of 2025 and reported receiving the 2021 ENERGY STAR Partner of the Year—Sustained Excellence Award.
Investor verification points
- Verify whether the unusually strong order growth and backlog conversion continue as mortgage rates, material costs and housing affordability change.
- Reconcile reported gross margin with the company’s non-GAAP margin excluding interest, impairments and abandonments.
- Monitor inventory growth, lot-option obligations, option deposits and future impairment exposure.
- Assess debt maturities, covenant headroom, credit ratings and the company’s ability to refinance or repay the $100 million term loan, including scheduled $50 million installments in September 2021 and September 2022.
- Evaluate cash generation after land acquisition, construction spending, letters of credit, surety bonds and required debt service.
- Review COVID-19, supply-chain, labor, warranty, construction-defect and litigation developments, including appellate activity related to the dismissed shareholder derivative claims.
- Confirm the sustainability of deferred tax asset realization and the effect of discrete tax items on the effective tax rate.