Beazer Homes USA, Inc. — Fiscal Q1 2018 Form 10-Q
Business context and reporting period
Beazer Homes is a geographically diversified homebuilder operating in 13 states across the West, East and Southeast regions. This unaudited filing covers the three months ended December 31, 2017, compared with the three months ended December 31, 2016. Fiscal 2018 began October 1, 2017.
Financial performance and key metrics
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Total revenue | $372.5 million | $339.2 million | +9.8% |
| Gross profit | $60.8 million | $53.7 million | +13.4% |
| Total gross margin | 16.3% | 15.8% | +50 bps |
| Operating income | $6.7 million | $1.3 million | +$5.4 million |
| Loss from continuing operations | $130.6 million | $1.4 million | Unfavorable by $129.2 million |
| Net loss | $130.9 million | $1.4 million | Unfavorable by $129.5 million |
| Diluted loss per share | $4.08 | $0.04 | Unfavorable |
| Cash used in operating activities | $102.2 million | $62.8 million | Higher use of $39.4 million |
Homebuilding revenue increased 9.4% to $367.8 million, driven by a 7.1% increase in closings to 1,066 and a 2.1% increase in average selling price to $345,000. Adjusted homebuilding gross margin, excluding interest amortization, impairments and abandonments, improved to 20.9% from 20.5%. SG&A declined to 13.9% of total revenue from 14.7%, while G&A declined to 10.0% from 10.7%.
Trailing-twelve-month Adjusted EBITDA was $182.7 million, up from $154.8 million. Q1 Adjusted EBITDA was $28.4 million versus $24.4 million in the prior-year quarter; these are non-GAAP measures and should not be viewed as substitutes for GAAP net income.
Balance sheet, cash flow, debt and liquidity
- Cash and cash equivalents were $177.8 million at December 31, 2017, and restricted cash was $12.1 million; total cash, cash equivalents and restricted cash were $189.9 million.
- Owned inventory increased to $1.63 billion from $1.54 billion at September 30, 2017. Land and land-development spending was $141.7 million, up 37.3% year over year.
- Total debt, net, was $1.32 billion, compared with $1.33 billion at September 30, 2017. Total stockholders’ equity declined to $552.8 million from $682.4 million, primarily reflecting the quarterly net loss.
- The Company issued $400.0 million of 5.875% senior notes due 2027 and used the proceeds plus cash to redeem $225.0 million of 2019 notes and $175.0 million of 2023 notes. The refinancing generated a $25.9 million loss on extinguishment of debt and is expected to reduce annual cash interest expense by approximately $2.1 million.
- The secured revolving credit facility was expanded to $200.0 million, with potential expansion to $250.0 million subject to lender approval. There were no borrowings outstanding; $34.2 million of letters of credit reduced available capacity to $165.8 million.
- Net cash decreased by $114.7 million during the quarter, principally due to operating cash use and land investment. Capital expenditures were $3.7 million.
Material changes versus the prior comparable period
- New orders increased 10.4% to 1,110 units, while sales per community per month improved to 2.4 from 2.2.
- Ending backlog declined 1.4% to 1,899 units, but backlog value increased 5.7% to $704.4 million as backlog average selling price rose 7.2% to $370,900.
- The Southeast delivered the strongest revenue growth, with homebuilding revenue up 26.9%; West revenue increased 2.8% and East revenue increased 5.5%.
- In December 2017, Beazer acquired more than 450 lots in Raleigh and Myrtle Beach from Bill Clark Homes for approximately $29.0 million, funded with available cash.
- The Company recorded a provisional $112.6 million tax expense from remeasuring deferred tax assets following the Tax Cuts and Jobs Act. Management expects a fiscal 2018 annualized effective tax rate of approximately 27%, excluding discrete items, and approximately 24% in fiscal 2019 and later years.
- The Company adopted accounting guidance concerning business combinations and restricted cash during the period and expects to adopt the new revenue standard on October 1, 2018. Management expects revenue timing to remain generally unchanged, although disclosures will change.
Outlook, commentary and risks
Management stated that housing fundamentals remained supportive, citing household formation, employment and wage growth, constrained housing supply and historically low mortgage rates. It also expects land and land-development spending to increase during fiscal 2018 and anticipates further land sales. The Company remains committed to its “2B-10” objectives: $2 billion of revenue and a 10% Adjusted EBITDA margin, with emphasis on absorption, average selling price, community growth, gross margin and SG&A leverage. No formal full-year revenue or earnings guidance was provided.
Key risks include housing-market cyclicality, affordability pressure, mortgage-rate and financing availability changes, labor and material cost inflation, weather-related construction delays, inventory impairment risk, land-option commitments, debt refinancing and covenant compliance, credit-rating changes, litigation and construction-defect claims, and changes arising from the Tax Cuts and Jobs Act.
Florida stucco and water-intrusion matters remain a material contingency. Through December 31, 2017, cumulative charges were $85.2 million; 709 homes had been identified as likely requiring repairs, 664 had been repaired, and the remaining related warranty accrual was $3.2 million. The Company also had approximately $229.3 million of performance bonds and $44.9 million of outstanding letters of credit.
Important facts for investors to verify
- Whether the provisional $112.6 million Tax Act-related tax expense and deferred-tax-asset measurements change during the permitted measurement period.
- Progress toward redeeming the remaining $96.4 million of 2019 senior notes and the resulting interest savings and liquidity effects.
- Whether operating cash flow improves as inventory investment and land-development spending increase.
- Backlog conversion, cancellation rates, community count, affordability trends and gross-margin performance by geographic segment.
- Potential additional inventory impairments, land-option deposits and the timing and ultimate cost of Florida water-intrusion remediation.
- Compliance with debt covenants, access to revolving capacity and the effect of any credit-rating changes.
- Future land acquisition and development commitments, including the approximately $380.4 million remaining obligation under lot-option agreements.