Beazer Homes USA, Inc. — Fiscal 2015 Third-Quarter Form 10-Q
Reporting period: Three and nine months ended June 30, 2015; filed August 4, 2015. Beazer is a geographically diversified U.S. homebuilder operating in 15 states across the West, East and Southeast regions. The financial statements are unaudited and interim results are subject to seasonal variability.
Financial performance and position
| Metric | Q3 2015 | Q3 2014 | 9M 2015 | 9M 2014 |
|---|---|---|---|---|
| Total revenue | $429.4 million | $354.7 million | $994.6 million | $917.9 million |
| Gross profit | $76.1 million | $68.8 million | $165.2 million | $175.6 million |
| Total gross margin | 17.7% | 19.4% | 16.6% | 19.1% |
| Operating income | $17.7 million | $15.1 million | $14.6 million | $32.2 million |
| Net income (loss) | $12.2 million | $(12.4) million | $(12.2) million | $(25.5) million |
| Diluted EPS | $0.38 | $(0.47) | $(0.46) | $(1.00) |
| Adjusted EBITDA | $36.9 million | $31.6 million | $55.7 million | $71.8 million |
Q3 homebuilding revenue increased 16.4% to $411.1 million, reflecting 4.2% higher closings and an 11.7% increase in average selling price to $318,000. Net new orders rose 18.1% to 1,524, while average active communities increased 17.1% to 164. Backlog increased 25.0% to 2,764 homes, with backlog value up 35.6% to $899.2 million and backlog average selling price up 8.5% to $325,300.
For the nine-month period, revenue increased 8.4%, but gross profit and operating income declined because of lower closings, lower margins, and Florida stucco warranty costs. Homebuilding gross margin was 18.1% in Q3 versus 19.4% in the prior-year quarter and 16.9% for nine months versus 19.2%.
Q3 SG&A, including commissions and general and administrative expenses, declined to 12.8% of revenue from 14.2%. Nine-month SG&A was 14.3% of revenue versus 14.6% in the prior-year period. Q3 income benefited from the absence of the $19.8 million prior-year loss on debt extinguishment.
Cash flow, liquidity and capitalization
- Cash and cash equivalents were $128.8 million at June 30, 2015, compared with $324.2 million at September 30, 2014.
- Restricted cash was $37.8 million; $22.4 million related to cash-secured loans.
- Nine-month operating cash flow was negative $238.1 million, primarily due to a $245.2 million increase in inventory and $353.5 million of land and land-development spending.
- Investing activities provided $35.0 million, aided by proceeds from the sale of American Homes 4 Rent securities and reduced restricted cash.
- Financing activities provided $7.8 million, including $50.0 million of credit-facility borrowings offset by $30.0 million of repayments.
- Total debt was $1.554 billion, compared with $1.535 billion at September 30, 2014. Debt included $20.0 million outstanding under the revolving facility.
- The $150 million secured revolving facility had $101.7 million of remaining capacity after borrowings and letters of credit. The Company was in compliance with facility and note covenants.
- Debt maturities include $172.9 million of 8.125% Senior Notes due June 2016 and $20.0 million of revolving commitments scheduled to mature in September 2016.
- Consolidated tangible net worth was $253.3 million, versus an $85 million covenant threshold associated with the 2016 Senior Notes.
Material changes versus the prior comparable periods
- Q3 profitability improved substantially, with net income of $12.2 million versus a $12.4 million loss, primarily from stronger revenue, operating performance and the absence of the prior-year debt-extinguishment loss.
- Nine-month net loss narrowed to $12.2 million from $25.5 million, but operating income fell to $14.6 million from $32.2 million.
- West performance weakened: Q3 operating income fell $2.5 million and nine-month operating income fell $15.2 million, driven by fewer closings and lower margins.
- East Q3 operating income increased $4.9 million, while Southeast Q3 operating income increased $6.1 million. Nine-month Southeast operating income declined $2.8 million despite higher revenue.
- Owned inventory increased to $1.822 billion from $1.557 billion, while substantially completed unsold homes declined to 98 from 205.
- Lot option deposits and pre-acquisition costs increased to $52.0 million, with $448.8 million of remaining option obligations, compared with $420.5 million at September 30, 2014.
- The Company decided not to continue reinvesting in new homebuilding assets in its New Jersey division, which may modestly delay the timing of its strategic targets.
Outlook, unusual items and principal risks
Management described housing demand as recovering slowly but steadily, supported by demographic trends, affordability and employment growth. Mortgage constraints, employment insecurity and limited wage growth remain impediments. Severe weather in Texas was expected to delay deliveries and pressure near-term margins, but management did not expect a lasting effect.
Management continues to pursue its “2B-10” objectives: $2 billion of revenue and a 10% Adjusted EBITDA margin. Trailing-twelve-month revenue was $1.5 billion and Adjusted EBITDA was $112.2 million, or $134.4 million excluding specified warranty and discontinued-operation items. Management identified higher absorption, average selling prices, active communities, gross margins and SG&A leverage as the principal drivers of progress. The filing does not provide formal quarterly or full-year revenue or earnings guidance.
- Florida stucco and water-intrusion matters generated $28.9 million of cumulative charges through June 30, 2015. Q3 and nine-month 2015 charges were $6.1 million and $24.0 million, respectively.
- As of June 30, 486 Florida homes had been identified as likely to require repairs, 116 had been repaired, and the remaining Florida accrual was $18.8 million. The assessment remains ongoing.
- Expected insurance recoveries of $7.3 million in Q3 and $13.0 million year-to-date were recorded as reductions of expense; no subcontractor recoveries had been recorded.
- Warranty reserves increased to $30.8 million from $16.1 million at September 30, 2014. The Company stated that ultimate costs could change as additional information becomes available.
- Deferred tax assets totaled $459.3 million, offset by a $415.8 million valuation allowance. Management expects a potential future non-cash tax benefit if sustained profitability supports reversal of part of the allowance, but no reversal was recorded at June 30.
- The Company had $217.4 million of performance bonds and $41.5 million of outstanding letters of credit, principally related to development obligations.
- The Company remains exposed to construction-defect claims, litigation, severe weather, market cyclicality, mortgage availability, land and construction costs, inventory impairments, debt refinancing and covenant compliance.
- Under the Deferred Prosecution Agreement and related HUD agreement, the Company had paid $22.7 million cumulatively and recorded a $4.6 million liability at June 30, 2015. Additional payments of 4% of defined Adjusted EBITDA are required until September 30, 2016 or cumulative payments reach $48.0 million.
Investor verification checklist
- Verify the pace and cost of Florida stucco remediation, the adequacy of the $18.8 million remaining accrual, and the timing and collectability of insurance recoveries.
- Assess whether operating cash flow can support the $1.822 billion inventory balance, planned land investment and $448.8 million of option commitments.
- Review the June 2016 Senior Note maturity, September 2016 revolver maturity, refinancing alternatives and covenant headroom.
- Monitor whether backlog converts to closings without elevated cancellations; backlog estimates remain subject to cancellation risk.
- Evaluate whether gross-margin pressure, Texas weather effects and New Jersey reinvestment changes affect progress toward “2B-10.”
- Reassess the deferred-tax-asset valuation allowance and any resulting non-cash tax benefit only after evidence of sustained profitability.