Beazer Homes USA, Inc. — Fiscal Q1 2021 Form 10-Q Summary
Business context and reporting period
Beazer Homes is a geographically diversified homebuilder operating in 13 states across the West, East, and Southeast regions. The filing covers the three months ended December 31, 2020, compared with the three months ended December 31, 2019. Results are seasonal and were affected by the ongoing COVID-19 pandemic.
Key financial metrics
| Metric | Q1 FY2021 | Q1 FY2020 |
|---|---|---|
| Total revenue | $428.5 million | $417.8 million |
| Homebuilding revenue | $424.2 million | $417.4 million |
| Gross profit | $75.3 million | $63.1 million |
| Gross margin | 17.6% | 15.1% |
| Operating income | $17.7 million | $3.9 million |
| Income from continuing operations | $12.0 million | $2.8 million |
| Net income | $12.0 million | $2.7 million |
| Diluted earnings per share | $0.40 | $0.09 |
| Net cash used in operating activities | $74.6 million | $84.5 million |
- Homebuilding gross margin excluding impairments, abandonments, and interest amortized to cost of sales was 22.1%, versus 19.8% in the prior-year quarter.
- SG&A was 12.7% of revenue, compared with 13.3% in the prior-year period.
- Adjusted EBITDA was $43.6 million, compared with $29.4 million.
- Cash, cash equivalents, and restricted cash totaled $262.0 million at December 31, 2020, including $244.6 million of cash and cash equivalents.
- Owned inventory was $1.414 billion, up from $1.351 billion at September 30, 2020.
- Total debt, net of issuance costs and accretion, was $1.132 billion, compared with $1.131 billion at September 30, 2020. Estimated fair value was $1.216 billion.
- The Company had no borrowings or letters of credit outstanding under its $250.0 million secured revolving facility, leaving $250.0 million of capacity.
Material changes versus the prior comparable period
- Net new orders increased 15.3% to 1,442, while the sales pace increased to 3.5 homes per community per month from 2.5.
- Cancellation rates declined to 12.3% from 14.9%.
- Backlog increased 53.6% to 2,837 homes, with backlog value up 58.8% to $1.162 billion. Backlog average selling price increased 3.4% to $409,700.
- Home closings were essentially flat at 1,114 versus 1,112, while average selling price increased 1.4% to $380,800.
- Revenue growth was supported by higher average selling prices and increased land sales and other revenue, which rose to $4.3 million from $0.4 million.
- Operating income improved by $13.7 million, primarily from higher gross profit and lower SG&A, partially offset by a $2.4 million increase in corporate and unallocated expenses.
- The Company recognized $0.5 million of abandonment charges in the East segment; no comparable charge was recorded in the prior-year quarter. No project-in-progress or land-held-for-sale impairment charges were recognized in either period.
- Operating cash use improved year over year but remained substantial, principally because inventory increased by $62.7 million to support growth.
Outlook, management commentary, risks, and unusual items
Management reported strong demand for new homes, attributed to low mortgage rates, limited housing supply, and consumer interest in suburban housing. The Company intends to execute a “balanced growth” strategy, allocating more capital beginning in fiscal 2021 to expand its lot position, deliver higher-margin homes, and improve overhead leverage while also managing leverage.
Management expects near-term average selling prices to increase based on the current backlog. It also sees potential for continued gross-margin expansion through pricing, lower incentives, product simplification, and cost reductions, although lumber and other material-cost pressures could constrain margins. No specific quantitative earnings or revenue guidance was provided.
- COVID-19 could reduce demand, orders, closings, revenue, cash flow, and profitability; increase material, labor, and subcontractor costs; and lead to future inventory, goodwill, or land-option impairment charges.
- Housing-market cyclicality, higher mortgage rates, reduced financing availability, employment changes, competition, affordability, and local market deterioration could adversely affect results.
- Inventory recoverability depends on assumptions regarding selling prices, absorption rates, and future cash flows. Future impairment charges could be material.
- Lot option contracts represented approximately 7,536 active lots, with $83.0 million of deposits and other non-refundable costs at risk and $493.8 million of remaining purchase-price obligations.
- Outstanding letters of credit and surety bonds were approximately $37.4 million and $257.3 million, respectively, primarily supporting development obligations.
- The Company had $5.1 million accrued for litigation and other matters, excluding warranty reserves. Certain derivative lawsuits related to historical California inventory impairments remained pending, and potential losses were not reasonably estimable.
- Warranty reserves were $12.6 million at December 31, 2020. Construction-defect, warranty, litigation, permitting, weather, environmental, and regulatory matters could create additional costs.
- The Company stated that it was in compliance with its debt covenants and believed existing capital resources and financing access were adequate for current and reasonably anticipated needs.
Most important facts for investors to verify
- Whether the unusually strong order growth and backlog conversion continue after the first quarter, including cancellation trends and delivery timing.
- Whether gross-margin gains persist despite lumber, labor, land, and other input-cost pressures.
- Cash generation and inventory investment requirements as the Company expands its community and lot position.
- Debt maturity and refinancing requirements, particularly the $100.0 million term loan maturing in September 2022 and the 2025 senior notes.
- The effect of COVID-19, mortgage rates, housing affordability, and local-market conditions on demand and inventory recoverability.
- Potential exposure from lot options, surety bonds, letters of credit, warranty claims, litigation, and future inventory impairments.
- Progress toward management’s commitment that all homes will be Net Zero Energy Ready by the end of 2025.