Business Context and Reporting Period
Beazer Homes USA, Inc. is a geographically diversified homebuilder operating in 13 states across the West, East and Southeast regions. This unaudited Form 10-Q covers the three and nine months ended June 30, 2021, the third quarter and first nine months of fiscal 2021. Fiscal year-end is September 30, 2021.
Key Financial Metrics
| Metric | Three Months Ended June 30 | Nine Months Ended June 30 |
|---|---|---|
| Total revenue | $570.9 million, up 7.1% | $1.549 billion, up 7.6% |
| Net income | $37.1 million, versus $15.2 million | $73.7 million, versus $28.5 million |
| Diluted EPS | $1.22, versus $0.51 | $2.43, versus $0.95 |
| Operating income | $48.7 million, versus $23.2 million | $100.0 million, versus $43.5 million |
| Operating margin | 8.5%, versus 4.3% | 6.5%, versus 3.0% |
| Total gross margin | 20.2%, versus 16.7% | 18.6%, versus 16.0% |
| Homebuilding gross margin | 20.2%, versus 17.0% | 18.7%, versus 16.1% |
| Adjusted EBITDA | $78.8 million, versus $54.0 million | $186.6 million, versus $127.3 million |
| Cash flow from operations | Not separately provided | $78.5 million, versus $59.0 million |
Homebuilding revenue was $566.9 million for the quarter and $1.539 billion year to date. Homebuilding gross margin excluding impairments, abandonments and interest amortized to cost of sales was 24.2% for the quarter and 22.9% year to date.
As of June 30, 2021, cash and cash equivalents were $358.3 million, restricted cash was $24.7 million, owned inventory was $1.408 billion and total assets were $2.093 billion. Total debt, net of issuance costs, was $1.110 billion, compared with $1.131 billion at September 30, 2020. Stockholders’ equity was $673.6 million, compared with $593.2 million at fiscal year-end.
Net cash used in investing activities was $10.0 million and net cash used in financing activities was $28.0 million for the first nine months. Cash, cash equivalents and restricted cash increased by $40.5 million to $383.0 million.
The $250.0 million secured revolving credit facility had no borrowings or letters of credit outstanding at quarter-end. The company reported compliance with its debt covenants. Debt included $100.0 million of term-loan principal due in September 2022, senior notes maturing from 2025 through 2029, and junior subordinated notes maturing in 2036.
Material Changes Versus the Prior Comparable Period
- Revenue increased primarily because of higher average selling prices and closings, with particularly strong growth in the East segment.
- Net income and diluted EPS more than doubled in both the quarter and year-to-date period, driven by higher revenue, improved homebuilding margins and SG&A leverage.
- Quarterly homebuilding gross margin increased 320 basis points to 20.2%; management attributed the improvement mainly to lower sales incentives and pricing increases.
- SG&A as a percentage of revenue declined to 11.1% from 11.7% for the quarter and to 11.5% from 12.3% year to date.
- Net new orders decreased 12.6% for the quarter to 1,199, primarily because average active communities declined 26.3% to 123. Year-to-date net new orders increased 4.9% to 4,495.
- Backlog increased 39.7% to 3,124 homes, while backlog value rose 53.1% to $1.355 billion. Backlog average selling price increased 9.6% to $433.6 thousand.
- The company controlled 19,761 lots, up 9.2% year over year, with 48.1% of active lots controlled through option contracts versus 29.9% a year earlier.
- Inventory impairments and abandonments declined to $0.2 million for the quarter and $0.7 million year to date, versus $2.3 million in each comparable 2020 period.
- The company repurchased $23.7 million principal amount of its 2027 Notes year to date, recognizing a $1.6 million loss on extinguishment of debt. No common-stock repurchases occurred during the period.
- S&P upgraded the corporate rating to B from B- in June 2021 and maintained a positive outlook; Moody’s maintained a B3 rating and revised its outlook to positive.
Guidance, Outlook, Commentary and Risks
Management stated that demand remained strong because of low mortgage rates, limited housing supply, favorable demographics and pandemic-related changes in living arrangements. It expected these factors to support demand through at least fiscal 2021, but did not provide quantified earnings or revenue guidance.
The company is deliberately limiting sales pace in certain communities to match production capacity, manage material-price inflation, support customer experience and maximize margins. It is also increasing land acquisition and development investment and working to rebuild its active community count.
Supply-chain disruptions, material shortages, labor availability and extended construction cycle times have lengthened expected backlog delivery from the historical three-to-six months to approximately four-to-nine months after construction begins. Management cautioned that labor and cost pressures may temper further margin expansion.
Principal risks include COVID-19 impacts, housing-market cyclicality, mortgage-rate increases, affordability deterioration, inflation in labor and building materials, construction delays, cancellations, inventory impairment, land-option abandonment, credit-market access, covenant compliance, construction-defect and warranty claims, litigation, natural disasters and regulatory or permitting changes.
As of June 30, 2021, the company had $106.6 million of deposits and other non-refundable costs under lot option agreements and $622.0 million of remaining option obligations. It also had approximately $30.8 million of letters of credit and $252.7 million of surety bonds outstanding. Warranty reserves were $12.3 million and litigation-related accruals, excluding warranty, were $4.5 million.
No formal community-level inventory impairment analysis was required for the quarter, but future deterioration in market conditions or changes in projected prices, absorption rates or costs could result in material impairment charges. The company reported no outstanding repayment guarantees related to unconsolidated entities.
Important Facts for Investors to Verify
- Whether backlog converts to closings within the stated four-to-nine-month timeframe and whether cancellations remain near the reduced 10.9% quarterly rate.
- Whether pricing gains and lower incentives offset inflation in labor, materials, land and construction costs.
- The timing and funding of the $50.0 million term-loan repayment due in September 2021 and the remaining $50.0 million due in September 2022.
- Whether active community counts and controlled lots expand sufficiently to sustain revenue growth after the current backlog is delivered.
- The company’s ability to maintain covenant compliance and adequate liquidity amid a $1.110 billion debt balance and substantial option, letter-of-credit and surety-bond commitments.
- Potential future inventory impairments, land-option abandonments, warranty costs, construction-defect claims and litigation losses.
- The effect of COVID-19, mortgage rates, housing affordability, supply-chain constraints and subcontractor availability on fiscal 2021 results.
- Management’s non-GAAP measures, including Adjusted EBITDA and gross margin excluding interest and impairments, against reported GAAP results.