BEAZER HOMES USA INC quarterly report, Q2 FY2018

Beazer Homes USA, Inc. — Fiscal 2018 Second-Quarter 10-Q

Reporting period: Quarterly and six-month periods ended March 31, 2018. Beazer is a geographically diversified homebuilder operating in 13 states across the West, East and Southeast segments. Fiscal 2018 began October 1, 2017. Results are seasonal and may not indicate full-year performance.

Financial Highlights

Metric	Three months ended March 31	Six months ended March 31
Total revenue	$455.2 million, up 7.0%	$827.7 million, up 8.2%
Operating income	$13.8 million, versus $7.5 million	$20.5 million, versus $8.8 million
Net income (loss)	$11.6 million, versus $(7.5) million	$(119.4) million, versus $(9.0) million
Diluted EPS	$0.35, versus $(0.23)	$(3.72), versus $(0.27)
Gross margin	16.5%, versus 15.8%	16.4%, versus 15.8%
Operating margin	3.0%, versus 1.8%	2.5%, versus 1.1%

Homebuilding revenue increased 4.6% in the quarter and 6.7% year to date. Quarterly closings rose 2.2% to 1,266, while average selling price rose 2.3% to $348.4 thousand.
Quarterly homebuilding gross margin excluding impairments, abandonments and interest improved to 21.3% from 20.7%; the comparable six-month margin was 21.1% versus 20.6%.
Adjusted EBITDA, a non-GAAP measure, was $39.5 million for the quarter, $67.9 million year to date and $189.1 million for the trailing twelve months.
New orders increased 8.4% in the quarter to 1,679 and 9.2% year to date to 2,789. Ending backlog increased 3.4% to 2,312 units, with backlog value up 14.0% to $885.4 million and backlog ASP up 10.3% to $383.0 thousand.
Cash and cash equivalents were $158.8 million at March 31, 2018; restricted cash was $12.8 million. Owned inventory increased to $1.677 billion from $1.543 billion at September 30, 2017.
Total debt, net of premiums and issuance costs, was $1.325 billion, compared with $1.327 billion at September 30, 2017. Stockholders’ equity declined to $567.0 million from $682.4 million, primarily reflecting the year-to-date net loss.

Cash Flow, Debt and Liquidity

Cash used in operating activities was $116.2 million for the six months, compared with $72.1 million in the prior-year period. The increase primarily reflected $285.1 million of land and land-development spending, up 38.3% year over year, including spending related to the Bill Clark Homes acquisition.
Cash used in investing activities was $8.3 million, including $8.2 million of capital expenditures. Cash used in financing activities was $8.6 million.
Total cash, cash equivalents and restricted cash declined by $133.0 million to $171.6 million.
In October 2017, the company issued $400.0 million of 5.875% senior notes due 2027 and used the proceeds, together with cash, to redeem $225.0 million of 2019 notes and $175.0 million of 2023 notes. The refinancing produced an after-market maturity extension and is expected to reduce annual interest expense by approximately $2.1 million, but generated a $25.9 million loss on debt extinguishment.
The secured revolving credit facility was expanded to $200.0 million and extended to February 2020, with potential expansion to $250.0 million subject to lender approval. There were no borrowings outstanding; $29.7 million of letters of credit reduced available capacity to $170.3 million. The company was in compliance with its debt covenants.

Material Changes Versus Prior Comparable Period

Quarterly profitability improved because of higher closings, higher selling prices, improved gross margin and the absence of the $15.6 million prior-year debt-extinguishment loss.
Year-to-date net loss worsened substantially because of a $109.1 million income-tax expense, including a provisional $112.6 million charge to remeasure deferred tax assets following the Tax Cuts and Jobs Act. The filing states that this estimate remains subject to further analysis during the measurement period.
West segment performance strengthened materially: quarterly revenue increased 21.2% and operating income increased $10.9 million. East quarterly revenue declined 8.4% and Southeast quarterly revenue declined 8.4%, with Southeast margins pressured by construction-cost increases in Atlanta.
No continuing-operations inventory impairment or abandonment charges were recorded in the quarter or six-month period; the prior-year comparable periods included $0.3 million and $0.3 million, respectively. Six-month discontinued operations included $0.5 million of impairment and abandonment charges.
Average active communities declined 1.7% year over year to 151, although the company ended the quarter with 153 active communities and expects land investment to support future community-count growth.

Guidance, Outlook and Management Commentary

Management remains committed to its “2B-10” objectives: approximately $2 billion of revenue and a 10% Adjusted EBITDA margin. Trailing twelve-month revenue was approximately $2.0 billion and Adjusted EBITDA was $189.1 million at March 31, 2018.
The company expects its fiscal 2018 annualized effective tax rate, excluding discrete items, to be approximately 27%; fiscal 2019 and subsequent years are expected to be approximately 24% or near that level.
Management expects additional land sales during the remainder of fiscal 2018, increased land and land-development spending and continued focus on absorption rates and SG&A leverage. No specific full-year revenue or earnings guidance was provided.
Management cited supportive housing fundamentals, including employment, wage growth, household formation and constrained housing supply, but noted affordability constraints, potentially higher mortgage rates, labor availability and cost pressures.

Risks, Contingencies and Unusual Items

Land and inventory values depend on market conditions, future selling prices, absorption rates and discount-rate assumptions. Owned inventory was $1.677 billion, and remaining obligations under unconsolidated lot-option agreements were $341.7 million, supported by $79.0 million of deposits and non-refundable costs.
Florida stucco and water-intrusion matters have generated cumulative charges of $85.0 million. As of March 31, 2018, 709 homes were identified as likely to require repairs, 675 had been repaired, and the remaining related accrual was $2.4 million. The company estimates another $2.4 million of potential costs for currently unreserved homes deemed unlikely to require repairs.
Warranty reserves totaled $14.6 million, and litigation-related accruals excluding warranty were $2.9 million. The company faces construction-defect, moisture-intrusion, product-liability and other litigation claims; certain potential losses cannot currently be estimated.
Outstanding performance bonds were approximately $222.3 million and letters of credit totaled approximately $40.7 million. No repayment guarantees related to unconsolidated-entity debt were outstanding.
The only variable-rate debt was the junior subordinated notes; a one-percentage-point rate increase would increase estimated interest expense by approximately $1.0 million over the following twelve months.
Key operating risks include housing-market cyclicality, affordability and mortgage-rate changes, labor and material costs, weather and construction delays, land impairment, credit access, debt refinancing, tax-law changes, warranty claims, litigation and regulatory requirements.

Investor Verification Checklist

Verify the effect and final accounting of the provisional $112.6 million Tax Act deferred-tax remeasurement charge.
Monitor operating cash flow, land spending, inventory growth and the company’s ability to fund planned community expansion.
Track repayment or refinancing of the remaining $96.4 million of 5.75% senior notes due June 2019.
Assess whether backlog conversion, cancellations, ASP and gross-margin trends support the “2B-10” objectives.
Review West growth against weaker East and Southeast performance, particularly Atlanta construction-cost pressure and Indianapolis mix effects.
Follow Florida water-intrusion remediation, insurance recoveries and potential additional warranty obligations.
Reconcile Adjusted EBITDA and adjusted gross-margin measures to GAAP results and consider the impact of capitalized interest and other non-GAAP adjustments.