Beazer Homes USA, Inc. — Fiscal 2022 Third-Quarter Form 10-Q
Reporting period: Three and nine months ended June 30, 2022; fiscal year ending September 30, 2022. Beazer is a geographically diversified homebuilder operating in 13 states across the West, East and Southeast regions.
Financial performance and position
| Metric | Three months ended June 30 | Nine months ended June 30 |
|---|---|---|
| Total revenue | $526.7 million, down 7.8% | $1.489 billion, down 3.9% |
| Gross profit | $132.5 million, up 14.7% | $349.6 million, up 21.1% |
| Total gross margin | 25.2%, versus 20.2% | 23.5%, versus 18.6% |
| Operating income | $67.2 million, versus $48.7 million | $162.8 million, versus $100.0 million |
| Net income | $54.3 million, versus $37.1 million | $133.9 million, versus $73.7 million |
| Diluted earnings per share | $1.76, versus $1.22 | $4.35, versus $2.43 |
| Adjusted EBITDA | $88.2 million, versus $78.8 million | $226.7 million, versus $186.6 million |
- Homebuilding revenue declined 7.7% in the quarter and 4.0% year to date, primarily because closings fell 24.3% and 19.1%, respectively. Higher average selling prices partly offset the lower volume.
- Quarterly homebuilding gross margin was 25.1%, compared with 20.2% in the prior-year quarter; excluding impairments, abandonments and interest amortized to cost of sales, margin was 28.1%, compared with 24.2%.
- Quarterly SG&A was 11.8% of revenue, compared with 11.1%; the increase reflected lower closings and revenue from longer construction cycles.
- Cash, cash equivalents and restricted cash totaled $81.8 million at June 30, 2022, including $42.0 million of unrestricted cash and $39.8 million of restricted cash.
- Net cash used in operating activities was $164.5 million year to date, versus $78.5 million of cash provided in the prior-year period, primarily because inventory increased $351.4 million.
- Owned inventory was $1.859 billion, up from $1.502 billion at September 30, 2021. Homes under construction increased to $976.6 million from $648.3 million.
- Total debt, net of issuance costs, was $1.049 billion, compared with $1.054 billion at September 30, 2021. The $50.0 million senior unsecured term loan matured in September 2022.
- The $250.0 million secured revolving facility had no borrowings and $248.2 million of remaining capacity at June 30, 2022. Additional cash-secured letters of credit totaled $28.8 million.
- Stockholders’ equity increased to $856.1 million from $724.9 million, primarily because of year-to-date net income.
Material changes versus the prior comparable periods
- Net new orders declined 22.9% in the quarter to 925 and 25.3% year to date to 3,357. Sales per community per month decreased to 2.5 from 3.2.
- The cancellation rate increased to 17.0% from 10.9% in the quarter and to 13.5% from 11.0% year to date.
- Backlog units declined 3.9% to 3,003, but backlog value increased 17.2% to $1.588 billion because backlog average selling price increased 22.0% to $528.8 thousand.
- Quarterly closings fell to 1,043 from 1,378, while average selling price rose 21.9% to $501.7 thousand. Year-to-date closings fell 19.1%, while average selling price rose 18.6% to $470.4 thousand.
- The West was the strongest segment, with quarterly revenue up 9.3% and operating income up $12.8 million. East and Southeast revenue declined 30.6% and 19.9%, respectively.
- Beazer acquired substantially all assets of San Antonio-based Imagine Homes on May 20, 2022. The acquired operations are reported in the West segment.
- During the quarter, Beazer repurchased $1.7 million of 2025 senior notes and recognized a $0.1 million gain on extinguishment of debt. Year to date, it repurchased $6.0 million of 2027 notes and $1.7 million of 2025 notes.
- The company repurchased 175,000 common shares for $2.5 million under a new $50.0 million authorization; $47.5 million remained available at June 30, 2022.
Outlook, commentary and risks
- Management reported that demand moderated in the third quarter because of sharply higher mortgage rates, elevated home prices, inflation, stock-market volatility and weaker buyer sentiment.
- Management is incorporating higher mortgage rates, lower sales pace and higher incentives into land underwriting and is seeking price discounts or improved terms on pending land transactions.
- Supply-chain disruption and labor shortages extended construction cycles by an average of two to three months, reducing backlog conversion and closings.
- Management continues to target earnings growth faster than revenue growth, a less-leveraged capital structure and total debt below $1.0 billion, while expanding its lot position and maintaining flexibility for share repurchases.
- Controlled lots increased to 24,899, including 12,571 lots under option contracts. Remaining option obligations, net of deposits, were $819.1 million, with $137.4 million of deposits and other nonrefundable costs at risk if options are terminated.
- Outstanding letters of credit and surety bonds were $30.6 million and $272.5 million, respectively. Litigation accruals were $8.7 million and warranty reserves were $13.0 million.
- Key risks include further mortgage-rate increases, reduced housing affordability and demand, cancellation risk, construction delays, labor and material inflation, inventory impairments, land-option abandonment costs, liquidity and refinancing risk, credit-rating changes, construction-defect claims, litigation, insurance availability and changing regulatory conditions.
- S&P reaffirmed the company’s corporate credit rating of B with a positive outlook in July 2022. Moody’s had previously upgraded the issuer rating to B2 with a stable outlook.
- Management stated that disclosure controls were effective as of June 30, 2022 and reported no material changes in internal control over financial reporting.
Important facts for investors to verify
- Whether the September 2022 $50.0 million term-loan maturity was refinanced or repaid and the effect on liquidity and leverage.
- Subsequent trends in mortgage rates, orders, cancellations, incentives, backlog conversion and construction-cycle times.
- Whether the significant inventory build and land-option obligations generate sufficient future cash returns without impairments.
- Changes in homebuilding gross margins as demand moderates and pricing power weakens.
- The company’s ability to achieve its goal of reducing total debt below $1.0 billion while funding inventory growth.
- Developments in construction-defect litigation, warranty claims, insurance recoveries and surety-bond requirements.
- Results and integration of the Imagine Homes acquisition and its contribution to the West segment.