Beazer Homes USA, Inc. — Fiscal 2020 Third-Quarter Form 10-Q
Business context and reporting period
Beazer Homes is a geographically diversified U.S. homebuilder operating in 13 states across the West, East and Southeast regions. The filing covers the three and nine months ended June 30, 2020, within the fiscal year ending September 30, 2020. Results were affected by the COVID-19 pandemic, although all states and local governments in the company’s markets deemed housing an essential service.
Key financial metrics
| Metric | Three months ended June 30 | Year-over-year change | Nine months ended June 30 | Year-over-year change |
|---|---|---|---|---|
| Total revenue | $533.1 million | Up 10.4% | $1.440 billion | Up 10.3% |
| Gross profit | $89.1 million | Up $17.3 million | $231.0 million | Up $181.3 million |
| Gross margin | 16.7% | Up 180 basis points | 16.0% | Up 1,220 basis points |
| Operating income | $23.2 million | Compared with $9.5 million | $43.5 million | Compared with a $125.9 million loss |
| Net income | $15.2 million | Compared with $11.6 million | $28.5 million | Compared with an $81.9 million loss |
| Diluted EPS | $0.51 | Compared with $0.38 | $0.95 | Compared with $(2.65) |
| Cash flow from operations | Not separately reported | — | $59.0 million | Compared with $(94.2) million |
Homebuilding revenue increased 10.4% in the quarter to $532.5 million, driven by 7.6% higher closings and a 2.6% increase in average selling price to $389.8 thousand. Nine-month closings increased 7.7% and average selling price increased 2.4% to $382.9 thousand.
Homebuilding gross margin excluding impairments, abandonments and interest amortized to cost of sales was 21.2% in the quarter and 20.7% year to date, compared with 19.4% and 19.6%, respectively, in the comparable periods. Management attributed the improvement to geographic and product mix, pricing, lower incentives, house-cost management, cycle-time improvements and lower warranty costs.
Adjusted EBITDA was $54.0 million for the quarter and $127.3 million for the nine months, compared with $38.7 million and $98.1 million, respectively. Adjusted EBITDA is a non-GAAP measure and excludes, among other items, impairments, stock-based compensation and restructuring costs.
Balance sheet, debt and liquidity
- Cash and cash equivalents were $152.3 million at June 30, 2020, compared with $106.7 million at September 30, 2019. Including restricted cash, total cash was $165.4 million.
- Total debt, net of issuance costs and accretion, was $1.180 billion, compared with $1.178 billion at September 30, 2019.
- The $250.0 million secured revolving credit facility had no borrowings or letters of credit outstanding, leaving $250.0 million of capacity. The company was in compliance with its debt covenants.
- Outstanding debt included a $150.0 million term loan maturing in September 2022, senior notes maturing from 2025 through 2029, and $67.6 million of junior subordinated notes maturing in 2036.
- Outstanding performance bonds and letters of credit were approximately $255.6 million and $48.7 million, respectively.
- Liquidity increased by $42.6 million during the nine months, including $59.0 million of operating cash flow, $7.3 million of investing outflows and $9.1 million of financing outflows.
Material changes versus the prior comparable period
- Results improved substantially because the nine-month 2019 period included $148.6 million of inventory impairment and abandonment charges, compared with $2.3 million in the current nine-month period.
- In the current quarter, the company recorded $1.3 million of land-held-for-sale impairments and $1.0 million of abandonment charges related to four terminated land acquisition contracts.
- Quarterly net new orders declined 11.1% to 1,372 homes, while cancellation rates increased to 21.1% from 15.2%. For the nine months, net new orders increased 4.0% to 4,284.
- Backlog declined 1.2% to 2,237 homes, but the aggregate backlog value increased 0.4% to $884.9 million because backlog average selling price increased 1.6% to $395.6 thousand.
- SG&A as a percentage of revenue improved to 11.7% for the quarter and 12.3% for the nine months, compared with 12.2% and 12.8%, respectively.
- The company reduced its workforce by approximately 8.0%, expects annualized savings of more than $10.0 million, and recorded $1.4 million of restructuring and severance charges in the quarter.
- Land acquisition and development spending declined to $55.7 million in the quarter from $102.8 million in the prior-year quarter.
Guidance, outlook, commentary and risks
The filing does not provide specific numerical revenue, earnings or closing guidance. Management stated that demand improved significantly late in the quarter: net new orders were down 59.9% year over year in April, down 5.8% in May and up 41.4% in June. Management attributed the recovery to low interest rates, limited housing supply, suburban demand and potential pent-up demand.
The company gradually resumed land acquisition and development spending while maintaining a focus on cash generation and liquidity. Management believed it had adequate capital resources as of the filing date, but noted that access to capital markets, bank financing and other funding could be constrained by COVID-19-related volatility and credit conditions.
- COVID-19 could reduce demand, closings, prices, revenue, cash flow and profitability; increase cancellations; disrupt construction and deliveries; and increase material, labor or subcontractor costs.
- Future inventory impairments, land-option abandonments or goodwill impairments could be material if housing conditions or projected cash flows deteriorate.
- The company controlled 18,093 lots, including 5,109 lots under option agreements with $384.9 million of remaining purchase obligations and $69.3 million of deposits and non-refundable costs.
- Deferred tax assets totaled $234.0 million net at June 30, 2020. Management concluded that a substantial portion was more likely than not realizable, but sustained earnings reductions could change that conclusion.
- Construction defect, warranty and other litigation matters remain ongoing. Warranty reserves were $12.3 million, litigation and other matter accruals were $3.6 million, and certain losses cannot presently be estimated.
- Variable-rate debt totaled approximately $67.6 million; a one-percentage-point rate increase would increase estimated annual interest expense by approximately $1.0 million.
Investor verification points
- Verify whether the late-quarter order recovery continued after June 30, 2020 and whether cancellation rates normalized.
- Assess the sustainability of the 21.2% quarterly adjusted homebuilding gross margin, including the effects of mix and prior impairment turns.
- Monitor COVID-19 impacts on backlog conversions, home deliveries, pricing, construction costs and future inventory valuations.
- Reconcile total debt of approximately $1.18 billion with cash of $152.3 million and available revolver capacity of $250.0 million.
- Review compliance with amended revolving-credit covenants and restrictions on share repurchases through September 30, 2020.
- Evaluate exposure from lot-option obligations, performance bonds, letters of credit, warranty claims and unresolved litigation.
- Confirm the realizability of the $234.0 million net deferred tax asset under future earnings scenarios.