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, 2019, the third quarter and first nine months of fiscal 2019. Fiscal 2019 ends September 30, 2019.
Key Financial Metrics
| Metric | Q3 FY2019 | Q3 FY2018 | 9M FY2019 | 9M FY2018 |
|---|---|---|---|---|
| Total revenue | $482.7 million | $511.5 million | $1.306 billion | $1.339 billion |
| Homebuilding revenue | $482.3 million | $507.0 million | $1.304 billion | $1.316 billion |
| Gross profit | $71.8 million | $83.2 million | $49.7 million | $219.2 million |
| Gross margin | 14.9% | 16.3% | 3.8% | 16.4% |
| Operating income (loss) | $9.5 million | $17.6 million | $(125.9) million | $38.1 million |
| Net income (loss) | $11.6 million | $13.4 million | $(81.9) million | $(106.0) million |
| Diluted EPS | $0.38 | $0.41 | $(2.65) | $(3.30) |
| Adjusted EBITDA | $38.7 million | $46.6 million | $98.1 million | $114.6 million |
| Cash used in operating activities | Not separately reported for the quarter | $(94.2) million | $(133.5) million |
Q3 homebuilding gross margin excluding impairments, abandonments and interest amortized to cost of sales was 19.4%, compared with 20.8% in the prior-year quarter. SG&A was 12.2% of revenue versus 12.1%.
At June 30, 2019, cash and cash equivalents were $68.5 million, restricted cash was $16.3 million, owned inventory was $1.703 billion and total debt was $1.316 billion. The revolving credit facility had $105.0 million of remaining capacity, with $105.0 million borrowed and no letters of credit outstanding under the facility. The company was in compliance with applicable debt covenants.
Material Changes Versus the Prior Comparable Period
- Q3 revenue declined 5.6%, primarily because closings fell 8.8% to 1,269, partially offset by a 4.3% increase in average selling price to $380,100.
- Net new orders increased 6.5% to 1,544 in Q3, while the cancellation rate improved to 15.2% from 18.6%. Backlog declined 4.5% to 2,264 homes, and backlog value declined 4.2% to $881.6 million.
- Gross profit and operating income declined in Q3 because of lower closings, increased incentives, higher construction and land costs, and lower gross margins.
- Nine-month results included $148.6 million of inventory impairments and abandonments, compared with $0.2 million in the prior-year period. The charges primarily consisted of $110.0 million on projects in progress and $38.6 million on land held for sale, principally involving California assets.
- Despite the nine-month operating loss, the year-to-date net loss improved from $106.0 million to $81.9 million, largely because the prior-year period included a $25.9 million loss on debt extinguishment and a $113.4 million income tax expense, while 2019 included a $44.3 million tax benefit.
- Operating cash use improved to $94.2 million from $133.5 million, although inventory investment remained significant at $156.5 million.
- The company repurchased $34.6 million of common stock during the first nine months under a $50.0 million authorization. It also repurchased or redeemed $21.7 million of senior notes and stated an intention to repurchase or redeem debt in an amount exceeding share repurchases by fiscal year-end.
Guidance, Outlook, Risks and Unusual Items
Management did not provide specific quantitative fiscal-year revenue, earnings or margin guidance in the filing. Management reported improving demand associated with lower mortgage rates, low unemployment, wage growth and household formation, while noting that affordability concerns had slowed orders earlier in fiscal 2019. The company expects average selling prices to increase in the near term and intends to balance debt reduction, share repurchases, land investment and liquidity according to market conditions.
- Housing demand remains sensitive to mortgage rates, employment, wages, consumer confidence, affordability and broader economic conditions.
- Margins face pressure from incentives, labor and material costs, land costs, activation of previously held-for-future-development assets and competitive conditions.
- Inventory valuations depend on projected selling prices, absorption rates, costs and discount rates. Additional impairments could be material if market assumptions deteriorate.
- The company controlled 21,717 lots, including 5,517 lots under option contracts. Deposits and non-refundable pre-acquisition costs totaled $75.7 million, with $389.8 million of remaining option obligations.
- Outstanding letters of credit and performance bonds were approximately $49.2 million and $286.5 million, respectively. The company had no outstanding debt guarantees related to unconsolidated entities.
- Two putative shareholder class actions were filed in June 2019 relating to the California inventory impairments. The company considers the allegations without merit; possible losses were not reasonably estimable.
- Construction defect, warranty, litigation, permitting, environmental, insurance and surety-bond exposures remain ongoing risks. Warranty reserves were $12.2 million at June 30, 2019.
- Moody’s reaffirmed a B3 issuer default rating in June 2019 and revised the outlook from positive to stable. The filing states that disclosure controls were effective and that there were no material changes to internal control over financial reporting.
Important Facts for Investors to Verify
- Whether demand, orders and backlog improve sufficiently to support higher closings and offset margin pressure.
- The potential for additional inventory impairments, particularly in California and other lower-performing communities.
- Progress toward reducing debt and interest expense while continuing share repurchases and funding land development.
- Cash generation, inventory investment and available revolver capacity through the seasonally important fourth fiscal quarter.
- The realization of the $258.7 million net deferred tax asset and the effect of future tax credits and valuation allowances.
- The status and potential financial impact of the shareholder lawsuits and other construction defect or warranty claims.
- The timing and proceeds from planned sales of remaining land held for sale assets.