Beazer Homes USA, Inc. — Form 10-Q Summary
Business context and reporting period
Unaudited results cover the fiscal third quarter and nine months ended June 30, 2014, compared with the same periods in 2013. Beazer is a residential homebuilder operating through West, East and Southeast segments across 16 states. Continuing operations exclude discontinued markets and the former title services business.
Key financial metrics
| Metric | Q3 2014 | Q3 2013 | 9M 2014 | 9M 2013 |
|---|---|---|---|---|
| Total revenue | $354.7 million | $314.4 million | $917.9 million | $849.2 million |
| Gross profit | $68.8 million | $54.1 million | $175.6 million | $134.1 million |
| Total gross margin | 19.4% | 17.2% | 19.1% | 15.8% |
| Operating income | $15.1 million | $8.5 million | $32.2 million | $5.2 million |
| Loss from continuing operations | $13.2 million | $5.4 million | $25.4 million | $43.5 million |
| Net loss | $12.4 million | $5.8 million | $25.5 million | $45.8 million |
| Total loss per diluted share | $0.47 | $0.23 | $1.00 | $1.86 |
Homebuilding revenue increased 12.8% in the quarter and 7.9% year to date, primarily from higher average selling prices. Q3 homebuilding closings increased 0.6% to 1,241, while nine-month closings declined 4.2% to 3,256. Average selling price increased 12.1% in the quarter and 12.6% year to date. Homebuilding gross margin was 19.4% in Q3 and 19.2% year to date, compared with 17.1% and 15.7%, respectively, in the prior-year periods.
Homebuilding gross margin excluding inventory impairments, abandonments and interest amortized to cost of sales was 22.7% in Q3 and 22.2% for the first nine months, compared with 20.3% and 19.3% in the prior-year periods. SG&A, including commissions, was 14.2% of revenue in Q3 and 14.6% year to date, versus 13.6% and 14.1%.
Net cash used in operating activities was $289.6 million for the nine months, compared with $198.2 million in 2013, mainly reflecting $381.5 million of land and land-development spending versus $314.4 million in the prior year. Net cash used in investing activities was $22.3 million. Financing activities provided $14.0 million. Cash and cash equivalents declined to $206.5 million from $504.5 million at September 30, 2013.
At June 30, 2014, total debt was $1.537 billion, compared with $1.512 billion at September 30, 2013. The company had $150 million of undrawn revolving-credit capacity, $58.0 million of restricted cash and no revolver borrowings. Letters of credit outstanding were $33.7 million. Stockholders’ equity was $219.0 million, down from $240.6 million.
Material changes versus the prior comparable period
- Revenue and operating income improved substantially, with nine-month operating income rising by $27.1 million to $32.2 million.
- The company issued $325 million of 5.75% senior notes due 2019 and redeemed all 9.125% senior notes due 2018. The refinancing is expected to reduce annual cash interest expense by more than $8 million, but produced a $19.8 million Q3 loss on debt extinguishment.
- Owned inventory increased to $1.588 billion from $1.305 billion, primarily reflecting increased land and development investment. Four communities were placed on the quarterly watch list; no impairment charges resulted from the formal recoverability analyses.
- Inventory impairments and option abandonments totaled $2.0 million in Q3 and $2.9 million year to date, including a $1.7 million Southeast wetlands-related lot abandonment.
- Net new orders declined 6.6% in Q3 and 6.8% year to date. Backlog units declined 6.2% to 2,212, but backlog dollar value increased 2.6% to $663.2 million because backlog average selling price rose 9.4% to approximately $299,800.
- The company ended the quarter with 142 active communities and invested $129.1 million in land and land development during Q3.
Guidance, outlook, risks and unusual items
Management continued to expect fiscal 2014 to be the company’s first full year of profitability since fiscal 2006. Its multi-year “2B-10” plan targets $2 billion of revenue and a 10% Adjusted EBITDA margin within two to three years. Management expects active communities, closings and average selling prices to increase as recently acquired land and communities under development become active. It also expected $10 million to $30 million of land-sale revenue in the fourth quarter.
Management reported favorable housing fundamentals, including improved consumer confidence, job growth and constrained housing supply, but noted softer conditions in portions of Las Vegas and Phoenix. Labor shortages and higher costs may extend development and construction schedules. The company expects to meet its liquidity needs through fiscal 2014 and fiscal 2015, subject to market conditions and spending levels.
On July 1, 2014, the pre-owned rental homes REIT was sold to American Homes 4 Rent; Beazer expected to record an approximately $6 million gain in Q4 fiscal 2014. The IRS appeal resolution was expected to produce approximately $26 million plus interest, with the tax benefit recognized in Q4. The company continued to maintain a substantial valuation allowance against deferred tax assets; net deferred tax assets were $5.5 million after a $483.6 million valuation allowance.
Key risks include housing-market cyclicality, cancellation risk in backlog, land and inventory valuation, construction costs and delays, mortgage availability and interest rates, liquidity and refinancing requirements, restrictive debt covenants, credit-rating changes, warranty and construction-defect claims, litigation, regulatory matters, tax-asset recoverability and obligations under the deferred prosecution agreement. The DPA and related settlements have a maximum liability of $55.0 million; $20.2 million had been paid and $3.3 million accrued at June 30, 2014. Performance bonds totaled approximately $200.3 million.
Most important facts for investors to verify
- Whether higher selling prices and gross margins can offset lower order volumes, community-count constraints and rising labor and material costs.
- The sustainability of positive operating income and management’s expectation of full-year fiscal 2014 profitability after excluding the debt-extinguishment charge.
- Cash consumption from land investment, inventory growth and seasonal working-capital needs relative to $206.5 million of cash and $150 million of revolver capacity.
- Debt maturities, refinancing access, covenant compliance and the impact of the 2019 refinancing on future interest expense.
- Potential inventory impairments if housing markets, absorption rates or land values weaken.
- The timing and amount of the expected Q4 REIT gain and IRS-related tax benefit.
- Future obligations related to litigation, warranty claims, performance bonds, the DPA, environmental matters and $417.2 million of remaining lot-option purchase commitments.