Beazer Homes USA, Inc. — Fiscal 2014 Second-Quarter Form 10-Q
Business context and reporting period
Beazer Homes is a residential homebuilder operating through West, East and Southeast segments across 16 states. The filing covers the three and six months ended March 31, 2014, compared with the corresponding periods in 2013. Results are seasonal, with generally higher orders in the second and third fiscal quarters and higher closings in the third and fourth quarters.
Financial performance and key metrics
| Metric | Three months ended March 31, 2014 | Three months ended March 31, 2013 | Six months ended March 31, 2014 | Six months ended March 31, 2013 |
|---|---|---|---|---|
| Total revenue | $270.0 million | $287.9 million | $563.2 million | $534.8 million |
| Gross profit | $52.2 million | $43.9 million | $106.8 million | $80.0 million |
| Total gross margin | 19.3% | 15.2% | 19.0% | 15.0% |
| Operating income | $5.6 million | $0.3 million | $17.1 million | $(3.3) million |
| Net loss | $(8.0) million | $(19.6) million | $(13.1) million | $(40.0) million |
| Net loss per share | $(0.31) | $(0.80) | $(0.52) | $(1.64) |
| Cash used in operating activities | Not separately provided | Not separately provided | $(188.1) million | $(76.3) million |
Homebuilding revenue declined 6.8% in the quarter as closings fell 13.3% to 977, partly offset by a 7.5% increase in average selling price to $272,400. Six-month homebuilding revenue increased 4.9%, while closings declined 6.9% and average selling price increased 12.7% to $276,000.
Homebuilding gross margin excluding impairments, abandonments and interest amortized to cost of sales improved to 22.5% in the quarter from 19.1% in the prior-year quarter, and to 21.9% for the six-month period from 18.7%. SG&A as a percentage of revenue increased to 16.2% in the quarter from 14.1%, reflecting higher selling, marketing and personnel costs.
At March 31, 2014, cash and cash equivalents were $299.6 million, restricted cash was $50.8 million, total debt was $1.512 billion and stockholders’ equity was $230.8 million. The Company had $150 million of available capacity under its secured revolving credit facility and no outstanding borrowings under that facility. Inventory was $1.488 billion, up from $1.314 billion at September 30, 2013.
Material changes versus the prior comparable period
- Quarterly revenue decreased $17.9 million, but gross profit increased $8.3 million and operating income increased $5.3 million.
- Six-month revenue increased $28.4 million, gross profit increased $26.9 million and operating results improved from a $3.3 million loss to $17.1 million of income.
- Net loss narrowed by $11.7 million for the quarter and $26.9 million for the six-month period.
- Net new orders decreased 8.6% in the quarter and 6.8% for the six-month period. The average active community count declined 6.7% year over year for the quarter.
- Backlog declined 2.2% to 2,163 homes, but backlog value increased 9.1% to $637.1 million as backlog average selling price increased 11.5% to $294,500.
- Operating cash use increased substantially, principally because land and land-development spending increased to $252.4 million from $152.6 million in the prior-year six-month period.
- Inventory impairments and option abandonments declined to $0.9 million for the six months from $2.2 million. No impairments resulted from discounted cash-flow analyses in either period.
Outlook, unusual items, risks and contingencies
- Management continued to expect fiscal 2014 to be the Company’s first full year of profitability since fiscal 2006.
- The multi-year “2B-10” plan targets $2 billion of revenue and a 10% Adjusted EBITDA margin within two to three years. Achievement depends on increasing active communities, sales productivity, average selling prices and gross margins while controlling costs.
- Severe winter weather, labor and material constraints, permitting delays and third-party development delays deferred more than 40 expected closings and delayed development of multiple communities. Management characterized the weather impact as temporary.
- In April 2014, after quarter-end, the Company issued $325 million of 5.75% Senior Notes due 2019 and used the proceeds to redeem its 9.125% Senior Notes due 2018. Management expected annual cash-interest savings of approximately $8.4 million, but anticipated an approximately $19.8 million loss on debt extinguishment in the fiscal third quarter.
- The Company remained in compliance with its debt covenants. Its consolidated tangible net worth was $206.8 million versus an $85 million threshold relevant to the 2016 Notes.
- Land-option commitments included $378.5 million of remaining purchase obligations and $47.1 million of deposits and nonrefundable pre-acquisition costs. The Company controlled 29,331 lots, including 5,602 lots under option.
- The Company had $189.3 million of performance bonds and $26.5 million of outstanding letters of credit. It also had obligations associated with the Deferred Prosecution Agreement and other settlements, with maximum aggregate liability stated as not exceeding $55.0 million; $20.2 million had been paid and $1.8 million recorded as a liability at March 31, 2014.
- Construction-defect, warranty, environmental, litigation and potential mortgage-loan repurchase claims remain risks. Warranty reserves were $12.6 million, and litigation and other matter reserves excluding warranty were $19.4 million.
- Substantially all deferred tax assets remained subject to a valuation allowance. The Company reported $491.9 million of valuation allowance against gross deferred tax assets of $551.5 million.
Most important facts for investors to verify
- Whether the anticipated fiscal 2014 profitability and “2B-10” targets are achieved, particularly given continued net losses and negative operating cash flow.
- The conversion of backlog into closings, including the effects of weather, labor shortages, permitting delays and community count growth.
- Whether higher average selling prices and gross margins offset rising land, labor, material, selling and administrative costs.
- The post-quarter refinancing, including actual debt-extinguishment charges, interest savings and effects on maturity concentration and liquidity.
- The recoverability of the $1.488 billion inventory balance and potential future impairment or option-abandonment charges.
- Future cash requirements for land purchases, land options, performance bonds, letters of credit, debt service and settlement obligations.
- Developments in construction-defect, warranty, litigation, tax-audit and deferred-tax-asset matters.