Beazer Homes USA, Inc. — Fiscal 2024 Second-Quarter Form 10-Q
Reporting period: Three and six months ended March 31, 2024; fiscal year ends September 30. 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 Mar. 31, 2024 | Prior year | Six months ended Mar. 31, 2024 | Prior year |
|---|---|---|---|---|
| Total revenue | $541.5 million | $543.9 million | $928.4 million | $988.8 million |
| Gross profit | $101.9 million | $102.9 million | $179.6 million | $188.7 million |
| Operating income | $36.0 million | $38.8 million | $56.3 million | $67.3 million |
| Net income | $39.2 million | $34.7 million | $60.9 million | $59.0 million |
| Diluted EPS | $1.26 | $1.13 | $1.96 | $1.93 |
| Operating margin | 6.6% | 7.1% | 6.1% | 6.8% |
| Homebuilding gross margin | 18.7% | 18.7% | 19.2% | 18.9% |
| Adjusted EBITDA | $58.8 million | $62.1 million | $96.8 million | $109.3 million |
Revenue declined 0.4% for the quarter and 6.1% year to date. Quarterly homebuilding revenue declined 0.6%, as closings fell 1.8% to 1,044, partially offset by a 1.2% increase in average selling price to $515.9 thousand. Six-month closings declined 5.7% and homebuilding revenue declined 6.7%.
Net income increased primarily because of an $8.6 million gain on the sale of a minority investment and higher interest income. Excluding the investment gain, quarterly Adjusted EBITDA declined $3.3 million, or approximately 5%, and six-month Adjusted EBITDA declined $12.5 million, or approximately 11%.
Cash, cash equivalents and restricted cash totaled $165.4 million at March 31, 2024, including $132.9 million of unrestricted cash, compared with $386.3 million at September 30, 2023. Operating activities used $239.6 million during the first six months, primarily reflecting a $299.1 million inventory increase. Investing activities used $18.8 million, while financing activities provided $37.4 million.
Owned inventory increased to $2.06 billion from $1.76 billion at September 30, 2023. Homes under construction increased to 2,829 from 2,163, including 1,084 spec homes.
Debt, Liquidity and Capitalization
- Total debt, net of issuance costs, was $1.02 billion at March 31, 2024, compared with $978.0 million at September 30, 2023.
- Total debt-to-capitalization was 46.8%, compared with 49.7% at March 31, 2023. Net debt-to-net capitalization was 43.4%, compared with 42.7% a year earlier.
- In March 2024, Beazer issued $250.0 million of 7.5% senior notes due 2031 and redeemed the remaining $197.9 million of its 2025 Notes. The transaction resulted in a $0.4 million loss on extinguishment of debt.
- The unsecured revolving credit facility was extended to March 15, 2028. No borrowings or letters of credit were outstanding under the facility, leaving $300.0 million of capacity at March 31, 2024.
- Outstanding standalone letters of credit were $34.8 million and surety bonds were $255.4 million.
- Interest payments were $34.6 million during the first six months. Variable-rate debt totaled approximately $75.4 million; a one-percentage-point rate increase would increase estimated annual interest expense by approximately $1.0 million.
Material Changes and Operating Trends
- Average active communities increased 13.8% to 140, and ending active communities increased 19.8% to 145. Management continues to target more than 200 active communities by the end of fiscal 2026.
- Quarterly net new orders increased 10.0% to 1,299, while the sales pace declined to 3.1 homes per community per month from 3.2. Six-month net new orders increased 27.6% to 2,122.
- Backlog increased 10.1% to 2,046 homes, with an aggregate value of $1.08 billion. Backlog average selling price declined 1.1% to $525.5 thousand.
- The West was the strongest region, with quarterly net orders up 36.3% and revenue up 4.8%. East and Southeast quarterly net orders declined 11.1% and 30.7%, respectively.
- Quarterly gross margin excluding impairments, abandonments and interest declined to 21.7% from 22.0%, primarily due to product and community mix and increased closing-cost incentives, partly offset by lower build costs.
- SG&A increased to 11.5% of revenue from 11.2%, reflecting higher sales and marketing spending to support community expansion and lower revenue.
- No inventory impairment or abandonment charges were recorded in the current-year quarter or year-to-date period. Prior-year charges were $0.1 million for the quarter and $0.3 million year to date.
Outlook, Risks and Unusual Items
Management reported healthy demand, supported by low resale inventory, low unemployment and consumer confidence, but stated that mortgage-rate volatility and affordability remain significant constraints. Beazer is using its Mortgage Choice platform and modifying home sizes and specifications to address affordability.
Long-term objectives include more than 200 active communities by fiscal 2026, net debt-to-net capitalization below 30% by fiscal 2026, and 100% of home starts meeting the Zero Energy Ready standard by the end of calendar 2025. No specific fiscal 2024 earnings or revenue guidance was provided in the filing.
Key risks include higher or volatile mortgage rates, affordability pressure, construction labor and material costs, supply-chain disruptions, land and inventory valuation risk, cancellation of backlog, competition, permitting and regulatory delays, natural disasters, cybersecurity events, construction-defect and warranty claims, litigation, insurance and surety-bond availability, and access to debt or equity financing.
Lot option agreements covered 13,527 active lots, with $174.6 million of deposits and nonrefundable pre-acquisition costs and $989.4 million of remaining purchase commitments. Litigation accruals were $8.8 million, and warranty reserves were $12.1 million at March 31, 2024. Management stated that liquidity was adequate and that debt covenants were satisfied.
The filing states that disclosure controls were effective as of March 31, 2024 and that there were no material changes to internal control over financial reporting. No material changes were reported to previously disclosed risk factors.
Investor Verification Items
- Assess whether the $8.6 million investment-sale gain materially affects reported earnings and compare operating performance using Adjusted EBITDA excluding the gain.
- Monitor cash burn from elevated land acquisition, land development and construction spending, inventory growth, and future operating cash flow.
- Review the refinancing economics, including the 7.5% 2031 Notes, total interest burden and progress toward the stated leverage target.
- Track mortgage rates, cancellation rates, sales pace, backlog conversion and regional order trends, particularly the weakness in the East and Southeast.
- Evaluate gross-margin sensitivity to incentives, product mix, build costs and affordability-related price or specification changes.
- Review the $989.4 million of remaining lot-option purchase commitments and the $255.4 million of surety bonds for potential liquidity requirements.
- Monitor construction-defect litigation, warranty reserve adequacy, insurance recoveries and the potential for uninsured losses.