Beazer Homes USA, Inc. — Fiscal 2016 Second-Quarter Form 10-Q
Reporting period: Fiscal quarter and six months ended March 31, 2016. The unaudited filing covers a geographically diversified homebuilder operating in 13 states across the West, East and Southeast regions. Fiscal 2016 runs from October 1, 2015 through September 30, 2016.
Key Financial Metrics
| Metric | Three months ended March 31, 2016 | Three months ended March 31, 2015 | Six months ended March 31, 2016 | Six months ended March 31, 2015 |
|---|---|---|---|---|
| Total revenue | $385.6 million | $299.4 million | $730.1 million | $565.1 million |
| Gross profit | $59.6 million | $53.9 million | $117.1 million | $89.1 million |
| Operating income (loss) | $3.0 million | $6.4 million | $12.2 million | $(3.1) million |
| Net income (loss) | $(1.2) million | $(2.0) million | $(0.2) million | $(24.3) million |
| Diluted loss per share | $(0.04) | $(0.08) | $(0.01) | $(0.92) |
| Net cash used in operating activities | Not separately provided | Not separately provided | $(59.9) million | $(202.9) million |
Margins: Total gross margin was 15.4% in the quarter and 16.0% for the six-month period, compared with 18.0% and 15.8%, respectively, in the prior-year periods. Homebuilding gross margin excluding impairments, abandonments and interest amortized to cost of sales was 20.2% in the quarter and 20.8% year to date, compared with 21.7% and 19.3%.
Operating drivers: Second-quarter homebuilding revenue increased 31.8% to $377.3 million, driven by 1,150 closings, up 22.9%, and a $328,000 average selling price, up 7.3%. Six-month homebuilding revenue increased 30.3% to $713.8 million, with closings up 20.8% to 2,199 and average selling price up 7.9% to $324,600.
Cash and liquidity: Cash and cash equivalents were $134.9 million at March 31, 2016, down from $251.6 million at September 30, 2015. Restricted cash was $17.3 million. The secured revolving credit facility had $116.1 million of remaining capacity after $28.9 million of letters of credit. Management stated that it expected liquidity to meet fiscal 2016 needs, subject to market conditions and spending requirements.
Debt: Total debt, net of discounts, was $1.46 billion at March 31, 2016, compared with $1.53 billion at September 30, 2015. The Company issued a $140 million secured two-year term loan in March 2016, primarily to redeem its remaining 2016 Senior Notes. The term loan requires quarterly principal payments of $17.5 million beginning June 30, 2016, bears interest at LIBOR plus 550 basis points and matures March 11, 2018. The Company was in compliance with applicable debt covenants.
Inventory and capital: Owned inventory increased to $1.75 billion from $1.70 billion at September 30, 2015. Six-month land and land-development spending was $195.3 million, down 21.1% from the prior year, reflecting efforts to reduce leverage and greater use of finished-lot purchases and land banking.
Material Changes Versus the Prior Comparable Period
- Revenue and closings increased substantially, particularly in the West and Southeast segments. West revenue rose 62.7% in the quarter and 71.3% year to date; Southeast revenue rose 22.0% and 19.1%, respectively.
- Quarterly operating income declined to $3.0 million from $6.4 million despite higher revenue, primarily because of lower gross margin, higher capitalized interest amortized to cost of sales and a $1.8 million inventory impairment charge. Six-month operating income improved from a $3.1 million loss to $12.2 million.
- New orders declined 9.4% in the quarter and 7.6% year to date. Ending backlog declined 9.2% to 2,300 homes, although backlog average selling price increased 4.6% to $336,100.
- Sales per community per month declined to 3.1 from 3.5, while the average active community count increased 3.8% to 166.
- General and administrative expense increased in absolute dollars but improved as a percentage of revenue to 10.1% from 10.9% in the quarter and to 9.7% from 11.4% year to date. SG&A as a percentage of revenue improved to 13.9% from 14.9% in the quarter and to 13.6% from 15.4% year to date.
- Operating cash use improved materially to $59.9 million from $202.9 million, while financing cash use increased to $73.2 million because of debt redemptions and refinancing activity.
Guidance, Outlook, Risks and Unusual Items
Management outlook: Management continued to pursue its “2B-10” objectives of reaching $2 billion of revenue and a 10% Adjusted EBITDA margin, implying at least $200 million of Adjusted EBITDA. Its current target ranges include sales per community per month of 2.8 to 3.0, average selling price of $330,000 to $340,000, active communities of 170 to 175, homebuilding gross margin excluding impairments, abandonments and interest of 21.0% to 22.0%, and SG&A of 11.0% to 12.0% of revenue. These are management objectives, not guaranteed results.
Trailing twelve-month Adjusted EBITDA excluding specified unusual items was $160.1 million, up 24.0% year over year. Management emphasized improving absorption rates, gross margin and leverage while selectively expanding communities.
Warranty and water-intrusion exposure: Through March 31, 2016, the Company had recorded cumulative charges of $61.0 million for Florida stucco and New Jersey water-intrusion issues. Current-year warranty charges were substantially offset by recognized insurance recoveries. The warranty liability was $40.9 million, including $26.3 million related to Florida stucco issues. Approximately 680 Florida homes had been identified as likely requiring repairs, with 279 repaired; additional homes remained under review. Potential repairs for additional homes not yet reserved were estimated at approximately $7.0 million. The ultimate liability may change as inspections and claims continue.
Other unusual items: The Company recorded $3.2 million of inventory impairment and abandonment charges year to date and a $2.5 million loss on debt extinguishment. It also recorded a $3.9 million income tax benefit for the quarter and a $3.3 million benefit year to date; management stated that effective tax rates were not meaningful because of discrete tax items and deferred-tax valuation allowance changes.
Principal risks: Risks include housing-cycle and local-market deterioration, consumer confidence and employment changes, mortgage-rate increases or reduced mortgage availability, weather-related delays, labor and material cost inflation, land and inventory impairment risk, backlog cancellations, debt refinancing and covenant compliance, construction-defect claims, insurance recoverability, litigation, regulatory and environmental matters, and access to capital markets. The filing states there were no material changes to the risk factors disclosed in the 2015 Form 10-K.
The Company controlled 25,132 lots, including 5,994 lots under option contracts. Deposits and other non-refundable option costs totaled approximately $72.0 million, with remaining option obligations of approximately $430.1 million. It also had approximately $213.7 million of performance bonds outstanding.
Most Important Facts for Investors to Verify
- Whether lower order activity and the 9.2% backlog decline persist, particularly in the East and Southeast segments.
- Whether homebuilding gross margins recover toward management’s 21% to 22% target range after higher land, labor, interest and community-closeout costs.
- The ultimate cost of Florida and New Jersey water-intrusion claims, the pace of repairs and the collectability and timing of insurance recoveries.
- The Company’s ability to fund $17.5 million quarterly term-loan amortization beginning June 30, 2016, while maintaining land investment and operating liquidity.
- Potential additional inventory impairments, particularly in communities on the West segment watch list and in land held for sale.
- Whether management can achieve its “2B-10” objectives while reducing leverage and maintaining adequate liquidity.
- Future obligations under the Deferred Prosecution Agreement and HUD Agreement, including the 4% adjusted EBITDA payment requirement through September 30, 2016 or until cumulative payments reach $48.0 million.