Beazer Homes USA, Inc. — Fiscal 2023 First-Quarter Form 10-Q
Reporting period: Three months ended December 31, 2022. The filing was dated February 2, 2023. Beazer is a geographically diversified U.S. homebuilder operating in 13 states across the West, East and Southeast regions. Results are unaudited and may not indicate full-year performance because of seasonal variability.
Financial Performance and Position
| Metric | Q1 FY2023 | Q1 FY2022 | Change |
|---|---|---|---|
| Total revenue | $444.9 million | $454.1 million | Down 2.0% |
| Homebuilding revenue | $444.1 million | $446.7 million | Down 0.6% |
| Gross profit | $85.8 million | $97.4 million | Down $11.6 million |
| Total gross margin | 19.3% | 21.4% | Down 210 basis points |
| Operating income | $28.5 million | $40.9 million | Down 30.4% |
| Net income | $24.3 million | $34.9 million | Down $10.6 million |
| Diluted EPS | $0.80 | $1.14 | Down $0.34 |
| Cash used in operating activities | $86.8 million | $77.8 million | Higher use of $9.0 million |
Homebuilding gross margin was 19.2%, compared with 20.9% in the prior-year quarter. Excluding impairments, abandonments and interest amortized to cost of sales, homebuilding gross margin was 22.3%, compared with 24.2%. Management attributed the deterioration primarily to increased price concessions and closing-cost incentives as demand weakened.
Commissions were $14.1 million and general and administrative expenses were $40.6 million. Selling, general and administrative expenses were 12.3% of revenue, versus 11.8% in the prior-year quarter. The effective tax rate was 14.5%, compared with 15.6%, partly reflecting approximately $3.0 million of energy-efficiency tax credits.
Cash, Debt and Liquidity
- Cash and cash equivalents were $120.7 million at December 31, 2022, compared with $214.6 million at September 30, 2022. Cash, cash equivalents and restricted cash totaled $156.6 million.
- Net cash used in operating activities was $86.8 million, primarily reflecting a $40.5 million increase in inventory and an $80.8 million net decrease in non-inventory working capital balances.
- Total debt, net of issuance costs and accretion, was $984.3 million, compared with $983.4 million at September 30, 2022.
- Senior Notes had a carrying value of $911.5 million and an estimated fair value of $836.6 million. Junior Subordinated Notes had a carrying value and estimated fair value of $72.8 million.
- The new senior unsecured revolving credit facility provides $265.0 million of capacity, with no borrowings or letters of credit outstanding at quarter-end. The company may request up to $135.0 million of additional commitments.
- Outstanding stand-alone letters of credit were $30.4 million, secured by $31.5 million of restricted cash. Surety bonds totaled $277.5 million.
- Management stated that the company was in compliance with its debt covenants and believed available liquidity was sufficient for current and reasonably anticipated requirements.
Material Changes Versus the Prior Comparable Period
- Net new orders declined 57.8% to 482, while sales per community per month fell to 1.3 from 3.3.
- The cancellation rate increased to 37.1% from 11.8%; gross new orders declined 40.8% to 766.
- Backlog declined 40.2% to 1,740 homes, and backlog value declined 33.0% to $940.9 million. Backlog average selling price increased 11.9% to $540.8 thousand, but declined slightly sequentially from $547.5 thousand.
- Home closings decreased 18.3% to 833, while average selling price increased 21.6% to $533.1 thousand.
- West revenue increased 7.0%, East revenue declined 24.7%, and Southeast revenue increased 10.2%. East operating income fell $10.6 million, West fell $5.4 million, and Southeast increased $2.5 million.
- Owned inventory increased to $1.779 billion from $1.738 billion. The company controlled 24,735 lots, up 7.3% year over year, with 54.4% of active lots controlled through option agreements.
- The company recorded $0.2 million of abandonment charges and a $0.5 million loss on extinguishment of debt related to the early termination of its prior secured revolving credit facility.
- Land sales and other revenue declined to $0.8 million from $7.4 million, primarily because of fewer land-sale closings.
Outlook, Commentary and Risks
Management described fiscal 2023 housing conditions as challenging because of elevated mortgage rates, inflation, an uncertain economic outlook and weaker buyer sentiment. The company expects market uncertainty to continue and may use additional pricing concessions, incentives or mortgage-rate buy-down programs, which could reduce near-term margins.
Management plans to reduce build costs, recover construction cycle times, prudently manage overhead, invest selectively in land, gradually increase active communities and expand use of lot option agreements. Management continues to view the long-term housing outlook positively because of demographic trends and a persistent housing shortage.
- Key risks include further increases in mortgage rates, reduced mortgage availability, lower affordability, cancellations and declining home prices.
- Supply-chain disruptions, labor shortages, higher construction costs and longer cycle times could constrain closings and margins.
- Inventory valuations, land values and lot-option commitments are sensitive to market conditions. Remaining obligations under unconsolidated lot options were $820.8 million, with $150.9 million of deposits and other non-refundable costs incurred.
- Construction defect claims, warranty costs, litigation, insurance availability and surety-bond requirements could adversely affect results. Litigation accruals were $8.0 million at quarter-end, and the warranty reserve was $13.2 million.
- Variable-rate debt totaled approximately $72.8 million; a one-percentage-point rate increase would increase estimated annual interest expense by approximately $1.0 million.
- Management reported no material changes to previously disclosed risk factors, and disclosure controls were effective as of December 31, 2022.
Investor Verification Priorities
- Verify whether order trends, cancellation rates and backlog stabilize or deteriorate further as mortgage rates and affordability evolve.
- Monitor reported and adjusted homebuilding gross margins, including the effect of incentives, price concessions, interest amortization and inventory impairments.
- Assess operating cash conversion and inventory growth, particularly land acquisition and development spending.
- Review liquidity relative to approximately $984.3 million of debt, upcoming 2025 Senior Note maturity and $820.8 million of remaining lot-option obligations.
- Evaluate potential inventory impairments, lot-option abandonments, warranty claims, construction-defect litigation and surety-bond or letter-of-credit draws.
- Confirm the sustainability of the higher average selling prices, given management’s indication that backlog ASP had begun to decline sequentially.