Beazer Homes USA, Inc. — Form 10-Q Summary
Business context and reporting period
Beazer Homes is a geographically diversified homebuilder operating in 13 states across the West, East and Southeast regions. This filing covers the three and six months ended March 31, 2020, representing the fiscal second quarter and first half of fiscal 2020. Results were materially affected by the emerging COVID-19 pandemic, particularly during the latter half of March.
Key financial metrics
| Metric | Three months ended March 31, 2020 | Three months ended March 31, 2019 | Six months ended March 31, 2020 | Six months ended March 31, 2019 |
|---|---|---|---|---|
| Total revenue | $489.4 million | $421.3 million | $907.2 million | $823.3 million |
| Gross profit (loss) | $78.8 million | $(82.7) million | $142.0 million | $(22.0) million |
| Gross margin | 16.1% | (19.6)% | 15.7% | (2.7)% |
| Operating income (loss) | $16.4 million | $(139.0) million | $20.4 million | $(135.4) million |
| Net income (loss) | $10.6 million | $(100.9) million | $13.4 million | $(93.6) million |
| Diluted EPS | $0.35 | $(3.28) | $0.45 | $(2.99) |
| Adjusted EBITDA | $43.9 million | $32.6 million | $73.3 million | $59.4 million |
- Homebuilding revenue increased 15.9% in the quarter and 10.2% year to date. Quarterly closings rose 12.6% to 1,277, while average selling price increased 2.9% to $382,100.
- Homebuilding gross margin was 16.1% in the quarter and 15.7% year to date. Excluding impairments and interest amortized to cost of sales, homebuilding gross margin was 20.8% and 20.3%, respectively.
- Net cash used in operating activities was $45.9 million for the six months, compared with $83.0 million in the prior-year period. Inventory increased $89.2 million.
- Net cash provided by financing activities was $241.0 million, primarily reflecting $345.0 million of revolving-facility borrowings less $95.0 million of repayments.
- Cash and cash equivalents totaled $294.3 million at March 31, 2020; cash, cash equivalents and restricted cash totaled $312.5 million.
- Total debt, net of issuance costs, was $1.429 billion, up from $1.178 billion at September 30, 2019. The $250.0 million revolving credit facility was fully drawn, leaving no remaining capacity at quarter-end.
- Owned inventory was $1.595 billion, compared with $1.504 billion at September 30, 2019. Stockholders’ equity was $547.5 million.
Material changes versus the prior comparable period
- Results improved substantially because the company recorded no inventory impairment charges in the current quarter versus $147.6 million in the prior-year quarter. The prior-year charges included $109.0 million on development projects and $38.6 million on land held for sale.
- Quarterly operating income improved by $155.4 million, from a $139.0 million loss to $16.4 million of income. The comparison is significantly affected by the prior-year impairments and related write-offs.
- Excluding impairments and interest amortization, quarterly homebuilding gross profit increased $18.0 million and margin improved by approximately 100 basis points to 20.8%.
- Net new orders increased 3.9% to 1,661 in the quarter and 13.1% to 2,912 year to date. However, the quarterly cancellation rate increased to 15.8% from 14.5%.
- Backlog increased 12.2% to 2,231 homes, with an aggregate value of $895.0 million, up 14.3%; backlog average selling price increased 1.9% to $401,200.
- Segment performance was mixed: quarterly revenue increased 27.0% in the West and 17.3% in the East but declined 5.2% in the Southeast. The West accounted for most of the improvement in operating income.
- The company adopted ASC 842 for leases on October 1, 2019, recognizing operating lease right-of-use assets of $13.9 million and lease liabilities of $16.0 million at adoption.
Guidance, outlook, risks and unusual items
- Management did not provide quantitative fiscal 2020 guidance. It expects COVID-19 to cause material declines in net orders, closings, revenue, cash flow and/or profitability in one or more 2020 periods versus the prior year and beginning-of-year expectations.
- COVID-19 caused slower customer traffic and sales pace, increased cancellations, delayed deliveries and temporary closure of sales centers, model homes and design studios to the general public. Sales shifted to appointment-only and virtual processes.
- Management is prioritizing liquidity and positive cash flow by focusing on backlog closings and reducing or deferring land acquisition, development and general and administrative spending. Land acquisition and development investment during the quarter was $123.0 million versus $139.9 million in the prior-year quarter.
- At March 31, 2020, the company had three communities on its inventory watch list and recognized no impairment charges. Management warned that further deterioration in housing or economic conditions could produce material future inventory, goodwill or land-option abandonment charges.
- On April 27, 2020, the company amended its revolving facility to enhance flexibility, including temporarily reducing collateral-ratio requirements, restricting open-market share repurchases and reducing permitted other investments. Management expected continued covenant compliance.
- The company suspended additional share repurchases for the remainder of fiscal 2020. It repurchased 362,000 shares for $3.3 million during the first six months; no dividends were paid.
- Off-balance-sheet commitments included $382.4 million of remaining purchase obligations under lot-option contracts, supported by $67.6 million of deposits and pre-acquisition costs. The company also had $56.1 million of letters of credit and $265.6 million of performance bonds.
- Construction-defect and other litigation matters remain outstanding. The company recorded $3.5 million for litigation and other matters, excluding warranty claims, and stated that certain potential losses cannot presently be reasonably estimated.
- Interest-rate risk included approximately $317.1 million of variable-rate debt; a one-percentage-point increase in rates would increase estimated annual interest expense by approximately $3.5 million.
Most important facts for investors to verify
- Whether COVID-19 caused sustained declines in orders, closings, backlog conversion, selling prices or cancellation rates after March 31, 2020.
- The company’s liquidity after fully drawing the revolving facility and its ability to refinance or obtain additional borrowing capacity.
- Compliance with amended facility, senior-note and term-loan covenants, including upcoming $50.0 million term-loan installments in September 2020 and September 2021.
- Potential future inventory, goodwill and land-option impairment charges if housing demand, pricing or absorption deteriorates.
- Cash flow conversion, inventory growth and the company’s ability to fund owned-land development and lot-option obligations.
- The financial exposure from construction-defect claims, performance bonds, letters of credit and other contingencies.
- Whether deferred tax assets remain realizable if COVID-19 produces prolonged losses or reduced future earnings.