Beazer Homes USA, Inc. — Fiscal Q2 2019 Form 10-Q
Reporting period: Three and six months ended March 31, 2019; filed May 2, 2019. Beazer is a geographically diversified homebuilder operating in 13 states across the West, East and Southeast regions. The interim financial statements are unaudited, and results are subject to significant seasonality.
Financial performance and position
| Metric | Three months ended March 31, 2019 | Three months ended March 31, 2018 | Six months ended March 31, 2019 | Six months ended March 31, 2018 |
|---|---|---|---|---|
| Total revenue | $421.3 million | $455.2 million | $823.3 million | $827.7 million |
| Net income (loss) | $(100.9) million | $11.6 million | $(93.6) million | $(119.4) million |
| Operating income (loss) | $(139.0) million | $13.8 million | $(135.4) million | $20.5 million |
| Gross margin | (19.6)% | 16.5% | (2.7)% | 16.4% |
| Basic loss per share | $(3.28) | Basic EPS $0.36 | $(2.99) | $(3.72) |
| Net cash used in operating activities | Not separately reported for the quarter | $(83.0) million | $(116.2) million |
- Homebuilding revenue was $420.9 million in the quarter, down 4.6% year over year, as closings fell 10.4% to 1,134; average selling price increased 6.5% to $371,200.
- Adjusted homebuilding gross margin excluding impairments, abandonments and interest was 19.8%, versus 21.3% in the prior-year quarter. Reported homebuilding gross margin was negative 10.5%.
- Adjusted EBITDA was $32.6 million for the quarter and $59.4 million year to date, compared with $39.5 million and $67.9 million, respectively, in the comparable periods.
- Cash, cash equivalents and restricted cash totaled $98.6 million at March 31, 2019, including $86.4 million of unrestricted cash and $12.2 million of restricted cash.
- Owned inventory was $1.63 billion, down from $1.69 billion at September 30, 2018. Total assets were $2.06 billion and stockholders’ equity was $529.2 million.
- Total debt was $1.30 billion, compared with $1.23 billion at September 30, 2018. The revolving credit facility had $75.0 million outstanding and $135.0 million of remaining capacity; the Company was in compliance with its debt covenants.
Material changes versus the prior comparable period
- The Company recorded $147.6 million of inventory impairment charges in the quarter, compared with none in the prior-year quarter. The charges covered 15 California communities: $109.0 million for nine Southern California projects in progress and $38.6 million for six communities in Northern and Southern California that management now intends to sell.
- The impairments drove the quarterly gross loss, operating loss and net loss. They were primarily associated with lower expected selling prices, weaker demand and a strategic decision to sell certain California land assets.
- Quarterly net new orders declined 4.8% to 1,598, while sales per community per month declined to 3.3 from 3.7. Backlog units declined 14.0% to 1,989 and backlog value declined 11.5% to $783.3 million, partially offset by a 2.8% increase in backlog average selling price to $393,800.
- The average active community count increased 8.2% to 163, and the Company ended the quarter with 166 active communities. Land and land-development investment was $139.9 million during the quarter, compared with $143.4 million in the prior-year quarter.
- Operating cash use improved year over year, but inventory increased $88.5 million during the first six months as the Company funded land, development and construction activity.
- The Company repurchased $24.0 million of common stock, or approximately 2.2 million shares, during the first six months under a $50.0 million authorization. It also redeemed portions of its 2023 and 2025 Senior Notes, recording a $0.2 million gain on extinguishment of debt.
- The Company adopted ASC 606 using the modified retrospective method on October 1, 2018. Management reported no material impact on opening retained earnings or the amount and timing of revenue.
Guidance, outlook, commentary and risks
- Management cited low unemployment, wage growth, household formation and lower mortgage rates as supportive of housing demand, while noting continuing affordability pressure and softer demand in certain markets.
- The Company expects average selling price to increase in the near term, supported by the $393,800 average selling price in backlog. However, reduced backlog units and lower order rates may pressure future closings.
- Management expects land and land-development spending to support continued community-count growth, while balancing investment against leverage reduction and capital efficiency.
- The Company stated that it expects to repurchase or redeem debt in an amount exceeding share repurchases by the end of fiscal 2019, but capital allocation may change with market conditions, strategic opportunities, debt covenants and liquidity needs.
- Management expects liquidity to be sufficient for fiscal 2019. This expectation depends on operating performance, inventory spending, access to capital markets and continued availability under credit facilities.
- Key risks include housing-market cyclicality, affordability and mortgage-rate changes, land and labor costs, construction and warranty claims, inventory valuation, additional impairments, backlog cancellations, regulatory and permitting delays, litigation, credit-rating changes and the ability to refinance or reduce debt.
- The timing of planned California land dispositions is unknown. Future deterioration in market conditions or valuation assumptions could result in additional material impairment charges.
- Outstanding off-balance-sheet commitments included $386.9 million of remaining obligations under lot option agreements, $271.6 million of performance bonds and $47.2 million of letters of credit and related facilities. The Company reported no outstanding repayment guarantees for unconsolidated entities.
- Warranty reserves were $12.6 million, and litigation and other non-warranty accruals were $3.3 million at March 31, 2019. Management did not expect current legal matters to have a material adverse effect, but stated that outcomes and potential losses cannot always be predicted.
Important facts for investors to verify
- Whether demand, orders and backlog stabilize after the reported declines, particularly in the West segment and California markets.
- Whether the $147.6 million of California impairments adequately reflects current selling prices, absorption rates and land-sale assumptions, and whether further impairments occur.
- Progress and realized proceeds from the planned California land sales.
- Cash generation relative to inventory investment, lot-option exercises and scheduled debt obligations.
- Execution of the stated debt-reduction plan while continuing share repurchases and community expansion.
- Remaining liquidity, credit-facility availability and compliance with financial and restrictive covenants.
- Changes in adjusted gross margin, reported gross margin and the effect of prior impairments on future cost of sales.
- Potential exposure from construction defects, warranty claims, performance bonds, letters of credit and other contingencies.