BEAZER HOMES USA INC quarterly report, Q3 FY2022

Beazer Homes USA, Inc. — Fiscal 2022 Third-Quarter Form 10-Q

Reporting period: Three and nine months ended June 30, 2022; fiscal year ending September 30, 2022. 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 June 30	Nine months ended June 30
Total revenue	$526.7 million, down 7.8%	$1.489 billion, down 3.9%
Gross profit	$132.5 million, up 14.7%	$349.6 million, up 21.1%
Total gross margin	25.2%, versus 20.2%	23.5%, versus 18.6%
Operating income	$67.2 million, versus $48.7 million	$162.8 million, versus $100.0 million
Net income	$54.3 million, versus $37.1 million	$133.9 million, versus $73.7 million
Diluted earnings per share	$1.76, versus $1.22	$4.35, versus $2.43
Adjusted EBITDA	$88.2 million, versus $78.8 million	$226.7 million, versus $186.6 million

Homebuilding revenue declined 7.7% in the quarter and 4.0% year to date, primarily because closings fell 24.3% and 19.1%, respectively. Higher average selling prices partly offset the lower volume.
Quarterly homebuilding gross margin was 25.1%, compared with 20.2% in the prior-year quarter; excluding impairments, abandonments and interest amortized to cost of sales, margin was 28.1%, compared with 24.2%.
Quarterly SG&A was 11.8% of revenue, compared with 11.1%; the increase reflected lower closings and revenue from longer construction cycles.
Cash, cash equivalents and restricted cash totaled $81.8 million at June 30, 2022, including $42.0 million of unrestricted cash and $39.8 million of restricted cash.
Net cash used in operating activities was $164.5 million year to date, versus $78.5 million of cash provided in the prior-year period, primarily because inventory increased $351.4 million.
Owned inventory was $1.859 billion, up from $1.502 billion at September 30, 2021. Homes under construction increased to $976.6 million from $648.3 million.
Total debt, net of issuance costs, was $1.049 billion, compared with $1.054 billion at September 30, 2021. The $50.0 million senior unsecured term loan matured in September 2022.
The $250.0 million secured revolving facility had no borrowings and $248.2 million of remaining capacity at June 30, 2022. Additional cash-secured letters of credit totaled $28.8 million.
Stockholders’ equity increased to $856.1 million from $724.9 million, primarily because of year-to-date net income.

Material changes versus the prior comparable periods

Net new orders declined 22.9% in the quarter to 925 and 25.3% year to date to 3,357. Sales per community per month decreased to 2.5 from 3.2.
The cancellation rate increased to 17.0% from 10.9% in the quarter and to 13.5% from 11.0% year to date.
Backlog units declined 3.9% to 3,003, but backlog value increased 17.2% to $1.588 billion because backlog average selling price increased 22.0% to $528.8 thousand.
Quarterly closings fell to 1,043 from 1,378, while average selling price rose 21.9% to $501.7 thousand. Year-to-date closings fell 19.1%, while average selling price rose 18.6% to $470.4 thousand.
The West was the strongest segment, with quarterly revenue up 9.3% and operating income up $12.8 million. East and Southeast revenue declined 30.6% and 19.9%, respectively.
Beazer acquired substantially all assets of San Antonio-based Imagine Homes on May 20, 2022. The acquired operations are reported in the West segment.
During the quarter, Beazer repurchased $1.7 million of 2025 senior notes and recognized a $0.1 million gain on extinguishment of debt. Year to date, it repurchased $6.0 million of 2027 notes and $1.7 million of 2025 notes.
The company repurchased 175,000 common shares for $2.5 million under a new $50.0 million authorization; $47.5 million remained available at June 30, 2022.

Outlook, commentary and risks

Management reported that demand moderated in the third quarter because of sharply higher mortgage rates, elevated home prices, inflation, stock-market volatility and weaker buyer sentiment.
Management is incorporating higher mortgage rates, lower sales pace and higher incentives into land underwriting and is seeking price discounts or improved terms on pending land transactions.
Supply-chain disruption and labor shortages extended construction cycles by an average of two to three months, reducing backlog conversion and closings.
Management continues to target earnings growth faster than revenue growth, a less-leveraged capital structure and total debt below $1.0 billion, while expanding its lot position and maintaining flexibility for share repurchases.
Controlled lots increased to 24,899, including 12,571 lots under option contracts. Remaining option obligations, net of deposits, were $819.1 million, with $137.4 million of deposits and other nonrefundable costs at risk if options are terminated.
Outstanding letters of credit and surety bonds were $30.6 million and $272.5 million, respectively. Litigation accruals were $8.7 million and warranty reserves were $13.0 million.
Key risks include further mortgage-rate increases, reduced housing affordability and demand, cancellation risk, construction delays, labor and material inflation, inventory impairments, land-option abandonment costs, liquidity and refinancing risk, credit-rating changes, construction-defect claims, litigation, insurance availability and changing regulatory conditions.
S&P reaffirmed the company’s corporate credit rating of B with a positive outlook in July 2022. Moody’s had previously upgraded the issuer rating to B2 with a stable outlook.
Management stated that disclosure controls were effective as of June 30, 2022 and reported no material changes in internal control over financial reporting.

Important facts for investors to verify

Whether the September 2022 $50.0 million term-loan maturity was refinanced or repaid and the effect on liquidity and leverage.
Subsequent trends in mortgage rates, orders, cancellations, incentives, backlog conversion and construction-cycle times.
Whether the significant inventory build and land-option obligations generate sufficient future cash returns without impairments.
Changes in homebuilding gross margins as demand moderates and pricing power weakens.
The company’s ability to achieve its goal of reducing total debt below $1.0 billion while funding inventory growth.
Developments in construction-defect litigation, warranty claims, insurance recoveries and surety-bond requirements.
Results and integration of the Imagine Homes acquisition and its contribution to the West segment.