Business Context and Reporting Period
Beazer Homes USA, Inc. is a geographically diversified U.S. homebuilder operating in 13 states across the West, East and Southeast regions. This unaudited Form 10-Q covers the three months ended December 31, 2018, the first quarter of fiscal 2019, compared with the three months ended December 31, 2017.
Financial Performance and Position
| Metric | Q1 FY2019 | Q1 FY2018 | Change |
|---|---|---|---|
| Total revenue | $402.0 million | $372.5 million | +7.9% |
| Homebuilding revenue | $401.0 million | $367.8 million | +9.0% |
| Gross profit | $60.7 million | $60.8 million | Approximately flat |
| Operating income | $3.5 million | $6.7 million | -$3.2 million |
| Income from continuing operations | $7.3 million | $(130.6) million | Improved by $137.9 million |
| Net income | $7.3 million | $(130.9) million | Improved by $138.3 million |
| Diluted EPS | $0.23 | $(4.08) | Improved |
| Adjusted EBITDA | $26.8 million | $28.4 million | -$1.6 million |
| Cash used in operating activities | $(54.7) million | $(102.2) million | Use decreased |
- Reported homebuilding gross margin was 15.1%, compared with 16.4% in the prior-year quarter. Excluding inventory impairments, abandonments and interest amortized to cost of sales, adjusted homebuilding gross margin was 19.7%, down from 20.9%.
- SG&A was 13.5% of revenue, compared with 13.9% in the prior-year quarter. G&A was 9.6% of revenue, compared with 10.0%.
- Home closings increased 1.6% to 1,083, while average selling price increased 7.3% to $370,300.
- Net new orders declined 12.1% to 976, and sales per active community per month declined to 2.0 from 2.4. Cancellation rates increased to 19.8% from 18.9%.
- Backlog declined 19.7% to 1,525 homes, and backlog value declined 15.8% to $593.1 million. Backlog average selling price increased 4.9% to $388,900.
- Owned inventory increased to $1.72 billion from $1.69 billion at September 30, 2018. Cash and cash equivalents were $84.4 million, with restricted cash of $12.6 million.
- Total debt, net of premiums and issuance costs, was $1.26 billion, compared with $1.23 billion at September 30, 2018. Debt included $25.0 million drawn under the revolving credit facility.
Material Changes Versus the Prior Comparable Period
- Profitability benefited materially from the absence of the prior-year $25.9 million loss on extinguishment of debt and from a current-year $3.9 million income tax benefit versus $108.1 million of prior-year tax expense.
- The current-year tax benefit primarily reflected recognition of $5.3 million of tax credits related to prior fiscal years. Management expects an approximately 25% annualized effective tax rate for fiscal 2019, subject to discrete items.
- Operating income declined despite higher revenue because of lower gross margins, a $1.0 million inventory impairment, higher commissions and increased depreciation and amortization.
- The West segment performed better, with revenue up 18.3% and operating income up $3.2 million. East operating income declined $2.0 million, while Southeast operating income declined $5.5 million, partly due to lower margins and a $0.9 million impairment charge.
- The company adopted ASC 606 on October 1, 2018 using the modified retrospective method. Management reported no material effect on opening retained earnings or the amount and timing of revenue.
- The company acquired Venture Homes in July 2018 for $61.3 million, adding more than 1,100 owned or controlled lots in the Atlanta market. Purchase accounting remained provisional at December 31, 2018.
Liquidity, Capital Allocation and Debt
- Cash, cash equivalents and restricted cash decreased by $56.2 million during the quarter, primarily because of $54.7 million of operating cash use, $6.3 million of investing cash use and share repurchases.
- The revolving credit facility had $210.0 million of total commitments and $183.5 million of remaining capacity after $25.0 million of borrowings and $1.5 million of letters of credit. The facility matures in February 2021, and the company was in compliance with its covenants.
- The company repurchased approximately 1.6 million shares for $16.5 million under an accelerated share repurchase agreement at an average price of $10.62. The remaining authorization was $33.5 million at December 31, 2018.
- From January 1 through February 1, 2019, the company repurchased an additional 561,851 shares for $6.4 million. Remaining authorization was $27.1 million at February 1, 2019.
- Management stated its intention to repurchase or redeem a similar amount of debt to the share repurchases by the end of fiscal 2019, while retaining flexibility to change capital allocation based on market conditions and strategic opportunities.
Outlook, Commentary, Risks and Unusual Items
Management described housing demand as more challenging because rising home prices and mortgage rates have pressured affordability and financial-market volatility appears to have weakened demand. Low unemployment, rising wages and household formation remain supportive factors. The company intends to focus on value and affordability ahead of the spring selling season.
- Management expects average selling prices to increase in the near term, supported by the $388,900 average selling price in backlog.
- The average active community count increased 3.0% to 160, with 162 active communities at quarter-end. Land and land development spending was $121.0 million versus $141.7 million in the prior-year quarter.
- Margin risks include land, labor and material cost pressures; product and geographic mix; activation of lower-margin land held for future development; purchase-accounting effects from Venture Homes; and competitive pricing and incentives.
- One Southeast community was impaired by $858,000, with an additional $149,000 of related capitalized interest and indirect costs impaired.
- The company controlled 23,149 lots, including 5,908 lots under option contracts. Remaining obligations under unconsolidated lot options were $367.0 million, supported by $71.6 million of deposits and non-refundable pre-acquisition costs.
- Outstanding performance bonds were approximately $250.1 million, and outstanding letters of credit were approximately $41.2 million. The company had no outstanding repayment guarantees related to unconsolidated entity debt.
- Construction defect, warranty and other litigation matters remain contingencies. The company reported a $3.3 million litigation accrual, excluding warranty reserves, and stated that current matters are not expected to have a material adverse effect, although unfavorable outcomes could materially affect results.
- Key risks include cyclical housing demand, mortgage rates and financing availability, inventory impairment, land and construction costs, liquidity and refinancing, debt covenant compliance, credit ratings, cancellations, regulatory and environmental requirements, natural disasters, construction defects and cybersecurity.
Most Important Facts for Investors to Verify
- Whether the decline in orders, absorptions and backlog persists into the spring selling season.
- Whether the company can maintain or improve adjusted gross margins despite cost inflation, mix changes and lower-margin community activations.
- The pace of operating cash generation and inventory growth relative to debt and planned land investment.
- Execution of the stated debt-reduction or debt-redemption objective alongside continued share repurchases.
- Availability under the revolving credit facility and continued compliance with debt covenants.
- Recoverability of the $218.0 million net deferred tax asset and the approximately 25% expected fiscal 2019 effective tax rate.
- Potential additional inventory impairments, option-contract obligations, performance-bond exposure and construction-defect or warranty claims.