Beazer Homes USA, Inc. — Fiscal 2023 Second-Quarter Form 10-Q
Reporting period: Three and six months ended March 31, 2023; fiscal year ends September 30. Beazer is a geographically diversified homebuilder operating in 13 states across the West, East, and Southeast regions. Results are unaudited and seasonal.
Key Financial Metrics
| Metric | Three Months Ended March 31, 2023 | Prior Year | Six Months Ended March 31, 2023 | Prior Year |
|---|---|---|---|---|
| Total revenue | $543.9 million | $508.5 million | $988.8 million | $962.7 million |
| Homebuilding revenue | $542.0 million | $507.2 million | $986.1 million | $953.9 million |
| Gross profit | $102.9 million | $119.8 million | $188.7 million | $217.2 million |
| Gross margin | 18.9% | 23.5% | 19.1% | 22.6% |
| Operating income | $38.8 million | $54.6 million | $67.3 million | $95.6 million |
| Net income | $34.7 million | $44.7 million | $59.0 million | $79.6 million |
| Diluted EPS | $1.13 | $1.45 | $1.93 | $2.59 |
| Adjusted EBITDA | $62.1 million | $77.4 million | $109.3 million | $138.5 million |
Homebuilding gross margin was 18.7% for the quarter and 18.9% year to date, compared with 23.5% and 22.3%, respectively, in the comparable periods. Excluding impairments, abandonments, and interest amortized to cost of sales, homebuilding gross margin was 22.0% for the quarter and 22.1% year to date, versus 26.8% and 25.6% in the prior-year periods.
Operating cash flow was $40.3 million for the six months ended March 31, 2023, compared with cash usage of $58.1 million in the prior-year period. Capital expenditures were $7.8 million. Net cash, cash equivalents, and restricted cash increased $27.3 million to $279.2 million.
At March 31, 2023, cash and cash equivalents were $240.8 million, restricted cash was $38.3 million, owned inventory was $1.742 billion, total debt was $985.2 million, and stockholders’ equity was $999.0 million. Net debt was approximately $744.4 million excluding restricted cash.
Material Changes Versus the Prior Comparable Period
- Quarterly revenue increased 7.0%, while six-month revenue increased 2.7%, primarily from higher average selling prices and, for the quarter, stronger Southeast closings.
- Quarterly net income declined 22.3%, and six-month net income declined 25.8%, primarily because of lower gross margins and increased price concessions and closing-cost incentives.
- Quarterly operating income declined $15.8 million; six-month operating income declined $28.3 million.
- Quarterly net new orders declined 8.5% to 1,181, and the cancellation rate increased to 18.6% from 12.2%. For the six-month period, net new orders declined 31.6% to 1,663, reflecting weak first-quarter market conditions.
- Backlog declined 40.5% to 1,858 homes, and backlog value declined 37.7% to $987.2 million. Backlog average selling price increased 4.7% to $531,300.
- Quarterly closings declined 1.4% to 1,063, while average selling price increased 8.4% to $509,900. Average active communities increased to 123 from 119.
- SG&A as a percentage of revenue improved to 11.2% from 12.2% for the quarter and to 11.7% from 12.0% year to date.
- The Company recorded only $0.1 million of inventory impairment and abandonment charges in the quarter and $0.3 million year to date, compared with $0.9 million in the comparable periods.
Debt, Liquidity, and Capital Resources
- The Company entered into a $265.0 million senior unsecured revolving credit facility in October 2022, replacing its secured facility. No borrowings or letters of credit were outstanding under the new facility at March 31, 2023; the Company reported full $265.0 million availability and compliance with covenants.
- Senior notes consisted principally of $211.2 million due 2025, $357.3 million due 2027, and $350.0 million due 2029, net of issuance costs. Junior subordinated notes had a net carrying value of $73.3 million and a principal balance of approximately $100.8 million.
- Outstanding standalone letters of credit were $33.1 million, and surety bonds were $271.1 million. These primarily support infrastructure obligations to local governments.
- In April 2023, after quarter-end, the Company repurchased $5.0 million of its 2025 Notes using cash on hand, generating a loss on extinguishment of less than $0.1 million.
- The Company had $41.8 million remaining under its $50.0 million share repurchase authorization at March 31, 2023. No share repurchases or dividends occurred during the reported periods.
Guidance, Outlook, Risks, and Unusual Items
Management reported sequentially improved buyer traffic, sales pace, and cancellation rates as mortgage rates stabilized, but expects market uncertainty to continue through fiscal 2023. The Company plans to invest selectively in land, gradually increase active communities, use lot options to support longer-term growth, reduce construction and overhead costs, and preserve liquidity. No quantitative earnings or revenue guidance was provided.
Management identified the long-term housing outlook as positive because of demographic trends and an estimated housing shortage, while noting continued affordability pressure from mortgage rates. The Company controlled 23,820 lots at quarter-end, including 23,091 active lots; 54.0% of active lots were controlled through option agreements. Deposits and non-refundable pre-acquisition costs were $152.0 million, with $789.3 million of remaining purchase price if options are exercised.
- Principal risks include higher mortgage rates, reduced housing demand and affordability, economic deterioration, construction labor and material costs, supply-chain constraints, cancellation risk, land and inventory valuation risk, financing and credit-rating risk, and financial institution disruptions.
- Construction defect and warranty claims remain material contingencies. Warranty reserves were $13.1 million and litigation accruals were $8.1 million at March 31, 2023. Management stated that reserves and insurance were adequate, but acknowledged that losses could exceed estimates or insurance coverage.
- Variable-rate debt was approximately $73.3 million. A one-percentage-point increase in rates would increase estimated annual interest expense by approximately $1.0 million.
- Deferred tax assets remained subject to valuation analysis; management concluded that federal and certain state deferred tax assets were more likely than not realizable.
- Disclosure controls were effective as of March 31, 2023, and no material changes to internal control over financial reporting were reported.
Investor Verification Points
- Verify whether gross-margin stabilization continues as incentives, mortgage-rate buydowns, and price concessions affect future closings.
- Monitor backlog conversion, cancellations, new orders, and community count, particularly in the West and East segments.
- Assess liquidity against $985.2 million of debt, upcoming 2025 maturities, option-related commitments, letters of credit, and surety bonds.
- Review inventory valuation assumptions and potential impairment or abandonment exposure if housing conditions deteriorate.
- Track construction-defect litigation, warranty costs, insurance recoveries, and the adequacy of related reserves.
- Reconcile management’s non-GAAP measures, including adjusted EBITDA and gross margin excluding interest and impairments, to GAAP results.