Beazer Homes USA, Inc. — Fiscal 2022 First-Quarter Form 10-Q
Reporting period: Three months ended December 31, 2021; filed January 27, 2022. Beazer is a geographically diversified U.S. homebuilder operating in 13 states across the West, East, and Southeast regions.
Financial Results and Key Metrics
| Metric | Q1 FY2022 | Q1 FY2021 | Change |
|---|---|---|---|
| Total revenue | $454.1 million | $428.5 million | +6.0% |
| Gross profit | $97.4 million | $75.3 million | +29.4% |
| Total gross margin | 21.4% | 17.6% | +380 bps |
| Operating income | $40.9 million | $17.7 million | +131.5% |
| Operating margin | 9.0% | 4.1% | +490 bps |
| Income from continuing operations | $34.9 million | $12.0 million | +190.0% |
| Net income | $34.9 million | $12.0 million | +190.8% |
| Diluted EPS | $1.14 | $0.40 | +$0.74 |
| Adjusted EBITDA | $61.1 million | $43.6 million | +40.1% |
Homebuilding revenue increased 5.3% to $446.7 million. Closings declined 8.5% to 1,019, but average selling price increased 15.1% to $438,400. Homebuilding gross margin rose to 20.9% from 17.6%; excluding impairments, abandonments, and interest amortized to cost of sales, the margin was 24.2% versus 22.1%.
Net cash used in operating activities was $77.8 million, compared with $74.6 million in the prior-year quarter, primarily reflecting a $79.2 million increase in inventory. Capital expenditures were $2.9 million. Cash, cash equivalents, and restricted cash decreased $87.2 million to $186.9 million, including $157.7 million of unrestricted cash and cash equivalents.
Owned inventory increased to $1.582 billion from $1.502 billion at September 30, 2021. Total debt was $1.055 billion, substantially unchanged from September 30, 2021. The company had $250.0 million of undrawn capacity under its secured revolving credit facility and stated that it was in compliance with applicable debt covenants.
Material Changes Versus the Prior Comparable Period
- Revenue and profitability improved primarily because of higher home prices, lower sales incentives, favorable demand, and increased land sales and other revenue.
- Net orders decreased 20.9% to 1,141, while average sales per community per month declined to 3.3 from 3.5. Management deliberately limited sales and lot releases in certain communities to align demand with production capacity and protect margins.
- Average active communities declined 16.2% to 114, but controlled lots increased 22.6% year over year to 23,049. Active lots under option represented 49.2% of active lots, compared with 41.5% a year earlier.
- Backlog increased 2.5% to 2,908 homes and its aggregate value increased 20.9% to $1.405 billion. Backlog average selling price increased 17.9% to $483,200.
- Construction cycle times increased by approximately two to three months because of labor and materials shortages, limiting backlog conversion and reducing closings.
- No inventory impairment or abandonment charges were recognized, compared with $0.5 million of abandonment charges in the prior-year quarter.
- The effective tax rate declined to 15.6% from 25.5%, partly because of $3.2 million of energy-efficiency tax credits and discrete stock-based compensation tax effects.
- The Southeast was the only segment with lower revenue and operating income, primarily because closings declined 31.3%. West and East operating income increased by $9.4 million and $8.5 million, respectively.
Outlook, Risks, Contingencies, and Unusual Items
Management reported that housing demand remained strong despite affordability concerns and gradually higher mortgage rates. Its fiscal 2022 priorities are to expand the lot position, increase land spending and use of lot options, improve profitability, reduce total debt below $1.0 billion, and improve customer and employee outcomes. Management expected average selling prices to continue increasing in the near term based on backlog pricing.
The principal operating risks are supply-chain disruptions, shortages and higher costs for labor and building materials, longer construction times, mortgage-rate increases, affordability pressure, housing-market cyclicality, inflation, land and inventory valuation risk, and potential COVID-19 effects. Results are seasonal and the first-quarter results are not necessarily indicative of the full fiscal year.
Lot option agreements carried $121.6 million of deposits and pre-acquisition costs and $715.4 million of remaining obligations net of deposits. The company had $31.9 million of outstanding letters of credit and $281.8 million of surety bonds, primarily supporting development obligations. It also had $8.7 million accrued for litigation matters and a $12.7 million warranty reserve. Management stated that no repayment guarantees for unconsolidated-entity debt were outstanding.
The $50.0 million senior unsecured term loan matures in September 2022. Variable-rate debt was approximately $70.7 million; a one-percentage-point increase in rates would increase estimated annual interest expense by approximately $1.0 million. No dividends or share repurchases occurred during the quarter. The share repurchase program had $12.0 million of remaining authorization.
Important Facts for Investors to Verify
- Whether supply-chain and labor constraints continue to delay closings and reduce backlog conversion.
- Whether pricing power can offset construction-cost inflation and preserve the reported gross-margin improvement.
- The company’s ability to reduce debt below $1.0 billion while increasing land acquisition and development spending.
- Refinancing or repayment plans for the $50.0 million term loan maturing in September 2022 and the June 2022 expiration of the Bilateral Facility.
- Future cash requirements associated with $715.4 million of net lot-option obligations, $281.8 million of surety bonds, and outstanding letters of credit.
- Potential changes in inventory valuations, warranty reserves, construction-defect litigation, insurance recoveries, and deferred-tax-asset realizability.
- The effect of higher mortgage rates and affordability pressure on orders, cancellations, backlog, and community absorption.
- That Adjusted EBITDA and gross margin excluding selected costs are non-GAAP measures and should be reconciled to GAAP results.