Beazer Homes USA, Inc. — Fiscal Q1 2020 Form 10-Q Summary
Business context and reporting period
Beazer Homes is a geographically diversified homebuilder operating in 13 states across the West, East and Southeast regions. The filing covers the three months ended December 31, 2019, the first quarter of fiscal 2020, compared with the three months ended December 31, 2018. Results are seasonal and are not necessarily indicative of full-year performance.
Financial and operating metrics
| Metric | Q1 FY2020 | Q1 FY2019 | Change |
|---|---|---|---|
| Total revenue | $417.8 million | $402.0 million | Up 3.9% |
| Homebuilding revenue | $417.4 million | $401.0 million | Up 4.1% |
| Gross profit | $63.1 million | $60.7 million | Up 4.1% |
| Gross margin | 15.1% | 15.1% | Flat |
| Operating income | $3.9 million | $3.5 million | Up $0.4 million |
| Net income | $2.7 million | $7.3 million | Down $4.6 million |
| Diluted EPS | $0.09 | $0.23 | Down $0.14 |
| Cash used in operating activities | $84.5 million | $54.7 million | Higher use of $29.8 million |
Adjusted homebuilding gross margin excluding impairments, abandonments and interest amortized to cost of sales was 19.8%, compared with 19.7% in the prior-year quarter. SG&A was 13.3% of revenue versus 13.5%. Adjusted EBITDA was $29.4 million, compared with $26.8 million.
Net new orders increased 28.2% to 1,251, while closings increased 2.7% to 1,112. Average selling price increased 1.4% to $375,400. Backlog increased 21.1% to 1,847 homes, and backlog value increased 23.4% to $732.1 million, with backlog average selling price of $396,400.
Liquidity, debt and balance sheet
- Cash and cash equivalents were $41.3 million at December 31, 2019; restricted cash was $18.8 million, for total cash, cash equivalents and restricted cash of $60.0 million.
- Owned inventory increased to $1.574 billion from $1.504 billion at September 30, 2019, primarily reflecting land acquisition, land development and construction spending.
- Total debt, net of issuance costs, was $1.208 billion, compared with $1.178 billion at September 30, 2019.
- The $250.0 million revolving credit facility had $30.0 million drawn and $220.0 million of remaining capacity. The company was in compliance with its debt covenants.
- Net cash used in operations was driven principally by a $69.0 million increase in inventory. Net cash provided by financing was $24.3 million, including $125.0 million of new revolver borrowings and $95.0 million of repayments.
- Outstanding letters of credit and performance bonds were approximately $50.4 million and $276.1 million, respectively.
Material changes versus the prior comparable period
- Operating performance improved modestly: revenue, closings, orders, backlog and gross profit increased, supported particularly by the West segment.
- Net income declined despite higher operating income because the prior-year period benefited from a $3.9 million income tax benefit, including $5.3 million of prior-year energy-efficient homebuilding tax credits. The current quarter recorded a $0.2 million tax benefit, including $0.7 million of such credits.
- No inventory impairments were recorded in the current quarter, compared with $1.0 million in the prior-year quarter.
- West revenue increased 21.8%, while East revenue declined 11.5% and Southeast revenue declined 18.1%, primarily due to regional differences in average selling prices, closings and product mix.
- Inventory increased 4.7% from fiscal year-end, while operating cash use increased substantially due to higher investment in inventory.
- The company adopted ASC 842 lease accounting on October 1, 2019, recording $13.9 million of operating lease right-of-use assets and $16.0 million of lease liabilities without an effect on retained earnings.
- No share repurchases occurred during the quarter. The repurchase program had $15.4 million of remaining authorization at December 31, 2019.
Guidance, outlook, commentary and risks
Management cited improving employment, wage growth, household formation, constrained housing supply and historically low mortgage rates as supportive of demand. The company is targeting sales of approximately 2.8 to 3.2 homes per community per month for fiscal 2020; trailing twelve-month sales pace was 2.9. Management expects near-term average selling prices to benefit from the higher average selling price in backlog and believes margin expansion may come from product simplification, cost control, improved cycle times and limited sales incentives.
Management stated that available liquidity should be sufficient to meet fiscal 2020 needs, subject to market conditions and changes in land and development spending. No specific revenue or earnings guidance was provided in the filing.
- Housing demand is cyclical and sensitive to employment, consumer confidence, affordability, mortgage rates and financing availability.
- Land, labor, materials, construction costs and subcontractor performance may pressure margins.
- Inventory valuations depend on projected selling prices and absorption rates; adverse market conditions could result in impairment charges.
- Backlog is subject to cancellation risk and may not convert to closings as expected.
- Leverage, refinancing needs, credit ratings, covenant compliance and access to capital markets remain important liquidity risks.
- Construction defect claims, warranty costs, litigation, environmental matters, permits, performance bonds and letters of credit may create contingencies. The company reported $3.5 million of litigation and other non-warranty accruals and stated that certain shareholder derivative claims related to prior California impairments were not reasonably estimable.
- Lot option contracts represented approximately $386.8 million of remaining purchase obligations, supported by $74.8 million of deposits and non-refundable pre-acquisition costs.
Most important facts for investors to verify
- Whether the substantial increase in orders and backlog converts into closings and cash generation during the remaining fiscal year.
- Whether inventory growth and land investment can be supported without further increasing leverage.
- The sustainability of the approximately 19.8% adjusted homebuilding gross margin and the impact of interest amortization and impairment turns.
- Regional trends, particularly continued West strength and weakness in East and Southeast closings or pricing.
- Future tax benefits, deferred tax asset realizability and the effect of discrete tax items on reported earnings.
- Potential inventory impairments, warranty and construction-defect costs, litigation exposure and obligations under performance bonds, letters of credit and lot options.
- Debt maturities, interest-rate exposure and the company’s ability to refinance or reduce approximately $1.2 billion of debt.