Beazer Homes USA, Inc. — Fiscal 2018 Third-Quarter Form 10-Q
Reporting period: Three and nine months ended June 30, 2018. Beazer is a geographically diversified homebuilder operating in 13 states across the West, East and Southeast regions. Fiscal 2018 ends September 30, 2018.
Financial performance and position
| Metric | Q3 2018 | Q3 2017 | 9M 2018 | 9M 2017 |
|---|---|---|---|---|
| Total revenue | $511.5 million | $478.6 million | $1.339 billion | $1.243 billion |
| Gross profit | $83.2 million | $78.4 million | $219.2 million | $199.5 million |
| Operating income | $17.6 million | $15.6 million | $38.1 million | $24.4 million |
| Net income from continuing operations | $13.4 million | $7.1 million | $(105.5) million | $(1.7) million |
| Net income (loss) | $13.4 million | $7.1 million | $(106.0) million | $(1.8) million |
| Diluted EPS | $0.41 | $0.22 | $(3.30) | $(0.05) |
- Q3 homebuilding revenue increased 7.3% to $507.0 million, driven by 1,391 closings versus 1,387 and a 7.0% increase in average selling price to $364.5 thousand.
- Reported total gross margin was 16.3% in Q3 and 16.4% for the nine months. Homebuilding gross margin excluding impairments, abandonments and interest was 20.8% in Q3 versus 21.3% in the prior-year quarter, and 21.0% for the nine months versus 20.9%.
- Q3 operating margin improved to 3.4% from 3.3%; nine-month operating margin improved to 2.8% from 2.0%.
- Trailing twelve-month Adjusted EBITDA was $191.4 million, up 14.1% from $167.9 million, against the company’s “2B-10” objective of at least $200 million of Adjusted EBITDA and a 10% margin.
- Net cash used in operating activities was $133.5 million for the nine months, compared with $39.9 million in the prior-year period. The change primarily reflected a $222.3 million increase in inventory and $440.6 million of land and land-development spending.
- Cash, cash equivalents and restricted cash totaled $148.5 million at June 30, 2018, including $136.3 million of unrestricted cash and $12.2 million of restricted cash.
- Owned inventory increased to $1.768 billion from $1.543 billion at September 30, 2017, while land held for future development declined by $27.8 million to $84.8 million.
- Total debt was $1.327 billion, broadly unchanged from September 30, 2017. The company had $200.0 million of undrawn capacity under its secured revolving credit facility and was in compliance with applicable covenants.
Material changes versus the prior comparable period
- Q3 revenue increased 6.9% and operating income increased $2.0 million. Nine-month revenue increased 7.7% and operating income increased $13.7 million.
- West segment performance was strongest: Q3 revenue rose 16.1% and operating income rose $3.5 million. Southeast operating income declined $3.0 million in Q3 and $5.7 million for the nine months, primarily due to lower margins and higher costs.
- Q3 net new orders declined 9.1% to 1,450, and sales absorption fell to 3.1 homes per community per month from 3.4. Cancellation rates increased to 18.6% from 16.9%.
- Backlog units declined 3.0% to 2,371, but backlog value increased 7.1% to $920.7 million as backlog average selling price increased 10.4% to $388.3 thousand.
- In October 2017, Beazer issued $400.0 million of 5.875% senior notes due 2027. Proceeds and cash on hand were used to redeem $225.0 million of notes due 2019 and $175.0 million of notes due 2023. The refinancing generated a $25.9 million loss on extinguishment of debt and is expected to reduce annual interest expense by approximately $2.1 million.
- The nine-month tax provision was $113.4 million, principally because of a $112.6 million provisional non-cash charge from remeasuring deferred tax assets following the Tax Cuts and Jobs Act. Management expects a potential material non-cash tax benefit if additional evidence supports realization of remaining deferred tax assets.
Guidance, outlook, risks and unusual items
- Management described housing conditions as stable and modestly improving, supported by household formation, employment, wage growth and constrained housing supply. Offsetting concerns include rising mortgage rates, affordability pressure, labor and material cost inflation, and financial-market volatility.
- The company expects to continue pursuing its “2B-10” objectives, with emphasis on sales absorption, community growth and SG&A leverage. Management expects fiscal 2018’s annualized effective tax rate, excluding discrete items, to be approximately 27%, and fiscal 2019’s rate to be approximately 24%.
- Management expects to redeem the remaining $96.4 million of 5.75% senior notes due June 2019 by the end of fiscal 2018.
- Land and land-development spending is expected to increase during the remainder of fiscal 2018, including to support newly acquired communities. Higher land costs, construction costs, labor constraints and lower-margin newly activated communities may pressure margins.
- On July 13, 2018, after quarter-end, the company acquired substantially all assets and operations of Venture Homes for approximately $65.0 million in cash. The acquisition included more than 1,000 lots, nine active communities, 18 future communities and 51 homes in backlog. Purchase accounting was not complete as of the filing date.
- Florida stucco and water-intrusion matters had generated cumulative charges of $85.1 million through June 30, 2018. Of 708 homes identified as likely requiring repairs, 682 had been repaired; the remaining accrual was $2.1 million, with estimated additional costs of approximately $2.3 million for homes deemed unlikely to require repair.
- Outstanding performance bonds were approximately $233.6 million, and outstanding letters of credit were approximately $37.2 million. The company had no repayment guarantees related to unconsolidated entities.
- Key risks include housing-cycle and local-market deterioration, affordability and mortgage-rate increases, inventory impairments, construction and warranty claims, land and labor costs, liquidity and refinancing needs, covenant compliance, litigation, weather, regulation and the realization of deferred tax assets.
Important facts for investors to verify
- Whether declining Q3 orders, higher cancellation rates and lower absorption persist into the fourth quarter.
- Whether backlog value converts to closings without material cancellations or margin concessions.
- The timing and funding of the remaining 2019 senior-note redemption and the effect on liquidity.
- Whether operating cash flow improves after elevated land and inventory investment.
- The purchase-price allocation, liabilities assumed and earnings contribution from the Venture Homes acquisition.
- Future deferred-tax-asset valuation changes and the resulting effect on reported earnings and equity.
- Actual costs, insurance recoveries and remaining exposure related to Florida water-intrusion claims and other construction-defect litigation.