Beazer Homes USA, Inc. — Fiscal 2017 Third-Quarter Form 10-Q
Business Context and Reporting Period
Beazer Homes is a geographically diversified homebuilder operating in 13 states across the West, East and Southeast regions. This unaudited Form 10-Q covers the three and nine months ended June 30, 2017, within the fiscal year ending September 30, 2017. Results are seasonal and are not necessarily indicative of full-year performance.
Financial Performance and Position
| Metric | Three Months Ended June 30 | Nine Months Ended June 30 |
|---|---|---|
| Total revenue | $478.6 million, up 4.1% | $1.243 billion, up 4.5% |
| Homebuilding revenue | $472.4 million, up 4.7% | $1.230 billion, up 5.6% |
| Gross profit | $78.4 million | $199.5 million |
| Operating income | $15.6 million | $24.4 million |
| Net income (loss) | $7.1 million | $(1.8) million |
| Diluted EPS | $0.22 | $(0.05) |
| Operating margin | 3.3% | 2.0% |
| Total gross margin | 16.4% | 16.0% |
- Quarterly home closings increased 1.7% to 1,387, while average selling price increased 3.0% to $340.6 thousand. Nine-month closings increased 1.6% to 3,621, with average selling price up 3.9% to $339.8 thousand.
- Adjusted homebuilding gross margin, excluding impairments, amortized interest and specified unusual items, was 21.3% for the quarter and 20.9% for the trailing twelve months.
- Adjusted EBITDA was $44.3 million for the quarter, $99.2 million for the nine-month period and $167.9 million on a trailing-twelve-month basis, excluding specified unusual items.
- Cash and cash equivalents were $168.4 million at June 30, 2017, compared with $228.9 million at September 30, 2016. Restricted cash was $12.7 million.
- Cash used in operating activities was $39.9 million for the nine months, including $309.9 million of land and land-development spending. Capital expenditures were $8.7 million.
- Total debt, net, was $1.335 billion at June 30, 2017, compared with $1.332 billion at September 30, 2016. The company reported a net debt reduction of approximately $3 million after refinancing and retiring certain obligations.
- The $180 million secured revolving credit facility had no borrowings outstanding, $39.9 million of letters of credit, and $140.1 million of remaining capacity. The company was in compliance with applicable debt covenants.
Material Changes Versus the Prior Comparable Period
- Quarterly net income increased to $7.1 million from $5.8 million, despite operating income declining to $15.6 million from $16.3 million.
- Nine-month net income declined to a loss of $1.8 million from income of $5.5 million, primarily because of a $15.6 million loss on debt extinguishment associated with refinancing and debt retirement.
- Quarterly homebuilding demand improved: net new orders rose 7.0% to 1,595, sales absorption increased to 3.4 homes per community per month from 3.0, and ending backlog increased 0.7% to 2,444 units. Backlog value rose 5.6% to $859.9 million, with backlog average selling price up 4.8% to $351.8 thousand.
- Average active communities declined 6.2% to 155, although management expects increased land spending to support community-count growth beginning in fiscal 2018.
- Inventory increased to $1.656 billion from $1.569 billion, while land held for future development declined by approximately $60 million during the fiscal year.
- Impairment and abandonment charges declined substantially to $0.5 million for the quarter and $0.8 million for the nine months, compared with $11.9 million and $15.1 million, respectively, in the prior-year periods.
- Prior-year results included a $15.5 million insurance recovery and significant Florida stucco-related items, limiting comparability. Current-year results also included a $2.7 million write-off of a legacy land-investment deposit.
Guidance, Outlook, Commentary and Risks
- Management believes housing fundamentals remain supportive because of household formation, employment, wage growth, constrained housing supply and historically low mortgage rates. Affordability constraints, political and regulatory uncertainty, financial-market volatility and potential mortgage-rate increases remain concerns.
- The company remains committed to its “2B-10” objectives: $2 billion of revenue and a 10% Adjusted EBITDA margin, or at least $200 million of Adjusted EBITDA. Management did not provide a firm completion date, but continues to target progress through higher absorption, average selling price, active communities and gross margin, together with lower SG&A as a percentage of revenue.
- Management plans to reduce debt by at least another $100 million through fiscal 2018, while increasing land and land-development investment to support future community growth.
- Florida stucco and water-intrusion matters remain a material contingency. Cumulative charges through June 30, 2017 were $84.6 million; 709 homes were identified as likely requiring repairs, 609 had been repaired, and the remaining related accrual was $7.2 million. Additional potential repair costs of approximately $2.9 million were identified for other homes, with no reserve recorded for those homes.
- Warranty and litigation estimates depend on future claims, repair costs, insurance recoveries and subcontractor recoveries. The company had $19.8 million of total warranty reserves and $4.4 million accrued for litigation and related matters at June 30, 2017.
- The company controlled 22,481 lots, including 6,077 lots under option contracts. Deposits and other non-refundable pre-acquisition costs were $91.3 million, with remaining option obligations of $439.3 million.
- Outstanding performance bonds were approximately $208.6 million, principally for roads and other improvements. The company had no repayment guarantees outstanding for debt of unconsolidated entities.
- The company carries $312.4 million of net deferred tax assets and a $66.3 million valuation allowance. Potential U.S. corporate tax-rate reductions could reduce the value of the deferred tax assets and require an earnings charge.
Important Facts for Investors to Verify
- Whether operating cash flow remains negative as land and community investment increases.
- The pace and cost of Florida stucco remediation, the adequacy of reserves, and the timing and collectability of insurance or subcontractor recoveries.
- Progress toward the stated $100 million fiscal 2018 debt-reduction goal and the company’s ability to refinance or repay upcoming maturities.
- Whether backlog conversion, cancellation rates, pricing and absorption support the targeted revenue and Adjusted EBITDA objectives.
- Whether inventory growth, land-option obligations and performance bonds create additional liquidity or impairment risk if housing conditions weaken.
- The effect of potential tax-law changes on the $312.4 million deferred tax asset balance.