Beazer Homes USA, Inc. — Fiscal 2016 Third-Quarter Form 10-Q
Reporting period: Quarter and nine months ended June 30, 2016; fiscal year ends September 30. Beazer is a geographically diversified homebuilder operating in 13 states across the West, East and Southeast regions. The filing is unaudited and results are subject to seasonal variability.
Key Financial Metrics
| Metric | Q3 2016 | Q3 2015 | 9M 2016 | 9M 2015 |
|---|---|---|---|---|
| Total revenue | $459.9 million | $429.4 million | $1,190.0 million | $994.6 million |
| Operating income | $16.3 million | $17.7 million | $28.5 million | $14.6 million |
| Net income (loss) | $5.8 million | $12.2 million | $5.5 million | $(12.2) million |
| Diluted EPS | $0.18 | $0.38 | $0.18 | $(0.46) |
| Operating margin | 3.5% | 4.1% | 2.4% | 1.5% |
| Total gross margin | 16.9% | 17.7% | 16.4% | 16.6% |
| Adjusted EBITDA | $53.8 million | $36.9 million | $109.4 million | $55.7 million |
- Homebuilding activity: Q3 closings increased 5.5% to 1,364, while average selling price increased 4.0% to $330.6 thousand. Nine-month closings rose 14.4% to 3,563 and average selling price rose 6.2% to $326.9 thousand.
- Revenue mix: Q3 homebuilding revenue increased 9.7% to $451.0 million. Nine-month homebuilding revenue increased 21.5% to $1,164.8 million. Land sales and other revenue declined to $9.0 million in Q3 and $25.2 million for nine months.
- Cash flow: Net cash used in operating activities was $30.9 million for the first nine months, compared with $238.1 million in the prior-year period. Land and land-development spending was $267.8 million, down 24.2% year over year.
- Liquidity: Cash and cash equivalents were $127.2 million, restricted cash was $18.8 million, and remaining capacity under the secured revolving credit facility was $115.1 million as of June 30, 2016.
- Debt: Total debt, net of discounts, was $1.429 billion versus $1.528 billion at September 30, 2015. The company had $1.234 billion of senior notes, a $120.8 million term loan and $59.4 million of junior subordinated notes.
- Balance sheet: Owned inventory was $1.732 billion versus $1.698 billion at fiscal year-end. Stockholders’ equity was $641.4 million versus $630.4 million.
Material Changes Versus the Prior Comparable Period
- Revenue and closings increased substantially, led by the West segment. Q3 West homebuilding revenue rose 40.8%, while East and Southeast homebuilding revenue declined 8.5% and 5.0%, respectively.
- Q3 net income declined despite higher revenue because of a $5.3 million income tax expense versus a prior-year tax benefit, $11.9 million of impairment and abandonment charges versus $0.2 million, and higher interest costs.
- Nine-month operating income more than doubled to $28.5 million, primarily because of increased homebuilding gross profit and higher closings.
- New orders declined 2.2% in Q3 and 5.7% for the first nine months. Ending backlog declined 12.2% to 2,426 homes, although backlog average selling price increased 3.2% to $335.8 thousand.
- Homebuilding gross margin, excluding impairments, abandonments and interest, was 24.1% in Q3 versus 21.3% in the prior-year quarter. Excluding a $15.5 million insurance recovery, management stated that the comparable Q3 margin was 20.7%.
- Inventory impairment and abandonment charges increased to $15.1 million for the first nine months, including $13.7 million of project-in-progress impairments and $0.8 million of abandonments.
- The company issued a $140 million secured term loan in March 2016, used primarily to redeem the remaining 2016 senior notes. The term loan requires quarterly principal payments of $17.5 million and matures in March 2018.
Guidance, Outlook, Risks and Unusual Items
- Management continued to pursue its “2B-10” objectives: $2 billion of revenue and a 10% Adjusted EBITDA margin. Trailing-12-month Adjusted EBITDA excluding specified unusual items was $161.4 million, up 20.1% year over year.
- Management’s target ranges include sales of 2.8–3.0 homes per community per month, average selling price of $330–$340 thousand, 170–175 active communities, homebuilding gross margin of 21%–22%, and SG&A of 11%–12% of revenue.
- Management expects to meet fiscal 2016 liquidity needs and anticipates additional land sales during the remainder of the year, but noted that market conditions could change land spending and liquidity requirements.
- Florida stucco and New Jersey water-intrusion matters remained significant. Cumulative charges through June 30, 2016 were $71.5 million. The company had identified 724 Florida homes likely requiring repairs, repaired 352, and retained a $26.3 million Florida-related accrual.
- The company recorded $47.9 million of insurance recoveries during the first nine months and an additional $15.5 million recovery from a settlement with its insurer. Insurance recoveries may fluctuate and subcontractor recoveries had not been recorded.
- Three communities were on the impairment watch list at quarter-end; two were impaired during the quarter, resulting in $11.9 million of quarterly impairment charges.
- The company controlled 24,317 lots, including 6,155 lots under option contracts. Remaining option obligations were $438.5 million, supported by approximately $77.0 million of deposits and non-refundable costs.
- Outstanding performance bonds were approximately $190.4 million and letters of credit totaled approximately $45.5 million. The company reported compliance with its debt and revolving-credit covenants.
- Credit ratings included Moody’s B3 with a positive outlook, S&P B-, and Fitch B- with a negative outlook. Downgrades could increase borrowing costs or restrict access to capital.
- A purported Arizona class action concerning roof underlayment was filed on July 7, 2016. The company believes the allegations are without merit and stated that any potential exposure was not probable or estimable.
Investor Verification Items
- Verify the sustainability of revenue growth and whether declining orders and backlog could pressure future closings.
- Reconcile reported gross margins with management’s non-GAAP margins after removing impairments, interest and insurance recoveries.
- Monitor Florida and New Jersey warranty claims, remaining reserves, repair activity and future insurance recoveries.
- Assess term-loan amortization, 2018 maturities, total leverage and covenant headroom.
- Evaluate liquidity after land spending, option exercises, performance-bond requirements and seasonal cash needs.
- Review the recoverability of $324.8 million of deferred tax assets and the $57.7 million valuation allowance.
- Track additional inventory impairments, land abandonments and changes in homebuilding market conditions.