Beazer Homes USA, Inc. — Fiscal 2016 First-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. The filing covers the three months ended December 31, 2015, the first quarter of fiscal 2016. Results are unaudited and subject to seasonal variability; homebuilding activity generally produces higher orders in the second and third fiscal quarters and higher closings in the third and fourth quarters.
Key financial metrics
| Metric | Q1 FY2016 | Q1 FY2015 |
|---|---|---|
| Total revenue | $344.4 million | $265.8 million |
| Homebuilding revenue | $336.6 million | $261.6 million |
| Gross profit | $57.6 million | $35.2 million |
| Total gross margin | 16.7% | 13.3% |
| Operating income (loss) | $9.1 million | $(9.5) million |
| Income (loss) from continuing operations | $1.2 million | $(18.1) million |
| Net income (loss) | $1.0 million | $(22.3) million |
| Diluted earnings (loss) per share | $0.03 | $(0.84) |
| Adjusted EBITDA | $29.5 million | $(1.3) million |
| Adjusted EBITDA excluding unusual items | $25.9 million | $16.3 million |
| Net cash used in operating activities | $(77.8) million | $(172.5) million |
Homebuilding closings increased 18.5% to 1,049, while average selling price increased 8.6% to $320.9 thousand. Homebuilding gross margin was 17.3%, compared with 13.5% in the prior-year quarter. Excluding impairments, abandonments and interest amortized to cost of sales, homebuilding gross margin was 21.5%, compared with 16.6%.
Balance sheet, debt and liquidity
- Cash and cash equivalents were $144.9 million at December 31, 2015, compared with $251.6 million at September 30, 2015. Restricted cash was $39.4 million.
- Owned inventory increased to $1.730 billion from $1.698 billion, including $271.3 million of land held for future development and $54.5 million of land held for sale.
- Total debt, net of discounts, declined to $1.502 billion from $1.528 billion. The company repaid $26.9 million of debt during the quarter, including $22.9 million of the 8 1/8% Senior Notes due June 2016.
- The $145.0 million secured revolving credit facility had no borrowings outstanding, $28.6 million of letters of credit outstanding and $116.4 million of remaining capacity. Management stated that all debt covenants were satisfied at quarter-end.
- The company had $14.6 million of additional letters of credit backed by cash collateral and approximately $188.6 million of performance bonds.
- Management expected available liquidity, operating cash flow and facility capacity to be sufficient to redeem or refinance the remaining $148.0 million balance of the 2016 Notes. An additional $5.0 million was repurchased in January 2016.
Material changes versus the prior comparable period
- Revenue rose 29.6%, driven by higher closings and selling prices. The West segment was the primary growth contributor, with homebuilding revenue up 82.1%; Southeast revenue increased 15.8%, while East revenue declined 7.4%.
- Operating results improved materially, but the comparison benefited from a $13.6 million Florida stucco charge in the prior-year quarter and a $3.6 million current-quarter net credit from insurance recoveries related to Florida stucco costs.
- Net orders declined 4.5% to 923, and sales per community per month declined to 1.8 from 2.1, despite average active communities increasing 9.7% to 169. The cancellation rate increased to 25.8% from 21.4%.
- Backlog increased 8.0% to 1,912 homes, with an aggregate value of $634.6 million and backlog average selling price of $331.9 thousand, up 4.9%.
- Operating cash outflow improved by $94.7 million year over year, primarily because land and land-development spending declined to $111.7 million from $145.4 million and working-capital outflows were lower.
- Inventory impairments and abandonments totaled $1.4 million, including $0.6 million of land-held-for-sale impairments and $0.8 million of Southeast abandonments; none were recorded in the prior-year quarter.
Guidance, outlook, commentary and risks
Management continued to pursue its “2B-10” objectives of approximately $2 billion of revenue and a 10% Adjusted EBITDA margin, or at least $200 million of Adjusted EBITDA. Current target ranges include sales per community per month of 2.8 to 3.0, average selling price of $330 thousand to $340 thousand, 170 to 175 active communities, homebuilding gross margin of 21% to 22%, and SG&A of 11% to 12% of revenue. Management did not provide a specific fiscal-year revenue or earnings forecast.
- Management cited favorable affordability, household formation and employment trends, but identified rising mortgage rates, financial-market volatility and severe weather as risks to demand and execution.
- Florida stucco and New Jersey water-intrusion matters remained material contingencies. Cumulative charges through December 31, 2015 were $41.1 million. The company recorded $16.5 million of insurance recoveries during the quarter and had a $13.7 million insurance recovery receivable.
- Warranty reserves were $28.9 million at quarter-end. In Florida, 599 homes had been identified as likely requiring repairs, 238 had been repaired, and the remaining Florida-related accrual was $14.7 million. Management stated that its assessment remains ongoing and additional costs could change.
- The company had $421.1 million of remaining obligations under unconsolidated lot-option agreements, supported by $65.6 million of deposits and non-refundable pre-acquisition costs. Exercise depends on market conditions and other factors.
- Additional risks include inventory valuation and impairment, labor and material costs, access to capital, debt refinancing and covenant compliance, construction-defect litigation, insurance recoveries, mortgage-related claims, tax-asset realizability, weather, regulation and water availability.
- The company remained subject to payments under its Deferred Prosecution Agreement and HUD Agreement. It had paid $28.1 million cumulatively and recorded an $8.6 million liability at December 31, 2015.
Important facts for investors to verify
- Whether the company refinanced or repaid the remaining 2016 Notes before the June 2016 maturity and the resulting effect on liquidity and interest expense.
- Whether Florida and New Jersey warranty claims continue to expand, and whether insurance recoveries are ultimately collected as recorded.
- Whether lower orders, higher cancellation rates and declining sales pace affect future closings and backlog conversion.
- Whether homebuilding gross margins recover toward the 21%–22% target after adjusting for warranty recoveries, mix, labor costs and land structure.
- Whether operating cash flow improves sufficiently to fund inventory investment, lot-option exercises and debt obligations without additional financing.
- Whether inventory impairments, abandonments or litigation and construction-defect costs increase as market conditions or property-level assumptions change.