Beazer Homes USA, Inc. — Q1 FY2014 Form 10-Q Summary
Reporting period: Three months ended December 31, 2013; comparative period ended December 31, 2012. The filing is unaudited and covers Beazer’s homebuilding operations in three segments: West, East and Southeast.
Financial performance
| Metric | Q1 FY2014 | Q1 FY2013 | Change |
|---|---|---|---|
| Total revenue | $293.2 million | $246.9 million | 18.7% increase |
| Homebuilding revenue | $290.0 million | $244.4 million | 18.6% increase |
| Gross profit | $54.7 million | $36.1 million | 51.5% increase |
| Total gross margin | 18.6% | 14.6% | Up 400 basis points |
| Operating income (loss) | $11.5 million | $(3.6) million | Improved $15.1 million |
| Loss from continuing operations | $(3.9) million | $(18.9) million | Improved $15.0 million |
| Net loss | $(5.1) million | $(20.4) million | Improved $15.3 million |
| Basic and diluted loss per share | $(0.21) | $(0.84) | Improved $0.63 |
| Net cash used in operating activities | $(113.9) million | $(87.5) million | Greater use of $26.4 million |
Homebuilding gross margin was 18.8%, compared with 14.6% in the prior-year quarter. Excluding inventory impairments, lot option abandonments and interest amortized to cost of sales, homebuilding gross margin was 21.2%, compared with 18.1%.
Sales volume was broadly flat: closings were 1,038 in both periods. Average selling price increased 18.6% to $279,300. Net new orders declined 4.0% to 895, while the cancellation rate improved to 21.8% from 26.4%.
Liquidity, balance sheet and debt
- Cash and cash equivalents were $382.6 million at December 31, 2013, down from $504.5 million at September 30, 2013.
- Restricted cash was $49.2 million, including approximately $22.4 million supporting cash-secured loans.
- Total debt was $1.516 billion, compared with $1.512 billion at September 30, 2013. Senior notes represented $1.415 billion net of discounts.
- The company had no borrowings under its $150 million secured revolving credit facility and reported full availability, subject to applicable covenants.
- Letters of credit outstanding were $24.7 million, supported by approximately $25.9 million of restricted cash. Performance bonds totaled approximately $176.5 million.
- Stockholders’ equity was $235.6 million, compared with $240.6 million at September 30, 2013. Accumulated deficit was $610.8 million.
- The company spent $123.8 million on land and land development, compared with $90.0 million in the prior-year quarter. Inventory increased to $1.383 billion from $1.314 billion.
Material changes versus the prior comparable period
- Revenue and gross profit increased materially, driven by higher average selling prices, lower incentives, improved product mix and operational efficiencies.
- Operating results moved from a $3.6 million loss to $11.5 million of income. All three operating segments reported higher operating income.
- General and administrative expenses increased to $28.4 million from $26.3 million, but selling, general and administrative expenses declined to 13.7% of revenue from 15.0%.
- Inventory impairment and option abandonment charges declined to $31,000 from $204,000. One West community was on the watch list at quarter-end but was not impaired.
- Operating cash consumption increased because of accelerated land and land development investment, inventory growth and reductions in accounts payable and other liabilities.
- Backlog declined 3.7% to 1,750 homes, but backlog value increased 4.5% to $500.0 million as backlog average selling price increased 8.5% to $285,700.
- Active communities declined 9% year over year, although management expects recently acquired and developed land to support future community growth.
Outlook, commentary and risks
Management introduced a multi-year “2B-10” plan targeting $2 billion of revenue and a 10% Adjusted EBITDA margin within two to three years. Management stated that fiscal 2014 is expected to be the company’s first full year of profitability since fiscal 2006, based on current housing-market and economic expectations.
Management characterized housing fundamentals as favorable but acknowledged recent demand softening, higher home prices and mortgage rates, labor and trade shortages, and potential construction-cycle extensions. Achievement of the plan depends on increasing active communities, sales per community, average selling prices and gross margins while controlling costs.
- Land option commitments totaled $362.0 million of remaining purchase obligations, supported by $44.3 million of deposits and non-refundable pre-acquisition costs.
- Deferred tax assets were subject to a $489.0 million valuation allowance. Section 382 limitations may restrict use of certain net operating losses and other tax attributes.
- The company remains exposed to inventory impairment risk if home prices, absorption rates or land values deteriorate.
- The company’s debt agreements restrict additional indebtedness, dividends and certain investments. It was in compliance with its debt covenants, and tangible net worth of $210.1 million exceeded the $85 million covenant threshold applicable to the 2016 notes.
- The deferred prosecution agreement and related settlements could require additional payments tied to 4% of Adjusted EBITDA; maximum aggregate liability is stated not to exceed $55.0 million, with $16.6 million paid and $4.5 million accrued at December 31, 2013.
- Construction defect, warranty, environmental, mortgage repurchase and other litigation matters remain possible contingencies. Litigation and other non-warranty liabilities accrued were $21.4 million.
- The company paid no dividends and repurchased no shares during the quarter.
Important facts for investors to verify
- Whether the planned increase in active communities converts the large land investment into sustained order, closing and backlog growth.
- Whether price increases and lower incentives can offset higher labor, materials, land and financing costs.
- The sustainability of the reported gross-margin improvement, including the impact of prior impairment “turn” benefits.
- Liquidity requirements and refinancing risk, particularly the $172.9 million of senior notes due in June 2016 and the $14.2 million of TEU amortizing notes due in August 2015.
- The likelihood and timing of reversing the deferred-tax-asset valuation allowance and the practical impact of Section 382 limitations.
- Potential cash requirements related to land options, performance bonds, warranty claims, litigation and the deferred prosecution agreement.
- Whether backlog quality, cancellation rates and mortgage availability support management’s profitability outlook.