Beazer Homes USA(BZH) - 2023 Q1 - Quarterly Report

PART I. FINANCIAL INFORMATION Item 1. Financial Statements Presents unaudited condensed consolidated financial statements and notes on accounting policies Condensed Consolidated Balance Sheets | in thousands (except share and per share data) | December 31, 2022 | September 30, 2022 | |:-----------------------------------------------|:------------------|:-------------------| | ASSETS | | | | Cash and cash equivalents | $ 120,746 | $ 214,594 | | Restricted cash | 35,899 | 37,234 | | Accounts receivable | 24,866 | 35,890 | | Income tax receivable | 9,597 | 9,606 | | Owned inventory | 1,779,223 | 1,737,865 | | Deferred tax assets, net | 152,769 | 156,358 | | Property and equipment, net | 23,990 | 24,566 | | Operating lease right-of-use assets | 8,914 | 9,795 | | Goodwill | 11,376 | 11,376 | | Other assets | 19,005 | 14,679 | | Total assets | $ 2,186,385 | $ 2,251,963 | | LIABILITIES AND STOCKHOLDERS' EQUITY | | | | Trade accounts payable | $ 106,824 | $ 143,641 | | Operating lease liabilities | 10,187 | 11,208 | | Other liabilities | 122,444 | 174,388 | | Total debt | 984,330 | 983,440 | | Total liabilities | 1,223,785 | 1,312,677 | | Stockholders' equity | | | | Common stock | 31 | 31 | | Total stockholders' equity | 962,600 | 939,286 | | Total liabilities and stockholders' equity | $ 2,186,385 | $ 2,251,963 | Condensed Consolidated Statements of Operations | in thousands (except per share data) | December 31, 2022 | December 31, 2021 | |:-------------------------------------|:------------------|:------------------| | Total revenue | $ 444,928 | $ 454,149 | | Gross profit | 85,768 | 97,400 | | Operating income | 28,502 | 40,939 | | Income from continuing operations | 24,408 | 34,895 | | Net income | $ 24,331 | $ 34,885 | | Basic income per share | $ 0.81 | $ 1.15 | | Diluted income per share | $ 0.80 | $ 1.14 | Condensed Consolidated Statements of Stockholders' Equity | in thousands | Common Shares | Common Stock Amount | Paid-in Capital | Accumulated Deficit | Total | |:-------------|:--------------|:--------------------|:----------------|:--------------------|:------| | Balance as of September 30, 2022 | 30,880 | $ 31 | $ 859,856 | $ 79,399 | $ 939,286 | | Net income and comprehensive income | — | — | — | 24,331 | 24,331 | | Stock-based compensation expense | — | — | 1,580 | — | 1,580 | | Shares issued under employee stock plans, net | 672 | — | — | — | — | | Common stock redeemed for tax liability | (205) | — | (2,597) | — | (2,597) | | Balance as of December 31, 2022 | 31,347 | $ 31 | $ 858,839 | $ 103,730 | $ 962,600 | | in thousands | Common Shares | Stock Amount | Paid-in Capital | Accumulated Deficit | Total | |:-------------|:--------------|:-------------|:----------------|:--------------------|:------| | Balance as of September 30, 2021 | 31,294 | $ 31 | $ 866,158 | $ (141,305) | $ 724,884 | | Net income and comprehensive income | — | — | — | 34,885 | 34,885 | | Stock-based compensation expense | — | — | 2,108 | — | 2,108 | | Shares issued under employee stock plans, net | 517 | — | — | — | — | | Forfeiture and other settlements of restricted stock | (44) | — | — | — | — | | Common stock redeemed for tax liability | (307) | — | (6,618) | — | (6,618) | | Balance as of December 31, 2021 | 31,460 | $ 31 | $ 861,648 | $ (106,420) | $ 755,259 | Condensed Consolidated Statements of Cash Flows | in thousands | Three Months Ended December 31, 2022 | Three Months Ended December 31, 2021 | |:-------------|:-------------------------------------|:-------------------------------------| | Cash flows from operating activities: | | | | Net income | $ 24,331 | $ 34,885 | | Net cash used in operating activities | (86,780) | (77,817) | | Cash flows from investing activities: | | | | Net cash used in investing activities | (3,231) | (2,811) | | Cash flows from financing activities: | | | | Net cash used in financing activities | (5,172) | (6,618) | | Net decrease in cash, cash equivalents, and restricted cash | (95,183) | (87,246) | | Cash, cash equivalents, and restricted cash at beginning of period | 251,828 | 274,143 | | Cash, cash equivalents, and restricted cash at end of period | $ 156,645 | $ 186,897 | Notes to Condensed Consolidated Financial Statements (1) Description of Business - Beazer Homes USA, Inc. is a geographically diversified homebuilder operating in 13 states across three regions: West, East, and Southeast. The company's objective is to provide homes with extraordinary value at an affordable price through its strategic pillars of Mortgage Choice, Choice Plans, and Surprising Performance[14][309] - The company's fiscal year 2023 began on October 1, 2022, and ends on September 30, 2023[15] (2) Basis of Presentation and Summary of Significant Accounting Policies - The unaudited condensed consolidated financial statements are prepared in accordance with GAAP for interim financial information, with all intercompany transactions and balances eliminated in consolidation[14][33] - Revenue is recognized upon the transfer of promised goods to customers. Homebuilding revenue is recognized when title and possession of the home are transferred at the closing date, while land sales revenue is recognized when performance obligations are satisfied, typically at closing[35][288][289] - The company is evaluating the impact of ASU 2020-04 and ASU 2022-06 related to Reference Rate Reform but does not expect a material impact on its consolidated financial statements[290] (3) Supplemental Cash Flow Information | in thousands | Three Months Ended December 31, 2022 | Three Months Ended December 31, 2021 | |:-------------|:-------------------------------------|:-------------------------------------| | Supplemental disclosure of non-cash activity: | | | | Increase in operating lease right-of-use assets | $ — | $ 626 | | Increase in operating lease liabilities | — | 626 | | Supplemental disclosure of cash activity: | | | | Interest payments | $ 24,524 | $ 25,081 | | Income tax payments | — | 53 | | Tax refunds received | 59 | — | | Reconciliation of cash, cash equivalents, and restricted cash: | | | | Cash and cash equivalents | $ 120,746 | $ 157,701 | | Restricted cash | 35,899 | 29,196 | | Total cash, cash equivalents, and restricted cash | $ 156,645 | $ 186,897 | (4) Owned Inventory | in thousands | December 31, 2022 | September 30, 2022 | |:-------------|:------------------|:-------------------| | Homes under construction | $ 759,545 | $ 785,742 | | Land under development | 782,628 | 731,190 | | Land held for future development | 19,879 | 19,879 | | Land held for sale | 18,583 | 15,674 | | Capitalized interest | 113,143 | 109,088 | | Model homes | 85,445 | 76,292 | | Total owned inventory | $ 1,779,223 | $ 1,737,865 | - As of December 31, 2022, the company had 2,383 homes under construction, including 840 spec homes totaling $268.5 million (701 in-process spec homes at $211.6 million and 139 finished spec homes at $56.9 million)[318] - No project in progress impairments were recognized during the three months ended December 31, 2022, and 2021[277] | in thousands | Three Months Ended December 31, 2022 | Three Months Ended December 31, 2021 | |:-------------|:-------------------------------------|:-------------------------------------| | West | $ 36 | $ — | | East | 154 | — | | Total abandonments charges | $ 190 | $ — | | Total impairments and abandonment charges | $ 190 | $ — | (5) Interest | in thousands | Three Months Ended December 31, 2022 | Three Months Ended December 31, 2021 | |:-------------|:-------------------------------------|:-------------------------------------| | Capitalized interest in inventory, beginning of period | $ 109,088 | $ 106,985 | | Interest incurred | 17,830 | 18,311 | | Capitalized interest amortized to home construction and land sales expenses | (13,775) | (14,780) | | Capitalized interest in inventory, end of period | $ 113,143 | $ 110,516 | (6) Borrowings | in thousands | December 31, 2022 | September 30, 2022 | |:-------------|:------------------|:-------------------| | 6.750% Senior Notes (2025 Notes) | $ 211,195 | $ 211,195 | | 5.875% Senior Notes (2027 Notes) | 357,255 | 357,255 | | 7.250% Senior Notes (2029 Notes) | 350,000 | 350,000 | | Unamortized debt issuance costs | (6,907) | (7,280) | | Total Senior Notes, net | 911,543 | 911,170 | | Junior Subordinated Notes | 72,787 | 72,270 | | Total debt, net | $ 984,330 | $ 983,440 | - The company entered into a new Senior Unsecured Revolving Credit Facility with $265.0 million capacity on October 13, 2022, replacing the previous Secured Revolving Credit Facility. As of December 31, 2022, no borrowings or letters of credit were outstanding under the Unsecured Facility[98][100] - The company had $30.4 million in outstanding letters of credit under stand-alone, cash-secured facilities as of December 31, 2022, secured by $31.5 million in restricted cash[101] - The company believes it was in compliance with all covenants under its Senior Notes and Junior Subordinated Notes as of December 31, 2022[78][105] (7) Operating Leases | in thousands | Three Months Ended December 31, 2022 | Three Months Ended December 31, 2021 | |:-------------|:-------------------------------------|:-------------------------------------| | Operating lease expense | $ 1,001 | $ 999 | | Cash payments on lease liabilities | $ 1,141 | $ 1,086 | | Weighted-average remaining lease term | 4.3 years | 4.7 years | | Weighted-average discount rate | 4.41% | 4.43% | | Fiscal Years Ending September 30, | in thousands | |:----------------------------------|:-------------| | 2023 | 2,658 | | 2024 | 2,688 | | 2025 | 2,299 | | 2026 | 1,643 | | 2027 | 702 | | Thereafter | 1,226 | | Total lease payments | 11,216 | | Less: imputed interest | 1,029 | | Total operating lease liabilities | 10,187 | (8) Contingencies | in thousands | Three Months Ended December 31, 2022 | Three Months Ended December 31, 2021 | |:-------------|:-------------------------------------|:-------------------------------------| | Balance at beginning of period | $ 13,926 | $ 12,931 | | Accruals for warranties issued | 2,413 | 2,372 | | Changes in liability related to warranties existing in prior periods | (810) | 534 | | Payments made | (2,370) | (3,094) | | Balance at end of period | $ 13,159 | $ 12,743 | - The company had an accrual of $8.0 million in other liabilities related to litigation matters as of December 31, 2022[36] - Outstanding letters of credit and surety bonds totaled $30.4 million and $277.5 million, respectively, as of December 31, 2022, primarily for obligations to local governments for development improvements[37] (9) Fair Value Measurements | in thousands | Level 1 | Level 2 | Level 3 | Total | |:-------------|:--------|:--------|:--------|:------| | As of December 31, 2022 | | | | | | Deferred compensation plan assets | $ — | $ 3,489 | $ — | $ 3,489 | | As of September 30, 2022 | | | | | | Deferred compensation plan assets | $ — | $ 3,179 | $ — | $ 3,179 | | Land held for sale | $ — | $ — | $ 902 | $ 902 | | in thousands | As of December 31, 2022 Carrying Amount | As of December 31, 2022 Fair Value | As of September 30, 2022 Carrying Amount | As of September 30, 2022 Fair Value | |:-------------|:----------------------------------------|:-----------------------------------|:-----------------------------------------|:------------------------------------| | Senior Notes | $ 911,543 | $ 836,552 | $ 911,170 | $ 753,338 | | Junior Subordinated Notes | 72,787 | 72,787 | 72,270 | 72,270 | | Total | $ 984,330 | $ 909,339 | $ 983,440 | $ 825,608 | (10) Income Taxes - Income tax expense from continuing operations decreased to $4.2 million for the three months ended December 31, 2022, compared to $6.5 million for the prior year period[20] - The income tax expense for Q1 FY23 was primarily driven by income from continuing operations and discrete impact related to stock-based compensation, partially offset by $3.0 million in energy efficiency tax credits[20] - Management concluded that it is more likely than not that all federal and certain state deferred tax assets will be realized as of December 31, 2022[21] (11) Stock-based Compensation | in thousands | Three Months Ended December 31, 2022 | Three Months Ended December 31, 2021 | |:-------------|:-------------------------------------|:-------------------------------------| | Stock-based compensation expense | $ 1,580 | $ 2,108 | | Three Months Ended December 31, 2022 | Shares | Weighted Average Exercise Price | |:-------------------------------------|:-------|:--------------------------------| | Outstanding at beginning of period | 27,507 | $ 14.31 | | Outstanding at end of period | 27,507 | 14.31 | | Exercisable at end of period | 27,271 | $ 14.29 | | Three Months Ended December 31, 2022 | Performance-Based Restricted Shares | Time-Based Restricted Shares | Total Restricted Shares | |:-------------------------------------|:------------------------------------|:-----------------------------|:------------------------| | Beginning of period | 436,146 | 412,042 | 848,188 | | Granted | 249,534 | 422,998 | 672,532 | | Vested | (334,736) | (232,071) | (566,807) | | End of period | 350,944 | 602,969 | 953,913 | - Total unrecognized compensation costs related to unvested restricted stock awards were $11.8 million as of December 31, 2022, expected to be recognized over a weighted-average period of 2.14 years[58] (12) Earnings Per Share | in thousands (except per share data) | Three Months Ended December 31, 2022 | Three Months Ended December 31, 2021 | |:-------------------------------------|:-------------------------------------|:-------------------------------------| | Numerator: | | | | Income from continuing operations | $ 24,408 | $ 34,895 | | Loss from discontinued operations, net of tax | (77) | (10) | | Net income | $ 24,331 | $ 34,885 | | Denominator: | | | | Basic weighted-average shares | 30,219 | 30,336 | | Dilutive effect of restricted stock awards | 257 | 379 | | Dilutive effect of stock options | 4 | 9 | | Diluted weighted-average shares | 30,480 | 30,724 | | Basic income per share: | | | | Continuing operations | $ 0.81 | $ 1.15 | | Discontinued operations | — | — | | Total | $ 0.81 | $ 1.15 | | Diluted income per share: | | | | Continuing operations | $ 0.80 | $ 1.14 | | Discontinued operations | — | — | | Total | $ 0.80 | $ 1.14 | (13) Other Liabilities | in thousands | December 31, 2022 | September 30, 2022 | |:-------------|:------------------|:-------------------| | Customer deposits | $ 29,615 | $ 34,270 | | Accrued compensations and benefits | 22,500 | 57,781 | | Accrued interest | 14,970 | 22,723 | | Warranty reserve | 13,159 | 13,926 | | Litigation accruals | 8,010 | 9,832 | | Income tax liabilities | 914 | 320 | | Other | 33,276 | 35,536 | | Total | $ 122,444 | $ 174,388 | (14) Segment Information - The company operates in 13 states, grouped into three homebuilding segments: West (Arizona, California, Nevada, Texas), East (Delaware, Indiana, Maryland, New Jersey, Tennessee, Virginia), and Southeast (Florida, Georgia, North Carolina, South Carolina)[97][124][147] | in thousands | 2022 | 2021 | |:-------------|:----------|:----------| | West | $ 274,815 | $ 257,666 | | East | 86,190 | 118,169 | | Southeast | 83,923 | 78,314 | | Total revenue | $ 444,928 | $ 454,149 | | in thousands | 2022 | 2021 | |:-------------|:-----------|:-----------| | West | $ 37,357 | $ 42,724 | | East | 9,262 | 19,859 | | Southeast | 10,679 | 8,200 | | Corporate and unallocated | (28,796) | (29,844) | | Total operating income | $ 28,502 | $ 40,939 | | in thousands | Three Months Ended December 31, 2022 | Three Months Ended December 31, 2021 | |:-------------|:-------------------------------------|:-------------------------------------| | West | $ 1,510 | $ 1,333 | | East | 533 | 69 | | Southeast | 717 | 355 | | Corporate and unallocated | 485 | 1,137 | | Total capital expenditures | $ 3,245 | $ 2,894 | | in thousands | December 31, 2022 | September 30, 2022 | |:-------------|:------------------|:-------------------| | West | $ 996,357 | $ 995,339 | | East | 360,367 | 334,323 | | Southeast | 310,918 | 305,443 | | Corporate and unallocated | 518,743 | 616,858 | | Total assets | $ 2,186,385 | $ 2,251,963 | | in thousands | Three Months Ended December 31, 2022 | Three Months Ended December 31, 2021 | |:-------------|:-------------------------------------|:-------------------------------------| | West | $ 1,605 | $ 1,599 | | East | 273 | 435 | | Southeast | 330 | 399 | | Corporate and unallocated | 305 | 448 | | Total depreciation and amortization | $ 2,513 | $ 2,881 | Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses Q1 FY23 financial performance, market conditions, operations, liquidity, and strategy Executive Overview and Outlook - Conditions in the housing market worsened during Q1 FY23 due to elevated mortgage rates, inflation, and an uncertain economic outlook, negatively impacting housing affordability and buyer sentiment[152] - Despite current challenges, the long-term housing market outlook remains positive, supported by demographic shifts towards homeownership and a multi-million unit housing deficit[153] - The company plans to strategically invest in land, gradually increase active communities, and expand the use of lot option agreements to position for long-term growth, while maintaining a strong liquidity position and controlling risk[153] Overview of Results for Our Fiscal First Quarter - Sales per community per month decreased to 1.3 (from 3.3 in prior year quarter), and net new orders were down 57.8% to 482, reflecting a challenging sales environment[131] - Average Selling Price (ASP) for homes closed increased 21.6% year-over-year to $533.1 thousand, but backlog ASP was sequentially down slightly, indicating potential future lower closing ASP[132] - The cancellation rate for the quarter increased to 37.1% from 11.8% in the prior year quarter, driven by higher cancellation volume and lower gross sales[154] - Homebuilding gross margin decreased to 19.2% (from 20.9% YoY). Excluding impairments, abandonments, and interest, it decreased to 22.3% (from 24.2% YoY)[155] - SG&A as a percentage of total revenue increased to 12.3% (from 11.8% YoY), primarily due to decreased closings and revenue[156] Seasonal and Quarterly Variability - The company's homebuilding operating cycle historically shows escalating new order activity in the second and third fiscal quarters and increased closings in the third and fourth fiscal quarters[135] - These seasonal patterns may be impacted or reduced by factors such as economic downturns, leading to decreased revenues and closings[135] Results of Continuing Operations | $ in thousands | Three Months Ended December 31, 2022 | Three Months Ended December 31, 2021 | |:---------------|:-------------------------------------|:-------------------------------------| | Total Revenue | $ 444,928 | $ 454,149 | | Gross Profit | $ 85,768 | $ 97,400 | | Homebuilding Gross Margin | 19.2 % | 20.9 % | | SG&A as a percentage of total revenue | 12.3 % | 11.8 % | | Operating Income | $ 28,502 | $ 40,939 | | Operating Income as a percentage of total revenue | 6.4 % | 9.0 % | | Effective Tax Rate | 14.5 % | 15.6 % | EBITDA: Reconciliation of Net Income to Adjusted EBITDA | in thousands | Three Months Ended December 31, 2022 | Three Months Ended December 31, 2021 | 22 vs 21 Change | |:-------------|:-------------------------------------|:-------------------------------------|:----------------| | Net income | $ 24,331 | $ 34,885 | $ (10,554) | | EBIT | 42,239 | 56,125 | (13,886) | | EBITDA | 44,752 | 59,006 | (14,254) | | Adjusted EBITDA | $ 47,148 | $ 61,114 | $ (13,966) | Homebuilding Operations Data | | Three Months Ended December 31, 2022 New Orders, net | Three Months Ended December 31, 2021 New Orders, net | 22 vs 21 Change | 2022 Cancellation Rates | 2021 Cancellation Rates | |:----------|:---------------------------------------|:---------------------------------------|:----------------|:------------------------|:------------------------| | West | 248 | 655 | (62.1)% | 43.6 % | 12.8 % | | East | 120 | 236 | (49.2)% | 24.5 % | 13.9 % | | Southeast | 114 | 250 | (54.4)% | 31.7 % | 7.1 % | | Total | 482 | 1,141 | (57.8)% | 37.1 % | 11.8 % | - Net new orders decreased by 57.8% year-over-year, driven by a 60.1% decrease in sales pace and increased cancellation rates across all segments[140] | | As of December 31, 2022 | As of December 31, 2021 | 22 vs 21 Change | |:-----------------------------------------|:------------------------|:------------------------|:----------------| | Backlog Units: | | | | | West | 995 | 1,705 | (41.6)% | | East | 375 | 602 | (37.7)% | | Southeast | 370 | 601 | (38.4)% | | Total | 1,740 | 2,908 | (40.2)% | | Aggregate dollar value of homes in backlog (in millions) | $ 940.9 | $ 1,405.2 | (33.0)% | | ASP in backlog (in thousands) | $ 540.8 | $ 483.2 | 11.9 % | Homebuilding Revenue, Average Selling Price, and Closings | $ in thousands | Homebuilding Revenue 2022 | Homebuilding Revenue 2021 | Homebuilding Revenue 22 vs 21 | Average Selling Price 2022 | Average Selling Price 2021 | Average Selling Price 22 vs 21 | Closings 2022 | Closings 2021 | Closings 22 vs 21 | |:---------------|:--------------------------|:--------------------------|:------------------------------|:---------------------------|:---------------------------|:-------------------------------|:--------------|:--------------|:------------------| | West | $ 274,322 | $ 256,492 | 7.0 % | $ 537.9 | $ 425.4 | 26.4 % | 510 | 603 | (15.4)% | | East | 86,031 | 114,287 | (24.7)% | 555.0 | 466.5 | 19.0 % | 155 | 245 | (36.7)% | | Southeast | 83,731 | 75,950 | 10.2 % | 498.4 | 444.2 | 12.2 % | 168 | 171 | (1.8)% | | Total | $ 444,084 | $ 446,729 | (0.6)% | $ 533.1 | $ 438.4 | 21.6 % | 833 | 1,019 | (18.3)% | - Current fiscal quarter closings were affected by longer construction cycle times due to lingering impacts of supply chain disruptions and labor shortages[162] Homebuilding Gross Profit and Gross Margin - Total homebuilding gross profit decreased by $8.2 million to $85.1 million, and gross margin decreased by 170 basis points to 19.2% year-over-year[166] - Excluding impairment and abandonment charges and interest amortized to cost of sales, homebuilding gross profit decreased by $9.0 million, and gross margin decreased by 190 basis points to 22.3%. This deterioration was primarily driven by increased price concessions as demand weakened[166] | $ in thousands | HB Gross Profit | HB Gross Margin | Impairments & Abandonments (I&A) | HB Gross Profit excluding I&A | HB Gross Margin excluding I&A | Interest Amortized to COS (Interest) | HB Gross Profit excluding I&A and Interest | HB Gross Margin excluding I&A and Interest | |:---------------|:----------------|:----------------|:---------------------------------|:------------------------------|:------------------------------|:-------------------------------------|:-------------------------------------------|:-------------------------------------------| | West | $ 59,362 | 21.6 % | $ 36 | $ 59,398 | 21.7 % | $ — | $ 59,398 | 21.7 % | | East | 16,521 | 19.2 % | 154 | 16,675 | 19.4 % | — | 16,675 | 19.4 % | | Southeast | 18,501 | 22.1 % | — | 18,501 | 22.1 % | — | 18,501 | 22.1 % | | Corporate & unallocated | (9,270) | | — | (9,270) | | 13,775 | 4,505 | | | Total homebuilding | $ 85,114 | 19.2 % | $ 190 | $ 85,304 | 19.2 % | $ 13,775 | $ 99,079 | 22.3 % | | | Pre-imp