BEAZER HOMES USA, INC. Executive Overview and Outlook Market Conditions The demand for new and existing homes is dependent on a variety of demographic and economic factors, including job and wage growth, household formation, consumer confidence, mortgage financing, and overall housing affordability. Prior to the onset of the COVID-19 pandemic, broad economic factors including rising levels of household formation, a constrained supply of new and used homes, and low mortgage rates, by historical standards, contributed to improving conditions for new home sales. The COVID-19 pandemic has led to significant market disruptions and volatility. While the economic recovery following initial containment and mitigation measures of COVID-19 is still ongoing, demand for new homes in our markets remains strong. We believe this is the result of low interest rates and short supply of homes, together with what may be a desire by many people to move out of crowded urban areas into new homes in the suburbs. Despite this, the magnitude and duration of the COVID-19 pandemic remains unknown. If economic conditions deteriorate, we may experience material declines in our net new orders, closings, revenues, cash flow and/or profitability in fiscal 2021, compared to the corresponding prior-year periods, and compared to our expectations. In addition, if conditions in the overall housing market or in a specific market worsen in the future beyond our current expectations, if future changes in our business strategy significantly affect any key assumptions used in our projections of future cash flows, or if there are material changes in any of the other items we consider in assessing recoverability, we may recognize charges in future periods for inventory impairments related to our current inventory assets. Any such charges could be material to our consolidated financial statements. For further discussion of the potential impacts on our business from the COVID-19 pandemic, see Part I, Item 1A - Risk Factors within our 2020 Annual Report. Overview of Results for Our Fiscal First Quarter Reflecting on the current market conditions discussed above and our operating strategy, during the first quarter of fiscal 2021, we made improvements in net new orders, sales pace, homes in backlog, homebuilding gross margin, and net income as compared to the first quarter of fiscal 2020. Profitability For the quarter endedDecember 31, 2020 , we recorded net income from continuing operations of$12.0 million compared to net income from continuing operations of$2.8 million in the first quarter of fiscal 2020. There were certain items that impacted the comparability of net income from continuing operations between periods: •We recognized$0.5 million in inventory abandonment charges in the current quarter compared to no such charges recognized in the prior year quarter. •Income tax expense from continuing operations was$4.1 million during the current quarter primarily due to income from continuing operations, as compared to$0.2 million income tax benefit for the prior year quarter. Refer to Note 10 of the notes to the condensed consolidated financial statements for additional details. Balanced Growth Strategy We continue to execute against our balanced growth strategy, which we define as the expansion of earnings at a faster rate than our revenue growth, supported by a less-leveraged and return-driven capital structure. This strategy provides us with flexibility to increase return on capital, reduce leverage, or increase investment in land and other operating assets in response to changing market conditions. Over the last ten years, our balanced growth strategy has led to significant improvements in profitability without asset growth. Beginning in fiscal 2021, we expect to allocate more capital to grow our total lot position, and generate higher operating margins by delivering higher margin homes and maximizing overhead leverage. The following is a summary of our performance against certain key operating and financial metrics during the current period: •Sales per community per month was 3.5 and 2.5 for the quarter endedDecember 31, 2020 and 2019, respectively. The increase in sales pace is reflective of the high demand for new homes primarily driven by low interest rates, short supply of homes, and consumers' reassessment of living arrangements. Sales per community per month was 3.5 and 2.9 for the trailing 12 months endedDecember 31, 2020 and 2019, respectively. 26 -------------------------------------------------------------------------------- Table of Contents •During the quarter endedDecember 31, 2020 , our net new orders increased to 1,442, up 15.3% from the prior year quarter, while our average active community count of 136 was down 19.0% from the prior year quarter. We ended the quarter with a lower active community count in part due to strong sales pace we have experienced since the fourth fiscal quarter of 2020 through the current quarter. We are working to rebuild community counts by investing in new communities. We continue to evaluate strategic opportunities to purchase land within our geographic footprint, balancing our desire to reduce leverage with land acquisition strategies that maximize the efficiency of capital employed. •Aggregated dollar value of homes in backlog as ofDecember 31, 2020 was$1,162.4 million , up 58.8% compared to a year earlier. As a result of our strong sales pace, we ended the quarter with 2,837 homes in backlog, up 53.6% compared to a year earlier. ASP in backlog as ofDecember 31, 2020 has risen 3.4% versus the prior year quarter to$409.7 thousand . •Homebuilding gross margin for the quarter endedDecember 31, 2020 was 17.6%, up from 15.1% in the prior year quarter. Homebuilding gross margin excluding impairments and abandonments and interest for the quarter endedDecember 31, 2020 was 22.1%, up from 19.8% in the prior year quarter. With our strong sales paces and strong backlog, we believe opportunities remain for continued gross margin expansion through maximizing revenue while reducing costs by simplifying our product offerings, although cost pressures from lumber and other direct materials costs may temper gross margin expansion in the future. •SG&A for the quarter endedDecember 31, 2020 was 12.7% of total revenue, down from 13.3% a year earlier. We remain focused on improving overhead cost management in relation to our revenue growth, contributing to our balanced growth strategy. Seasonal and Quarterly Variability Our homebuilding operating cycle historically has reflected escalating new order activity in the second and third fiscal quarters and increased closings in the third and fourth fiscal quarters. Accordingly, our financial results for the three months endedDecember 31, 2020 may not be indicative of our full year results, particularly in light of the COVID-19 pandemic. Commitment to Environmental, Social and Governance (ESG) Matters Our focus for fiscal 2021 is not only about positioning us for future growth but also involves another important part of our operations, namely our commitment to ESG matters. Although we believe we have been a leader among the public homebuilders in ESG for some time, we are taking a number of important steps forward in fiscal 2021. As described in our proxy statement filed onDecember 18, 2020 (2020 Proxy Statement), we are the first national builder to publicly commit to ensuring each home we build is Net Zero Energy Ready (defined below), and we have committed to reach this objective by the end of 2025. We calculate the energy performance of our homes using the industry standard Home Energy Rating System (HERS), which measures energy efficiency on an easy to understand scale: the lower the number, the more energy efficient the home. Net Zero Energy Ready means that every home we build will have a gross HERS index score (before any benefit of renewable energy production) of 45 or less, and homeowners will be able to achieve net zero energy by attaching a properly sized renewable energy system. We have been among the most efficient public builders from a HERS perspective. We believe our commitment to Net Zero Energy Ready will continue to keep the energy-efficiency of the homes we build well ahead of other new homes built to code. Further, we have incorporated HERS environmental achievement goals into our fiscal 2021 long-term incentive compensation awards to demonstrate our commitment to Net Zero Energy Ready. Refer to our 2020 Proxy Statement for further discussions on our ESG initiatives. 27 -------------------------------------------------------------------------------- Table of Contents RESULTS OF CONTINUING OPERATIONS: The following table summarizes certain key income statement metrics for the periods presented: Three Months Ended December 31, $ in thousands 2020 2019 Revenue: Homebuilding$ 424,229 $ 417,399 Land sales and other 4,310 405 Total$ 428,539 $ 417,804 Gross profit: Homebuilding$ 74,837 $ 63,108 Land sales and other 456 29 Total$ 75,293 $ 63,137 Gross margin: Homebuilding 17.6 % 15.1 % Land sales and other 10.6 % 7.2 % Total 17.6 % 15.1 % Commissions$ 16,507 $ 16,065 General and administrative expenses (G&A)$ 37,976 $ 39,699 SG&A (commissions plus G&A) as a percentage of total revenue 12.7 % 13.3 % G&A as a percentage of total revenue 8.9 % 9.5 % Depreciation and amortization$ 3,122 $ 3,427 Operating income$ 17,688 $ 3,946 Operating income as a percentage of total revenue 4.1 % 0.9 % Effective tax rate (a) 25.5 % (8.1) % Equity in income of unconsolidated entities $
(75)
(a) Calculated as tax expense (benefit) for the period divided by income from
continuing operations. Due to a variety of factors, including the impact of
discrete tax items on our effective tax rate, our income tax benefit is not
always directly correlated to the amount of pre-tax income for the associated
periods.
28
--------------------------------------------------------------------------------
Table of Contents
EBITDA: Reconciliation of Net Income (Loss) to Adjusted EBITDA
Reconciliation of Adjusted EBITDA to total company net income (loss), the most
directly comparable GAAP measure, is provided for each period discussed below.
Management believes that Adjusted EBITDA assists investors in understanding and
comparing the operating characteristics of homebuilding activities by
eliminating many of the differences in companies' respective capitalization, tax
position, and level of impairments. These EBITDA measures should not be
considered alternatives to net income (loss) determined in accordance with GAAP
as an indicator of operating performance.
The reconciliation of Adjusted EBITDA to total company net income (loss) below
differs from prior year, as it reclassifies stock-based compensation expense
from an adjustment within EBITDA to an adjustment within Adjusted EBITDA in
order to accurately present EBITDA per its definition.
The following table reconciles our net income (loss) to Adjusted EBITDA for the
periods presented:
Three Months Ended December 31, LTM Ended December 31,(a)
in thousands 2020 2019 20 vs 19 2020 2019 20 vs 19
Net income (loss) $ 11,997 $ 2,746 $ 9,251 $ 61,477 $ (84,085) $ 145,562
Expense (benefit) from income taxes 4,114 (228) 4,342 22,006 (33,549) 55,555
Interest amortized to home construction and land sales expenses and capitalized interest impaired 18,813 19,669 (856) 94,806 111,172
(16,366)
Interest expense not qualified for capitalization 1,600 1,442 158 8,626 4,309 4,317 EBIT 36,524 23,629 12,895 186,915 (2,153) 189,068 Depreciation and amortization 3,122 3,427 (305) 15,335 15,416 (81) EBITDA 39,646 27,056 12,590 202,250 13,263 188,987 Stock-based compensation expense 3,511 2,311 1,200 11,236 10,723
513
Loss on extinguishment of debt - - - - 24,920
(24,920)
Inventory impairments and abandonments (b) 465 - 465 2,576 133,819
(131,243)
Restructuring and severance expenses (10) - (10) 1,307 -
1,307
Litigation settlement in discontinued operations - - - 1,260 - 1,260 Adjusted EBITDA$ 43,612 $ 29,367 $ 14,245 $ 218,629 $ 182,725 $ 35,904
(a) "LTM" indicates amounts for the trailing 12 months. (b) In periods during which we impaired certain of our inventory assets, capitalized interest that is impaired is included in the line above titled "Interest amortized to home construction and land sales expenses and capitalized interest impaired."
29
--------------------------------------------------------------------------------
Table of Contents
Homebuilding Operations Data
The following table summarizes new orders and cancellation rates by reportable
segment for the periods presented:
Three Months Ended December 31,
New Orders, net Cancellation Rates
2020 2019 20 vs 19 2020 2019
West 782 737 6.1 % 14.6 % 15.6 %
East 320 233 37.3 % 8.6 % 14.7 %
Southeast 340 281 21.0 % 10.1 % 13.3 %
Total 1,442 1,251 15.3 % 12.3 % 14.9 %
Net new orders for the quarter ended December 31, 2020 increased to 1,442, up
15.3% from the quarter ended December 31, 2019 . The increase in net new orders
was driven primarily by an increase in absorption rate from 2.5 sales per
community per month in the prior year quarter to 3.5, and a decrease in
cancellation rates from 14.9% in the prior year quarter to 12.3%. All three of
our reportable segments experienced sales pace increases during the current
quarter, while average active community count decreased across all reportable
segments.
The table below summarizes backlog units by reportable segment as well as the
aggregate dollar value and ASP of homes in backlog as of December 31, 2020 and
December 31, 2019 :
As of December 31,
2020 2019 20 vs 19
Backlog Units:
West 1,505 1,025 46.8 %
East 721 382 88.7 %
Southeast 611 440 38.9 %
Total 2,837 1,847 53.6 %
Aggregate dollar value of homes in backlog (in millions)
$ 732.1 58.8 % ASP in backlog (in thousands)$ 409.7 $ 396.4 3.4 % Backlog reflects the number of homes for which the Company has entered into a sales contract with a customer but has not yet delivered the home. Homes in backlog are generally delivered within three to six months following commencement of construction. The aggregate dollar value of homes in backlog as ofDecember 31, 2020 increased 58.8% compared toDecember 31, 2019 due to a 3.4% increase in the ASP of homes in backlog as well as a 53.6% increase in backlog units. The increase in backlog units was primarily due to the increase in sales pace and net new orders. Homebuilding Revenue, Average Selling Price, and Closings The table below summarizes homebuilding revenue, ASP of our homes closed, and closings by reportable segment for the periods presented: Three Months Ended December 31, Homebuilding Revenue Average Selling Price Closings $ in thousands 2020 2019 20 vs 19 2020 2019 20 vs 19 2020 2019 20 vs 19 West$ 232,940 $ 254,398 (8.4) %$ 362.8 $ 366.6 (1.0) % 642 694 (7.5) % East 97,964 77,645 26.2 % 439.3 404.4 8.6 % 223 192 16.1 % Southeast 93,325 85,356 9.3 % 374.8 377.7 (0.8) % 249 226 10.2 % Total$ 424,229 $ 417,399 1.6 %$ 380.8 $ 375.4 1.4 % 1,114 1,112 0.2 % For the three months endedDecember 31, 2020 , homebuilding revenue increased primarily as a result of increase in ASP, while closings stayed relatively flat year over year. The ASP changes were impacted primarily by a change in mix of closings between geographies, products, and among communities within each individual market as compared to the prior year period. On average, we anticipate that our ASP will continue to increase in the near-term as indicated by the ASP for homes in backlog as ofDecember 31, 2020 . 30 -------------------------------------------------------------------------------- Table of Contents Homebuilding Gross Profit and Gross Margin The following tables present our homebuilding (HB) gross profit and gross margin by reportable segment and in total. In addition, such amounts are presented excluding inventory impairments and abandonments and interest amortized to cost of sales (COS). Homebuilding gross profit is defined as homebuilding revenue less home cost of sales (which includes land and land development costs, home construction costs, capitalized interest, indirect costs of construction, estimated warranty costs, closing costs, and inventory impairment and abandonment charges). Three Months Ended December 31, 2020 HB Gross Impairments & HB Gross HB Gross Interest Profit HB Gross Margin HB Gross HB Gross Abandonments Profit w/o Margin w/o Amortized to w/o I&A and w/o I&A and $ in thousands Profit Margin (I&A) I&A I&A COS (Interest) Interest Interest West$ 52,874 22.7 % $ -$ 52,874 22.7 % $ -$ 52,874 22.7 % East 19,865 20.3 % 465 20,330 20.8 % - 20,330 20.8 % Southeast 19,822 21.2 % - 19,822 21.2 % - 19,822 21.2 % Corporate & unallocated (a) (17,724) - (17,724) 18,560 836 Total homebuilding$ 74,837 17.6 % $ 465$ 75,302 17.8 %$ 18,560 $ 93,862 22.1 % Three Months Ended December 31, 2019 Interest HB Gross Impairments & HB Gross HB Gross Amortized to Profit HB Gross Margin HB Gross HB Gross Abandonments Profit w/o Margin w/o COS w/o I&A and w/o I&A and $ in thousands Profit Margin (I&A) I&A I&A (Interest) Interest Interest West$ 52,109 20.5 % $ -$ 52,109 20.5 % $ -$ 52,109 20.5 % East 13,892 17.9 % - 13,892 17.9 % - 13,892 17.9 % Southeast 13,460 15.8 % - 13,460 15.8 % - 13,460 15.8 % Corporate & unallocated (a) (16,353) - (16,353) 19,669 3,316 Total homebuilding$ 63,108 15.1 % $ -$ 63,108 15.1 %$ 19,669 $ 82,777 19.8 % (a) Corporate and unallocated includes capitalized interest amortized to HB cost of sales, and indirect costs capitalized and amortized related to HB cost of sales. Our homebuilding gross profit increased by$11.7 million to$74.8 million for the three months endedDecember 31, 2020 , compared to$63.1 million in the prior year quarter. The increase in homebuilding gross profit was primarily driven by growth in homebuilding revenue of$6.8 million , and an increase in gross margin of 250 basis points to 17.6%. However, as shown in the tables above, the comparability of our gross profit and gross margin was modestly impacted by impairments and abandonment charges which increased by$0.5 million , and interest amortized to homebuilding cost of sales which decreased by$1.1 million period-over-period (refer to Note 5 and Note 6 of the notes to the condensed consolidated financial statements in this Form 10-Q for additional details). When excluding the impact of impairment and abandonments charges and interest amortized to homebuilding cost of sales, homebuilding gross profit increased by$11.1 million compared to the prior year quarter, while homebuilding gross margin increased by 230 basis points percent to 22.1%. The year-over-year improvement in gross margin for the three months endedDecember 31, 2020 is primarily driven by lower sales incentives and pricing increases. Measures of homebuilding gross profit and gross margin after excluding inventory impairments and abandonments, interest amortized to cost of sales, and other non-recurring items are not GAAP financial measures. These measures should not be considered alternatives to homebuilding gross profit and gross margin determined in accordance with GAAP as an indicator of operating performance. In particular, the magnitude and volatility of non-cash inventory impairment and abandonment charges for the Company and other homebuilders have been significant historically and, as such, have made financial analysis of our industry more difficult. Homebuilding metrics excluding these charges, as well as interest amortized to cost of sales and other similar presentations by analysts and other companies, are frequently used to assist investors in understanding and comparing the operating characteristics of homebuilding activities by eliminating many of the differences in companies' respective level of impairments and levels of debt. Management believes these non-GAAP measures enable holders of our securities to better understand the cash implications of our operating performance and our ability to service our debt obligations as they currently exist and as 31 -------------------------------------------------------------------------------- Table of Contents additional indebtedness is incurred in the future. These measures are also useful internally, helping management to compare operating results and to measure cash available for discretionary spending. In a given period, our reported gross profit is generated from both communities previously impaired and communities not previously impaired. In addition, as indicated above, certain gross profit amounts arise from recoveries of prior period costs, including warranty items that are not directly tied to communities generating revenue in the period. Home closings from communities previously impaired would, in most instances, generate very low or negative gross margins prior to the impact of the previously recognized impairment. Gross margin for each home closing is higher for a particular community after an impairment because the carrying value of the underlying land was previously reduced to the present value of future cash flows as a result of the impairment, leading to lower cost of sales at the home closing. This improvement in gross margin resulting from one or more prior impairments is frequently referred to in the aggregate as the "impairment turn" or "flow-back" of impairments within the reporting period. The amount of this impairment turn may exceed the gross margin for an individual impaired asset if the gross margin for that asset prior to the impairment would have been negative. The extent to which this impairment turn is greater than the reported gross margin for the individual asset is related to the specific historical cost basis of that individual asset. The asset valuations that result from our impairment calculations are based on discounted cash flow analyses and are not derived by simply applying prospective gross margins to individual communities. As such, impaired communities may have gross margins that are somewhat higher or lower than the gross margins for unimpaired communities. The mix of home closings in any particular quarter varies to such an extent that comparisons between previously impaired and never impaired communities would not be a reliable way to ascertain profitability trends or to assess the accuracy of previous valuation estimates. In addition, since any amount of impairment turn is tied to individual lots in specific communities, it will vary considerably from period to period. As a result of these factors, we review the impairment turn impact on gross margin on a trailing 12-month basis rather than a quarterly basis as a way of considering whether our impairment calculations are resulting in gross margins for impaired communities that are comparable to our unimpaired communities. For the trailing 12-month period, our homebuilding gross margin was 16.9% and excluding interest and inventory impairments and abandonments, it was 21.5%. For the same trailing 12-month period, homebuilding gross margin was as follows in those communities that have previously been impaired, which represented 9.4% of total closings during this period:
Homebuilding Gross Margin from previously impaired communities:
Pre-impairment turn gross margin
1.7 %
Impact of interest amortized to COS related to these communities 4.4 %
Pre-impairment turn gross margin, excluding interest amortization 6.1 %
Impact of impairment turns
17.6 %
Gross margin (post impairment turns), excluding interest amortization 23.7 %
For a further discussion of our impairment policies, refer to Notes 2 and 5 of the notes to the condensed consolidated financial statements in this Form 10-Q.
32
--------------------------------------------------------------------------------
Table of Contents
Land Sales and Other Revenue and Gross Profit
Land sales relate to land and lots sold that do not fit within our homebuilding
programs and strategic plans. We also have other revenue related to title
examinations provided for our homebuyers in certain markets. The following
tables summarize our land sales and other revenue and related gross profit by
reportable segment for the periods presented:
Land Sales and Other Revenue Land Sales and Other Gross Profit
Three Months Ended December 31, Three Months Ended December 31,
in thousands 2020 2019 20 vs 19 2020 2019 20 vs 19
West $ 3,940 $ - $ 3,940 $ 707 $ - $ 707
East - 395 (395) - 17 (17)
Southeast 370 10 360 57 12 45
Corporate and unallocated
(a) - - - (308) - (308)
Total $ 4,310 $ 405 $ 3,905 $ 456 $ 29 $ 427
(a) Corporate and unallocated includes capitalized interest and capitalized
indirect costs expensed to land cost of sale related to land sold.
To further support our efforts to reduce leverage, we continued to focus on
closing a number of land sales in the three months ended December 31, 2020 for
land positions that did not fit within our strategic plans. Future land and lot
sales will depend on a variety of factors, including local market conditions,
individual community performance, and changing strategic plans.
Operating Income
The table below summarizes operating income by reportable segment for the
periods presented:
Three Months Ended December 31,
in thousands 2020 2019 20 vs 19
West $ 33,303 $ 30,331 $ 2,972
East 11,368 5,321 6,047
Southeast 10,308 3,156 7,152
Corporate and unallocated (a) (37,291) (34,862) (2,429)
Operating income (b) $ 17,688 $ 3,946 $ 13,742
(a) Corporate and unallocated includes amortization of capitalized interest,
capitalization and amortization of indirect costs, expenses related to numerous
shared services functions that benefit all segments but are not allocated to the
operating segments, and certain other amounts that are not allocated to our
operating segments.
Our operating income increased by $13.7 million to $17.7 million for the three
months ended December 31, 2020 , compared to operating income of $3.9 million for
the three months ended December 31, 2019 , driven primarily by the previously
discussed increase in gross profit and decreased SG&A costs compared to the
prior year quarter.
Below operating income, we experienced a slight increase in other expense, net,
for the three months ended December 31, 2020 , primarily due to an increase of
$0.2 million in interest expense not qualified for capitalization. See Note 6 of
the notes to our condensed consolidated financial statements in this Form 10-Q
for a further discussion.
Three Months Ended December 31, 2020 as compared to 2019
West Segment: Homebuilding revenue decreased by 8.4% for the three months ended
December 31, 2020 compared to the prior year quarter due to a 7.5% decrease in
closings and a 1.0% decrease in ASP. Compared to the prior year quarter,
homebuilding gross profit increased by $0.8 million due to the increase in
homebuilding gross margin. Homebuilding gross margin increased to 22.7%, up from
20.5% in the prior year quarter. The increase in gross margin was driven
primarily by lower sales incentives and pricing increases. The $3.0 million
increase in operating income compared to the prior year quarter was due to the
aforementioned increase in gross profit and lower SG&A expenses in the segment.
East Segment: Homebuilding revenue increased by 26.2% for the three months ended
December 31, 2020 compared to the prior year quarter due to a 16.1% increase in
closings as well as an 8.6% increase in ASP. Compared to the prior year quarter,
homebuilding gross profit increased by $6.0 million due to the increase in
homebuilding revenue and higher gross margin, which, excluding abandonment,
increased from 17.9% to 20.8%. The increase in gross margin was driven primarily
by lower
33
--------------------------------------------------------------------------------
Table of Contents
sales incentives and pricing increases. The increase of $6.0 million in
operating income was primarily due to the increase in gross profit.
Southeast Segment: Homebuilding revenue increased by 9.3% for the three months
ended December 31, 2020 compared to the prior year quarter due to a 10.2%
increase in closings, partially offset by a 0.8% decrease in ASP. Compared to
the prior year quarter, homebuilding gross profit increased by $6.4 million due
to an increase in homebuilding gross margin and homebuilding revenue.
Homebuilding gross margin increased from 15.8% to 21.2% compared to the prior
year quarter. The increase in gross margin was primarily driven by lower sales
incentives and pricing increases. The increase in operating income of $7.2
million was primarily due to the previously discussed increase in gross margin
and reduced SG&A expenses period-over-period in the segment.
Corporate and Unallocated: Our Corporate and unallocated results include
amortization of capitalized interest, capitalization and amortization of
indirect costs, expenses for various shared services functions that benefit all
segments but are not allocated, including information technology, treasury,
corporate finance, legal, branding and national marketing, and certain other
amounts that are not allocated to our operating segments. For the three months
ended December 31, 2020 , corporate and unallocated net expenses were up $2.4
million from the prior year quarter primarily due to higher corporate G&A costs
and an increase in the proportion of indirect costs expensed to cost of sales
period-over-period, partially offset by lower amortization of capitalized
interest to cost of sales.
Income Taxes
Our income tax assets and liabilities and related effective tax rate are
affected by various factors, the most significant of which is the valuation
allowance recorded against a portion of our deferred tax assets. Due to the
effect of our valuation allowance adjustments beginning in fiscal 2008, a
comparison of our annual effective tax rates must consider the changes in our
valuation allowance. As such, our effective tax rates have not been meaningful
metrics, as our income tax expense/benefit was not directly correlated to the
amount of pretax income or loss for the associated periods. Beginning in fiscal
2016, the Company began using an annualized effective tax rate in interim
periods to determine its income tax benefit/expense, which we believe more
closely correlates with our periodic pretax income or loss. The annualized
effective tax rate will continue to be impacted by discrete tax items.
Our current fiscal year-to-date income tax expense was primarily driven by
income tax expense on earnings from continuing operations. The tax benefit for
the three months ended December 31, 2019 was primarily driven by the generation
of additional federal tax credits, partially offset by income tax expense on
earnings from continuing operations. Refer to Note 11 of the notes to the
condensed consolidated financial statements included in this Form 10-Q for
further discussion of our income taxes.
Liquidity and Capital Resources
Our sources of liquidity include, but are not limited to, cash from operations,
proceeds from Senior Notes, our Secured Revolving Credit Facility (the Facility)
and other bank borrowings, the issuance of equity and equity-linked securities,
and other external sources of funds. Our short-term and long-term liquidity
depends primarily upon our level of net income, working capital management
(cash, accounts receivable, accounts payable and other liabilities), and
available credit facilities.
Cash, cash equivalents, and restricted cash decreased as follows for the periods
presented:
Three Months Ended December 31,
in thousands 2020 2019
Cash used in operating activities $ (74,578) $ (84,530)
Cash used in investing activities (2,858) (2,547)
Cash (used in) provided by financing activities (3,044) 24,319
Net decrease in cash, cash equivalents, and restricted cash
Operating Activities Net cash used in operating activities was$74.6 million for the three months endedDecember 31, 2020 . The primary drivers of operating cash flows are typically cash earnings and changes in inventory levels, including land acquisition and development spending. Net cash used in operating activities during the period was primarily driven by an increase in inventory of$62.7 million resulting from land acquisition, land development, and house construction spending to support continued growth, and a net increase in non-inventory working capital balances of$35.1 million , partially offset by income before income taxes of$16.1 million , which included$7.1 million of non-cash charges. 34 -------------------------------------------------------------------------------- Table of Contents Net cash used in operating activities was$84.5 million for the three months endedDecember 31, 2019 , primarily driven by income before income taxes of$2.5 million , which included,$5.7 million of non-cash charges, offset by an increase in inventory of$69.0 million resulting from land acquisition, land development, and house construction spending to support continued growth, and a net increase in non-inventory working capital balances of$23.7 million . Investing Activities Net cash used in investing activities for the three months endedDecember 31, 2020 andDecember 31, 2019 , was$2.9 million and$2.5 million , respectively, primarily driven in both periods by capital expenditures for model homes. Financing Activities Net cash used in financing activities was$3.0 million for the three months endedDecember 31, 2020 primarily driven by tax payments for stock-based compensation awards vesting and payment of debt issuance costs. Net cash provided by financing activities was$24.3 million for the three months endedDecember 31, 2019 driven by net borrowings under the Facility, partially offset by tax payments for stock-based compensation awards vesting, cash settlement of performance-based restricted stock, and repayment of other miscellaneous borrowings. Financial Position As ofDecember 31, 2020 , our liquidity position consisted of$244.6 million in cash and cash equivalents and$250.0 million of remaining capacity under the Facility. The unprecedented public health and governmental efforts to contain the COVID-19 pandemic have created significant uncertainty as to general economic and housing market conditions for 2021 and beyond. As of the date of this report, we believe we have adequate capital resources and sufficient access to external financing sources to satisfy our current and reasonably anticipated requirements for funds to conduct our operations and meet other needs in the ordinary course of our business. During this time, we may also engage in capital markets, bank loan, project debt or other financial transactions, including the repurchase of debt or potential new issuances of debt or equity securities to support our business needs. The amounts involved in these transactions, if any, may be material. In addition, as necessary or desirable, we may adjust or amend the terms of and/or expand the capacity of the Facility, or enter into additional letter of credit facilities, or other similar facility arrangements, in each case with the same or other financial institutions, or allow any such facilities to mature or expire. However, with the uncertainty surrounding the COVID-19 pandemic, our ability to engage in such transactions may be constrained by volatile or tight economic, capital, credit and financial market conditions, as well as lender interest and capacity and our liquidity, leverage and net worth. Accordingly, we can provide no assurance as to the successful completion of, or the operational limitations arising from, any one or series of such transactions. For further discussion of the potential impacts from the COVID-19 pandemic on our capital resources and liquidity, see Part I, Item 1A - Risk Factors within our 2020 Annual Report.. 35 -------------------------------------------------------------------------------- Table of Contents Debt We generally fulfill our short-term cash requirements with cash generated from operations and available borrowings. Additionally, our Secured Revolving Credit Facility (the Facility) provides working capital and letter of credit capacity of$250.0 million . As ofDecember 31, 2020 , no borrowings and no letters of credit were outstanding under the Facility, resulting in$250.0 million remaining capacity. OnOctober 8, 2020 , the Company executed a Ninth Amendment to the Facility. The Ninth Amendment (1) extended the termination date of the Facility fromFebruary 15, 2022 toFebruary 15, 2023 ; (2) permits the maximum aggregate amount of commitments under the Credit Agreement to be increased to up to$300.0 million pursuant to one or more additional incremental increases, subject to the approval of any lenders providing such increases; and (3) revises the minimum liquidity covenant such that if the interest coverage ratio is greater than or equal to 1.00 to 1.00 and the housing collateral ratio is greater than or equal to 1.75 to 1.00, the Company is required to maintain minimum liquidity of$50.0 million ; and in all other cases, the Company is required to maintain minimum liquidity of$100.0 million . We have also entered into a number of stand-alone, cash secured letter of credit agreements with banks. These combined facilities provide for letter of credit needs collateralized by either cash or assets of the Company. We currently have$11.7 million of outstanding letters of credit under these facilities, which are secured by cash collateral that is maintained in restricted accounts totaling$12.9 million . To provide greater letter of credit capacity, the Company has also entered into a reimbursement agreement, which provides for the issuance of performance letters of credit, and an unsecured credit agreement that provides for the issuance of up to$50.0 million of standby letters of credit to backstop the Company's obligations under the reimbursement agreement (collectively, the "Bilateral Facility"). As ofDecember 31, 2020 , the total stated amount of performance letters of credit issued under the reimbursement agreement was$25.7 million (and the stated amount of the backstop standby letter of credit issued under the credit agreement was$40.0 million ). In the future, we may from time to time seek to continue to retire or purchase our outstanding debt through cash repurchases or in exchange for other debt securities, in open market purchases, privately-negotiated transactions, or otherwise. In addition, any material variance from our projected operating results could require us to obtain additional equity or debt financing. There can be no assurance that we will be able to complete any of these transactions in the future on favorable terms or at all. See Note 7 of the notes to the condensed consolidated financial statements in this Form 10-Q for additional details related to our borrowings. 36 -------------------------------------------------------------------------------- Table of Contents Supplemental Guarantor Information As discussed in Note 7 of the notes to the condensed consolidated financial statements in this Form 10-Q, the Company's obligations to pay principal and interest under certain debt agreements are guaranteed on a joint and several basis by substantially all of the Company's subsidiaries. Some of the immaterial subsidiaries do not guarantee the Senior Notes. The guarantees are full and unconditional. The following summarized financial information is presented forBeazer Homes USA, Inc. and the guarantor subsidiaries on a combined basis after elimination of intercompany transactions between entities in the combined group and amounts related to investments in any subsidiary that is a non-guarantor. As of December
31,
in thousands 2020 As of September 30, 2020 Total assets$ 1,982,883 2,006,611 Due from non-guarantor subsidiary 620 417 Total liabilities 1,377,616 1,414,105 Three Months Ended Three Months Ended in thousands December 31, 2020 December 31, 2020 Total revenues $ 428,184 417,804 Gross profit 75,040 63,137 Income from continuing operations 11,906 2,804 Net income 11,867 2,755 Credit Ratings Our credit ratings are periodically reviewed by rating agencies. InJuly 2020 , Moody's reaffirmed the Company's issuer corporate family rating of B3 and stable outlook for the Company. InOctober 2020 , S&P revised the Company's outlook to positive and reaffirmed the Company's corporate credit rating of B-. These ratings and our current credit condition affect, among other things, our ability to access new capital. Negative changes to these ratings may result in more stringent covenants and higher interest rates under the terms of any new debt. Our credit ratings could be lowered, or rating agencies could issue adverse commentaries in the future, which could have a material adverse effect on our business, financial condition, results of operations, and liquidity. In particular, a weakening of our financial condition, including any further increase in our leverage or decrease in our profitability or cash flows, could adversely affect our ability to obtain necessary funds, could result in a credit rating downgrade or change in outlook, or could otherwise increase our cost of borrowing. Stock Repurchases and Dividends Paid During the first quarter of fiscal 2019, the Company's Board of Directors approved a share repurchase program that authorizes the Company to repurchase up to$50.0 million of its outstanding common stock. As part of this program, the Company repurchased common stock during fiscal 2019 and 2020 through open market transactions, 10b5-1 plans, and accelerated share repurchase (ASR) agreements. All shares have been retired upon repurchase. The aggregate reduction to stockholders' equity related to share repurchases during the fiscal year endedSeptember 30, 2020 andSeptember 30, 2019 was$3.3 million and$34.6 million , respectively. No share repurchases were made during the three months endedDecember 31, 2020 . As ofDecember 31, 2020 , the remaining availability of the share repurchase program was$12.0 million . The indentures under which our Senior Notes were issued contain certain restrictive covenants, including limitations on the payment of dividends. There were no dividends paid during the three months endedDecember 31, 2020 or 2019. 37 -------------------------------------------------------------------------------- Table of Contents Off-Balance Sheet Arrangements and Aggregate Contractual Commitments Lot Option Contracts We historically have attempted to control a portion of our land supply through lot option contracts. As ofDecember 31, 2020 , we controlled 18,801 lots, which includes 366 lots of land held for future development and 295 lots of land held for sale. Of the total active 18,140 lots, we owned 58.5%, or 10,604 of these lots, and the remaining 7,536 of these lots, or 41.5%, were under option contracts with land developers and land bankers, which generally require the payment of cash or the posting of a letter of credit for the right to acquire lots during a specified period of time at a certain price. As a result of the flexibility that these options provide us, upon a change in market conditions (as we are currently experiencing as a result of the COVID-19 pandemic), we may renegotiate the terms of the options prior to exercise or terminate the agreement. Under option contracts, purchase of the properties is contingent upon satisfaction of certain requirements by us and the sellers, and our liability is generally limited to forfeiture of the non-refundable deposits and other non-refundable amounts incurred, which totaled approximately$83.0 million as ofDecember 31, 2020 . The total remaining purchase price, net of cash deposits, committed under all options was$493.8 million as ofDecember 31, 2020 . Based on market conditions and our liquidity, we may further expand our use of option agreements to supplement our owned inventory supply. We expect to exercise, subject to market conditions and seller satisfaction of contract terms, most of our option contracts. Various factors, some of which are beyond our control, such as market conditions, weather conditions, and the timing of the completion of development activities, will have a significant impact on the timing of option exercises or whether lot options will be exercised at all. We have historically funded the exercise of lot options with operating cash flows. We expect these sources to continue to be adequate to fund anticipated future option exercises. Therefore, we do not anticipate that the exercise of our lot options will have a material adverse effect on our liquidity. Investments in Unconsolidated Entities Occasionally, we use legal entities in which we have less than a controlling interest. We enter into the majority of these arrangements with land developers, other homebuilders, and financial partners to acquire attractive land positions, to manage our risk profile, and to leverage our capital base. The underlying land positions are developed into finished lots for sale to the unconsolidated entity's members or other third parties. We account for our interest in unconsolidated entities under the equity method. Historically, we and our partners have provided varying levels of guarantees of debt or other obligations of our unconsolidated entities. As ofDecember 31, 2020 , we had no repayment guarantees outstanding related to the debt of our unconsolidated entities. See Note 4 of the notes to the condensed consolidated financial statements in this Form 10-Q for more information. Letters of Credit and Surety Bonds In connection with the development of our communities, we are frequently required to provide performance, maintenance, and other bonds and letters of credit in support of our related obligations with respect to such developments. The amount of such obligations outstanding at any time varies in accordance with our pending development activities. In the event any such bonds or letters of credit are drawn upon, we would be obligated to reimburse the issuer of such bonds or letters of credit. As ofDecember 31, 2020 , we had outstanding letters of credit and surety bonds of approximately$37.4 million and$257.3 million , respectively, primarily related to our obligations to local governments to construct roads and other improvements in various developments. Derivative Instruments and Hedging Activities We are exposed to fluctuations in interest rates. From time-to-time, we may enter into derivative agreements to manage interest costs and hedge against risks associated with fluctuating interest rates. However, as ofDecember 31, 2020 , we were not a party to any such derivative agreements. We do not enter into or hold derivatives for trading or speculative purposes. 38 -------------------------------------------------------------------------------- Table of Contents Critical Accounting Policies and Estimates Our critical accounting policies require the use of judgment in their application and in certain cases require estimates of inherently uncertain matters. Although our accounting policies are in compliance with accounting principles generally accepted inthe United States of America (GAAP), a change in the facts and circumstances of the underlying transactions could significantly change the application of the accounting policies and the resulting financial statement impact. It is also possible that other professionals applying reasonable judgment to the same set of facts and circumstances could reach a different conclusion. As disclosed in our 2020 Annual Report, our most critical accounting policies relate to inventory valuation (projects in progress, land held for future development, and land held for sale), revenue recognition, warranty reserves, and income tax valuation allowances and ownership changes. There have been no significant changes to our critical accounting policies and estimates during the three months ended December 31, 2020 as compared to those described in Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations included in our 2020 Annual Report on Form 10-K. 39 -------------------------------------------------------------------------------- Table of Contents FORWARD-LOOKING STATEMENTS This Quarterly Report on Form 10-Q (Form 10-Q) contains forward-looking statements. These forward-looking statements represent our expectations or beliefs concerning future events or results, and it is possible that such events or results described in this Form 10-Q will not occur or be achieved. These forward-looking statements can generally be identified by the use of statements that include words such as "estimate," "project," "believe," "expect," "anticipate," "intend," "plan," "foresee," "likely," "will," "outlook," "goal," "target" or other similar words or phrases. These forward-looking statements involve risks, uncertainties and other factors, many of which are outside of our control, that could cause actual events or results to differ materially from the events or results discussed in the forward-looking statements, including, among other things, the matters discussed in this Form 10-Q in the section captioned "Management's Discussion and Analysis of Financial Condition and Results of Operations." Additional information about factors that could lead to material changes is contained in Part I, Item 1A- Risk Factors of our Annual Report on Form 10-K for the fiscal year endedSeptember 30, 2020 . These factors are not intended to be an all-inclusive list of risks and uncertainties that may affect the operations, performance, development and results of our business, but instead are the risks that we currently perceive as potentially being material. Such factors may include: •the cyclical nature of the homebuilding industry and a potential deterioration in homebuilding industry conditions; •economic changes nationally or in local markets, changes in consumer confidence, wage levels, declines in employment levels, inflation or increases in the quantity and decreases in the price of new homes and resale homes on the market; •the potential negative impact of the COVID-19 pandemic, which, in addition to exacerbating each of the risks listed above and below, may include a significant decrease in demand for our homes or consumer confidence generally with respect to purchasing a home, an inability to sell and build homes in a typical manner or at all, increased costs or decreased supply of building materials, including lumber, or the availability of subcontractors, housing inspectors, and other third-parties we rely on to support our operations, and recognizing charges in future periods, which may be material, for goodwill impairments, inventory impairments and/or land option contract abandonments; •shortages of or increased prices for labor, land or raw materials used in housing production, and the level of quality and craftsmanship provided by our subcontractors; •the availability and cost of land and the risks associated with the future value of our inventory, such as asset impairment charges we took on selectCalifornia assets during the second quarter of fiscal 2019; •factors affecting margins, such as decreased land values underlying land option agreements, increased land development costs in communities under development or delays or difficulties in implementing initiatives to reduce our production and overhead cost structure; •our ability to raise debt and/or equity capital, due to factors such as limitations in the capital markets (including market volatility) or adverse credit market conditions, and our ability to otherwise meet our ongoing liquidity needs (which could cause us to fail to meet the terms of our covenants and other requirements under our various debt instruments and therefore trigger an acceleration of a significant portion or all of our outstanding debt obligations), including the impact of any downgrades of our credit ratings or reduction in our liquidity levels; •market perceptions regarding any capital raising initiatives we may undertake (including future issuances of equity or debt capital); •terrorist acts, protests and civil unrest, political uncertainty, natural disasters, acts of war or other factors over which the Company has little or no control; •estimates related to homes to be delivered in the future (backlog) are imprecise, as they are subject to various cancellation risks that cannot be fully controlled; •increases in mortgage interest rates, increased disruption in the availability of mortgage financing, changes in tax laws or otherwise regarding the deductibility of mortgage interest expenses and real estate taxes or an increased number of foreclosures; •increased competition or delays in reacting to changing consumer preferences in home design; 40 -------------------------------------------------------------------------------- Table of Contents •natural disasters or other related events that could result in delays in land development or home construction, increase our costs or decrease demand in the impacted areas; •the potential recoverability of our deferred tax assets; •potential delays or increased costs in obtaining necessary permits as a result of changes to, or complying with, laws, regulations or governmental policies, and possible penalties for failure to comply with such laws, regulations or governmental policies, including those related to the environment; •the results of litigation or government proceedings and fulfillment of any related obligations; •the impact of construction defect and home warranty claims; •the cost and availability of insurance and surety bonds, as well as the sufficiency of these instruments to cover potential losses incurred; •the impact of information technology failures, cybersecurity issues or data security breaches; or •the impact on homebuilding in key markets of governmental regulations limiting the availability of water. Any forward-looking statement, including any statement expressing confidence regarding future outcomes, speaks only as of the date on which such statement is made and, except as required by law, we undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which such statement is made or to reflect the occurrence of unanticipated events. New factors emerge from time to time, and it is not possible to predict all such factors. Item 3. Quantitative and Qualitative Disclosures About Market Risk We are exposed to a number of market risks in the ordinary course of business. Our primary market risk exposure relates to fluctuations in interest rates. We do not believe that our exposure in this area is material to our cash flows or results of operations. As ofDecember 31, 2020 , we had variable rate debt outstanding totaling approximately$68.7 million . A one percent increase in the interest rate for these notes would result in an increase of our interest expense by approximately$1.0 million over the next twelve-month period. The estimated fair value of our fixed-rate debt as ofDecember 31, 2020 was$1.15 billion , compared to a carrying amount of$1.06 billion . The effect of a hypothetical one-percentage point decrease in our estimated discount rates would increase the estimated fair value of the fixed rate debt instruments from$1.15 billion to$1.21 billion as ofDecember 31, 2020 . Item 4. Controls and Procedures Disclosure Controls and Procedures As of the end of the period covered by this report, an evaluation was performed based on criteria established in the Internal Control - Integrated Framework issued by theCommittee of Sponsoring Organizations of theTreadway Commission (2013 Framework) under the supervision and with the participation of the Company's management, including the Chief Executive Officer (CEO) and Chief Financial Officer (CFO), of the effectiveness of the Company's disclosure controls and procedures as defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the Act). Based on that evaluation, the CEO and CFO concluded that the Company's disclosure controls and procedures were effective as ofDecember 31, 2020 at a reasonable assurance level. Attached as exhibits to this Quarterly Report on Form 10-Q are certifications of our CEO and CFO, which are required by Rule 13a-14 of the Act. This Disclosure Controls and Procedures section includes information concerning management's evaluation of disclosure controls and procedures referred to in those certifications and should be read in conjunction with the certifications of the CEO and CFO. Changes in Internal Control Over Financial Reporting There have been no changes in the Company's internal control over financial reporting during the quarter endedDecember 31, 2020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. We have not experienced any material impact to our internal control over financial reporting despite the fact that most of our employees are working remotely due to the COVID-19 pandemic. 41
--------------------------------------------------------------------------------
Table of Contents
© Edgar Online, source
