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. The COVID-19 pandemic created strong demand in the housing market beginning in the second half of fiscal 2020, which has continued throughout fiscal 2021. Many factors contributed to this level of demand, including historically low mortgage interest rates, a structural shortage of homes to purchase, favorable demographics, as well as workplace changes as a result of the pandemic. During the first quarter of fiscal 2022, demand remained strong and healthy despite affordability concerns and a gradual uptick in mortgage interest rates. The increased activity combined with COVID-19 related impacts has led to inflation and a variety of supply chain disruptions, including increases in labor and direct building costs, as well as lack of availability of certain materials and construction labor, resulting in elongated construction cycle times and decreased backlog conversion. In response, we proactively managed our sales pace and lot releases to better align with our production capacity. We have also worked closely with our trade partners to proactively address shortages earlier in the construction cycle. Furthermore, the strength in our markets has allowed us to pass on cost increases through increased prices, leading to improvements in our margins and profitability. 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 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. Our priorities for fiscal 2022 is to grow our lot position by increasing land spend and our use of land option agreements, improve profitability while reducing our total debt below$1.0 billion , deliver extraordinary customer experience and encourage employee well-being. Overview of Results for Our Fiscal First Quarter The following is a summary of our performance against certain key operating and financial metrics during the three months endedDecember 31, 2021 : •During the quarter endedDecember 31, 2021 , sales per community per month was 3.3 compared to 3.5 in the prior year quarter, and our net new orders were 1,141, down 20.9% from 1,442 in the prior year quarter. Sales per community per month was 3.6 and 3.5 for the trailing 12 months endedDecember 31, 2021 and 2020, respectively. We believe our sales pace has been strong by historical standards and will remain robust throughout fiscal 2022. Given the high demand and construction cycle time constraints, we have deliberately limited sales in a number of our communities to better align sales pace with production capacity, to ensure a positive customer experience and to maximize margins. •During the quarter endedDecember 31, 2021 , our average active community count of 114 was down 16.2% from 136 in the prior year quarter. We ended the quarter with an active community count of 116, compared to 134 in the prior year quarter. This is in part due to strong sales pace experienced during fiscal 2021 as well as the temporary reduction in land spend during fiscal 2020 and the first half of 2021. We are working to grow community counts by increasing investments in new communities. We invested$97.8 million and$32.9 million in land acquisition and land development during the quarters endedDecember 31, 2021 andDecember 31, 2020 , respectively. •As ofDecember 31, 2021 , our land position includes 23,049 controlled lots, up 22.6% from 18,801 as ofDecember 31, 2020 . Excluding land held for future development and land held for sale lots, we controlled 22,426 active lots, up 23.6% from the prior year quarter. As ofDecember 31, 2021 , we had 11,027 lots, or 49.2% of our total active lots, under option contracts as compared to 7,536 lots, or 41.5% of our total active lots, under option contracts as ofDecember 31, 2020 . •Aggregated dollar value of homes in backlog as ofDecember 31, 2021 was$1,405.2 million , up 20.9% compared to the prior year quarter. As a result of our strong sales pace, we ended the quarter with 2,908 homes in backlog, up 2.5% compared to the prior year quarter. Benefiting from pricing power in most markets, ASP in backlog as ofDecember 31, 2021 has risen to$483.2 thousand , up 17.9% versus the prior year quarter. 26 -------------------------------------------------------------------------------- Tab le of Contents •Our ASP for homes closed during the quarter endedDecember 31, 2021 was$438.4 thousand , up 15.1% from$380.8 thousand in the prior year quarter. The year-over-year increase in ASP on closings was impacted primarily by price appreciation due to strong demand and short supply of homes. 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, 2021 . •Homebuilding gross margin for the quarter endedDecember 31, 2021 was 20.9%, up from 17.6% in the prior year quarter. Homebuilding gross margin excluding impairments, abandonments, and interest for the quarter endedDecember 31, 2021 was 24.2%, up from 22.1% in the prior year quarter. Our homebuilding gross margin has been favorably impacted by the strong demand and price appreciation, although cost pressures and the availability of labor has affected and may continue to temper gross margin expansion in the future. •SG&A for the quarter endedDecember 31, 2021 was 11.8% of total revenue, down from 12.7% 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. However, these seasonal patterns may be impacted or reduced by a variety of factors. Accordingly, our financial results for the three months endedDecember 31, 2021 may not be indicative of our full year results. 27 -------------------------------------------------------------------------------- Tab le 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 2021 2020 Revenue: Homebuilding$ 446,729 $ 424,229 Land sales and other 7,420 4,310 Total$ 454,149 $ 428,539 Gross profit: Homebuilding$ 93,304 $ 74,837 Land sales and other 4,096 456 Total$ 97,400 $ 75,293 Gross margin: Homebuilding (a) 20.9 % 17.6 % Land sales and other 55.2 % 10.6 % Total 21.4 % 17.6 % Commissions$ 15,813 $ 16,507 General and administrative expenses (G&A)$ 37,767 $ 37,976 SG&A (commissions plus G&A) as a percentage of total revenue 11.8 % 12.7 % G&A as a percentage of total revenue 8.3 % 8.9 % Depreciation and amortization$ 2,881 $ 3,122 Operating income$ 40,939 $ 17,688 Operating income as a percentage of total revenue 9.0 % 4.1 % Effective tax rate (b) 15.6 % 25.5 % Inventory impairments and abandonments $ -$ 465 Equity in income (loss) of unconsolidated entities$ 288 $ (75) (a) Excluding impairments, abandonments, and interest amortized to cost of sales, homebuilding gross margin was 24.2% and 22.1% for the three months endedDecember 31, 2021 and 2020, respectively. Please see "Homebuilding Gross Profit and Gross Margin" section below for a reconciliation of homebuilding gross profit and the related gross margin excluding impairments and abandonments and interest amortized to cost of sales to homebuilding gross profit and gross margin, the most directly comparable GAAP measure. (b) Calculated as tax expense 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 expense is not always directly correlated to the amount of pre-tax income for the associated periods. For the three months endedDecember 31, 2021 , our effective tax rate was impacted by, among other factors, energy efficiency tax credits of$3.2 million claimed, compared to less than$0.1 million of such credits claimed during the three months endedDecember 31, 2020 . 28 -------------------------------------------------------------------------------- Tab le of Contents EBITDA: Reconciliation of Net Income to Adjusted EBITDA Reconciliation of Adjusted EBITDA to total company net income, the most directly comparable GAAP measure, is provided for each period discussed below. Management believes that Adjusted EBITDA assists investors in understanding and comparing the operating characteristics of homebuilding activities by eliminating many of the differences in companies' respective capitalization, tax position, and level of impairments. These EBITDA measures should not be considered alternatives to net income determined in accordance with GAAP as an indicator of operating performance. The following table reconciles our net income to Adjusted EBITDA for the periods presented: Three Months Ended December 31, LTM Ended December 31, (a) in thousands 2021 2020 21 vs 20 2021 2020 21 vs 20 Net income$ 34,885 $ 11,997 $ 22,888 $ 144,909 $ 61,477 $ 83,432 Expense from income taxes 6,460 4,114 2,346 23,847 22,006 1,841 Interest amortized to home construction and land sales expenses and capitalized interest impaired 14,780 18,813 (4,033) 83,257 94,806
(11,549)
Interest expense not qualified for capitalization - 1,600 (1,600) 1,181 8,626 (7,445) EBIT 56,125 36,524 19,601 253,194 186,915 66,279 Depreciation and amortization 2,881 3,122 (241) 13,735 15,335 (1,600) EBITDA 59,006 39,646 19,360 266,929 202,250 64,679 Stock-based compensation expense 2,108 3,511 (1,403) 10,764 11,236
(472)
Loss on extinguishment of debt - - - 2,025 -
2,025
Inventory impairments and abandonments (b) - 465 (465) 388 2,576
(2,188)
Restructuring and severance expenses - (10) 10 - 1,307
(1,307)
Litigation settlement in discontinued operations - - - 120 1,260 (1,140) Adjusted EBITDA$ 61,114 $ 43,612 $ 17,502 $ 280,226 $ 218,629 $ 61,597
(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."
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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
2021 2020 21 vs 20 2021 2020
West 655 782 (16.2) % 12.8 % 14.6 %
East 236 320 (26.3) % 13.9 % 8.6 %
Southeast 250 340 (26.5) % 7.1 % 10.1 %
Total 1,141 1,442 (20.9) % 11.8 % 12.3 %
Net new orders for the quarter ended December 31, 2021 decreased to 1,141, down
20.9% from the quarter ended December 31, 2020 . The decrease in net new orders
was driven primarily by a 16.2% decrease in active community count from 136 in
the prior year quarter to 114 and a decrease in sales pace from 3.5 sales per
community per month in the prior year quarter to 3.3, partially offset by a
decrease in cancellation rates from 12.3% in the prior year quarter to 11.8%. We
are working to grow community count by investing in new communities, and we are
also actively managing sales pace, in part by selectively increasing prices and
limiting lot releases in some communities, to optimize margins and lot supply.
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, 2021 and
2020:
As of December 31,
2021 2020 21 vs 20
Backlog Units:
West 1,705 1,505 13.3 %
East 602 721 (16.5) %
Southeast 601 611 (1.6) %
Total 2,908 2,837 2.5 %
Aggregate dollar value of homes in backlog (in millions)
$ 1,162.4 20.9 % ASP in backlog (in thousands)$ 483.2 $ 409.7 17.9 % 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 have historically been delivered within three to six months following commencement of construction. Ongoing supply chain disruptions, including the availability of certain materials and construction labor, has led to extended construction cycle times. As a result, we are experiencing increased construction cycle times by an average of two to three months across our markets, compared toDecember 31, 2020 . The aggregate dollar value of homes in backlog as ofDecember 31, 2021 increased 20.9% compared toDecember 31, 2020 due to a 17.9% increase in the ASP of homes in backlog and a 2.5% increase in backlog units. 30
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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 2021 2020 21 vs 20
2021 2020 21 vs 20 2021 2020 21 vs 20
West $ 256,492 $ 232,940 10.1 % $ 425.4 $ 362.8 17.3 % 603 642 (6.1) %
East 114,287 97,964 16.7 % 466.5 439.3 6.2 % 245 223 9.9 %
Southeast 75,950 93,325 (18.6) % 444.2 374.8 18.5 % 171 249 (31.3) %
Total $ 446,729 $ 424,229 5.3 % $ 438.4 $ 380.8 15.1 % 1,019 1,114 (8.5) %
For the three months ended December 31, 2021 , homebuilding revenue increased
primarily as a result of increase in ASP, partially offset by a decrease in
closings. The ASP changes were impacted primarily by price appreciation due to
inflation, strong demand, and short supply of homes, as well as 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 of December 31, 2021 .
West Segment: Homebuilding revenue increased by 10.1% for the three months ended
December 31, 2021 compared to the prior year quarter due to a 17.3% increase in
ASP, partially offset by a 6.1% decrease in closings. The decrease in closings
was primarily due to a decrease in backlog conversion rates as a result of
longer production cycle times compared to the prior year quarter.
East Segment: Homebuilding revenue increased by 16.7% for the three months ended
December 31, 2021 compared to the prior year quarter due to a 9.9% increase in
closings and a 6.2% increase in ASP. Although the east segment also experienced
prolonged production cycle times, higher number of units were closed during the
current year quarter due to timing of scheduled closings, whereby a higher
percentage of beginning backlog was scheduled to close during the current year
quarter compared to the prior year quarter.
Southeast Segment: Homebuilding revenue decreased by 18.6% for the three months
ended December 31, 2021 compared to the prior year quarter due to a 31.3%
decrease in closings, partially offset by a 18.5% increase in ASP. The decrease
in closings was due to a decrease in backlog conversion rates as a result of
longer production cycle times as well as timing of scheduled closings.
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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).
Reconciliation of homebuilding gross profit and the related gross margin
excluding impairments and abandonments and interest amortized to cost of sales
to homebuilding gross profit and gross margin, the most directly comparable GAAP
measure, is provided for each period discussed below. Management believes that
this information assists investors in comparing the operating characteristics of
homebuilding activities by eliminating many of the differences in companies'
respective level of impairments and level of debt. 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.
Three Months Ended December 31, 2021
HB Gross
HB Gross HB Gross Profit HB Gross Margin
Impairments & Profit Margin Interest excluding excluding
HB Gross HB Gross Abandonments excluding excluding Amortized to I&A and I&A and
$ in thousands Profit Margin (I&A) I&A I&A COS (Interest) Interest Interest
West $ 62,927 24.5 % $ - $ 62,927 24.5 % $ - $ 62,927 24.5 %
East 25,534 22.3 % - 25,534 22.3 % - 25,534 22.3 %
Southeast 16,035 21.1 % - 16,035 21.1 % - 16,035 21.1 %
Corporate & unallocated
(a) (11,192) - (11,192) 14,780 3,588
Total homebuilding $ 93,304 20.9 % $ - $ 93,304 20.9 % $ 14,780 $ 108,084 24.2 %
Three Months Ended December 31, 2020
HB Gross
HB Gross HB Gross Profit HB Gross Margin
Impairments & Profit Margin Interest excluding excluding
HB Gross HB Gross Abandonments excluding excluding Amortized to I&A and 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 %
(a) Corporate and unallocated includes capitalized interest and capitalized
indirect costs expensed to homebuilding cost of sale related to homes closed, as
well as capitalized interest and capitalized indirect costs impaired in order to
reflect projects in progress assets at fair value.
Our homebuilding gross profit increased by $18.5 million to $93.3 million for
the three months ended December 31, 2021 , compared to $74.8 million in the prior
year quarter. The increase in homebuilding gross profit was primarily driven by
growth in homebuilding revenue of $22.5 million , and an increase in gross margin
of 330 basis points to 20.9%. However, as shown in the tables above, the
comparability of our gross profit and gross margin was modestly impacted by
impairment and abandonment charges which decreased by $0.5 million , and interest
amortized to homebuilding cost of sales which decreased by $3.8 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 abandonment charges and interest
amortized to homebuilding cost of sales, homebuilding gross profit increased by
$14.2 million compared to the prior year quarter, while homebuilding gross
margin increased by 210 basis points to 24.2%. The year-over-year improvement in
gross margin for the three months ended December 31, 2021 was primarily driven
by lower sales incentives and pricing increases, although cost pressures and the
availability of labor has affected and may continue to temper gross margin
expansion in the future.
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West Segment: Compared to the prior year quarter, homebuilding gross profit
increased by $10.1 million due to the increase in homebuilding revenue and
higher gross margin. Homebuilding gross margin, excluding impairments and
abandonments, increased to 24.5%, up from 22.7% in the prior year quarter. The
increase in gross margin was driven primarily by lower sales incentives and
pricing increases.
East Segment: Compared to the prior year quarter, homebuilding gross profit
increased by $5.7 million due to the increase in homebuilding revenue and higher
gross margin. Homebuilding gross margin, excluding impairments and abandonments,
increased to 22.3%, up from 20.8% in the prior year quarter. The increase in
gross margin was driven primarily by lower sales incentives and pricing
increases.
Southeast Segment: Compared to the prior year quarter, homebuilding gross profit
decreased by $3.8 million due to a decrease in homebuilding revenue and
relatively flat gross margin. Homebuilding gross margin, excluding impairments
and abandonments, of 21.1% remained relatively flat compared to 21.2% in the
prior year quarter.
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 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 ended December 31, 2021 , our homebuilding gross margin was
19.5%. Excluding interest and inventory impairments and abandonments, our
homebuilding gross margin for the trailing 12-month period ended December 31,
2021 was 23.4%. For the same trailing 12-month period, homebuilding gross margin
was as follows in those communities that have previously been impaired, which
represented 7.3% of total closings during this period:
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Homebuilding Gross Margin from previously impaired communities:
Pre-impairment turn gross margin
8.2 %
Impact of interest amortized to COS related to these communities 3.6 %
Pre-impairment turn gross margin, excluding interest amortization 11.8 %
Impact of impairment turns
16.5 %
Gross margin (post impairment turns), excluding interest amortization 28.3 %
For a further discussion of our impairment policies, refer to Note 5 of the notes to the condensed consolidated financial statements in this Form 10-Q. 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 2021 2020 21 vs 20 2021 2020 21 vs 20 West$ 1,174 $ 3,940 $ (2,766) $ 478$ 707 $ (229) East 3,882 - 3,882 3,407 - 3,407 Southeast 2,364 370 1,994 211 57 154 Corporate and unallocated (a) - - - - (308) 308 Total$ 7,420 $ 4,310 $ 3,110 $ 4,096 $ 456 $ 3,640 (a) Corporate and unallocated includes capitalized interest and capitalized indirect costs expensed to land cost of sale related to land sold, as well as capitalized interest and capitalized indirect costs impaired in order to reflect land held for sale assets at net realizable value. To further support our efforts to improve capital efficiency, we continued to focus on closing a number of land sales in the three months endedDecember 31, 2021 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 2021 2020 21 vs 20 West$ 42,724 $ 33,303 $ 9,421 East 19,859 11,368 8,491 Southeast 8,200 10,308 (2,108) Corporate and unallocated (a) (29,844) (37,291) 7,447 Operating income$ 40,939 $ 17,688 $ 23,251 (a) Corporate and unallocated includes amortization of capitalized interest, capitalization and amortization of indirect costs, impairment of capitalized interest and capitalized 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$23.3 million to$40.9 million for the three months endedDecember 31, 2021 , compared to operating income of$17.7 million for the three months endedDecember 31, 2020 , driven primarily by the previously discussed increase in gross profit. SG&A as a percentage of total revenue decreased by 90 basis points from 12.7% to 11.8% as we continue to focus on improving overhead cost management in relation to total revenue growth. 34 -------------------------------------------------------------------------------- Tab le of Contents West Segment: The$9.4 million increase in operating income compared to the prior year quarter was primarily due to the increase in gross profit previously discussed, and lower commissions expense despite higher homebuilding revenue as we reduced our reliance on external agents given the favorable sales environment. These increases to operating income were partially offset by higher G&A expenses in the segment. East Segment: The$8.5 million increase in operating income compared to the prior year quarter was primarily due to the increase in gross profit previously discussed and lower sales and marketing expenses, partially offset by higher commissions expense on higher homebuilding revenue and higher G&A expenses in the segment. Southeast Segment: The$2.1 million decrease in operating income compared to the prior year quarter was primarily due to the decrease in gross profit previously discussed, partially offset by lower commissions expense on lower homebuilding revenue, lower sales and marketing expenses, and lower G&A expenses in the segment. Corporate and Unallocated: Our Corporate and unallocated results include amortization of capitalized interest, capitalization and amortization of indirect costs, impairment of capitalized interest and capitalized 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 endedDecember 31, 2021 , corporate and unallocated net expenses decreased by$7.4 million from the prior year quarter primarily due to lower amortization of capitalized interest and capitalized indirect costs to cost of sales, and lower G&A costs. Below operating income, we had one noteworthy year-over-year fluctuation for the three months endedDecember 31, 2021 compared to the prior period. Specifically, we experienced a decline in other expense, net, primarily attributable to a year-over-year decrease 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 further discussion of this items. 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. In addition, our effective tax rate is also impacted by a variety of factors, including, but not limited to, tax credits and permanent differences. As such, our income tax expense/benefit is not always directly correlated to the amount of pre-tax income or loss for the associated periods. We recognized income tax expense from continuing operations of$6.5 million for the three months endedDecember 31, 2021 compared to$4.1 million for the three months endedDecember 31, 2020 . Our current fiscal year-to-date income tax expense was primarily driven by income tax expense on earnings from continuing operations, partially offset by the generation of additional federal tax credits and the discrete tax benefits related to stock-based compensation activity in the quarter. The tax expense for the three months endedDecember 31, 2020 was primarily driven by income tax expense on earnings from continuing operations and the discrete tax expense related to stock-based compensation activity in the quarter. Refer to Note 11 of the notes to the condensed consolidated financial statements included in this Form 10-Q for further discussion of our income taxes. Liquidity and Capital Resources Our sources of liquidity include, but are not limited to, cash from operations, proceeds from Senior Notes, the Facility and other bank borrowings, the issuance of equity and equity-linked securities, and other external sources of funds. Our short-term and long-term liquidity depends primarily upon our level of net income, working capital management (cash, accounts receivable, accounts payable and other liabilities), and available credit facilities. Cash, cash equivalents, and restricted cash increased as follows for the periods presented: Three Months Ended December 31, in thousands 2021 2020 Cash used in operating activities$ (77,817) $ (74,578) Cash used in investing activities (2,811) (2,858) Cash used in financing activities (6,618) (3,044)
Net decrease in cash, cash equivalents, and restricted cash
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Operating Activities
Net cash used in operating activities was $77.8 million for the three months
ended December 31, 2021 . 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 $79.2
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 $44.8 million . This was partially
offset by cash inflows from income before income taxes of $41.4 million , which
included $4.8 million of non-cash charges.
Net cash used in operating activities was $74.6 million for the three months
ended December 31, 2020 , primarily driven by an increase in inventory of $62.7
million resulting from land acquisition, land development, and house
construction spending, and a net increase in non-inventory working capital
balances of $35.1 million , partially offset by cash inflows from income before
income taxes of $16.1 million , which included $7.1 million of non-cash charges.
Investing Activities
Net cash used in investing activities for the three months ended December 31,
2021 and December 31, 2020 , was $2.8 million and $2.9 million , respectively,
primarily driven in both periods by capital expenditures for model homes.
Financing Activities
Net cash used in financing activities was $6.6 million for the three months
ended December 31, 2021 primarily driven by tax payments for stock-based
compensation awards vesting.
Net cash used in financing activities was $3.0 million for the three months
ended December 31, 2020 primarily driven by tax payments for stock-based
compensation awards vesting and payment of debt issuance costs.
Financial Position
As of December 31, 2021 , our liquidity position consisted of $157.7 million in
cash and cash equivalents and $250.0 million of remaining capacity under the
Facility.
While we believe we possess sufficient liquidity, we are mindful of potential
short-term or seasonal requirements for enhanced liquidity that may arise to
operate and grow our business. 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.
Debt
We generally fulfill our short-term cash requirements with cash generated from
our operations and available borrowings. Additionally, our Secured Revolving
Credit Facility provides working capital and letter of credit capacity of $250.0
million . As of December 31, 2021 , no borrowings and no letters of credit were
outstanding under the Facility, resulting in $250.0 million remaining capacity.
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
$23.7 million of outstanding letters of credit under these facilities, which are
secured by cash collateral that is maintained in restricted accounts totaling
$24.6 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 of December 31, 2021 , the total stated amount of
performance letters of credit issued under the reimbursement agreement was $8.2
million (and the stated amount of the backstop standby letter of credit issued
under the credit agreement was $40.0 million ).
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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.
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 for Beazer 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
in thousands December 31, 2021 September 30, 2021
Due from non-guarantor subsidiary $ 1,837 $ 1,532
Total assets 2,055,479 2,075,518
Total liabilities 1,303,935 1,353,734
Three Months Ended December 31,
in thousands 2021 2020
Total revenues $ 453,433 $ 428,184
Gross profit 96,868 75,040
Income from continuing operations 34,839 11,906
Net income 34,829 11,867
Credit Ratings
Our credit ratings are periodically reviewed by rating agencies. In June 2021 ,
S&P upgraded the Company's corporate rating to a B from a B- and reaffirmed the
Company's positive outlook. In August 2021 , Moody's upgraded the Company's
issuer corporate family rating from B3 to B2 and revised the Company's outlook
from positive to stable. 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 ended
September 30, 2020 and September 30, 2019 was $3.3 million and $34.6 million ,
respectively. No share repurchases were made during fiscal year 2021 or the
three months ended December 31, 2021 . As of December 31, 2021 , 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 ended December 31, 2021 or 2020.
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Off-Balance Sheet Arrangements and Aggregate Contractual Commitments
Lot Option Agreements
We historically have attempted to control a portion of our land supply through
lot option agreements. As of December 31, 2021 , we controlled 23,049 lots, which
includes 272 lots of land held for future development and 351 lots of land held
for sale. Of the total active 22,426 lots, we owned 50.8%, or 11,399 of these
lots, and the remaining 11,027 of these lots, or 49.2%, were under option
contracts, primarily through lot option agreements 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. In comparison, we controlled 7,536 lots, or 41.5% of our total
active lot position, through option contracts as of December 31, 2020 . As a
result of the flexibility that these options provide us, upon a change in market
conditions, 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 $121.6
million as of December 31, 2021 . The total remaining purchase price, net of cash
deposits, committed under all options was $715.4 million as of December 31,
2021 . 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 of December 31,
2021 , 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. We had outstanding letters of credit and surety
bonds of $31.9 million and $281.8 million , respectively, as of December 31,
2021 , primarily related to our obligations to local governments to construct
roads and other improvements in various developments.
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 in the 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 2021
Annual Report, our most critical accounting policies relate to inventory
valuation of projects in progress, warranty reserves, and income tax valuation
allowances. There have been no significant changes to our critical accounting
policies and estimates during the three months ended December 31, 2021 as
compared to those described in Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations included in our 2021 Annual
Report on Form 10-K.
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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 ended
September 30, 2021 . 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 and
governmental actions, each of which is outside our control and affects the
affordability of, and demand for, the homes we sell;
•potential negative impacts 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;
•supply chain challenges negatively impacting our homebuilding production,
including shortages of raw materials and other critical components such as
windows, doors, and appliances;
•shortages of or increased costs for labor used in housing production, and the
level of quality and craftsmanship provided by such labor;
•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 select
California 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 no control;
•inaccurate estimates related to homes to be delivered in the future (backlog),
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;
•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;
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•the potential recoverability of our deferred tax assets;
•increases in corporate tax rates;
•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;
•the impact of governmental regulations on homebuilding in key markets, such as
regulations limiting the availability of water; and
•the success of our Environmental, Social, and Governance (ESG) initiatives,
including our ability to meet our goal that every home we build will be Net Zero
Energy Ready by 2025 as well as the success of any other related partnerships or
pilot programs we may enter into in order to increase the energy efficiency of
our homes and prepare for a Net Zero future.
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 of December 31, 2021 , we had variable rate debt
outstanding totaling approximately $70.7 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 of December 31, 2021 was $1.06
billion , compared to a carrying amount of $0.98 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 $1.06
billion to $1.11 billion as of December 31, 2021 .
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 the Committee of Sponsoring Organizations of the Treadway 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 of December 31, 2021 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 ended December 31, 2021 that have materially
affected, or are reasonably likely to materially affect, our internal control
over financial reporting.
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