Beazer Homes USA, Inc. Fiscal 2016 Form 10-K Summary
Business context and reporting period
Beazer Homes is a geographically diversified U.S. homebuilder operating in 13 states across the West, East and Southeast regions. The filing covers the fiscal year ended September 30, 2016; fourth-quarter results are included but the filing is an annual report rather than a standalone quarterly filing.
Operations consist primarily of designing, constructing and selling single-family and multi-family homes, with additional land sales and other revenue. The company ended fiscal 2016 with 161 active communities and controlled 23,356 lots, including 16,918 owned lots and 6,438 lots under option contracts.
Key financial metrics
| Metric | Fiscal 2016 | Fiscal 2015 | Change |
|---|---|---|---|
| Total revenue | $1.822 billion | $1.627 billion | Up 12.0% |
| Homebuilding revenue | $1.785 billion | $1.571 billion | Up 13.6% |
| Gross profit | $297.2 million | $272.4 million | Up 9.1% |
| Gross margin | 16.3% | 16.7% | Down 40 bps |
| Operating income | $59.3 million | $51.6 million | Up $7.7 million |
| Income from continuing operations | $5.2 million | $346.6 million | Down materially |
| Net income | $4.7 million | $344.1 million | Down materially |
| Diluted EPS from continuing operations | $0.16 | $10.91 | Down materially |
| Adjusted EBITDA | $175.4 million | $126.8 million | Up 38.3% |
| Adjusted EBITDA excluding specified unusual items | $156.3 million | $144.1 million | Up 8.5% |
| Adjusted EBITDA margin | 9.6% | 7.8% | Up 180 bps |
Reported earnings were heavily affected by the prior-year release of a $335.2 million deferred-tax valuation allowance, which benefited fiscal 2015. Fiscal 2016 also included $13.4 million of debt-extinguishment losses, $15.3 million of inventory impairment and abandonment charges, and a $15.5 million insurance settlement recorded as a reduction of home construction expenses.
Closings increased 8.2% to 5,419, while average closing price increased 5.1% to $329,400. Net new orders declined 1.1% to 5,297. Ending backlog declined 6.0% to 1,916 homes, but backlog value declined only 2.2% to $652.7 million because backlog average selling price increased 4.0% to $340,600.
Underlying homebuilding gross margin, excluding impairments, abandonments, interest amortized to cost of sales and specified warranty and insurance items, declined to 20.6% from 21.5%. SG&A declined to 12.3% of revenue from 12.8%, and G&A declined to 8.4% from 8.8%.
Cash flow, liquidity and debt
| Metric | Fiscal 2016 | Fiscal 2015 |
|---|---|---|
| Cash provided by operating activities | $163.0 million | $(81.0) million |
| Cash provided by investing activities | $11.8 million | $27.4 million |
| Cash used in financing activities | $(197.5) million | $(18.9) million |
| Cash and cash equivalents at year-end | $228.9 million | $251.6 million |
| Total debt | $1.332 billion | $1.516 billion |
| Inventory | $1.569 billion | $1.698 billion |
| Stockholders’ equity | $642.9 million | $630.4 million |
Land and land-development spending declined 25.7% to $336.9 million, supporting the improvement in operating cash flow and the company’s deleveraging objective. Management reported a nearly $157 million reduction in debt during fiscal 2016.
The company issued $500 million of 8.75% unsecured Senior Notes due March 2022 and used the proceeds principally to redeem the $300 million Senior Secured Notes due April 2018 and $235 million Senior Notes due May 2019. It also reduced its $140 million secured term loan to $55 million outstanding at year-end. The remaining debt included $321.4 million of 5.75% Senior Notes due June 2019, $198.0 million due September 2021, $199.8 million due February 2023 and $59.9 million of junior subordinated notes.
At September 30, 2016, liquidity included $228.9 million of cash, $14.4 million of restricted cash and $106.8 million of availability under the revolving facility after letters of credit. A subsequent amendment increased revolving facility capacity from $145 million to $180 million and extended its maturity to February 2019. The company reported compliance with its debt covenants.
Material changes versus the prior comparable period
- Revenue, closings, operating income and adjusted EBITDA increased, primarily from higher closings and average selling prices.
- West segment revenue increased 40.0% and operating income increased $32.6 million, while East segment revenue declined 8.1% and operating income declined $10.3 million. Southeast revenue increased 5.6%.
- Net orders declined despite a higher average active community count, reflecting a lower sales pace of 2.7 homes per community per month versus 2.8.
- Backlog units declined, although higher backlog pricing largely offset the unit decline in dollar value.
- Inventory impairments and abandonments increased to $15.3 million from $3.1 million, including impairments affecting three communities.
- Florida water-intrusion warranty expense increased by $48.0 million in fiscal 2016, but was more than offset by insurance recoveries. Cumulative charges related to Florida and New Jersey water-intrusion issues reached $80.4 million.
- Income tax expense was $16.5 million versus a $324.6 million tax benefit in fiscal 2015. The prior-year benefit primarily reflected the release of a substantial deferred-tax valuation allowance.
- Fiscal 2016 included $15.5 million of additional insurance recoveries from a settlement with a third-party insurer and a $13.4 million loss on debt extinguishment.
Guidance, outlook, commentary and risks
Management expects housing fundamentals to remain supportive, citing household formation, job and wage growth, tight housing supply and historically low mortgage rates. However, it noted risks from fragile consumer confidence, potential increases in interest rates, adverse weather and local market conditions.
The company’s “2B-10” plan targets $2 billion of revenue and a 10% adjusted EBITDA margin, supported by sales of 2.8 to 3.2 homes per community per month, 170 to 175 active communities, average selling price of $330,000 to $340,000, adjusted homebuilding gross margin of 21% to 22% and SG&A of 11% to 12% of revenue. Fiscal 2016 results were below target on sales pace, active community count, adjusted gross margin and SG&A leverage, although average selling price approached the target range and adjusted EBITDA margin reached 9.6%.
Management plans to reduce debt by at least another $100 million through fiscal 2018 and expects higher land and land-development spending in fiscal 2017, with potential community-count growth in fiscal 2018 and beyond. The company also expects fiscal 2017 effective tax rates to be more in line with peers following a legal-entity and tax restructuring completed after year-end.
- Housing demand is sensitive to mortgage rates, mortgage availability, employment, consumer confidence, home prices and competition.
- Land and inventory valuations depend on projected sales prices, sales pace, construction costs and discount rates; adverse market changes could result in additional impairments.
- Outstanding land-option commitments totaled $446.4 million, with $80.4 million of deposits and non-refundable pre-acquisition costs at risk of forfeiture if options are not exercised.
- Florida and New Jersey water-intrusion claims remain subject to ongoing assessment. The Florida warranty accrual was $22.6 million at year-end, and additional potentially affected homes were not fully reserved.
- Construction-defect, warranty, litigation, insurance-recovery and subcontractor-recovery outcomes may differ from current estimates.
- Outstanding performance bonds were approximately $207.6 million and letters of credit approximately $50.3 million.
- The company remains highly leveraged, with substantial fixed-rate interest obligations and approximately $1.387 billion of scheduled debt principal payments, before considering refinancing or repayment actions.
- Deferred-tax asset realization depends on future taxable income; the company reported $309.955 million of net deferred-tax assets and a $66.265 million valuation allowance.
Most important facts for an investor to verify
- Reconcile GAAP earnings with adjusted EBITDA and isolate the effects of the prior-year tax valuation-allowance release, insurance recoveries, warranty items, impairments and debt-extinguishment losses.
- Review debt maturities, interest expense, refinancing requirements and the terms and covenants of the 2022 Notes, term loan and revolving facility.
- Monitor backlog conversion, cancellations, sales pace, active community count and the sustainability of the higher average selling prices.
- Assess whether adjusted homebuilding gross margin can recover toward the 21% to 22% “2B-10” target while land, labor and construction costs remain elevated.
- Track Florida and New Jersey warranty claims, remaining reserves, insurance receivables and potential subcontractor recoveries.
- Evaluate the recoverability of deferred-tax assets and the impact of the fiscal 2017 tax restructuring on cash taxes and effective tax rates.
- Review land-option commitments, performance bonds, letters of credit and potential inventory impairments under weaker housing-market conditions.