Beazer Homes USA, Inc. 2014 Form 10-K Summary
Business context and reporting period
Beazer Homes is a geographically diversified U.S. homebuilder operating in 16 states across the West, East and Southeast regions. The filing covers the fiscal year ended September 30, 2014; fiscal fourth-quarter results are included but not reported as a standalone quarterly filing.
Management characterized fiscal 2014 as a milestone year and described the housing market as being in the early stages of a multi-year recovery. The company continued implementing its “2B-10” plan, targeting $2 billion of revenue and a 10% Adjusted EBITDA margin through improvements in absorption, community count, average selling price, gross margin and cost leverage.
Financial and operating metrics
| Metric | Fiscal 2014 | Fiscal 2013 | Change |
|---|---|---|---|
| Total revenue | $1.464 billion | $1.288 billion | 13.7% increase |
| Homebuilding revenue | $1.410 billion | $1.279 billion | 10.2% increase |
| Gross profit | $263.5 million | $214.1 million | 23.0% increase |
| Gross margin | 18.0% | 16.6% | 140 basis-point increase |
| Operating income | $55.7 million | $27.3 million | Increase of $28.4 million |
| Income from continuing operations | $34.9 million | $(32.2) million | Return to profitability |
| Net income | $34.4 million | $(33.9) million | Return to profitability |
| Adjusted EBITDA | $128.3 million | $86.3 million | 48.7% increase |
| Adjusted EBITDA margin | 8.8% | 6.7% | 210 basis-point increase |
| Closings | 4,951 | 5,056 | 2.1% decrease |
| Average closing price | $284,800 | $253,000 | 12.6% increase |
| Net new orders | 4,748 | 5,026 | 5.5% decrease |
Homebuilding gross margin was 18.5%. Excluding inventory impairments, option abandonments and interest amortized to cost of sales, management reported a 21.9% homebuilding gross margin, compared with 20.0% in fiscal 2013. Selling, general and administrative expense was 13.3% of total revenue, compared with 13.5% in the prior year.
Fiscal 2014 operating cash flow was negative $160.5 million, primarily reflecting $551.2 million of land and land-development spending. Investing cash flow was negative $32.0 million, while financing cash flow was positive $12.2 million.
At September 30, 2014, cash and cash equivalents were $324.2 million, restricted cash was $62.9 million, inventory was $1.561 billion, total debt was $1.535 billion and stockholders’ equity was $279.1 million. Total debt represented 84.6% of total debt plus equity, and net debt represented 81.0% of net debt plus equity.
Material changes versus the prior comparable period
- Revenue increased substantially despite lower closings, primarily because the average selling price increased 12.6% and land sales and other revenue rose to $53.9 million from $8.4 million.
- Active communities increased to 155 from 134, following 73 community openings and 52 community closeouts. Management expects further community-count growth in fiscal 2015.
- Backlog declined to 1,690 homes valued at $515.9 million from 1,893 homes valued at $528.1 million. However, average backlog selling price increased to $305,300 from $279,000.
- The Southeast was the strongest growth region, with homebuilding revenue up 37.2% and closings up 17.8%. West revenue declined 1.2% and closings declined 12.3%, reflecting softer conditions in Las Vegas and Phoenix.
- Inventory increased to $1.561 billion from $1.314 billion, reflecting elevated land and development investment. Land and land-development spending increased to $551.2 million from $475.2 million.
- The company issued $325 million of 5.75% senior notes due 2019 and used the proceeds to redeem its 9.125% notes due 2018. The refinancing generated a $19.9 million loss on extinguishment of debt.
- The company reported a $41.8 million income-tax benefit, including a $28.5 million cash refund and benefit related to an IRS appeals matter and a $13.9 million non-cash benefit from reversals of uncertain tax-position reserves.
Guidance, outlook, risks and unusual items
Management expects fiscal 2015 revenue and orders to benefit from continued growth in active communities and anticipates further improvement in average selling prices. It nevertheless expects the housing recovery to remain slower and more uneven than underlying demographics and affordability might suggest because of mortgage-availability constraints and broader economic uncertainty.
The fourth quarter included $4.9 million of unexpected warranty charges related to water intrusion in older homes in Florida and New Jersey. Management does not expect these charges to recur, but investigations and potential recoveries from subcontractors and insurers remain ongoing. Warranty reserves were $16.1 million at September 30, 2014.
Fiscal 2014 also included $8.3 million of inventory impairments and lot-option abandonments. Management’s inventory valuations depend on assumptions regarding home prices, construction costs, absorption rates and discount rates; adverse market changes could result in additional impairments.
Liquidity included $324.2 million of cash, $62.9 million of restricted cash and $150 million of availability under the secured revolving credit facility, with no borrowings outstanding under that facility at year-end. Subsequent to year-end, the company extended $130 million of the facility to September 2016; the remaining $20 million commitment matures in September 2015.
Leverage and refinancing remain significant risks. Contractual commitments included $1.585 billion of debt principal, $689.2 million of interest commitments and $420.5 million of obligations related to lots under option. The company had $39.1 million of outstanding letters of credit and $221.1 million of performance bonds.
The company remains subject to construction-defect and warranty claims, litigation, regulatory requirements, mortgage-related legacy claims and a Deferred Prosecution Agreement/HUD Agreement requiring payments equal to 4% of defined Adjusted EBITDA until September 30, 2016 or cumulative payments of $48.0 million. Cumulative payments were $22.7 million at September 30, 2014, with a maximum remaining obligation of $25.3 million.
Substantially all deferred tax assets remained subject to a valuation allowance. Gross deferred tax assets were $491.5 million, offset by a $445.2 million valuation allowance. The company also remains subject to Section 382 limitations on the use of pre-ownership-change net operating losses.
No dividends or open-market share repurchases were made in fiscal 2014. Debt covenants restricted the availability of retained earnings for dividends and share repurchases.
Most important facts for investors to verify
- Whether higher average selling prices and the expanded community base can offset slower orders, lower backlog units and regional weakness.
- The sustainability of the 21.9% adjusted homebuilding gross margin and 8.8% Adjusted EBITDA margin after excluding specified items.
- Cash generation and liquidity after continued land investment, including the company’s ability to fund $420.5 million of lot-option commitments.
- Debt maturities, interest expense and compliance with restrictive covenants, particularly the 2016 tangible-net-worth covenant and 2018–2019 maturities.
- The ultimate cost of the Florida and New Jersey water-intrusion matters and the probability and timing of insurance or subcontractor recoveries.
- Potential additional inventory impairments if home prices, absorption rates, construction costs or mortgage availability deteriorate.
- The company’s ability to establish sufficient sustained profitability to reverse its deferred-tax-asset valuation allowance and use its tax attributes.
- Execution against the “2B-10” plan, including progress toward $2 billion of revenue and a 10% Adjusted EBITDA margin.