Beazer Homes USA, Inc. 2018 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, 2018; fiscal fourth-quarter results are included but the filing is an annual report.
Management’s strategy is “Balanced Growth,” emphasizing profitability, return on assets, reduced operational risk and lower leverage. Fiscal 2018 completed the company’s “2B-10” plan. Beazer also acquired Venture Homes in Atlanta on July 13, 2018.
Key financial and operating metrics
| Metric | Fiscal 2018 | Fiscal 2017 | Change |
|---|---|---|---|
| Total revenue | $2.107 billion | $1.916 billion | +10.0% |
| Gross profit | $345.0 million | $312.9 million | +10.3% |
| Gross margin | 16.4% | 16.3% | +10 basis points |
| Operating income | $81.5 million | $62.1 million | +31.2% |
| Operating margin | 3.9% | 3.2% | +70 basis points |
| Net income from continuing operations | $(45.0) million | $32.0 million | Declined $77.0 million |
| Net income | $(45.4) million | $31.8 million | Declined $77.2 million |
| Adjusted EBITDA | $204.7 million | $178.8 million | +14.5% |
| Adjusted EBITDA margin | 9.7% | 9.3% | +40 basis points |
| Cash from operating activities | $30.3 million | $95.9 million | Down $65.6 million |
| Cash, cash equivalents and restricted cash | $153.2 million | $304.6 million | Down $151.4 million |
| Total debt | $1.231 billion | $1.327 billion | Down $96.2 million |
Homebuilding revenue was $2.077 billion, up 9.6%. The company closed 5,767 homes, up 4.4%, while average selling price increased 5.0% to $360,200. Net new orders increased 1.5% to 5,544, and the cancellation rate improved modestly to 18.3% from 18.5%.
Ending backlog declined 12.0% to 1,632 homes, and backlog value declined 5.7% to $628.0 million. The average backlog selling price increased 7.2% to $384,800.
Owned inventory increased to $1.692 billion from $1.543 billion, primarily reflecting land acquisition, development and construction spending. Inventory included $907.8 million of development projects in progress and $83.2 million of land held for future development.
Material changes versus the prior comparable period
- West segment revenue increased 17.4% and operating income increased $31.7 million, led by Las Vegas and Phoenix.
- East segment revenue decreased 4.3% and operating income decreased $0.8 million, principally because of lower closings in Indianapolis and weaker product and community mix.
- Southeast revenue increased 11.0%, helped by the Venture acquisition, but operating income decreased $8.0 million because of lower margins, an Atlanta land impairment and Hurricane Florence disruption.
- Homebuilding gross margin excluding impairments, abandonments and interest was 21.2%, unchanged from fiscal 2017.
- SG&A declined to 11.8% of revenue from 12.4%, reflecting operating leverage and overhead controls.
- Cash flow from operations fell as inventory increased by $95.8 million and the company invested more heavily in land, land development and construction.
- Debt was reduced through the issuance of $400.0 million of 5.875% senior notes due 2027, repayment of $225.0 million of 2019 notes and $175.0 million of 2023 notes, and redemption of the remaining $96.4 million of 2019 notes.
Guidance, outlook, risks and unusual items
Management expects fiscal 2019 to include higher profitability, a higher active-community count, higher average selling prices, improved return on total assets and modest additional debt reduction. Management expects housing conditions to remain broadly comparable, supported by employment, wage growth and limited housing supply, but acknowledged that rising mortgage rates and home prices are pressuring affordability.
Fiscal 2018 net loss was substantially affected by a $110.1 million deferred-tax remeasurement charge arising from the Tax Cuts and Jobs Act, partially offset by a $27.4 million valuation-allowance release. The company also recorded a $27.8 million loss on debt extinguishment and $6.5 million of impairment and abandonment charges.
Other significant items include the $60.6 million Venture Homes acquisition, $5.9 million of impairments on land held for sale, and a $0.3 million impairment of an unconsolidated investment. Fiscal 2018 included $85.0 million of cumulative charges related to Florida stucco and water-intrusion issues; the remaining related accrual was $1.7 million at year-end, although management stated the ultimate liability may change.
Key risks include housing-cycle deterioration, higher mortgage rates, reduced affordability or mortgage availability, labor and material shortages, tariffs affecting construction costs, land and inventory impairments, backlog cancellations, substantial leverage, debt covenant compliance and refinancing risk, construction-defect and warranty claims, severe weather, regulatory restrictions including water availability, cybersecurity incidents and potential inability to realize deferred tax assets.
At September 30, 2018, liquidity included $139.8 million of cash, $13.4 million of restricted cash and $200.0 million of available revolving-facility capacity. The facility was subsequently increased to $210.0 million and extended to February 2021. The company was in compliance with its debt covenants at year-end.
Off-balance-sheet and contingent exposures included $383.2 million of remaining obligations under lot-option contracts, $237.8 million of performance bonds and $38.1 million of letters of credit. The company controlled 24,188 lots, including 6,673 lots under option contracts.
Subsequent to year-end, the board authorized a $50.0 million share-repurchase program, initially including an intended $16.5 million accelerated share repurchase. No open-market repurchases or dividends occurred during fiscal 2018.
Important facts for investors to verify
- Determine whether the fiscal 2018 GAAP net loss is appropriately normalized for the Tax Act deferred-tax charge, debt-extinguishment costs and inventory impairments.
- Assess whether the 12.0% backlog-unit decline signals weakening demand despite higher backlog pricing.
- Monitor affordability, mortgage rates, cancellation rates and community-level sales absorption in fiscal 2019.
- Evaluate the sustainability of the 21.2% adjusted homebuilding gross margin amid higher land, labor and material costs and activation of lower-margin land assets.
- Review liquidity and refinancing requirements, particularly the $500.0 million of senior notes maturing in 2022 and other debt maturities.
- Assess potential additional Florida water-intrusion and other construction-defect costs beyond recorded reserves and insurance recoveries.
- Validate the assumptions supporting the $213.955 million net deferred-tax asset and the company’s ability to generate approximately $768.0 million of future pretax income before tax attributes expire.
- Confirm the final purchase-price allocation and integration results for Venture Homes, including the $9.8 million of goodwill and other intangible assets.