Beazer Homes USA, Inc. — Fiscal 2020 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 reports the fiscal year ended September 30, 2020, with comparative fiscal 2019 and 2018 results. Fiscal fourth-quarter results are included for the quarter ended September 30, 2020.
COVID-19 materially disrupted operations beginning in March 2020. Housing was deemed an essential service in the Company’s markets, allowing construction and deliveries to continue, although sales centers and model homes temporarily closed to the public and operations shifted to appointment-based and virtual processes.
Key financial and operating metrics
| Metric | Fiscal 2020 | Fiscal 2019 | Change |
|---|---|---|---|
| Total revenue | $2,127.1 million | $2,087.7 million | Up 1.9% |
| Gross profit | $347.6 million | $166.0 million | Up $181.6 million |
| Gross margin | 16.3% | 8.0% | Up 830 basis points |
| Operating income | $79.1 million | $(89.9) million | Improved $169.0 million |
| Income from continuing operations | $53.3 million | $(79.4) million | Returned to profit |
| Net income | $52.2 million | $(79.5) million | Returned to profit |
| Diluted EPS from continuing operations | $1.78 | $(2.59) | Improved |
| Adjusted EBITDA | $204.4 million | $180.2 million | Up 13.4% |
| Adjusted EBITDA margin | 9.6% | 8.6% | Up 100 basis points |
| Cash flow from operating activities | $289.1 million | $113.6 million | Up $175.5 million |
| Total debt | $1,130.8 million | $1,178.3 million | Down $47.5 million |
| Cash and cash equivalents | $327.7 million | $106.7 million | Up $221.0 million |
- Homebuilding revenue was $2.117 billion; land sales and other revenue was $10.2 million.
- Homebuilding gross margin excluding impairments, abandonments and amortized interest was 21.0%, compared with 19.7% in fiscal 2019.
- Net new orders increased 12.9% to 6,293, while closings were broadly flat at 5,492 versus 5,500.
- Average selling price on closings increased 2.1% to $385,500.
- Backlog increased 46.9% to 2,509 homes, with a value of $995.3 million, compared with $665.1 million in 2019.
- Cancellation rates improved modestly to 15.8% from 16.1%.
- Owned inventory declined to $1.351 billion from $1.504 billion, while stockholders’ equity increased to $593.2 million from $538.8 million.
- Net debt declined to approximately $803 million from $1.071 billion.
- Fiscal fourth-quarter revenue was $686.7 million, operating income was $35.6 million and income from continuing operations was $24.6 million.
Material changes versus the prior comparable period
- Fiscal 2020 results benefited substantially from the absence of the prior year’s large inventory impairment charges. Inventory impairment and abandonment charges were $2.9 million in 2020 versus $148.6 million in 2019, including $110.0 million of project impairments and $38.6 million of land-held-for-sale impairments in 2019.
- The Company recorded no debt extinguishment loss in fiscal 2020, compared with a $24.9 million loss in fiscal 2019.
- Homebuilding gross margin excluding specified non-GAAP items improved by 130 basis points, driven by geographic and product mix, pricing, lower incentives, cost management, improved cycle times and lower warranty costs.
- Revenue growth was concentrated in the West, where revenue increased 16.5%; East revenue declined 6.0% and Southeast revenue declined 17.5%.
- The Company repaid $50.0 million of its Senior Unsecured Term Loan and repurchased approximately 362,000 shares for $3.3 million. No dividends were paid.
- Cash generation improved as inventory declined by $154.9 million and operating cash flow increased materially.
- The Company adopted the new lease accounting standard, recognizing operating lease right-of-use assets of $13.9 million and lease liabilities of $16.0 million at adoption.
Guidance, outlook, commentary and risks
- Management expected strong fourth-quarter order activity to support increased closings in the first half of fiscal 2021. It expected average selling prices to increase modestly during the first two quarters of fiscal 2021.
- Management stated that sales pace would likely normalize from the unusually strong fourth quarter toward a competitive range of 2.8 to 3.2 sales per community per month.
- The Company intends to continue its balanced-growth strategy, emphasizing earnings growth, capital efficiency, debt reduction and return on invested capital. Management’s long-term goal is to reduce outstanding debt below $1.0 billion.
- Liquidity at September 30, 2020 included $327.7 million of cash and $250.0 million of undrawn capacity under the secured revolving credit facility. The Company stated that it believed liquidity was adequate for current and reasonably anticipated needs.
- On October 8, 2020, the revolving facility maturity was extended to February 2023, potential commitments were permitted to increase to $300.0 million, and minimum liquidity requirements were revised to $50.0 million or $100.0 million depending on covenant conditions.
- Key risks include renewed COVID-19 disruption, weaker housing demand, higher mortgage rates, reduced mortgage availability, declining home prices, construction labor and material shortages, lumber cost inflation, land and inventory impairments, option contract abandonments, competition, regulatory and water-availability restrictions, construction defect claims, litigation, cybersecurity incidents and limited access to capital markets.
- Remaining obligations under land option contracts were $395.1 million, with deposits and other non-refundable amounts of approximately $75.9 million. Outstanding letters of credit and surety bonds were $48.8 million and $248.2 million, respectively.
- The Company reported $39.2 million of valuation allowance against deferred tax assets and indicated that approximately $915.5 million of cumulative pretax income would be required over the carryforward period to realize its deferred tax assets.
- Pending shareholder derivative litigation related to the 2019 inventory impairments remained unresolved; the Company stated that potential losses were not reasonably estimable.
Important facts for investors to verify
- Confirm the sustainability of the 2020 improvement in gross margin and whether unusually strong demand and pricing persisted after fiscal year-end.
- Assess the risk of backlog cancellations, delivery delays and margin pressure if COVID-19 conditions, mortgage availability or employment trends deteriorate.
- Review debt maturities, covenant requirements and the Company’s ability to reduce debt below $1.0 billion while continuing land investment.
- Evaluate exposure to the $395.1 million of land-option commitments, inventory valuation assumptions and potential future impairment or abandonment charges.
- Monitor construction labor, lumber and other material costs, which management identified as potential constraints on future margin expansion.
- Review pending litigation, construction defect and warranty exposures, including the $5.0 million litigation accrual excluding warranty reserves.
- Consider the recoverability of deferred tax assets and the effect of any future Section 382 ownership change.
- The independent auditor issued an unqualified opinion on the financial statements and internal control over financial reporting as of September 30, 2020.