Beazer Homes USA, Inc. — Fiscal 2015 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, 2015, including the fourth quarter. The company designs, constructs and sells single-family and multi-family homes, generally through 166 active communities at year-end, compared with 155 a year earlier.
Financial performance and key metrics
| Metric | Fiscal 2015 | Fiscal 2014 | Change |
|---|---|---|---|
| Total revenue | $1.627 billion | $1.464 billion | Up 11.2% |
| Homebuilding revenue | $1.571 billion | $1.410 billion | Up 11.4% |
| Gross profit | $272.4 million | $263.5 million | Up $9.0 million |
| Gross margin | 16.7% | 18.0% | Down 130 basis points |
| Operating income | $51.6 million | $55.7 million | Down $4.1 million |
| Net income | $344.1 million | $34.4 million | Increase largely tax-driven |
| Adjusted EBITDA | $126.8 million | $128.3 million | Down 1.1% |
| Adjusted EBITDA margin | 7.8% | 8.8% | Down 100 basis points |
| Cash used in operating activities | $81.0 million | $160.5 million | Improved by $79.4 million |
| Cash and cash equivalents | $251.6 million | $324.2 million | Down $72.6 million |
| Total debt | $1.528 billion | $1.535 billion | Down $7.2 million |
- Closings increased to 5,010 from 4,951, while average selling price increased 10.1% to $313,500 from $284,800.
- Net new orders increased 12.8% to 5,358. The cancellation rate improved to 20.1% from 21.3%.
- Backlog increased 20.6% to 2,038 homes, with backlog value up 29.4% to $667.7 million. Backlog average selling price rose to $327,600.
- Homebuilding gross margin excluding impairments, abandonments and interest amortized to cost of sales was 20.6%, compared with 21.9% in fiscal 2014. Excluding the Florida stucco impact, management reported an adjusted margin of 21.5%.
- SG&A as a percentage of revenue improved to 12.8% from 13.3%.
- Inventory increased to $1.698 billion from $1.561 billion, reflecting continued land and community investment.
- Debt to total capital was 70.8% and net debt to net capital was 66.6%, both improved from fiscal 2014.
Material changes versus the prior comparable period
- Revenue growth was driven by higher average selling prices, modestly higher closings, a larger active-community base and favorable geographic and product mix.
- The Southeast was the strongest growth region: revenue increased 25.8%, closings increased 11.4% and operating income increased $5.3 million.
- West revenue increased 8.8%, despite a 2.1% decline in closings. East revenue increased 4.6%, while closings declined 3.4%, largely due to the decision to stop reinvesting in New Jersey.
- Margins declined because of higher lot and labor costs, the structure of certain land transactions, geographic mix and warranty costs.
- Cash used in operations narrowed as inventory investment declined from $230.1 million to $121.7 million, although the company still spent approximately $453.3 million on land and land development.
- Stockholders’ equity increased to $630.4 million from $279.1 million, primarily because of fiscal 2015 net income and the recognition of deferred tax assets. Approximately 5.2 million shares were issued upon settlement of the remaining tangible equity unit purchase contracts.
- The company sold its American Homes 4 Rent investment in March 2015 and recorded a $1.8 million loss.
Guidance, outlook, commentary and unusual items
Management believes the housing recovery remains intact, supported by employment growth, favorable demographics, affordability and limited housing supply. However, mortgage constraints, weak wage growth, consumer-confidence volatility and potential increases in interest rates remain headwinds. Severe weather in Texas delayed deliveries and pressured margins in fiscal 2015, but management did not expect a lasting effect.
The company refined its multi-year “2B-10” objectives, targeting $2 billion of revenue and a 10% Adjusted EBITDA margin, or at least $200 million of Adjusted EBITDA. Supporting operating ranges include sales per community per month of 2.8 to 3.2, 170 to 175 active communities, average selling price of $330,000 to $340,000, homebuilding gross margin of 21% to 22% and SG&A of 11% to 12% of revenue. Management expects further EBITDA growth in fiscal 2016 from increased closings, higher selling prices and fixed-cost leverage, while also intending to reduce leverage.
- Tax benefit: Fiscal 2015 net income included a $335.2 million release of a substantial portion of the deferred-tax-asset valuation allowance. The resulting $324.6 million income-tax benefit makes reported net income and effective tax rate less representative of recurring operating performance.
- Florida stucco claims: The company recorded $26.3 million of additional warranty expense, partially offset by $12.7 million of anticipated insurance recoveries, for a $13.6 million net impact. At September 30, 2015, 532 homes had been identified as potentially requiring repairs, 163 had been fully repaired, and the remaining Florida-related accrual was $14.5 million.
- Other contingencies: Total warranty reserves were $27.7 million. The company also had $12.6 million of litigation and other non-warranty accruals, $43.1 million of outstanding letters of credit and $201.3 million of performance bonds.
- DPA/HUD obligations: The company must pay 4% of defined Adjusted EBITDA until September 30, 2016, or until cumulative payments reach $48.0 million. Cumulative payments were $22.7 million, with a $7.4 million liability recorded at year-end.
- Liquidity and refinancing: The $170.9 million balance of 8 1/8% Senior Notes was due in June 2016. Management intended to refinance the notes and stated that available liquidity would be sufficient for repayment if refinancing was unavailable.
- Credit facility amendment: Subsequent to year-end, the revolving credit facility was increased from $130 million to $145 million and extended to January 15, 2018. At year-end, available capacity was $101.3 million after letters of credit.
Important facts for investors to verify
- Whether operating earnings and cash generation can improve without relying on the one-time deferred tax benefit.
- The ultimate cost, timing and insurance or subcontractor recoveries associated with Florida stucco and other construction-defect claims.
- The company’s ability to refinance or repay the $170.9 million of notes due in June 2016 while continuing land investment.
- Whether homebuilding gross margin can reach the 21%–22% target despite higher land, labor and construction costs.
- Whether backlog converts to closings at projected prices and margins, given cancellation risk and mortgage-financing constraints.
- The potential for additional inventory impairments if home prices, absorption rates or economic conditions weaken.
- Compliance with debt covenants, including tangible-net-worth requirements, and the restrictions on dividends and share repurchases.
- Exposure from land option commitments of $420.1 million, performance bonds, letters of credit, litigation and environmental or regulatory requirements.