Business Context and Reporting Period
Beazer Homes USA, Inc. is a geographically diversified U.S. homebuilder operating in 13 states across the West, East and Southeast regions. The filing is a Form 10-K for the fiscal year ended September 30, 2017; fiscal fourth-quarter results are included but not separately reported as a standalone filing.
Management’s strategy emphasizes growth, capital efficiency and debt reduction through the “2B-10” plan: $2 billion of revenue and a 10% Adjusted EBITDA margin. The company ended fiscal 2017 with 155 active communities, below its target range of 170 to 175.
Financial Performance and Key Metrics
| Metric | Fiscal 2017 | Fiscal 2016 | Change |
|---|---|---|---|
| Total revenue | $1.916 billion | $1.822 billion | Up 5.2% |
| Homebuilding revenue | $1.896 billion | $1.785 billion | Up 6.2% |
| Gross profit | $312.9 million | $297.2 million | Up 5.3% |
| Gross margin | 16.3% | 16.3% | Flat |
| Operating income | $62.1 million | $59.3 million | Up 4.7% |
| Net income | $31.8 million | $4.7 million | Up $27.1 million |
| Net income from continuing operations | $32.0 million | $5.2 million | Up $26.7 million |
| Diluted EPS from continuing operations | $0.99 | $0.16 | Improved |
| Adjusted EBITDA | $178.8 million | $156.3 million | Up 14.4% |
| Adjusted EBITDA margin | 9.3% | 8.6% | Up 70 basis points |
| Cash provided by operating activities | $95.9 million | $163.0 million | Down $67.1 million |
Home closings increased 2.0% to 5,525, while average selling price rose 4.2% to $343,100. Net orders increased 3.2% to 5,464. Backlog declined 3.2% to 1,855 homes, but backlog value increased 2.0% to $665.8 million as backlog ASP rose 5.4% to $358,900.
Reported homebuilding gross margin was 16.5%. Excluding impairments, abandonments and interest amortized to cost of sales, adjusted homebuilding gross margin increased to 21.2% from 20.6%. Selling, general and administrative expenses were 12.4% of revenue, compared with 12.3% in the prior year.
At September 30, 2017, cash and cash equivalents were $292.1 million, restricted cash was $12.5 million, inventory was $1.543 billion and total assets were $2.221 billion. Total debt was $1.327 billion, compared with $1.332 billion a year earlier. Debt represented 66.0% of total debt plus equity, versus 67.4% in fiscal 2016. Stockholders’ equity increased to $682.4 million from $642.9 million.
Material Changes Versus the Prior Comparable Period
- Revenue, closings, average selling price and Adjusted EBITDA all increased, supported by improved pricing, higher absorption rates and favorable market conditions in most regions.
- Sales per active community per month improved to 2.9 from 2.7, despite the lower average active community count of 155 versus 166.
- West revenue increased 4.1%, East revenue increased 5.6% and Southeast revenue increased 10.7%.
- Inventory impairments and abandonments declined substantially to $2.4 million from $15.3 million.
- Operating cash flow declined because land and land development spending increased to approximately $446.4 million, up $109.5 million year over year.
- Land held for future development declined by approximately $100 million as previously inactive parcels were activated for homebuilding.
- The company reduced debt by approximately $3.0 million during fiscal 2017 and reported nearly $160 million of debt reduction over fiscal 2016 and 2017 combined.
- Fiscal 2017 income tax expense fell to $2.7 million from $16.5 million, partly due to $7.5 million of federal energy-efficiency tax credits and a $3.5 million reduction in the valuation allowance against state deferred tax assets.
Debt, Liquidity and Capital Structure
In March 2017, Beazer issued $250 million of 6.75% unsecured senior notes due 2025. Proceeds were principally used to redeem the $198 million senior notes due 2021 and repay the remaining $55 million term loan. The related debt activity produced a $12.6 million loss on extinguishment of debt for fiscal 2017.
At year-end, the secured revolving credit facility had $180 million of total capacity and $145.3 million of available capacity after letters of credit. The company was in compliance with its debt covenants. Subsequent to year-end, the facility was amended to increase capacity to $200 million, extend its maturity to February 2020 and permit a potential increase to $250 million.
Also subsequent to year-end, the company issued $400 million of 5.875% senior notes due 2027 and used the proceeds, together with $34.5 million of cash, to redeem $225 million of notes due 2019 and $175 million of notes due 2023. This refinancing resulted in a $25.9 million loss on extinguishment of debt.
The company controlled 21,507 lots at September 30, 2017, including 5,514 lots under option. Remaining purchase price under land option contracts was $408.3 million, with deposits and non-refundable pre-acquisition costs of approximately $91.9 million. Outstanding performance bonds and letters of credit were approximately $200.6 million and $45.5 million, respectively.
Guidance, Outlook, Risks and Unusual Items
- Management described housing fundamentals as supportive, citing household formation, employment, wage growth, constrained housing supply and historically low mortgage rates.
- Key challenges include affordability constraints, political and regulatory uncertainty, mortgage availability, interest-rate increases, labor and material cost inflation, competition for land and severe weather.
- Management remains focused on reaching the “2B-10” targets: 2.8 to 3.2 sales per community per month, 170 to 175 active communities, $340,000 to $350,000 ASP, 21% to 22% adjusted homebuilding gross margin and SG&A of 11% to 12% of revenue.
- Fiscal 2017 was affected by Hurricanes Harvey and Irma, which disrupted operations in Texas and certain Southeast markets and reduced some sales and closings.
- Florida stucco and water-intrusion issues remain a contingency. Cumulative charges through September 30, 2017 were $85.6 million. The remaining Florida-related accrual was $4.7 million, while additional potential repair costs were estimated at approximately $2.5 million for homes not yet deemed likely to require repairs.
- Warranty reserves totaled $18.1 million at year-end, compared with $39.1 million a year earlier. Management believes reserves and insurance coverage are adequate, but actual costs may differ.
- The company recorded a $2.7 million write-off of a deposit on a legacy development-site investment deemed uncollectible.
- The Deferred Prosecution Agreement and related HUD agreement were fully paid in January 2017, with cumulative payments of $33.5 million; management stated this would be the final report for the matter.
- Pending litigation primarily involves construction defects, moisture intrusion and product liability. Some matters cannot currently be estimated, and unfavorable outcomes could exceed insurance coverage.
- The company has significant deferred tax assets, including $293.3 million of federal and state tax carryforwards, offset by a $65.2 million valuation allowance. Realization depends on future taxable income and tax-law changes.
Important Facts for Investors to Verify
- Reconcile reported GAAP earnings with Adjusted EBITDA and adjusted gross margin, particularly the effects of capitalized interest, impairments, insurance recoveries and other non-recurring items.
- Review the post-year-end 2027 notes issuance, redemptions of 2019 and 2023 debt, resulting refinancing costs and the company’s updated maturity schedule.
- Assess whether operating cash flow can support increased land investment, option exercises, construction spending and debt service.
- Monitor backlog conversion, cancellation rates, active community growth and whether the company can reach its 170-to-175-community target.
- Evaluate exposure to housing affordability, mortgage rates, labor and material costs, severe weather and regional market weakness.
- Track Florida water-intrusion claims, remaining warranty reserves, potential uninsured losses and insurance or subcontractor recoveries.
- Review land inventory valuation assumptions, including projected home prices, absorption rates and discount rates, because market deterioration could trigger additional impairments.
- Confirm compliance with debt covenants, revolver availability, letters of credit, performance bonds and the $408.3 million of remaining land-option purchase commitments.
- Consider the effect of deferred tax asset utilization, valuation allowance changes and potential U.S. tax-law changes on future effective tax rates and cash taxes.