Beazer Homes USA, Inc. — Fiscal 2019 Form 10-K Summary
Reporting period: Fiscal year ended September 30, 2019; the filing includes fourth-quarter results but is an annual Form 10-K. Beazer is a geographically diversified U.S. homebuilder operating in 13 states across the West, East and Southeast regions.
Financial and Operating Highlights
| Metric | Fiscal 2019 | Fiscal 2018 | Change |
|---|---|---|---|
| Total revenue | $2.088 billion | $2.107 billion | (0.9%) |
| Homebuilding revenue | $2.077 billion | $2.077 billion | Flat |
| Gross profit | $166.0 million | $345.0 million | (51.9%) |
| Gross margin | 8.0% | 16.4% | Down 840 bps |
| Operating income/(loss) | $(89.9) million | $81.5 million | Declined $171.4 million |
| Net loss | $(79.5) million | $(45.4) million | Loss increased $34.1 million |
| Diluted loss per share | $(2.60) | $(1.41) | Worsened |
| Adjusted EBITDA | $180.2 million | $204.7 million | (12.0%) |
| Adjusted EBITDA margin | 8.6% | 9.7% | Down 110 bps |
| Cash from operating activities | $113.6 million | $54.8 million | Increased $58.8 million |
| Cash, cash equivalents and restricted cash | $122.8 million | $153.2 million | Down $30.5 million |
| Total debt | $1.178 billion | $1.231 billion | Down $52.9 million |
- Homes closed declined 4.6% to 5,500, while average closing price increased 4.9% to $377,700.
- Net new orders increased 0.6% to 5,576, supported by a higher average active community count of 166 versus 156.
- Backlog increased 4.7% to 1,708 homes, with backlog value up 5.9% to $665.1 million and backlog average selling price up to $389,400.
- Homebuilding gross margin excluding impairments, abandonments and interest declined to 19.7% from 21.2%, reflecting higher incentives, labor and material costs, geographic mix and softer early-year demand.
- SG&A improved to 11.6% of revenue from 11.8%.
- Owned inventory declined to $1.504 billion from $1.692 billion.
Material Changes Versus Fiscal 2018
- Fiscal 2019 results were materially affected by $148.6 million of inventory impairment and abandonment charges, compared with $6.5 million in fiscal 2018. This included $110.0 million on projects in progress and $38.6 million on land held for sale, primarily involving California assets.
- West segment operating income fell from $142.3 million to a $5.5 million loss, primarily because of California-related impairments and lower margins.
- East and Southeast operating income declined modestly, reflecting lower closings, higher incentives and softer demand in parts of the year.
- The company generated a $37.2 million income tax benefit in fiscal 2019 versus $94.5 million of tax expense in fiscal 2018. Tax rates are not considered meaningful because of deferred tax assets, valuation allowances, tax credits and other discrete items.
- Debt management reduced outstanding debt by $51.3 million. The company issued $350.0 million of 7.25% senior notes due 2029 and entered into a $150.0 million, 4.875% term loan, using proceeds and cash to redeem $500.0 million of 8.75% notes due 2022.
- The company repurchased $34.6 million of common stock during fiscal 2019 and paid no dividends. Approximately $15.4 million remained under the repurchase authorization at year-end.
Liquidity, Debt and Commitments
- Year-end liquidity included $106.7 million of cash, $16.1 million of restricted cash and $250.0 million of undrawn capacity under the secured revolving credit facility.
- The revolving facility was amended to increase commitments from $210.0 million to $250.0 million and extend its termination date to February 2022. The company reported compliance with applicable debt covenants.
- Contractual commitments totaled $2.221 billion, including $1.225 billion of principal debt, $585.4 million of estimated interest and $389.7 million of obligations under land option contracts.
- The company controlled 19,875 lots, including 14,470 owned lots and 5,405 lots under option. Deposits and other non-refundable option costs totaled approximately $78.2 million.
Outlook, Commentary and Risks
- Management expects fiscal 2020 objectives to include increased EBITDA, improved balance-sheet efficiency and lower leverage. It expects to reduce more debt in fiscal 2020 than in fiscal 2019 and has a longer-term goal of less than $1.0 billion of outstanding debt.
- Management expects sales pace to remain in a range of 2.8 to 3.2 homes per active community per month and expects average selling prices to increase slightly in the first two quarters of fiscal 2020 based on year-end backlog.
- Management attributed improving demand in the second half of fiscal 2019 to lower mortgage rates and a favorable macroeconomic environment, including low unemployment, rising wages and household formation.
- Key risks include the cyclical housing market, mortgage-rate and financing availability changes, affordability pressure, competition, labor and material costs, land valuation, inventory impairments, backlog cancellations, leverage and refinancing risk, regulatory and water restrictions, natural disasters, construction defects, litigation and cybersecurity events.
- Florida stucco and water-intrusion matters remained a contingency. Cumulative charges through September 30, 2019 were $82.4 million; 707 homes had been identified as likely requiring repairs, 686 had been repaired, and the remaining related accrual was approximately $0.5 million.
- Shareholder derivative lawsuits related to the fiscal 2019 inventory impairments remained pending at the filing date. The company stated that potential losses were not reasonably estimable and intended to defend the claims. A related putative securities class action had been voluntarily dismissed.
- The company adopted ASC 606 during fiscal 2019 without a material impact on opening retained earnings or the amount or timing of revenue. It expected the new lease standard, effective October 1, 2019, to add approximately $18.0 million of lease liabilities and corresponding right-of-use assets.
Investor Verification Checklist
- Verify the sustainability of the 19.7% adjusted homebuilding gross margin and whether pricing incentives, labor costs and materials costs are improving.
- Review the valuation assumptions and geographic concentration underlying the $148.6 million impairment charges, particularly the California assets and remaining land held for sale.
- Assess cash generation relative to scheduled debt principal, interest commitments and the $389.7 million of land option obligations.
- Monitor progress toward the stated debt-reduction target and the effect of the 2029 refinancing on annual cash interest expense.
- Track backlog conversion, cancellation rates, sales pace and affordability trends as mortgage rates and home prices change.
- Review the status and insurance coverage of construction-defect, Florida stucco and shareholder litigation matters.
- Evaluate the recoverability of $247.0 million of net deferred tax assets, including the $38.5 million valuation allowance and the need to generate approximately $944.0 million of future pretax income over the carryforward period.