UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_____________________________________________________________
FORM 10-K
_____________________________________________________________
x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended September 30, 2016
or
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission File Number 001-12822
_____________________________________________________________
BEAZER HOMES USA, INC.
(Exact name of registrant as specified in its charter)
_____________________________________________________________
DELAWARE | 58-2086934 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. employer Identification no.) | |
1000 Abernathy Road, Suite 260, Atlanta, Georgia | 30328 | |
(Address of principal executive offices) | (Zip Code) | |
(770) 829-3700
(Registrant’s telephone number, including area code)
_____________________________________________________________
Securities registered pursuant to Section 12(b) of the Act:
Title of Securities | Exchanges on Which Registered | |
Common Stock, $.001 par value per share | New York Stock Exchange | |
Series A Junior Participating Preferred Stock Purchase Rights | New York Stock Exchange | |
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
YES ¨ NO x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
YES ¨ NO x
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to the filing requirements for the past 90 days. YES x NO ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES x NO ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer”, and “smaller reporting company” in Rule 12b-2 of the Exchange Act (Check One):
Large accelerated filer | ¨ | Accelerated filer | x |
Non-accelerated filer | ¨ | Smaller reporting company | ¨ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES ¨ NO x
The aggregate market value of the registrant’s Common Stock held by non-affiliates of the registrant as of March 31, 2016, based on the closing sale price per share as reported by the New York Stock Exchange on such date, was $283,643,227.
Class | Outstanding at November 10, 2016 | |
Common Stock, $0.001 par value | 33,071,331 | |
DOCUMENTS INCORPORATED BY REFERENCE
Part of 10-K where incorporated | |
Portions of the registrant’s Proxy Statement for the 2017 Annual Meeting of Stockholders | III |
BEAZER HOMES USA, INC.
FORM 10-K
INDEX
References to “we,” “us,” “our,” “Beazer,” “Beazer Homes” and the “Company” in this Annual Report on Form 10-K refer to Beazer Homes USA, Inc.
FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K (Form 10-K) contains forward-looking statements. These forward-looking statements represent our expectations or beliefs concerning future results, and it is possible that the results described in this Form 10-K will not be achieved. These forward-looking statements can generally be identified by the use of statements that include words such as “estimate,” “project,” “believe,” “expect,” “anticipate,” “intend,” “plan,” “foresee,” “likely,” “will,” “goal,” “target” or other similar words or phrases. All forward-looking statements are based upon information available to us on the date of this Form 10-K.
These forward-looking statements describe risks, uncertainties and other factors, many of which are outside of our control, that could cause actual results to differ materially from the results discussed in the forward-looking statements, including, among other things, the matters discussed in this Form 10-K in the section captioned “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Additional information about factors that could lead to material changes in performance is contained in Part I, Item 1A— Risk Factors of this Form 10-K. These factors are not intended to be an all-inclusive list of risks and uncertainties that may affect the operations, performance, development and results of our business, but instead are the risks that we currently perceive as potentially being material. Such factors may include:
• | economic changes nationally or in local markets, changes in consumer confidence, declines in employment levels, inflation or increases in the quantity and decreases in the price of new homes and resale homes on the market; |
• | the cyclical nature of the homebuilding industry and a potential deterioration in homebuilding industry conditions; |
• | factors affecting margins, such as decreased land values underlying land option agreements, increased land development costs on communities under development or delays or difficulties in implementing initiatives to reduce our production and overhead cost structure; |
• | the availability and cost of land and the risks associated with the future value of our inventory, such as additional asset impairment charges or writedowns; |
• | estimates related to homes to be delivered in the future (backlog) are imprecise, as they are subject to various cancellation risks that cannot be fully controlled; |
• | shortages of or increased prices for labor, land or raw materials used in housing production and the level of quality and craftsmanship provided by our subcontractors; |
• | our cost of and ability to access capital, due to factors such as limitations in the capital markets or adverse credit market conditions, and otherwise meet our ongoing liquidity needs, including the impact of any downgrades of our credit ratings or reductions in our tangible net worth or liquidity levels; |
• | our ability to reduce our outstanding indebtedness and to comply with covenants in our debt agreements or satisfy such obligations through repayment or refinancing; |
• | a substantial increase in mortgage interest rates, increased disruption in the availability of mortgage financing, a change in tax laws regarding the deductibility of mortgage interest for tax purposes or an increased number of foreclosures; |
• | increased competition or delays in reacting to changing consumer preferences in home design; |
• | continuing severe weather conditions or other related events that could result in delays in land development or home construction, increase our costs or decrease demand in the impacted areas; |
• | estimates related to the potential recoverability of our deferred tax assets; |
• | potential delays or increased costs in obtaining necessary permits as a result of changes to, or complying with, laws, regulations or governmental policies, and possible penalties for failure to comply with such laws, regulations or governmental policies, including those related to the environment; |
• | the results of litigation or government proceedings and fulfillment of any related obligations; |
• | the impact of construction defect and home warranty claims, including water intrusion issues in Florida; |
• | the cost and availability of insurance and surety bonds, as well as the sufficiency of these instruments to cover potential losses incurred; |
• | the performance of our unconsolidated entities and our unconsolidated entity partners; |
• | the impact of information technology failures or data security breaches; |
• | terrorist acts, natural disasters, acts of war or other factors over which the Company has little or no control; or |
• | the impact on homebuilding in key markets of governmental regulations limiting the availability of water. |
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Any forward-looking statement speaks only as of the date on which such statement is made and, except as required by law, we undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which such statement is made or to reflect the occurrence of unanticipated events. New factors emerge from time-to-time and it is not possible for management to predict all such factors.
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PART I
Item 1. Business
We are a geographically diversified homebuilder with active operations in 13 states within three geographic regions in the United States: the West, East and Southeast. Our homes are designed to appeal to homeowners at different price points across various demographic segments, and are generally offered for sale in advance of their construction. Our objective is to provide our customers with homes that incorporate exceptional value and quality, while seeking to maximize our return on invested capital over the course of a housing cycle.
Beazer Homes USA, Inc. was incorporated in Delaware in 1993. Our principal executive offices are located at 1000 Abernathy Road, Suite 260, Atlanta, Georgia 30328, and our main telephone number is (770) 829-3700. We also provide information about our company, including active communities, through our Internet website located at www.beazer.com. Information on our website is not a part of this Form 10-K and shall not be deemed incorporated by reference.
Industry Overview and Current Market Conditions
The sale and production of new homes has been, and will likely remain, a large industry in the United States for four primary reasons: (1) historical growth in both population and households; (2) demographic patterns that indicate an increased likelihood of home ownership as age and income increase; (3) job creation within geographic markets that necessitate new home construction; and (4) consumer demand for home features that can be more easily provided in a new home than an existing home.
In any year, the demand for new homes is dependent on a variety of factors, including job growth, changes in population and demographics, the availability and cost of mortgage financing, the supply of new and existing homes and consumer confidence. These factors all fluctuate over time at both a national and a more localized market level. Consumer confidence is perhaps the most important of these variables and is the hardest one to predict accurately because it is a function of, among other things, consumers' views of their employment and income prospects, recent and likely home price trends, localized new and existing home inventory, the level of current and anticipated mortgage interest rates, the availability of consumer credit, valuations in stock and bond markets and other factors. While we believe there are multiple factors that point to further improvement in the homebuilding market in the next several years, such as attractive affordability, rising levels of household formation and continued job growth, there are several risks that could significantly impact our business. These risks include fragile consumer confidence, continued volatility in our domestic and international stock markets and adverse weather conditions, as well as a variety of local market risks where we do business.
We believe that we are well positioned in key homebuilding markets, and that the underlying fundamentals that drive home purchases are supportive. Solid traffic levels in our new home models and sales centers provide confidence that the homebuilding sales environment will continue to be relatively positive, with occasional fluctuations, particularly in markets in which we operate.
Long-Term Business Strategy
Our long-term business strategy is focused on a balance between achieving and surpassing our “2B-10” goals and reducing our debt levels, both of which are discussed below.
“2B-10” Plan
In November 2013, we introduced a multi-year “2B-10” plan, which provided a roadmap of revenue and margin metrics to achieve $2 billion in revenue with a 10% Adjusted EBITDA margin. Taken together, reaching “2B-10” would result in Adjusted EBITDA of at least $200 million. In November 2015, we refined the specific metrics we expect will lead us to our “2B-10” objectives by providing ranges to each metric instead of point estimates as follows:
• | improve and maintain our sales per community per month to a range of 2.8 to 3.2; |
• | increase and maintain an active community count between a range of 170 and 175; |
• | increase our average selling price (ASP) to a range of $330 thousand to $340 thousand; |
• | continue to improve our homebuilding gross margin to be within a range of 21% to 22% (excluding impairments and abandonments and interest amortized to homebuilding cost of sales); and |
• | drive cost leverage, as measured by selling, general and administrative expenses as a percentage of total revenue, to a range of 11% to 12%. |
Since we rolled out our “2B-10” plan, we have consistently noted that there are a number of paths to achieving our underlying goal of $200 million of EBITDA, and we continue our commitment to reaching these objectives as soon as possible. For a further discussion of our “2B-10” plan, refer to our “Management's Discussion and Analysis of Financial Conditions and Results of Operations” in this Form 10-K.
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Underlying our “2B-10” plan, we have developed a long-term business strategy that focuses on the following elements in order to provide a wide range of homebuyers with quality homes, while maximizing return on our invested capital over the course of a housing cycle:
Geographic Diversification in Growth Markets. We compete in a large number of geographic markets across the United States (U.S.) in an attempt to reduce our exposure to any particular regional economy. Within these markets, we build homes in a variety of new home communities. We continually review our selection of markets based on both aggregate demographic information and our own operating results. We use the results of these reviews to re-allocate our investments to those markets where we believe we can maximize our profitability and return on capital. During the second quarter of 2015, this review led us to the decision that we would not continue to invest in new homebuilding assets in New Jersey.
Diversity of Product Offerings. Our product strategy aims to address the needs of our target buyers. Within each of our markets, we determine the profile of buyers we hope to target and design neighborhoods, product types and individual homes with the specific needs of those buyers in mind. Depending on the market, we attempt to address one or more of the following categories of home buyers: entry-level, move-up or retirement-oriented. Within these buyer groups, we have developed detailed targeted buyer profiles based on demographic and psychographic data, including information about their marital and family status, employment, age, affluence, special interests, media consumption and distance moved. Recognizing that our customers want to choose certain components of their new home, we offer a limited number of free structural options on most homes (“Choice PlansTM”), as well as other paid structural options, and utilize design studios in most of our markets that enable our customers to further personalize their home by allowing them to select certain non-structural options such as cabinetry, flooring, fixtures, appliances and wall coverings.
Differentiated Process. Our sales strategy has three specific tenets: lender choice (“Mortgage Choices”), personalization (Choice PlansTM) and energy efficiency (refer to section entitled “Differentiating Beazer Homes” for a further discussion). To address the homebuyers’ perceived challenge of securing a mortgage, we facilitate the process by making available a small number of preferred lenders who offer a comprehensive set of mortgage products, competitive rates and outstanding customer service. In response to consumers’ desire to reflect their personal preferences and lifestyle in their homes, we continue to evolve our floor plans based on market opportunity and demand. We create base plans that meet most homebuyers’ needs, but also give the homebuyer the flexibility to change how the home lives through choices in structural and design options at no additional cost. We engineer our homes for energy-efficiency, resulting in cost savings and comfort. Using the ENERGYSTAR® standards as our minimum performance criteria, our homes reduce the impact on the environment while decreasing our homebuyers’ annual operating costs.
Consistent Use of National Brand. Our homebuilding and marketing activities are conducted under the name of Beazer Homes in each of our markets. We believe that the Beazer Homes® trademark has significant value and is an important factor in the marketing of our homebuilding activities and business. We utilize a single brand name across our markets in order to better leverage our national and local marketing activities. Using a single brand has allowed us to execute successful national marketing campaigns and online marketing practices.
Operational Scale Efficiencies. Beyond marketing advantages, we attempt to create both national and local scale efficiencies as a result of the size and scope of our operations. On a national basis, we are able to achieve volume purchasing advantages in certain product categories; share best practices in land development and construction, marketing and planning and design among our markets; respond to telephonic and online customer inquiries; and leverage our fixed costs in ways that improve profitability. On a local level, while we are not generally the largest builder within our markets, we do attempt to be a major participant within our selected submarkets and with our targeted buyer profiles. There are further design, construction and cost advantages associated with having strong market positions within particular markets.
Debt Reduction. We will continue to take steps to further reduce our leverage, reflecting our view that doing so in a strong housing market will create long-term shareholder value. During our fiscal 2016, we established aggressive debt reduction targets, and delevered our balance sheet by nearly $157 million. We will continue to focus on this strategy, and plan to further reduce our debt by at least $100 million through our fiscal 2018.
Balanced Land Policies. We seek to maximize our return on capital by carefully managing our investment in land, so that our debt reduction targets can be achieved while maintaining and growing our community count. To reduce the risks associated with these investments and to maximize our capital base, we sometimes use options to control land. We may acquire lots from various development and land banking entities pursuant to purchase and option agreements. We generally do not speculate in land that does not have the benefit of entitlements providing basic development rights to the owner. Additionally, we have continued to activate certain parcels of land held for future development so that these assets can begin to generate revenue for the Company. For a further discussion of our land policies, refer to section entitled “Land Acquisition and Development.”
4
Reportable Business Segments
Our active homebuilding operations consist of the design, sale and construction of single-family and multi-family homes in the following geographic regions, which represent our reportable segments:
Segment/State | Market(s) | |
West: | ||
Arizona | Phoenix | |
California | Los Angeles County, Orange County, Riverside and San Bernardino Counties, San Diego County, Ventura County, Sacramento County, Kern County, Yuba County | |
Nevada | Las Vegas | |
Texas | Dallas/Ft. Worth, Houston | |
East: | ||
Indiana | Indianapolis | |
Maryland/Delaware | Baltimore, Howard, Anne Arundel, Metro-Washington, D.C./ Sussex | |
Tennessee | Nashville | |
Virginia | Loudoun County, Prince William County, Stafford County, Spotsylvania County, Fredericksburg | |
Southeast: | ||
Florida | Tampa/St. Petersburg, Orlando | |
Georgia | Atlanta, Savannah | |
North Carolina | Raleigh/Durham | |
South Carolina | Charleston, Myrtle Beach | |
The following tables summarize certain operating information of our reportable segments, including number of homes closed, the average closing price for the periods presented and units and dollar value in backlog as of September 30, 2016, 2015 and 2014. Refer to “Management's Discussion and Analysis of Results of Operations and Financial Condition” in Item 7 of this Form 10-K for additional information.
2016 | 2015 | 2014 | ||||||||||||||||||
($ in thousands) | Number of Homes Closed | Average Closing Price | Number of Homes Closed | Average Closing Price | Number of Homes Closed | Average Closing Price | ||||||||||||||
West | 2,508 | $ | 326.1 | 1,954 | $ | 299.0 | 1,996 | $ | 269.1 | |||||||||||
East | 1,373 | 368.0 | 1,546 | 355.4 | 1,600 | 328.4 | ||||||||||||||
Southeast | 1,538 | 300.1 | 1,510 | 289.4 | 1,355 | 256.3 | ||||||||||||||
Total Company | 5,419 | $ | 329.4 | 5,010 | $ | 313.5 | 4,951 | $ | 284.8 | |||||||||||
September 30, 2016 | September 30, 2015 | September 30, 2014 | ||||||||||||||||||
Units in Backlog | Dollar Value in Backlog (in millions) | Units in Backlog | Dollar Value in Backlog (in millions) | Units in Backlog | Dollar Value in Backlog (in millions) | |||||||||||||||
West | 828 | $ | 278.5 | 955 | $ | 307.1 | 557 | $ | 154.9 | |||||||||||
East | 444 | 168.5 | 487 | 181.1 | 600 | 208.2 | ||||||||||||||
Southeast | 644 | 205.6 | 596 | 179.5 | 533 | 152.7 | ||||||||||||||
Total Company | 1,916 | $ | 652.7 | 2,038 | $ | 667.7 | 1,690 | $ | 515.9 | |||||||||||
ASP in backlog (in thousands) | $ | 340.6 | $ | 327.6 | $ | 305.3 | ||||||||||||||
5
Seasonal and Quarterly Variability
Our homebuilding operating cycle generally reflects higher levels of new home order activity in our second and third fiscal quarters, and increased closings in our third and fourth fiscal quarters. However, during periods of economic downturn in the industry, decreased revenues and closings will typically reduce seasonal patterns.
Markets and Product Description
We evaluate a number of factors in determining which geographic markets to enter and remain in, as well as which consumer segments to target with our homebuilding activities. We attempt to anticipate changes in economic and real estate conditions by evaluating statistical information, such as the historical and projected growth of the population; the number of new jobs created or projected to be created; the number of housing starts in previous periods; building lot availability and price; housing inventory; level of competition; and home sale absorption rates.
We generally seek to differentiate ourselves from our competition in a particular market with respect to customer service, product type, incorporating energy-efficient features into the homes we build and design and construction quality. We maintain the flexibility to alter our product mix within a given market, depending on market conditions. In determining our product mix, we consider demographic trends, demand for a particular type of product, consumer preferences, margins, timing and the economic strength of the market. Although some of our homes are priced at the upper end of the market and we offer a selection of amenities and home customization options, we generally do not build “custom homes.” We aim to create efficiencies by using standardized design plans whenever possible. In all of our home offerings, we attempt to maximize customer satisfaction by incorporating quality and energy-efficient materials, distinctive design features, convenient locations and competitive prices.
Operational Overview
Corporate Operations
We perform the following functions at our corporate office to promote standardization and operational excellence:
• | evaluate and select geographic markets; |
• | allocate capital resources to particular markets for land acquisitions; |
• | maintain and develop relationships with lenders and capital markets to create and maintain access to financial resources; |
• | maintain and develop relationships with national product vendors; |
• | perform certain accounting, finance, legal, risk and marketing functions to support our field operations; |
• | operate and manage information systems and technology support operations; and |
• | monitor the operations of our divisions and partners. |
We allocate capital resources necessary for new investments in a manner consistent with our overall business strategy. We will vary our capital allocation based on market conditions, results of operations and other factors. Capital commitments are determined through consultation among selected executive and operational personnel who play an important role in ensuring that new investments are consistent with our strategy. Financial controls are also maintained through the centralization and standardization of accounting and finance activities, policies and procedures.
Field Operations
The development and construction of each new home community is managed by our operating divisions, each of which is generally led by a market leader who reports through to our Chief Executive Officer. Within our operating divisions, our field teams are equipped with the skills needed to complete the functions of identifying land acquisition opportunities, land entitlement, land development, home construction, marketing, sales, warranty service and certain purchasing and planning/design functions. However, the accounting and accounts payable functions of our field operations are concentrated in our national accounting center, which we consider to be part of our corporate operations.
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Land Acquisition and Development
Generally, the land we acquire is purchased only after necessary entitlements have been obtained so that we have the right to begin development or construction as market conditions dictate. The term “entitlements” refers to subdivision approvals, development agreements, tentative maps or recorded plats, depending on the jurisdiction in which the land is located. Entitlements generally give a developer the right to obtain building permits upon compliance with conditions that are usually within the developer's control. Although entitlements are ordinarily obtained prior to the purchase of land, we are still required to obtain a variety of other governmental approvals and permits during the development process. In limited circumstances, we will purchase property without all necessary entitlements where we have identified an opportunity to build on such property in a manner consistent with our strategy.
We select land for development based upon a variety of factors, including:
• | internal and external demographic and marketing studies; |
• | suitability for development during the time period of one to five years from the beginning of the development process to the last closing; |
• | financial review as to the feasibility of the proposed project, including profit margins and returns on capital employed; |
• | the ability to secure governmental approvals and entitlements; |
• | environmental and legal due diligence; |
• | competition in the area; |
• | proximity to local traffic corridors and amenities; and |
• | management's judgment of the real estate market and economic trends and our experience in a particular market. |
We generally purchase land or obtain an option to purchase land, which, in either case, requires certain site improvements prior to construction. Where required, we then undertake or, in the case of land under option, the grantor of the option then undertakes, the development activities (through contractual arrangements with local developers, general contractors and/or subcontractors), which include site planning and engineering, as well as constructing road, sewer, water, utilities, drainage and recreational facilities and other amenities. When available in certain markets, we also buy finished lots that are ready for home construction. During our fiscal 2016 and 2015, we continued to pursue land acquisition opportunities, spending approximately $184.0 million and $223.7 million, respectively, for land acquisition and $152.9 million and $229.6 million, respectively, for land development.
We strive to develop a design and marketing concept for each of our communities, which includes determination of the size, style and price range of the homes, layout of streets, layout of individual lots and overall community design. The product line offered in a particular new home community depends upon many factors, including the housing generally available in the area, the needs of a particular market and our cost of lots in the new home community.
Option Contracts
We acquire certain lots by means of option contracts from various sellers, including land banking entities. Option contracts generally require the payment of a cash deposit or issuance of a letter of credit for the right to acquire lots during a specified period of time at a fixed or variable price.
Under option contracts, purchase of the underlying properties is contingent upon satisfaction of certain requirements by us and the sellers. Our liability under option contracts is generally limited to forfeiture of the non-refundable deposits, letters of credit and other non-refundable amounts incurred, which totaled approximately $80.5 million as of September 30, 2016. The total remaining purchase price, net of cash deposits, committed under all land option contracts was $446.4 million as of September 30, 2016.
We expect to exercise, subject to market conditions and seller satisfaction of contract terms, most of our option contracts. Various factors, some of which are beyond our control, such as market conditions, weather conditions and the timing of the completion of development activities, will have a significant impact on the timing of option exercises or whether lot options will be exercised at all.
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The following table summarizes, by reportable segment, land controlled by us as of September 30, 2016:
Lots Owned | |||||||||||||||||||||||
Lots with Homes Under Construction (a) | Finished Lots | Lots Under Development | Lots Held for Future Development | Lots Held for Sale | Total Lots Owned | Total Lots Under Contract | Total Lots Controlled | ||||||||||||||||
West | |||||||||||||||||||||||
Arizona | 111 | 415 | 205 | 46 | 1 | 778 | 600 | 1,378 | |||||||||||||||
California | 261 | 627 | 939 | 2,136 | 45 | 4,008 | 592 | 4,600 | |||||||||||||||
Nevada | 66 | 259 | 601 | 613 | — | 1,539 | 73 | 1,612 | |||||||||||||||
Texas | 587 | 1,204 | 1,141 | — | 40 | 2,972 | 2,013 | 4,985 | |||||||||||||||
Total West | 1,025 | 2,505 | 2,886 | 2,795 | 86 | 9,297 | 3,278 | 12,575 | |||||||||||||||
East | |||||||||||||||||||||||
Indiana | 116 | 357 | 440 | 93 | 34 | 1,040 | 234 | 1,274 | |||||||||||||||
Maryland/Delaware | 160 | 340 | 329 | 462 | 159 | 1,450 | 639 | 2,089 | |||||||||||||||
New Jersey | — | 4 | — | 116 | — | 120 | — | 120 | |||||||||||||||
Tennessee | 104 | 19 | 503 | — | 101 | 727 | 619 | 1,346 | |||||||||||||||
Virginia | 59 | 104 | 111 | — | — | 274 | 20 | 294 | |||||||||||||||
Total East | 439 | 824 | 1,383 | 671 | 294 | 3,611 | 1,512 | 5,123 | |||||||||||||||
Southeast | |||||||||||||||||||||||
Florida | 228 | 591 | 516 | 33 | — | 1,368 | 631 | 1,999 | |||||||||||||||
Georgia | 79 | 132 | 360 | — | 23 | 594 | 304 | 898 | |||||||||||||||
North Carolina | 88 | 146 | — | 21 | — | 255 | 431 | 686 | |||||||||||||||
South Carolina | 210 | 649 | 781 | 68 | 1 | 1,709 | 282 | 1,991 | |||||||||||||||
Total Southeast | 605 | 1,518 | 1,657 | 122 | 24 | 3,926 | 1,648 | 5,574 | |||||||||||||||
Corporate and unallocated (b) | — | — | — | — | 84 | 84 | — | 84 | |||||||||||||||
Total | 2,069 | 4,847 | 5,926 | 3,588 | 488 | 16,918 | 6,438 | 23,356 | |||||||||||||||
(a) This category represents lots upon which construction of a home has commenced, including model homes.
(b) Lots held for sale are parcels held by our discontinued operations.
The following table summarizes, by reportable segment, the dollar value of our land under development, land held for future development and land held for sale as of September 30, 2016:
(In thousands) | Land Under Development | Land Held for Future Development | Land Held for Sale | ||||||||
West | $ | 382,861 | $ | 172,015 | $ | 6,577 | |||||
East | 178,592 | 30,036 | 20,930 | ||||||||
Southeast | 180,964 | 10,955 | 1,090 | ||||||||
Corporate and unallocated (a) | — | — | 1,099 | ||||||||
Total | $ | 742,417 | $ | 213,006 | $ | 29,696 | |||||
(a) Land held for sale are parcels held by our discontinued operations.
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Investments in Unconsolidated Entities and Marketable Securities
We participate in a number of joint ventures and other unconsolidated entities in which we have less than a controlling interest. We enter into the majority of these investments with land developers, other homebuilders and financial partners to acquire attractive land positions, to manage our risk profile and to leverage our capital base. The underlying land positions are developed into finished lots for sale to the unconsolidated entity’s members or other third parties. We account for our interest in unconsolidated entities under the equity method.
Our unconsolidated entities periodically obtain secured acquisition and development financing. As of September 30, 2016, our unconsolidated entities had borrowings outstanding totaling $14.7 million. In the past, we and our partners have provided varying levels of guarantees of debt or other obligations for our unconsolidated entities. However, as of September 30, 2016, we had no repayment guarantees outstanding related to the debt of our unconsolidated entities. See Note 4 of notes to the consolidated financial statements in this Form 10-K for further information.
Our consolidated balance sheets include investments in unconsolidated entities totaling $10.5 million and $13.7 million as of September 30, 2016 and September 30, 2015, respectively.
During the fourth quarter of our fiscal 2014, the Company acquired shares of American Homes 4 Rent (AMH) in exchange for the Company's interest in a real estate investment trust (REIT). The shares, which represented marketable equity securities with a readily available fair value, were sold in March 2015 at a loss of $1.8 million.
Construction
We typically act as the general contractor for the construction of our new home communities. Our project development activities are controlled by our operating divisions, whose employees supervise the construction of each new home community by coordinating the activities of subcontractors and suppliers, subjecting their work to quality and cost controls and ensuring compliance with zoning and building codes. We specify that quality, durable materials be used in the construction of our homes. Our subcontractors follow design plans prepared by architects and engineers who are retained or directly employed by us, and whose designs are geared to the local market. Our home plans are created in a collaborative effort with industry leading architectural firms, allowing us to stay current in our home designs with changing trends, as well as to expand our focus on value engineering without losing design value to our customers.
Agreements with our subcontractors and materials suppliers are generally entered into after a competitive bidding process during which we obtain information from prospective subcontractors and vendors with respect to their financial condition and ability to perform their agreements with us in accordance with the specifications we provide. Subcontractors typically are retained on a project-by-project basis to complete construction at a fixed price. We do not maintain significant inventories of construction materials, except for materials being utilized for homes under construction. We have numerous suppliers of raw materials and services used in our business, and such materials and services have been, and continue to be, available. However, material prices may fluctuate due to various factors, including demand or supply shortages, which may be beyond the control of us or our vendors. Whenever possible, we enter into regional and national supply contracts with certain of our vendors. We believe that our relationships with our suppliers and subcontractors are good.
Construction time for our homes depends on the availability of labor, materials and supplies, product type and location. Homes are designed to promote efficient use of space and materials and to minimize construction costs and time. In all of our markets, construction of a home is typically completed within three to six months following commencement of construction. As of September 30, 2016, excluding models, we had 1,826 homes at various stages of completion, of which 1,358 were under contract and included in backlog at such date and 468 homes (178 were substantially completed and 290 under construction) were not under a sales contract, either because the construction of the home was begun without a sales contract or because the original sales contract had been canceled (known as “speculative” or “spec” homes).
Warranty Program
We currently provide a limited warranty (ranging from one to two years) covering workmanship and materials per our defined standards of performance. In addition, we provide a limited warranty for up to ten years covering only certain defined structural element failures. For certain homes sold through March 31, 2004 (and in certain markets through July 31, 2004), we self-insured our warranty obligations through our wholly-owned risk retention group. We continue to maintain reserves to cover potential claims on homes covered under this warranty program. Beginning with homes sold on or after April 1, 2004 (August 1, 2004 in certain markets), our warranties have been issued, administered and insured, subject to applicable self-insured retentions, by independent third parties.
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Since we subcontract our homebuilding work to subcontractors whose contracts generally include an indemnity obligation and a requirement that certain minimum insurance requirements be met, including providing us with a certificate of insurance prior to receiving payments for their work, many claims relating to workmanship and materials are the primary responsibility of our subcontractors.
In addition, we maintain third-party insurance, subject to applicable self-insured retentions, for most construction defects that we encounter in the normal course of business. We believe that our warranty and litigation accruals and third-party insurance are adequate to cover the ultimate resolution of our potential liabilities associated with known and anticipated warranty and construction defect related claims and litigation. Please see Note 9 of notes to the consolidated financial statements in this Form 10-K for additional information. However, there can be no assurance that the terms and limitations of the limited warranty will be effective against claims made by homebuyers; that we will be able to renew our insurance coverage or renew it at reasonable rates; that we will not be liable for damages, the cost of repairs, and/or the expense of litigation surrounding possible construction defects, soil subsidence or building related claims; or that claims will not arise out of events or circumstances not covered by insurance and/or not subject to effective indemnification agreements with our subcontractors.
Marketing and Sales
We make extensive use of digital and traditional marketing vehicles and other promotional activities, including our websites (www.beazer.com and www.beazerenespanol.com), mobile site (m.beazer.com), real estate listing sites, online advertising (including search engine marketing and display advertising), social media, video, brochures, direct marketing and out-of-home advertising (including billboards and signage) located in the immediate areas of our developments, as well as additional activities. In connection with these marketing vehicles, we have registered or applied for registration of trademarks and Internet domain names, including Beazer Homes® and Choice PlansTM, for use in our business.
Our best practice is to build, decorate, furnish and landscape model homes for each community we build and maintain on-site sales offices. As of September 30, 2016, we maintained and owned 243 model homes. We believe that model homes play a particularly important role in our selling efforts, and we are continuously innovating within our model homes to provide a unique, memorable and hands-on experience for our customers (i.e. digital kiosks, interactive site maps/plans, interactive magnetic floor plan boards, signage and more). The selection of interior features is also a principal component of our marketing and sales efforts.
Our homes are customarily sold through commissioned new home sales counselors (who work from the sales offices located in the model homes used in the community), as well as through independent brokers. Our sales counselors and extended sales team are available to assist prospective homebuyers by providing them with floor plans, price information, tours of model homes, the community's unique selling proposition, detailed explanations of our three differentiators, discussed below, and associated savings opportunities. Sales personnel are trained by us and participate in a structured training program focused on sales techniques, product enhancements, competitive products in the area, construction schedules and Company policies around compliance, which management believes results in a sales force with extensive knowledge of our operating policies and housing products. Our policy also stipulates that sales personnel must be licensed real estate agents where required by law.
We sometimes use various sales incentives in order to attract homebuyers. The use of incentives depends largely on local economic and competitive market conditions.
Depending on market conditions, we also at times begin construction on a number of homes for which no signed sales contract exists. This speculative inventory satisfies demand by providing near ready or move in ready homes targeted at relocated personnel, first-time buyers and independent brokers who require a completed home within 60 days.
Differentiating Beazer Homes
We know that our buyers have many choices when purchasing a home. To help us become a builder of choice and thereby achieve the operational objectives we have outlined, we have identified the following three strategic pillars that differentiate Beazer's homes from both resale homes and other newly built homes:
Mortgage Choices - Most of our buyers need to arrange financing in order to purchase a new home. Unlike many of our major competitors, we do not have an in-house mortgage company. Instead, for every Beazer community, we have identified a group of preferred lenders that provide a comprehensive product portfolio, competitive rates and fees and outstanding customer service. We encourage those lenders to compete for our customers’ business, which is a unique program among national homebuilders and enables our customers to secure the mortgage program that best fits their needs.
Choice PlansTM - Every family lives in their home differently, which is why we created Choice PlansTM. Choice PlansTM allow buyers to choose how primary living areas, like the kitchen and master bathroom, are configured at no extra
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cost. Whether our buyers choose an office or an expanded family room, our plans are designed for the way a buyer wants to live.
Energy Efficiency - Nearly all newly-built homes afford buyers a substantial reduction in utility bills due to their modern, energy-efficient construction and materials. That's a feature most used homes cannot provide. At Beazer, we go even further by ensuring our homes are built to the latest ENERGY STAR® standards and providing every buyer with an energy rating for their home, completed by a qualified third-party rating company. Used homes typically have an energy rating (on a scale in which a lower score is better) of 130, while new homes that are built to code typically score around 100. The average new Beazer home has an energy rating of 65.
Customer Financing
As previously mentioned, we do not provide mortgage origination services. Unlike many of our peers, we have no ownership interest in any lender, and are able to promote competition among lenders on behalf of our customers. Approximately 92% of our fiscal 2016 customers elected to finance their home purchase.
Competition
The development and sale of residential properties is highly competitive and fragmented. We compete for residential sales on the basis of a number of interrelated factors, including location, reputation, amenities, design, quality and price with numerous large and small homebuilders, including some homebuilders with nationwide operations and greater financial resources and/or lower costs than us. We also compete for residential sales with individual resales of existing homes and available rental housing.
We utilize our experience within our geographic markets and the breadth of our product line to vary our regional product offerings to reflect changing market conditions. We strive to respond to market conditions and to capitalize on the opportunities for advantageous land acquisitions in desirable locations. To further strengthen our competitive position, we rely on quality design, construction and service to provide customers with a higher measure of home.
Government Regulation and Environmental Matters
In most instances, our land is purchased with entitlements, giving us the right to obtain building permits upon compliance with specified conditions, which generally are within our control. The length of time necessary to obtain such permits and approvals affects the carrying costs of unimproved property acquired for the purpose of development and construction. In addition, the continued effectiveness of permits already granted is subject to factors such as changes in policies, rules and regulations and their interpretation and application. Many governmental authorities have imposed impact fees as a means of defraying the cost of providing certain governmental services to developing areas. To date, these governmental approval processes have not had a material adverse effect on our development activities, and all homebuilders in a given market face the same fees and restrictions. However, there can be no assurance that these and other restrictions will not adversely affect us in the future.
We may also be subject to periodic delays or may be precluded entirely from developing communities due to building moratoriums, “slow-growth” or “no-growth” initiatives or building permit allocation ordinances, which could be implemented in the future in the markets in which we operate. Substantially all of our land is entitled and, therefore, the moratoriums generally would only adversely affect us if they arose from health, safety and welfare issues such as insufficient water or sewage facilities. Local and state governments also have broad discretion regarding the imposition of development fees for communities in their jurisdictions. However, these fees are normally established when we receive recorded final maps and building permits. We are also subject to a variety of local, state and federal statutes, ordinances, rules and regulations concerning the protection of health and the environment. These laws may result in delays, cause us to incur substantial compliance and other costs and prohibit or severely restrict development in certain environmentally sensitive regions or areas. Our communities in California are especially susceptible to restrictive government regulations and environmental laws, particularly surrounding water usage due to continuing drought conditions within that region.
In order to provide homes to homebuyers qualifying for Federal Housing Administration (FHA)-insured or Veterans Affairs (VA)-guaranteed mortgages, we must construct homes in compliance with FHA and VA regulations. These laws and regulations include provisions regarding operating procedures, investments, lending and privacy disclosures and premiums.
In some states, we are required to be registered as a licensed contractor and comply with applicable rules and regulations. Also, in various states, our new home counselors are required to be licensed real estate agents and to comply with the laws and regulations applicable to real estate agents.
Failure to comply with any of these laws or regulations, where applicable, could result in loss of licensing and a restriction of our business activities in the applicable jurisdiction.
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Bonds and Other Obligations
In connection with the development of our communities, we are frequently required to provide letters of credit and performance, maintenance and other bonds in support of our related obligations with respect to such developments. The amount of such obligations outstanding at any time varies in accordance with our pending development activities. In the event any such bonds or letters of credit are drawn upon, we would be obligated to reimburse the issuer of such bonds or letters of credit. As of September 30, 2016, we had approximately $50.3 million and $207.6 million of outstanding letters of credit and performance bonds, respectively, primarily related to our obligations to local governments to construct roads and other improvements in various developments. We have an immaterial amount of outstanding letters of credit related to our land option contracts as of September 30, 2016.
Employees and Subcontractors
As of September 30, 2016, we employed approximately 1,100 persons, of whom 365 were sales and marketing personnel and 255 were construction personnel. Although none of our employees are covered by collective bargaining agreements, at times certain of the subcontractors engaged by us may be represented by labor unions or may be subject to collective bargaining arrangements. We believe that our relations with our employees and subcontractors are good.
Available Information
Our Internet website address is www.beazer.com and our mobile site is m.beazer.com. Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to section 13(a) or 15(d) of the Securities Exchange Act are available free of charge through our website as soon as reasonably practicable after we electronically file with or furnish them to the Securities and Exchange Commission (SEC), and are available in print to any stockholder who requests a printed copy. The public may also read and copy any materials that we file with the SEC at the SEC's Public Reference Room at 100 F Street N.E., Washington, D.C. 20549. You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. Furthermore, the SEC maintains a website that contains reports, proxy statements, information statements and other information regarding issuers, including us, that file electronically with the SEC at www.sec.gov.
In addition, many of our corporate governance documents are available on our website at www.beazer.com. Specifically, our Audit, Finance, Compensation and Nominating/Corporate Governance Committee Charters, our Corporate Governance Guidelines and Code of Business Conduct and Ethics are available. Each of these documents is also available in print to any stockholder who requests it.
The content on our website and mobile site is available for information purposes only and is not a part of and shall not be deemed incorporated by reference in this Form 10-K.
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Item 1A. Risk Factors
Our home sales and operating revenues could decline due to macro-economic and other factors outside of our control, such as changes in consumer confidence, declines in employment levels, inflation and increases in the quantity and decreases in the price of new homes and resale homes on the market.
Changes in national and regional economic conditions, as well as local economic conditions where we conduct our operations and where prospective purchasers of our homes live, may result in more caution on the part of homebuyers and, consequently, fewer home purchases. These economic uncertainties involve, among other things, conditions of supply and demand in local markets and changes in consumer confidence and income, employment levels and government regulations. These risks and uncertainties could periodically have an adverse effect on consumer demand and the pricing of our homes, which could cause our operating revenues to decline, thereby negatively impacting our financial condition and results of operations.
The homebuilding industry is cyclical. A severe downturn in the industry could adversely affect our business, financial condition and results of operations.
During periods of downturn in the industry, housing markets across the United States may experience an oversupply of both new and resale home inventory, an increase in foreclosures, reduced levels of consumer demand for new homes, increased cancellation rates, aggressive price competition among homebuilders and increased incentives for home sales. In the event of a downturn, we may experience a material reduction in revenues and margins. Continued weakness in the homebuilding market could adversely affect our business, financial condition and results of operations, and could result in additional inventory impairments in the future.
Our long-term success depends on our ability to acquire finished lots and undeveloped land suitable for residential homebuilding at reasonable prices, in accordance with our land investment criteria.
The homebuilding industry is highly competitive for suitable land and the risk inherent in purchasing and developing land increases as consumer demand for housing increases. The availability of finished and partially finished developed lots and undeveloped land for purchase that meet our investment criteria depends on a number of factors outside our control, including land availability in general, competition with other homebuilders and land buyers, inflation in land prices, zoning, allowable housing density, the ability to obtain building permits and other regulatory requirements. Should suitable lots or land become less available, the number of homes we may be able to build and sell could be reduced, and the cost of land could increase, perhaps substantially, which could adversely impact our financial condition and results of operations.
As competition for suitable land increases, the cost of acquiring both finished and undeveloped lots and the cost of developing owned land could rise, and the availability of suitable land at acceptable prices may decline, which could adversely impact our financial results. The availability of suitable land assets could also affect the success of our land acquisition strategy and ultimately our long-term strategic goals by impacting our ability to increase the number of actively selling communities, grow our revenues and margins and achieve or maintain profitability.
The market value of our land and/or homes may decline, leading to impairments and reduced profitability.
We regularly acquire land for replacement and expansion of our land inventory within our existing and new markets. The market value of land, building lots and housing inventories can fluctuate significantly as a result of changing market conditions, and the measures we employ to manage inventory risk may not be adequate to insulate our operations from a severe drop in inventory values. When market conditions are such that land values are not appreciating, option agreements previously entered into may become less desirable, at which time we may elect to forgo deposits and preacquisition costs and terminate the agreements. In a situation of adverse market conditions, we may incur impairment charges or have to sell land at a loss, which could adversely affect our financial condition and results of operations.
An increase in cancellation rates may negatively impact our business and lead to imprecise estimates related to homes to be delivered in the future (backlog).
Our backlog reflects the number and value of homes for which we have entered into a sales contract with a customer but have not yet delivered the home. Although these sales contracts typically require a cash deposit and do not make the sale contingent on the sale of the customer's existing home, in some cases a customer may cancel the contract and receive a complete or partial refund of the deposit as a result of local laws or as a matter of our business practices. If industry or economic conditions deteriorate or if mortgage financing becomes less accessible, more homebuyers may have an incentive to cancel their contracts with us, even where they might be entitled to no refund or only a partial refund, rather than complete the purchase. Significant cancellations have had, and could have, a material adverse effect on our business as a result of lost sales revenue and the accumulation of unsold housing inventory. It is important to note that both backlog and cancellation metrics are operational, rather than accounting data, and should
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be used only as a general gauge to evaluate our performance. There is an inherent imprecision in these metrics based on an evaluation of qualitative factors during the transaction cycle.
We are dependent on the continued availability and satisfactory performance of our subcontractors, which, if unavailable or unsatisfactory, could have a material adverse effect on our business. Additionally, increased prices for the labor or materials provided by these subcontractors could adversely affect our financial condition, results of operations and liquidity.
We conduct our land development and homebuilding operations only as a general contractor. Virtually all land development and construction work is performed by unaffiliated third-party subcontractors. As a consequence, we depend on the continued availability of and satisfactory performance by these subcontractors for the development of our land and construction of our homes. There may not be sufficient availability of and satisfactory performance by these unaffiliated third-party subcontractors in the markets in which we operate, adversely impacting our financial condition and results of operations. Additionally, the prices paid for the services of these subcontractors could unexpectedly increase, which could have a material adverse effect on our business.
Our access to capital and our ability to obtain additional financing could be affected by any downgrade of our credit ratings, as well as limitations in the capital markets or adverse credit market conditions.
The Company's credit rating and ratings on our senior notes and our current credit condition affect, among other things, our ability to access new capital, especially debt. Negative changes in these ratings may result in more stringent covenants and higher interest rates under the terms of any new debt. If our credit ratings are lowered or rating agencies issue adverse commentaries in the future, it could have a material adverse effect on our business, financial condition, results of operations and liquidity. In particular, a weakening of our financial condition, including a significant increase in our leverage or decrease in our profitability or cash flows, could adversely affect our ability to obtain necessary funds, result in a credit rating downgrade or change in outlook, or otherwise increase our cost of borrowing.
Our senior notes, revolving credit facility, letter of credit facilities and certain other debt impose significant restrictions and obligations on us. Restrictions on our ability to borrow could adversely affect our liquidity. In addition, our substantial indebtedness could adversely affect our financial condition, limit our growth and make it more difficult for us to satisfy our debt obligations.
Our senior notes, revolving credit facility, letter of credit facilities and certain other debt impose certain restrictions and obligations on us. Under certain of these instruments, we must comply with defined covenants that limit our ability to, among other things, incur additional indebtedness, engage in certain asset sales, make certain types of restricted payments, engage in transactions with affiliates and create liens on our assets. Failure to comply with certain of these covenants could result in an event of default under the applicable instrument. Any such event of default could negatively impact other covenants or lead to cross defaults under certain of our other debt agreements. There can be no assurance that we will be able to obtain any waivers or amendments that may become necessary in the event of a future default situation without significant additional cost or at all.
Our substantial indebtedness could have important consequences to us and the holders of our securities, including, among other things:
• | causing us to be unable to satisfy our obligations under our debt agreements; |
• | making us more vulnerable to adverse general economic and industry conditions; |
• | making it difficult to fund future working capital, land purchases, acquisitions, share repurchases, general corporate or other activities; and |
• | causing us to be limited in our flexibility in planning for, or reacting to, changes in our business. |
In addition, subject to the restrictions of our existing debt instruments, we may incur additional indebtedness. If new debt is added to our current debt levels, the related risks that we now face could intensify. Our growth plans and our ability to make payments of principal or interest on, or to refinance, our indebtedness will depend on our future operating performance and our ability to enter into additional debt and/or equity financings. If we are unable to generate sufficient cash flows in the future to service our debt, we may be required to refinance all or a portion of our existing debt, to sell assets or to obtain additional financing. We may not be able to do any of the foregoing on terms acceptable to us, if at all.
We could experience a reduction in home sales and revenues due to our inability to acquire and develop land for our communities if we are unable to obtain reasonably priced financing.
The homebuilding industry is capital intensive and homebuilding requires significant up-front expenditures to acquire land and to begin development. Accordingly, we incur substantial indebtedness to finance our homebuilding activities. If internally generated funds are not sufficient, we would seek additional capital in the form of equity or debt financing from a variety of potential sources, including additional bank financing and/or securities offerings. The amount and types of indebtedness that we may incur are limited
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by the terms of our existing debt. In addition, the availability of borrowed funds, especially for land acquisition and construction financing, may be greatly reduced nationally, and the lending community may require increased amounts of equity to be invested in a project by borrowers in connection with both new loans and the extension of existing loans. The credit and capital markets have continued to experience significant volatility. If we are required to seek additional financing to fund our operations, the volatility in these markets may restrict our flexibility to access such financing. If we are not successful in obtaining sufficient capital to fund our planned capital and other expenditures, we may be unable to acquire land for our housing developments, thereby limiting our anticipated growth and community count. Additionally, if we cannot obtain additional financing to fund the purchase of land under our option contracts, we may incur contractual penalties and fees.
A substantial increase in mortgage interest rates, the unavailability of mortgage financing or a change in tax laws regarding the deductibility of mortgage interest for tax purposes may reduce consumer demand for our homes.
Substantially all purchasers of our homes finance their acquisition with mortgage financing. Housing demand is adversely affected by reduced availability of mortgage financing and factors that increase the upfront or monthly cost of financing a home, such as increases in interest rates, insurance premiums or limitations on mortgage interest deductibility. The continued decrease in the willingness and ability of lenders to make home mortgage loans, the tightening of lending standards and the limitation of financing product options have made it more difficult for homebuyers to obtain acceptable financing. Any substantial increase in mortgage interest rates or unavailability of mortgage financing may adversely affect the ability of prospective first-time and move-up homebuyers to obtain financing for our homes, as well as adversely affect the ability of prospective move-up homebuyers to sell their current homes. Therefore, a disruption in the credit markets and/or the curtailed availability of mortgage financing may adversely affect our business, financial condition and results of operations.
If we are unsuccessful in competing against our competitors, our market share could decline or our growth could be impeded and, as a result, our financial condition and results of operations could suffer.
Competition in the homebuilding industry is intense, and there are relatively low barriers to entry into our business. Increased competition could hurt our business, as it could prevent us from acquiring attractive parcels of land on which to build homes or make such acquisitions more expensive, hinder our market share expansion and lead to pricing pressures on our homes that may adversely impact our margins and revenues. If we are unable to successfully compete, our financial results could suffer and our ability to service our debt could be adversely affected. Our competitors may independently develop land and construct housing units that are superior or substantially similar to our products. Furthermore, some of our competitors have substantially greater financial resources and lower costs of funds and operations than we do. Many of these competitors also have longstanding relationships with subcontractors and suppliers in the markets in which we operate. We currently build in several of the top markets in the nation and, therefore, we expect to continue to face additional competition from new entrants into our markets.
Severe weather conditions or other related events could result in delays in land development or home construction, increase our costs or decrease demand in the impacted areas.
Severe weather conditions or other related events that are beyond our direct control could impact our operations in several ways. First, these events may cause land development or home construction delays in the impacted areas. Not only does severe weather at times halt our development and construction-related activities, but it could for our competitors as well, ultimately leading to increased competition for subcontractors, which could delay our progress even after the event has concluded. Additionally, increased competition for skilled labor could lead to cost overruns, as we may have to incentivize the impacted region’s limited trade base to work on our homes, in addition to other costs incurred to remediate the impact of the severe weather conditions on our overall job site. Finally, severe weather and related events may also temporarily impact demand, as buyers are not as willing to shop for new homes during the event. These risks could adversely affect our business, financial condition and results of operations.
The tax benefits of our pre-ownership change net operating loss carryforwards and built-in losses were substantially limited since we experienced an “ownership change” as defined in Section 382 of the Internal Revenue Code, and portions of our deferred income tax asset have been written off since they were not fully realizable. Any subsequent ownership change, should it occur, could have a further impact on these tax attributes.
Section 382 of the Internal Revenue Code contains rules that limit the ability of a company that undergoes an “ownership change,” which is generally defined as any change in ownership of more than 50% of its common stock over a three-year period, to utilize its net operating loss carryforwards and certain built-in losses or deductions, as of the ownership change date, that are recognized during the five-year period after the ownership change. These rules generally operate by focusing on changes in the ownership among shareholders owning, directly or indirectly, 5% or more of the company's common stock (including changes involving a shareholder becoming a 5% shareholder) or any change in ownership arising from a new issuance of stock or share repurchases by the company.
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We believe we have significant “built-in losses” in our assets (i.e. an excess tax basis over current fair market value) that may result in tax losses as such assets are sold. Net operating losses generally may be carried forward for a 20-year period to offset future earnings and reduce our federal income tax liability. Built-in losses, if and when recognized, generally will result in tax losses that may then be deducted or carried forward. However, we experienced an “ownership change” under Section 382 as of January 12, 2010. As a result of this previous “ownership change” for purposes of Section 382, our ability to use certain net operating loss carryforwards and built-in losses or deductions in existence prior to the ownership change was limited by Section 382.
The realization of all or a portion of our deferred income tax assets (including net operating loss carryforwards) is dependent upon the generation of future income during the statutory carryforward periods. Our inability to utilize our limited pre-ownership change net operating loss carryforwards and any future recognized built-in losses or deductions, or the occurrence of a future ownership change and resulting additional limitations to these tax attributes, could have a material adverse effect on our financial condition, results of operations and cash flows.
We may incur additional operating expenses or longer construction cycle times due to compliance programs or fines, penalties and remediation costs pertaining to environmental regulations within our markets. Additionally, any violations of such regulations could harm our reputation, thereby negatively impacting our financial condition and results of operations.
We are subject to a variety of local, state and federal statutes, ordinances, rules and regulations concerning the protection of health and the environment. The particular environmental laws that apply to any given community vary greatly according to the location of the community site, the site's environmental conditions and the present and former use of the site. Environmental laws may result in delays, may cause us to implement time consuming and expensive compliance programs and may prohibit or severely restrict development in certain environmentally sensitive regions or areas. From time-to-time, the United States Environmental Protection Agency (EPA) and similar federal or state agencies review homebuilders' compliance with environmental laws and may levy fines and penalties for failure to strictly comply with applicable environmental laws or impose additional requirements for future compliance as a result of past failures. Any such actions taken with respect to us may increase our costs or harm our reputation. Further, we expect that increasingly stringent requirements will be imposed on homebuilders in the future. Environmental regulations can also have an adverse impact on the availability and price of certain raw materials such as lumber. Our communities in California are especially susceptible to restrictive government regulations and environmental laws, particularly surrounding water usage due to continuing drought conditions within that region.
We are subject to extensive government regulation, which could cause us to incur significant liabilities or restrict our business activities.
Regulatory requirements could cause us to incur significant liabilities and operating expenses and could restrict our business activities. We are subject to local, state and federal statutes and rules regulating, among other things, certain developmental matters, building and site design, the availability of water and matters concerning the protection of health and the environment. Our operating costs may be increased by governmental regulations, such as building permit allocation ordinances and impact and other fees and taxes, which may be imposed to defray the cost of providing certain governmental services and improvements. Other governmental regulations, such as building moratoriums and “no growth” or “slow growth” initiatives, which may be adopted in communities that have developed rapidly, may cause delays in new home communities or otherwise restrict our business activities, resulting in reductions in our revenues. Any delay or refusal from government agencies to grant us necessary licenses, permits and approvals could have an adverse effect on our financial condition and results of operations.
We may be subject to significant potential liabilities as a result of construction defect, product liability and warranty claims made against us.
As a homebuilder, we have been, and continue to be, subject to construction defect, product liability and home warranty claims, including moisture intrusion and related claims, arising in the ordinary course of business. These claims are common to the homebuilding industry and can be costly, as evidenced by the recent water intrusion issues in Florida.
With respect to certain general liability exposures, including construction defect claims, product liability claims and related claims, assessment of claims and the related liability and reserve estimation process is highly judgmental due to the complex nature of these exposures and unique circumstances of each claim. Furthermore, once claims are asserted for construction defects, it can be difficult to determine the extent to which the assertion of these claims will expand geographically. Although we have obtained insurance for construction defect claims, such policies may not be available or adequate to cover liability for damages, the cost of repairs and/or the expense of litigation. Current and future claims may arise out of events or circumstances not covered by insurance and not subject to effective indemnification agreements with our subcontractors.
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Our operating expenses could increase if we are required to pay higher insurance premiums or litigation costs for various claims, which could negatively impact our financial condition and results of operations. Additionally, our insurance policies may not offset our entire expense due to limitation in coverages, amounts payable under the policies or other related restrictions.
The costs of insuring against construction defect, product liability and director and officer claims are substantial. Increasingly in recent years, lawsuits (including class action lawsuits) have been filed against builders, asserting claims of personal injury and property damage. Our insurance may not cover all of the claims, including personal injury claims, or such coverage may become prohibitively expensive. If we are not able to obtain adequate insurance against these claims, we may experience losses that could negatively impact our financial condition and results of operations, as well as our cash flows.
Historically, builders have recovered from subcontractors and their insurance carriers a significant portion of the construction defect liabilities and costs of defense that the builders have incurred. However, insurance coverage available to subcontractors for construction defects is becoming increasingly expensive and the scope of coverage is restricted. If we cannot effectively recover from our subcontractors or their carriers, we may suffer even greater losses.
A builder's ability to recover against any available insurance policy depends upon the continued solvency and financial strength of the insurance carrier that issued the policy. Many of the states in which we build homes have lengthy statutes of limitations applicable to claims for construction defects. To the extent that any carrier providing insurance coverage to us or our subcontractors becomes insolvent or experiences financial difficulty in the future, we may be unable to recover on those policies, thereby negatively impact our financial condition and results of operations.
We are dependent on the services of certain key employees and the loss of their services could hurt our business.
Our future success depends upon our ability to attract, train and retain skilled personnel. If we are unable to retain our key employees or attract, train or retain other skilled personnel in the future, it could hinder our business strategy and impose additional costs of identifying and training new individuals. Competition for qualified personnel in all of our operating markets, as well as within our corporate operations, is intense.
We conduct certain of our operations through land development joint ventures with independent third parties in which we do not have a controlling interest, and we can be adversely impacted by the joint venture partners' failure to fulfill their obligations.
We participate in land development joint ventures (JVs) in which we have less than a controlling interest. We have entered into JVs in order to acquire attractive land positions, to manage our risk profile and to leverage our capital base. Our JVs are typically entered into with developers, other homebuilders and financial partners to develop finished lots for sale to the JVs members and other third parties. A deterioration of the housing market could result in a write-down of our investment in certain of our JVs, reflecting impairments of inventory held within those JVs.
Our JV investments are generally very illiquid both because we lack a controlling interest in the JVs and because most of our JVs are structured to require super-majority or unanimous approval of the members to sell a substantial portion of the JV's assets or for a member to receive a return of its invested capital. Our lack of a controlling interest also results in the risk that the JV will take actions that we disagree with or fail to take actions that we desire, including actions regarding the sale of the underlying property.
Our JVs typically obtain secured acquisition, development and construction financing. Historically, we and our JV partners provided varying levels of guarantees of debt or other obligations of our unconsolidated JVs. These guarantees include construction completion guarantees, repayment guarantees and environmental indemnities. We accrue for guarantees we determine are probable and reasonably estimable, but we do not record a liability for the contingent aspects of any guarantees that we determine are reasonably possible but not probable. As of September 30, 2016, we had no outstanding repayment guarantees related to our JVs.
Information technology failures or data security breaches could harm our business.
We use information technology and other computer resources to perform important operational and marketing activities and to maintain our business records. Certain of these resources are provided to us and/or maintained by third-party service providers pursuant to agreements that specify certain security and service level standards. Our computer systems, including our back-up systems and those of our third-party providers, are subject to damage or interruption from power outages, computer and telecommunication failures, computer viruses, security breaches, natural disasters, usage errors by our employees or contractors and other related risks. A significant and extended disruption of or breach of security related to our computer systems and back-up systems may damage our reputation and cause us to lose customers, sales and revenue, result in the unintended misappropriation of proprietary, personal and confidential information and require us to incur significant expense to remediate or otherwise resolve these issues.
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At any given time, we are the subject of pending civil litigation that could require us to pay substantial damages or could otherwise have a material adverse effect on us.
Certain of our subsidiaries have been named in class action and multi-party lawsuits regarding claims made by homebuyers. We cannot predict or determine the timing or final outcome of the current lawsuits, or the effect that any adverse determinations the lawsuits may have on us. An unfavorable determination in any of the lawsuits could result in the payment by us of substantial monetary damages that may not be covered by insurance. Further, the legal costs associated with the lawsuits and the amount of time required to be spent by management and the Board of Directors on these matters, even if we are ultimately successful, could have a material adverse effect on our business, financial condition and results of operations. In addition to expenses incurred to defend the Company in these matters, under Delaware law and our bylaws, we may have an obligation to indemnify our current and former officers and directors in relation to these matters. We have obligations to advance legal fees and expenses to certain directors and officers.
Our insurance carriers may seek to rescind or deny coverage with respect to certain of the pending lawsuits, or we may not have sufficient coverage under such policies. If the insurance companies are successful in rescinding or denying coverage, or if we do not have sufficient coverage under our policies, our business, financial condition and results of operations could be materially adversely affected.
Our stock price is volatile and could decline.
The securities markets in general and our common stock in particular have experienced significant price and volume volatility over the past several years. The market price and volume of our common stock may continue to experience significant fluctuations due not only to general stock market conditions, but also to a change in sentiment in the market regarding our industry, operations or business prospects. The price and volume volatility of our common stock may be affected by:
• | operating results that vary from the expectations of securities analysts and investors; |
• | factors influencing home purchases, such as availability of home mortgage loans and interest rates, credit criteria applicable to prospective borrowers, ability to sell existing residences and homebuyer sentiment in general; |
• | the operating and securities price performance of companies that investors consider comparable to us; |
• | announcements of strategic developments, acquisitions and other material events by us or our competitors; and |
• | changes in global financial markets and global economies and general market conditions, such as interest rates, commodity and equity prices and the value of financial assets. |
Our ability to raise funds through the issuance of equity or otherwise use our common stock as consideration is impacted by the price of our common stock. A low stock price may adversely impact our ability to reduce our financial leverage, as measured by the ratio of total debt to total capital. Continued high levels of leverage or significant increases may adversely affect our credit ratings and make it more difficult for us to access additional capital. These factors may limit our ability to implement our operating and growth plans.
We experience fluctuations and variability in our operating results on a quarterly basis and, as a result, our historical performance may not be a meaningful indicator of future results.
We historically have experienced, and expect to continue to experience, variability in home sales and net earnings on a quarterly basis. As a result of such variability, our historical performance may not be a meaningful indicator of future results. Our quarterly results of operations may continue to fluctuate in the future as a result of a variety of both national and local factors, including, among others:
• | the timing of home closings and land sales; |
• | our ability to continue to acquire additional land or secure option contracts to acquire land on acceptable terms; |
• | conditions of the real estate market in areas where we operate and of the general economy; |
• | raw material and labor shortages; |
• | seasonal home buying patterns; and |
• | other changes in operating expenses, including the cost of labor and raw materials, personnel and general economic conditions. |
The occurrence of natural disasters could increase our operating expenses and reduce our revenues and cash flows.
The climates and geology of many of the states in which we operate, including California, Florida, Georgia, North Carolina, South Carolina, Tennessee, Texas and certain mid-Atlantic states, present increased risks of natural disasters. To the extent that hurricanes, severe storms, earthquakes, droughts, floods, wildfires or other natural disasters or similar events occur, our homes under
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construction or our building lots in such states could be damaged or destroyed, which may result in losses exceeding our insurance coverage. Any of these events could negatively impact our financial condition and results of operations.
Terrorist attacks or acts of war against the United States or increased domestic or international instability could have an adverse effect on our operations.
Adverse developments in the war on terrorism, terrorist attacks against the United States or any outbreak or escalation of hostilities between the United States and any foreign power may cause disruption to the economy, our Company, our employees and our customers, which could negatively impact our financial condition and results of operations.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
As of September 30, 2016, we have under lease approximately 35,000 square feet of office space in Atlanta, Georgia to house our corporate headquarters. We also lease an aggregate of approximately 280,000 square feet of office space for our divisional and shared services operations at various locations. All facilities are in good condition and are adequately utilized and sufficient to meet our present operating needs.
Due to the nature of our business, significant amounts of property are held by us as inventory in the ordinary course of our homebuilding operations.
Item 3. Legal Proceedings
Litigation
From time-to-time, we have received claims from institutions that have acquired mortgages originated by our subsidiary, Beazer Mortgage Corporation (BMC), demanding damages or indemnity arising from BMC's activities or that we repurchase such mortgages. BMC stopped originating mortgages in 2008. We have been able to resolve these claims for amounts that are not material to our consolidated financial statements. We currently have one outstanding claim for an immaterial amount. We cannot rule out the potential for additional mortgage loan repurchase or indemnity claims in the future from other investors. At this time, we do not believe that the exposure related to any such claims would be material to our consolidated financial condition, results of operations or cash flows.
A purported class action lawsuit was filed on July 7, 2016 against the Company in Maricopa County Arizona Superior Court on behalf of all homeowners in Arizona that purchased homes from the Company that included a certain roof underlayment. The complaint alleges various construction defects, but principally claims that the roof underlayment used in these homes is susceptible to leaks and was not installed in accordance with best practices. The monetary damages the plaintiffs seek have not been quantified. The Company believes these allegations are without merit and that class action treatment is inappropriate. We have removed this case to federal court. The Company intends to vigorously defend itself against these claims, and believes at this time that any potential exposure is neither probable nor able to be estimated. To that end, we filed motions to dismiss the class action allegations on various grounds. After the filing of the motions to dismiss, the plaintiffs agreed to withdraw the class action allegations without prejudice and filed an amended complaint removing the class action portion of the allegations.
In the normal course of business, we are subject to various lawsuits. We cannot predict or determine the timing or final outcome of these lawsuits or the effect that any adverse findings or determinations in pending lawsuits may have on us. In addition, an estimate of possible loss or range of loss, if any, cannot presently be made with respect to certain of these pending matters. An unfavorable determination in any of the pending lawsuits could result in the payment by us of substantial monetary damages, which may not be fully covered by insurance. Further, the legal costs associated with the lawsuits and the amount of time required to be spent by management and the Board of Directors on these matters, even if we are ultimately successful, could have a material adverse effect on our financial condition, results of operations or cash flows.
Other Matters
On July 1, 2009, we entered into a Deferred Prosecution Agreement and associated Bill of Information (the DPA) with the United States Attorney for the Western District of North Carolina and a separate but related agreement with the United States Department of Housing and Urban Development (HUD) and the Civil Division of the United States Department of Justice (the HUD Agreement). We have satisfied our obligations under the DPA and in July 2014 the United States District Court for the Western Division of North Carolina dismissed the Bill of Information. However, under these agreements, we were obligated to make payments equal to 4% of “adjusted EBITDA,” as defined in the agreements, until the earlier of (a) September 30, 2016 or (b) the date that a
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cumulative $48.0 million had been paid pursuant to the DPA and the HUD Agreement. Accordingly, after making the fiscal year 2016 payments described below, our obligations under the HUD Agreement will expire. As of September 30, 2016, we have paid a cumulative $28.1 million related to the DPA and the HUD Agreement. Additionally, we have a liability of $6.9 million recorded on our consolidated balance sheet as of September 30, 2016 related to the DPA and the HUD Agreement. Our expense related to these agreements was $4.9 million, $5.3 million and $5.4 million for our fiscal 2016, 2015 and 2014, respectively, and was recorded in general and administrative expenses in our consolidated statements of income.
We and certain of our subsidiaries have been named as defendants in various claims, complaints and other legal actions, most relating to construction defects, moisture intrusion and product liability. Certain of the liabilities resulting from these actions are covered in whole or part by insurance. In our opinion, based on our current assessment, the ultimate resolution of these matters will not have a material adverse effect on our financial condition, results of operations or cash flows.
Item 4. Mine Safety Disclosures
Not applicable.
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PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market Information
The Company lists its common shares on the New York Stock Exchange (NYSE) under the symbol “BZH.” On November 10, 2016, the last reported sales price of the Company's common stock on the NYSE was $10.84, and we had approximately 185 stockholders of record and 33,071,331 shares of common stock outstanding. The following table sets forth, for the periods presented, the range of high and low trading prices for the Company's common stock during our fiscal 2016 and 2015.
1st Qtr | 2nd Qtr | 3rd Qtr | 4th Qtr | |||||||||||||
Fiscal Year Ended September 30, 2016 | ||||||||||||||||
High | $ | 15.79 | $ | 11.75 | $ | 10.06 | $ | 12.71 | ||||||||
Low | $ | 11.18 | $ | 6.07 | $ | 6.81 | $ | 7.43 | ||||||||
Fiscal Year Ended September 30, 2015 | ||||||||||||||||
High | $ | 20.44 | $ | 20.52 | $ | 21.19 | $ | 20.20 | ||||||||
Low | $ | 15.70 | $ | 14.20 | $ | 17.26 | $ | 13.01 | ||||||||
Dividends
The indentures under which our senior notes were issued contain certain restrictive covenants, including limitations on the payment of dividends. There were no dividends paid during our fiscal 2016, 2015 or 2014. The Board of Directors will periodically reconsider the declaration of dividends, assuming payment of dividends is not limited under our indentures. The reinstatement of quarterly dividends, the amount of such dividends and the form in which the dividends are paid (cash or stock) will depend upon our financial condition, results of operations and other factors that the Board of Directors deems relevant.
Securities Authorized for Issuance under Equity Compensation Plans
The following table provides information about the Company's shares of common stock that may be issued under our existing equity compensation plans as of September 30, 2016, all of which have been approved by our stockholders:
Plan Category | Number of Common Shares to be Issued Upon Exercise of Outstanding Options, Warrants and Rights | Weighted Average Exercise Price of Outstanding Options, Warrants and Rights | Number of Common Shares Remaining Available for Future Issuance Under Equity Compensation Plans | |||
Equity compensation plans approved by stockholders | 672,669 | $16.49 | 777,998 | |||
Issuer Purchases of Equity Securities
None.
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Performance Graph
The following graph illustrates the cumulative total stockholder return on Beazer Homes' common stock for the last five fiscal years through September 30, 2016, as compared to the S&P 500 Index and the S&P 500 Homebuilding Index. The comparison assumes an investment of $100 at September 30, 2011 in Beazer Homes' common stock and in each of the benchmark indices specified, assumes that all dividends were reinvested and accounts for the impact of any stock splits, where applicable. Stockholder returns over the indicated period are based on historical data and should not be considered indicative of future stockholder returns.
Fiscal Year Ended September 30, | |||||||||||
2012 | 2013 | 2014 | 2015 | 2016 | |||||||
u | Beazer Homes USA, Inc. | 235.10 | 238.41 | 222.25 | 176.56 | 154.44 | |||||
g | S&P 500 Index | 130.20 | 155.39 | 186.05 | 184.91 | 213.44 | |||||
p | S&P 500 Homebuilding Index | 276.55 | 280.05 | 303.19 | 384.08 | 381.37 | |||||
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Item 6. Selected Financial Data
The following table summarizes certain financial data for the periods presented:
Fiscal Year Ended September 30, | |||||||||||||||||||
2016 | 2015 | 2014 | 2013 | 2012 | |||||||||||||||
($ in millions, except per share amounts and unit data) | |||||||||||||||||||
Statements of Income Data: (a) | |||||||||||||||||||
Total revenue | $ | 1,822 | $ | 1,627 | $ | 1,464 | $ | 1,288 | $ | 1,006 | |||||||||
Gross profit | 297 | 272 | 263 | 214 | 105 | ||||||||||||||
Gross margin (b) | 16.3 | % | 16.7 | % | 18.0 | % | 16.6 | % | 10.4 | % | |||||||||
Operating income (loss) | $ | 59 | $ | 52 | $ | 56 | $ | 27 | $ | (62 | ) | ||||||||
Income (loss) from continuing operations | 5 | 347 | 35 | (32 | ) | (136 | ) | ||||||||||||
Income (loss) per share from continuing operations - basic | 0.16 | 12.54 | 1.35 | (1.30 | ) | (7.34 | ) | ||||||||||||
Income (loss) per share from continuing operations - diluted | 0.16 | 10.91 | 1.10 | (1.30 | ) | (7.34 | ) | ||||||||||||
Net income (loss) | 4,693 | 344,094 | 34,383 | (33,868 | ) | (145,326 | ) | ||||||||||||
Balance Sheet Data (end of year): (c) | |||||||||||||||||||
Cash and cash equivalents and restricted cash | $ | 243 | $ | 290 | $ | 387 | $ | 553 | $ | 741 | |||||||||
Inventory | 1,569 | 1,698 | 1,561 | 1,314 | 1,112 | ||||||||||||||
Total assets (d) | 2,213 | 2,409 | 2,050 | 1,970 | 1,965 | ||||||||||||||
Total debt (d) | 1,332 | 1,516 | 1,520 | 1,496 | 1,481 | ||||||||||||||
Stockholders' equity | 643 | 630 | 279 | 241 | 262 | ||||||||||||||
Supplemental Financial Data: (c) | |||||||||||||||||||
Cash provided by (used in): | |||||||||||||||||||
Operating activities | $ | 163 | $ | (81 | ) | $ | (160 | ) | $ | (175 | ) | $ | (21 | ) | |||||
Investing activities | 12 | 27 | (32 | ) | 190 | 5 | |||||||||||||
Financing activities | (198 | ) | (19 | ) | 12 | 1 | 134 | ||||||||||||
Financial Statistics: (c) | |||||||||||||||||||
Total debt as a percentage of total debt and stockholders' equity (end of year) (d) | 67.4 | % | 70.6 | % | 84.5 | % | 86.1 | % | 85.0 | % | |||||||||
Net debt as a percentage of net debt and stockholders' equity (end of year) (d),(e) | 63.2 | % | 66.3 | % | 80.8 | % | 80.1 | % | 74.5 | % | |||||||||
Adjusted EBITDA from total operations (f) | $ | 175.4 | $ | 126.8 | $ | 128.3 | $ | 86.3 | $ | 21.8 | |||||||||
Adjusted EBITDA margin from total operations (g) | 9.6 | % | 7.8 | % | 8.8 | % | 6.7 | % | 2.2 | % | |||||||||
Operating Statistics from continuing operations: | |||||||||||||||||||
New orders, net | 5,297 | 5,358 | 4,748 | 5,026 | 4,901 | ||||||||||||||
Closings | 5,419 | 5,010 | 4,951 | 5,056 | 4,428 | ||||||||||||||
Average selling price on closings (in thousands) | $ | 329.4 | $ | 313.5 | $ | 284.8 | $ | 253.0 | $ | 224.9 | |||||||||
Units in backlog (end of year) | 1,916 | 2,038 | 1,690 | 1,893 | 1,923 | ||||||||||||||
Average selling price in backlog (end of year; in thousands) | $ | 340.6 | $ | 327.6 | $ | 305.3 | $ | 279.0 | $ | 249.1 | |||||||||
(a) Statements of income data is from continuing operations. Gross profit includes inventory impairments and abandonments of $15.3 million, $3.1 million, $8.3 million, $2.6 million and $12.2 million for the fiscal years ended September 30, 2016, 2015, 2014, 2013 and 2012, respectively, as well as unexpected warranty costs and additional insurance recoveries from our third-party insurer, both of which are detailed in the table below that reconciles our net income to Adjusted EBITDA (subsequently defined). The aforementioned charges related to impairments and abandonments were primarily driven by the deterioration of the homebuilding environment over the applicable years, as well as reductions in pricing taken for certain communities in more recent years. Income (loss) from continuing operations for the fiscal years ended 2016, 2015, 2014, 2013 and 2012 also includes losses on extinguishment of debt of $13.4 million, $0.1 million, $19.9 million, $4.6 million and $45.1 million, respectively.
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(b) Gross margin = gross profit divided by total revenue.
(c) Discontinued operations were not segregated in the consolidated balance sheets or consolidated statements of cash flows, but are not material in the periods presented.
(d) Amounts presented have been impacted by the reclassification of debt issuance costs required by Accounting Standards Update 2015-03. The debt issuance costs reclassified for the years ended 2014, 2013 and 2012 amounted to $15.8 million, $16.6 million and $17.7 million, respectively. Refer to Note 2 of notes to the consolidated financial statements in this Form 10-K for further discussion.
(e) Net Debt = debt less unrestricted cash and cash equivalents and restricted cash related to the cash secured loan, when outstanding.
(f) Adjusted EBIT (earnings before interest, debt extinguishment charges and taxes) equals net income (loss) before (a) previously capitalized interest amortized to home construction and land sales expenses, capitalized interest impaired and interest expense not qualified for capitalization; (b) debt extinguishment charges; and (c) income taxes. Adjusted EBITDA (earnings before interest, taxes, depreciation, amortization, debt extinguishment charges and impairments) is calculated by adding non-cash charges, including depreciation, amortization, inventory impairment and abandonment charges and joint venture impairment charges for the period to Adjusted EBIT. Adjusted EBIT and Adjusted EBITDA are not Generally Accepted Accounting Principles (GAAP) financial measures. Adjusted EBIT and Adjusted EBITDA should not be considered alternatives to net income determined in accordance with GAAP as an indicator of operating performance. Because some analysts and companies may not calculate Adjusted EBIT and Adjusted EBITDA in the same manner as Beazer Homes, the Adjusted EBIT and Adjusted EBITDA information presented above may not be comparable to similar presentations by others.
(g) Adjusted EBITDA margin = Adjusted EBITDA divided by total revenue.
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Reconciliation of Adjusted EBITDA to total company net income (loss), the most directly comparable GAAP measure, is provided for each period discussed below. Management believes that Adjusted EBITDA assists investors in understanding and comparing the operating characteristics of homebuilding activities by eliminating many of the differences in companies' respective capitalization, tax position and level of impairments. These EBITDA measures should not be considered alternatives to net income determined in accordance with GAAP as an indicator of operating performance.
In addition, given the unusual size and nature of certain amounts recorded during the periods presented, Adjusted EBITDA is also shown excluding these amounts in the following table. Management believes that this representation best reflects the operating characteristics of the Company.
The following table reconciles our net income (loss) to Adjusted EBITDA for the periods presented:
Fiscal Year Ended September 30, | |||||||||||||||||||
(In thousands) | 2016 | 2015 | 2014 | 2013 | 2012 | ||||||||||||||
Net income (loss) | $ | 4,693 | $ | 344,094 | $ | 34,383 | $ | (33,868 | ) | $ | (145,326 | ) | |||||||
Expense (benefit) from income taxes | 16,224 | (325,927 | ) | (41,802 | ) | (3,684 | ) | (40,747 | ) | ||||||||||
Interest amortized to home construction and land sales expenses and capitalized interest impaired | 79,322 | 56,164 | 41,065 | 41,246 | 61,227 | ||||||||||||||
Interest expense not qualified for capitalization | 25,388 | 29,822 | 50,784 | 59,458 | 71,474 | ||||||||||||||
Loss on debt extinguishment | 13,423 | 80 | 19,917 | 4,636 | 45,097 | ||||||||||||||
Adjusted EBIT | 139,050 | 104,233 | 104,347 | 67,788 | (8,275 | ) | |||||||||||||
Depreciation and amortization and stock compensation amortization | 21,752 | 19,473 | 15,866 | 15,642 | 17,573 | ||||||||||||||
Inventory impairments and abandonments (a) | 14,572 | 3,109 | 8,062 | 2,650 | 12,514 | ||||||||||||||
Joint venture impairment and abandonment charges | — | — | — | 181 | 36 | ||||||||||||||
Adjusted EBITDA | 175,374 | 126,815 | 128,275 | 86,261 | 21,848 | ||||||||||||||
Unexpected warranty costs related to Florida stucco issues (net of expected insurance recoveries) | (3,612 | ) | 13,582 | 4,290 | — | — | |||||||||||||
Unexpected warranty costs related to water intrusion issues in New Jersey (net of expected insurance recoveries) | — | — | 648 | — | — | ||||||||||||||
Additional insurance recoveries from third-party insurer | (15,500 | ) | — | — | — | — | |||||||||||||
Litigation settlement in discontinued operations | — | 3,660 | — | — | — | ||||||||||||||
Adjusted EBITDA excluding unexpected warranty costs, additional insurance recoveries and a litigation settlement in discontinued operations | $ | 156,262 | $ | 144,057 | $ | 133,213 | $ | 86,261 | $ | 21,848 | |||||||||
(a) Amounts for the years ended September 30, 2016, 2014 and 2012 exclude $0.7 million, $0.2 million and $0.3 million, respectively, in capitalized interest impaired during the period. Capitalized interest that is impaired is included in the line above titled “Interest amortized to home construction and land sales expenses and capitalized interest impaired.”
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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Executive Overview and Outlook
Market Conditions
In any period, the demand for new homes is dependent on a variety of factors, including job growth, changes in population and demographics, the availability and cost of mortgage financing, the supply of new and existing homes and, importantly, consumer confidence. These factors all fluctuate over time at both a national and a more localized market level. While we believe that there are multiple factors that point to further improvement in the homebuilding market in the next several years, such as rising levels of household formation, tight housing supply in many markets, job and wage growth and mortgage rates that continue to be historically low, there are several risks that could significantly impact our business. These risks include fragile consumer confidence, continued volatility in our domestic and international stock markets, the threat of rising interest rates and adverse weather conditions, as well as a variety of local market risks where we do business. However, we continue to believe that we are well positioned in key markets, and that the underlying fundamentals that drive home purchases are supportive.
Overview of Results for Our Fiscal 2016
Fiscal 2016 was another very positive year for us, highlighted by two important accomplishments. First, we were able to continue to grow Adjusted EBITDA, which once certain non-recurring items, such as unexpected warranty costs, an insurance settlement and a litigation settlement, are eliminated (refer to Item 6, Selected Financial Data, in this Form 10-K for a reconciliation of Adjusted EBITDA), increased by 8.5% over the prior fiscal year. Second, we significantly improved the health of our balance sheet by reducing our debt balance and by activating additional previously idled land parcels.
Profitability. For the fiscal year ended September 30, 2016, we recorded net income from continuing operations of $5.2 million, a decline of $341.4 million from the prior fiscal year's net income from continuing operations of $346.6 million. However, the following items impacted the comparability of our net income from continuing operations between periods:
• | In the current fiscal year, we had income tax expense of $16.5 million compared to the prior fiscal year's income tax benefit of $324.6 million, which included the impact of the release of a substantial portion of our valuation allowance on our deferred tax assets of $335.2 million; |
• | Unexpected warranty costs related to water intrusion issues in Florida (the Florida stucco issues), net of insurance recoveries, resulted in a net credit to home construction expenses of $3.6 million in fiscal 2016 versus additional expense of $13.6 million in fiscal 2015; |
• | An insurance settlement received from our third-party insurer to resolve certain issues related to the extent of our insurance coverage for multiple policy years was recognized during the current fiscal year as a reduction of our home construction expenses of $15.5 million; |
• | We recorded $15.3 million and $3.1 million in impairment and abandonment charges, including those on active projects, as well as land held for sale, during our fiscal 2016 and fiscal 2015, respectively, an increase of $12.2 million; and |
• | Total interest expense, including capitalized interest amortized to home construction and land sales expenses and interest expense not qualified for capitalization and included as other expense, was $104.0 million in the current fiscal year compared to $85.9 million in the prior fiscal year, an increase of $18.1 million (see Note 6 of the notes to our consolidated financial statements in this Form 10-K). |
Looking at our underlying operating results, year-over-year closings increased by 8.2%, from 5,010 in the prior fiscal year to 5,419 in the current fiscal year, and our average selling price (ASP) increased over the prior fiscal year by 5.1% to $329.4 thousand. These combined to increase our homebuilding revenue by 13.6%, from $1.57 billion in the prior fiscal year to $1.78 billion in the current fiscal year. However, homebuilding gross margin, excluding impairments, abandonments, interest and the impacts of the Florida stucco issues and insurance settlement noted above, declined to 20.6% in the current fiscal year from 21.5% in the prior fiscal year due to the impact of several factors addressed within our “Results of Continuing Operations” discussion below. Commission expense grew year-over-year because of higher business volume, but declined as a percentage of homebuilding revenue when compared with the prior fiscal year. Finally, although our general and administrative (G&A) expenses increased year-over-year because our business has grown, it has declined as a percentage of total revenue as we have been able to improve our cost leverage on higher revenues.
We ended the current fiscal year with a backlog of 1,916 units, which represents a 6.0% decrease from the end of our prior fiscal year due to a decline in new order activity, coupled with higher year-over-year closings. However, the current fiscal year ending backlog had an ASP of $340.6 thousand, a year-over-year increase of 4.0%, causing our aggregate dollar value of homes in backlog to only decline by 2.2%.
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Debt Reduction. In addition to the profitability we achieved during our fiscal 2016, we also reduced our outstanding debt by nearly $157 million as follows:
• | We redeemed (1) our Senior Notes due June 2016, which had a balance of $170.9 million as of the beginning of the current fiscal year and had our most restrictive covenants; (2) our $300.0 million Senior Secured Notes due April 2018; (3) our $235.0 million Senior Notes due May 2019; (4) $3.6 million of our Senior Notes due June 2019; (5) $2.0 million of our Senior Notes due 2021; and (6) $85.0 million of our $140.0 million term loan, including $35.0 million of scheduled repayments and $50.0 million of early redemptions. |
• | We issued (1) a two-year secured term loan for $140 million, which had only $55.0 million outstanding as of the end of our fiscal 2016 due to the redemptions noted above, and (2) $500 million of Senior Notes due March 2022, which are unsecured and have an interest rate of 8.75%. |
Reaching “2B-10”
In November 2013, we introduced a multi-year “2B-10” plan, which provided a roadmap of revenue and margin metrics to achieve $2 billion in revenue with a 10% Adjusted EBITDA margin. Taken together, reaching “2B-10” would result in Adjusted EBITDA of at least $200 million. In November 2015, we refined the specific metrics we expect will lead us to our “2B-10” objectives by providing ranges to each metric instead of point estimates. Since we rolled out our “2B-10” plan, we have consistently noted that there are a number of paths to achieving our underlying goal of $200 million of EBITDA. Additionally, during the second quarter of our fiscal 2015, we made the decision that we would not continue to reinvest in new homebuilding assets in our New Jersey division, which has had a modest impact on the timing of the achievement of our “2B-10” objectives. Nonetheless, we continue our commitment to reaching these objectives as soon as possible. We expect to reach these objectives by making improvements on five key metrics: (1) sales per community per month (or our absorption rate); (2) active community count; (3) ASP; (4) homebuilding gross margin; and (5) cost leverage as measured by selling, general and administrative costs (SG&A) as a percentage of total revenue.
During fiscal 2016, we continued to make progress on several of these metrics, as discussed below, resulting in revenue of $1.8 billion, up 12.0% year-over-year, and Adjusted EBITDA (excluding non-recurring items, such as unexpected warranty cost related to the Florida stucco issues, additional insurance recoveries received in the current fiscal year from our third-party insurer and a litigation settlement in discontinued operations recorded in the prior fiscal year; refer to Item 6, Selected Financial Data, in this Form 10-K for a reconciliation of Adjusted EBITDA) of $156.3 million, compared to $144.1 million in the prior fiscal year, an increase of 8.5%. These improvements were due to the intense focus we have placed on the operational drivers of this plan, and in part, to stronger home pricing conditions. Our progress on each metric is discussed in more detail below.
Sales per Community per Month. During fiscal 2016, our rate of sales per community per month was 2.7, which was slightly lower than the prior fiscal year rate of 2.8, and fell just below the metric of 2.8 to 3.2 sales per community per month set in our “2B-10” plan. However, while each of the first three quarters of the current fiscal year saw our sales per community per month fall behind the first three respective prior fiscal year quarters, we had very strong sales in the final quarter of our current fiscal year (achieving sales per community per month of 2.8, compared to 2.4 during the fourth quarter of fiscal 2015), as momentum continues to build in some of our newer communities. We believe that our absorptions remain among the strongest in the industry, and will maintain focus on our sales absorptions as a top operational priority.
Active Community Count. In previous years, we significantly increased our level of land investments in an effort to grow our active community count. In doing so, we purchased mostly raw and partially developed land in some of the best school districts and most active job markets in the country. While we continue to focus on controlling land parcels in strong markets, we have balanced our goal of reducing our outstanding debt with maintaining community count by increasingly focusing on the use of option contracts and developed lot deals to maximize the efficiency of our capital. We ended fiscal 2016 with 161 active communities, which was 3.0% lower than a year earlier and below our “2B-10” target metric of a community count range between 170 and 175. Our active community count as of the end of the current fiscal year was lower, as we allocated capital to debt reduction during the year; however, we expect higher spend on land and land development activities during our fiscal 2017 and a corresponding growth in community count in fiscal 2018 and beyond.
Average Selling Price. Although we have been buying land in almost all of our markets, our incremental land investments over the past couple of years have been disproportionately focused on securing attractive parcels in Texas, California and the Mid-Atlantic, which feature some of the strongest employment characteristics in the country, as well as some of our higher-priced product lines. This geographic mix shift, combined with some market pricing power, has led to a continued rise in our ASP on closings from $313.5 thousand last year to $329.4 thousand this year. In addition, we ended fiscal 2016 with an ASP for our units in backlog of $340.6 thousand, indicating that future ASP should continue to increase. Our targeted “2B-10” metric for ASP is a range of $330.0 thousand to $340.0 thousand, which we are approaching.
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Homebuilding Gross Margin. During fiscal 2016, our margin was a bit depressed during the first half of the year, as we made the decision to sell a higher share of speculative homes at slightly reduced margins to generate liquidity to pay off our Senior Notes due June 2016. However, once we secured financing to redeem these notes, we returned to selling a more normal mix of specs and "to be built" homes, which allowed us to increase our margins during the second half of the year. For the year, our homebuilding gross margin (excluding impairments, abandonments and interest in cost of sales) improved by 100 basis points to 21.6%. However, excluding the current fiscal year reduction in home construction expenses resulting from an agreement with our third-party insurer and the impact on home construction expenses related to the Florida stucco issues in both periods, homebuilding gross margin declined to 20.6% in the current fiscal year from 21.5% in the prior fiscal year, a decrease of 90 basis points (refer to “Homebuilding Gross Profit and Gross Margin” section below for a full reconciliation of our gross profit and gross margin for each period discussed). The current year adjusted gross margin is below the “2B-10” target for our homebuilding margin of between 21.0% and 22.0% (excluding impairments and abandonments and interest amortized to homebuilding cost of sales). As discussed further below, our homebuilding gross margin was impacted by the structure of our land purchase transactions, since finished lot purchases tend to result in lower gross margins, and activation of assets formerly classified as land held for future development, which generally have lower margins.
Cost Leverage. Finally, our cost leverage improved from fiscal 2015. Our SG&A expenses were 12.3% of total revenue for fiscal 2016, compared with 12.8% a year earlier. Although this metric continues to be above our “2B-10” target range of 11.0% to 12.0%, as we continue to grow total revenue, we anticipate further improvement on this metric.
We expect to continue our focus on our “2B-10” metrics during fiscal 2017, with particular emphasis on driving sales absorptions and improving our homebuilding gross margin.
Debt Reduction and Capital Efficiency
During our fiscal 2016, we reduced our debt balance by nearly $157 million, which surpassed our established debt reduction target for the current fiscal year. We will continue to focus on deleverage, and plan to further reduce our debt by at least another $100 million through our fiscal 2018. We believe that doing so in a strong housing market will create long-term shareholder value. By actively managing our debt structure, we were successful in paying off certain secured senior notes in part by issuing unsecured senior debt with a later maturity date. See Note 8 of the notes to our consolidated financial statements in this Form 10-K for further discussion of our outstanding borrowings and debt activity.
Additionally, we have increasingly sought to maximize our return on capital by carefully managing our investment in land, so that our debt reduction targets can be achieved while maintaining our community count. To reduce the risks associated with these investments and to maximize our capital base, we have increasingly used options to control land. Furthermore, we have continued to activate certain parcels of land held for future development so that these assets can begin to generate revenue for the Company.
Seasonal and Quarterly Variability: Our homebuilding operating cycle generally reflects escalating new order activity in the second and third fiscal quarters and increased closings in the third and fourth fiscal quarters. The following tables present certain quarterly operating data for the periods presented:
New Orders (Net of Cancellations) | |||||||||||||||
1st Qtr | 2nd Qtr | 3rd Qtr | 4th Qtr | Total | |||||||||||
2016 | 923 | 1,538 | 1,490 | 1,346 | 5,297 | ||||||||||
2015 | 966 | 1,698 | 1,524 | 1,170 | 5,358 | ||||||||||
2014 | 895 | 1,390 | 1,290 | 1,173 | 4,748 | ||||||||||
Closings | |||||||||||||||
1st Qtr | 2nd Qtr | 3rd Qtr | 4th Qtr | Total | |||||||||||
2016 | 1,049 | 1,150 | 1,364 | 1,856 | 5,419 | ||||||||||
2015 | 885 | 936 | 1,293 | 1,896 | 5,010 | ||||||||||
2014 | 1,038 | 977 | 1,241 | 1,695 | 4,951 | ||||||||||
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RESULTS OF CONTINUING OPERATIONS
The following table summarizes certain key income statement metrics for the periods presented:
Fiscal Year Ended September 30, | |||||||||||
($ in thousands) | 2016 | 2015 | 2014 | ||||||||
Revenues: | |||||||||||
Homebuilding | $ | 1,784,777 | $ | 1,570,627 | $ | 1,409,880 | |||||
Land sales and other | 37,337 | 56,786 | 53,887 | ||||||||
Total | $ | 1,822,114 | $ | 1,627,413 | $ | 1,463,767 | |||||
Gross profit: | |||||||||||
Homebuilding | $ | 293,860 | $ | 267,269 | $ | 260,746 | |||||
Land sales and other | 3,347 | 5,175 | 2,713 | ||||||||
Total | $ | 297,207 | $ | 272,444 | $ | 263,459 | |||||
Gross margin: | |||||||||||
Homebuilding(a) | 16.5 | % | 17.0 | % | 18.5 | % | |||||
Land sales and other | 9.0 | % | 9.1 | % | 5.0 | % | |||||
Total | 16.3 | % | 16.7 | % | 18.0 | % | |||||
Commissions | $ | 70,460 | $ | 65,023 | $ | 58,028 | |||||
General and administrative expenses (G&A) | $ | 153,628 | $ | 142,496 | $ | 136,463 | |||||
SG&A (commissions plus G&A) as a percentage of total revenue | 12.3 | % | 12.8 | % | 13.3 | % | |||||
G&A as a percentage of total revenue | 8.4 | % | 8.8 | % | 9.3 | % | |||||
Depreciation and amortization | $ | 13,794 | $ | 13,338 | $ | 13,279 | |||||
Operating income | $ | 59,325 | $ | 51,587 | $ | 55,689 | |||||
Operating income as a percentage of total revenue | 3.3 | % | 3.2 | % | 3.8 | % | |||||
Effective tax rate(b) | 76.0 | % | (1,473.3 | )% | 608.0 | % | |||||
Equity in income of unconsolidated entities | $ | 131 | $ | 536 | $ | 6,545 | |||||
Loss on extinguishment of debt | 13,423 | 80 | 19,917 | ||||||||
(a) In addition to other items, our homebuilding gross margin for the periods presented was impacted by (1) a $15.5 million reduction in home construction expenses in the current fiscal year resulting from a settlement with our third-party insurer to resolve certain issues related to the extent of our insurance coverage for multiple policy years and (2) unexpected warranty costs related to the Florida stucco issues, as well as the associated insurance recoveries, in each period presented. Refer to further discussion of these items below in section titled “Homebuilding Gross Profit and Gross Margin.”
(b) Calculated as tax expense (benefit) for the period divided by income from continuing operations. Due to the effects of a variety of factors, including the impact of discrete tax items, changes in our valuation allowance on our deferred tax assets and changes in our unrecognized tax benefits, our effective tax rate was not a meaningful metric, particularly in the prior periods presented, as our income tax expense and benefit were not directly correlated to the amount of pretax income or loss for the associated periods.
Homebuilding Operations Data
The following table summarizes new orders, net and cancellation rates by reportable segment for the periods presented:
New Orders, net | Cancellation Rates | ||||||||||||||||||||||
2016 | 2015 | 2014 | 16 v 15 | 15 v 14 | 2016 | 2015 | 2014 | ||||||||||||||||
West | 2,381 | 2,352 | 1,815 | 1.2 | % | 29.6 | % | 21.9 | % | 19.7 | % | 21.9 | % | ||||||||||
East | 1,330 | 1,433 | 1,539 | (7.2 | )% | (6.9 | )% | 20.1 | % | 22.8 | % | 21.4 | % | ||||||||||
Southeast | 1,586 | 1,573 | 1,394 | 0.8 | % | 12.8 | % | 18.2 | % | 18.1 | % | 20.5 | % | ||||||||||
Total | 5,297 | 5,358 | 4,748 | (1.1 | )% | 12.8 | % | 20.4 | % | 20.1 | % | 21.3 | % | ||||||||||
Sales per active community per month of 2.7 for the fiscal year ended September 30, 2016 was slightly below the same metric for the fiscal year ended September 30, 2015, when we had 2.8 sales per active community per month. Therefore, despite the
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increase in our average active community count from 161 during our fiscal 2015 to 166 during our fiscal 2016, our decline in sales pace resulted in a reduction of new orders, net of 1.1%. For the fiscal year ended September 30, 2016, the 1.2% increase in new orders, net in our West segment was due to stronger sales in our Las Vegas market and our Sacramento operations, where we activated several new communities during the prior fiscal year, offset by a decline in new orders, net in our Texas market, due to a particularly strong prior year sales performance, and our Southern California market. The 7.2% decline in new orders, net in our East segment during our fiscal 2016 was caused by declines in our Indianapolis market, where we are working to build our community count back up, and, to a lesser extent, by our New Jersey operations, where we elected not to continue to reinvest in new homebuilding assets in the prior fiscal year. Finally, the year-over-year increase in new orders, net in our Southeast segment was primarily driven by strong order activity from our Atlanta division, as we continue to invest in new communities in this market, partially offset by our Charleston division, as we transition into several new communities.
Sales per active community per month of 2.8 for the year ended September 30, 2015 was even with the same metric for the year ended September 30, 2014. However, during our fiscal 2015, we grew our community active community count to 166 as of September 30, 2015, compared to 155 as of September 30, 2014. This growth in community count resulted in the 12.8% year-over-year increase in net new orders, net shown above. The fiscal 2015 increase in new orders, net in our West segment was driven by substantial year-over-year increases in Texas and California, offset by a decline in Las Vegas. The negative year-over-year trend for fiscal 2015 in our East segment was largely driven by a decline in new orders, net in New Jersey, where we elected not to continue to reinvest in new homebuilding assets. Excluding New Jersey, our new orders, net in our East segment would have declined 1.1% in fiscal 2015 when compared with our fiscal 2014. Finally, the fiscal 2015 increase in new orders, net over fiscal 2014 in our Southeast segment was driven by sizable increases in our Atlanta and Charleston markets.
The table below summarizes backlog units by reportable segment, as well as aggregate dollar value of homes in backlog and ASP in backlog as of September 30, 2016, 2015 and 2014:
As of September 30, | ||||||||||||||||||
2016 | 2015 | 2014 | 16 v 15 | 15 v 14 | ||||||||||||||
Backlog Units: | ||||||||||||||||||
West | 828 | 955 | 557 | (13.3 | )% | 71.5 | % | |||||||||||
East | 444 | 487 | 600 | (8.8 | )% | (18.8 | )% | |||||||||||
Southeast | 644 | 596 | 533 | 8.1 | % | 11.8 | % | |||||||||||
Total | 1,916 | 2,038 | 1,690 | (6.0 | )% | 20.6 | % | |||||||||||
Aggregate dollar value of homes in backlog (in millions) | $ | 652.7 | $ | 667.7 | $ | 515.9 | (2.2 | )% | 29.4 | % | ||||||||
ASP in backlog (in thousands) | $ | 340.6 | $ | 327.6 | $ | 305.3 | 4.0 | % | 7.3 | % | ||||||||
Backlog reflects the number of homes for which the Company has entered into a sales contract with a customer but has not yet delivered the home. Backlog as of September 30, 2016 is lower than the prior year, driven by the year-over-year decline in new orders, net, discussed above, as well as a lower community count as of the end of the year. Backlog as of September 30, 2015 was higher than the prior fiscal year, driven by the increase in new orders, net year-over-year, discussed above, and a higher active community count.
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Homebuilding Revenue, Average Selling Price and Closings
The tables below summarize homebuilding revenue, the ASP of our homes closed and closings by reportable segment for the periods presented:
Homebuilding Revenue | Average Selling Price | ||||||||||||||||||||||||||||||||||
(In thousands) | 2016 | 2015 | 2014 | 16 v 15 | 15 v 14 | 2016 | 2015 | 2014 | 16 v 15 | 15 v 14 | |||||||||||||||||||||||||
West | $ | 817,971 | $ | 584,202 | $ | 537,149 | 40.0 | % | 8.8 | % | $ | 326.1 | $ | 299.0 | $ | 269.1 | 9.1 | % | 11.1 | % | |||||||||||||||
East | 505,198 | 549,484 | 525,439 | (8.1 | )% | 4.6 | % | 368.0 | 355.4 | 328.4 | 3.5 | % | 8.2 | % | |||||||||||||||||||||
Southeast | 461,608 | 436,941 | 347,292 | 5.6 | % | 25.8 | % | 300.1 | 289.4 | 256.3 | 3.7 | % | 12.9 | % | |||||||||||||||||||||
Total | $ | 1,784,777 | $ | 1,570,627 | $ | 1,409,880 | 13.6 | % | 11.4 | % | $ | 329.4 | $ | 313.5 | $ | 284.8 | 5.1 | % | 10.1 | % | |||||||||||||||
Closings | ||||||||||||||
2016 | 2015 | 2014 | 16 v 15 | 15 v 14 | ||||||||||
West | 2,508 | 1,954 | 1,996 | 28.4 | % | (2.1 | )% | |||||||
East | 1,373 | 1,546 | 1,600 | (11.2 | )% | (3.4 | )% | |||||||
Southeast | 1,538 | 1,510 | 1,355 | 1.9 | % | 11.4 | % | |||||||
Total | 5,419 | 5,010 | 4,951 | 8.2 | % | 1.2 | % | |||||||
The change in ASP for our fiscal year ended September 30, 2016 was impacted primarily by a change in mix of closings between geographies, products and among communities within each individual market as compared with the prior fiscal year. It was also positively impacted by our operational strategies, as well as improved market conditions in certain geographies. These same dynamics enhanced our ability to generate a higher ASP during our fiscal 2015 when compared with our fiscal 2014; in particular a higher proportion of closings generated from certain markets with high ASPs, including California, pushed our ASP significantly higher during fiscal 2015. On average, we anticipate that our ASP will likely continue to increase, as indicated by our ASP for homes in backlog as of September 30, 2016.
Closings for our fiscal year ended September 30, 2016 increased due to our higher year-over-year average active community count as compared with our fiscal year ended September 30, 2015, particularly as certain of our markets re-open or expand, as well as improved performance in communities that have recently opened. Additionally, the significant increase in closings for the year ended September 30, 2016 was also positively impacted by (1) increased backlog entering the current fiscal year versus the prior fiscal year; (2) the sale and closing of a significant number of speculative (spec) homes in our Maryland market (particularly early in the year); and (3) additional closings in our Texas market that were pushed out of our prior fiscal year due to the weather conditions in that region.
A year-over-year increase in closings and higher ASP drove our increase in homebuilding revenues for fiscal 2016 as compared to our fiscal 2015. A higher ASP, and to some extent a year-over-year increase in closings, was the reason for our fiscal 2015 increase in homebuilding revenues as compared to fiscal 2014.
Homebuilding Gross Profit and Gross Margin
The following tables present our homebuilding (HB) gross profit and gross margin by reportable segment and total homebuilding gross profit and gross margin, as well as such amounts excluding inventory impairments and abandonments and interest amortized to cost of sales (COS) for the periods presented. Additionally, we have shown the impact of several non-recurring items, such as unexpected warranty costs, net of insurance recoveries, and additional insurance recoveries from our third-party insurer, on our gross profit and gross margin for each period presented. Homebuilding gross profit is defined as homebuilding revenues less home cost of sales (which includes land and land development costs, home construction costs, capitalized interest, indirect costs of construction, estimated warranty costs, closing costs and inventory impairment and abandonment charges).
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($ in thousands) | Fiscal Year Ended September 30, 2016 | |||||||||||||||||||||||||||
HB Gross Profit (Loss) | HB Gross Margin | Impairments & Abandonments (I&A) | HB Gross Profit w/o (a) I&A | HB Gross Margin w/o I&A | Interest Amortized to HB COS | HB Gross Profit w/o I&A and Interest | HB Gross Margin w/o I&A and Interest | |||||||||||||||||||||
West | $ | 169,603 | 20.7 | % | $ | 6,729 | $ | 176,332 | 21.6 | % | $ | — | $ | 176,332 | 21.6 | % | ||||||||||||
East | 89,572 | 17.7 | % | 5,894 | 95,466 | 18.9 | % | — | 95,466 | 18.9 | % | |||||||||||||||||
Southeast | 92,573 | 20.1 | % | 788 | 93,361 | 20.2 | % | — | 93,361 | 20.2 | % | |||||||||||||||||
Corporate & unallocated | (57,888 | ) | 1,101 | (56,787 | ) | 77,941 | 21,154 | |||||||||||||||||||||
Total homebuilding | $ | 293,860 | 16.5 | % | $ | 14,512 | $ | 308,372 | 17.3 | % | $ | 77,941 | $ | 386,313 | 21.6 | % | ||||||||||||
Unexpected warranty costs related to Florida stucco issues (net of expected insurance recoveries) | (3,612 | ) | (3,612 | ) | ||||||||||||||||||||||||
Additional insurance recoveries from third-party insurer | (15,500 | ) | (15,500 | ) | ||||||||||||||||||||||||
Adjusted homebuilding | 274,748 | 15.4 | % | 367,201 | 20.6 | % | ||||||||||||||||||||||
($ in thousands) | Fiscal Year Ended September 30, 2015 | |||||||||||||||||||||||||||
HB Gross Profit (Loss) | HB Gross Margin | Impairments & Abandonments (I&A) | HB Gross Profit w/o I&A | HB Gross Margin w/o I&A | Interest Amortized to HB COS | HB Gross Profit w/o I&A and Interest | HB Gross Margin w/o I&A and Interest | |||||||||||||||||||||
West | $ | 121,264 | 20.8 | % | $ | — | $ | 121,264 | 20.8 | % | $ | — | $ | 121,264 | 20.8 | % | ||||||||||||
East | 104,451 | 19.0 | % | 1,676 | 106,127 | 19.3 | % | — | 106,127 | 19.3 | % | |||||||||||||||||
Southeast | 79,062 | 18.1 | % | — | 79,062 | 18.1 | % | — | 79,062 | 18.1 | % | |||||||||||||||||
Corporate & unallocated | (37,508 | ) | — | (37,508 | ) | 55,006 | 17,498 | |||||||||||||||||||||
Total homebuilding | $ | 267,269 | 17.0 | % | $ | 1,676 | $ | 268,945 | 17.1 | % | $ | 55,006 | $ | 323,951 | 20.6 | % | ||||||||||||
Unexpected warranty costs related to Florida stucco issues (net of expected insurance recoveries) | 13,582 | 13,582 | ||||||||||||||||||||||||||
Adjusted homebuilding | 280,851 | 17.9 | % | 337,533 | 21.5 | % | ||||||||||||||||||||||
($ in thousands) | Fiscal Year Ended September 30, 2014 | |||||||||||||||||||||||||||
HB Gross Profit (Loss) | HB Gross Margin | Impairments & Abandonments (I&A) | HB Gross Profit w/o I&A | HB Gross Margin w/o I&A | Interest Amortized to HB COS | HB Gross Profit w/o I&A and Interest | HB Gross Margin w/o I&A and Interest | |||||||||||||||||||||
West | $ | 120,048 | 22.3 | % | $ | 4,948 | $ | 124,996 | 23.3 | % | $ | — | $ | 124,996 | 23.3 | % | ||||||||||||
East | 99,400 | 18.9 | % | 463 | 99,863 | 19.0 | % | — | 99,863 | 19.0 | % | |||||||||||||||||
Southeast | 66,743 | 19.2 | % | 2,523 | 69,266 | 19.9 | % | — | 69,266 | 19.9 | % | |||||||||||||||||
Corporate & unallocated | (25,445 | ) | 373 | (25,072 | ) | 39,255 | 14,183 | |||||||||||||||||||||
Total homebuilding | $ | 260,746 | 18.5 | % | $ | 8,307 | $ | 269,053 | 19.1 | % | $ | 39,255 | $ | 308,308 | 21.9 | % | ||||||||||||
Unexpected warranty costs related to Florida stucco issues | $ | 4,290 | $ | 4,290 | ||||||||||||||||||||||||
Unexpected warranty costs related to water intrusion issues in New Jersey | $ | 648 | $ | 648 | ||||||||||||||||||||||||
Adjusted homebuilding | $ | 265,684 | 18.8 | % | $ | 313,246 | 22.2 | % | ||||||||||||||||||||
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Our overall homebuilding gross profit increased to $293.9 million for the fiscal year ended September 30, 2016, from $267.3 million in the prior year. The increase was due to additional gross profit on a $214.2 million increase in homebuilding revenues (driven by higher year-over-year closings and ASP, as previously discussed). However, the gross profit realized on additional revenue was partially offset by a decline in our gross margin from 17.0% in the prior fiscal year to 16.5% in the current fiscal year. As shown in the tables above, gross margin in the current and prior fiscal years was impacted by several items, including (1) impairments and abandonments, which increased from $1.7 million in fiscal 2015 to $14.5 million in fiscal 2016 (refer to Note 5 of the notes to our consolidated financial statements in this Form 10-K); (2) interest amortized to homebuilding cost of sales, which increased from $55.0 million in fiscal 2015 to $77.9 million in fiscal 2016 (refer to Note 6 of the notes to our consolidated financial statements in this Form 10-K); and (3) the impact of the Florida stucco issues, net of anticipated insurance recoveries, and a settlement with our third-party insurer to resolve certain issues related to the extent of our insurance coverage for multiple policy years, both of which are further discussed in Note 9 of the notes to our consolidated financial statements in this Form 10-K. When factoring in the impact of impairments and abandonments, interest and non-recurring items, our gross margin declined by 90 basis points, from 21.5% in fiscal 2015 to 20.6% in fiscal 2016. This decline is due to a variety of factors, including (1) lower margins on speculative homes closed during the current year, particularly in the first two quarters, due to our focus on returning capital to the Company; (2) geographic mix of closings; (3) the structure of our land purchase transactions, since finished lot purchases tend to result in lower gross margins; (4) activation of assets formerly classified as land held for future development, which generally have lower margins; and (5) higher labor costs.
Our overall homebuilding gross profit increased to $267.3 million for the fiscal year ended September 30, 2015, from $260.7 million in the prior year. The increase was due to additional gross profit on a $160.7 million increase in homebuilding revenues, which offset a decline in homebuilding gross margin from 18.5% in fiscal 2014 to 17.0% in fiscal 2015. However, in both fiscal 2015 and 2014, we had unexpected warranty costs that impacted our homebuilding gross profit and margin. When excluding the impact of these specific costs (refer to Item 6, Selected Financial Data, in this Form 10-K), our homebuilding gross margin would have been 17.9% for fiscal 2015 (21.5% without impairments and abandonments and interest), compared with 18.8% for fiscal 2014 (22.2% without impairments and abandonments and interest). The decline in our margin, after considering impairments and abandonments, interest and unexpected warranty costs, was due to (1) higher overall lot costs, as land in certain markets continued to rise in value; (2) the structure of our land deals, as finished lot purchases or the use of land bankers tend to result in lower gross margins; (3) higher labor costs; and (4) geographic mix of closings.
Total homebuilding gross profit and gross margin excluding inventory impairments and abandonments, interest amortized to cost of sales and other non-recurring items that we disclose are not GAAP financial measures. These measures should not be considered alternatives to homebuilding gross profit and gross margin determined in accordance with GAAP as an indicator of operating performance.
In particular, the magnitude and volatility of non-cash inventory impairment and abandonment charges for the Company, and for other homebuilders, have been significant and, as such, have made financial analysis of our industry more difficult. Homebuilding metrics excluding these charges, as well as interest amortized to cost of sales, and other similar presentations by analysts and other companies are frequently used to assist investors in understanding and comparing the operating characteristics of homebuilding activities by eliminating many of the differences in companies' respective level of impairments and levels of debt. Management believes these non-GAAP measures enable holders of our securities to better understand the cash implications of our operating performance and our ability to service our debt obligations as they currently exist and as additional indebtedness is incurred in the future. These measures are also useful internally, helping management compare operating results and as a measure of the level of cash that may be available for discretionary spending.
In a given period, our reported gross profit is generated from both communities previously impaired and communities not previously impaired. In addition, as indicated above, certain gross profit amounts arise from recoveries of prior period costs, including warranty items, that are not directly tied to communities generating revenue in the period. Home closings from communities previously impaired would, in most instances, generate very low or negative gross margins prior to the impact of the previously recognized impairment. Gross margin for each home closing is higher for a particular community after an impairment because the carrying value of the underlying land was previously reduced to the present value of future cash flows as a result of the impairment, leading to lower cost of sales at the home closing. This improvement in gross margin resulting from one or more prior impairments is frequently referred to in the aggregate as the “impairment turn” or “flow-back” of impairments within the reporting period. The amount of this impairment turn may exceed the gross margin for an individual impaired asset if the gross margin for that asset prior to the impairment would have been negative. The extent to which this impairment turn is greater than the reported gross margin for the individual asset is related to the specific historical cost basis of that individual asset.
The asset valuations that result from our impairment calculations are based on discounted cash flow analyses and are not derived by simply applying prospective gross margins to individual communities. As such, impaired communities may have gross margins that are somewhat higher or lower than the gross margin for unimpaired communities. The mix of home closings in any particular quarter varies to such an extent that comparisons between previously impaired and never impaired communities would not be a
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reliable way to ascertain profitability trends or to assess the accuracy of previous valuation estimates. In addition, since any amount of impairment turn is tied to individual lots in specific communities, it will vary considerably from period to period. As a result of these factors, we review the impairment turn impact on gross margins on a trailing 12-month basis as a way of considering whether our impairment calculations are resulting in gross margins from our continuing operations for impaired communities that are comparable to our unimpaired communities. For fiscal 2016, our homebuilding gross margin was 16.5% and excluding interest and inventory impairments and abandonments, it was 21.6%. For the same period, homebuilding gross margin was as follows in those communities that have previously been impaired, which represented 7.8% of total closings during fiscal 2016:
Homebuilding Gross Margin from previously impaired communities: | ||
Pre-impairment turn gross margin | (7.0 | )% |
Impact of interest amortized to COS related to these communities | 5.2 | % |
Pre-impairment turn gross margin, excluding interest amortization | (1.8 | )% |
Impact of impairment turns | 12.9 | % |
Gross margin (post impairment turns), excluding interest amortization | 11.1 | % |
For a further discussion of our impairment policies and communities impaired during the current and prior two fiscal years, refer to Notes 2 and 5 of the notes to consolidated financial statements in this Form 10-K.
Land Sales and Other Revenues and Gross Profit
Land sales relate to land and lots sold that did not fit within our homebuilding programs and strategic plans in certain markets. Other revenues included net fees we received for general contractor services we performed on behalf of a third party and broker fees. The following tables summarize our land sales and other revenues and related gross profit (loss) by reportable segment for the periods presented:
(In thousands) | Land Sales and Other Revenues | ||||||||||||||||
2016 | 2015 | 2014 | 16 v 15 | 15 v 14 | |||||||||||||
West | $ | 9,936 | $ | 23,313 | $ | 19,592 | (57.4 | )% | 19.0 | % | |||||||
East | 21,751 | ||||||||||||||||