BZH-3.31.14-Q2 Document
Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_____________________________________________________________ 
FORM 10-Q
_____________________________________________________________ 
 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended March 31, 2014
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)
 _____________________________________________________________
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 twelve 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 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
Class
 
Outstanding at April 30, 2014
Common Stock, $0.001 par value
 
26,721,886

Table of Contents

References to “we,” “us,” “our,” “Beazer”, “Beazer Homes” and the “Company” in this quarterly report on Form 10-Q refer to Beazer Homes USA, Inc.
FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains forward-looking statements. These forward-looking statements represent our expectations or beliefs concerning future events, and it is possible that the results described in this quarterly report 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 quarterly report.
These forward-looking statements are subject to 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 quarterly report 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 our Annual Report on Form 10-K for the fiscal year ended September 30, 2013. These factors are not intended to be an all-encompassing 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:

•
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;
•
economic changes nationally or in local markets, including 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 in the market;
•
the cyclical nature of the homebuilding industry and a potential deterioration in homebuilding industry conditions;
•
estimates related to homes to be delivered in the future (backlog) are imprecise as they are subject to various cancellation risks which cannot be fully controlled;
•
shortages of or increased prices for labor, land or raw materials used in housing production;
•
our cost of and ability to access capital 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 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, or an increased number of foreclosures;
•
increased competition or delays in reacting to changing consumer preference in home design;
•
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 production and overhead cost structure;
•
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 and governmental policies;
•
the results of litigation or government proceedings and fulfillment of the obligations in the Deferred Prosecution Agreement and consent orders with governmental authorities and other settlement agreements;
•
the impact of construction defect and home warranty claims;
•
the cost and availability of insurance and surety bonds;
•
the performance of our unconsolidated entities and our unconsolidated entity partners;
•
delays in land development or home construction resulting from adverse weather conditions;
•
the impact of information technology failures or data security breaches;
•
effects of changes in accounting policies, standards, guidelines or principles; or
•
terrorist acts, acts of war and other factors over which the Company has little or no control.
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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BEAZER HOMES USA, INC.
FORM 10-Q
INDEX
 


3
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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

BEAZER HOMES USA, INC.
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
 
 
March 31,
2014
 
September 30,
2013
ASSETS
 
 
 
Cash and cash equivalents
$
299,620

 
$
504,459

Restricted cash
50,765

 
48,978

Accounts receivable (net of allowance of $1,278 and $1,651, respectively)
28,911

 
22,342

Income tax receivable
2,813

 
2,813

Inventory
 
 
 
Owned inventory
1,480,360

 
1,304,694

Land not owned under option agreements
7,751


9,124

Total inventory
1,488,111

 
1,313,818

Investments in unconsolidated entities
36,547

 
44,997

Deferred tax assets, net
5,407

 
5,253

Property, plant and equipment, net
18,142

 
17,000

Other assets
21,068

 
27,129

Total assets
$
1,951,384

 
$
1,986,789

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Trade accounts payable
$
71,891

 
$
83,800

Other liabilities
133,675

 
145,623

Obligations related to land not owned under option agreements
3,147

 
4,633

Total debt (net of discounts of $4,780 and $5,160 respectively)
1,511,873

 
1,512,183

Total liabilities
1,720,586

 
1,746,239

Stockholders’ equity:
 
 
 
Preferred stock (par value $.01 per share, 5,000,000 shares authorized, no shares issued)
—

 
—

Common stock (par value $0.001 per share, 63,000,000 shares authorized, 26,721,886 and 25,245,945 issued and outstanding, respectively)
27

 
25

Paid-in capital
849,520

 
846,165

Accumulated deficit
(618,749
)
 
(605,640
)
Total stockholders’ equity
230,798

 
240,550

Total liabilities and stockholders’ equity
$
1,951,384

 
$
1,986,789


See Notes to Unaudited Condensed Consolidated Financial Statements.


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BEAZER HOMES USA, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
 
 
Three Months Ended
 
Six Months Ended
 
March 31,
 
March 31,
 
2014
 
2013
 
2014
 
2013
Total revenue
$
270,021

 
$
287,902

 
$
563,191

 
$
534,804

Home construction and land sales expenses
216,969

 
241,992

 
455,438

 
452,606

Inventory impairments and option contract abandonments
880

 
2,025

 
911

 
2,229

Gross profit
52,172

 
43,885

 
106,842

 
79,969

Commissions
11,096

 
11,686

 
22,917

 
22,328

General and administrative expenses
32,628

 
28,795

 
61,038

 
55,123

Depreciation and amortization
2,831

 
3,093

 
5,738

 
5,808

Operating income (loss)
5,617

 
311

 
17,149

 
(3,290
)
Equity in (loss) income of unconsolidated entities
(17
)
 
68

 
302

 
104

Loss on extinguishment of debt
(153
)
 
(3,638
)
 
(153
)
 
(3,638
)
Other expense, net
(13,727
)
 
(16,195
)
 
(29,484
)
 
(31,822
)
Loss from continuing operations before income taxes
(8,280
)
 
(19,454
)
 
(12,186
)
 
(38,646
)
Benefit from income taxes
(56
)
 
(343
)
 
(14
)
 
(596
)
Loss from continuing operations
(8,224
)
 
(19,111
)
 
(12,172
)
 
(38,050
)
Income (loss) from discontinued operations, net of tax
253

 
(529
)
 
(937
)
 
(1,978
)
Net loss
$
(7,971
)
 
$
(19,640
)
 
$
(13,109
)
 
$
(40,028
)
Weighted average number of shares:
 
 
 
 
 
 
 
Basic and Diluted
25,320

 
24,654

 
25,163

 
24,472

Basic and Diluted (loss) income per share:
 
 
 
 
 
 
 
Continuing Operations
$
(0.32
)
 
$
(0.78
)
 
$
(0.48
)
 
$
(1.55
)
Discontinued Operations
$
0.01

 
$
(0.02
)
 
$
(0.04
)
 
$
(0.09
)
Total
$
(0.31
)
 
$
(0.80
)
 
$
(0.52
)
 
$
(1.64
)

See Notes to Unaudited Condensed Consolidated Financial Statements.


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BEAZER HOMES USA, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
 
 
Six Months Ended
 
March 31,
 
2014
 
2013
Cash flows from operating activities:
 
 
 
Net loss
$
(13,109
)
 
$
(40,028
)
Adjustments to reconcile net loss to net cash used in operating activities:
 
 
 
Depreciation and amortization
5,738

 
5,808

Stock-based compensation expense
1,266

 
1,638

Inventory impairments and option contract abandonments
911

 
2,246

Deferred and other income tax benefit
(79
)
 
(577
)
Changes in allowance for doubtful accounts
(373
)
 
(184
)
Equity in income of unconsolidated entities
(302
)
 
(104
)
Cash distributions of income from unconsolidated entities
512

 
336

Loss on extinguishment of debt
153

 
1,517

Changes in operating assets and liabilities:
 
 
 
Increase in accounts receivable
(6,196
)
 
(287
)
Decrease in income tax receivable
—

 
3,859

Increase in inventory
(156,876
)
 
(40,407
)
Decrease in other assets
3,488

 
2,823

Decrease in trade accounts payable
(11,909
)
 
(7,033
)
Decrease in other liabilities
(11,037
)
 
(6,050
)
Other changes
(239
)
 
107

Net cash used in operating activities
(188,052
)
 
(76,336
)
Cash flows from investing activities:
 
 
 
Capital expenditures
(6,641
)
 
(3,869
)
Investments in unconsolidated entities
(3,193
)
 
(400
)
Return of capital from unconsolidated entities
—

 
432

Increases in restricted cash
(2,588
)
 
(1,044
)
Decreases in restricted cash
801

 
7,562

Net cash (used in) provided by investing activities
(11,621
)
 
2,681

Cash flows from financing activities:
 
 
 
Repayment of debt
(4,747
)
 
(183,319
)
Proceeds from issuance of new debt
—

 
200,000

Debt issuance costs
(26
)
 
(4,635
)
Settlement of unconsolidated entity debt obligation
—

 
(500
)
Payments for other financing activities
(393
)
 
(26
)
Net cash (used in) provided by financing activities
(5,166
)
 
11,520

Decrease in cash and cash equivalents
(204,839
)
 
(62,135
)
Cash and cash equivalents at beginning of period
504,459

 
487,795

Cash and cash equivalents at end of period
$
299,620

 
$
425,660


See Notes to Unaudited Condensed Consolidated Financial Statements.

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BEAZER HOMES USA, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(1) Summary of Significant Accounting Policies
The accompanying unaudited condensed consolidated financial statements of Beazer Homes USA, Inc. (Beazer Homes, Beazer or the Company) have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) for interim financial information and in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X. Such financial statements do not include all of the information and disclosures required by GAAP for complete financial statements. In our opinion, all adjustments (consisting primarily of normal recurring accruals) necessary for a fair presentation have been included in the accompanying financial statements. The results of our consolidated operations presented herein for the three and six months ended March 31, 2014 are not necessarily indicative of the results to be expected for the full year due to seasonal variations in operations and other items. For further information and a discussion of our significant accounting policies other than as discussed below, refer to our audited consolidated financial statements appearing in Beazer Homes’ Annual Report on Form 10-K for the fiscal year ended September 30, 2013 (the 2013 Annual Report).
Over the past few years, we have discontinued homebuilding operations in certain of our markets. Results from our title services business and our exit markets are reported as discontinued operations in the accompanying unaudited condensed consolidated statements of operations for all periods presented (see Note 14 for further discussion of our Discontinued Operations). Our net loss is equivalent to our comprehensive loss so we have not presented a separate statement of comprehensive loss. We evaluated events that occurred after the balance sheet date but before the financial statements were issued or were available to be issued for accounting treatment and disclosure.
Inventory Valuation. We assess our inventory assets no less than quarterly for recoverability in accordance with the policies as described in Notes 1 and 4 to the consolidated financial statements in our 2013 Annual Report. Our homebuilding inventories that are accounted for as held for development include land and home construction assets grouped together as communities. Homebuilding inventories held for development are stated at cost (including direct construction costs, capitalized indirect costs, capitalized interest and real estate taxes) unless facts and circumstances indicate that the carrying value of the assets may not be recoverable. For those communities for which construction and development activities are expected to occur in the future or have been idled (land held for future development), all applicable interest and real estate taxes are expensed as incurred and the inventory is stated at cost unless facts and circumstances indicate that the carrying value of the assets may not be recoverable. We record assets held for sale at the lower of the carrying value or fair value less costs to sell.
Other Liabilities. Other liabilities include the following:
(In thousands)
March 31, 2014
 
September 30, 2013
Income tax liabilities
$
20,358

 
$
20,170

Accrued warranty expenses
12,561

 
11,663

Accrued interest
33,907

 
33,372

Accrued and deferred compensation
14,102

 
25,579

Customer deposits
13,847

 
11,408

Other
38,900

 
43,431

Total
$
133,675

 
$
145,623

















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(2) Supplemental Cash Flow Information
 
Six Months Ended
 
March 31,
(In thousands)
2014
 
2013
Supplemental disclosure of non-cash activity:
 
 
 
Decrease in obligations related to land not owned under option agreements
$
(1,486
)
 
$
(1,501
)
Decrease in debt related to conversion of Mandatory Convertible Subordinated Notes and Tangible Equity Units for common stock
(2,376
)
 
(9,402
)
Non-cash land acquisitions
16,833

 
—

Supplemental disclosure of cash activity:

 

Interest payments
60,396

 
48,944

Income tax payments
91

 
121

Tax refunds received
—

 
3,925



(3) Investments in Unconsolidated Entities
As of March 31, 2014, we participated in certain land development joint ventures and other unconsolidated entities in which Beazer Homes had less than a controlling interest. The following table presents our investment in our unconsolidated entities, the total equity and outstanding borrowings of these unconsolidated entities, and our guarantees of these borrowings, as of March 31, 2014 and September 30, 2013:
(In thousands)
March 31, 2014
 
September 30, 2013
Beazer’s investment in unconsolidated entities
$
36,547

 
$
44,997

Total equity of unconsolidated entities
387,572

 
385,040

Total outstanding borrowings of unconsolidated entities
111,624

 
85,938


For the three and six months ended March 31, 2014 and 2013, our income from unconsolidated entity activities and the overall equity in income of unconsolidated entities is as follows:
 
Three Months Ended
 
Six Months Ended
 
March 31,
 
March 31,
(In thousands)
2014
 
2013
 
2014
 
2013
Continuing operations:
 
 
 
 
 
 
 
(Loss) income from unconsolidated entity activity
$
(17
)
 
$
68

 
$
302

 
$
104

Equity in (loss) income of unconsolidated entities - continuing operations
$
(17
)
 
$
68

 
$
302

 
$
104


South Edge/Inspirada
During the quarter ended March 31, 2014, we received land in exchange for our investment in Inspirada and paid $1.0 million to the joint venture related to infrastructure and development costs. We continue to have an obligation for our portion of future infrastructure and other development costs which are estimated at approximately $5.7 million.
Pre-Owned Rental Homes
Effective May 3, 2012, we contributed $0.3 million in cash and our Pre-Owned Homes business at cost, including 190 homes in Arizona and Nevada, of which 187 were leased, for an initial 23.5% equity method investment in an unconsolidated real estate investment trust (the REIT). The Company also received grants of restricted units in the REIT, of which a portion vested during the year ended September 30, 2012. As of March 31, 2014, we held a 15.0% investment in the REIT.

Periodically we provide services including treasury operations, cash management, accounting and financial reporting support, legal services, human resources support, environmental and safety services, and tax support to the REIT on an as needed basis.

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Guarantees
Historically, Beazer and our land development joint venture partners provide varying levels of guarantees of debt and other debt-related obligations for these unconsolidated entities. As of March 31, 2014 and September 30, 2013, we had no outstanding guarantees or other debt-related obligations related to our unconsolidated entities.
During the fiscal year ended September 30, 2013, we entered into a settlement agreement related to one repayment guarantee, paid $0.5 million to settle our liability and recognized the remaining $0.2 million as other income.
We and our joint venture partners generally provide unsecured environmental indemnities to land development joint venture project lenders. In each case, we have performed due diligence on potential environmental risks. These indemnities obligate us to reimburse the project lenders for claims related to environmental matters for which they are held responsible. During the three and six months ended March 31, 2014 and 2013, we were not required to make any payments related to environmental indemnities.
In assessing the need to record a liability for the contingent aspect of these guarantees, we consider our historical experience in being required to perform under the guarantees, the fair value of the collateral underlying these guarantees and the financial condition of the applicable unconsolidated entities. In addition, we monitor the fair value of the collateral of these unconsolidated entities to ensure that the related borrowings do not exceed the specified percentage of the value of the property securing the borrowings. We have not recorded a liability for the contingent aspects of any guarantees that we determined were reasonably possible but not probable.

(4) Inventory
(In thousands)
March 31, 2014
 
September 30, 2013
Homes under construction
$
319,758

 
$
262,476

Development projects in progress
681,665

 
578,453

Land held for future development
306,119

 
341,986

Land held for sale
57,537

 
31,331

Capitalized interest
72,256

 
52,562

Model homes
43,025

 
37,886

Total owned inventory
$
1,480,360

 
$
1,304,694


Homes under construction includes homes substantially finished and ready for delivery and homes in various stages of construction. We had 116 ($31.0 million) and 113 ($30.7 million) substantially completed homes that were not subject to a sales contract (spec homes at March 31, 2014 and September 30, 2013, respectively. Development projects in progress consist principally of land and land improvement costs. Certain of the fully developed lots in this category are reserved by a deposit or sales contract. Land held for future development consists of communities for which construction and development activities are expected to occur in the future or have been idled and are stated at cost unless facts and circumstances indicate that the carrying value of the assets may not be recoverable. All applicable interest and real estate taxes on land held for future development are expensed as incurred. During the current quarter, we began development on a large project in California that was previously included in land held for future development. Land held for sale in Unallocated and Other as of March 31, 2014 includes land held for sale in the markets we have decided to exit including Charlotte, North Carolina and Detroit, Michigan. Total owned inventory, by reportable segment, is set forth in the table below:

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(In thousands)
Projects in
Progress
 
Held for Future
Development
 
Land Held
for Sale
 
Total Owned
Inventory
March 31, 2014
 
 
 
 
 
 
 
West Segment
$
411,823

 
$
262,399

 
$
14,470

 
$
688,692

East Segment
359,553

 
25,496

 
30,453

 
415,502

Southeast Segment
236,496

 
18,224

 
10,319

 
265,039

Unallocated and Other
108,832

 
—

 
2,295

 
111,127

Total
$
1,116,704

 
$
306,119

 
$
57,537

 
$
1,480,360

September 30, 2013
 
 
 
 
 
 
 
West Segment
$
339,319

 
$
292,875

 
$
16,572

 
$
648,766

East Segment
331,894

 
25,491

 
3,833

 
361,218

Southeast Segment
178,624

 
23,620

 
8,208

 
210,452

Unallocated and Other
81,540

 
—

 
2,718

 
84,258

Total
$
931,377

 
$
341,986

 
$
31,331

 
$
1,304,694


Inventory Impairments. When conducting our community level review for the recoverability of our homebuilding inventories held for development, we establish a quarterly “watch list” of communities with more than 10 homes remaining to sell that carry profit margins in backlog and in our forecast that are below a minimum threshold of profitability. Assets on the quarterly watch list are subject to substantial additional financial and operational analyses and review that consider the competitive environment and other factors contributing to profit margins below our threshold. For communities where the current competitive and market dynamics indicate that these factors may be other than temporary, which may call into question the recoverability of our investment, a formal impairment analysis is performed. The formal impairment analysis consists of both qualitative competitive market analyses and a quantitative analysis reflecting market and asset specific information.

As of March 31, 2014, four communities were on our quarterly watch list. As of March 31, 2013, one community was on our quarterly watch list. However, after additional financial and operational review, we determined that the factors contributing to profit margins below our threshold for a number of these communities were temporary in nature and therefore those communities were not subjected to further analysis.
($ in thousands)
 
 
Undiscounted Cash Flow Analyses Prepared
Segment
# of
Communities
on Watch List
 
# of
Communities
 
Pre-analysis
Book Value
(BV)
 
Aggregate
Undiscounted
Cash Flow as a
% of BV
Quarter Ended March 31, 2014
 
 
 
 
 
 
 
West
1

 
—

 
$
—

 
n/a

East
1

 
—

 
—

 
n/a

Southeast
2

 
1

 
7,478

 
107.9
%
Unallocated
—

 
—

 
—

 
n/a

Total
4

 
1

 
$
7,478

 
107.9
%
Quarter Ended March 31, 2013
 
 
 
 
 
 
 
West
—

 
—

 
$
—

 
n/a

East
1

 
—

 
—

 
n/a

Southeast
—

 
—

 
—

 
n/a

Unallocated
—

 
—

 
—

 
n/a

Total
1

 
—

 
$
—

 
n/a


There were no impairments recorded during the three and six months ended March 31, 2014 or 2013 related to our discounted cash flow analyses. The impairments on development projects and homes in process below for the six months ended March 31, 2013 related to homes sold and in backlog with net contribution margins below a minimum threshold of profitability in communities that were not otherwise impaired through our discounted cash flow analysis.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Our assumptions about future home sales prices and absorption rates require significant judgment because the residential home building industry is cyclical and is highly sensitive to changes in economic conditions. Market deterioration that exceeds our

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estimates may lead us to incur impairment charges on previously impaired homebuilding assets in addition to homebuilding assets not currently impaired but for which indicators of impairment may arise if markets deteriorate.

The impairments on land held for sale generally represent further write downs of these properties to net realizable value, less estimated costs to sell and are based on current market conditions and our review of recent comparable transactions at the applicable period end. Our assumptions about land sales prices require significant judgment because the current market is highly sensitive to changes in economic conditions. We calculated the estimated fair values of land held for sale based on current market conditions and assumptions made by management, which may differ materially from actual results and may result in additional impairments if market conditions deteriorate.

Also, we have determined the proper course of action with respect to a number of communities within each homebuilding segment was to not exercise certain options and to write-off the deposits securing the option takedowns and pre-acquisition costs, as applicable. In determining whether to abandon a lot option contract, we evaluate the lot option primarily based upon the expected cash flows from the property that is the subject of the option. If we intend to abandon or walk-away from a lot option contract, we record a charge to earnings in the period such decision is made for the deposit amount and any related capitalized costs associated with the lot option contract. Abandonment charges relate to our decision to abandon or not exercise certain option contracts that are not projected to produce adequate results or no longer fit in our long-term strategic plan.
The following table sets forth, by reportable homebuilding segment, the inventory impairments and lot option abandonment charges recorded for the three and six months ended March 31, 2014 and 2013, as applicable:
 
Three Months Ended March 31,
 
Six Months Ended March 31,
(In thousands)
2014
 
2013
 
2014
 
2013
Development projects and homes in process (Held for Development)
 
 
 
 
 
 
West
$
—

 
$
—

 
$
—

 
$
46

East
—

 
—

 
—

 
13

Southeast
—

 
—

 
—

 
—

Unallocated
—

 
—

 
—

 
—

Subtotal
$
—

 
$
—

 
$
—

 
$
59

Land Held for Sale
 
 
 
 
 
 
 
West
$
—

 
$
—

 
$
—

 
$
—

East
—

 
—

 
31

 
—

Southeast
28

 
1,778

 
28

 
1,778

Subtotal
$
28

 
$
1,778

 
$
59

 
$
1,778

Lot Option Abandonments
 
 
 
 
 
 
 
West
$
—

 
$
30

 
$
—

 
$
104

East
—

 
(2
)
 
—

 
20

Southeast
852

 
219

 
852

 
268

Unallocated
—

 
—

 
—

 
—

Subtotal
$
852

 
$
247

 
$
852

 
$
392

Continuing Operations
$
880

 
$
2,025

 
$
911

 
$
2,229

Discontinued Operations
 
 
 
 
 
 
 
Held for Development
$
—

 
$
—

 
$
—

 
$
—

Land Held for Sale
—

 
—

 
—

 
17

Lot Option Abandonments
—

 
—

 
—

 
—

Subtotal
$
—

 
$
—

 
$
—

 
$
17

Total Company
$
880

 
$
2,025

 
$
911

 
$
2,246


Lot Option Agreements and Variable Interest Entities (VIEs). As previously discussed, we also have access to land inventory through lot option contracts, which generally enable us to defer acquiring portions of properties owned by third parties and unconsolidated entities until we have determined whether to exercise our lot option. A majority of our lot option contracts require a non-refundable cash deposit or irrevocable letter of credit based on a percentage of the purchase price of the land for the right to acquire lots during a specified period of time at a certain price. Under lot option contracts, purchase of the properties is contingent upon satisfaction of certain requirements by us and the sellers. Our liability under option contracts is generally limited to forfeiture

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of the non-refundable deposits, letters of credit and other non-refundable amounts incurred. We expect to exercise, subject to market conditions and seller satisfaction of contract terms, most of our remaining 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.
For the VIEs in which we are the primary beneficiary, we have consolidated the VIE and reflected such assets and liabilities as land not owned under option agreements in our balance sheets. For VIEs we were required to consolidate, we recorded the remaining contractual purchase price under the applicable lot option agreement to land not owned under option agreements with an offsetting increase to obligations related to land not owned under option agreements. Also, to reflect the purchase price of this inventory consolidated, we present the related option deposits as land not owned under option agreement in the accompanying unaudited condensed consolidated balance sheets. Consolidation of these VIEs has no impact on the Company’s results of operations or cash flows.
The following provides a summary of our interests in lot option agreements as of March 31, 2014 and September 30, 2013:
(In thousands)
Deposits &
Non-refundable
Preacquisition
Costs Incurred
 
Remaining
Obligation
 
Land Not Owned
Under Option
Agreements
As of March 31, 2014
 
 
 
 
 
Consolidated VIEs
$
4,604

 
$
3,147

 
$
7,751

Unconsolidated lot option agreements
42,463

 
375,348

 
—

Total lot option agreements
$
47,067

 
$
378,495

 
$
7,751

As of September 30, 2013
 
 
 
 
 
Consolidated VIEs
$
4,491

 
$
4,633

 
$
9,124

Unconsolidated lot option agreements
32,822

 
284,005

 
—

Total lot option agreements
$
37,313

 
$
288,638

 
$
9,124


(5) Interest
Our ability to capitalize all interest incurred during the three and six months ended March 31, 2014 and 2013 has been limited by our inventory eligible for capitalization. The following table sets forth certain information regarding interest:
 
Three Months Ended March 31,
 
Six Months Ended March 31,
(In thousands)
2014
 
2013
 
2014
 
2013
Capitalized interest in inventory, beginning of period
$
61,836

 
$
41,922

 
$
52,562

 
$
38,190

Interest incurred
32,458

 
29,177

 
64,899

 
57,595

Interest expense not qualified for capitalization and included as other expense
(14,659
)
 
(16,246
)
 
(30,691
)
 
(32,457
)
Capitalized interest amortized to house construction and land sales expenses
(7,379
)
 
(9,352
)
 
(14,514
)
 
(17,827
)
Capitalized interest in inventory, end of period
$
72,256

 
$
45,501

 
$
72,256

 
$
45,501


(6) Earnings Per Share

In computing diluted loss per share for the three and six months ended March 31, 2014 and 2013, all common stock equivalents were excluded from the computation of diluted loss per share as a result of their anti-dilutive effect. For the quarter ended March 31, 2014, these excluded common stock equivalents included options/stock-settled appreciation rights (SSARs) to purchase 0.7 million shares of common stock, 0.3 million shares of nonvested restricted stock and 5.2 million shares issuable upon the conversion of our Tangible Equity Unit (TEU) prepaid stock purchase contracts (PSPs).

In March 2014, the Company entered into an agreement to issue 1,368,108 shares, or 1.5372 shares per TEU, of common stock, par value $0.001, in exchange for 890,000 TEUs. Each outstanding TEU consisted of a prepaid stock purchase contract and a 7.5% senior amortizing note which was due July 15, 2015. At maturity, holders of the prepaid stock purchase contracts would have automatically received a minimum of 1.40746 shares per contract, up to a maximum of 1.72414 shares per contract, depending on the Company's common stock at such time. In lieu of paying the present value of the remaining principal and interest payments

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due to the holders in cash, the TEU exchange provided 115,433 shares over the 1,252,675 shares that would have been received at maturity, assuming the Company’s stock price remains above $17.75 per share.

As of March 31, 2014, there were approximately 3.7 million TEUs outstanding (including $9.9 million of amortizing notes). The PSPs related to the TEUs are scheduled to be settled in Beazer Homes' common stock on July 15, 2015. If on that date, our common stock price is (1) at or below $14.50 per share, the PSPs will convert to 1.72414 shares per unit, (2) at or above $17.75 per share, the PSPs will convert to 1.40746 shares per unit or (3) between $14.50 and $17.75 per share, the PSPs will convert to a number of shares of our common stock equal to $25.00 divided by the applicable market value of our common stock. If the remaining TEU PSPs were converted at the settlement factor under their agreement based on our current stock price, we would be required to issue approximately 5.2 million shares of common stock to the instrument holders upon conversion.

(7) Borrowings

At March 31, 2014 and September 30, 2013 we had the following long-term debt, net of discounts:
(In thousands)
Maturity Date
 
March 31, 2014
 
September 30, 2013
8 1/8% Senior Notes
June 2016
 
172,879

 
172,879

6 5/8% Senior Secured Notes
April 2018
 
300,000

 
300,000

9 1/8% Senior Notes
June 2018
 
298,000

 
298,000

9 1/8% Senior Notes
May 2019
 
235,000

 
235,000

7 1/2% Senior Notes
September 2021
 
200,000

 
200,000

7 1/4% Senior Notes
February 2023
 
200,000

 
200,000

TEU Senior Amortizing Notes
August 2015
 
9,908

 
16,141

Unamortized debt discounts
 
 
(4,780
)
 
(5,160
)
Total Senior Notes, net
 
 
1,411,007

 
1,416,860

Junior subordinated notes
July 2036
 
54,703

 
53,670

Cash Secured Loan
November 2017
 
22,368

 
22,368

Other secured notes payable
Various Dates
 
23,795

 
19,285

Total debt, net
 
 
$
1,511,873

 
$
1,512,183


Secured Revolving Credit Facility — In September 2012, we amended and expanded our Secured Revolving Credit Facility from $22 million to $150 million. The three-year amended Secured Revolving Credit Facility provides for future working capital and letter of credit needs collateralized by substantially all of the Company's personal property (excluding cash and cash equivalents) and real property. This facility is subject to various financial, collateral-based and negative covenants with which we are required to comply. As of March 31, 2014, we were in compliance with all such covenants and had $150 million of available borrowings under the Secured Revolving Credit Facility. We have elected to cash collateralize all letters of credit; however, as of March 31, 2014, we have also pledged approximately $1 billion of inventory assets to our Secured Revolving Credit Facility to collateralize potential future borrowings or letters of credit. The Secured Revolving Credit Facility contains certain covenants, including negative covenants and financial maintenance covenants, with which we are required to comply. Subject to our option to cash collateralize our obligations under the Secured Revolving Credit Facility upon certain conditions, our obligations under the Secured Revolving Credit Facility are secured by liens on substantially all of our personal property and a significant portion of our owned real properties. There were no outstanding borrowings under the Secured Revolving Credit Facility as of March 31, 2014 or September 30, 2013.
We have entered into stand-alone, cash-secured letter of credit agreements with banks to maintain our pre-existing letters of credit and to provide for the issuance of new letters of credit. The letter of credit arrangements combined with our Secured Revolving Credit Facility provide a total letter of credit capacity of approximately $220.0 million. As of March 31, 2014 and September 30, 2013, we have letters of credit outstanding of $26.5 million and $25.2 million, respectively, which are secured by cash collateral in restricted accounts. The Company may enter into additional arrangements to provide additional letter of credit capacity.
Senior Notes — The majority of our Senior Notes are unsecured or secured obligations ranking pari passu with all other existing and future senior indebtedness. Substantially all of our significant subsidiaries are full and unconditional guarantors of the Senior Notes and are jointly and severally liable for obligations under the Senior Notes and the Secured Revolving Credit Facility. Each guarantor subsidiary is a 100% owned subsidiary of Beazer Homes.

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The Company's Senior Notes are subject to indentures containing certain restrictive covenants which, among other things, restrict our ability to pay dividends, repurchase our common stock, incur additional indebtedness and to make certain investments. Specifically, all of our Senior Notes contain covenants that restrict our ability to incur additional indebtedness unless it is refinancing indebtedness or non-recourse indebtedness. The incurrence of refinancing indebtedness and non-recourse indebtedness, as defined in the applicable indentures, are exempted from the covenant test. As of March 31, 2014, we were not able to incur additional indebtedness, except refinancing or non-recourse indebtedness. Compliance with our Senior Note covenants does not significantly impact our operations. We were in compliance with the covenants contained in all of our Senior Notes as of March 31, 2014.
Our Senior Notes due 2016 (the 2016 Notes) contain the most restrictive covenants, including the consolidated tangible net worth covenant, which states that should consolidated tangible net worth fall below $85 million for two consecutive quarters, the Company is required to make an offer to purchase 10% of the 2016 Notes at par. If triggered and fully subscribed, this could result in our having to purchase $27.5 million of the 2016 Notes, which may be reduced by certain 2016 Note repurchases (potentially at less than par) made in the open market after the triggering date. As of March 31, 2014 our consolidated tangible net worth was $206.8 million, well in excess of the minimum covenant requirement.
Subsequent to quarter-end, in April 2014, we issued and sold $325 million aggregate principal amount of 5.75% Senior Notes due June 2019 (the June 2019 Notes) at par (before underwriting and other issuance costs) through a private placement to qualified institutional buyers. Interest on the June 2019 Notes is payable semi-annually in cash in arrears, beginning on December 15, 2014. The June 2019 Notes will mature on June 15, 2019. Prior to maturity, we may, at our option redeem the June 2019 Notes at any time, in whole or in part, at specified redemption prices, which also include a customary make-whole premium provision through June 15, 2017.
The proceeds from the issuance of the June 2019 Notes were used to redeem all of our outstanding Senior Notes due June 2018 (the 2018 Notes), including the applicable $17.2 million call price and make-whole premiums provided for by the 2018 Notes. We anticipate recording a loss on debt extinguishment of the 2018 Notes, of approximately $19.8 million in our fiscal third quarter ending June 30, 2014 related to the premiums paid and the write-off of unamortized debt issuance costs.
In September 2013, we issued and sold $200 million aggregate principal amount of 7.500% Senior Notes due 2021 (the 2021 Notes) at a price of 98.541% (before underwriting and other issuance costs) through a private placement to qualified institutional buyers. Interest on the 2021 Notes is payable semi-annually in cash in arrears, beginning on March 15, 2014. The 2021 Notes will mature on September 15, 2021. Prior to maturity, we may, at our option, redeem the 2021 Notes at any time, in whole or in part, at specified redemption prices, which also include a customary make-whole premium provision through September 15, 2016. In January 2014, we exchanged 100% of the 2021 Notes for notes that are freely transferable and registered under the Securities Act of 1933.
In February 2013, we issued and sold $200 million aggregate principal amount of 7.25% Senior Notes due 2023 (the 2023 Notes) at par (before underwriting and other issuance costs) through a private placement to qualified institutional buyers. Interest on the 2023 Notes is payable semi-annually in cash in arrears, beginning August 1, 2013. The 2023 Notes will mature on February 1, 2023. Prior to maturity, we may, at our option, redeem the 2023 Notes at any time, in whole or in part, at specified redemption prices, which also include a customary make-whole premium provision through August 1, 2018. In August 2013, we exchanged 100% of the 2023 Notes for notes that are freely transferable and registered under the Securities Act of 1933.
The 2021 and 2023 Notes rank equally in right of payment with all of our existing and future senior unsecured obligations, senior to all of the Company's existing and future subordinated indebtedness and effectively subordinated to the Company's existing and future secured indebtedness, including indebtedness under our revolving credit facility and our 6.625% Senior Secured Notes due 2018, to the extent of the value of the assets securing such indebtedness. The 2021 and 2023 Notes and related guarantees are structurally subordinated to all indebtedness and other liabilities of all of the Company's subsidiaries that do not guarantee the 2021 or 2023 Notes. The 2021 and 2023 Notes are fully and unconditionally guaranteed jointly and severally on a senior basis by the Company's wholly-owned subsidiaries party to the Indenture.
During the fiscal year ended September 30, 2013, we used a portion of the net cash proceeds from the 2023 Notes offering to redeem all of our outstanding 6.875% Senior Notes due 2015 (the 2015 Notes). The 2015 Notes were redeemed at 101.146% of the principal amount, plus accrued and unpaid interest. During fiscal 2013, we also repurchased $2 million of our outstanding 9.125% Senior Notes due 2018 in open market transactions. These transactions resulted in a loss on debt extinguishment of $3.6 million, net of unamortized discounts and debt issuance costs recognized in the quarter ended March 31, 2013. All Senior Notes redeemed/repurchased by the Company were canceled.
Senior Notes: Tangible Equity Units — In July 2012, we issued 4.6 million 7.5% TEUs (the 2012 TEUs), which were comprised of prepaid stock purchase contracts (PSPs) and senior amortizing notes. As the two components of the TEUs are legally separate and detachable, we have accounted for the two components as separate items for financial reporting purposes and valued them

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based on their relative fair value at the date of issuance. The amortizing notes are unsecured senior obligations and rank equally with all of our other unsecured indebtedness. Outstanding notes pay quarterly installments of principal and interest through maturity. The PSPs were originally accounted for as equity (additional paid in capital) at the initial fair value of these contracts based on the relative fair value method. During the quarter ended March 31, 2014, we exchanged 890,000 TEUs, including approximately $2.4 million of amortizing notes, for Beazer Homes' common stock. The PSPs related to the remaining 2012 TEUs are scheduled to be settled in Beazer Homes' common stock on July 15, 2015. See Note 6 for more information related to this exchange and the future PSP settlement.
Junior Subordinated Notes — $103.1 million of unsecured junior subordinated notes mature on July 30, 2036, are redeemable at par and pay a fixed rate of 7.987% for the first ten years ending July 30, 2016. Thereafter, the securities have a variable interest rate as defined in the junior subordinated notes agreement. The obligations relating to these notes and the related securities are subordinated to our Secured Revolving Credit Facility and Senior Notes. In January 2010, we modified the terms of $75 million of these notes and recorded these notes at their estimated fair value. Over the remaining life of the notes, we will increase their carrying value until this carrying value equals the face value of the notes. As of March 31, 2014, the unamortized accretion was $46.1 million and will be amortized over the remaining life of the notes.
As of March 31, 2014, we were in compliance with all covenants under our Junior Notes.
Cash Secured Loans — We have two separate loan facilities, totaling $22.4 million outstanding as of March 31, 2014. Borrowing under the cash secured loan facilities will replenish cash used to repay or repurchase the Company’s debt and would be considered “refinancing indebtedness” under certain of the Company’s existing indentures and debt covenants. However, because the loans are fully collateralized by cash equal to the loan amount, the loans do not provide liquidity to the Company.
The loans mature in November 2017, however, the lenders of these facilities may put the outstanding loan balances to the Company at the two or four year anniversaries of the loans. Borrowings under the facilities are fully secured by cash held by the lender or its affiliates. This secured cash is reflected as restricted cash on our unaudited condensed consolidated balance sheet as of March 31, 2014 and September 30, 2013. The cash secured loan has an interest rate equivalent to LIBOR plus 0.4% per annum which is paid every three months following the effective date of each borrowing. During the fiscal year ended September 30, 2013, we repaid $205 million of the outstanding cash secured term loans and recognized a $1 million loss on debt extinguishment in the quarter ended September 30, 2013, primarily related to the unamortized discounts and debt issuance costs related to these loans.
Other Secured Notes Payable — We periodically acquire land through the issuance of notes payable. As of March 31, 2014 and September 30, 2013, we had outstanding notes payable of $23.8 million and $19.3 million respectively, primarily related to land acquisitions. These notes payable have varying expiration dates between 2014 and 2019 and have a weighted average fixed rate of 4.03% at March 31, 2014. These notes are secured by the real estate to which they relate.
The agreements governing these secured notes payable contain various affirmative and negative covenants. There can be no assurance that we will be able to obtain any future waivers or amendments that may become necessary without significant additional cost or at all. In each instance, however, a covenant default can be cured by repayment of the indebtedness.

(8) Income Taxes
For the three and six months ended March 31, 2014 and 2013, our non-cash tax provision/benefit from continuing operations primarily related to a change in our prior year's recognized tax benefits.
As of March 31, 2014 and September 30, 2013, we had $2.7 million and $2.6 million of accrued interest and penalties related to our unrecognized tax benefits, respectively.
In the normal course of business, we are subject to audits by federal and state tax authorities. Our federal income tax returns for fiscal years 2007 through 2010 are under Internal Revenue Service (IRS) appeal. Our federal income tax returns for fiscal years 2011 through 2012 and certain state income tax returns for various fiscal years are under routine examination. The statute of limitations for our major tax jurisdictions remains open for examination for fiscal years 2007 and subsequent years. The final outcome of these appeals and examinations are not yet determinable and therefore the change in our unrecognized tax benefits that could occur within the next 12 months cannot be estimated at this time.

Based upon an evaluation of all available evidence, we established a valuation allowance for substantially all of our deferred tax assets during fiscal 2008. As of March 31, 2014, we continued our evaluation of whether the valuation allowance against our deferred tax assets was still required. We considered positive evidence including evidence of recovery in the housing markets where we operate, the prospects of continued profitability and growth, a strong backlog and sufficient balance sheet liquidity to sustain and grow operations. Although the Company’s performance and current positioning is bringing it closer to a conclusion that a valuation allowance is no longer needed, further evidence of sustained profitability is needed to reverse our valuation

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allowance against our deferred tax assets. Therefore, based upon all available positive and negative evidence, we concluded a valuation allowance is still needed for substantially all of our gross deferred tax assets at March 31, 2014. The Company's deferred tax asset valuation allowance was $491.9 million and $487.3 million as of March 31, 2014 and September 30, 2013, respectively. In future periods, we expect to reduce all or a portion of our valuation allowance, generating a non-cash tax benefit, if sufficient positive evidence is present indicating that more likely than not a portion or all of our deferred tax assets will be realized. Changes in existing tax laws could also affect actual tax results and the valuation of deferred tax assets over time.

Further, we experienced an “ownership change” as defined in Section 382 of the Internal Revenue Code (Section 382) as of January 12, 2010. Section 382 contains rules that limit the ability of a company that undergoes an “ownership change” to utilize its net operating loss carryforwards (NOLs) and certain built-in losses or deductions recognized during the five-year period after the ownership change to offset future taxable income. Therefore, our ability to utilize our pre-ownership change net operating loss carryforwards and recognize certain built-in losses or deductions is limited by Section 382 to an estimated maximum amount of approximately $11.4 million ($4 million tax-effected) annually. Certain deferred tax assets are not subject to any limitation imposed. Due to the Section 382 limitation and the maximum carryforward period of our NOLs, we will be unable to fully recognize certain deferred tax assets. As future economic conditions unfold, we will be able to confirm that certain deferred tax assets will not provide any future tax benefit. At such time, we will accordingly remove any deferred tax asset and corresponding valuation allowance.

Accordingly, a portion of our $551.5 million of total gross deferred tax assets related to accrued losses on our inventory may be unavailable due to the limitation imposed by Section 382. As of March 31, 2014, we estimate that between $52.5 million and $88.5 million may be unavailable due to our Section 382 limitation. As a result, upon the resumption of sustained profitability and reversal of our valuation allowance, between $408.8 million and $444.8 million of our net deferred tax assets may be available to us for the reduction of future cash taxes. The actual realization of our deferred tax assets is difficult to predict and will be dependent on future events.

Considering the limitation imposed by Section 382, the table below depicts the classifications of our deferred tax assets:
(In thousands)
March 31, 2014
Deferred tax assets:
 
Subject to annual limitation
$
98,232

Generally not subject to annual limitation
364,833

Certain components likely to be subject to annual limitation
88,455

Total deferred tax assets
551,520

Deferred tax liabilities
(54,257
)
Net deferred tax assets before valuation allowance
497,263

Valuation allowance
(491,856
)
Net deferred tax assets
$
5,407


(9) Contingencies
Beazer Homes and certain of its subsidiaries have been and continue to be named as defendants in various construction defect claims, complaints and other legal actions. The Company is subject to the possibility of loss contingencies arising in its business. In determining loss contingencies, we consider the likelihood of loss as well as the ability to reasonably estimate the amount of such loss or liability. An estimated loss is recorded when it is considered probable that a liability has been incurred and when the amount of loss can be reasonably estimated.
Warranty Reserves. We currently provide a limited warranty (ranging from one to two years) covering workmanship and materials per our defined performance quality standards. In addition, we provide a limited warranty (generally ranging from a minimum of five years up to the period covered by the applicable statute of repose) covering only certain defined construction defects. We also provide a defined structural element warranty with single-family homes and townhomes in certain states.
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. Therefore, many claims relating to workmanship and materials are the primary responsibility of the subcontractors.

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Warranty reserves are included in other liabilities and the provision for warranty accruals is included in home construction and land sales expenses in the unaudited condensed consolidated financial statements. We record reserves covering anticipated warranty expense for each home closed. Management reviews the adequacy of warranty reserves each reporting period based on historical experience and management’s estimate of the costs to remediate the claims and adjusts these provisions accordingly. Our review includes a quarterly analysis of the historical data and trends in warranty expense by operating segment. An analysis by operating segment allows us to consider market specific factors such as our warranty experience, the number of home closings, the prices of homes, product mix and other data in estimating our warranty reserves. In addition, our analysis also contemplates the existence of any non-recurring or community-specific warranty related matters that might not be contemplated in our historical data and trends.
As a result of our quarterly analyses, we adjust our estimated warranty liabilities, if required. While we believe our warranty reserves are adequate as of March 31, 2014, historical data and trends may not accurately predict actual warranty costs or future developments could lead to a significant change in the reserve. Our warranty reserves are as follows:
 
Three Months Ended
 
Six Months Ended
 
March 31,
 
March 31,
(In thousands)
2014
 
2013
 
2014
 
2013
Balance at beginning of period
$
11,911

 
$
14,342

 
$
11,663

 
$
15,477

Accruals for warranties issued
1,047

 
1,302

 
2,170

 
2,730

Changes in liability related to warranties existing in prior periods
1,480

 
(437
)
 
3,223

 
(1,739
)
Payments made
(1,877
)
 
(1,606
)
 
(4,495
)
 
(2,867
)
Balance at end of period
$
12,561

 
$
13,601

 
$
12,561

 
$
13,601


Litigation
As disclosed in prior SEC filings, we operated Beazer Mortgage Corporation (BMC) from 1998 through February 2008 to offer mortgage financing to buyers of our homes. BMC entered into various agreements with mortgage investors, pursuant to which BMC originated certain mortgage loans and ultimately sold these loans to investors. In general, underwriting decisions were not made by BMC but by the investors themselves or third-party service providers. From time to time we have received claims from institutions which have acquired certain of these mortgages demanding damages or indemnity arising from BMC's activities or that we repurchase such mortgages. We have been able to resolve these claims for amounts that are not material to our consolidated financial position or results of operation. We currently have an insignificant number of such claims outstanding for which we believe we have no liability. However, we cannot rule out the potential for additional mortgage loan repurchase or indemnity claims in the future from other investors, although, at this time, we do not believe that the exposure related to any such claims would be material to our consolidated financial position or results of operations. As of March 31, 2014, no liability has been recorded for any such additional claims as such exposure is not both probable and reasonably estimable.
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 business, financial condition and results of operations.
Other Matters
As disclosed in our 2009 Form 10-K, on July 1, 2009, the Company announced that it had resolved the criminal and civil investigations by the United States Attorney’s Office in the Western District of North Carolina (the U.S. Attorney) and other state and federal agencies concerning matters that were the subject of the independent investigation, initiated in April 2007 by the Audit Committee of the Board of Directors (the Investigation) and concluded in May 2008. Under the terms of a deferred prosecution agreement (DPA), the Company’s liability for each of the fiscal years after 2010 through a portion of fiscal 2014 (unless extended as previously described in our 2009 Form 10-K) will be equal to 4% of the Company’s adjusted EBITDA (as defined in the DPA). The total amount of such obligations will be dependent on several factors; however, the maximum liability under the DPA and other settlement agreements discussed above will not exceed $55.0 million, of which $20.2 million has been paid as of March 31, 2014 and an additional $1.8 million has been recorded as a liability at March 31, 2014. Positive adjusted EBITDA in future years will require us to incur additional expense in the future.

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In 2006, we received two Administrative Orders issued by the New Jersey Department of Environmental Protection. The Orders allege certain violations of wetlands disturbance permits and assess proposed fines of $630,000 and $678,000, respectively. Although we believe that we have significant defenses to the alleged violations, we reached a settlement with the Department, through an Administrative Consent Order (the “ACO”). Pursuant to the ACO, we agreed to pay a penalty of $125,000 and donate a 35-acre parcel of land to a local soil conservation district (or make an additional $250,000 payment if the parcel cannot be conveyed). We have paid the $125,000 penalty and are in the process of completing actions that will allow us to convey the 35-acre donation parcel.
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.
We have accrued $19.4 million and $19.9 million in other liabilities related to litigation and other matters, excluding warranty, as of March 31, 2014 and September 30, 2013, respectively.
We had outstanding letters of credit and performance bonds of approximately $26.5 million and $189.3 million, respectively, at March 31, 2014 related principally to our obligations to local governments to construct roads and other improvements in various developments. We have no outstanding letters of credit relating to our land option contracts as of March 31, 2014.

(10) Fair Value Measurements
As of March 31, 2014, we had no assets or liabilities in our unaudited condensed consolidated balance sheets that were required to be measured at fair value on a recurring basis. Certain of our assets are required to be recorded at fair value on a non-recurring basis when events and circumstances indicate that the carrying value may not be recovered. We use a fair value hierarchy that requires us to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value as follows: Level 1 – Quoted prices in active markets for identical assets or liabilities; Level 2 – Inputs other than quoted prices included in Level 1 that are observable either directly or indirectly through corroboration with market data; Level 3 – Unobservable inputs that reflect our own estimates about the assumptions market participants would use in pricing the asset or liability.
As previously disclosed, we review our long-lived assets, including inventory, for recoverability when factors that indicate an impairment may exist, but no less than quarterly. Fair value is based on estimated cash flows discounted for market risks associated with the long-lived assets. The fair values of our investments in unconsolidated entities are determined primarily using a discounted cash flow model to value the underlying net assets of the respective entities. See Notes 1, 3 and 4 for additional information related to the fair value accounting for the assets listed above. Determining which hierarchical level an asset or liability falls within requires significant judgment. We evaluate our hierarchy disclosures each quarter.
The following table presents our assets measured at fair value on a non-recurring basis for each hierarchy level and represents only those assets whose carrying values were adjusted to fair value during the six months ended March 31, 2014 and 2013:
(In thousands)
Level 1
 
Level 2
 
Level 3
 
Total
Six Months Ended March 31, 2014
 
 
 
 
 
 
 
Land held for sale
—

 
—

 
$
4,766

 
$
4,766

Six Months Ended March 31, 2013
 
 
 
 
 
 
 
Land held for sale
—

 
—

 
$
2,013

 
$
2,013

The fair value of our cash and cash equivalents, restricted cash, accounts receivable, trade accounts payable, other liabilities, cash secured loan and other secured notes payable approximate their carrying amounts due to the short maturity of these assets and liabilities.
Obligations related to land not owned under option agreements approximate fair value. The carrying values and estimated fair values of other financial assets and liabilities were as follows:
(In thousands)
As of March 31, 2014
 
As of September 30, 2013
 
Carrying
Amount
 
Fair Value
 
Carrying
Amount
 
Fair Value
Senior Notes
$
1,411,007

 
$
1,516,051

 
$
1,416,860

 
$
1,469,904

Junior Subordinated Notes
54,703

 
54,703

 
53,670

 
53,670

 
$
1,465,710

 
$
1,570,754

 
$
1,470,530

 
$
1,523,574


The estimated fair value shown above for our publicly-held Senior Notes has been determined using quoted market rates (Level 2). Since there is no trading market for our junior subordinated notes, the fair value of these notes is estimated by discounting scheduled cash flows through maturity (Level 3). The discount rate is estimated using market rates currently being offered on loans with similar terms and credit quality. Judgment is required in interpreting market data to develop these estimates of fair

18
Table of Contents

value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts that we could realize in a current market exchange.

(11) Stock-based Compensation
For the three months ended March 31, 2014, our total stock-based compensation, included in general and administrative expenses (G&A), was approximately $0.7 million ($0.5 million net of tax). The fair value of each option/stock-based stock appreciation right (SSAR) grant is estimated on the date of grant using the Black-Scholes option-pricing model. The fair value of each performance-based, nonvested stock grant is estimated on the date of grant using the Monte Carlo valuation method. The cash-settled component of any awards granted to employees are accounted for as a liability award and the liability is adjusted to fair value each reporting period until vested. Non-performance based, nonvested stock is valued based on the market price of the common stock on the date of the grant.
During the six months ended March 31, 2014 and 2013, employees surrendered 21,772 and 1,306 shares, respectively, to us in payment of minimum tax obligations upon the vesting of stock awards under our stock incentive plans. We valued the stock at the market price on the date of surrender, for an aggregate value of approximately $414,000 and $19,000 for the six months ended March 31, 2014 and 2013, respectively.

Stock Options: We used the following weighted-average assumptions for our options granted during the six months ended March 31, 2014:
Expected life of options
5.1 years

Expected volatility
45.99
%
Expected discrete dividends
—

Weighted average risk-free interest rate
1.42
%
Weighted average fair value
$
7.97


We considered the historic returns of our stock and the implied volatility of our publicly-traded options in determining expected volatility. We assumed no dividends would be paid since our Board of Directors has suspended payment of dividends indefinitely and payment of dividends is restricted under our Senior Note covenants. The risk-free interest rate is based on the term structure of interest rates at the time of the option grant and we have relied upon a combination of the observed exercise behavior of our prior grants with similar characteristics, the vesting schedule of the current grants, and an index of peer companies with similar grant characteristics to determine the expected life of the options.
The intrinsic value of a stock option/SSAR is the amount by which the market value of the underlying stock exceeds the exercise price of the option/SSAR. At March 31, 2014, our SSAR/stock options outstanding had an intrinsic value of $2.2 million. The intrinsic value of SSARs/stock options vested and expected to vest in the future was $2.2 million. The SSARS/stock options vested and expected to vest in the future had a weighted average expected life of 2.8 years. The aggregate intrinsic value of exercisable SSARs/stock options as of March 31, 2014 was $1.0 million.
The following table summarizes stock options and SSARs outstanding as of March 31, 2014, as well as activity during the three and six months then ended:
 
Three Months Ended
 
Six Months Ended
 
March 31, 2014
 
March 31, 2014
 
Shares
 
Weighted-
Average
Exercise
Price
 
Shares
 
Weighted-
Average
Exercise
Price
Outstanding at beginning of period
721,127

 
$
29.92

 
560,784

 
$
33.01

Granted
—

 
—

 
161,010

 
19.11

Exercised
(1,182
)
 
16.64

 
(1,288
)
 
16.16

Expired
(2,870
)
 
176.31

 
(2,870
)
 
176.31

Forfeited
(5,206
)
 
22.60

 
(5,767
)
 
22.23

Outstanding at end of period
711,869

 
$
29.41

 
711,869

 
$
29.41

Exercisable at end of period
408,929

 
$
39.19

 
408,929

 
$
39.19

Vested or expected to vest in the future
706,895

 
$
29.49

 
706,895

 
$
29.49


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Table of Contents


Nonvested Stock Awards: Compensation cost arising from nonvested stock awards granted to employees is recognized as an expense using the straight-line method over the vesting period. As of March 31, 2014 and September 30, 2013, there was $2.2 million and $1.0 million, respectively, of total unrecognized compensation cost related to nonvested stock awards included in paid-in capital. The cost remaining at March 31, 2014 is expected to be recognized over a weighted average period of 1.7 years.
During the six months ended March 31, 2014, we issued 28,690 shares of performance-based restricted stock (Performance Shares) to our executive officers and certain corporate employees. Each Performance Share represents a contingent right to receive one share of the Company’s common stock if vesting is satisfied at the end of the three-year performance period. The number of shares that will vest at the end of the three-year performance period will depend upon the level to which the following two performance criteria are achieved (1) Beazer’s total shareholder return (TSR) relative to a group of peer companies and (2) the compound annual growth rate (CAGR) during the three-year performance period of Beazer common stock. The target number of Performance Shares that vest may be increased by up to 50% based on the level of achievement of the above criteria as defined in the applicable award agreement. Payment for Performance Shares in excess of the target number (28,690) will be settled in cash. Any portion of the Performance Shares that do not vest at the end of the period will be forfeited. The grants of the performance-based, nonvested stock were valued using the Monte Carlo valuation method and had an estimated fair value of $15.90 per share, a portion of which is attributable to the potential cash-settled liability aspect of the grant which is included in Other Liabilities.
A Monte Carlo simulation model requires the following inputs: (1) expected dividend yield on the underlying stock, (2) expected price volatility of the underlying stock, (3) risk-free interest rate for the period corresponding with the expected term of the award and (4) fair value of the underlying stock. For the Company and each member of the peer group, the following inputs were used, as applicable, in the Monte Carlo simulation model to determine the fair value as of the grant date for the Performance Shares: 0% dividend yield for the Company, expected price volatility ranging from 35.0% to 59.1% and a risk-free interest rate of 0.66%. The methodology used to determine these assumptions is similar to that for the Black-Scholes Model used for stock option grants discussed above; however the expected term is determined by the model in the Monte Carlo simulation.
Activity relating to nonvested stock awards, including the Performance Shares for the three and six months ended March 31, 2014 is as follows:
 
Three Months Ended
 
Six Months Ended
 
March 31, 2014
 
March 31, 2014
 
Shares
 
Weighted
Average
Grant
Date Fair
Value
 
Shares
 
Weighted
Average
Grant
Date Fair
Value
Beginning of period
312,855

 
$
13.18

 
280,416

 
$
12.32

Granted
—

 
—

 
135,567

 
17.53

Vested
(239
)
 
18.82

 
(102,277
)
 
16.64

Forfeited
(6,160
)
 
17.45

 
(7,250
)
 
16.45

End of period
306,456

 
$
13.08

 
306,456

 
$
13.08


(12) Segment Information
We have three homebuilding segments operating in 16 states. Revenues in our homebuilding segments are derived from the sale of homes which we construct and from land and lot sales. Our reportable segments have been determined on a basis that is used internally by management for evaluating segment performance and resource allocations. The reportable homebuilding segments and all other homebuilding operations, not required to be reported separately, include operations conducting business in the following states:
West: Arizona, California, Nevada and Texas
East: Delaware, Indiana, Maryland, New Jersey, New York, Pennsylvania, Tennessee (Nashville) and Virginia
Southeast: Florida, Georgia, North Carolina (Raleigh) and South Carolina
Management’s evaluation of segment performance is based on segment operating income. Operating income for our homebuilding segments is defined as homebuilding, land sale and other revenues less home construction, land development and land sales expense, commission expense, depreciation and amortization and certain general and administrative expenses which are incurred by or allocated to our homebuilding segments. The accounting policies of our segments are those described in Note 1 above and Note 1 to our consolidated financial statements in our 2013 Annual Report.

20
Table of Contents

 
Three Months Ended
 
Six Months Ended
 
March 31,
 
March 31,
(In thousands)
2014
 
2013
 
2014
 
2013
Revenue
 
 
 
 
 
 
 
West
$
121,886

 
$
118,996

 
$
244,462

 
$
229,122

East
83,366

 
117,129

 
190,955

 
213,668

Southeast
64,769

 
51,777

 
127,774

 
92,014

Total revenue
$
270,021

 
$
287,902

 
$
563,191

 
$
534,804


 
Three Months Ended
 
Six Months Ended
 
March 31,
 
March 31,
(In thousands)
2014
 
2013
 
2014
 
2013
Operating income (loss)
 
 
 
 
 
 
 
West
$
14,338

 
$
10,045

 
$
30,100

 
$
18,403

East
2,994

 
10,313

 
11,229

 
16,501

Southeast
4,162

 
2,050

 
9,790

 
4,380

Segment total
21,494

 
22,408

 
51,119

 
39,284

Corporate and unallocated (a)
(15,877
)
 
(22,097
)
 
(33,970
)
 
(42,574
)
Total operating income (loss)
$
5,617

 
$
311

 
$
17,149

 
$
(3,290
)

 
Three Months Ended
 
Six Months Ended
 
March 31,
 
March 31,
(In thousands)
2014
 
2013
 
2014
 
2013
Depreciation and amortization
 
 
 
 
 
 
 
West
$
1,304

 
$
1,185

 
$
2,686

 
$
2,207

East
556

 
900

 
1,248

 
1,583

Southeast
358

 
339

 
749

 
657

Segment total
2,218

 
2,424

 
4,683

 
4,447

Corporate and unallocated (a)
613

 
669

 
1,055

 
1,361

Depreciation and amortization - continuing operations
$
2,831

 
$
3,093

 
$
5,738

 
$
5,808


 
Six Months Ended
 
March 31,
(In thousands)
2014
 
2013
Capital Expenditures
 
 
 
West
$
2,661

 
$
1,866

East
1,546

 
611

Southeast
1,022

 
482

Corporate and unallocated
1,412

 
910

Consolidated total
$
6,641

 
$
3,869



21
Table of Contents

(In thousands)
March 31, 2014
 
September 30, 2013
Assets
 
 
 
West
$
709,167

 
$
680,346

East
428,398

 
369,937

Southeast
283,985

 
228,814

Corporate and unallocated (b)
529,834

 
707,692

Consolidated total
$
1,951,384

 
$
1,986,789


(a)
Corporate and unallocated includes amortization of capitalized interest and numerous shared services functions that benefit all segments, the costs of which are not allocated to the operating segments reported above including information technology, national sourcing and purchasing, treasury, corporate finance, legal, branding and other national marketing costs.
(b)
Primarily consists of cash and cash equivalents, consolidated inventory not owned, deferred taxes, capitalized interest and other items that are not allocated to the segments.

(13) Supplemental Guarantor Information
As discussed in Note 7, our obligations to pay principal, premium, if any, and interest under certain debt are guaranteed on a joint and several basis by substantially all of our subsidiaries. Certain of our immaterial subsidiaries do not guarantee our Senior Notes or our Secured Revolving Credit Facility. The guarantees are full and unconditional and the guarantor subsidiaries are 100% owned by Beazer Homes USA, Inc.



22
Table of Contents

Beazer Homes USA, Inc.
Unaudited Consolidating Balance Sheet Information
March 31, 2014
(In thousands)
 
 
Beazer Homes
USA, Inc.
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Consolidating
Adjustments
 
Consolidated
Beazer Homes
USA, Inc.
ASSETS
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
302,176

 
$
1,699

 
$
1,689

 
$
(5,944
)
 
$
299,620

Restricted cash
49,733

 
1,032

 
—

 
—

 
50,765

Accounts receivable (net of allowance of $1,278)
—

 
28,908

 
3

 
—

 
28,911

Income tax receivable
2,813

 
—

 
—

 
—

 
2,813

Owned inventory
—

 
1,480,360

 
—

 
—

 
1,480,360

Consolidated inventory not owned
—

 
7,751

 
—

 
—

 
7,751

Investments in unconsolidated entities
773

 
35,774

 
—

 
—

 
36,547

Deferred tax assets, net
5,407

 
—

 
—

 
—

 
5,407

Property, plant and equipment, net
—

 
18,142

 
—

 
—

 
18,142

Investments in subsidiaries
155,251

 
—

 
—

 
(155,251
)
 
—

Intercompany
1,240,777

 
—

 
2,406

 
(1,243,183
)
 
—

Other assets
17,058

 
3,901

 
109

 
—

 
21,068

Total assets
$
1,773,988

 
$
1,577,567

 
$
4,207

 
$
(1,404,378
)
 
$
1,951,384

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
 
 
 
 
 
 
Trade accounts payable
$
—

 
$
71,891

 
$
—

 
$
—

 
$
71,891

Other liabilities
52,706

 
79,966

 
1,003

 
—

 
133,675

Intercompany
2,406

 
1,246,721

 
—

 
(1,249,127
)
 
—

Obligations related to land not owned under option agreements
—

 
3,147

 
—

 
—

 
3,147

Total debt (net of discounts of $4,780)
1,488,078

 
23,795

 
—

 
—

 
1,511,873

Total liabilities
1,543,190

 
1,425,520

 
1,003

 
(1,249,127
)
 
1,720,586

Stockholders’ equity
230,798

 
152,047

 
3,204

 
(155,251
)
 
230,798

Total liabilities and stockholders’ equity
$
1,773,988

 
$
1,577,567

 
$
4,207

 
$
(1,404,378
)
 
$
1,951,384


23
Table of Contents

Beazer Homes USA, Inc.
 
Unaudited Consolidating Balance Sheet Information
September 30, 2013
(In thousands)

 
Beazer Homes
USA, Inc.
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Consolidating
Adjustments
 
Consolidated
Beazer Homes
USA, Inc.
ASSETS
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
499,341

 
$
6,324

 
$
1,637

 
$
(2,843
)
 
$
504,459

Restricted cash
47,873

 
1,105

 
—

 
—

 
48,978

Accounts receivable (net of allowance of $1,651)
—

 
22,339

 
3

 
—

 
22,342

Income tax receivable
2,813

 
—

 
—

 
—

 
2,813

Owned inventory
—

 
1,304,694

 
—

 
—

 
1,304,694

Consolidated inventory not owned
—

 
9,124

 
—

 
—

 
9,124

Investments in unconsolidated entities
773

 
44,224

 
—

 
—

 
44,997

Deferred tax assets, net
5,253

 
—

 
—

 
—

 
5,253

Property, plant and equipment, net
—

 
17,000

 
—

 
—

 
17,000

Investments in subsidiaries
123,600

 
—

 
—

 
(123,600
)
 
—

Intercompany
1,088,949

 
—

 
2,747

 
(1,091,696
)
 
—

Other assets
19,602

 
7,147

 
380

 
—

 
27,129

Total assets
$
1,788,204

 
$
1,411,957

 
$
4,767

 
$
(1,218,139
)
 
$
1,986,789

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
 
 
 
 
 
 
Trade accounts payable
$
—

 
$
83,800

 
$
—

 
$
—

 
$
83,800

Other liabilities
52,009

 
92,384

 
1,230

 
—

 
145,623

Intercompany
2,747

 
1,091,792

 
—

 
(1,094,539
)
 
—

Obligations related to land not owned under option agreements
—

 
4,633

 
—

 
—

 
4,633

Total debt (net of discounts of $5,160)
1,492,898

 
19,285

 
—

 
—

 
1,512,183

Total liabilities
1,547,654

 
1,291,894

 
1,230

 
(1,094,539
)
 
1,746,239

Stockholders’ equity
240,550

 
120,063

 
3,537

 
(123,600
)
 
240,550

Total liabilities and stockholders’ equity
$
1,788,204

 
$
1,411,957

 
$
4,767

 
$
(1,218,139
)
 
$
1,986,789




24
Table of Contents

Beazer Homes USA, Inc.
 
Unaudited Consolidating Statement of Operations Information
(In thousands)
 
Beazer Homes
USA, Inc.
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Consolidating
Adjustments
 
Consolidated
Beazer Homes
USA, Inc.
Three Months Ended March 31, 2014
 
 
 
 
 
 
 
 
 
Total revenue
$
—

 
$
270,021

 
$
100

 
$
(100
)
 
$
270,021

Home construction and land sales expenses
7,379

 
209,690

 
—

 
(100
)
 
216,969

Inventory impairments and option contract abandonments
—

 
880

 
—

 
—

 
880

Gross (loss) profit
(7,379
)
 
59,451

 
100

 
—

 
52,172

Commissions
—

 
11,096

 
—

 
—

 
11,096

General and administrative expenses
—

 
32,592

 
36

 
—

 
32,628

Depreciation and amortization
—

 
2,831

 
—

 
—

 
2,831

Operating (loss) income
(7,379
)
 
12,932

 
64

 
—

 
5,617

Equity in income of unconsolidated entities
—

 
(17
)
 
—

 
—

 
(17
)
Loss on extinguishment of debt
(153
)
 
—

 
—

 
—

 
(153
)
Other (expense) income, net
(14,659
)
 
933

 
(1
)
 
—

 
(13,727
)
(Loss) income before income taxes
(22,191
)
 
13,848

 
63

 
—

 
(8,280
)
(Benefit from) provision for income taxes
(210
)
 
131

 
23

 
—

 
(56
)
Equity in income of subsidiaries
13,757

 
—

 
—

 
(13,757
)
 
—

(Loss) income from continuing operations
(8,224
)
 
13,717

 
40

 
(13,757
)
 
(8,224
)
Income (loss) from discontinued operations
—

 
257

 
(4
)
 
—

 
253

Equity in income of subsidiaries
253

 
—

 
—

 
(253
)
 
—

Net (loss) income
$
(7,971
)
 
$
13,974

 
$
36

 
$
(14,010
)
 
$
(7,971
)
 
Beazer Homes
USA, Inc.
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Consolidating
Adjustments
 
Consolidated
Beazer Homes
USA, Inc.
Three Months Ended March 31, 2013