Edgar Filing: BEAZER HOMES USA INC

Document

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, 2018



¨	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 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 whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act:



Large accelerated filer	¨	Accelerated filer	x

Non-accelerated filer	¨	(Do not check if a smaller reporting company)

Smaller reporting company	¨	Emerging growth company	¨

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

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 as of April 26, 2018
Common Stock, $0.001 par value		33,627,883

Table of Contents

BEAZER HOMES USA, INC.

TABLE OF CONTENTS



PART I. FINANCIAL INFORMATION	2
Item 1. Financial Statements	2
Condensed Consolidated Balance Sheets as of March 31, 2018 and September 30, 2017	2
Condensed Consolidated Statements of Income (Loss) and Comprehensive Income (Loss) for the three and six months ended March 31, 2018 and 2017	3
Condensed Consolidated Statements of Cash Flows for the six months ended March 31, 2018 and 2017	4
Notes to Condensed Consolidated Financial Statements	5
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	29
Item 3. Quantitative and Qualitative Disclosures About Market Risk	45
Item 4. Controls and Procedures	45

PART II. OTHER INFORMATION	45
Item 1. Legal Proceedings	45
Item 1A. Risk Factors	45
Item 6. Exhibits	46

SIGNATURES	47

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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

BEAZER HOMES USA, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)



in thousands (except share and per share data)	March 31, 2018			September 30, 2017
ASSETS
Cash and cash equivalents	$	158,787		$	292,147
Restricted cash	12,783			12,462
Accounts receivable (net of allowance of $346 and $330, respectively)	30,183			36,323
Income tax receivable	112			88
Owned inventory	1,677,361			1,542,807
Investments in unconsolidated entities	4,293			3,994
Deferred tax assets, net	199,229			307,896
Property and equipment, net	20,166			17,566
Other assets	4,589			7,712
Total assets	$	2,107,503		$	2,220,995
LIABILITIES AND STOCKHOLDERS’ EQUITY
Trade accounts payable	$	117,143		$	103,484
Other liabilities	97,937			107,659
Total debt (net of premium of $3,027 and $3,413, respectively, and debt issuance costs of $15,905 and $14,800, respectively)	1,325,457			1,327,412
Total liabilities	1,540,537			1,538,555
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, 33,628,126 issued and outstanding and 33,515,768 issued and outstanding, respectively)	34			34
Paid-in capital	876,978			873,063
Accumulated deficit	(310,046		)	(190,657		)
Total stockholders’ equity	566,966			682,440
Total liabilities and stockholders’ equity	$	2,107,503		$	2,220,995

See accompanying notes to condensed consolidated financial statements.

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BEAZER HOMES USA, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (LOSS) AND COMPREHENSIVE INCOME (LOSS)

(Unaudited)



	Three Months Ended						Six Months Ended
	March 31,						March 31,
in thousands (except per share data)	2018			2017			2018			2017
Total revenue	$	455,178		$	425,468		$	827,667		$	764,709
Home construction and land sales expenses	380,101			357,788			691,761			643,366
Inventory impairments and abandonments	—			282			—			282
Gross profit	75,077			67,398			135,906			121,061
Commissions	17,334			16,632			31,690			29,955
General and administrative expenses	40,852			40,100			78,137			76,488
Depreciation and amortization	3,066			3,155			5,573			5,832
Operating income	13,825			7,511			20,506			8,786
Equity in income of unconsolidated entities	256			33			155			55
Loss on extinguishment of debt	—			(15,563		)	(25,904		)	(15,563		)
Other expense, net	(1,453		)	(3,940		)	(4,598		)	(9,136		)
Income (loss) from continuing operations before income taxes	12,628			(11,959		)	(9,841		)	(15,858		)
Expense (benefit) from income taxes	1,012			(4,464		)	109,118			(7,004		)
Income (loss) from continuing operations	11,616			(7,495		)	(118,959		)	(8,854		)
Loss from discontinued operations, net of tax	(58		)	(40		)	(430		)	(110		)
Net income (loss) and comprehensive income (loss)	$	11,558		$	(7,535	)	$	(119,389	)	$	(8,964	)
Weighted average number of shares:
Basic	32,140			31,969			32,097			31,931
Diluted	32,721			31,969			32,097			31,931
Basic earnings (loss) per share:
Continuing operations	$	0.36		$	(0.23	)	$	(3.71	)	$	(0.27	)
Discontinued operations	—			—			(0.01		)	—
Total	$	0.36		$	(0.23	)	$	(3.72	)	$	(0.27	)
Diluted income (loss) per share:
Continuing operations	$	0.36		$	(0.23	)	$	(3.71	)	$	(0.27	)
Discontinued operations	(0.01		)	$	—		(0.01		)	—
Total	$	0.35		$	(0.23	)	$	(3.72	)	$	(0.27	)

See accompanying notes to condensed consolidated financial statements.

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BEAZER HOMES USA, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)



	Six Months Ended
	March 31,
in thousands	2018			2017
Cash flows from operating activities:
Net loss	$	(119,389	)	$	(8,964	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization	5,573			5,832
Stock-based compensation expense	5,208			4,517
Inventory impairments and abandonments	450			282
Deferred and other income tax expense (benefit)	108,668			(7,334		)
Write-off of deposit on legacy land investment	—			2,700
Gain on sale of fixed assets	(114		)	(72		)
Change in allowance for doubtful accounts	16			(161		)
Equity in income of unconsolidated entities	(171		)	(55		)
Cash distributions of income from unconsolidated entities	116			6
Non-cash loss on extinguishment of debt	3,173			3,676
Changes in operating assets and liabilities:
Decrease in accounts receivable	6,124			9,606
(Increase) decrease in income tax receivable	(24		)	4
Increase in inventory	(132,683		)	(50,031		)
Decrease in other assets	2,914			3,546
Increase (decrease) in trade accounts payable	13,659			(3,884		)
Decrease in other liabilities	(9,705		)	(31,730		)
Net cash used in operating activities	(116,185		)	(72,062		)
Cash flows from investing activities:
Capital expenditures	(8,192		)	(5,677		)
Proceeds from sale of fixed assets	133			74
Investments in unconsolidated entities	(421		)	(2,411		)
Return of capital from unconsolidated entities	176			1,621
Net cash used in investing activities	(8,304		)	(6,393		)
Cash flows from financing activities:
Repayment of debt	(401,497		)	(256,207		)
Proceeds from issuance of new debt	400,000			250,000
Repayment of borrowings from credit facility	(25,000		)	(25,000		)
Borrowings from credit facility	25,000			25,000
Debt issuance costs	(5,743		)	(4,721		)
Other financing activities	(1,310		)	(388		)
Net cash used in financing activities	(8,550		)	(11,316		)
Decrease in cash, cash equivalents, and restricted cash	(133,039		)	(89,771		)
Cash, cash equivalents, and restricted cash at beginning of period	304,609			243,276
Cash, cash equivalents, and restricted cash at end of period	$	171,570		$	153,505

See accompanying notes to condensed consolidated financial statements.

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BEAZER HOMES USA, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(1) Description of Business

Beazer Homes USA, Inc. is a geographically diversified homebuilder with active operations in 13 states within three geographic regions in the United States: the West, East, and Southeast. Unless the context indicates otherwise, the terms “we,” “us,” “our,” “Beazer,” “Beazer Homes,” and the “Company” used in this Quarterly Report on Form 10-Q refer to Beazer Homes USA, Inc. and its subsidiaries.

The Company's 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.

For an additional description of our business, refer to Item 1 within our Annual Report on Form 10-K for the fiscal year ended September 30, 2017 (2017 Annual Report).

(2) Basis of Presentation and Summary of Significant Accounting Policies

The accompanying unaudited condensed consolidated financial statements of 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 unaudited condensed consolidated financial statements do not include all of the information and disclosures required by GAAP for complete financial statements. The accompanying condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 2017. In the opinion of management, all adjustments (consisting primarily of normal recurring adjustments) necessary for a fair presentation have been included in the accompanying unaudited condensed consolidated financial statements. The results of the Company's consolidated operations presented herein for the three and six months ended March 31, 2018 are not necessarily indicative of the results to be expected for the full fiscal year due to seasonal variations in our operations and other factors.

Basis of Consolidation

The accompanying condensed consolidated financial statements include the accounts of Beazer Homes USA, Inc. and its consolidated subsidiaries. Intercompany transactions and balances have been eliminated in consolidation.

In the past, we have discontinued homebuilding operations in various markets. Results from certain of these exited markets are reported as discontinued operations in the accompanying unaudited condensed consolidated statements of income (loss) for all periods presented (see Note 16 for a further discussion of our discontinued operations).

We evaluated events that occurred after the balance sheet date but before these financial statements were issued for accounting treatment and disclosure.

Our fiscal 2018 began on October 1, 2017 and ends on September 30, 2018. Our fiscal 2017 began on October 1, 2016 and ended on September 30, 2017.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make informed estimates and judgments that affect the amounts reported in the condensed consolidated financial statements and accompanying notes. Accordingly, actual results could differ from these estimates.

Inventory Valuation

We assess our inventory assets no less than quarterly for recoverability in accordance with the policies described in Notes 2 and 5 to the audited consolidated financial statements within our 2017 Annual Report. Our homebuilding inventories that are accounted for as held for development (projects in progress) 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 that 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 land held for sale at the lower of the carrying value or fair value less costs to sell.

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Recent Accounting Pronouncements

Revenue from Contracts with Customers. In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2014-09, Revenue from Contracts with Customers (ASU 2014-09). ASU 2014-09 requires entities to recognize revenue at an amount that the entity expects to be entitled to upon transferring control of goods or services to a customer, as opposed to when risks and rewards transfer to a customer under the existing revenue recognition guidance. In August 2015, the FASB issued ASU 2015-14 to defer the effective date of ASU 2014-09 for one year, which makes the guidance effective for the Company's first fiscal year beginning after December 15, 2017. Additionally, the FASB is permitting entities to early adopt the standard, which allows for either full retrospective or modified retrospective methods of adoption, for reporting periods beginning after December 15, 2016. We have been involved in industry-specific discussions with the FASB on the treatment of certain items related to our business. However, due to the nature of our operations, we expect to identify similar performance obligations under ASU 2014-09 compared with the deliverables and separate units of account we have identified under existing accounting standards. As a result, we expect the timing of our revenues to remain generally the same. Nonetheless, we expect our revenue-related disclosures to change. We expect to adopt the provisions of ASU 2014-09 effective October 1, 2018.

Leases. In February 2016, the FASB issued ASU 2016-02, Leases (ASU 2016-02). ASU 2016-02 requires lessees to record most leases on their balance sheets. The timing and classification of lease-related expenses for lessees will depend on whether a lease is determined to be an operating lease or a finance lease using updated criteria within ASU 2016-02. Operating leases will result in straight-line expense (similar to current operating leases), while finance leases will result in a front-loaded expense pattern (similar to current capital leases). Regardless of lease type, the lessee will recognize a right-of-use asset, representing the right to use the identified asset during the lease term, and a related lease liability, representing the present value of the lease payments over the lease term. Lessor accounting will be largely similar to that under the current lease accounting rules. The guidance within ASU 2016-02 will be effective for the Company's first fiscal year beginning after December 15, 2018, with early adoption permitted. ASU 2016-02 must be adopted using a modified retrospective approach, which requires application of the standard at the beginning of the earliest comparative period presented, with certain optional practical expedients. ASU 2016-02 also requires significantly enhanced disclosures around an entity's leases and the related accounting. We continue to evaluate the impact of ASU 2016-02 on our consolidated financial statements. However, a large majority of our leases are for office space, which we have determined will be treated as operating leases under ASU 2016-02. As such, we anticipate recording a right-of-use asset and related lease liability for these leases, but we do not expect our expense recognition pattern to change. Therefore, we do not anticipate any significant change to our statements of income or cash flows as a result of adopting ASU 2016-02.

Statement of Cash Flows. In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flow - Restricted Cash (ASU 2016-18). ASU 2016-18 requires that an entity's statement of cash flows explain the change during the period in that entity's total cash and cash equivalents, including amounts generally described as restricted cash or restricted cash equivalents. Therefore, changes in restricted cash and restricted cash equivalents will no longer be shown as specific line items within the statement of cash flows. Additionally, an entity is to reconcile its cash and cash equivalents as per its balance sheet to the cash and cash equivalent balances presented in its statement of cash flows. The Company early adopted the guidance within ASU 2016-18 as of September 30, 2017. Therefore, changes in our restricted cash balances are no longer shown in our statements of cash flows as these balances are included in the beginning and ending cash balances in our statements of cash flows.

The following table presents the changes to our consolidated statements of cash flows as of March 31, 2017 due to the adoption of ASU 2016-18:



(In thousands)	Six Months Ended March 31, 2017
Consolidated Statements of Cash Flows:
Net cash used in investing activities (as originally reported)	$	(6,684	)
Movements in restricted cash	291
Net cash used in investing activities (as re-casted)	$	(6,393	)

Business Combinations. In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business (ASU 2017-01). ASU 2017-01 clarifies the framework for determining whether an integrated set of assets and activities meets the definition of a business. The revised framework establishes a screen for determining whether an integrated set of assets and activities is a business and narrows the definition of a business, which is expected to result in fewer transactions being accounted for as business combinations. Acquisitions of integrated sets of assets and activities that do not meet the definition of a business are accounted for as asset acquisitions. This pronouncement is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2017, with early adoption permitted for transactions that have not been reported in previously issued financial statements. The Company early adopted this guidance as of December 31, 2017 and applied it to applicable transactions occurring during this period.

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Income Taxes. In December 2017, the Securities and Exchange Commission Staff issued SAB 118, which provides guidance on accounting for the income tax effects of the Tax Cuts and Jobs Act (Tax Act). SAB 118 provides a measurement period that should not extend beyond one year from the Tax Act enactment date for companies to complete the accounting under ASC 740. In accordance with SAB 118, a company must reflect the income tax effects of those aspects of the Tax Act for which the accounting under ASC 740 is complete. To the extent that a company's accounting for certain income tax effects of the Tax Act is incomplete but it is able to determine a reasonable estimate, it must record a provisional estimate in the financial statements and should continue to apply ASC 740 on the basis of the provisions of the tax laws that were in effect immediately before the enactment of the Tax Act. The Company adopted the guidance of SAB 118 as of December 31, 2017. Refer to Note 10 for additional information on the Tax Act and the impact to our financial statements.

(3) Supplemental Cash Flow Information

The following table presents supplemental disclosure of non-cash and cash activity for the periods presented:



	Six Months Ended
	March 31,
(In thousands)	2018		2017
Supplemental disclosure of non-cash activity:
Non-cash land acquisitions ^(a)	$	—	$	5,197
Land acquisitions for debt	—		6,304
Supplemental disclosure of cash activity:
Interest payments	$	43,433	$	50,153
Income tax payments	10		91
Tax refunds received	39		3
Reconciliation of cash, cash equivalents, and restricted cash:
Cash and cash equivalents	$	158,787	$	138,809
Restricted cash	12,783		14,696
Total cash, cash equivalents, and restricted cash shown in the statement of cash flows	$	171,570	$	153,505

^(a) For the six months ended March 31, 2017, non-cash land acquisitions were comprised of lot takedowns from one of the Company's unconsolidated land development joint ventures.

(4) Investments in Unconsolidated Entities

As of March 31, 2018, the Company participated in certain joint ventures and had investments in unconsolidated entities in which it had less than a controlling interest. The following table presents the Company's investment in unconsolidated entities as well as the total equity and outstanding borrowings of such unconsolidated entities as of March 31, 2018 and September 30, 2017:



(In thousands)	March 31, 2018		September 30, 2017
Investment in unconsolidated entities	$	4,293	$	3,994
Total equity of unconsolidated entities	12,078		11,811
Total outstanding borrowings of unconsolidated entities	16,474		15,797

Equity in income of unconsolidated entities is as follows for the periods presented:



	Three Months Ended				Six Months Ended
	March 31,				March 31,
(In thousands)	2018		2017		2018		2017
Equity in income of unconsolidated entities	$	256	$	33	$	155	$	55

For the three and six months ended March 31, 2018 and 2017, there were no impairments related to investments in unconsolidated entities.

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Guarantees

Historically, the Company's joint ventures typically obtained secured acquisition, development, and construction financing. In addition, the Company and its joint venture partners provided varying levels of guarantees of debt and other debt-related obligations for these unconsolidated entities. However, as of March 31, 2018 and September 30, 2017, the Company had no outstanding guarantees or other debt-related obligations related to investments in unconsolidated entities.

Beazer and its joint venture partners generally provide unsecured environmental indemnities to land development joint venture project lenders. These indemnities obligate the Company 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, 2018 and 2017, Beazer was not required to make any payments related to environmental indemnities.

In assessing the need to record a contingent liability for these guarantees, the Company considers its 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, the fair value of the collateral of unconsolidated entities is monitored to ensure that the related borrowings do not exceed the specified percentage of the value of the property securing the borrowings. As of March 31, 2018, no liability was recorded for the contingent aspects of any guarantees that were determined to be reasonably possible but not probable.

(5) Inventory

Owned inventory consisted of the following as of March 31, 2018 and September 30, 2017:



(In thousands)	March 31, 2018		September 30, 2017
Homes under construction	$	527,102	$	419,312
Development projects in progress	825,355		785,777
Land held for future development	87,718		112,565
Land held for sale	9,927		17,759
Capitalized interest	149,034		139,203
Model homes	78,225		68,191
Total owned inventory	$	1,677,361	$	1,542,807

Homes under construction include homes substantially finished and ready for delivery and homes in various stages of construction, including the cost of the underlying lot. The Company had 126 (with a cost of $40.3 million) and 171 (with a cost of $52.6 million) substantially completed homes that were not subject to a sales contract (spec homes) as of March 31, 2018 and September 30, 2017, 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 customer 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. Land held for future development is 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. Land held for sale includes land and lots that do not fit within our homebuilding programs and strategic plans in certain markets. Land held for sale is recorded at the lower of the carrying value or fair value less costs to sell.

The amount of interest we are able to capitalize is dependent upon our qualified inventory balance, which considers the status of our inventory holdings. Our qualified inventory balance includes the majority of our homes under construction and development projects in progress, but excludes land held for future development and land held for sale (see Note 6 for additional information on capitalized interest).

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Total owned inventory by reportable segment and by category is presented in the table below as of March 31, 2018 and September 30, 2017:



(In thousands)	Projects in Progress ^(a)		Land Held for Future Development		Land Held for Sale		Total Owned Inventory
March 31, 2018
West Segment	$	751,745	$	62,190	$	1,484	$	815,419
East Segment	285,068		14,570		7,522		307,160
Southeast Segment	338,666		10,958		897		350,521
Corporate and unallocated ^(b)	204,237		—		24		204,261
Total	$	1,579,716	$	87,718	$	9,927	$	1,677,361
September 30, 2017
West Segment	$	673,828	$	87,231	$	3,848	$	764,907
East Segment	250,002		14,391		11,578		275,971
Southeast Segment	301,268		10,943		1,233		313,444
Corporate and unallocated ^(b)	187,385		—		1,100		188,485
Total	$	1,412,483	$	112,565	$	17,759	$	1,542,807

^(a)Projects in progress include homes under construction, development projects in progress, capitalized interest, and model homes categories from the preceding table.

^(b)Projects in progress amount includes capitalized interest and indirect costs that are maintained within our Corporate and unallocated segment. Land held for sale amount includes parcels held by our discontinued operations.

Inventory Impairments

When conducting our community level review for the recoverability of our inventory related to projects in progress, we establish a quarterly “watch list” of communities that carry gross margins in backlog and in our forecast that are below a minimum threshold of profitability, as well as recent closings that have gross margins less than a specific threshold. Each community is first evaluated qualitatively to determine if there are temporary factors driving the low profitability levels. Following our qualitative evaluation, communities with more than ten homes remaining to close are subjected to substantial additional financial and operational analyses and review that consider the competitive environment and other factors contributing to gross margins below our watch list threshold. Our assumptions about future home sales prices and absorption rates require significant judgment because the residential homebuilding industry is cyclical and is highly sensitive to changes in economic conditions. For certain communities, we determined that it is prudent to reduce sales prices or further increase sales incentives in response to a variety of factors, including competitive market conditions in those specific submarkets for the product and locations of these communities. 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. Market deterioration that exceeds our initial 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.

For the quarter ended March 31, 2018, there were two communities on our quarterly watch list, one in the West segment and the other in the Southeast segment. However, none of these communities required further analysis to be performed after considering certain qualitative factors. For the quarter ended March 31, 2017, there were six communities on our quarterly watch list, five in our West segment and the other one in our East segment. However, none of these communities required further impairment analysis to be performed after considering the number of lots remaining in each community and certain other qualitative factors.

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Impairments on land held for sale generally represent 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. Our assumptions about land sales prices require significant judgment because the real estate market is highly sensitive to changes in economic conditions. We calculate the estimated fair value 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.

From time-to-time, we also determine that the proper course of action with respect to a community is to not exercise an option and to write off the deposit securing the option takedown and the related pre-acquisition costs, as applicable. In determining whether to abandon lots or lot option contracts, our evaluation is primarily based upon the expected cash flows from the property. Additionally, in certain limited instances, we are forced to abandon lots due to environmental, permitting, or other regulatory issues that do not allow us to build on those lots. If we intend to abandon or walk away from a property, we record a charge to earnings for the deposit amount and any related capitalized costs in the period such decision is made. Abandonment charges generally relate to our decision to abandon lots or not exercise certain option contracts that are not projected to produce adequate results, no longer fit with our long-term strategic plan or, in limited circumstances, are not suitable for building due to environmental or regulatory restrictions that are enacted.

The following table presents our total impairment and abandonment charges for the periods presented:



	Three Months Ended March 31,				Six Months Ended March 31,
(In thousands)	2018		2017		2018		2017
Land Held for Sale:
West	$	—	$	94	$	—	$	94
Abandonments:
East	—		188		—		188
Total continuing operations	$	—	$	282	$	—	$	282
Discontinued Operations:
Land Held for Sale	—		—		450		—
Total impairment and abandonment charges	$	—	$	282	$	450	$	282

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. The 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 specified 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 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 at all.

The following table provides a summary of our interests in lot option agreements as of March 31, 2018 and September 30, 2017:



(In thousands)	Deposits & Non-refundable Pre-acquisition Costs Incurred		Remaining Obligation
As of March 31, 2018
Unconsolidated lot option agreements	$	78,971	$	341,737
As of September 30, 2017
Unconsolidated lot option agreements	$	91,854	$	408,300

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(6) Interest

Interest capitalized during the three and six months ended March 31, 2018 and 2017 was limited by the balance of inventory eligible for capitalization. The following table presents certain information regarding interest for the periods presented:



	Three Months Ended March 31,						Six Months Ended March 31,
(In thousands)	2018			2017			2018			2017
Capitalized interest in inventory, beginning of period	$	144,847		$	144,299		$	139,203		$	138,108
Interest incurred	25,492			26,482			51,047			53,569
Interest expense not qualified for capitalization and included as other expense ^(a)	(1,650		)	(4,046		)	(5,085		)	(9,298		)
Capitalized interest amortized to home construction and land sales expenses ^(b)	(19,655		)	(19,819		)	(36,131		)	(35,463		)
Capitalized interest in inventory, end of period	$	149,034		$	146,916		$	149,034		$	146,916

^(a) The amount of interest we are able to capitalize is dependent upon our qualified inventory balance, which considers the status of our inventory holdings. Our qualified inventory balance includes the majority of our homes under construction and development projects in progress, but excludes land held for future development and land held for sale.

^(b)Capitalized interest amortized to home construction and land sale expenses varies based on the number of homes closed during the period and land sales, if any, as well as other factors.

(7) Borrowings

The Company's debt, net of premiums, discounts, and unamortized debt issuance costs consisted of the following as of March 31, 2018 and September 30, 2017:



(In thousands)	Maturity Date	March 31, 2018			September 30, 2017
5 3/4% Senior Notes	June 2019	$	96,393		$	321,393
8 3/4% Senior Notes	March 2022	500,000			500,000
7 1/4% Senior Notes	February 2023	24,834			199,834
6 3/4% Senior Notes	March 2025	250,000			250,000
5 7/8% Senior Notes	October 2027	400,000			—
Unamortized debt premium, net		3,026			3,413
Unamortized debt issuance costs		(15,905		)	(14,800		)
Total Senior Notes, net		1,258,348			1,259,840
Junior Subordinated Notes (net of unamortized accretion of $37,803 and $38,837, respectively)	July 2036	62,970			61,937
Other Secured Notes payable	Various Dates	4,139			5,635
Total debt, net		$	1,325,457		$	1,327,412

Secured Revolving Credit Facility

The Secured Revolving Credit Facility (the Facility) provides working capital and letter of credit capacity. In October 2017, a Fourth Amendment to the Facility was executed. The Fourth Amendment (1) extends the termination date of the Facility from February 15, 2019 to February 15, 2020; (2) increases the maximum aggregate amount of commitments under the Facility (including borrowings and letters of credit) from $180.0 million to $200.0 million; and (3) includes a condition that allows the Facility to be increased by an additional $50 million to $250 million, subject to the approval of any lenders providing any such increase. The aggregate collateral ratio (as defined by the underlying Credit Agreement) remained at 4.00 to 1.00 and the after-acquired exclusionary condition (also as defined by the underlying Credit Agreement) remained at $800.0 million. The Facility continues to be with three lenders. For additional discussion of the Facility, refer to Note 8 to the audited consolidated financial statements within our 2017 Annual Report.

As of March 31, 2018 and September 30, 2017, no borrowings were outstanding under the Facility; however, $29.7 million and $34.7 million in letters of credit were outstanding, respectively, resulting in a remaining capacity of $170.3 million and $145.3 million, respectively. The Facility requires compliance with certain covenants, including negative covenants and financial maintenance covenants. As of March 31, 2018, the Company was in compliance with all such covenants.

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Letter of Credit Facilities

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 in addition to those issued under the Facility. As of March 31, 2018 and September 30, 2017, total letters of credit outstanding under these additional facilities were $11.0 million and $10.8 million, respectively, all of which were secured by cash collateral in restricted accounts. The Company may enter into additional arrangements to provide greater letter of credit capacity.

Senior Notes

Our Senior Notes are unsecured 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 Facility. Each guarantor subsidiary is a 100% owned subsidiary of Beazer Homes. See Note 15 for further information.

All unsecured Senior 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 any outstanding indebtedness under the Facility, to the extent of the value of the assets securing such indebtedness. The unsecured Senior Notes and related guarantees are structurally subordinated to all indebtedness and other liabilities of all of the Company's subsidiaries that do not guarantee these notes, but are fully and unconditionally guaranteed jointly and severally on a senior basis by the Company's wholly-owned subsidiaries party to each applicable indenture.

The Company's Senior Notes are issued under indentures that contain certain restrictive covenants which, among other things, restrict our ability to pay dividends, repurchase our common stock, incur certain types of additional indebtedness, and to make certain investments. Compliance with our Senior Note covenants does not significantly impact our operations. We were in compliance with the covenants contained in the indentures of all of our Senior Notes as of March 31, 2018.

In October 2017, we issued and sold $400.0 million aggregate principal amount of 5.875% unsecured Senior Notes due October 2027 at par (before underwriting and other issuance costs) through a private placement to qualified institutional buyers (the 2027 Notes). Interest on the 2027 Notes is payable semi-annually beginning on April 15, 2018. The 2027 Notes will mature on October 15, 2027. We may redeem the 2027 Notes at any time prior to October 15, 2022, in whole or in part, at a redemption price equal to 100% of the principal amount of the notes to be redeemed, together with accrued and unpaid interest to, but excluding, the redemption date, plus a customary make-whole premium. In addition, on or prior to October 15, 2022, we may redeem up to 35% of the aggregate principal amount of the 2027 Notes with the net cash proceeds of certain equity offerings at a redemption price equal to 105.875% of the principal amount, plus accrued and unpaid interest to, but excluding, the redemption date, provided at least 65% of the aggregate principal amount of the 2027 Notes originally issued remains outstanding immediately after such redemption. Upon the occurrence of certain specified changes of control, the holders of the 2027 Notes will have the right to require us to purchase all or a part of the notes at a repurchase price equal to 101% of their principal amount, plus accrued and unpaid interest to, but excluding, the repurchase date. The covenants related to the 2027 Notes are consistent with our other senior notes. Refer to the table on the following page for additional details regarding redemption features of the 2027 Notes.

During the three months ended December 31, 2017, the proceeds of the 2027 Notes, as well as $34.5 million cash on hand, were used to redeem $225.0 million of our 5.75% unsecured Senior Notes due 2019 and $175.0 million of our 7.25% unsecured Senior Notes due 2023, resulting in a loss on extinguishment of debt of $25.9 million during the six months ended March 31, 2018, of which $3.2 million was a non-cash write-off of debt issuance and discount costs.

In March 2017, we issued and sold $250 million aggregate principal amount of 6.75% unsecured Senior Notes due March 2025 at par (before underwriting and other issuance costs) through a private placement to qualified institutional buyers (the 2025 Notes). Interest on the 2025 Notes is payable semi-annually, beginning on September 15, 2017. The 2025 Notes will mature on March 15, 2025. We may redeem the 2025 Notes at any time prior to March 15, 2020, in whole or in part, at a redemption price equal to 100% of the principal amount of the notes to be redeemed, together with accrued and unpaid interest to, but excluding, the redemption date, plus a customary make-whole premium. In addition, on or prior to March 15, 2020, we may redeem up to 35% of the aggregate principal amount of the 2025 Notes with the net cash proceeds of certain equity offerings at a redemption price equal to 106.75% of the principal amount, plus accrued and unpaid interest to, but excluding, the redemption date, provided at least 65% of the aggregate principal amount of the 2025 Notes originally issued remains outstanding immediately after such redemption. Upon the occurrence of certain specified changes of control, the holders of the 2025 Notes will have the right to require us to purchase all or a part of the notes at a repurchase price equal to 101% of their principal amount, plus accrued and unpaid interest to, but excluding, the repurchase date. The covenants related to the 2025 Notes are consistent with our other senior notes.

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During the three months ended March 31, 2017, we redeemed our outstanding Senior Notes due 2021, as well as the then outstanding balance on our term loan, mainly by utilizing the proceeds received from the 2025 Notes issued during the current quarter, which is discussed above, as well as cash on hand. This debt repurchase activity resulted in a loss on extinguishment of debt of $15.6 million during the three and six months ended March 31, 2017.

For additional redemption features, refer to the table below that summarizes the redemption terms for our Senior Notes:



Senior Note Description	Issuance Date	Maturity Date	Redemption Terms
5 3/4% Senior Notes	April 2014	June 2019	Callable at any time before March 15, 2019, in whole or in part, at a redemption price equal to 100% of the principal amount, plus a customary make-whole premium; on or after March 15, 2019, callable at 100% of the principal amount plus, in each case, accrued and unpaid interest
8 3/4% Senior Notes	September 2016	March 2022	Callable at any time prior to March 15, 2019, in whole or in part, at a redemption price equal to 100% of the principal amount, plus a customary make-whole premium; on or after March 15, 2019, callable at a redemption price equal to 104.375% of the principal amount; on or after March 15, 2020, callable at a redemption price equal to 102.188% of the principal amount; on or after March 15, 2021, callable at a redemption price equal to 100% of the principal amount plus, in each case, accrued and unpaid interest
7 1/4% Senior Notes	February 2013	February 2023	After February 1, 2018, callable at a redemption price equal to 103.625% of the principal amount; on or after February 1, 2019, callable at a redemption price equal to 102.41% of the principal amount; on or after February 1, 2020, callable at a redemption price equal to 101.208% of the principal amount; on or after February 1, 2021, callable at 100% of the principal amount plus, in each case, accrued and unpaid interest
6 3/4% Senior Notes	March 2017	March 2025	Callable at any time prior to March 15, 2020, in whole or in part, at a redemption price equal to 100% of the principal amount, plus a customary make-whole premium; on or after March 15, 2020, callable at a redemption price equal to 105.063% of the principal amount; on or after March 15, 2021, callable at a redemption price equal to 103.375% of the principal amount; on or after March 15, 2022, callable at a redemption price equal to 101.688% of the principal amount; on or after March 15, 2023, callable at a redemption price equal to 100.000% of the principal amount, plus, in each case, accrued and unpaid interest
5 7/8% Senior Notes	October 2017	October 2027	Callable at any time prior to October 15, 2022, in whole or in part, at a redemption price equal to 100% of the principal amount, plus a customary make-whole premium; on or after October 15, 2022, callable at a redemption price equal to 102.938% of the principal amount; on or after October 15, 2023, callable at a redemption price equal to 101.958% of the principal amount; on or after October 15, 2024, callable at a redemption price equal to 100.979% of the principal amount; on or after October 15, 2025, callable at a redemption price equal to 100.000% of the principal amount, plus, in each case, accrued and unpaid interest

Junior Subordinated Notes

Our unsecured junior subordinated notes (Junior Subordinated Notes) mature on July 30, 2036. The Junior Subordinated Notes are redeemable at par and paid interest at a fixed rate of 7.987% for the first ten years ending July 30, 2016. The securities now have a floating interest rate as defined in the Junior Subordinated Notes Indenture, which was a weighted-average of 4.24% as of March 31, 2018 (because the rate on the portion of the Junior Subordinated Notes that was modified, as discussed subsequently, is subject to a floor). The obligations relating to these notes are subordinated to the Facility and the Senior Notes. In January 2010, we modified the terms of $75.0 million of these notes and recorded them at their then estimated fair value. Over the remaining life of the Junior Subordinated Notes, we will increase their carrying value until this carrying value equals the face value of the notes. As of March 31, 2018, the unamortized accretion was $37.8 million and will be amortized over the remaining life of the notes. As of March 31, 2018, we were in compliance with all covenants under our Junior Subordinated Notes.

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Other Secured Notes Payable

We periodically acquire land through the issuance of notes payable. As of March 31, 2018 and September 30, 2017, we had outstanding secured notes payable of $4.1 million and $5.6 million, respectively, primarily related to land acquisitions. These secured notes payable related to land acquisitions have varying expiration dates between 2018 and 2019, and have a weighted-average fixed interest rate of 1.56% as of March 31, 2018. 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) 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 related to these defects as well as others arising from its business. In determining loss contingencies, we consider the likelihood of loss and our ability to reasonably estimate the amount of such loss. An estimated loss is recorded when it is considered probable that a liability has been incurred and 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 for up to ten years covering only certain defined structural element failures.

Our homebuilding work is performed by subcontractors that typically must agree to indemnify us with regard to their work and provide certificates of insurance demonstrating that they have met our insurance requirements and have named us as an additional insured under their policies. Therefore, many claims relating to workmanship and materials that result in warranty spending are the primary responsibility of these subcontractors. In addition, we maintain insurance coverage related to our construction efforts that can result in recoveries of warranty and construction defect costs above certain specified limits.

Warranty reserves are included in other liabilities within the consolidated balance sheets, and the provision for warranty accruals is included in home construction expenses in our consolidated statements of income. Reserves covering anticipated warranty expenses are recorded for each home closed. Management assesses the adequacy of warranty reserves each reporting period based on historical experience and the expected costs to remediate potential claims. Our review includes a quarterly analysis of the historical data and trends in warranty expense by operating division. Such analysis considers market-specific factors such as warranty experience, the number of home closings, the prices of homes, product mix, and other data in estimating warranty reserves. In addition, the analysis also contemplates the existence of any non-recurring or community-specific warranty-related matters that might not be included in historical data and trends. While estimated warranty liabilities are adjusted each reporting period based on the results of our quarterly analyses, we may not accurately predict actual warranty costs, which could lead to significant changes in the reserves.

Changes in warranty reserves are as follows for the periods presented:



	Three Months Ended						Six Months Ended
	March 31,						March 31,
(In thousands)	2018			2017			2018			2017
Balance at beginning of period	$	15,816		$	32,309		$	18,091		$	39,131
Accruals for warranties issued ^(a)	3,400			3,249			7,613			5,907
Changes in liability related to warranties existing in prior periods ^(b)	(1,097		)	2,463			(3,394		)	7,855
Payments made ^(b)	(3,536		)	(12,635		)	(7,727		)	(27,507		)
Balance at end of period	$	14,583		$	25,386		$	14,583		$	25,386

^(a) Accruals for warranties issued are a function of the number of home closings in the period, the selling prices of the homes closed, and the rates of accrual per home estimated as a percentage of the selling price of the home.

^(b) Changes in liability related to warranties existing and payments made are elevated during the periods presented primarily due to charges and subsequent payments related to water intrusion issues in certain of our communities located in Florida (refer to separate discussion below).

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Florida Water Intrusion Issues

In the latter portion of fiscal 2014, we began to experience an increase in reported stucco and water intrusion issues in certain of our communities in Florida (the Florida stucco issues). Through March 31, 2018, we cumulatively recorded charges related to these issues of $85.0 million.

Warranty reserves related to the Florida stucco issues decreased during the three and six months ended March 31, 2018 by $0.2 million and $0.6 million, respectively. As of March 31, 2018, 709 homes have been identified as likely to require repairs, of which 675 homes have been repaired. The majority of the remaining repairs in our Florida communities are expected to be completed during fiscal 2018. We made payments related to the Florida stucco issues of $0.6 million and $1.7 million during the three and six months ended March 31, 2018, respectively. These amounts included payments on fully repaired homes and homes for which remediation is not yet complete, bringing the remaining accrual related to this issue to $2.4 million as of March 31, 2018. This accrual is included in the overall warranty liability detailed above. As of March 31, 2018, no reserves have been established for homes within the impacted communities that are deemed unlikely to require repairs. Were such homes to require repairs, the total cost of remediation is estimated to be $2.4 million based on current repair costs. For additional information related to the Florida stucco issues, refer to Note 9 of the notes to the consolidated financial statements in our 2017 Annual Report.

Insurance Recoveries

The Company has insurance policies that provide for the reimbursement of certain warranty costs incurred above specified thresholds for each period covered. We have surpassed these thresholds for certain policy years, particularly those that cover most of the homes impacted by the Florida stucco issues discussed above. As such, beginning with the first quarter of our fiscal 2015, we expect a substantial majority of additional costs incurred for warranty work on homes within these policy years to be reimbursed by our insurers.

We adjust our insurance receivables each quarter to reflect our estimate of future costs to be incurred subject to recoveries from insurers. Insurance receivables were reduced by $0.2 million and $0.4 million during the three and six months ended March 31, 2018, respectively, to reflect the amounts deemed probable of receiving. The changes to our insurance receivables fully offset the current three and six month period changes in our reserve related to the Florida stucco issues. For the three and six months ended March 31, 2017, insurance recoveries totaled $2.3 million and $6.2 million, respectively. Through March 31, 2018, actual plus expected insurance recoveries related to the Florida stucco issues cumulatively totaled $82.6 million.

Amounts recorded for anticipated insurance recoveries are reflected within the consolidated statements of income as a reduction of home construction expenses. Amounts not yet received from our insurer are recorded on a gross basis, without any reduction for the associated warranty expense, within accounts receivable on our consolidated balance sheets.

Litigation

From time-to-time, we receive claims from institutions that have acquired mortgages originated by our subsidiary, Beazer Mortgage Corporation (BMC), demanding damages or indemnity or that we repurchase such mortgages. BMC stopped originating mortgages in 2008. We have been able to resolve these claims for no cost or for amounts that are not material to our consolidated financial statements. 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. As of March 31, 2018, no liability has been recorded for any additional claims related to this matter 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 that 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 our 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.

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Other Matters

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 in 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 an accrual of $2.9 million and $3.9 million in other liabilities on our consolidated balance sheets for litigation and related matters, excluding warranty, as of March 31, 2018 and September 30, 2017, respectively.

We had outstanding letters of credit and performance bonds of approximately $40.7 million and $222.3 million, respectively, as of March 31, 2018, related principally to our obligations to local governments to construct roads and other improvements in various developments.

(9) Fair Value Measurements

As of the dates presented, we had assets on our consolidated balance sheets that were required to be measured at fair value on a recurring or non-recurring basis. 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; and


•	Level 3 – Unobservable inputs that reflect our own estimates about the assumptions market participants would use in pricing the asset or liability.

Certain of our assets are required to be recorded at fair value on a recurring basis. The fair value of our deferred compensation plan assets is based on market-corroborated inputs (Level 2).

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 of these assets may not be recovered. We review our long-lived assets, including inventory, for recoverability when factors indicate an impairment may exist, but no less than quarterly. Fair value of assets deemed to be impaired is determined based upon the type of asset being evaluated. The fair value of our owned inventory assets, when required to be calculated, is discussed within Notes 2 and 5. The fair value of our investments in unconsolidated entities is determined primarily using a discounted cash flow model to value the underlying net assets of the respective entities. Due to the substantial use of unobservable inputs in valuing the assets on a non-recurring basis, they are classified within Level 3.

Determining which hierarchical level an asset or liability falls within requires significant judgment. We evaluate our hierarchy disclosures each quarter.

The following table presents the period-end balances of assets measured at fair value on a recurring basis and the impairment-date fair value of certain assets measured at fair value on a non-recurring basis for each hierarchy level. These balances represent only those assets whose carrying values were adjusted to fair value during the periods presented:



(In thousands)	Level 1		Level 2		Level 3		Total
As of March 31, 2018
Deferred compensation plan assets ^(a)	$	—	$	1,445	$	—	$	1,445
Land held for sale ^(b)	—		—		642		642
As of September 30, 2017
Deferred compensation plan assets ^(a)	$	—	$	1,114	$	—	$	1,114
Development projects in progress ^(b)	—		—		3,791		3,791
Land held for sale ^(b)	—		—		325		325

^(a)Measured at fair value on a recurring basis.

^(b)Measured at fair value on a non-recurring basis.

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The fair value of our cash and cash equivalents, restricted cash, accounts receivable, trade accounts payable, other liabilities, amounts due under the Facility (if outstanding), and other secured notes payable approximate their carrying amounts due to the short maturity of these assets and liabilities. When outstanding, obligations related to land not owned under option agreements approximate fair value.

The following table presents the carrying value and estimated fair value of certain of our other financial liabilities as of March 31, 2018 and September 30, 2017:



	As of March 31, 2018				As of September 30, 2017
(In thousands)	Carrying Amount ^(a)		Fair Value		Carrying Amount ^(a)		Fair Value
Senior Notes ^(b)	$	1,258,348	$	1,275,856	$	1,259,840	$	1,355,657
Junior Subordinated Notes	62,970		62,970		61,937		61,937
	$	1,321,318	$	1,338,826	$	1,321,777	$	1,417,594

^(a)Carrying amounts are net of unamortized debt premiums, debt issuance costs, and accretion.

^(b) The estimated fair value for our publicly-held Senior Notes has been determined using quoted market rates (Level 2).

(10) Income Taxes

Income Tax Provision

The Company's income tax provision for quarterly interim periods is based on an estimated annual effective income tax rate calculated separately from the effect of significant, infrequent, or unusual items. The total income tax provision, including discontinued operations, was a tax expense of $1.0 million and $109.0 million for the three and six months ended March 31, 2018, respectively, compared to an income tax benefit of $4.5 million and $7.1 million for the three and six months ended March 31, 2017, respectively. The current fiscal year income tax expense was primarily driven by (1) the remeasurement of our deferred tax assets as a result of the enactment of the Tax Cuts and Jobs Act (Tax Act); and (2) several discrete tax expenses, including the impacts to our stock-based compensation expense as a result of current period activity; both partially offset by (3) the loss incurred from continuing operations; and (4) the completion of work necessary to claim an additional $2.3 million in tax credits related to prior fiscal years. The tax benefit for the six months ended March 31, 2017 was primarily driven by the Company's loss from continuing operations and the completion of work necessary to claim an additional $1.3 million in tax credits, which were recorded in fiscal 2017 but related to fiscal 2016.

Deferred Tax Assets and Liabilities

The Tax Act is comprehensive tax reform legislation that was enacted by the U.S. government on December 22, 2017. The Tax Act includes significant changes to the Internal Revenue Code, including a reduction in the corporate tax rate from 35% to 21%. Additionally, the Tax Act establishes new laws that will impact our fiscal 2019, including, but not limited to, eliminating the corporate alternative minimum tax (AMT), changes to how existing AMT credits can be realized, and imposing new limitations on the deductibility of certain executive compensation.

In connection with our initial analysis of the Tax Act's impacts, and in accordance with the guidance in SAB 118, we recorded a discrete net tax expense of $112.6 million during the three months ended December 31, 2017. This net expense is primarily related to the corporate tax rate reduction and the associated remeasurement of our deferred tax assets. While a provisional tax expense of $112.6 million was recorded based on reasonable estimates of the impact of the reduction in the corporate tax rate, the estimate may be affected by additional analyses related to the Tax Act and temporary differences that will reverse during our fiscal 2018 and subsequent tax years. No change to the estimate was recorded during the three months ended March 31, 2018.

The Company continues to evaluate its deferred tax assets each period to determine if a valuation allowance is required based on whether it is more likely than not that some portion of these deferred tax assets will not be realized. As of March 31, 2018, we concluded that it is more likely than not that a substantial portion of our deferred tax assets will be realized. As part of our analysis, we considered both positive and negative factors that impact profitability and whether those factors would lead to a change in the estimate of our deferred tax assets that may be realized in the future. Although the Tax Act may result in changes to our taxable income in the future, we do not anticipate that these changes would be significant enough to result in a change to our estimate when taken into account with other applicable factors. As of March 31, 2018, our conclusions on the valuation allowance and Internal Revenue Code Section 382 limitations related to our deferred tax assets remain consistent with the determinations we made during the period ended September 30, 2017, and such conclusions are based on similar company specific and industry factors to those discussed in Note 13 to the audited consolidated financial statements within our 2017 Annual Report.

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(11) Stock-based Compensation

Stock-based compensation expense is included in G&A expenses in the condensed consolidated statements of income. A summary of the expense related to stock-based compensation by award type is as follows for the periods presented:



	Three Months Ended March 31,						Six Months Ended March 31,
(In thousands)	2018			2017			2018			2017
Stock options expense	$	73		$	55		$	133		$	162
Restricted stock awards expense	2,525			2,286			5,075			4,355
Before tax stock-based compensation expense	2,598			2,341			5,208			4,517
Tax benefit	(659		)	(833		)	(1,321		)	(1,607		)
After tax stock-based compensation expense	$	1,939		$	1,508		$	3,887		$	2,910

During the six months ended March 31, 2018 and 2017, employees surrendered 62,330 shares and 30,018 shares, respectively, to the Company in payment of minimum tax obligations upon the vesting of stock awards under our stock incentive plans. The aggregate value of surrendered shares based on the the market price on the date of surrender was approximately $1.3 million and $0.4 million for the six months ended March 31, 2018 and 2017, respectively.

Stock Options

The fair value of each stock option granted is estimated on the grant date using the Black-Scholes option-pricing model (Black-Scholes Model). As of March 31, 2018, the intrinsic value of our stock options outstanding, vested and expected to vest, and exercisable were $1.6 million, $1.6 million, and $1.0 million, respectively. As of March 31, 2018 and September 30, 2017, total unrecognized compensation cost related to nonvested stock options was $0.3 million and $0.3 million, respectively. The cost remaining as of March 31, 2018 is expected to be recognized over a weighted-average period of 2.0 years.

During the six months ended March 31, 2018, we issued 23,680 stock options, each for one share of the Company's stock. These stock options typically vest ratably over three years from the grant date or two years from the grant date if issued under the Employee Stock Option Program (EOP; refer to Note 16 of the notes to the consolidated financial statements in our 2017 Annual Report). Following are the assumptions used to value stock options granted, which derived the weighted average fair value shown, for the period presented:



	Six Months Ended
	March 31, 2018
Expected life of options	5.0 years
Expected volatility	44.71		%
Expected dividends	—
Weighted average risk-free interest rate	2.06		%
Weighted average fair value	$	8.49

We 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 granted. We considered 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.

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Activity related to stock options for the periods presented is as follows:



	Three Months Ended				Six Months Ended
	March 31, 2018				March 31, 2018
	Shares		Weighted Average Exercise Price		Shares		Weighted Average Exercise Price
Outstanding at beginning of period	556,159		$	14.11	593,753		$	14.76
Granted	—		—		23,680		20.46
Exercised	—		—		(1,666	)	7.56
Expired	—		—		(56,967	)	23.65
Forfeited	(5,900	)	7.48		(8,541	)	9.46
Outstanding at end of period	550,259		$	14.18	550,259		$	14.18
Exercisable at end of period	435,432		$	14.81	435,432		$	14.81
Vested or expected to vest in the future	550,222		$	14.18	550,222		$	14.18

Restricted Stock Awards

The fair value of restricted stock awards with market conditions is estimated on the grant date using a Monte Carlo valuation model. The fair value of restricted stock awards without market conditions is based on the market price of the Company's common stock on the date of grant. If applicable, the cash-settled component of any awards granted to employees is accounted for as a liability, which is adjusted to fair value each reporting period until vested.

Compensation cost arising from restricted stock awards granted to employees is recognized as an expense using the straight-line method over the vesting period. As of March 31, 2018 and September 30, 2017, there was $12.9 million and $8.8 million, respectively, of total unrecognized compensation cost related to nonvested restricted stock awards. The cost remaining as of March 31, 2018 is expected to be recognized over a weighted average period of 1.8 years.

We issued two types of restricted stock awards during the six months ended March 31, 2018 as follows: (1) performance-based restricted stock awards with a payout based on the Company's performance and certain market conditions; and (2) time-based restricted stock awards. Each award type is discussed further below.

Performance-Based Restricted Stock Awards. During the six months ended March 31, 2018, we issued 165,085 shares of performance-based restricted stock with market conditions (2018 Performance Shares) to our executive officers and certain other employees. The 2018 Performance Shares are structured to be awarded based on the Company's performance under three pre-determined financial metrics at the end of the three-year performance period. After determining the number of shares earned based on these financial metrics, which can range from 0% to 175% of the targeted number of shares, the award will be subject to further upward or downward adjustment by as much as 20% based on the Company's relative total shareholder return (TSR) compared against the S&P Homebuilders Select Industry Index during the three-year performance period. The 2018 Performance Shares were valued using the Monte Carlo valuation model due to the existence of the TSR market condition and had an estimated fair value of $22.40 per share on the date of grant.

A Monte Carlo valuation model requires the following inputs: (1) the expected dividend yield on the underlying stock; (2) the expected price volatility of the underlying stock; (3) the risk-free interest rate for the period corresponding with the expected term of the award; and (4) the fair value of the underlying stock. For the Company and each member of the peer group, the following inputs were used in the Monte Carlo valuation model to determine the fair value as of the grant date for the 2018 Performance Shares: 0% dividend yield for the Company; expected price volatility ranging from 21.1% to 50.0%; and a risk-free interest rate of 1.81%. The methodology used to determine these assumptions is similar to the Black-Scholes Model; however, the expected term is determined by the model in the Monte Carlo simulation.

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. Any 2018 Performance Shares earned in excess of the target number of 165,085 shares may be settled in cash or additional shares at the discretion of the Compensation Committee of our Board of Directors. Any portion of these that do not vest at the end of the period will be forfeited.

Time-Based Restricted Stock Awards. During six months ended March 31, 2018, we also issued 211,165 shares of time-based restricted stock (Restricted Shares) to our directors, executive officers, and certain other employees. The Restricted Shares granted to our non-employee directors vest on the one-year anniversary of the date of grant, while the Restricted Shares granted to our executive officers and other employees vest ratably over three years on each anniversary from the date of grant.

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Activity relating to restricted stock awards for the period presented is as follows:



	Six Months Ended March 31, 2018
	Performance-Based Restricted Stock				Time-Based Restricted Stock				Total Restricted Stock
	Shares		Weighted Average Grant Date Fair Value		Shares		Weighted Average Grant Date Fair Value		Shares		Weighted Average Grant Date Fair Value
Beginning of period	668,766		$	15.72	872,181		$	16.47	1,540,947		$	16.14
Granted	165,085		22.40		211,165		20.20		376,250		21.17
Vested	—		—		(225,608	)	14.01		(225,608	)	14.01
Forfeited	(188,058	)	18.96		(15,685	)	16.35		(203,743	)	18.76
End of period	645,793		$	16.48	842,053		$	18.07	1,487,846		$	17.38

(12) Earnings Per Share

Basic income (loss) per share is calculated by dividing net income (loss) by the weighted-average number of shares outstanding during the period. Diluted income per share adjusts the basic income per share for the effects of any potentially dilutive instruments, only in periods in which the Company has net income and such effects are dilutive under the treasury stock method. Basic and diluted income (loss) per share is calculated using unrounded numbers.

The Company reported net income for the three months ended March 31, 2018, but a net loss for the remaining periods presented. Accordingly, for the periods with a net loss, all common stock equivalents were excluded from the computation of diluted loss per share because inclusion would have resulted in anti-dilution. For the three and six months ended March 31, 2018, 0.3 million and 1.4 million shares related to nonvested stock-based compensation awards, respectively, were excluded from our calculation of diluted income (loss) per share as a result of their anti-dilutive effect. For both the three and six months ended March 31, 2017, 1.6 million shares related to nonvested stock-based compensation awards were excluded from our calculation of diluted income per share as a result of their anti-dilutive effect.



	Three Months Ended March 31,		Six Months Ended March 31,
(In thousands)	2018	2017	2018	2017
Basic shares	32,140	31,969	32,097	31,931
Shares issuable upon vesting of restricted stock	466	—	—	—
Shares issuable upon exercise of options	115	—	—	—
Diluted shares	32,721	31,969	32,097	31,931

(13) Other Liabilities

Other liabilities include the following as of March 31, 2018 and September 30, 2017:



(In thousands)	March 31, 2018		September 30, 2017
Accrued bonus and deferred compensation	$	19,620	$	36,753
Customer deposits	17,562		11,704
Accrued interest	16,318		11,024
Accrued warranty expense	14,583		18,091
Litigation accrual	2,886		3,899
Income tax liabilities	1,168		811
Other	25,800		25,377
Total other liabilities	$	97,937	$	107,659

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(14) Segment Information

We currently operate in 13 states that are grouped into three homebuilding segments based on geography. Revenue from our homebuilding segments is derived from the sale of homes that 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. We have considered the applicable aggregation criteria and have combined our homebuilding operations into three reportable segments as follows:

West: Arizona, California, Nevada, and Texas

East: Delaware, Indiana, Maryland, New Jersey^(a), Tennessee, and Virginia

Southeast: Florida, Georgia, North Carolina, and South Carolina

^(a)During our fiscal 2015, we made the decision that we would not continue to reinvest in new homebuilding assets in our New Jersey division; therefore, it is no longer considered an active operation. However, it is included in this listing because the segment information below continues to include New Jersey.

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 G&A expenses that are incurred by or allocated to our homebuilding segments. The accounting policies of our segments are described in Note 2 to the consolidated financial statements within our 2017 Annual Report.

The following tables contain our revenue, operating income, and depreciation and amortization by segment for the periods presented:



	Three Months Ended				Six Months Ended
	March 31,				March 31,
(In thousands)	2018		2017		2018		2017
Revenue
West	$	234,510	$	185,155	$	412,481	$	356,904
East	107,412		116,640		196,265		200,799
Southeast	113,256		123,673		218,921		207,006
Total revenue	$	455,178	$	425,468	$	827,667	$	764,709



	Three Months Ended						Six Months Ended
	March 31,						March 31,
(In thousands)	2018			2017			2018			2017
Operating income ^(a)
West	$	31,715		$	20,779		$	52,825		$	41,794
East ^(b)	8,926			10,532			16,322			12,089
Southeast	7,897			12,574			14,807			17,589
Segment total	48,538			43,885			83,954			71,472
Corporate and unallocated ^(c)	(34,713		)	(36,374		)	(63,448		)	(62,686		)
Total operating income	$	13,825		$	7,511		$	20,506		$	8,786

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	Three Months Ended				Six Months Ended
	March 31,				March 31,
(In thousands)	2018		2017		2018		2017
Depreciation and amortization
West	$	1,697	$	1,545	$	2,953	$	2,793
East	551		598		990		1,127
Southeast	542		656		1,121		1,122
Segment total	2,790		2,799		5,064		5,042
Corporate and unallocated ^(c)	276		356		509		790
Total depreciation and amortization	$	3,066	$	3,155	$	5,573	$	5,832

^(a) Operating income is impacted by impairment and abandonment charges incurred during the periods presented (see Note 5).

^(b) Operating income for our East segment for the six months ended March 31, 2017 was impacted by a charge to G&A of $2.7 million related to the write-off of a deposit on a legacy investment in a development site that we deemed uncollectible.

^(c)Corporate and unallocated operating loss includes amortization of capitalized interest; movement in capitalized indirects; expenses related to numerous shared services functions that benefit all segments but are not allocated to the operating segments reported above, including information technology, treasury, corporate finance, legal, branding and national marketing; and certain other amounts that are not allocated to our operating segments.

Corporate and unallocated depreciation and amortization represents depreciation and amortization related to assets held by our corporate functions that benefit all segments.

The following table contains capital expenditures by segment for the periods presented:



	Six Months Ended
	March 31,
(In thousands)	2018		2017
Capital Expenditures
West	$	4,238	$	3,165
East	1,133		1,446
Southeast	1,185		875
Corporate and unallocated	1,636		191
Total capital expenditures	$	8,192	$	5,677

The following table contains our asset balance by segment as of March 31, 2018 and September 30, 2017:



(In thousands)	March 31, 2018		September 30, 2017
Assets
West	$	830,572	$	779,964
East	318,984		298,532
Southeast	365,975		331,618
Corporate and unallocated ^(a)	591,972		810,881
Total assets	$	2,107,503	$	2,220,995

^(a) Primarily consists of cash and cash equivalents, restricted cash, deferred taxes, capitalized interest and indirects, and other items that are not allocated to the segments.

(15) 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 the Facility. The guarantees are full and unconditional and the guarantor subsidiaries are 100% owned by Beazer Homes USA, Inc. The following unaudited financial information presents the line items of our unaudited condensed consolidated financial statements separated by amounts related to the parent issuer, guarantor subsidiaries, non-guarantor subsidiaries, and consolidating adjustments as of or for the periods presented.

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Beazer Homes USA, Inc.

Condensed Consolidating Balance Sheet Information

March 31, 2018

(Unaudited)



in thousands	Beazer Homes USA, Inc.		Guarantor Subsidiaries		Non-Guarantor Subsidiaries		Consolidating Adjustments			Consolidated Beazer Homes USA, Inc.
ASSETS
Cash and cash equivalents	$	157,652	$	7,735	$	694	$	(7,294	)	$	158,787
Restricted cash	11,818		965		—		—			12,783
Accounts receivable (net of allowance of $346)	—		30,180		3		—			30,183
Income tax receivable	112		—		—		—			112
Owned inventory	—		1,677,361		—		—			1,677,361
Investments in unconsolidated entities	773		3,520		—		—			4,293
Deferred tax assets, net	199,229		—		—		—			199,229
Property and equipment, net	—		20,166		—		—			20,166
Investments in subsidiaries	737,894		—		—		(737,894		)	—
Intercompany	799,150		—		2,329		(801,479		)	—
Other assets	803		3,786		—		—			4,589
Total assets	$	1,907,431	$	1,743,713	$	3,026	$	(1,546,667	)	$	2,107,503
LIABILITIES AND STOCKHOLDERS’ EQUITY
Trade accounts payable	$	—	$	117,143	$	—	$	—		$	117,143
Other liabilities	16,818		80,889		230		—			97,937
Intercompany	2,329		806,444		—		(808,773		)	—
Total debt (net of premium and debt issuance costs)	1,321,318		4,139		—		—			1,325,457
Total liabilities	1,340,465		1,008,615		230		(808,773		)	1,540,537
Stockholders’ equity	566,966		735,098		2,796		(737,894		)	566,966
Total liabilities and stockholders’ equity	$	1,907,431	$	1,743,713	$	3,026	$	(1,546,667	)	$	2,107,503

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Beazer Homes USA, Inc.

Condensed Consolidating Balance Sheet Information

September 30, 2017

(Unaudited)



in thousands	Beazer Homes USA, Inc.		Guarantor Subsidiaries		Non-Guarantor Subsidiaries		Consolidating Adjustments			Consolidated Beazer Homes USA, Inc.
ASSETS
Cash and cash equivalents	$	283,191	$	15,393	$	724	$	(7,161	)	$	292,147
Restricted cash	11,001		1,461		—		—			12,462
Accounts receivable (net of allowance of $330)	—		36,322		1		—			36,323
Income tax receivable	88		—		—		—			88
Owned inventory	—		1,542,807		—		—			1,542,807
Investments in unconsolidated entities	773		3,221		—		—			3,994
Deferred tax assets, net	307,896		—		—		—			307,896
Property and equipment, net	—		17,566		—		—			17,566
Investments in subsidiaries	808,067		—		—		(808,067		)	—
Intercompany	606,168		—		2,337		(608,505		)	—
Other assets	599		7,098		15		—			7,712
Total assets	$	2,017,783	$	1,623,868	$	3,077	$	(1,423,733	)	$	2,220,995
LIABILITIES AND STOCKHOLDERS’ EQUITY
Trade accounts payable	$	—	$	103,484	$	—	$	—		$	103,484
Other liabilities	11,229		96,189		241		—			107,659
Intercompany	2,337		613,329		—		(615,666		)	—
Total debt (net of premium and debt issuance costs)	1,321,777		5,635		—		—			1,327,412
Total liabilities	1,335,343		818,637		241		(615,666		)	1,538,555
Stockholders’ equity	682,440		805,231		2,836		(808,067		)	682,440
Total liabilities and stockholders’ equity	$	2,017,783	$	1,623,868	$	3,077	$	(1,423,733	)	$	2,220,995

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Beazer Homes USA, Inc.

Consolidating Statements of Income (Loss) and Comprehensive Income (Loss)

(Unaudited)



in thousands	Beazer Homes USA, Inc.			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Consolidating Adjustments			Consolidated Beazer Homes USA, Inc.
Three Months Ended March 31, 2018
Total revenue	$	—		$	455,178		$	23		$	(23	)	$	455,178
Home construction and land sales expenses	19,655			360,469			—			(23		)	380,101
Gross (loss) profit	(19,655		)	94,709			23			—			75,077
Commissions	—			17,334			—			—			17,334
General and administrative expenses	—			40,823			29			—			40,852
Depreciation and amortization	—			3,066			—			—			3,066
Operating (loss) income	(19,655		)	33,486			(6		)	—			13,825
Equity in income of unconsolidated entities	—			256			—			—			256
Other (expense) income, net	(1,650		)	203			(6		)	—			(1,453		)
(Loss) income before income taxes	(21,305		)	33,945			(12		)	—			12,628
(Benefit) expense from income taxes	(5,710		)	6,725			(3		)	—			1,012
Equity in income of subsidiaries	27,211			—			—			(27,211		)	—
Income (loss) from continuing operations	11,616			27,220			(9		)	(27,211		)	11,616
Loss from discontinued operations, net of tax	—			(52		)	(6		)	—			(58		)
Equity in loss of subsidiaries from discontinued operations	(58		)	—			—			58			—
Net income (loss) and comprehensive income (loss)	$	11,558		$	27,168		$	(15	)	$	(27,153	)	$	11,558

in thousands	Beazer Homes USA, Inc.			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Consolidating Adjustments			Consolidated Beazer Homes USA, Inc.
Three Months Ended March 31, 2017
Total revenue	$	—		$	425,468		$	24		$	(24	)	$	425,468
Home construction and land sales expenses	19,819			337,993			—			(24		)	357,788
Inventory impairments and abandonments	—			282			—			—			282
Gross (loss) profit	(19,819		)	87,193			24			—			67,398
Commissions	—			16,632			—			—			16,632
General and administrative expenses	—			40,071			29			—			40,100
Depreciation and amortization	—			3,155			—			—