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

For the fiscal year ended September 30, 2018
or
 
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number 001-12822
_____________________________________________________________ 
BEAZER HOMES USA, INC.
(Exact name of registrant as specified in its charter)
 _____________________________________________________________ 
DELAWARE
 
58-2086934
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. employer
Identification no.)
1000 Abernathy Road, Suite 260,
Atlanta, Georgia
 
30328
(Address of principal executive offices)
 
(Zip Code)

(770) 829-3700
(Registrant’s telephone number, including area code)
 _____________________________________________________________


Securities registered pursuant to Section 12(b) of the Act:
 
 
 
 
Title of Securities
 
Exchanges on Which Registered
Common Stock, $.001 par value per share
 
New York Stock Exchange
 

Securities registered pursuant to Section 12(g) of the Act:
None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
YES  ¨ NO  x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
YES  ¨ NO  x
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to the filing requirements for the past 90 days.    YES  x    NO  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    YES  x    NO  ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.   ¨
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
¨
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
The aggregate market value of the registrant’s Common Stock held by non-affiliates of the registrant as of March 31, 2018, based on the closing sale price per share as reported by the New York Stock Exchange on such date, was $520,899,550.
Class
 
Outstanding at November 8, 2018
Common Stock, $0.001 par value
 
33,522,046

DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s Proxy Statement for the registrant’s 2019 Annual Meeting of Stockholders are incorporated by reference into Part III of this Form 10-K to the extent stated herein. The Proxy Statement will be filed within 120 days of the registrant’s fiscal year ended September 30, 2018.





BEAZER HOMES USA, INC.
TABLE OF CONTENTS
 
 
 
 
 




References to “we,” “us,” “our,” “Beazer,” “Beazer Homes” and the “Company” in this Annual Report on Form 10-K refer to Beazer Homes USA, Inc.
FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K (Form 10-K) contains forward-looking statements. These forward-looking statements represent our expectations or beliefs concerning future results, and it is possible that the results described in this Form 10-K will not be achieved. These forward-looking statements can generally be identified by the use of statements that include words such as “estimate,” “project,” “believe,” “expect,” “anticipate,” “intend,” “plan,” “foresee,” “likely,” “will,” “goal,” “target” or other similar words or phrases. All forward-looking statements are based upon information available to us as of the date they are made.
These forward-looking statements involve risks, uncertainties and other factors, many of which are outside of our control, that could cause actual results to differ materially from the results discussed in the forward-looking statements, including, among other things, the matters discussed in this Form 10-K in the section captioned “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Additional information about factors that could lead to material changes in performance is contained in Part I, Item 1A- Risk Factors of this Form 10-K. These factors are not intended to be an all-inclusive list of risks and uncertainties that may affect the operations, performance, development and results of our business, but instead are the risks that we currently perceive as potentially being material. Such factors may include:
the cyclical nature of the homebuilding industry and a potential deterioration in homebuilding industry conditions;
economic changes nationally or in local markets, changes in consumer confidence, declines in employment or wage levels, inflation or increases in the quantity and decreases in the price of new homes and resale homes on the market;
shortages of or increased prices for labor, land or raw materials used in housing production, and the level of quality and craftsmanship provided by our subcontractors;
factors affecting margins, such as decreased land values underlying land option agreements, increased land development costs in communities under development or delays or difficulties in implementing initiatives to reduce our production and overhead cost structure;
the availability and cost of land and the risks associated with the future value of our inventory, such as additional asset impairment charges or write-downs;
estimates related to homes to be delivered in the future (backlog) are imprecise, as they are subject to various cancellation risks that cannot be fully controlled;
increases in mortgage interest rates, increased disruption in the availability of mortgage financing, continued changes in tax laws or otherwise regarding the deductibility of mortgage interest expenses and real estate taxes or an increased number of foreclosures;
our allocation of capital and the cost of and ability to access capital, due to factors such as limitations in the capital markets or adverse credit market conditions, and otherwise meet our ongoing liquidity needs, including the impact of any downgrades of our credit ratings or liquidity levels;
our ability to reduce our outstanding indebtedness and to comply with covenants in our debt agreements or satisfy such obligations through repayment or refinancing;
increased competition or delays in reacting to changing consumer preferences in home design;
natural disasters and other related events that could result in delays in land development or home construction, increase our costs or decrease demand in the impacted areas;
the potential recoverability of our deferred tax assets;
potential delays or increased costs in obtaining necessary permits as a result of changes to, or complying with, laws, regulations or governmental policies, and possible penalties for failure to comply with such laws, regulations or governmental policies, including those related to the environment;
the results of litigation or government proceedings and fulfillment of any related obligations;
the impact of construction defect and home warranty claims, including water intrusion issues in Florida;
the cost and availability of insurance and surety bonds, as well as the sufficiency of these instruments to cover potential losses incurred;
the impact of information technology failures, cybersecurity issues or data security breaches;
terrorist acts, natural disasters, acts of war or other factors over which the Company has little or no control; or
the impact on homebuilding in key markets of governmental regulations limiting the availability of water.
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 to predict all such factors.

1


PART I
Item 1. Business
We are a geographically diversified homebuilder with active operations in 13 states within three geographic regions in the United States: the West, East, and Southeast. Our homes are designed to appeal to homeowners at different price points across various demographic segments, and are generally offered for sale in advance of their construction. Our objective is to provide our customers with homes that incorporate exceptional value and quality, at affordable prices, while seeking to maximize our return on invested capital over the course of a housing cycle.
Beazer Homes USA, Inc. was incorporated in Delaware in 1993. Our principal executive offices are located at 1000 Abernathy Road, Suite 260, Atlanta, Georgia 30328, and our main telephone number is (770) 829-3700. We also provide information about our company, including active communities, through our Internet website located at www.beazer.com. Information on our website is not a part of this Form 10-K and shall not be deemed incorporated by reference.
Industry Overview and Current Market Conditions
The sale and production of new homes has been, and will likely remain, a large industry in the United States for four primary reasons: (1) historical growth in both population and households; (2) demographic patterns that indicate an increased likelihood of home ownership as age and income increase; (3) job creation within geographic markets that necessitate new home construction; and (4) consumer demand for home features that can be more easily provided in a new home than an existing home.
The demand for new and existing homes is dependent on a variety of demographic and economic factors, including job and wage growth, household formation, consumer confidence and mortgage financing. Currently, we are experiencing a strong job market as wages rise and the rate of household formation continues to grow. However, as the prices for new and existing homes have increased over the past few years and mortgage interest rates have inched upward, the affordability of homes has recently come under pressure, causing a slowdown in sales activity. In addition, labor availability concerns have helped constrain the growth of the supply of new homes available for sale. Though affordability concerns will continue, we believe the strong economic backdrop along with the limited supply of homes for sale provides us with confidence in the overall market for new home sales over the near term.
Long-Term Business Strategy
We achieved both our “2B-10” plan and our $250.0 million debt reduction goal in fiscal 2018. Collectively, these multi-year initiatives were part of our larger and longer-term Balanced Growth strategy. We remain committed to this Balanced Growth strategy, which is designed to increase shareholder value by improving our return on assets while reducing operational risk and debt.
For fiscal 2019, we have several objectives that are aligned with this longer-term strategy. These include generating higher profitability, increasing return on total assets, and further reducing our net debt to EBITDA ratio.
To drive additional profitability, we expect to have a higher community count and an increase in our average selling price (ASP) in fiscal 2019, primarily driven by a mix shift between communities and divisions. We will still maintain one of the lowest ASPs among our peer group.
To improve our return on assets, we expect to benefit from the activation of a number of assets that were previously classified as land held for future development, increase the portion of our land position that is controlled by lot options, and target smaller communities for acquisition.
To reduce our net debt to EBITDA ratio, we expect to increase profitability and modestly reduce our outstanding debt by the end of the fiscal year.

2


Reportable Business Segments
Our active homebuilding operations consist of the design, sale, and construction of single-family and multi-family homes in the following geographic regions, which represent our reportable segments:
Segment/State
 
Market(s)
West:
 
 
Arizona
 
Phoenix
California
 
Los Angeles County, Orange County, Riverside and San Bernardino Counties, San Diego County, Sacramento County, Yuba County
Nevada
 
Las Vegas
Texas
 
Dallas/Ft. Worth, Houston
East:
 
 
Indiana
 
Indianapolis
Maryland/Delaware
 
Baltimore, Howard, Metro-Washington, D.C./Sussex
Tennessee
 
Nashville
Virginia
 
Loudoun County, Prince William County, Stafford County, Spotsylvania County, Fredericksburg
Southeast:
 
 
Florida
 
Tampa/St. Petersburg, Orlando
Georgia
 
Atlanta, Savannah
North Carolina
 
Raleigh/Durham
South Carolina
 
Charleston, Myrtle Beach
The following tables summarize certain operating information of our reportable segments, including number of homes closed, the average selling price for the periods presented, and units and dollar value in backlog as of September 30, 2018, 2017, and 2016. Refer to “Management's Discussion and Analysis of Results of Operations and Financial Condition” in Item 7 of this Form 10-K for additional information.
 
2018
 
2017
 
2016
($ in thousands)
Number of Homes Closed
 
Average Closing Price
 
Number of Homes Closed
 
Average Closing Price
 
Number of Homes Closed
 
Average Selling Price
West
2,895

 
$
345.3

 
2,527

 
$
336.9

 
2,508

 
$
326.1

East
1,221

 
418.3

 
1,382

 
386.1

 
1,373

 
368.0

Southeast
1,651

 
343.5

 
1,616

 
316.1

 
1,538

 
300.1

Total Company
5,767

 
$
360.2

 
5,525

 
$
343.1

 
5,419

 
$
329.4

 
September 30, 2018
 
September 30, 2017
 
September 30, 2016
 
Units in Backlog
 
Dollar Value in Backlog (in millions)
 
Units in Backlog
 
Dollar Value in Backlog (in millions)
 
Units in Backlog
 
Dollar Value in Backlog (in millions)
West
858

 
$
305.5

 
879

 
$
306.0

 
828

 
$
278.5

East
281

 
127.5

 
413

 
161.7

 
444

 
168.5

Southeast
493

 
195.0

 
563

 
198.1

 
644

 
205.6

Total Company
1,632

 
$
628.0

 
1,855

 
$
665.8

 
1,916

 
$
652.7

ASP in backlog (in thousands)
 
 
$
384.8

 
 
 
$
358.9

 
 
 
$
340.6


3


Seasonal and Quarterly Variability
Our homebuilding operating cycle generally reflects higher levels of new home order activity in our second and third fiscal quarters, and increased closings in our third and fourth fiscal quarters. However, these seasonal patterns may be impacted or reduced by a variety of factors, including periods of economic downturn, which result in decreased revenues and closings.
Markets and Product Description
We evaluate a number of factors in determining which geographic markets to enter and remain in as well as which consumer segments to target with our homebuilding activities. We compete in sixteen geographic markets across the United States in part to reduce our exposure to any particular regional economy. Within these markets, we build homes in a variety of new home communities. We continually review our sixteen markets based on aggregate demographic information, land prices and availability, competitive dynamics, and our own operating results. We use the results of these reviews to re-allocate our investments to those markets where we believe we can maximize our profitability and return on capital.
We generally seek to differentiate ourselves from our competition in a particular market with respect to customer service, product type, incorporating energy-efficient features into the homes we build and design, and construction quality. We maintain the flexibility to alter our product mix within a given market, depending on market conditions. In determining our product mix, we consider demographic trends, demand for a particular type of product, consumer preferences, margins, timing, and the economic strength of the market. Depending on the market, we attempt to address one or more of the following categories of home buyers: entry-level, move-up, or retirement-oriented. We expect our focus on retirement-oriented buyers to increase as our Gatherings® business progresses, which is further discussed below. Within these buyer groups, we have developed detailed targeted buyer profiles based on demographic and psychographic data, including information about their marital and family status, employment, age, affluence, special interests, media consumption, and distance moved. Although we offer a selection of amenities and home customization options, we generally do not build “custom homes.” In all of our home offerings, we attempt to maximize customer satisfaction by incorporating quality and energy-efficient materials, distinctive design features, convenient locations, and competitive prices.
Gatherings. Gatherings® by Beazer Homes was officially launched in 2016 to address the growing 55 plus segment and to capitalize on Beazer’s success in building age-targeted condominiums. We strive to provide exceptional value at an affordable price and become a premier provider of condominium living for active adults over age 55. We are currently pursuing Gatherings assets in Florida, Texas, Georgia, Tennessee, Maryland, Virginia, Nevada, Arizona, California, North Carolina, and South Carolina. As of September 30, 2018, we have approved new communities representing nearly 700 future sales.
Operational Overview
Corporate Operations
We perform the following functions at our corporate office to promote standardization and operational excellence:
evaluate and select geographic markets;
allocate capital resources for land acquisitions;
maintain and develop relationships with lenders and capital markets to create and maintain access to financial resources;
maintain and develop relationships with national product vendors;
perform certain accounting, finance, legal, risk and marketing functions to support our field operations;
operate and manage information systems and technology support operations; and
monitor the operations of our divisions and partners.
We allocate capital resources in a manner consistent with our overall business strategy. We will vary our capital allocation based on market conditions, results of operations, and other factors. Capital commitments are determined through consultation among selected executive and operational personnel who play an important role in ensuring that new investments are consistent with our strategy. Financial controls are also maintained through the centralization and standardization of accounting and finance activities, policies, and procedures.

4


Field Operations
The development and construction of each new home community is managed by our operating divisions, each of which is led by a regional market leader who reports to our Chief Executive Officer. Within our operating divisions, our field teams are equipped with the skills needed to complete the functions of identifying land acquisition opportunities, land entitlement, land development, home construction, local marketing, sales, warranty service, and certain purchasing and planning/design functions. However, the accounting and accounts payable functions of our field operations are concentrated in our national accounting center, which we consider to be part of our corporate operations.
Land Acquisition and Development
Generally, the land we acquire is purchased only after necessary entitlements have been obtained so that we have the right to begin development or construction as market conditions dictate. The term “entitlements” refers to subdivision approvals, development agreements, tentative maps, or recorded plats, depending on the jurisdiction in which the land is located. Entitlements generally give a developer the right to obtain building permits upon compliance with conditions that are usually within the developer's control. Although entitlements are ordinarily obtained prior to the purchase of land, we are still required to obtain a variety of other governmental approvals and permits during the development process. In limited circumstances, we will purchase property without all necessary entitlements where we have identified an opportunity to build on such property in a manner consistent with our strategy.
We select land for purchase based upon a variety of factors, including:
internal and external demographic and marketing studies;
suitability for development during the time period of one to five years from the beginning of the development process to the last closing;
financial review as to the feasibility of the proposed project, including profit margins and returns on capital employed;
the ability to secure governmental approvals and entitlements;
environmental and legal due diligence;
competition in the area;
proximity to local traffic corridors and amenities; and
management's judgment of the real estate market and economic trends and our experience in a particular market.
We generally purchase land or obtain an option to purchase land, which, in either case, requires certain site improvements prior to home construction. Where required, we then undertake or the grantor of the option then undertakes in the case of land under option, the development activities (through contractual arrangements with local developers, general contractors, and/or subcontractors), which include site planning and engineering as well as constructing roads, water, sewer, and utility infrastructures, drainage and recreational facilities, and other amenities. When available in certain markets, we also buy finished lots that are ready for home construction. During our fiscal 2018 and 2017, we continued to pursue land acquisition opportunities and develop our land positions, spending approximately $425.4 million and $301.4 million, respectively, for land acquisition and $210.1 million and $145.0 million, respectively, for land development.
We strive to develop a design and marketing concept for each of our communities, which includes determination of the size, style, and price range of the homes, layout of streets and individual lots, and overall community design. The product line offered in a particular new home community depends upon many factors, including the housing generally available in the area, the needs of a particular market, and our cost of lots in the new home community.
Option Contracts
We acquire certain lots by means of option contracts from various sellers and developers, including land banking entities. Option contracts generally require the payment of a cash deposit or issuance of a letter of credit for the right to acquire lots during a specified period of time at a fixed or variable price.

5


Under option contracts, purchase of the underlying properties is contingent upon satisfaction of certain requirements by us and the sellers. Our liability under option contracts is generally limited to forfeiture of the non-refundable deposits, letters of credit, and other non-refundable amounts incurred, which totaled approximately $72.8 million as of September 30, 2018. The total remaining purchase price, net of cash deposits, committed under all land option contracts was $383.2 million as of September 30, 2018.
We expect to exercise, subject to market conditions and seller satisfaction of contract terms, most of our option contracts. Various factors, some of which are beyond our control, such as market conditions, weather conditions, and the timing of the completion of development activities, will have a significant impact on the timing of option exercises or whether lot options will be exercised at all.
The following table summarizes land controlled by us by reportable segment as of September 30, 2018:
 
Lots Owned
 
 
 
 
 
Lots with Homes Under Construction (a)
 
Finished Lots
 
Lots Under Development
 
Lots Held for Future Development
 
Lots Held for Sale
 
Total Lots Owned
 
Total Lots Under Contract
 
Total Lots Controlled
West
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Arizona
167

 
252

 
481

 

 

 
900

 
605

 
1,505

California
264

 
523

 
2,101

 
578

 
1

 
3,467

 
40

 
3,507

Nevada
174

 
372

 
482

 
239

 

 
1,267

 
601

 
1,868

Texas
558

 
1,204

 
2,439

 

 

 
4,201

 
2,478

 
6,679

Total West
1,163

 
2,351

 
5,503

 
817

 
1

 
9,835

 
3,724

 
13,559

East
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Indiana
103

 
188

 
690

 

 
40

 
1,021

 
97

 
1,118

Maryland/Delaware
112

 
90

 
544

 
93

 
7

 
846

 
644

 
1,490

New Jersey

 

 

 
117

 

 
117

 

 
117

Tennessee
112

 
131

 
715

 

 
101

 
1,059

 
137

 
1,196

Virginia
28

 
82

 
172

 

 

 
282

 
353

 
635

Total East
355

 
491

 
2,121

 
210

 
148

 
3,325

 
1,231

 
4,556

Southeast
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Florida
213

 
462

 
344

 
33

 

 
1,052

 
533

 
1,585

Georgia
246

 
366

 
462

 

 
86

 
1,160

 
525

 
1,685

North Carolina
95

 
125

 
40

 
21

 

 
281

 
314

 
595

South Carolina
139

 
445

 
1,132

 
68

 
36

 
1,820

 
346

 
2,166

Total Southeast
693

 
1,398

 
1,978

 
122

 
122

 
4,313

 
1,718

 
6,031

Corporate and unallocated (b)

 

 

 

 
42

 
42

 

 
42

Total
2,211

 
4,240

 
9,602

 
1,149

 
313

 
17,515

 
6,673

 
24,188

(a) This category represents lots upon which construction of a home has commenced, including model homes.
(b) Lots held for sale are parcels held by our operations considered to be discontinued.

6


The following table summarizes the dollar value of our land under development, land held for future development, and land held for sale by reportable segment as of September 30, 2018:
(In thousands)
Land Under Development
 
Land Held for Future Development
 
Land Held for Sale
West
$
509,406

 
$
58,125

 
$

East
185,462

 
14,077

 
4,580

Southeast
212,925

 
10,971

 
3,177

Corporate and unallocated (a)

 

 
24

Total
$
907,793

 
$
83,173

 
$
7,781

(a) Land held for sale are parcels held by our operations considered to be discontinued.
Investments in Unconsolidated Entities
Occasionally, we use legal entities in which we have less than a controlling interest. We enter into the majority of these investments with land developers, other homebuilders and financial partners to acquire attractive land positions, to manage our risk profile and to leverage our capital base. The underlying land positions are developed into finished lots for sale to the unconsolidated entity’s members or other third parties. We account for our interest in unconsolidated entities under the equity method.
Historically, we and our partners have provided varying levels of guarantees of debt or other obligations of our unconsolidated entities. As of September 30, 2018, our unconsolidated entities had borrowings outstanding totaling $12.3 million. See Note 4 of notes to the consolidated financial statements in this Form 10-K for further information.
Our consolidated balance sheets include investments in unconsolidated entities totaling $4.0 million and $4.0 million as of September 30, 2018 and September 30, 2017, respectively.
Construction
We typically act as the general contractor for the construction of our new home communities. Our project development activities are controlled by our operating divisions whose employees supervise the construction of each new home community by coordinating the activities of subcontractors and suppliers, subjecting their work to quality and cost controls and ensuring compliance with zoning and building codes. We specify that quality, durable materials be used in the construction of our homes. Our subcontractors follow design plans prepared by architects and engineers who are retained or directly employed by us and whose designs are geared to the local market. Our home plans are created in a collaborative effort with industry leading architectural firms, allowing us to stay current in our home designs with changing trends as well as expanding our focus on value engineering without sacrificing design value for our customers.
Agreements with our subcontractors and materials suppliers are generally entered into after a competitive bidding process during which we obtain information from prospective subcontractors and vendors with respect to their financial condition and ability to perform their agreements with us in accordance with the specifications we provide. Subcontractors typically are retained on a project-by-project basis to complete construction at a fixed price. We do not maintain significant inventories of construction materials, except for materials being utilized for homes under construction. We have numerous suppliers of raw materials and services used in our business, and such materials and services have been and continue to be available. However, material prices may fluctuate due to various factors, including demand or supply shortages and the price of certain commodities, which may be beyond the control of us or our vendors. Whenever possible, we enter into regional and national supply contracts with certain of our vendors. We believe that our relationships with our suppliers and subcontractors are good.
Construction time for our homes depends on local governmental approval processes, product type, location, and the availability of labor, materials, and supplies. Homes are designed to promote efficient use of space and materials and to minimize construction costs and time. In all of our markets, construction of a home is typically completed within three to six months following commencement of construction. As of September 30, 2018, excluding models, we had 1,973 homes at various stages of completion, of which 1,246 were under contract and included in backlog at such date and 727 homes (240 were substantially completed and 487 under construction) were not under a sales contract, either because the construction of the home was begun without a sales contract or because the original sales contract had been canceled (known as “speculative” or “spec” homes).

7


Warranty Program
We currently provide a limited warranty (ranging from one to two years) covering workmanship and materials per our defined standards of performance. In addition, we provide a limited warranty for up to ten years covering only certain defined structural element failures. For certain homes sold through March 31, 2004 (and in certain markets through July 31, 2004), we self-insured our warranty obligations through our wholly-owned risk retention group. We continue to maintain reserves to cover potential claims on homes covered under this warranty program. Beginning with homes sold on or after April 1, 2004 (August 1, 2004 in certain markets), our warranties have been issued, administered and insured, subject to applicable self-insured retentions, by independent third parties.
Since we subcontract our homebuilding work to subcontractors whose contracts generally include an indemnity obligation and a requirement that certain minimum insurance requirements be met, including providing us with a certificate of insurance prior to receiving payments for their work, many claims relating to workmanship and materials are the primary responsibility of our subcontractors.
In addition, we maintain third-party insurance, subject to applicable self-insured retentions, for most construction defects that we encounter in the normal course of business. We believe that our warranty and litigation accruals and third-party insurance are adequate to cover the ultimate resolution of our potential liabilities associated with known and anticipated warranty and construction defect related claims and litigation. Please see Note 9 of notes to the consolidated financial statements in this Form 10-K for additional information. However, there can be no assurance that the terms and limitations of the limited warranty will be effective against claims made by homebuyers; that we will be able to renew our insurance coverage or renew it at reasonable rates; that we will not be liable for damages, the cost of repairs, and/or the expense of litigation surrounding possible construction defects, soil subsidence, or building related claims; or that claims will not arise out of events or circumstances not covered by insurance and/or not subject to effective indemnification agreements with our subcontractors.
Marketing and Sales
We make extensive use of digital and traditional marketing vehicles and other promotional activities, including our websites (www.beazer.com and www.beazerenespanol.com), mobile site (m.beazer.com), real estate listing sites, digital advertising (including search engine marketing and display advertising), social media, video, brochures, direct marketing, and out-of-home advertising (including billboards and signage) located in the immediate areas of our developments, as well as additional activities. In connection with these marketing vehicles, we have registered or applied for registration of trademarks and internet domain names, including Beazer Homes®, Gatherings®, and Choice PlansTM, for use in our business.
Our practice is to build, decorate, furnish, and landscape model homes for each community we build and maintain on-site sales offices. As of September 30, 2018, we maintained and owned 238 model homes. We believe that model homes play a particularly important role in our selling efforts, and we are continuously innovating within our model homes to provide a unique, memorable, and hands-on experience for our customers, i.e., digital kiosks, interactive site maps/plans, interactive magnetic floor plan boards, signage, and more. The selection of interior features is also a principal component of our marketing and sales efforts.
Our homes are customarily sold through commissioned new home sales counselors (who work from the sales offices located in the model homes used in the community) as well as through independent brokers. Our new home counselors are available to assist prospective homebuyers by providing them with floor plans, price information, tours of model homes, the community's unique selling proposition, detailed explanations of our three differentiators, discussed below, and associated savings opportunities. Sales personnel are trained internally and participate in a structured training program focused on sales techniques, product enhancements, competitive products in the area, construction schedules, and Company policies around compliance, which management believes results in a sales force with extensive knowledge of our operating policies and housing products. Our policy is that sales personnel must be licensed real estate agents where required by law.
We sometimes use various sales incentives in order to attract homebuyers. The use of incentives depends largely on local economic and competitive market conditions.
Depending on market conditions, we also at times begin construction on a number of homes for which no signed sales contract exists, known as “speculative” or “spec” homes. This speculative inventory satisfies demand by providing near ready or move in ready homes targeted at relocated personnel and others who require a completed home within 60 days.
Differentiating Beazer Homes
We know that our buyers have many choices when purchasing a home. To help us become a builder of choice and thereby achieve the operational objectives we have outlined, we have identified the following three strategic pillars that differentiate Beazer's homes from both resale homes and other newly built homes:

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Mortgage Choices - Most of our buyers need to arrange financing in order to purchase a new home. Unlike many of our major competitors, we do not have an in-house mortgage company. Instead, for every Beazer community, we have identified a group of preferred lenders that provide a comprehensive product portfolio, competitive rates and fees, and outstanding customer service. We encourage those lenders to compete for our customers’ business, which is a unique program among national homebuilders and enables our customers to secure the mortgage program that best fits their needs.
Choice PlansTM - Every family lives in their home differently, which is why we created Choice PlansTM. Choice PlansTM allow buyers to choose how primary living areas, like the kitchen and master bathroom, are configured at no extra cost. Whether our buyers choose an office or an expanded family room, our plans are designed for the way a buyer wants to live.
Energy Efficiency - Nearly all newly-built homes afford buyers a substantial reduction in utility bills due to their modern, energy-efficient construction and materials. That's a feature most used homes cannot provide. At Beazer, we go even further by ensuring our homes are built to the latest ENERGY STAR® standards and by providing every buyer with an energy rating for their home, completed by a qualified third-party rating company. Used homes typically have an energy rating (on a scale in which a lower score is better) of 130, while new homes that are built to code typically score around 100. The average new Beazer home has an energy rating of 62.
Customer Financing
As previously mentioned, we do not provide mortgage origination services. Unlike many of our peers, we have no ownership interest in any lender and are able to promote competition among lenders on behalf of our customers through our Mortgage Choices program. Approximately 91% of our fiscal 2018 customers elected to finance a portion of their home purchase.
Competition
The development and sale of residential properties is highly competitive and fragmented. We compete for residential sales on the basis of a number of interrelated factors, including location, reputation, amenities, design, quality, and price with numerous large and small homebuilders, including many homebuilders with nationwide operations and greater financial resources and/or lower costs than us. We also compete for residential sales with individual resales of existing homes and available rental housing.
We utilize our experience within our geographic markets and the breadth of our product line to vary regional product offerings to reflect changing market conditions. We strive to respond to market conditions and to capitalize on the opportunities for advantageous land acquisitions in desirable locations. Our product offerings strive to provide extraordinary value at an affordable price with intentional focus on Millennials and Baby Boomers.
Government Regulation and Environmental Matters
In most instances, our land is purchased with entitlements, giving us the right to obtain building permits upon compliance with specified conditions, which generally are within our control. The length of time necessary to obtain such permits and approvals affects the carrying costs of unimproved property acquired for the purpose of development and construction. In addition, the continued effectiveness of permits already granted is subject to factors such as changes in policies, rules and regulations, and their interpretation and application. Many governmental authorities have imposed impact fees as a means of defraying the cost of providing certain governmental services to developing areas. To date, these governmental approval processes have not had a material adverse effect on our development activities, and all homebuilders in a given market face the same fees and restrictions. However, there can be no assurance that these and other restrictions will not adversely affect us in the future.
We may also be subject to periodic delays or may be precluded entirely from developing communities due to building moratoriums, “slow-growth” or “no-growth” initiatives, or building permit allocation ordinances, which could be implemented in the future in the markets in which we operate. Substantially all of our land is entitled and, therefore, the moratoriums generally would only adversely affect us if they arose from health, safety, and welfare issues such as insufficient water or sewage facilities. Local and state governments also have broad discretion regarding the imposition of development fees for communities in their jurisdictions. However, these fees are normally established when we receive recorded final maps and building permits. We are also subject to a variety of local, state, and federal statutes, ordinances, rules, and regulations concerning the protection of health and the environment. These laws may result in delays, cause us to incur substantial compliance and other costs, and prohibit or severely restrict development in certain environmentally sensitive regions or areas. Our communities in California are especially susceptible to restrictive government regulations and environmental laws, particularly surrounding water usage due to continuing drought conditions within that region.
In order to provide homes to homebuyers qualifying for Federal Housing Administration (FHA)-insured or Veterans Affairs (VA)-guaranteed mortgages, we must construct homes in compliance with FHA and VA regulations. These laws and regulations include provisions regarding operating procedures, investments, lending, and privacy disclosures and premiums.

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In some states, we are required to be registered as a licensed contractor and comply with applicable rules and regulations. Also, in various states, our new home counselors are required to be licensed real estate agents and to comply with the laws and regulations applicable to real estate agents.
Failure to comply with any of these laws or regulations, where applicable, could result in loss of licensing and a restriction of our business activities in the applicable jurisdiction.
Health and Safety Matters
We strive to provide a safe and healthy work environment for all employees. We believe that corporate social responsibility is an essential factor for our overall success. This includes adopting ethical practices to direct how we do business while keeping the interests of our stakeholders and the environment in mind, including valuing and challenging the talented men and women who comprise our workforce.
The objectives of our practices and policies underscore this commitment:
To treat all employees with dignity and respect. Employee diversity and inclusion are embraced and opportunities for training, growth, and advancement are strongly encouraged.
To uphold ethical standards and comply with applicable laws and our internal guidelines, including a Code of Conduct applicable to all employees and an actively-managed ethics hotline.
To promote the idea that the quality of our products and employee well-being are predicated on a safe and healthy work environment. Our Safety First culture focuses on the safety of our people at every level of the organization.
We are also committed to maintaining high standards in health and safety at all of our sites. We have a health and safety audit system that includes comprehensive independent third-party inspections. All of our team members are required to attend certain health and safety related training programs applicable to their respective job responsibilities.
Bonds and Other Obligations
In connection with the development of our communities, we are frequently required to provide performance, maintenance, and other bonds and letters of credit in support of our related obligations with respect to such developments. The amount of such obligations outstanding at any time varies in accordance with our pending development activities. In the event any such bonds or letters of credit are drawn upon, we would be obligated to reimburse the issuer of such bonds or letters of credit. As of September 30, 2018, we had approximately $237.8 million and $38.1 million of outstanding performance bonds and letters of credit, respectively, primarily related to our obligations to local governments to construct roads and other improvements in various developments.
Employees and Subcontractors
As of September 30, 2018, we employed approximately 1,280 persons, of whom 393 were sales and marketing personnel and 316 were construction personnel. Although none of our employees are covered by collective bargaining agreements, at times certain of the subcontractors engaged by us may be represented by labor unions or may be subject to collective bargaining arrangements. We believe that our relations with our employees and subcontractors are good.
Available Information
Our Internet website address is www.beazer.com and our mobile site is m.beazer.com. Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to section 13(a) or 15(d) of the Securities Exchange Act are available free of charge through our website as soon as reasonably practicable after we electronically file with or furnish them to the Securities and Exchange Commission (SEC), and are available in print to any stockholder who requests a printed copy. The public may also read and copy any materials that we file with the SEC at the SEC's Public Reference Room at 100 F Street N.E., Washington, D.C. 20549. You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. Furthermore, the SEC maintains a website that contains reports, proxy statements, information statements and other information regarding issuers, including us, that file electronically with the SEC at www.sec.gov.
In addition, many of our corporate governance documents are available on our website at www.beazer.com. Specifically, our Audit, Finance, Compensation, and Nominating/Corporate Governance Committee Charters, our Corporate Governance Guidelines and Code of Business Conduct and Ethics are available. Each of these documents is also available in print to any stockholder who requests it.

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The content on our website and mobile site is available for information purposes only and is not a part of and shall not be deemed incorporated by reference in this Form 10-K.
Item 1A. Risk Factors
A number of conditions that affect demand for the homes we sell are outside of our control. Many of these conditions, such as interest rates, inflation, employment levels, wage levels and governmental actions also impact consumer confidence, upon which our business is highly dependent.
Changes in national and regional economic conditions, as well as local economic conditions where we conduct our operations, may result in more caution on the part of homebuyers and, consequently, fewer home purchases. These economic uncertainties involve, among other things, interest rates, inflation, employment levels, wage growth and governmental actions, all of which are out of our control and affect the affordability of, and demand for, the homes we sell. These conditions also impact consumer confidence, upon which our business is highly dependent. Adverse changes in any of these conditions could decrease demand and pricing for our homes or result in customer cancellations of pending contracts, which could adversely affect the number of home sales we make or reduce home prices, either of which could result in a decrease in our revenues and earnings and adversely affect our financial condition.
Because almost all of our customers require mortgage financing, increases in interest rates could negatively affect the affordability of the homes we sell. In addition, reductions in mortgage availability or increases in the effective costs of owning a home could prevent our customers from buying our homes and adversely affect our business and financial results.
Substantially all of the purchasers of our homes finance their acquisition with mortgage financing. Mortgage interest rates have remained near historic lows for the last several years, which has made the homes we sell more affordable. However, interest rates are currently rising and are expected to continue to rise in the near term. Increases in interest rates increase the costs of owning a home and could adversely affect the purchasing power of consumers and lower demand for the homes we sell, which could result in a decrease in our revenues and earnings and adversely affect our financial condition.
The availability of mortgage financing is significantly influenced by governmental entities such as the Federal Housing Administration, Veteran’s Administration and Government National Mortgage Association and government-sponsored enterprises known as Fannie Mae and Freddie Mac. The tightening of their or other lenders’ borrowing standards may make it more difficult for our customers to obtain acceptable financing and, therefore, may adversely affect our business, financial condition and results of operations.
Mortgage interest expense and real estate taxes represent significant costs of homeownership. Therefore, when there are changes in federal or state income tax laws that eliminate or substantially limit the income tax deductions relating to these expenses, the after-tax costs of owning a new home can increase significantly. For example, the “Tax Cuts and Jobs Act,” which was enacted in December 2017, includes provisions that impose significant limitations with respect to these income tax deductions. Under this legislation, through the end of 2025, the annual deduction for real estate property taxes and state and local income or sales taxes has been limited to a combined amount of $10,000 ($5,000 in the case of a separate return filed by a married individual). In addition, through the end of 2025, the deduction for mortgage interest will generally only be available with respect to acquisition indebtedness that does not exceed $750,000 ($375,000 in the case of a separate return filed by a married individual). We believe changes such as these adversely impact the demand for and sales prices of homes in certain markets, including parts of California and Maryland, and therefore could adversely affect our business, financial condition and results of operations.
Inflation may adversely affect us by increasing costs beyond what we can recover through price increases.
Inflation can adversely affect us by increasing costs of land, materials and labor. In addition, inflation is often accompanied by higher interest rates which, as discussed above, are currently on the rise. In an inflationary environment, depending on homebuilding industry and other economic conditions, we may be unable to raise home prices enough to keep up with the rate of inflation, which would reduce our profit margins. Although the rate of inflation has been low for the last several years, during the same period we have experienced, and we continue to experience, increases in the prices of land, labor and materials above the general inflation rate.

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Supply shortages and other risks related to the demand for skilled labor and building materials could increase costs, delay deliveries and could adversely affect our financial condition and results of operations.
The residential construction industry experiences price fluctuations and shortages in labor and materials from time to time. Shortages in labor can be due to shortages in qualified trades people, lack of availability of adequate utility infrastructure and services, or our need to rely on local subcontractors who may not be adequately capitalized or insured. Labor and material shortages can be more severe during periods of strong demand for housing or during periods in which the markets where we operate experience natural disasters such as hurricanes or flooding as discussed more fully below. Pricing for labor and materials can be affected by the factors discussed above, changes in energy prices, and various other national, regional and local economic factors. For example, recent government imposed tariffs on imported building supplies, such as lumber, have significantly increased the cost to construct our homes. Such cost increases limit our ability to control costs, potentially reducing margins on the homes we build if we are not able to successfully offset the increased costs through higher sales prices.
The homebuilding industry is cyclical. A downturn in the industry could adversely affect our business, financial condition and results of operations.
During periods of downturn in the homebuilding industry, housing markets across the United States may experience an oversupply of both new and resale home inventory, an increase in foreclosures, reduced levels of consumer demand for new homes, increased cancellation rates, aggressive price competition among homebuilders and increased incentives for home sales. In the event of a downturn, we may experience a material reduction in revenues and margins and our financial condition as well as our results of operations could be adversely affected.
Our long-term success depends on our ability to acquire finished lots and undeveloped land suitable for residential homebuilding at reasonable prices, in accordance with our land investment criteria.
The homebuilding industry is highly competitive for suitable land and the risk inherent in purchasing and developing land increases as consumer demand for housing increases. The availability of finished and partially finished developed lots and undeveloped land for purchase that meet our investment criteria depends on a number of factors outside our control, including land availability in general, competition with other homebuilders and land buyers, inflation in land prices, zoning, allowable housing density, the ability to obtain building permits and other regulatory requirements. Should suitable lots or land become less available, the number of homes we may be able to build and sell could be reduced, and the cost of land could increase, perhaps substantially, which could adversely impact our financial condition and results of operations.
As competition for suitable land increases, the cost of acquiring both finished and undeveloped lots and the cost of developing owned land could rise, and the availability of suitable land at acceptable prices may decline, which could adversely impact our financial results. The availability of suitable land assets could also affect the success of our land acquisition strategy and ultimately our long-term strategic goals by impacting our ability to increase the number of actively selling communities, grow our revenues and margins and achieve or maintain profitability.
The market value of our land and/or homes may decline, leading to impairments and reduced profitability.
We regularly acquire land for replacement and expansion of our land inventory within our existing and new markets. The market value of land, building lots and housing inventories can fluctuate significantly as a result of changing market conditions, and the measures we employ to manage inventory risk may not be adequate to insulate our operations from a severe drop in inventory values. When market conditions are such that land values are not appreciating, option agreements previously entered into may become less desirable, at which time we may elect to forgo deposits and preacquisition costs and terminate the agreements. In a situation of adverse market conditions, we may incur impairment charges or have to sell land at a loss, which could adversely affect our financial condition and results of operations.
Reduced numbers of home sales extend the time it takes us to recover land purchase and property development costs, negatively impacting profitability and our results of operations.
We incur many costs even before we begin to build homes in a community. Depending on the stage of development a land parcel is in when we acquire it, these may include costs of preparing land, finishing and entitling lots, installing roads, sewers, water systems and other utilities, taxes and other costs related to ownership of the land on which we plan to build homes. If the rate at which we sell and deliver homes slows, or if we delay the opening of new home communities, we may incur additional pre-construction costs and it may take longer for us to recover our costs, which could adversely affects our profitability and results of operations.

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An increase in cancellation rates may negatively impact our business and lead to imprecise estimates related to homes to be delivered in the future (backlog).
Our backlog reflects the number and value of homes for which we have entered into a sales contract with a customer but have not yet delivered the home. Although these sales contracts typically require a cash deposit and do not make the sale contingent on the sale of the customer's existing home, in some cases a customer may cancel the contract and receive a complete or partial refund of the deposit as a result of local laws or as a matter of our business practices. If industry or economic conditions deteriorate or if mortgage financing becomes less accessible, more homebuyers may have an incentive to cancel their contracts with us, even where they might be entitled to no refund or only a partial refund, rather than complete the purchase. Significant cancellations have had, and could have, a material adverse effect on our business as a result of lost sales revenue and the accumulation of unsold housing inventory. It is important to note that both backlog and cancellation metrics are operational, rather than accounting data, and should be used only as a general gauge to evaluate our performance. There is an inherent imprecision in these metrics based on an evaluation of qualitative factors during the transaction cycle.
Our access to capital and our ability to obtain additional financing could be affected by any downgrade of our credit ratings, as well as limitations in the capital markets or adverse credit market conditions.
The Company's credit rating and ratings on our senior notes and our current credit condition affect, among other things, our ability to access new capital, especially debt. Negative changes in these ratings may result in more stringent covenants and higher interest rates under the terms of any new debt. If our credit ratings are lowered or rating agencies issue adverse commentaries in the future, it could have a material adverse effect on our business, financial condition, results of operations and liquidity. In particular, a weakening of our financial condition, including a significant increase in our leverage or decrease in our profitability or cash flows, could adversely affect our ability to obtain necessary funds, result in a credit rating downgrade or change in outlook, or otherwise increase our cost of borrowing.
We could experience a reduction in home sales and revenues due to our inability to acquire and develop land for our communities if we are unable to obtain reasonably priced financing.
The homebuilding industry is capital intensive and homebuilding requires significant up-front expenditures to acquire land and to begin development. Accordingly, we incur substantial indebtedness to finance our homebuilding activities. If internally generated funds are not sufficient, we would seek additional capital in the form of equity or debt financing from a variety of potential sources, including additional bank financing and/or securities offerings. The amount and types of indebtedness that we may incur are limited by the terms of our existing debt. In addition, the availability of borrowed funds, especially for land acquisition and construction financing, may be greatly reduced nationally, and the lending community may require increased amounts of equity to be invested in a project by borrowers in connection with both new loans and the extension of existing loans. The credit and capital markets have continued to experience significant volatility. If we are required to seek additional financing to fund our operations, the volatility in these markets may restrict our flexibility to access such financing. If we are not successful in obtaining sufficient capital to fund our planned capital and other expenditures, we may be unable to acquire land for our housing developments, thereby limiting our anticipated growth and community count. Additionally, if we cannot obtain additional financing to fund the purchase of land under our option contracts, we may incur contractual penalties and fees.
Our senior notes, revolving credit facility, letter of credit facilities and certain other debt impose significant restrictions and obligations on us. Restrictions on our ability to borrow could adversely affect our liquidity. In addition, our substantial indebtedness could adversely affect our financial condition, limit our growth and make it more difficult for us to satisfy our debt obligations.
Our senior notes, revolving credit facility, letter of credit facilities and other debt impose certain restrictions and obligations on us. Under certain of these instruments, we must comply with defined covenants that limit our ability to, among other things, incur additional indebtedness, engage in certain asset sales, make certain types of restricted payments, engage in transactions with affiliates and create liens on our assets. Failure to comply with certain of these covenants could result in an event of default under the applicable instrument. Any such event of default could negatively impact other covenants or lead to cross defaults under certain of our other debt agreements. There can be no assurance that we will be able to obtain any waivers or amendments that may become necessary in the event of a future default situation without significant additional cost or at all.

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Our substantial indebtedness could have important consequences to us and the holders of our securities, including, among other things:
causing us to be unable to satisfy our obligations under our debt agreements;
making us more vulnerable to adverse general economic and industry conditions;
making it difficult to fund future working capital, land purchases, acquisitions, share repurchases, general corporate or other activities; and
causing us to be limited in our flexibility in planning for, or reacting to, changes in our business.
In addition, subject to the restrictions of our existing debt instruments, we may incur additional indebtedness. If new debt is added to our current debt levels, the related risks that we now face could intensify. Our growth plans and our ability to make payments of principal or interest on, or to refinance, our indebtedness will depend on our future operating performance and our ability to enter into additional debt and/or equity financings. If we are unable to generate sufficient cash flows in the future to service our debt, we may be required to refinance all or a portion of our existing debt, to sell assets or to obtain additional financing. We may not be able to do any of the foregoing on terms acceptable to us, if at all.
If we are unsuccessful in competing against our competitors, our market share could decline or our growth could be impeded and, as a result, our financial condition and results of operations could suffer.
Competition in the homebuilding industry is intense, and there are relatively low barriers to entry into our business. Increased competition could hurt our business, as it could prevent us from acquiring attractive parcels of land on which to build homes or make such acquisitions more expensive, hinder our market share expansion and lead to pricing pressures on our homes that may adversely impact our margins and revenues. If we are unable to successfully compete, our financial results could suffer and our ability to service our debt could be adversely affected. Our competitors may independently develop land and construct housing units that are superior or substantially similar to our products. Furthermore, many of our competitors have substantially greater financial resources and lower costs of funds and operations than we do. Many of these competitors also have longstanding relationships with subcontractors and suppliers in the markets in which we operate. We currently build in several of the top markets in the nation and, therefore, we expect to continue to face additional competition from new entrants into our markets.
Natural disasters and other related events could result in delays in land development or home construction, increase our costs or decrease demand in the impacted areas.
The climates and geology of many of the states in which we operate, including California, Florida, Georgia, North Carolina, South Carolina, Tennessee, Texas and certain mid-Atlantic states, present increased risks of natural disasters. To the extent that hurricanes, severe storms, earthquakes, droughts, floods, wildfires or other natural disasters or similar events occur, our homes under construction or our building lots in such states could be damaged or destroyed, which may result in losses exceeding our insurance coverage. For example, in fiscal 2017 and 2018, Hurricanes Harvey, Irma and Florence disrupted our operations in Texas, Florida, North Carolina and South Carolina, which resulted in what we believe were temporary reductions in sales and closings. Natural disasters can also lead to increased competition for subcontractors, which can delay our progress even after the event has concluded. Additionally, and as discussed above, increased competition for skilled labor can lead to cost overruns, as we may have to incentivize the impacted region’s limited trade base to work on our homes. Finally, natural disasters and other related events may also temporarily impact demand, as buyers are not as willing to shop for new homes during or after the event. These risks could adversely affect our business, financial condition and results of operations.
The tax benefits of our pre-ownership change net operating loss carryforwards and built-in losses were substantially limited since we experienced an “ownership change” as defined in Section 382 of the Internal Revenue Code, and portions of our deferred income tax asset have been written off since they were not fully realizable. Any subsequent ownership change, should it occur, could have a further impact on these tax attributes.
Section 382 of the Internal Revenue Code contains rules that limit the ability of a company that undergoes an “ownership change,” which is generally defined as any change in ownership of more than 50% of its common stock over a three-year period, to utilize its net operating loss carryforwards and certain built-in losses or deductions, as of the ownership change date, that are recognized during the five-year period after the ownership change. These rules generally operate by focusing on changes in the ownership among shareholders owning, directly or indirectly, 5% or more of the company's common stock (including changes involving a shareholder becoming a 5% shareholder) or any change in ownership arising from a new issuance of stock or share repurchases by the company.

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We believe we have significant “built-in losses” in our assets, i.e., an excess tax basis over current fair market value, which may result in tax losses as such assets are sold. Net operating losses generally may be carried forward for a 20-year period to offset future earnings and reduce our federal income tax liability. Any net operating losses created during or after our fiscal 2019 may be carried forward indefinitely; however, the loss can only be utilized to offset 80% of taxable income generated in a tax year. Built-in losses, if and when recognized, generally will result in tax losses that may then be deducted or carried forward. However, we experienced an “ownership change” under Section 382 as of January 12, 2010. As a result of this previous “ownership change” for purposes of Section 382, our ability to use certain net operating loss carryforwards and built-in losses or deductions in existence prior to the ownership change was limited by Section 382. We cannot predict or control the occurrence or timing of another ownership change in the future. If another ownership change were to occur, the limitations imposed by Section 382 could result in a material amount of our net operating loss carryforwards expiring unused and, therefore, significantly impair the future value of our deferred tax assets.
Our certificate of incorporation prohibits certain transfers of our common stock that could result in an ownership change. In addition, we are party to a rights agreement intended to act as a deterrent to any person desiring to acquire 4.95% or more of our common stock. However, these protective provisions of our certificate of incorporation and the rights agreement expire on November 12, 2019. Any extension of these protective provisions and our entry into a new rights agreement will require approval by our stockholders. We cannot guarantee that the requisite stockholder approvals will be obtained. In addition, neither the protective provisions nor the rights agreement offer a complete solution, and an ownership change may occur even if the protective provisions of our charter are extended and a new rights agreement is approved upon expiration. The protective provisions of our certificate of incorporation may not be enforceable against all stockholders and may not prevent all stock transfers that have the potential to cause a Section 382 ownership shift, and the rights agreement may deter, but ultimately cannot block, all transfers of our common stock that might result in an ownership change.
The realization of all or a portion of our deferred income tax assets (including net operating loss carryforwards) is dependent upon the generation of future income during the statutory carryforward periods. Our inability to utilize our limited pre-ownership change net operating loss carryforwards and recognized built-in losses or deductions, or the occurrence of a future ownership change and resulting additional limitations to these tax attributes, could have a material adverse effect on our financial condition, results of operations and cash flows.
Information technology failures, cybersecurity breaches or data security breaches could harm our business.
We use information technology and other computer resources to perform important operational and marketing activities and to maintain our business records. Certain of these resources are provided to us and/or maintained by third-party service providers pursuant to agreements that specify certain security and service level standards. Our computer systems, including our back-up systems and portable electronic devices, and those of our third-party providers, are subject to damage or interruption from power outages, computer and telecommunication failures, computer viruses, security breaches including malware and phishing, cyberattacks, natural disasters, usage errors by our employees or contractors and other related risks. As part of our normal business activities, we collect and store certain confidential information, including information about employees, homebuyers, customers, vendors and suppliers. This information is entitled to protection under a number of regulatory regimes. We share some of this information with third parties who assist us with certain aspects of our business. A significant and extended disruption of or breach of security related to our computer systems and back-up systems may result in business disruption, damage our reputation and cause us to lose customers, sales and revenue, result in the unintended misappropriation of proprietary, personal and confidential information and require us to incur significant expense to remediate or otherwise resolve these issues including financial obligations to third parties, fines, penalties, regulatory proceedings and private litigation with potentially large costs and other competitive disadvantages.
Our stock price is volatile and could decline.
The securities markets in general and our common stock in particular have experienced significant price and volume volatility over the past several years. The market price and volume of our common stock may continue to experience significant fluctuations due not only to general stock market conditions, but also to a change in sentiment in the market regarding our industry, operations or business prospects. The price and volume volatility of our common stock may be affected by:
operating results that vary from the expectations of securities analysts and investors;
factors influencing home purchases, such as higher interest rates and availability of home mortgage loans, credit criteria applicable to prospective borrowers, ability to sell existing residences and homebuyer sentiment in general;
the operating and securities price performance of companies that investors consider comparable to us;
announcements of strategic developments, acquisitions and other material events by us or our competitors; and

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changes in global financial markets and global economies and general market conditions, such as interest rates, commodity and equity prices and the value of financial assets.
Our ability to raise funds through the issuance of equity or otherwise use our common stock as consideration is impacted by the price of our common stock. A low stock price may adversely impact our ability to reduce our financial leverage, as measured by the ratio of total debt to total capital. Continued high levels of leverage or significant increases may adversely affect our credit ratings and make it more difficult for us to access additional capital. These factors may limit our ability to implement our operating and growth plans.
Inefficient or ineffective allocation of capital could adversely affect our operating results and/or stockholder value.
Our goal is to allocate capital to maximize our overall long-term returns. This includes spending on capital projects, such as developing strategic businesses (e.g., the launch of our Gatherings® business in 2016 to meet the needs of the growing 55 plus segment) and acquiring other homebuilders with the potential to strengthen our industry position. In addition, from time to time we may engage in bond repurchases to reduce our indebtedness and return value to our stockholders through share repurchases. If we do not properly allocate our capital, we may fail to produce optimal financial results and we may experience a reduction in stockholder value, including increased volatility in our stock price.
We experience fluctuations and variability in our operating results on a quarterly basis and, as a result, our historical performance may not be a meaningful indicator of future results.
We historically have experienced, and expect to continue to experience, variability in home sales and earnings on a quarterly basis. As a result of such variability, our historical performance may not be a meaningful indicator of future results. Our quarterly results of operations may continue to fluctuate in the future as a result of a variety of both national and local factors, including, among others:
the timing of home closings and land sales;
our ability to continue to acquire additional land or secure option contracts to acquire land on acceptable terms;
conditions of the real estate market in areas where we operate and of the general economy;
raw material and labor shortages;
seasonal home buying patterns; and
other changes in operating expenses, including the cost of labor and raw materials, personnel and general economic conditions.
We may incur additional operating expenses or longer construction cycle times due to compliance programs or fines, penalties and remediation costs pertaining to environmental regulations within our markets. Additionally, any violations of such regulations could harm our reputation, thereby negatively impacting our financial condition and results of operations.
We are subject to a variety of local, state and federal statutes, ordinances, rules and regulations concerning the protection of health and the environment. The particular environmental laws that apply to any given community vary greatly according to the location of the community site, the site's environmental conditions and the present and former use of the site. Environmental laws may result in delays, may cause us to implement time consuming and expensive compliance programs and may prohibit or severely restrict development in certain environmentally sensitive regions or areas. From time to time, the United States Environmental Protection Agency (EPA) and similar federal or state agencies review homebuilders' compliance with environmental laws and may levy fines and penalties for failure to strictly comply with applicable environmental laws or impose additional requirements for future compliance as a result of past failures. Any such actions taken with respect to us may increase our costs or harm our reputation. Further, we expect that increasingly stringent requirements will be imposed on homebuilders in the future. Environmental regulations can also have an adverse impact on the availability and price of certain raw materials such as lumber. Our communities in California are especially susceptible to restrictive government regulations and environmental laws, particularly surrounding water usage due to continuing drought conditions within that region.

16


We are subject to extensive government regulation, which could cause us to incur significant liabilities or restrict our business activities.
Regulatory requirements could cause us to incur significant liabilities and operating expenses and could restrict our business activities. We are subject to local, state and federal statutes and rules regulating, among other things, certain developmental matters, building and site design, the availability of water and matters concerning the protection of health, safety and the environment. Our operating costs may be increased by governmental regulations, such as building permit allocation ordinances and impact and other fees and taxes, which may be imposed to defray the cost of providing certain governmental services and improvements. Other governmental regulations, such as building moratoriums and “no growth” or “slow growth” initiatives, which may be adopted in communities that have developed rapidly, may cause delays in new home communities or otherwise restrict our business activities, resulting in reductions in our revenues. Any delay or refusal from government agencies to grant us necessary licenses, permits and approvals could have an adverse effect on our financial condition and results of operations.
We may be subject to significant potential liabilities as a result of construction defect, product liability and warranty claims made against us.
As a homebuilder, we have been, and continue to be, subject to construction defect, product liability and home warranty claims, including moisture intrusion and related claims, arising in the ordinary course of business. These claims are common to the homebuilding industry and can be costly, as evidenced by the water intrusion issues in Florida.
With respect to certain general liability exposures, including construction defect claims, product liability claims and related claims, assessment of claims and the related liability and reserve estimation process is highly judgmental due to the complex nature of these exposures and unique circumstances of each claim. Furthermore, once claims are asserted for construction defects, it can be difficult to determine the extent to which the assertion of these claims will expand geographically. Although we have obtained insurance for construction defect claims, such policies may not be available or adequate to cover liability for damages, the cost of repairs and/or the expense of litigation. Current and future claims may arise out of events or circumstances not covered by insurance and not subject to effective indemnification agreements with our subcontractors.
At any given time, we are the subject of pending civil litigation that could require us to pay substantial damages or could otherwise have a material adverse effect on us.
Certain of our subsidiaries have been named in class action and multi-party lawsuits regarding claims made by homebuyers. We cannot predict or determine the timing or final outcome of the current lawsuits, or the effect that any adverse determinations the lawsuits may have on us. An unfavorable determination in any of the lawsuits could result in the payment by us of substantial monetary damages that may not be covered by insurance. Further, the legal costs associated with the lawsuits and the amount of time required to be spent by management and the Board of Directors on these matters, even if we are ultimately successful, could have a material adverse effect on our business, financial condition and results of operations. In addition to expenses incurred to defend the Company in these matters, under Delaware law and our bylaws, we may have an obligation to indemnify our current and former officers and directors in relation to these matters. We have obligations to advance legal fees and expenses to directors and certain officers.
Our insurance carriers may seek to rescind or deny coverage with respect to certain of the pending lawsuits, or we may not have sufficient coverage under such policies. If the insurance companies are successful in rescinding or denying coverage, or if we do not have sufficient coverage under our policies, our business, financial condition and results of operations could be materially adversely affected.
Our operating expenses could increase if we are required to pay higher insurance premiums or litigation costs for various claims, which could negatively impact our financial condition and results of operations. Additionally, our insurance policies may not offset our entire expense due to limitation in coverages, amounts payable under the policies or other related restrictions.
The costs of insuring against construction defect, product liability and director and officer claims are substantial. Increasingly in recent years, lawsuits (including class action lawsuits) have been filed against builders, asserting claims of personal injury and property damage. Our insurance may not cover all of the claims, including personal injury claims, or such coverage may become prohibitively expensive. If we are not able to obtain adequate insurance against these claims, we may experience losses that could negatively impact our financial condition and results of operations, as well as our cash flows.
Historically, builders have recovered from subcontractors and their insurance carriers a significant portion of the construction defect liabilities and costs of defense that the builders have incurred. However, insurance coverage available to subcontractors for construction defects is becoming increasingly expensive and the scope of coverage is restricted. If we cannot effectively recover from our subcontractors or their carriers, we may suffer even greater losses.

17


A builder's ability to recover against any available insurance policy depends upon the continued solvency and financial strength of the insurance carrier that issued the policy. Many of the states in which we build homes have lengthy statutes of limitations applicable to claims for construction defects. To the extent that any carrier providing insurance coverage to us or our subcontractors becomes insolvent or experiences financial difficulty in the future, we may be unable to recover on those policies, thereby negatively impact our financial condition and results of operations.
We are dependent on the services of certain key employees and the loss of their services could hurt our business.
Our future success depends upon our ability to attract, train and retain skilled personnel. If we are unable to retain our key employees or attract, train or retain other skilled personnel in the future, it could hinder our business strategy and impose additional costs of identifying and training new individuals. Competition for qualified personnel in all of our operating markets, as well as within our corporate operations, is intense.
Terrorist attacks or acts of war against the United States or increased domestic or international instability could have an adverse effect on our operations.
Adverse developments in the war on terrorism, terrorist attacks against the United States or any outbreak or escalation of hostilities between the United States and any foreign power may cause disruption to the economy, our Company, our employees and our customers, which could negatively impact our financial condition and results of operations.
Negative publicity or poor relations with the residents of our communities could negatively impact sales, which could cause our revenues or results of operations to decline.
Unfavorable media related to our industry, company, brands, marketing, personnel, operations, business performance, or prospects may affect our stock price and the performance of our business, regardless of its accuracy or inaccuracy. Our success in maintaining, extending and expanding our brand image depends on our ability to adapt to a rapidly changing media environment. Adverse publicity or negative commentary on social media outlets could hurt operating results, as consumers might avoid or protest brands that receive bad press or negative reviews. Negative publicity may result in a decrease in our operating results. In addition, residents of communities we develop may look to us to resolve issues or disputes that may arise in connection with the operation or development of their communities. Efforts made by us to resolve these issues or disputes could be deemed unsatisfactory by the affected residents, and subsequent actions by these residents could adversely affect sales or our reputation.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
As of September 30, 2018, we had under lease approximately 35,000 square feet of office space in Atlanta, Georgia to house our corporate headquarters. We also lease an aggregate of approximately 210,000 square feet of office space for our divisional and shared services operations at various locations. All facilities are in good condition, adequately utilized, and sufficient to meet our present operating needs.
Due to the nature of our business, significant amounts of property are held by us as inventory in the ordinary course of our homebuilding operations. See Note 5 of notes to the consolidated financial statements in this Form 10-K for a further discussion of our inventory.
Item 3. Legal Proceedings
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. At present there are no such claims outstanding; however, we cannot rule out the potential for additional mortgage loan repurchase or indemnity claims in the future. 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.

18


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 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.
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 part by insurance. In our opinion, based on our current assessment, the ultimate resolution of these matters will not have a material adverse effect on our financial condition, results of operations, or cash flows.
Item 4. Mine Safety Disclosures
Not applicable.

19


PART II

Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market Information
The Company lists its common stock on the New York Stock Exchange (NYSE) under the symbol “BZH.” On November 8, 2018, the last reported sales price of the Company's common stock on the NYSE was $8.80, and we had approximately 185 stockholders of record and 33,522,046 shares of common stock outstanding. The following table sets forth, for the periods presented, the range of high and low trading prices for the Company's common stock during our fiscal 2018 and 2017.
 
 
1st Qtr
 
2nd Qtr
 
3rd Qtr
 
4th Qtr
Fiscal Year Ended September 30, 2018
 
 
 
 
 
 
 
 
High
 
$
23.24

 
$
20.94

 
$
17.46

 
$
16.08

Low
 
$
18.66

 
$
15.02

 
$
14.05

 
$
10.46

Fiscal Year Ended September 30, 2017
 
 
 
 
 
 
 
 
High
 
$
15.80

 
$
14.82

 
$
15.10

 
$
18.75

Low
 
$
9.67

 
$
11.18

 
$
11.58

 
$
13.09

Dividends
The indentures under which our senior notes were issued contain certain restrictive covenants, including limitations on the payment of dividends. There were no dividends paid during our fiscal 2018, 2017, or 2016. The Board of Directors will periodically reconsider the declaration of dividends, assuming payment of dividends is not limited under our indentures. The reinstatement of quarterly dividends, the amount of such dividends and the form in which the dividends are paid (cash or stock) will depend upon our financial condition, results of operations, and other factors that the Board of Directors deems relevant.
Securities Authorized for Issuance under Equity Compensation Plans
The following table provides information about the Company's shares of common stock that may be issued under our existing equity compensation plans as of September 30, 2018, all of which have been approved by our stockholders:
Plan Category
 
Number of Common Shares to be Issued Upon Exercise of Outstanding Options, Warrants and Rights
 
Weighted-Average Exercise Price of Outstanding Options, Warrants and Rights
 
Number of Common Shares Remaining Available for Future Issuance Under Equity Compensation Plans
Equity compensation plans approved by stockholders
 
533,052
 
$14.26
 
2,066,189
Issuer Purchases of Equity Securities
None.

20


Performance Graph
The following graph illustrates the cumulative total stockholder return on Beazer Homes' common stock for the last five fiscal years through September 30, 2018 as compared to the S&P 500 Index and the S&P 500 Homebuilding Index. The comparison assumes an investment of $100 at September 30, 2013 in Beazer Homes' common stock and in each of the benchmark indices specified, assumes that all dividends were reinvested, and accounts for the impact of any stock splits, where applicable. Stockholder returns over the indicated period are based on historical data and should not be considered indicative of future stockholder returns.
http://api.tenkwizard.com/cgi/image?quest=1&rid=23&ipage=12547554&doc=15
 
 
Fiscal Year Ended September 30,
 
 
2014
2015
2016
2017
2018
u
Beazer Homes USA, Inc.
93.22

74.06

64.78

104.11

58.33

g
S&P 500 Index
119.73

119.00

137.36

162.92

192.10

p
S&P 500 Homebuilding Index
108.26

137.15

136.18

179.31

173.30



21


Item 6. Selected Financial Data
The following table summarizes certain financial data for the periods presented:
 
Fiscal Year Ended September 30,
 
2018
 
2017
 
2016
 
2015
 
2014
 
($ in millions, except per share amounts and unit data)
Statements of Operations Data: (a)
 
 
 
 
 
 
 
 
 
Total revenue
$
2,107

 
$
1,916

 
$
1,822

 
$
1,627

 
$
1,464

Gross profit
345

 
313

 
297

 
272

 
263

Gross margin (b)
16.4
%
 
16.3
%
 
16.3
%
 
16.7
%
 
18.0
%
Operating income
$
82

 
$
62

 
$
59

 
$
52

 
$
56

(Loss) income from continuing operations
(45
)
 
32

 
5

 
347

 
35

(Loss) income per share from continuing operations - basic
(1.40
)
 
1.00

 
0.16

 
12.54

 
1.35

(Loss) income per share from continuing operations - diluted
(1.40
)
 
0.99

 
0.16

 
10.91

 
1.10

Net (loss) income (c)
$
(45.4
)
 
$
31.8

 
$
4.7

 
$
344.1

 
$
34.4

 
 
 
 
 
 
 
 
 
 
Balance Sheet Data (end of year): (d)
 
 
 
 
 
 
 
 
 
Cash, cash equivalents and restricted cash
$
153

 
$
305

 
$
243

 
$
290

 
$
387

Inventory
1,692

 
1,543

 
1,569

 
1,698

 
1,561

Total assets
2,128

 
2,221

 
2,213

 
2,409

 
2,050

Total debt
1,231

 
1,327

 
1,332

 
1,516

 
1,520

Stockholders' equity
644

 
682

 
643

 
630

 
279

 
 
 
 
 
 
 
 
 
 
Supplemental Financial Data: (d)
 
 
 
 
 
 
 
 
 
Cash provided by (used in):
 
 
 
 
 
 
 
 
 
Operating activities
$
30

 
$
96

 
$
163

 
$
(81
)
 
$
(160
)
Investing activities
(74
)
 
(14
)
 
(13
)
 
3

 
(18
)
Financing activities
(108
)
 
(21
)
 
(198
)
 
(19
)
 
12

 
 
 
 
 
 
 
 
 
 
Financial Statistics: (d)
 
 
 
 
 
 
 
 
 
Total debt as a percentage of total debt and stockholders' equity (end of year)
65.7
%
 
66.0
%
 
67.4
%
 
70.6
%
 
84.5
%
Net debt as a percentage of net debt and stockholders' equity (end of year) (e)
62.9
%
 
60.3
%
 
63.2
%
 
66.3
%
 
80.8
%
Adjusted EBITDA from total operations (f)
$
204.7

 
$
178.8

 
$
156.3

 
$
144.1

 
$
133.2

Adjusted EBITDA margin from total operations (g)
9.7
%
 
9.3
%
 
8.6
%
 
8.9
%
 
9.1
%
Operating Statistics from continuing operations:
 
 
 
 
 
 
 
 
 
New orders, net
5,544

 
5,464

 
5,297

 
5,358

 
4,748

Closings
5,767

 
5,525

 
5,419

 
5,010

 
4,951

Average selling price on closings (in thousands)
$
360.2

 
$
343.1

 
$
329.4

 
$
313.5

 
$
284.8

Units in backlog (end of year)
1,632

 
1,855

 
1,916

 
2,038

 
1,690

Average selling price in backlog (end of year; in thousands)
$
384.8

 
$
358.9

 
$
340.6

 
$
327.6

 
$
305.3

(a) Statements of operations data is from continuing operations. Gross profit includes inventory impairments and abandonments of $6.5 million, $2.4 million, $15.3 million, $3.1 million, and $8.3 million for the fiscal years ended September 30, 2018, 2017, 2016, 2015, and 2014, respectively, as well as unexpected warranty costs and additional insurance recoveries from our third-party insurer, both of which are detailed in the table below that reconciles our net income to Adjusted EBITDA (subsequently defined). The aforementioned charges related to impairments and abandonments were primarily driven by reductions in pricing taken for certain communities as a result of competitive pressures over the applicable years. Income (loss) from continuing operations for the fiscal years ended 2018, 2017, 2016, 2015, and 2014 also includes losses on extinguishment of debt of $27.8 million, $12.6 million, $13.4 million, $0.1 million, and $19.9 million, respectively.

22


(b) Gross margin = gross profit divided by total revenue.
(c) For fiscal 2015, amount includes $335.2 million release of a substantial portion of the valuation allowance on our deferred tax assets. For fiscal 2018, amount includes $110.1 million tax expense for the remeasurement of our deferred tax assets at the newly enacted 21.0% federal tax rate, partially offset by an additional $27.4 million release of valuation allowance on our deferred tax assets. See Note 13 of notes to the consolidated financial statements in this Form 10-K for a further discussion of income taxes and the valuation allowance.
(d) Discontinued operations were not segregated in the consolidated balance sheets or consolidated statements of cash flows and are not material in the periods presented.
(e) Net Debt = debt less unrestricted cash and cash equivalents and restricted cash related to the cash secured loan, when outstanding.
(f) EBIT (earnings before interest and taxes) equals net income (loss) before (a) previously capitalized interest amortized to home construction and land sales expenses, capitalized interest impaired, and interest expense not qualified for capitalization; and (b) income taxes. EBITDA (earnings before interest, taxes, depreciation, and amortization) is calculated by adding non-cash charges, including depreciation and amortization for the period to EBIT. Adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization) is calculated by adding charges, including debt extinguishment charges, inventory impairment and abandonment charges, joint venture impairment charges, and other non-recurring items for the period to EBITDA. EBITDA and Adjusted EBITDA are not Generally Accepted Accounting Principles (GAAP) financial measures. EBITDA and Adjusted EBITDA should not be considered alternatives to net income determined in accordance with GAAP as an indicator of operating performance. Because some analysts and companies may not calculate EBITDA and Adjusted EBITDA in the same manner as Beazer Homes, the EBITDA and Adjusted EBITDA information presented above may not be comparable to similar presentations by others.
(g) Adjusted EBITDA margin = Adjusted EBITDA divided by total revenue.

23


Reconciliation of Adjusted EBITDA to total company net income (loss), the most directly comparable GAAP measure, is provided for each period discussed below. Management believes that Adjusted EBITDA assists investors in understanding and comparing the operating characteristics of homebuilding activities by eliminating many of the differences in companies' respective capitalization, tax position, and level of impairments. These EBITDA measures should not be considered alternatives to net income determined in accordance with GAAP as an indicator of operating performance.
The following table reconciles our net income (loss) to Adjusted EBITDA for the periods presented:
 
Fiscal Year Ended September 30,
(In thousands)
2018
 
2017
 
2016
 
2015
 
2014
Net (loss) income
$
(45,375
)
 
$
31,813

 
$
4,693

 
$
344,094

 
$
34,383

Expense (benefit) from income taxes
94,373

 
2,621

 
16,224

 
(325,927
)
 
(41,802
)
Interest amortized to home construction and land sales expenses and capitalized interest impaired
91,331

 
88,820

 
79,322

 
56,164

 
41,065

Interest expense not qualified for capitalization
5,325

 
15,636

 
25,388

 
29,822

 
50,784

EBIT
145,654

 
138,890

 
125,627

 
104,153

 
84,430

Depreciation and amortization and stock-based compensation amortization
24,065

 
22,173

 
21,752

 
19,473

 
15,866

EBITDA
169,719

 
161,063

 
147,379

 
123,626

 
100,296

Loss on extinguishment of debt
27,839

 
12,630

 
13,423

 
80

 
19,917

Inventory impairments and abandonments (a)
6,770

 
2,389

 
14,572

 
3,109

 
8,062

Joint venture impairment and abandonment charges
341

 

 

 

 

Unexpected warranty costs related to Florida stucco issues (net of expected insurance recoveries)

 

 
(3,612
)
 
13,582

 
4,290

Unexpected warranty costs related to water intrusion issues in New Jersey (net of expected insurance recoveries)

 

 

 

 
648

Additional insurance recoveries from third-party insurer

 

 
(15,500
)
 

 

Litigation settlement in discontinued operations

 

 

 
3,660

 

Write-off of deposit on legacy land investment

 
2,700

 

 

 

Adjusted EBITDA
$
204,669

 
$
178,782

 
$
156,262

 
$
144,057

 
$
133,213

(a) In periods during which we impaired certain of our inventory assets, capitalized interest that is impaired is included in the lines above titled “Interest amortized to home construction and land sales expenses and capitalized interest impaired" and "Interest expense not qualified for capitalization.”


24


Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Executive Overview and Outlook
Market Conditions
The demand for new and existing homes is dependent on a variety of demographic and economic factors, including job and wage growth, household formation, consumer confidence, and mortgage financing. Currently, we are experiencing a strong job market as wages rise and household formation continues. However, as the prices for new and existing homes increased over the past few years, coupled with rising mortgage interest rates, the affordability of homes has come under pressure, causing a slowdown in sales activity. In addition, labor availability concerns have helped constrain the growth of the supply of new homes available for sale. Accordingly, despite more constrained affordability, we expect conditions in the housing market to remain relatively comparable in the coming year.
Therefore, the strong economic backdrop along with the limited supply of homes for sale provides us with confidence in the market for new home sales going forward.
Overview of Results for Our Fiscal 2018
Fiscal 2018 represented the culmination of a multi-year effort to achieve "2B-10" with revenue of $2.1 billion and $204.7 million in Adjusted EBITDA, which we have attained through execution of our Balanced Growth strategy and a continued focus on our five key metrics. Additionally, we successfully completed the acquisition of Venture Homes ("Venture"), a leading private homebuilder in the Atlanta market.
Profitability
For the fiscal year ended September 30, 2018, we recorded net loss from continuing operations of $45.0 million, a decrease of $77.0 million from the prior fiscal year’s net income from continuing operations of $32.0 million. However, there were multiple items that impacted the comparability of our net income from continuing operations between periods:
Income tax expense from continuing operations was $94.5 million and $2.7 million for fiscal 2018 and fiscal 2017, respectively. Income tax expense in fiscal 2018 was impacted by a $110.1 million charge from the remeasurement of our deferred tax assets as a result of the reduced federal corporate tax rate related to the Tax Cuts and Jobs Act enacted on December 22, 2017, partially offset by an income tax benefit of $27.4 million related to the release of the valuation allowance on a portion of our deferred tax assets. Refer to Note 13 of the notes to the consolidated financial statements for additional discussion of these matters.
We recognized $27.8 million in loss on extinguishment of debt in fiscal 2018, an increase of $15.2 million compared to the prior fiscal year.
We recorded $6.5 million in impairment and abandonment charges in fiscal 2018, an increase of $4.1 million from the prior year.
Debt Reduction and Capital Efficiency
We also reduced our outstanding debt by $96.4 million as follows:
In October 2017, we issued and sold $400.0 million of Senior Notes due October 2027. The proceeds from the 2027 Notes were principally used to fund the repayment of $225.0 million of our 2019 Notes and $175.0 million of our 2023 Notes.
During September 2018, we redeemed the remaining $96.4 million principal balance of our 2019 Notes.
We have fulfilled our plan to reduce debt by $250.0 million over three years. Refer to Note 8 of the notes to our consolidated financial statements in this Form 10-K for further discussion of our outstanding borrowings.
During the current fiscal year, our land held for future development balance declined by approximately $29.4 million due to the activation of multiple parcels for homebuilding activities, leaving a remaining balance of $83.2 million as of September 30, 2018.

25


Reaching “2B-10”
In November 2013, we introduced a multi-year “2B-10” plan, which provided a roadmap of revenue and margin metrics to achieve $2.0 billion in revenue with a 10% Adjusted EBITDA margin. Taken together, reaching “2B-10” would result in Adjusted EBITDA of at least $200 million, which we have attained in fiscal 2018.
In fiscal 2018, we made additional improvements across most of our targeted metrics to reach this goal, as discussed below. In turn, we generated revenue of $2.1 billion, up 10.0% year-over-year, and $204.7 million in Adjusted EBITDA, a 14.5% increase compared to the prior fiscal year (refer to Item 6, Selected Financial Data, in this Form 10-K for a reconciliation of Adjusted EBITDA). Our progress on each metric is discussed below:
Sales per community per month was 3.0 and 2.9 for the fiscal years ended September 30, 2018 and 2017, respectively. We improved our sales absorptions on a year-over-year basis, resulting in sales absorptions for the current year within our targeted range of 2.8 to 3.2 sales per community per month as established in our “2B-10” plan. We continue to believe that we are among the industry leaders in sales absorption rates and are focused on driving further increases in our sales pace moving forward.
We ended the year with an active community count of 160, which was 3.2% higher than the prior year. This increase in community count was anticipated, as we placed additional emphasis during fiscal 2017 on land and land development activities. Furthermore, we capitalized on the strategic opportunity to acquire Venture Homes in fiscal 2018, which contributed to our overall community count and increased our presence in the Atlanta market.
Our ASP for homes closed during the fiscal year ended September 30, 2018 was $360.2 thousand, up 5.0% compared to the prior year. The year-over-year improvement in ASP on closings was primarily a function of geographic mix and product shift, though we also benefited from pricing power in some markets. In addition, we ended fiscal 2018 with an ASP of $384.8 thousand for our units in backlog, indicating that price growth should continue to persist in the near future. Our targeted “2B-10” metric for ASP was a range of $340.0 thousand to $350.0 thousand.
Homebuilding gross margin excluding impairments and abandonments and interest for the fiscal year ended September 30, 2018 was 21.2%, which remains consistent with the prior year. The current year adjusted gross margin is within the “2B-10” target for our homebuilding margin of between 21.0% and 22.0% (excluding impairments and abandonments and interest amortized to homebuilding cost of sales).
SG&A for the fiscal year ended September 30, 2018 was 11.8% of total revenue compared with 12.4% a year earlier. SG&A as a percentage of total revenue declined in the current year due to our continued focus on improving overhead cost management in relation to our revenue growth. We completed the year with SG&A as a percentage of total revenue within the "2B-10" target range of 11.0% to 12.0%.
Seasonal and Quarterly Variability: Our homebuilding operating cycle generally reflects escalating new order activity in the second and third fiscal quarters and increased closings in the third and fourth fiscal quarters. The following tables present new order and closings data for the periods presented:
New Orders (Net of Cancellations)
 
1st Qtr
 
2nd Qtr
 
3rd Qtr
 
4th Qtr
 
Total
2018
1,110

 
1,679

 
1,450

 
1,305

 
5,544

2017
1,005

 
1,549

 
1,595

 
1,315

 
5,464

2016
923

 
1,538

 
1,490

 
1,346

 
5,297

Closings
 
1st Qtr
 
2nd Qtr
 
3rd Qtr
 
4th Qtr
 
Total
2018
1,066

 
1,266

 
1,391

 
2,044

 
5,767

2017
995

 
1,239

 
1,387

 
1,904

 
5,525

2016
1,049

 
1,150

 
1,364

 
1,856

 
5,419



26


RESULTS OF CONTINUING OPERATIONS
The following table summarizes certain key income statement metrics for the periods presented:
 
Fiscal Year Ended September 30,
($ in thousands)
2018
 
2017
 
2016
Revenues:
 
 
 
 
 
Homebuilding
$
2,077,360

 
$
1,895,855

 
$
1,784,777

Land sales and other
29,773

 
20,423

 
37,337

Total
$
2,107,133

 
$
1,916,278

 
$
1,822,114

Gross profit:
 
 
 
 
 
Homebuilding
$
348,275

 
$
312,201

 
$
293,860

Land sales and other
(3,260
)
 
663

 
3,347

Total
$
345,015

 
$
312,864

 
$
297,207

Gross margin:
 
 
 
 
 
Homebuilding (a)
16.8
 %
 
16.5
%
 
16.5
%
Land sales and other
(10.9
)%
 
3.2
%
 
9.0
%
Total
16.4
 %
 
16.3
%
 
16.3
%
Commissions
$
81,002

 
$
74,811

 
$
70,460

G&A (b)
$
168,658

 
$
161,906

 
$
153,628

SG&A (commissions plus G&A) as a percentage of total revenue
11.8
 %
 
12.4
%
 
12.3
%
G&A as a percentage of total revenue
8.0
 %
 
8.4
%
 
8.4
%
Depreciation and amortization
$
13,807

 
$
14,009

 
$
13,794

Operating income
$
81,548

 
$
62,138

 
$
59,325

Operating income as a percentage of total revenue
3.9
 %
 
3.2
%
 
3.3
%
Effective tax rate (c)
191.1
 %
 
7.8
%
 
76.0
%
Equity in income of unconsolidated entities
$
34

 
$
371

 
$
131

Loss on extinguishment of debt
$
27,839

 
$
12,630

 
$
13,423

(a) Homebuilding gross margin for fiscal 2016 was impacted by a $15.5 million reduction in home construction expenses resulting from a settlement with our third-party insurer to resolve certain issues related to the extent of our insurance coverage for multiple policy years, and unexpected warranty costs related to the Florida stucco issues as well as the associated insurance recoveries. Refer to further discussion of these items below in section titled “Homebuilding Gross Profit and Gross Margin.”
(b) G&A was impacted in 2017 by a $2.7 million charge to write off a deposit on a legacy investment in a development site that we deemed uncollectible.
(c) Calculated as tax expense (benefit) for the period divided by income (loss) from continuing operations. Due to a variety of factors, including the impact of discrete tax items on our effective tax rate, our income tax expense (benefit) is not always directly correlated to the amount of pretax income (loss) for the associated periods.

27


Homebuilding Operations Data
The following table summarizes net new orders and cancellation rates by reportable segment for the periods presented:
 
New Orders, net
 
Cancellation Rates
 
2018
 
2017
 
2016
 
18 v 17
 
17 v 16
 
2018
 
2017
 
2016
West
2,874

 
2,578

 
2,381

 
11.5
 %
 
8.3
 %
 
18.4
%
 
18.1
%
 
21.9
%
East
1,089

 
1,351

 
1,330

 
(19.4
)%
 
1.6
 %
 
20.9
%
 
18.1
%
 
20.1
%
Southeast
1,581

 
1,535

 
1,586

 
3.0
 %
 
(3.2
)%
 
16.2
%
 
19.4
%
 
18.2
%
Total
5,544

 
5,464

 
5,297

 
1.5
 %
 
3.2
 %
 
18.3
%
 
18.5
%
 
20.4
%
Sales per active community per month were 3.0 for fiscal year 2018 compared to 2.9 for fiscal year 2017, contributing to the 1.5% increase in net new orders year-over-year, driven by our continued emphasis on sales absorptions. Average active communities were relatively flat compared to the prior year, with 156 average active communities during fiscal 2018 compared to 155 during fiscal 2017. For the fiscal year ended September 30, 2018, the 11.5% increase in net new orders in our West segment was primarily attributable to a significant year-over-year increase in our Las Vegas and Dallas markets. Net new orders declined by 19.4% in the East as we work to rebuild community counts by making new investments. The 3.0% increase in net new orders in the Southeast segment was primarily due to 100 net new orders in the fourth quarter of fiscal 2018 within communities acquired from Venture Homes. Additionally, net new orders were impacted in North and South Carolina in the Southeast segment due to Hurricane Florence, which impacted our ability to sell homes in the affected areas for a number of weeks.
Sales per active community per month were 2.9 for fiscal year 2017 compared to 2.7 for fiscal year 2016, an increase of 10.5%. Our ability to drive sales pace also reflected the robust demand we witnessed throughout the spring and summer selling seasons in the majority of our markets as well as our community mix and the maturation of certain communities versus the prior year. Our average active communities declined from 166 during fiscal 2016 to 155 during fiscal 2017, partially offsetting our stronger absorptions and ultimately resulting in a 3.2% increase in net new orders for the fiscal year. For the fiscal year ended September 30, 2017, the 8.3% increase in net new orders in our West segment was due to stronger sales in our Las Vegas, Phoenix, and Southern California markets, where we activated several new communities during fiscal 2016, offset by a decline in net new orders in our Houston market due to severe weather-related conditions as well as lower community count in response to local economic conditions in prior periods. The 1.6% increase in net new orders in our East segment during our fiscal 2017 was mainly driven by improved sales absorptions in our Virginia market. Finally, the year-over-year decline in net new orders in our Southeast segment was primarily driven by our Florida markets due to a lower community count in both our Orlando and Tampa divisions and, to a lesser extent, impacts from severe weather during the fourth quarter.
The table below summarizes backlog units by reportable segment as well as the aggregate dollar value and ASP of homes in backlog as of September 30, 2018, 2017, and 2016:
 
As of September 30,
 
 
 
 
 
2018
 
2017
 
2016
 
18 v 17
 
17 v 16
Backlog Units:
 
 
 
 
 
 
 
 
 
West
858

 
879

 
828

 
(2.4
)%
 
6.2
 %
East
281

 
413

 
444

 
(32.0
)%
 
(7.0
)%
Southeast
493

 
563

 
644

 
(12.4
)%
 
(12.6
)%
Total
1,632

 
1,855

 
1,916

 
(12.0
)%
 
(3.2
)%
Aggregate dollar value of homes in backlog (in millions)
$
628.0

 
$
665.8

 
$
652.7

 
(5.7
)%
 
2.0
 %
ASP in backlog (in thousands)
$
384.8

 
$
358.9

 
$
340.6

 
7.2
 %
 
5.4
 %
Backlog reflects the number of homes for which the Company has entered into a sales contract with a customer but has not yet delivered the home. Homes in backlog are generally delivered within three to six months following commencement of construction. The aggregate dollar value of homes in backlog as of September 30, 2018 decreased 5.7% compared to the prior year due to a 12.0% decline in units in backlog, partially offset by a 7.2% increase in the ASP of homes in backlog. The decline in units in backlog was primarily driven by a rise in the pace of closings compared to the prior fiscal year and disruptions related to Hurricane Florence in North and South Carolina.

28


The aggregate dollar value of homes in backlog as of September 30, 2017 increased 2.0% compared to September 30, 2016 due to a 5.4% increase in the ASP of homes in backlog, partially offset by a 3.2% decline in units in backlog. The decline in units in backlog was primarily due to shorter cycle times, disruptions related to Hurricanes Harvey and Irma in Houston and certain markets in our Southeast segment, and lower community counts in fiscal 2017 as compared to fiscal 2016.
Homebuilding Revenue, Average Selling Price, and Closings
The tables below summarize homebuilding revenue, the ASP of our homes closed, and closings by reportable segment for the periods presented:
 
Homebuilding Revenue
 
Average Selling Price
($ in thousands)
2018
 
2017
 
2016
 
18 v 17
 
17 v 16
 
2018
 
2017
 
2016
 
18 v 17
 
17 v 16
West
$
999,599

 
$
851,472

 
$
817,971

 
17.4
 %
 
4.1
%
 
$
345.3

 
$
336.9

 
$
326.1

 
2.5
%
 
3.3
%
East
510,710

 
533,585

 
505,198

 
(4.3
)%
 
5.6
%
 
418.3

 
386.1

 
368.0

 
8.3
%
 
4.9
%
Southeast
567,051

 
510,798

 
461,608

 
11.0
 %
 
10.7
%
 
343.5

 
316.1

 
300.1

 
8.7
%
 
5.3
%
Total
$
2,077,360

 
$
1,895,855

 
$
1,784,777

 
9.6
 %
 
6.2
%
 
$
360.2

 
$
343.1

 
$
329.4

 
5.0
%
 
4.2
%
 
Closings
 
2018
 
2017
 
2016
 
18 v 17
 
17 v 16
West
2,895

 
2,527

 
2,508

 
14.6
 %
 
0.8
%
East
1,221

 
1,382

 
1,373

 
(11.6
)%
 
0.7
%
Southeast
1,651

 
1,616

 
1,538

 
2.2
 %
 
5.1
%
Total
5,767

 
5,525

 
5,419

 
4.4
 %
 
2.0
%
The increase in ASP across all segments for the year ended September 30, 2018 was impacted by a change in the mix of closings between geographies, products, and communities within each individual market as compared with the prior fiscal year. It was also positively impacted by our operational strategies as well as improved market conditions in certain geographies. These same dynamics enhanced our ability to generate a higher ASP during fiscal 2017 when compared with fiscal 2016; in particular, a higher proportion of closings generated from certain markets with higher ASPs, including California. On average, we anticipate that our ASP will likely continue to increase in the near-term as indicated by our ASP for homes in backlog as of September 30, 2018.
For fiscal year 2018, the year-over-year increase in closings in our West segment was primarily driven by strong growth in our Las Vegas and Phoenix markets, where we sold a significant number of homes in certain communities. Closings in our East segment declined due to lower closings in our Indianapolis market, partially offset by growth in our Maryland market. Closings increased in our Southeast segment primarily due to growth in the Atlanta market related to the Venture Homes acquisition, which added 70 closings in the fourth quarter of fiscal 2018, partially offset by disruption from Hurricane Florence which caused us to push a small number of closings into the first quarter of fiscal year 2019.
Closings for fiscal year 2017 increased compared to fiscal year 2016 in all markets of our West segment except for Texas. The decrease in Texas was due to a year-over-year decline in community count and, to a lesser extent, weather-related conditions in Houston that resulted in home construction delays in the fiscal fourth quarter of 2017. The decline in Texas was offset by growth in our Sacramento division, which continued to gain momentum after being re-activated, and our Las Vegas division, where certain communities continued to mature. In our East segment, we experienced increases in closings in our Indianapolis and Nashville divisions, offset by decreases in our Maryland division, where community count declined slightly and less emphasis was placed in 2017 on building and closing spec homes than in the prior year. In our Southeast segment, the increase in closings was primarily driven by our Atlanta, Charleston, and Myrtle Beach divisions, partially offset by declines in our Orlando division.
Our overall higher ASP coupled with the increase in closings described above resulted in homebuilding revenue growth for fiscal 2018 as compared to fiscal 2017 and fiscal 2016.

29


Homebuilding Gross Profit and Gross Margin
The following tables present our homebuilding (HB) gross profit and gross margin by reportable segment and in total. In addition, such amounts are presented excluding inventory impairments and abandonments and interest amortized to cost of sales (COS). Homebuilding gross profit is defined as homebuilding revenue less home cost of sales (which includes land and land development costs, home construction costs, capitalized interest, indirect costs of construction, estimated warranty costs, closing costs, and inventory impairment and abandonment charges). For fiscal 2016, we have shown the gross profit and gross margin impact of unexpected warranty costs related to the Florida stucco issues (net of expected insurance recoveries) as well as additional insurance recoveries from a third-party insurer, both of which we consider to be non-recurring items.
($ in thousands)
Fiscal Year Ended September 30, 2018
 
HB Gross
Profit (Loss)
 
HB Gross
Margin
 
Impairments &
Abandonments
(I&A)
 
HB Gross
Profit (Loss) w/o (a)
I&A
 
HB Gross
Margin w/o
I&A
 
Interest
Amortized to COS (Interest)
 
HB Gross Profit
w/o I&A and
Interest
 
HB Gross Margin
w/o I&A and
Interest
West
$
228,637

 
22.9
%
 
$

 
$
228,637

 
22.9
%
 
$

 
$
228,637

 
22.9
%
East
102,346

 
20.0
%
 

 
102,346

 
20.0
%
 

 
102,346

 
20.0
%
Southeast
104,051

 
18.3
%
 
793

 
104,844

 
18.5
%
 

 
104,844

 
18.5
%
Corporate & unallocated
(86,759
)
 
 
 
212

 
(86,547
)
 
 
 
91,132

 
4,585

 
 
Total homebuilding
$
348,275

 
16.8
%
 
$
1,005

 
$
349,280

 
16.8
%
 
$
91,132

 
$
440,412

 
21.2
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
($ in thousands)
Fiscal Year Ended September 30, 2017
 
HB Gross
Profit (Loss)
 
HB Gross
Margin
 
Impairments &
Abandonments
(I&A)
 
HB Gross
Profit (Loss) w/o I&A
 
HB Gross
Margin w/o
I&A
 
Interest
Amortized to COS (Interest)
 
HB Gross Profit
w/o I&A and
Interest
 
HB Gross Margin
w/o I&A and
Interest
West
$
186,629

 
21.9
%
 
$
1,625

 
$
188,254

 
22.1
%
 
$

 
$
188,254

 
22.1
%
East
109,289

 
20.5
%
 
188

 
109,477

 
20.5
%
 

 
109,477

 
20.5
%
Southeast
103,193

 
20.2
%
 

 
103,193

 
20.2
%
 

 
103,193

 
20.2
%
Corporate & unallocated
(86,910
)
 
 
 
68

 
(86,842
)
 
 
 
88,764

 
1,922

 
 
Total homebuilding
$
312,201

 
16.5
%
 
$
1,881

 
$
314,082

 
16.6
%
 
$
88,764

 
$
402,846

 
21.2
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
($ in thousands)
Fiscal Year Ended September 30, 2016
 
HB Gross
Profit (Loss)
 
HB Gross
Margin
 
Impairments &
Abandonments
(I&A)
 
HB Gross
Profit (Loss) w/o I&A
 
HB Gross
Margin w/o
I&A
 
Interest
Amortized to COS
(Interest)
 
HB Gross Profit
w/o I&A and
Interest
 
HB Gross Margin
w/o I&A and
Interest
West
$
169,603

 
20.7
%
 
$
6,729

 
$
176,332

 
21.6
%
 
$

 
$
176,332

 
21.6
%
East
89,572

 
17.7
%
 
5,894

 
95,466

 
18.9
%
 

 
95,466

 
18.9
%
Southeast
92,573

 
20.1
%
 
788

 
93,361

 
20.2
%
 

 
93,361

 
20.2
%
Corporate & unallocated
(57,888
)
 
 
 
1,101

 
(56,787
)
 
 
 
77,941

 
21,154

 
 
Total homebuilding
$
293,860

 
16.5
%
 
$
14,512

 
$
308,372

 
17.3
%
 
$
77,941

 
$
386,313

 
21.6
%
Unexpected warranty costs related to Florida stucco issues (net of expected insurance recoveries)
(3,612
)
 
 
 
 
 
 
 
 
 
 
 
(3,612
)
 
 
Additional insurance recoveries from third-party insurer
(15,500
)
 
 
 
 
 
 
 
 
 
 
 
(15,500
)
 
 
Adjusted homebuilding
$
274,748

 
15.4
%
 
 
 
 
 
 
 
 
 
$
367,201

 
20.6
%
(a) w/o - without

30


Our overall homebuilding gross profit increased to $348.3 million for the fiscal year ended September 30, 2018, from $312.2 million in the prior year. The increase was driven by growth in homebuilding revenue of $181.5 million combined with slightly higher gross margin. However, as shown in the tables above, the comparability of our gross profit and gross margin was modestly impacted by certain items. Specifically, interest amortized to homebuilding cost of sales increased by $2.4 million year-over-year, and impairment and abandonment charges decreased by $0.9 million over the same period (refer to Note 5 and Note 6 of the notes to our consolidated financial statements in this Form 10-K for additional details). When excluding the impact of impairments and abandonments, interest, and non-recurring items, year-over-year gross profit increased by $37.6 million while our gross margin remained flat at 21.2%. The year-over-year stability in gross margin is due to a variety of factors, including: (1) mix of closings between geographies/markets, individual communities within each market, and product type; (2) our pricing strategies, including margin impact on homes closed during the current fiscal year; (3) increased focus on managing our house costs and improving cycle times; (4) fluctuations in discrete items in the current period such as warranty costs; and (5) the impact of purchase accounting related to our acquisition of Venture Homes. Going forward, our gross margin will continue to be impacted by several headwinds, including activation of land assets formerly classified as land held for future development, which generally have lower margins, the structure of some of our land purchase transactions, such as finished lot purchases, which tend to result in lower gross margins, and increasing land and direct homebuilding costs.
Our overall homebuilding gross profit increased to $312.2 million for the fiscal year ended September 30, 2017, from $293.9 million in the prior year. The increase was due to additional gross profit generated on the $111.1 million increase in homebuilding revenue, while our gross margin remained flat year-over-year. The comparability of our gross profit and gross margin, as shown in the tables above, was impacted by three significant items as follows: (1) impairments and abandonments, which decreased from $14.5 million in fiscal 2016 to $1.9 million in fiscal 2017; (2) interest amortized to homebuilding cost of sales, which increased from $77.9 million in fiscal 2016 to $88.8 million in fiscal 2017; and (3) our fiscal 2016 gross profit and gross margin included a $3.6 million impact related to the Florida stucco issues, net of anticipated insurance recoveries, and a $15.5 million settlement with our third-party insurer. When factoring out the impact of impairments and abandonments, interest, and non-recurring items, our gross margin increased by 60 basis points, from 20.6% in fiscal 2016 to 21.2% in fiscal 2017.
Measures of homebuilding gross profit and gross margin after excluding inventory impairments and abandonments, interest amortized to cost of sales, and other non-recurring items are not GAAP financial measures. These measures should not be considered alternatives to homebuilding gross profit and gross margin determined in accordance with GAAP as an indicator of operating performance.
In particular, the magnitude and volatility of non-cash inventory impairment and abandonment charges for the Company and other homebuilders have been significant historically and, as such, have made financial analysis of our industry more difficult. Homebuilding metrics excluding these charges, as well as interest amortized to cost of sales and other similar presentations by analysts and other companies, are frequently used to assist investors in understanding and comparing the operating characteristics of homebuilding activities by eliminating many of the differences in companies' respective level of impairments and levels of debt. Management believes these non-GAAP measures enable holders of our securities to better understand the cash implications of our operating performance and our ability to service our debt obligations as they currently exist and as additional indebtedness is incurred in the future. These measures are also useful internally, helping management to compare operating results and to measure cash available for discretionary spending.
In a given period, our reported gross profit is generated from both communities previously impaired and communities not previously impaired. In addition, as indicated above, certain gross profit amounts arise from recoveries of prior period costs, including warranty items that are not directly tied to communities generating revenue in the period. Home closings from communities previously impaired would, in most instances, generate very low or negative gross margins prior to the impact of the previously recognized impairment. Gross margin for each home closing is higher for a particular community after an impairment because the carrying value of the underlying land was previously reduced to the present value of future cash flows as a result of the impairment, leading to lower cost of sales at the home closing. This improvement in gross margin resulting from one or more prior impairments is frequently referred to in the aggregate as the “impairment turn” or “flow-back” of impairments within the reporting period. The amount of this impairment turn may exceed the gross margin for an individual impaired asset if the gross margin for that asset prior to the impairment would have been negative. The extent to which this impairment turn is greater than the reported gross margin for the individual asset is related to the specific historical cost basis of that individual asset.

31


The asset valuations that result from our impairment calculations are based on discounted cash flow analyses and are not derived by simply applying prospective gross margins to individual communities. As such, impaired communities may have gross margins that are somewhat higher or lower than the gross margins for unimpaired communities. The mix of home closings in any particular quarter varies to such an extent that comparisons between previously impaired and never impaired communities would not be a reliable way to ascertain profitability trends or to assess the accuracy of previous valuation estimates. In addition, since any amount of impairment turn is tied to individual lots in specific communities, it will vary considerably from period to period. As a result of these factors, we review the impairment turn impact on gross margin on a trailing 12-month basis rather than a quarterly basis as a way of considering whether our impairment calculations are resulting in gross margins for impaired communities that are comparable to our unimpaired communities. For fiscal 2018, our homebuilding gross margin was 16.8% and excluding interest and inventory impairments and abandonments, it was 21.2%. For the same period, homebuilding gross margin was as follows in those communities that have previously been impaired, which represented 9.4% of total closings during fiscal 2018:
Homebuilding Gross Margin from previously impaired communities:
 
Pre-impairment turn gross margin
(13.9
)%
Impact of interest amortized to COS related to these communities
15.7
 %
Pre-impairment turn gross margin, excluding interest amortization
1.8
 %
Impact of impairment turns
16.1
 %
Gross margin (post impairment turns), excluding interest amortization
17.9
 %
For a further discussion of our impairment policies and communities impaired during the current and prior two fiscal years, refer to Notes 2 and 5 of the notes to consolidated financial statements in this Form 10-K.
Land Sales and Other Revenues and Gross Profit
Land sales relate to land and lots sold that did not fit within our homebuilding programs and strategic plans in certain markets. Other revenues included net fees we received for general contractor services that we performed on behalf of a third party and broker fees. The following tables summarize our land sales and other revenues and related gross profit (loss) by reportable segment for the periods presented:
($ in thousands)
Land Sales and Other Revenues
 
2018
 
2017
 
2016
 
18 v 17
 
17 v 16
West
$
15,204

 
$
1,758

 
$
9,936

 
764.8
 %
 
(82.3
)%
East
13,853

 
17,837

 
21,751

 
(22.3
)%
 
(18.0
)%
Southeast
716

 
828

 
5,650

 
(13.5
)%
 
(85.3
)%
Total
$
29,773

 
$
20,423

 
$
37,337

 
45.8
 %
 
(45.3
)%
 
 
 
 
 
 
 
 
 
 
($ in thousands)
Land Sales and Other Gross Profit (Loss)
 
2018
 
2017
 
2016
 
18 v 17
 
17 v 16
West
$
1,708

 
$
732

 
$
2,921

 
133.3
 %
 
(74.9
)%
East
321

 
(119
)
 
678

 
369.7
 %
 
(117.6
)%
Southeast
(3,153
)
 
50

 
598

 
(6,406.0
)%
 
(91.6
)%
Corporate and unallocated (a)
(2,136
)
 

 
(850
)
 
n/m

 
n/m

Total
$
(3,260
)
 
$
663

 
$
3,347

 
(591.7
)%
 
(80.2
)%
(a) Corporate and unallocated includes interest and indirects related to land sold that was expensed.
n/m - indicates the percentage is “not meaningful.”
For the fiscal year ended September 30, 2018, we recognized impairment charges in our Southeast and Corporate and unallocated segments of approximately $3.2 million and $2.1 million, respectively, related to a community in our Atlanta market. Please see Note 5 of the notes to consolidated financial statements in this Form 10-K for additional details.
To further support our efforts to reduce leverage, we continued to focus on closing a number of land sales in the current fiscal year for land positions that did not fit within our strategic plans. Future land and lot sales will depend on a variety of factors, including local market conditions, individual community performance, and changing strategic plans.

32


Operating Income
The table below summarizes operating income by reportable segment for the periods presented:
 
Fiscal Year Ended September 30,
 
 
 
 
(In thousands)
2018
 
2017