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Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_____________________________________________________________ 
FORM 10-Q
_____________________________________________________________ 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended December 31, 2019
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 each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock, $0.001 par value
BZH
New York Stock Exchange
 _____________________________________________________________
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 every Interactive Data File required to be submitted 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 such files).    YES  x    NO  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act:
Large accelerated filer
¨
Accelerated filer
x
Non-accelerated filer
o
Smaller reporting company
o
Emerging growth company
o
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
Number of shares of common stock outstanding as of January 28, 2020: 31,384,758


Table of Contents

BEAZER HOMES USA, INC.
TABLE OF CONTENTS
 
 
 
 
 

1

Table of Contents

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

BEAZER HOMES USA, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
 
in thousands (except share and per share data)
December 31,
2019
 
September 30,
2019
ASSETS
 
 
 
Cash and cash equivalents
$
41,277

 
$
106,741

Restricted cash
18,759

 
16,053

Accounts receivable (net of allowance of $313 and $304, respectively)
19,439

 
26,395

Income tax receivable
4,612

 
4,935

Owned inventory
1,574,280

 
1,504,248

Investments in unconsolidated entities
3,930

 
3,962

Deferred tax assets, net
247,382

 
246,957

Property and equipment, net
26,623

 
27,421

Operating lease right-of-use assets
12,975

 

Goodwill
11,376

 
11,376

Other assets
7,451

 
9,556

Total assets
$
1,968,104

 
$
1,957,644

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Trade accounts payable
$
110,153

 
$
131,152

Operating lease liabilities
15,158

 

Other liabilities
95,451

 
109,429

Total debt (net of debt issuance costs of $12,080 and $12,470, respectively)
1,208,062

 
1,178,309

Total liabilities
1,428,824

 
1,418,890

Stockholders’ equity:
 
 
 
Preferred stock (par value $0.01 per share, 5,000,000 shares authorized, no shares issued)

 

Common stock (par value $0.001 per share, 63,000,000 shares authorized, 31,383,068 issued and outstanding and 30,933,110 issued and outstanding, respectively)
31

 
31

Paid-in capital
852,055

 
854,275

Accumulated deficit
(312,806
)
 
(315,552
)
Total stockholders’ equity
539,280

 
538,754

Total liabilities and stockholders’ equity
$
1,968,104

 
$
1,957,644


See accompanying notes to condensed consolidated financial statements.


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BEAZER HOMES USA, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
 
 
Three Months Ended
 
 
December 31,
 
 in thousands (except per share data)
2019
 
2018
 
Total revenue
$
417,804

 
$
402,040

 
Home construction and land sales expenses
354,667

 
340,378

 
Inventory impairments and abandonments

 
1,007

 
Gross profit
63,137

 
60,655

 
Commissions
16,065

 
15,737

 
General and administrative expenses
39,699

 
38,642

 
Depreciation and amortization
3,427

 
2,770

 
Operating income
3,946

 
3,506

 
Equity in loss of unconsolidated entities
(13
)
 
(64
)
 
Other expense, net
(1,340
)
 
(42
)
 
Income from continuing operations before income taxes
2,593

 
3,400

 
Benefit from income taxes
(211
)
 
(3,922
)
 
Income from continuing operations
2,804

 
7,322

 
Loss from discontinued operations, net of tax
(58
)
 
(11
)
 
Net income
$
2,746

 
$
7,311

 
Weighted average number of shares:
 
 
 
 
Basic
29,746

 
31,801

 
Diluted
30,138

 
32,055

 
Basic income per share:
 
 
 
 
Continuing operations
$
0.09

 
$
0.23

 
Discontinued operations

 

 
Total
$
0.09

 
$
0.23

 
Diluted income per share:
 
 
 
 
Continuing operations
$
0.09

 
$
0.23

 
Discontinued operations

 

 
Total
$
0.09

 
$
0.23

 

See accompanying notes to condensed consolidated financial statements.















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Table of Contents

BEAZER HOMES USA, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Unaudited)

 
Three Months Ended December 31, 2019
 
Common Stock
 
Paid-in Capital
 
Accumulated Deficit
 
 
in thousands
Shares
 
Amount
 
 
 
Total
Balance as of September 30, 2019
30,933

 
$
31

 
$
854,275

 
$
(315,552
)
 
$
538,754

Net income and comprehensive loss

 

 

 
2,746

 
2,746

Amortization of nonvested stock awards

 

 
2,311

 

 
2,311

Exercises of stock options
47

 

 
173

 

 
173

Shares issued under employee stock plans, net
574

 

 

 

 

Forfeiture and other settlements of restricted stock
(1
)
 

 
(2,058
)
 

 
(2,058
)
Common stock redeemed for tax liability
(170
)
 

 
(2,646
)
 

 
(2,646
)
Balance as of December 31, 2019
31,383

 
$
31

 
$
852,055

 
$
(312,806
)
 
$
539,280



 
Three Months Ended December 31, 2018
 
Common Stock
 
Paid-in Capital
 
Accumulated Deficit
 
 
in thousands
Shares
 
Amount
 
 
 
Total
Balance as of September 30, 2018
33,522

 
$
34

 
$
880,025

 
$
(236,032
)
 
$
644,027

Net income and comprehensive income

 

 

 
7,311

 
7,311

Amortization of nonvested stock awards

 

 
2,114

 

 
2,114

Exercises of stock options
1

 

 
7

 

 
7

Shares issued under employee stock plans, net
910

 

 

 

 

Forfeiture of restricted stock
(28
)
 

 

 

 

Common stock redeemed for tax liability
(176
)
 

 
(1,850
)
 

 
(1,850
)
Share repurchases
(1,554
)
 
(1
)
 
(16,499
)
 

 
(16,500
)
Balance as of December 31, 2018
32,675

 
$
33

 
$
863,797

 
$
(228,721
)
 
$
635,109


See accompanying notes to condensed consolidated financial statements.

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BEAZER HOMES USA, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
Three Months Ended
 
December 31,
in thousands
2019
 
2018
Cash flows from operating activities:
 
 
 
Net income
$
2,746

 
$
7,311

Adjustments to reconcile net loss to net cash used in operating activities:
 
 
 
Depreciation and amortization
3,427

 
2,770

Stock-based compensation expense
2,311

 
2,114

Inventory impairments and abandonments

 
1,007

Deferred and other income tax benefit
(228
)
 
(4,070
)
Gain on sale of fixed assets
(63
)
 
(35
)
Change in allowance for doubtful accounts
9

 

Equity in loss of unconsolidated entities
13

 
65

Cash distributions of income from unconsolidated entities

 
320

Changes in operating assets and liabilities:
 
 
 
Decrease in accounts receivable
6,947

 
5,298

Decrease in income tax receivable
303

 

Increase in inventory
(68,999
)
 
(29,722
)
Decrease in other assets
1,978

 
1,430

Decrease in trade accounts payable
(20,999
)
 
(26,568
)
Decrease in other liabilities
(11,975
)
 
(14,610
)
Net cash used in operating activities
(84,530
)
 
(54,690
)
Cash flows from investing activities:
 
 
 
Capital expenditures
(2,632
)
 
(6,354
)
Proceeds from sale of fixed assets
66

 
54

Return of capital from unconsolidated entities
19

 

Net cash used in investing activities
(2,547
)
 
(6,300
)
Cash flows from financing activities:
 
 
 
Repayment of debt
(1,150
)
 
(1,479
)
Repayment of borrowings from credit facility
(95,000
)
 
(75,000
)
Borrowings from credit facility
125,000

 
100,000

Debt issuance costs

 
(400
)
Repurchase of common stock

 
(16,500
)
Tax payments for stock-based compensation awards
(2,646
)
 
(1,850
)
Stock option exercises and other financing activities
(1,885
)
 
7

Net cash provided by financing activities
24,319

 
4,778

Decrease in cash, cash equivalents, and restricted cash
(62,758
)
 
(56,212
)
Cash, cash equivalents, and restricted cash at beginning of period
122,794

 
153,248

Cash, cash equivalents, and restricted cash at end of period
$
60,036

 
$
97,036


See accompanying notes to condensed consolidated financial statements.

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Table of Contents

BEAZER HOMES USA, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(1) Description of Business
Beazer Homes USA, Inc. (“we,” “us,” “our,” “Beazer,” “Beazer Homes” and the “Company”) is a geographically diversified homebuilder with active operations in 13 states within three geographic regions in the United States: the West, East, and Southeast.
Our homes are designed to appeal to homeowners at different price points across various demographic segments and are generally offered for sale in advance of their construction. Our objective is to provide our customers with homes that incorporate exceptional value and quality, while seeking to maximize our return on invested capital over the course of a housing cycle.
For an additional description of our business, refer to Item 1 within our Annual Report on Form 10-K for the fiscal year ended September 30, 2019 (2019 Annual Report).
(2) Basis of Presentation and Summary of Significant Accounting Policies
The accompanying unaudited condensed consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) for interim financial information and in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X. The unaudited condensed consolidated financial statements do not include all of the information and disclosures required by GAAP for complete financial statements. As such, the accompanying unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's 2019 Annual Report. In the opinion of management, all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation have been included in the accompanying unaudited condensed consolidated financial statements. The results of the Company's consolidated operations presented herein for the three months ended December 31, 2019 are not necessarily indicative of the results to be expected for the full fiscal year due to seasonal variations in our operations and other factors.
Basis of Consolidation
The accompanying unaudited condensed consolidated financial statements include the accounts of Beazer Homes USA, Inc. and its consolidated subsidiaries. Intercompany transactions and balances have been eliminated in consolidation. Our net income (loss) is equivalent to our comprehensive income (loss), so we have not presented a separate statement of comprehensive income (loss).
In the past, we have discontinued homebuilding operations in various markets. Results from certain of these exited markets are reported as discontinued operations in the accompanying unaudited condensed consolidated statements of operations for all periods presented (see Note 17 for a further discussion of our discontinued operations).
Our fiscal year 2020 began on October 1, 2019 and ends on September 30, 2020. Our fiscal year 2019 began on October 1, 2018 and ended on September 30, 2019.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make informed estimates and judgments that affect the amounts reported in the condensed consolidated financial statements and accompanying notes. Accordingly, actual results could differ from these estimates.
Share Repurchase Program
During the first quarter of fiscal 2019, the Company's Board of Directors approved a share repurchase program that authorizes the Company to repurchase up to $50.0 million of its outstanding common stock. As part of this program, the Company repurchased common stock during fiscal 2019 through open market transactions, 10b5-1 plans, and accelerated share repurchase (ASR) agreements.
All shares have been retired upon repurchase during fiscal 2019. The aggregate reduction to stockholders’ equity related to share repurchases during the fiscal year ended September 30, 2019 was $34.6 million. The Company made no share repurchases during the three months ended December 31, 2019. As of December 31, 2019, the remaining availability of the share repurchase program was $15.4 million.

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Table of Contents

Inventory Valuation
Inventory assets are assessed for recoverability no less than quarterly in accordance with the policies described in Notes 2 and 5 to the audited consolidated financial statements within our 2019 Annual Report. Homebuilding inventories that are accounted for as held for development (projects in progress) include land and home construction assets grouped together as communities. Homebuilding inventories held for development are stated at cost (including direct construction costs, capitalized indirect costs, capitalized interest, and real estate taxes) unless facts and circumstances indicate that the carrying value of the assets may not be recoverable. For communities that have been idled (land held for future development), all applicable interest and real estate taxes are expensed as incurred, and the inventory is stated at cost unless facts and circumstances indicate that the carrying value of the assets may not be recoverable. We record land held for sale at the lower of the carrying value or fair value less costs to sell.
Revenue Recognition
We recognize revenue upon the transfer of promised goods to our customers in an amount that reflects the consideration to which we expect to be entitled by applying the following five-step process specified in Accounting Standards Codification Topic 606.
Identify the contract(s) with a customer
Identify the performance obligations
Determine the transaction price
Allocate the transaction price
Recognize revenue when the performance obligations are met
The following table presents our total revenue disaggregated by revenue stream:
 
Three Months Ended
 
December 31,
in thousands
2019
 
2018
Homebuilding revenue
$
417,399

 
$
400,982

Land sales and other revenue
405

 
1,058

Total revenue (a)
$
417,804

 
$
402,040

(a) Please see Note 15 for total revenue disaggregated by reportable segment.
Homebuilding revenue
Homebuilding revenue is reported net of any discounts and incentives and is generally recognized when title to and possession of the home are transferred to the buyer at the closing date. The performance obligation to deliver the home is generally satisfied in less than one year from the original contract date. Home sale contract assets consist of cash from home closings held in escrow for our benefit, typically for less than five days, and are considered deposits in-transit and classified as cash. Contract liabilities include customer deposits related to sold but undelivered homes and totaled 13.9 million and 11.5 million as of December 31, 2019 and September 30, 2019, respectively. Of the customer liabilities outstanding as of September 30, 2019, $6.1 million was recognized in revenue during the three months ended December 31, 2019 upon closing of the related homes, and $0.2 million was refunded to or forfeited by the buyer. The remaining balance of $5.2 million remains included within customer deposits as of December 31, 2019.
Land sales and other revenue
Land sales revenue relates to land that does not fit within our homebuilding programs and strategic plans. Land sales typically require cash consideration on the closing date, which is generally when performance obligations are satisfied. In some periods, we also have other revenue related to broker fees as well as fees received for general contractor services that we perform on behalf of third parties. Revenue for broker and general contractor services are typically immaterial and are generally recognized as performance obligations are satisfied.

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Recent Accounting Pronouncements
Leases. On October 1, 2019, we adopted Accounting Standards Update (ASU) No. 2016-02, Leases (ASU 2016-02) and related amendments, collectively codified in ASC 842, Leases (ASC 842). ASC 842 requires lessees to record most leases on their balance sheets by recognize a right-of-use asset, representing the right to use the identified asset during the lease term, and a corresponding lease liability, representing the present value of the lease payments over the lease term. Lessor accounting will be largely similar to that under the previous accounting rules. ASC 842 also requires significantly enhanced disclosures around an entity's leases and the related accounting. As part of our adoption of ASC 842, we applied a modified retrospective approach, whereby prior year financial statements were not recast. We also elected the package of transition practical expedients, which allowed us to not reassess (1) whether any expired or existing contracts are or contain leases, (2) the lease classification for any expired or existing leases, and (3) the initial direct costs for any existing leases. In addition, we elected the practical expedient that allows lessees to account for lease and non-lease components together as a single component for all leases. Upon adoption of ASC 842, we recorded net operating lease right-of-use (ROU) assets of 13.9 million and operating lease liabilities of 16.0 million. Existing prepaid rent and accrued rent were recorded as an offset to the gross operating lease ROU assets. The adoption of ASC 842 did not have any impact on our retained earnings. See Note 8 for additional discussion of our operating leases.
Fair Value Measurements. In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820) - Disclosure Framework (ASU 2018-13). The updated guidance improves the disclosure requirements for fair value measurements. The updated guidance is effective for fiscal years beginning after December 15, 2019 and interim periods within those fiscal years. Early adoption is permitted for any removed or modified disclosures. We are currently assessing the impact of adopting the updated provisions.
Internal-Use Software. In August 2018, the FASB issued ASU 2018-15, Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40): Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract (ASU 2018-15). ASU 2018-15 aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. This new guidance will be effective for public companies for fiscal years beginning after December 15, 2019 and interim periods within those fiscal years. Early adoption is permitted. The Company is currently evaluating the effect that the new guidance will have on its consolidated financial statements and related disclosures.
(3) Supplemental Cash Flow Information
The following table presents supplemental disclosure of non-cash and cash activity as well as a reconciliation of total cash balances between the condensed consolidated balance sheets and condensed consolidated statements of cash flows for the periods presented:
 
Three Months Ended
 
December 31,
in thousands
2019
 
2018
Supplemental disclosure of non-cash activity:
 
 
 
Beginning operating lease right-of-use asset (ASC 842 adoption)
$
13,895

 

Beginning operating lease right-of-use liability (ASC 842 adoption)
16,028

 

Supplemental disclosure of cash activity:
 
 
 
Interest payments
$
15,954

 
$
13,986

Income tax payments

 
121

Tax refunds received
303

 
1,148

Reconciliation of cash, cash equivalents, and restricted cash:
 
 
 
Cash and cash equivalents
$
41,277

 
$
84,399

Restricted cash
18,759

 
12,637

Total cash, cash equivalents, and restricted cash shown in the statement of cash flows
$
60,036

 
$
97,036


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Table of Contents

(4) Investments in Unconsolidated Entities
Unconsolidated Entities
As of December 31, 2019, the Company participated in certain joint ventures and had investments in unconsolidated entities in which it had less than a controlling interest. The following table presents the Company's investment in these unconsolidated entities as well as the total equity and outstanding borrowings of these unconsolidated entities as of December 31, 2019 and September 30, 2019:
in thousands
December 31, 2019
 
September 30, 2019
Investment in unconsolidated entities
$
3,930

 
$
3,962

Total equity of unconsolidated entities
8,501

 
9,969

Total outstanding borrowings of unconsolidated entities
12,618

 
12,658

Equity in income from unconsolidated entity activities included in income from continuing operations is as follows for the periods presented:
 
Three Months Ended
 
December 31,
in thousands
2019
 
2018
Equity in loss of unconsolidated entities
$
(13
)
 
$
(64
)
For the three months ended December 31, 2019 and 2018, there were no impairments related to investments in unconsolidated entities.
Guarantees
Historically, the Company's joint ventures typically obtained secured acquisition, development, and construction financing. In addition, the Company and its joint venture partners provided varying levels of guarantees of debt and other debt-related obligations for these unconsolidated entities. However, as of December 31, 2019 and September 30, 2019, the Company had no outstanding guarantees or other debt-related obligations related to our investments in unconsolidated entities.
The Company and its joint venture partners generally provide unsecured environmental indemnities to land development joint venture project lenders. These indemnities obligate the Company to reimburse the project lenders for claims related to environmental matters for which they are held responsible. During the three months ended December 31, 2019 and 2018, the Company was not required to make any payments related to environmental indemnities.
In assessing the need to record a liability for these guarantees, the Company considers its historical experience in being required to perform under the guarantees, the fair value of the collateral underlying these guarantees, and the financial condition of the applicable unconsolidated entities. In addition, the fair value of the collateral of unconsolidated entities is monitored to ensure that the related borrowings do not exceed the specified percentage of the value of the property securing the borrowings. As of December 31, 2019, no liability was recorded for the contingent aspects of any guarantees that were determined to be reasonably possible but not probable.

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Table of Contents

(5) Inventory
The components of our owned inventory are as follows as of December 31, 2019 and September 30, 2019:
in thousands
December 31, 2019
 
September 30, 2019
Homes under construction
$
580,580

 
$
507,542

Development projects in progress
732,380

 
738,201

Land held for future development
28,531

 
28,531

Land held for sale
11,443

 
12,662

Capitalized interest
137,010

 
136,565

Model homes
84,336

 
80,747

Total owned inventory
$
1,574,280

 
$
1,504,248

Homes under construction include homes substantially finished and ready for delivery and homes in various stages of construction, including the cost of the underlying lot. We had 267 (with a cost of $90.2 million) and 238 (with a cost of $82.2 million) substantially completed homes that were not subject to a sales contract (spec homes) as of December 31, 2019 and September 30, 2019, respectively.
Development projects in progress consist principally of land acquisition, land development and other common costs. These land related costs are allocated to individual lots on a pro-rata basis, and the lot costs are transferred to homes under construction when home construction begins for the respective lots. Certain of the fully developed lots in this category are reserved by a customer deposit or sales contract.
Land held for future development consists of communities for which construction and development activities are expected to occur in the future or have been idled and are stated at cost unless facts and circumstances indicate that the carrying value of the assets may not be recoverable. All applicable interest and real estate taxes on land held for future development are expensed as incurred.
Land held for sale includes land and lots that do not fit within our homebuilding programs and strategic plans in certain markets, and land is classified as held for sale once certain criteria are met (refer to Note 2). These assets are recorded at the lower of the carrying value or fair value less costs to sell.
The amount of interest we are able to capitalize depends on our qualified inventory balance, which considers the status of our inventory holdings. Our qualified inventory balance includes the majority of our homes under construction and development projects in progress but excludes land held for future development and land held for sale (see Note 6 for additional information on capitalized interest).

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Total owned inventory by reportable segment is presented in the table below as of December 31, 2019 and September 30, 2019:
in thousands
Projects in
Progress (a)
 
Land Held for Future Development
 
Land Held for Sale
 
Total Owned
Inventory
December 31, 2019
 
 
 
 
 
 
 
West Segment
$
733,525

 
$
3,483

 
$
4,235

 
$
741,243

East Segment
270,930

 
14,077

 
3,810

 
288,817

Southeast Segment
333,623

 
10,971

 
3,398

 
347,992

Corporate and unallocated (b)
196,228



 

 
196,228

Total
$
1,534,306

 
$
28,531

 
$
11,443

 
$
1,574,280

September 30, 2019
 
 
 
 
 
 
 
West Segment
$
723,094

 
$
3,483

 
$
5,160

 
$
731,737

East Segment
228,937

 
14,077

 
4,104

 
247,118

Southeast Segment
318,737

 
10,971

 
3,398

 
333,106

Corporate and unallocated (b)
192,287

 

 

 
192,287

Total
$
1,463,055

 
$
28,531

 
$
12,662

 
$
1,504,248

(a) Projects in progress include homes under construction, development projects in progress, capitalized interest, and model home categories from the preceding table.
(b) Projects in progress amount includes capitalized interest and indirect costs that are maintained within our Corporate and unallocated segment.
Inventory Impairments
When conducting our community level review for the recoverability of inventory related to projects in progress, we establish a quarterly “watch list” comprised of communities that carry profit margins in backlog or in our forecast that are below a minimum threshold of profitability, as well as recent closings that have gross margins less than a specified threshold. Each community is first evaluated qualitatively to determine if there are temporary factors driving the low profitability levels. Following our qualitative evaluation, communities with more than ten homes remaining to close are subjected to additional financial and operational review that considers the competitive environment and other factors contributing to gross margins below our watch list threshold. Our assumptions about future home sales prices and absorption rates require significant judgment because the residential homebuilding industry is cyclical and is highly sensitive to changes in economic conditions. For certain communities, it may be prudent to reduce sales prices or further increase sales incentives in response to a variety of factors, including competitive market conditions in those specific submarkets for the product and locations of these communities. For communities where the current competitive and market dynamics indicate that assets may not be recoverable, a formal impairment analysis is performed. The formal impairment analysis consists of both qualitative considerations and quantitative analyses reflecting market and asset specific information.
As of December 31, 2019, there were four communities on our quarterly watch list. However, none of these communities required further analysis to be performed after considering certain quantitative and qualitative factors.
As of December 31, 2018, there were four communities on our quarterly watch list that required further analysis to be performed after considering the lots remaining in each community and certain other qualitative factors. This additional analysis led to a $1 million impairment charge for one of these communities, principally due to a reduction in price that is other than temporary based on competitive and market dynamics.
Impairments on land held for sale generally represent write downs of these properties to net realizable value and are based on current market conditions and our review of recent comparable transactions. Our assumptions related to land sales prices require significant judgment because the real estate market is highly sensitive to changes in economic conditions, and our estimates of sale prices could differ significantly from actual results.
From time-to-time, we also determine that the proper course of action with respect to a community is to not exercise an option and to write off the deposit securing the option takedown and the related pre-acquisition costs, as applicable. In determining whether to abandon lots or lot option contracts, our evaluation is primarily based upon the expected cash flows from the property. Additionally, in certain limited instances, we are forced to abandon lots due to permitting or other regulatory issues that do not allow us to build on those lots. If we intend to abandon or walk away from a property, we record a charge to earnings for the deposit amount and any related capitalized costs in the period such decision is made. Abandonment charges generally relate to our decision to abandon lots or not exercise certain option contracts that are not projected to produce adequate results, no longer

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fit with our long-term strategic plan or, in limited circumstances, are not suitable for building due to regulatory or environmental restrictions that are enacted.
Lot Option Agreements and Variable Interest Entities (VIE)
As previously discussed, we also have access to land inventory through lot option contracts, which generally enable us to defer acquiring portions of properties owned by third parties and unconsolidated entities until we have determined whether to exercise our lot option. The majority of our lot option contracts require a non-refundable cash deposit or irrevocable letter of credit based on a percentage of the purchase price of the land for the right to acquire lots during a specified period of time at a specified price. Under lot option contracts, purchase of the properties is contingent upon satisfaction of certain requirements by us and the sellers. Our liability under option contracts is generally limited to forfeiture of the non-refundable deposits, letters of credit, and other non-refundable amounts incurred. We expect to exercise, subject to market conditions and seller satisfaction of contract terms, most of our remaining option contracts. Various factors, some of which are beyond our control, such as market conditions, weather conditions, and the timing of the completion of development activities, will have a significant impact on the timing of option exercises or whether lot options will be exercised at all.
The following table provides a summary of our interests in lot option agreements as of December 31, 2019 and September 30, 2019:
in thousands
Deposits &
Non-refundable
Pre-acquisition
Costs Incurred
 
Remaining
Obligation
As of December 31, 2019
 
 
 
Unconsolidated lot option agreements
$
74,836

 
$
386,762

As of September 30, 2019
 
 
 
Unconsolidated lot option agreements
$
78,202

 
$
389,705

(6) Interest
Interest capitalized during the three months ended December 31, 2019 and 2018 was limited by the balance of inventory eligible for capitalization. The following table presents certain information regarding interest for the periods presented:
 
Three Months Ended December 31,
in thousands
2019
 
2018
Capitalized interest in inventory, beginning of period
$
136,565

 
$
144,645

Interest incurred
21,556

 
24,921

Capitalized interest impaired

 
(115
)
Interest expense not qualified for capitalization and included as other expense (a)
(1,442
)
 
(242
)
Capitalized interest amortized to home construction and land sales expenses (b)
(19,669
)
 
(17,323
)
Capitalized interest in inventory, end of period
$
137,010

 
$
151,886

(a) The amount of interest capitalized depends on the qualified inventory balance, which considers the status of the Company's inventory holdings. The qualified inventory balance includes the majority of homes under construction and development projects in progress but excludes land held for future development and land held for sale.
(b) Capitalized interest amortized to home construction and land sales expenses varies based on the number of homes closed during the period and land sales, if any, as well as other factors.

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(7) Borrowings
The Company's debt, net of unamortized debt issuance costs consisted of the following as of December 31, 2019 and September 30, 2019:
in thousands
Final Maturity Date
 
December 31, 2019
 
September 30, 2019
Senior Unsecured Term Loan (Term Loan)
September 2022
 
$
150,000

 
$
150,000

6 3/4% Senior Notes (2025 Notes)
March 2025
 
229,555

 
229,555

5 7/8% Senior Notes (2027 Notes)
October 2027
 
394,000

 
394,000

7 1/4% Senior Notes (2029 Notes)
October 2029
 
350,000

 
350,000

Unamortized debt issuance costs
 
 
(12,080
)
 
(12,470
)
Total Senior Notes, net
 
 
1,111,475

 
1,111,085

Junior Subordinated Notes (net of unamortized accretion of $34,186 and $34,703, respectively)
July 2036
 
66,587

 
66,070

Revolving Credit Facility
February 2022
 
30,000

 

Other Secured Notes payable
Various Dates
 

 
1,154

Total debt, net
 
 
$
1,208,062

 
$
1,178,309

Secured Revolving Credit Facility
The Secured Revolving Credit Facility (the Facility) provides working capital and letter of credit capacity of $250.0 million with four lenders. For additional discussion of the Facility, refer to Note 8 to the audited consolidated financial statements within our 2019 Annual Report.
As of December 31, 2019, $30.0 million of borrowings and no letters of credit were outstanding under the Facility, resulting in a remaining capacity of $220.0 million. As of September 30, 2019, no borrowings and no letters of credit were outstanding under the Facility. The Facility requires compliance with certain covenants, including negative covenants and financial maintenance covenants. As of December 31, 2019, the Company was in compliance with all such covenants.
Senior Unsecured Term Loan
On September 9, 2019, the Company entered into a term loan agreement, which provides for a Senior Unsecured Term Loan (the Term Loan) in an aggregate principal amount of up to $150.0 million. The Term Loan will (1) mature in September 2022, with $50.0 million annual repayment installments in September 2020 and September 2021; (2) bears interest at a fixed rate of 4.875%; and (3) includes an option to prepay, subject to certain conditions and the payment of certain premiums. The Term Loan contains covenants generally consistent with the covenants contained in the Facility. As of December 31, 2019, the Company was in compliance with all such covenants.
Letter of Credit Facilities
The Company has entered into stand-alone, cash-secured letter of credit agreements with banks to maintain pre-existing letters of credit and to provide for the issuance of new letters of credit (in addition to the letters of credit issued under the Facility). As of December 31, 2019 and September 30, 2019, the Company had letters of credit outstanding under these additional facilities of $16.6 million and $14.1 million, respectively, all of which were secured by cash collateral in restricted accounts. The Company may enter into additional arrangements to provide additional letter of credit capacity.
In May 2018, the Company entered into a reimbursement agreement, which provides for the issuance of performance letters of credit, and an unsecured credit agreement that provides for the issuance of up to $50.0 million of standby letters of credit to backstop the Company's obligations under the reimbursement agreement (collectively, the "Bilateral Facility"). The Bilateral Facility will terminate on June 10, 2021. As of December 31, 2019, the total stated amount of performance letters of credit issued under the reimbursement agreement was $33.8 million (and the stated amount of the backstop standby letter of credit issued under the credit agreement was $40.0 million). The Company may enter into additional arrangements to provide greater letter of credit capacity.
Senior Notes
The Company's Senior Notes are unsecured obligations ranking pari passu with all other existing and future senior indebtedness. Substantially all of the Company's significant subsidiaries are full and unconditional guarantors of the Senior Notes and are jointly

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and severally liable for obligations under the Senior Notes and the Facility. Each guarantor subsidiary is a 100% owned subsidiary of Beazer Homes. See Note 16 for further information.
All unsecured Senior Notes rank equally in right of payment with all existing and future senior unsecured obligations, senior to all of the Company's existing and future subordinated indebtedness and effectively subordinated to the Company's existing and future secured indebtedness, including indebtedness under the Facility, if outstanding, to the extent of the value of the assets securing such indebtedness. The unsecured Senior Notes and related guarantees are structurally subordinated to all indebtedness and other liabilities of all of the Company's subsidiaries that do not guarantee these notes but are fully and unconditionally guaranteed jointly and severally on a senior basis by the Company's wholly-owned subsidiaries party to each applicable indenture.
The Company's Senior Notes are issued under indentures that contain certain restrictive covenants which, among other things, restrict our ability to pay dividends, repurchase our common stock, incur certain types of additional indebtedness, and make certain investments. Compliance with the Senior Note covenants does not significantly impact the Company's operations. The Company is in compliance with the covenants contained in the indentures of all of its Senior Notes as of December 31, 2019.

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For additional redemption features, refer to the table below that summarizes the redemption terms of our Senior Notes:
Senior Note Description
 
Issuance Date
 
Maturity Date
 
Redemption Terms
6 3/4% Senior Notes
 
March 2017
 
March 2025
 
On or prior to March 15, 2020, we may redeem up to 35% of the aggregate principal amount of the 2025 Notes with the net cash proceeds of certain equity offerings at a redemption price equal to 106.75% of the principal amount, plus accrued and unpaid interest to, but excluding, the redemption date, provided at least 65% of the aggregate principal amount of the 2025 Notes originally issued remains outstanding immediately after such redemption.
 
 
 
Callable at any time prior to March 15, 2020, in whole or in part, at a redemption price equal to 100.000% of the principal amount, plus a customary make-whole premium; on or after March 15, 2020, callable at a redemption price equal to 105.063% of the principal amount; on or after March 15, 2021, callable at a redemption price equal to 103.375% of the principal amount; on or after March 15, 2022, callable at a redemption price equal to 101.688% of the principal amount; on or after March 15, 2023, callable at a redemption price equal to 100.000% of the principal amount, plus, in each case, accrued and unpaid interest.
5 7/8% Senior Notes
 
October 2017
 
October 2027
 
On or prior to October 15, 2022, we may redeem up to 35% of the aggregate principal amount of the 2027 Notes with the net cash proceeds of certain equity offerings at a redemption price equal to 105.875% of the principal amount, plus accrued and unpaid interest to, but excluding, the redemption date, provided at least 65% of the aggregate principal amount of the 2027 Notes originally issued remains outstanding immediately after such redemption.
 
 
 
Callable at any time prior to October 15, 2022, in whole or in part, at a redemption price equal to 100.000% of the principal amount, plus a customary make-whole premium; on or after October 15, 2022, callable at a redemption price equal to 102.938% of the principal amount; on or after October 15, 2023, callable at a redemption price equal to 101.958% of the principal amount; on or after October 15, 2024, callable at a redemption price equal to 100.979% of the principal amount; on or after October 15, 2025, callable at a redemption price equal to 100.000% of the principal amount, plus, in each case, accrued and unpaid interest.
7 1/4% Senior Notes
 
September 2019
 
October 2029
 
On or prior to October 15, 2022, we may redeem up to 35% of the aggregate principal amount of the 2029 Notes with the net cash proceeds of certain equity offerings at a redemption price equal to 107.250% of the principal amount, plus accrued and unpaid interest to, but excluding, the redemption date, provided at least 65% of the aggregate principal amount of the 2029 Notes originally issued remains outstanding immediately after such redemption.
 
 
 
Callable at any time prior to October 15, 2024, in whole or in part, at a redemption price equal to 100% of the principal amount, plus a customary make-whole premium; on or after October 15, 2024, callable at a redemption price equal to 103.625% of the principal amount; on or after October 15, 2025, callable at a redemption price equal to 102.417% of the principal amount; on or after October 15, 2026, callable at a redemption price equal to 101.208% of the principal amount; on or after October 15, 2027, callable at a redemption price equal to 100.000% of the principal amount, plus, in each case, accrued and unpaid interest.

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Junior Subordinated Notes
The Company's unsecured junior subordinated notes (Junior Subordinated Notes) mature on July 30, 2036. The Junior Subordinated Notes are redeemable at par and paid interest at a fixed rate of 7.987% for the first ten years ending July 30, 2016. The securities now have a floating interest rate as defined in the Junior Subordinated Notes Indenture, which was a weighted-average of 4.39% as of December 31, 2019. The obligations relating to these notes are subordinated to the Facility and the Senior Notes. In January 2010, the Company modified the terms of $75.0 million of these notes and recorded them at their then estimated fair value. Over the remaining life of the Junior Subordinated Notes, we will increase their carrying value until this carrying value equals the face value of the notes. As of December 31, 2019, the unamortized accretion was $34.2 million and will be amortized over the remaining life of the notes. As of December 31, 2019, the Company was in compliance with all covenants under the Junior Subordinated Notes.
Other Secured Notes Payable
The Company periodically acquires land through the issuance of notes payable. As of September 30, 2019, the Company had outstanding notes payable of $1.2 million, primarily related to land acquisitions. During the three months ended December 31, 2019, we redeemed the remaining balance outstanding on these land acquisition related notes payable.
(8) Operating Leases
The Company leases certain office space and equipment under operating leases for use in our operations. We recognize operating lease expense on a straight-line basis over the lease term. Certain of our lease agreements include one or more options to renew. The exercise of lease renewal options is generally at our discretion. Variable lease expense primarily relates to maintenance and other monthly expense that do not depend on an index or rate.
We determine if an arrangement is a lease at contract inception. Lease and non-lease components are accounted for as a single component for all leases. Operating lease ROU assets and liabilities are recognized at the lease commencement date based on the present value of the future lease payments over the expected lease term, which includes optional renewal periods if we determine it is reasonably certain that the option will be exercised. As our leases do not provide an implicit rate, the discount rate used in the present value calculation represents our incremental borrowing rate determined using information available at the commencement date.
Operating lease expense is included as a component of general and administrative expenses in our condensed consolidated statements of operations. For the three months ended December 31, 2019, we recorded operating lease expense of $1.2 million. Cash payments on lease liabilities during the three months ended December 31, 2019 totaled $1.1 million. Sublease income and variable lease expenses are de minimis.
At December 31, 2019, weighted-average remaining lease term and discount rate were as follows:
Weighted-average remaining lease term
4.4 years
Weighted-average discount rate
4.94%

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The following is a maturity analysis of the annual undiscounted cash flows reconciled to the carrying value of the operating lease liabilities as of December 31, 2019:
Fiscal Years Ending September 30,
 
in thousands
 
2020 (a)
$
3,474

2021
4,217

2022
3,378

2023
2,560

2024
1,435

Thereafter
1,838

Total lease payments (b)
$
16,902

Less: Imputed interest
$
1,744

Total operating lease liabilities
$
15,158

(a) Remaining lease payments are for the period beginning January 1, 2020 through September 30, 2020.
(b) Lease payments excludes $4.0 million legally binding minimum lease payments for an office lease signed but not yet commenced at December 31, 2019. The related ROU asset and operating lease liability are not reflected on the Company’s condensed consolidated balance sheet as of December 31, 2019.
At September 30, 2019, under ASC 840, Leases (“ASC 840”), the future minimum rental commitments totaled $20.1 million under non-cancelable operating leases as follows: 2020 - $4.7 million; 2021 - $4.5 million; 2022 - $3.6 million; 2023 - $2.9 million; 2024 - $1.8 million; and $2.6 million thereafter.
(9) Contingencies
Beazer Homes and certain of its subsidiaries have been and continue to be named as defendants in various construction defect claims, complaints, and other legal actions. The Company is subject to the possibility of loss contingencies related to these defects as well as others arising from its business. In determining loss contingencies, we consider the likelihood of loss and our ability to reasonably estimate the amount of such loss. An estimated loss is recorded when it is considered probable that a liability has been incurred and the amount of loss can be reasonably estimated.
Warranty Reserves
We currently provide a limited warranty ranging from one to two years covering workmanship and materials per our defined quality standards. In addition, we provide a limited warranty for up to ten years covering only certain defined structural element failures.
Our homebuilding work is performed by subcontractors who typically must agree to indemnify us with regard to their work and provide certificates of insurance demonstrating that they have met our insurance requirements and have named us as an additional insured under their policies. Therefore, many claims relating to workmanship and materials that result in warranty spending are the primary responsibility of these subcontractors. In addition, we maintain insurance coverage related to our construction efforts that can result in recoveries of warranty and construction defect costs above certain specified limits.
Warranty reserves are included in other liabilities within the condensed consolidated balance sheets, and the provision for warranty accruals is included in home construction expenses in the condensed consolidated statements of operations. Reserves covering anticipated warranty expenses are recorded for each home closed. Management assesses the adequacy of warranty reserves each reporting period based on historical experience and the expected costs to remediate potential claims. Our review includes a quarterly analysis of the historical data and trends in warranty expense by division. Such analysis considers market-specific factors such as warranty experience, the number of home closings, the prices of homes, product mix, and other data in estimating warranty reserves. In addition, the analysis also contemplates the existence of any non-recurring or community-specific warranty-related matters that might not be included in historical data and trends. While estimated warranty liabilities are adjusted each reporting period based on the results of our quarterly analyses, we may not accurately predict actual warranty costs, which could lead to significant changes in the reserve.

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Changes in warranty reserves are as follows for the periods presented:
 
Three Months Ended
 
 
December 31,
 
in thousands
2019
 
2018
 
Balance at beginning of period
$
13,388

 
$
15,331

 
Accruals for warranties issued (a)
1,665

 
2,305

 
Changes in liability related to warranties existing in prior periods
67

 
(1,874
)
 
Payments made
(2,474
)
 
(2,330
)
 
Balance at end of period
$
12,646

 
$
13,432

 
(a) Accruals for warranties issued are a function of the number of home closings in the period, the selling prices of the homes closed, and the rates of accrual per home estimated as a percentage of the selling price of the home.
Insurance Recoveries
The Company has insurance policies that provide for the reimbursement of certain warranty costs incurred above specified thresholds for each period covered. Amounts recorded for anticipated insurance recoveries are reflected within the condensed consolidated statements of income as a reduction of home construction expenses. Amounts not yet received from our insurer are recorded on a gross basis, without any reduction for the associated warranty expense, within accounts receivable on our condensed consolidated balance sheets.
Litigation
In the normal course of business, we are subject to various lawsuits. We cannot predict or determine the timing or final outcome of these lawsuits or the effect that any adverse findings or determinations in pending lawsuits may have on us. In addition, an estimate of possible loss or range of loss, if any, cannot presently be made with respect to certain of these pending matters. An unfavorable determination in any of the pending lawsuits could result in the payment by us of substantial monetary damages that may not be fully covered by insurance. Further, the legal costs associated with the lawsuits and the amount of time required to be spent by management and our Board of Directors on these matters, even if we are ultimately successful, could have a material adverse effect on our financial condition, results of operations, or cash flows.
Claims Related to Inventory Impairment Charges. During the quarter ended March 31, 2019, we recognized inventory impairment charges related to 15 communities in California, all of which were previously land held for future development assets. Related to these inventory impairment charges, on June 5, 2019, a putative class action lawsuit was filed against Beazer Homes USA, Inc. and certain of our officers in the U.S. District Court for the Southern District of New York. The proposed class consisted of all persons and entities that acquired our securities between August 1, 2014 and May 2, 2019. On October 18, 2019, the plaintiffs filed a notice of voluntary dismissal of this case, and the Court subsequently entered an order dismissing the case.
Beginning June 25, 2019, several shareholder derivative lawsuits relating to the same inventory impairment charges discussed above were filed against Beazer Homes USA, Inc., certain of our officers and members of our Board of Directors in the U.S. District Court for the Northern District of Georgia. The plaintiffs in these cases allege breaches of fiduciary duty, unjust enrichment and violations of the federal securities laws. The plaintiffs seek, among other things, monetary damages, disgorgement of profits and attorneys’ and experts’ fees, but do not specify any specific amounts. We believe the allegations are without merit and intend to vigorously defend against the claims. However, because the outcome of these legal proceedings cannot be predicted with certainty, we have determined that the amount of any possible losses or range of possible losses in connection with these matters is not reasonably estimable.
Other Matters
We and certain of our subsidiaries have been named as defendants in various claims, complaints, and other legal actions, most relating to construction defects, moisture intrusion, and product liability. Certain of the liabilities resulting from these actions are covered in whole or in part by insurance. In our opinion, based on our current assessment, the ultimate resolution of these matters will not have a material adverse effect on our financial condition, results of operations, or cash flows.
We have an accrual of $3.5 million and $3.4 million in other liabilities on our condensed consolidated balance sheets related to litigation and other matters, excluding warranty, as of December 31, 2019 and September 30, 2019, respectively.

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We had outstanding letters of credit and performance bonds of approximately $50.4 million and $276.1 million, respectively, as of December 31, 2019, related principally to our obligations to local governments to construct roads and other improvements in various developments.
(10) Fair Value Measurements
As of the dates presented, we had assets on our condensed consolidated balance sheets that were required to be measured at fair value on a recurring or non-recurring basis. We use a fair value hierarchy that requires us to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value as follows:
Level 1 – Quoted prices in active markets for identical assets or liabilities;
Level 2 – Inputs other than quoted prices included in Level 1 that are observable either directly or indirectly through corroboration with market data; and
Level 3 – Unobservable inputs that reflect our own estimates about the assumptions market participants would use in pricing the asset or liability.
Certain of our assets are required to be recorded at fair value on a recurring basis. The fair value of our deferred compensation plan assets is based on market-corroborated inputs (Level 2).
Certain of our assets are required to be recorded at fair value on a non-recurring basis when events and circumstances indicate that the carrying value of these assets may not be recovered. We review our long-lived assets, including inventory, for recoverability when factors indicate an impairment may exist, but no less than quarterly. Fair value on assets deemed to be impaired is determined based upon the type of asset being evaluated. Fair value of our owned inventory assets, when required to be calculated, is further discussed within Notes 2 and 5. The fair value of our investments in unconsolidated entities is determined primarily using a discounted cash flow model to value the underlying net assets of the respective entities. Due to the substantial use of unobservable inputs in valuing the assets on a non-recurring basis, they are classified within Level 3.
During the three months ended December 31, 2019, we recognized no impairments on development projects in progress or land held for sale compared to $1.0 million impairments on development projects in progress and no impairments on land held for sale during the three months ended December 31, 2018.
Determining within which hierarchical level an asset or liability falls requires significant judgment. We evaluate our hierarchy disclosures each quarter.
The following table presents the period-end balances of assets measured at fair value on a recurring basis and the impairment-date fair value of certain assets measured at fair value on a non-recurring basis for each hierarchy level. These balances represent only those assets whose carrying values were adjusted to fair value during the periods presented:
in thousands
Level 1
 
Level 2
 
Level 3
 
Total
As of December 31, 2019
 
 
 
 
 
 
 
Deferred compensation plan assets (a)
$

 
$
2,136

 
$

 
$
2,136

As of September 30, 2019
 
 
 
 
 
 
 
Deferred compensation plan assets (a)
$

 
$
1,970

 
$

 
$
1,970

Development projects in progress (b)

 

 
84,982

(c) 
84,982

Land held for sale (b)

 

 
5,207

(c) 
5,207

(a) Measured at fair value on a recurring basis.
(b) Measured at fair value on a non-recurring basis, including the capitalized interest and indirect costs related to the asset.
(c) Amount represents the impairment-date fair value of the development projects in progress and land held for sale assets that were impaired during the period indicated.
The fair value of cash and cash equivalents, restricted cash, accounts receivable, trade accounts payable, other liabilities, amounts due under the Facility (if outstanding), and other secured notes payable approximate their carrying amounts due to the short maturity of these assets and liabilities. When outstanding, obligations related to land not owned under option agreements approximate fair value.

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The following table presents the carrying value and estimated fair value of certain other financial liabilities as of December 31, 2019 and September 30, 2019:
 
As of December 31, 2019
 
As of September 30, 2019
in thousands
Carrying
Amount
(a)
 
Fair Value
 
Carrying
Amount
(a)
 
Fair Value
Senior Notes (b)
$
1,111,475

 
$
1,167,303

 
$
1,111,085

 
$
1,115,011

Junior Subordinated Notes (c)
66,587

 
66,587

 
66,070

 
66,070

Total
$
1,178,062

 
$
1,233,890

 
$
1,177,155

 
$
1,181,081

(a) Carrying amounts are net of unamortized debt premiums/discounts, debt issuance costs, or accretion.
(b) The estimated fair value for our publicly-held Senior Notes has been determined using quoted market rates (Level 2).
(c) Since there is no trading market for our Junior Subordinated Notes, the fair value of these notes is estimated by discounting scheduled cash flows through maturity (level 3). The discount rate is estimated using market rates currently being offered on loans with similar terms and credit quality. Judgment is required in interpreting market data to develop these estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts that we could realize in a current market exchange.
(11) Income Taxes
Income Tax Provision
The Company's income tax provision for quarterly interim periods is based on an estimated annual effective income tax rate calculated separately from the effect of significant, infrequent, or unusual items. The total income tax provision, including discontinued operations, was a tax benefit of $0.2 million for the three months ended December 31, 2019, compared to an income tax benefit of $3.9 million for the three months ended December 31, 2018. The current fiscal year income tax benefit was substantially driven by (1) the completion of work necessary to claim an additional $0.7 million in tax credits related to prior fiscal years (2) the discrete impact related to stock-based compensation expense as a result of current period activity; partially offset by (3) income from continuing operations. The tax benefit for the three months ended December 31, 2018 was primarily driven by (1) the completion of work necessary to claim an additional $5.3 million in tax credits related to prior fiscal years; partially offset by (2) income from continuing operations; and (3) the discrete impact related to our stock-based compensation expense.
Deferred Tax Assets and Liabilities
As of December 31, 2019, the net deferred tax asset is comprised of various tax attributes that include $4.6 million of minimum tax credit carryforwards. Beginning in our fiscal 2019, the Company started making cash refund claims for significant portions of these credits due to the elimination of the alternative minimum tax in the Tax Cuts and Jobs Act.
The Company continues to evaluate its deferred tax assets each period to determine if a valuation allowance is required based on whether it is more likely than not that some portion of these deferred tax assets will not be realized. As of December 31, 2019, management concluded that it is more likely than not that a substantial portion of our deferred tax assets will be realized. As part of our analysis, we considered both positive and negative factors that impact profitability and whether those factors would lead to a change in the estimate of our deferred tax assets that may be realized in the future. Our conclusions on the valuation allowance and Internal Revenue Code Section 382 limitations related to our deferred tax assets remain consistent with the determinations we made during the period ended September 30, 2019, and such conclusions are based on similar company specific and industry factors to those discussed in Note 13 to the audited consolidated financial statements within our 2019 Annual Report.

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(12) Stock-based Compensation
Stock-based compensation expense is included in general and administrative expenses in the condensed consolidated statements of operations. We recognized $2.3 million and $2.1 million of stock-based compensation expense related to stock options and restricted stock awards for the three months ended December 31, 2019 and December 31, 2018, respectively.
Stock Options
Following is a summary of stock option activity for the three months ended December 31, 2019:
 
Three Months Ended
 
December 31, 2019
 
Shares
 
Weighted Average
Exercise Price
Outstanding at beginning of period
523,754

 
$
14.34

Granted

 

Exercised
(123,367
)
 
11.08

Cancelled
(100
)
 
15.47

Outstanding at end of period
400,287

 
$
15.35

Exercisable at end of period
363,931

 
$
15.64

Vested or expected to vest in the future
398,358

 
$
15.38

As of December 31, 2019 and September 30, 2019, total unrecognized compensation cost related to unvested stock options was $0.1 million and $0.1 million, respectively. The remaining cost as of December 31, 2019 is expected to be recognized over a weighted-average period of 0.95 years.
Restricted Stock Awards
During the three months ended December 31, 2019, the Company issued time-based restricted stock awards that vest ratably over three years on each anniversary from the grant date and performance-based restricted stock awards with a payout subject to the achievement of performance and market conditions over a three-year period.
Following is a summary of restricted stock activity for the three months ended December 31, 2019:
 
Three Months Ended December 31, 2019
 
Performance-Based Restricted Shares
 
Time-Based Restricted Shares
 
Total Restricted Shares
Beginning of period
778,814

 
611,607

 
1,390,421

Granted
260,131

 
313,829

 
573,960

Vested
(242,921
)
 
(289,648
)
 
(532,569
)
Forfeited

 
(1,202
)
 
(1,202
)
End of period
796,024

 
634,586

 
1,430,610

Each of our performance-based restricted share represents a contingent right to receive one share of the Company's common stock if vesting is satisfied at the end of the three-year performance period. Our performance stock award plans provide that any performance shares earned in excess of the target number of performance shares issued may be settled in cash or additional shares at the discretion of the Compensation Committee. During the three months ended December 31, 2019, we cash settled 135,337 shares earned above target level based on the performance level achieved under our 2017 performance-based award plan. The cash payment totaled $2.1 million, which was reflected as a reduction to paid-in capital in the accompanying condensed consolidated statements of stockholders' equity. We have not cash settled any such performance-based awards in the past, and we have no current plans to cash settle any additional performance-based restricted shares in the future.
As of December 31, 2019 and September 30, 2019, total unrecognized compensation cost related to unvested restricted stock awards was $16.0 million and $9.0 million, respectively. The remaining cost as of December 31, 2019 is expected to be recognized over a weighted average period of 2.15 years.

21

Table of Contents

(13) Earnings Per Share
Basic income (loss) per share is calculated by dividing net income (loss) by the weighted-average number of shares outstanding during the period. Diluted income (loss) per share adjusts the basic income (loss) per share for the effects of any potentially dilutive securities in periods in which the Company has net income and such effects are dilutive under the treasury stock method.
Following is a summary of the components of basic and diluted income (loss) per share for the periods presented:
 
Three Months Ended December 31,
in thousands, except per share data
2019
 
2018
Numerator:
 
 
 
Income from continuing operations
$
2,804

 
$
7,322

Loss from discontinued operations, net of tax
(58
)
 
(11
)
Net income
$
2,746

 
$
7,311

 
 
 
 
Denominator:
 
 
 
Basic weighted-average shares
29,746

 
31,801

Dilutive effect of restricted stock awards
353

 
243

Dilutive effect of stock options
39

 
11

Diluted weighted-average shares (a)
30,138

 
32,055

 
 
 
 
Basic income per share:
 
 
 
Continuing operations
$
0.09

 
$
0.23

Discontinued operations

 

Total
$
0.09

 
$
0.23

 
 
 
 
Diluted income per share:
 
 
 
Continuing operations
$
0.09

 
$
0.23

Discontinued operations

 

Total
$
0.09

 
$
0.23

(a) The following potentially dilutive shares were excluded from the calculation of diluted income per share as a result of their anti-dilutive effect.
 
Three Months Ended December 31,
in thousands
2019
 
2018
Stock options
210,509

 
493

Time-based restricted stock

 
195


22

Table of Contents

(14) Other Liabilities
Other liabilities include the following as of December 31, 2019 and September 30, 2019:
in thousands
December 31, 2019
 
September 30, 2019
Accrued bonus and deferred compensation
$
22,254

 
$
36,237

Accrued interest
17,328

 
12,767

Customer deposits
13,910

 
11,539

Accrued warranty expense
12,646

 
13,388

Litigation accrual
3,462

 
3,420

Income tax liabilities
825

 
648

Other
25,026

 
31,430

Total
$
95,451

 
$
109,429

(15) Segment Information

23

Table of Contents

We currently operate in 13 states that are grouped into three homebuilding segments based on geography. Revenues from our homebuilding segments are derived from the sale of homes that we construct and from land and lot sales. Our reportable segments have been determined on a basis that is used internally by management for evaluating segment performance and resource allocations. We have considered the applicable aggregation criteria and have combined our homebuilding operations into three reportable segments as follows:
West: Arizona, California, Nevada, and Texas
East: Delaware, Indiana, Maryland, New Jersey(a), Tennessee, and Virginia
Southeast: Florida, Georgia, North Carolina, and South Carolina
(a) During our fiscal 2015, we made the decision that we would not continue to reinvest in new homebuilding assets in our New Jersey division; therefore, it is no longer considered an active operation. However, it is included in this listing because the segment information below continues to include New Jersey.
Management’s evaluation of segment performance is based on segment operating income. Operating income for our homebuilding segments is defined as homebuilding and land sales and other revenue less home construction, land development, and land sales expense, commission expense, depreciation and amortization, and certain G&A expenses that are incurred by or allocated to our homebuilding segments. The accounting policies of our segments are those described in Note 2 to the consolidated financial statements within our 2019 Annual Report.
The following tables contain our revenue, operating income, and depreciation and amortization by segment for the periods presented:
 
Three Months Ended
 
December 31,
in thousands
2019
 
2018
Revenue
 
 
 
West
$
254,398

 
$
208,944

East
78,040

 
88,746

Southeast
85,366

 
104,350

Total revenue
$
417,804

 
$
402,040

 
Three Months Ended
 
December 31,
in thousands
2019
 
2018
Operating income (a)
 
 
 
West
$
30,331

 
$
24,261

East
5,321

 
5,395

Southeast
3,156

 
1,380

Segment total
38,808

 
31,036

Corporate and unallocated (b)
(34,862
)
 
(27,530
)
Total operating income
$
3,946

 
$
3,506

 
Three Months Ended
 
December 31,
in thousands
2019
 
2018
Depreciation and amortization
 
 
 
West
$
1,808

 
$
1,278

East
554

 
538

Southeast
540

 
610

Segment total
2,902

 
2,426

Corporate and unallocated (b)
525

 
344

Total depreciation and amortization
$
3,427

 
$
2,770


24

Table of Contents

(a) Operating income is impacted by impairment and abandonment charges incurred during the periods presented (see Note 5).
(b) Corporate and unallocated operating loss includes amortization of capitalized interest, movement in capitalized indirect costs, expenses related to numerous shared services functions that benefit all segments but are not allocated to the operating segments reported above, including information technology, treasury, corporate finance, legal, branding and national marketing, and other amounts that are not allocated to our operating segments. Corporate and unallocated depreciation and amortization represents depreciation and amortization related to assets held by our corporate functions that benefit all segments.
The following table presents capital expenditures by segment for the periods presented:
 
Three Months Ended
 
December 31,
in thousands
2019
 
2018
Capital Expenditures
 
 
 
West
$
1,484

 
$
2,651

East
452

 
762

Southeast
516

 
859

Corporate and unallocated
180

 
2,082

Total capital expenditures
$
2,632

 
$
6,354

The following table presents assets by segment as of December 31, 2019 and September 30, 2019:
in thousands
December 31, 2019
 
September 30, 2019
Assets
 
 
 
West
$
764,868

 
$
751,110

East
298,389

 
286,340

Southeast
368,332

 
359,431

Corporate and unallocated (a)
536,515

 
560,763

Total assets
$
1,968,104

 
$
1,957,644

(a) Primarily consists of cash and cash equivalents, restricted cash, deferred taxes, capitalized interest and indirect costs, and other items that are not allocated to the segments.
(16) Supplemental Guarantor Information
As discussed in Note 7, the Company's obligations to pay principal, premium, if any, and interest under certain debt agreements are guaranteed on a joint and several basis by substantially all of the Company's subsidiaries. Some of the immaterial subsidiaries do not guarantee the Senior Notes or the Facility. The guarantees are full and unconditional, and the guarantor subsidiaries are 100% owned by Beazer Homes USA, Inc. The following unaudited financial information presents the line items of the Company's unaudited condensed consolidated financial statements separated by amounts related to the parent issuer, guarantor subsidiaries, non-guarantor subsidiaries, and consolidating adjustments as of or for the periods presented.


25

Table of Contents

Beazer Homes USA, Inc.
Condensed Consolidating Balance Sheet Information
December 31, 2019
(Unaudited)
 
in thousands
Beazer Homes
USA, Inc.
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Consolidating
Adjustments
 
Consolidated
Beazer Homes
USA, Inc.
ASSETS
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
35,258

 
$
6,007

 
$
12

 
$

 
$
41,277

Restricted cash
17,847

 
912

 

 

 
18,759

Accounts receivable (net of allowance of $313)

 
19,439

 

 

 
19,439

Income tax receivable
4,612

 

 

 

 
4,612

Owned inventory

 
1,574,280

 

 

 
1,574,280

Investments in unconsolidated entities
773

 
3,157

 

 

 
3,930

Deferred tax assets, net
247,382

 

 

 

 
247,382

Property and equipment, net

 
26,623

 

 

 
26,623

Operating lease right-of-use assets

 
12,975

 

 

 
12,975

Investments in subsidiaries
711,246

 

 

 
(711,246
)
 

Intercompany
748,246

 

 
1,676

 
(749,922
)
 

Goodwill

 
11,376

 

 

 
11,376

Other assets
1,098

 
6,353

 

 

 
7,451

Total assets
$
1,766,462

 
$
1,661,122

 
$
1,688

 
$
(1,461,168
)
 
$
1,968,104

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
 
 
 
 
 
 
Trade accounts payable
$

 
$
110,153

 
$

 
$

 
$
110,153

Operating lease liabilities

 
15,158

 
$

 
$

 
$
15,158

Other liabilities
17,444

 
77,991

 
16

 

 
95,451

Intercompany
1,676

 
748,246

 

 
(749,922
)
 

Total debt (net of premium and debt issuance costs)
1,208,062

 

 

 

 
1,208,062

Total liabilities
1,227,182

 
951,548

 
16

 
(749,922
)
 
1,428,824

Stockholders’ equity
539,280

 
709,574

 
1,672

 
(711,246
)
 
539,280

Total liabilities and stockholders’ equity
$
1,766,462

 
$
1,661,122

 
$
1,688

 
$
(1,461,168
)
 
$
1,968,104


26

Table of Contents

Beazer Homes USA, Inc.
Condensed Consolidating Balance Sheet Information
September 30, 2019
(Unaudited)

in thousands
Beazer Homes
USA, Inc.
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Consolidating
Adjustments
 
Consolidated
Beazer Homes
USA, Inc.
ASSETS
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
70,617

 
$
36,115

 
$
9

 
$

 
$
106,741

Restricted cash
14,847

 
1,206

 

 

 
16,053

Accounts receivable (net of allowance of $304)

 
26,394

 
1

 

 
26,395

Income tax receivable
4,935

 

 

 

 
4,935

Owned inventory

 
1,504,248

 

 

 
1,504,248

Investments in unconsolidated entities
773

 
3,189

 

 

 
3,962

Deferred tax assets, net
246,957

 

 

 

 
246,957

Property and equipment, net

 
27,421

 

 

 
27,421

Investments in subsidiaries
636,791

 

 

 
(636,791
)
 

Intercompany
753,769

 

 
1,680

 
(755,449
)
 

Goodwill

 
11,376

 

 

 
11,376

Other assets
1,235

 
8,317

 
4

 

 
9,556

Total assets
$
1,729,924

 
$
1,618,266

 
$
1,694

 
$
(1,392,240
)
 
$
1,957,644

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
 
 
 
 
 
 
Trade accounts payable
$

 
$
131,152

 
$

 
$

 
$
131,152

Other liabilities
12,335

 
97,081

 
13

 

 
109,429

Intercompany
1,680

 
753,769

 

 
(755,449
)
 

Total debt (net of premium and debt issuance costs)
1,177,155

 
1,154

 

 

 
1,178,309

Total liabilities
1,191,170

 
983,156

 
13

 
(755,449
)
 
1,418,890

Stockholders’ equity
538,754

 
635,110

 
1,681

 
(636,791
)
 
538,754

Total liabilities and stockholders’ equity
$
1,729,924

 
$
1,618,266

 
$
1,694

 
$
(1,392,240
)
 
$
1,957,644



Beazer Homes USA, Inc.
Condensed Consolidating Statements of Operations
(Unaudited)
in thousands
Beazer Homes
USA, Inc.
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Consolidating
Adjustments
 
Consolidated
Beazer Homes
USA, Inc.
Three Months Ended December 31, 2019
 
 
 
 
 
 
 
 
 
Total revenue
$

 
$
417,804

 
$

 
$

 
$
417,804

Home construction and land sales expenses
19,669

 
334,998

 

 

 
354,667

Gross (loss) profit
(19,669
)
 
82,806

 

 

 
63,137

Commissions

 
16,065

 

 

 
16,065

General and administrative expenses

 
39,699

 

 

 
39,699

Depreciation and amortization

 
3,427

 

 

 
3,427

Operating (loss) income
(19,669
)
 
23,615

 

 

 
3,946

Equity in income of unconsolidated entities

 
(13
)
 

 

 
(13
)
Other (expense) income, net
(1,442
)
 
102

 

 

 
(1,340
)
(Loss) income from continuing operations before income taxes
(21,111
)
 
23,704

 

 

 
2,593

(Benefit) expense from income taxes
(1,900
)
 
1,689

 

 

 
(211
)
Equity in income of subsidiaries
22,015

 

 

 
(22,015
)
 

Income from continuing operations
2,804

 
22,015

 

 
(22,015
)
 
2,804

Loss from discontinued operations, net of tax

 
(49
)
 
(9
)
 

 
(58
)
Equity in loss of subsidiaries from discontinued operations
(58
)
 

 

 
58

 

Net income (loss)
$
2,746

 
$
21,966

 
$
(9
)
 
$
(21,957
)
 
$
2,746

 
 
 
 
 
 
 
 
 
 
in thousands
Beazer Homes
USA, Inc.
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Consolidating
Adjustments
 
Consolidated
Beazer Homes
USA, Inc.
Three Months Ended December 31, 2018
 
 
 
 
 
 
 
 
 
Total revenue
$

 
$
402,040

 
$
115

 
$
(115
)
 
$
402,040

Home construction and land sales expenses
17,323

 
323,170

 

 
(115
)
 
340,378

Inventory impairments and abandonments
115

 
892

 

 

 
1,007

Gross (loss) profit
(17,438
)
 
77,978

 
115

 

 
60,655

Commissions

 
15,737

 

 

 
15,737

General and administrative expenses

 
38,646

 
(4
)
 

 
38,642

Depreciation and amortization

 
2,770

 

 

 
2,770

Operating (loss) income
(17,438
)
 
20,825

 
119

 

 
3,506

Equity in income of unconsolidated entities

 
(64
)
 

 

 
(64
)
Other (expense) income, net
(242
)
 
204

 
(4
)
 

 
(42
)
(Loss) income from continuing operations before income taxes
(17,680
)
 
20,965

 
115

 

 
3,400

Expense (benefit) from income taxes
20,385

 
(24,336
)
 
29

 

 
(3,922
)
Equity in income of subsidiaries
45,387

 

 

 
(45,387
)
 

Income from continuing operations
7,322

 
45,301

 
86

 
(45,387
)
 
7,322

Loss from discontinued operations, net of tax

 
(7
)
 
(4
)
 

 
(11
)
Equity in loss of subsidiaries from discontinued operations
(11
)
 

 

 
11

 

Net income
$
7,311

 
$
45,294

 
$
82

 
$
(45,376
)
 
$
7,311





27

Table of Contents


Beazer Homes USA, Inc.
 Condensed Consolidating Statements of Cash Flow Information
(Unaudited)
in thousands
Beazer Homes
USA, Inc.
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Consolidating
Adjustments
 
Consolidated
Beazer Homes
USA, Inc.
Three Months Ended December 31, 2019
 
 
 
 
 
 
 
 
 
Net cash used in operating activities
$
(35,926
)
 
$
(48,490
)
 
$
(114
)
 
$

 
$
(84,530
)
Cash flows from investing activities:
 
 
 
 
 
 
 
 
 
Capital expenditures

 
(2,632
)
 

 

 
(2,632
)
Proceeds from sale of fixed assets

 
66

 

 

 
66

Return of capital from unconsolidated entities

 
19

 

 

 
19

Advances to/from subsidiaries
(21,906
)
 

 
117

 
21,789

 

Net cash (used in) provided by investing activities
(21,906
)
 
(2,547
)
 
117

 
21,789

 
(2,547
)
Cash flows from financing activities:
 
 
 
 
 
 
 
 
 
Repayment of debt

 
(1,150
)
 

 

 
(1,150
)
Repayment of borrowings from credit facility
(95,000
)
 

 

 

 
(95,000
)
Borrowings from credit facility
125,000

 

 

 

 
125,000

Tax payments for stock-based compensation awards
(2,646
)