BZH-6.30.2013-Q3 Document
Table of Contents

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

For the Quarterly Period Ended June 30, 2013
or
 
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

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

(770) 829-3700
(Registrant’s telephone number, including area code)
 _____________________________________________________________
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to the filing requirements for the past 90 days.    YES  x    NO  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    YES  x    NO  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer”, and “smaller reporting company” in Rule 12b-2 of the Exchange Act (Check One):
Large accelerated filer
¨
Accelerated filer
x
 
 
 
 
Non-accelerated filer
¨
Smaller reporting company
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    YES  ¨    NO  x
Class
 
Outstanding at July 31, 2013
Common Stock, $0.001 par value
 
25,088,909

Table of Contents

References to “we,” “us,” “our,” “Beazer”, “Beazer Homes” and the “Company” in this quarterly report on Form 10-Q refer to Beazer Homes USA, Inc.
FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains forward-looking statements. These forward-looking statements represent our expectations or beliefs concerning future events, and it is possible that the results described in this quarterly report will not be achieved. These forward-looking statements can generally be identified by the use of statements that include words such as “estimate,” “project,” “believe,” “expect,” “anticipate,” “intend,” “plan,” “foresee,” “likely,” “will,” “goal,” “target” or other similar words or phrases. All forward-looking statements are based upon information available to us on the date of this quarterly report.
These forward-looking statements are subject to risks, uncertainties and other factors, many of which are outside of our control, that could cause actual results to differ materially from the results discussed in the forward-looking statements, including, among other things, the matters discussed in this quarterly report in the section captioned “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Additional information about factors that could lead to material changes in performance is contained in Part I, Item 1A— Risk Factors of our Annual Report on Form 10-K for the fiscal year ended September 30, 2012. These factors are not intended to be an all-encompassing list of risks and uncertainties that may affect the operations, performance, development and results of our business, but instead are the risks that we currently perceive as potentially being material. Such factors may include:

•
economic changes nationally or in local markets, including changes in consumer confidence, changes in the level of housing starts, declines in employment levels, inflation and changes in the demand and prices of new homes and resale homes in the market;
•
a slower economic rebound than anticipated, coupled with persistently high unemployment and additional foreclosures;
•
estimates related to homes to be delivered in the future (backlog) are imprecise as they are subject to various cancellation risks which cannot be fully controlled;
•
a substantial increase in mortgage interest rates, increased disruption in the availability of mortgage financing or a change in tax laws regarding the deductibility of mortgage interest;
•
factors affecting margins such as decreased land values underlying land option agreements, increased land development costs on communities under development or delays or difficulties in implementing initiatives to reduce production and overhead cost structure;
•
the final outcome of various putative class action lawsuits, multi-party suits and similar proceedings as well as the results of any other litigation or government proceedings and fulfillment of the obligations in the Deferred Prosecution Agreement and consent orders with governmental authorities and other settlement agreements;
•
our cost of and ability to access capital and otherwise meet our ongoing liquidity needs including the impact of any downgrades of our credit ratings or reductions in our tangible net worth or liquidity levels;
•
our ability to comply with covenants in our debt agreements or satisfy such obligations through repayment or refinancing;
•
estimates related to the potential recoverability of our deferred tax assets;
•
increased competition or delays in reacting to changing consumer preference in home design;
•
shortages of or increased prices for labor, land or raw materials used in housing production;
•
additional asset impairment charges or writedowns;
•
the impact of construction defect and home warranty claims;
•
the cost and availability of insurance and surety bonds;
•
delays in land development or home construction resulting from adverse weather conditions;
•
potential delays or increased costs in obtaining necessary permits as a result of changes to, or complying with, laws, regulations, or governmental policies and possible penalties for failure to comply with such laws, regulations and governmental policies;
•
the performance of our unconsolidated entities and our unconsolidated entity partners;
•
potential exposure related to additional repurchase claims on mortgages and loans originated by Beazer Mortgage Corporation;
•
effects of changes in accounting policies, standards, guidelines or principles; or
•
terrorist acts, acts of war and other factors over which the Company has little or no control.
Any forward-looking statement speaks only as of the date on which such statement is made, and, except as required by law, we undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which such statement is made or to reflect the occurrence of unanticipated events. New factors emerge from time to time and it is not possible for management to predict all such factors.

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BEAZER HOMES USA, INC.
FORM 10-Q
INDEX
 


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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

BEAZER HOMES USA, INC.
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
 
 
June 30,
2013
 
September 30,
2012
ASSETS
 
 
 
Cash and cash equivalents
$
298,346

 
$
487,795

Restricted cash
246,013

 
253,260

Accounts receivable (net of allowance of $2,045 and $2,235, respectively)
26,066

 
24,599

Income tax receivable
3,080

 
6,372

Inventory
 
 
 
Owned inventory
1,265,112

 
1,099,132

Land not owned under option agreements
7,880


12,420

Total inventory
1,272,992

 
1,111,552

Investments in unconsolidated entities
42,477

 
42,078

Deferred tax assets, net
7,076

 
6,848

Property, plant and equipment, net
16,734

 
18,974

Other assets
30,133

 
30,740

Total assets
$
1,942,917

 
$
1,982,218

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Trade accounts payable
$
79,625

 
$
69,268

Other liabilities
126,746

 
147,718

Obligations related to land not owned under option agreements
2,904

 
4,787

Total debt (net of discounts of $2,341 and $3,082, respectively)
1,505,656

 
1,498,198

Total liabilities
1,714,931

 
1,719,971

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

 
—

Common stock (par value $0.001 per share, 63,000,000 shares authorized, 25,090,653 and 24,601,830 issued and outstanding, respectively)
25

 
25

Paid-in capital
845,549

 
833,994

Accumulated deficit
(617,588
)
 
(571,772
)
Total stockholders’ equity
227,986

 
262,247

Total liabilities and stockholders’ equity
$
1,942,917

 
$
1,982,218


See Notes to Unaudited Condensed Consolidated Financial Statements.


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BEAZER HOMES USA, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
 
 
Three Months Ended
 
Nine Months Ended
 
June 30,
 
June 30,
 
2013
 
2012
 
2013
 
2012
Total revenue
$
314,439

 
$
254,555

 
$
849,243

 
$
634,746

Home construction and land sales expenses
260,324

 
227,505

 
712,930

 
560,564

Inventory impairments and option contract abandonments
—

 
5,819

 
2,229

 
10,492

Gross profit
54,115

 
21,231

 
134,084

 
63,690

Commissions
13,078

 
10,776

 
35,406

 
27,522

General and administrative expenses
29,612

 
27,867

 
84,735

 
82,380

Depreciation and amortization
2,953

 
3,743

 
8,761

 
9,336

Operating income (loss)
8,472

 
(21,155
)
 
5,182

 
(55,548
)
Equity in (loss) income of unconsolidated entities
(310
)
 
48

 
(206
)
 
(25
)
Loss on extinguishment of debt
—

 
—

 
(3,638
)
 
(2,747
)
Other expense, net
(14,036
)
 
(16,804
)
 
(45,858
)
 
(53,342
)
Loss from continuing operations before income taxes
(5,874
)
 
(37,911
)
 
(44,520
)
 
(111,662
)
(Benefit from) provision for income taxes
(432
)
 
145

 
(1,028
)
 
(36,438
)
Loss from continuing operations
(5,442
)
 
(38,056
)
 
(43,492
)
 
(75,224
)
Loss from discontinued operations, net of tax
(346
)
 
(1,828
)
 
(2,324
)
 
(3,869
)
Net loss
$
(5,788
)
 
$
(39,884
)
 
$
(45,816
)
 
$
(79,093
)
Weighted average number of shares:
 
 
 
 
 
 
 
Basic and Diluted
24,770

 
19,810

 
24,571

 
16,777

Basic and Diluted loss per share:
 
 
 
 
 
 
 
Continuing Operations
$
(0.22
)
 
$
(1.92
)
 
$
(1.77
)
 
$
(4.48
)
Discontinued Operations
$
(0.01
)
 
$
(0.09
)
 
$
(0.09
)
 
$
(0.23
)
Total
$
(0.23
)
 
$
(2.01
)
 
$
(1.86
)
 
$
(4.71
)

See Notes to Unaudited Condensed Consolidated Financial Statements.


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BEAZER HOMES USA, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
 
 
Nine Months Ended
 
June 30,
 
2013
 
2012
Cash flows from operating activities:
 
 
 
Net loss
$
(45,816
)
 
$
(79,093
)
Adjustments to reconcile net loss to net cash used in operating activities:
 
 
 
Depreciation and amortization
8,761

 
9,371

Stock-based compensation expense
2,275

 
3,211

Inventory impairments and option contract abandonments
2,246

 
11,071

Deferred and other income tax benefit
(485
)
 
(36,378
)
Provision for doubtful accounts
(190
)
 
(1,678
)
Equity in loss of unconsolidated entities
207

 
62

Cash distributions of income from unconsolidated entities
336

 
—

Loss on extinguishment of debt
1,517

 
2,747

Changes in operating assets and liabilities:
 
 
 
(Increase) decrease in accounts receivable
(1,277
)
 
9,381

Decrease in income tax receivable
3,292

 
2,425

(Increase) decrease in inventory
(159,753
)
 
4,091

Decrease in other assets
559

 
5,442

Increase in trade accounts payable
10,357

 
778

Decrease in other liabilities
(20,274
)
 
(37,813
)
Other changes
51

 
(29
)
Net cash used in operating activities
(198,194
)
 
(106,412
)
Cash flows from investing activities:
 
 
 
Capital expenditures
(6,572
)
 
(15,117
)
Investments in unconsolidated entities
(1,374
)
 
(2,075
)
Return of capital from unconsolidated entities
432

 
440

Increases in restricted cash
(1,788
)
 
(1,679
)
Decreases in restricted cash
9,035

 
6,955

Net cash used in investing activities
(267
)
 
(11,476
)
Cash flows from financing activities:
 
 
 
Repayment of debt
(185,431
)
 
(3,369
)
Proceeds from issuance of new debt
200,000

 
—

Debt issuance costs
(4,935
)
 
(274
)
Equity issuance costs
—

 
(1,296
)
Settlement of unconsolidated entity debt obligation
(500
)
 
(15,862
)
Payments for other financing activities
(122
)
 
(98
)
Net cash provided by (used in) financing activities
9,012

 
(20,899
)
Decrease in cash and cash equivalents
(189,449
)
 
(138,787
)
Cash and cash equivalents at beginning of period
487,795

 
370,403

Cash and cash equivalents at end of period
$
298,346

 
$
231,616


See Notes to Unaudited Condensed Consolidated Financial Statements.

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

(1) Summary of Significant Accounting Policies
The accompanying unaudited condensed consolidated financial statements of Beazer Homes USA, Inc. (Beazer Homes, Beazer or the Company) have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) for interim financial information and in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X. Such financial statements do not include all of the information and disclosures required by GAAP for complete financial statements. In our opinion, all adjustments (consisting primarily of normal recurring accruals) necessary for a fair presentation have been included in the accompanying financial statements. The results of our consolidated operations presented herein for the three and nine months ended June 30, 2013 are not necessarily indicative of the results to be expected for the full year due to seasonal variations in operations and other items. For further information and a discussion of our significant accounting policies other than as discussed below, refer to our audited consolidated financial statements appearing in Beazer Homes’ Annual Report on Form 10-K for the fiscal year ended September 30, 2012 (the 2012 Annual Report).
Over the past few years, we have discontinued homebuilding operations in certain of our markets. Results from our title services business and our exit markets are reported as discontinued operations in the accompanying unaudited condensed consolidated statements of operations for all periods presented (see Note 14 for further discussion of our Discontinued Operations). In October 2012, the Company announced the effectiveness of a one-for-five reverse stock split. As applicable, all historic share and per share information, including earnings per share, in this Form 10-Q have been retroactively adjusted to reflect this reverse stock split. Certain items in prior period financial statements have been revised to conform to the current presentation. Our net loss is equivalent to our comprehensive loss so we have not presented a separate statement of comprehensive loss. We evaluated events that occurred after the balance sheet date but before the financial statements were issued or were available to be issued for accounting treatment and disclosure.
Inventory Valuation — We assess our inventory assets no less than quarterly for recoverability in accordance with the policies as described in Notes 1 and 4 to the consolidated financial statements in our 2012 Annual Report. Our homebuilding inventories that are accounted for as held for development include land and home construction assets grouped together as communities. Homebuilding inventories held for development are stated at cost (including direct construction costs, capitalized indirect costs, capitalized interest and real estate taxes) unless facts and circumstances indicate that the carrying value of the assets may not be recoverable. For those communities for which construction and development activities are expected to occur in the future or have been idled (land held for future development), all applicable interest and real estate taxes are expensed as incurred and the inventory is stated at cost unless facts and circumstances indicate that the carrying value of the assets may not be recoverable. We record assets held for sale at the lower of the carrying value or fair value less costs to sell.
Other Liabilities. Other liabilities include the following:
(In thousands)
June 30, 2013
 
September 30, 2012
Income tax liabilities
$
22,029

 
$
22,225

Accrued warranty expenses
13,445

 
15,477

Accrued interest
16,534

 
28,673

Accrued and deferred compensation
20,489

 
24,612

Customer deposits
13,724

 
8,830

Other
40,525

 
47,901

Total
$
126,746

 
$
147,718


Recent Accounting Pronouncements. In May 2011, the Financial Accounting Standard Board (FASB) issued ASU 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs. ASU 2011-04 clarifies some existing concepts, eliminates wording differences between GAAP and International Financial Reporting Standards (IFRS), and in some limited cases, changes some principles to achieve convergence between GAAP and IFRS. ASU 2011-04 results in a consistent definition of fair value and common requirements for measurement of and disclosure about fair value between GAAP and IFRS. ASU 2011-04 also expands the disclosures for fair value measurements that are estimated using significant unobservable (Level 3) inputs. The adoption of ASU 2011-04 effective with our second quarter of fiscal 2012 did not have a material effect on our operating results or financial position.



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(2) Supplemental Cash Flow Information
 
Nine Months Ended
 
June 30,
(In thousands)
2013
 
2012
Supplemental disclosure of non-cash activity:
 
 
 
(Decrease) increase in obligations related to land not owned under option agreements
$
(1,883
)
 
$
640

Decrease in future land purchase rights
—

 
(11,651
)
Contribution of future land purchase rights to unconsolidated entities
—

 
11,651

Decrease in debt related to conversion of Mandatory Convertible Subordinated Notes and Tangible Equity Units for common stock
(9,402
)
 
(55,308
)
Contribution of pre-owned net assets for investment in unconsolidated entity
—

 
(19,670
)
Non-cash land acquisitions
—

 
7,813

Supplemental disclosure of cash activity:

 

Interest payments
92,742

 
109,691

Income tax payments
133

 
751

Tax refunds received
3,925

 
2,565



(3) Investments in Unconsolidated Entities
As of June 30, 2013, we participated in certain land development joint ventures and other unconsolidated entities in which Beazer Homes had less than a controlling interest. The following table presents our investment in our unconsolidated entities, the total equity and outstanding borrowings of these unconsolidated entities, and our guarantees of these borrowings, as of June 30, 2013 and September 30, 2012:
(In thousands)
June 30, 2013
 
September 30, 2012
Beazer’s investment in unconsolidated entities
$
42,477

 
$
42,078

Total equity of unconsolidated entity
442,291

 
383,482

Total outstanding borrowings of unconsolidated entities
66,632

 
64,912

Beazer’s estimate of its maximum exposure to our repayment guarantees
—

 
696


For the three and nine months ended June 30, 2013 and 2012, our (loss) income from unconsolidated entity activities, the impairments of our investments in certain of our unconsolidated entities, and the overall equity in (loss) income of unconsolidated entities is as follows:
 
Three Months Ended
 
Nine Months Ended
 
June 30,
 
June 30,
(In thousands)
2013
 
2012
 
2013
 
2012
Continuing operations:
 
 
 
 
 
 
 
(Loss) income from unconsolidated entity activity
$
(129
)
 
$
48

 
$
(25
)
 
$
(25
)
Impairment of unconsolidated entity investment
(181
)
 
—

 
(181
)
 
—

Equity in (loss) income of unconsolidated entities - continuing operations
$
(310
)
 
$
48

 
$
(206
)
 
$
(25
)

South Edge/Inspirada
The Company holds a minority (less than 10%) interest in Inspirada Builders LLC which was formed in connection with the bankruptcy and subsequent plan of reorganization of the South Edge joint venture. During the quarter ended December 31, 2011, we paid $15.9 million in connection with this plan of reorganization. Our right to acquire land in Las Vegas, Nevada from Inspirada is a component of our investment. As such, we have recorded an investment in Inspirada, which includes the $11.7 million we previously estimated for our future right to purchase land and our cash contributions to the joint venture, primarily for organization costs. In addition to our initial payment, we, as a member of the Inspirada joint venture, will have obligations for a portion of future infrastructure and other development costs. At this time, these costs cannot be quantified due to, among other things, uncertainty over the future development configuration of the project and the related costs, market conditions, uncertainty over the

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remaining infrastructure costs and potential recoveries from previously filed bankruptcies of certain other South Edge members. In addition, there are uncertainties with respect to the location and density of the land we will receive as a result of our investment in Inspirada, the products we will build on such land and the estimated selling prices of such homes. Because there are uncertainties with respect to development costs, in future periods, we may be required to record adjustments to the carrying value of this Inspirada investment as better information becomes available.
Pre-Owned Rental Homes
Effective May 3, 2012, we contributed $0.3 million in cash and our Pre-Owned Homes business at cost, including 190 homes in Arizona and Nevada, of which 187 were leased, for an initial 23.5% equity method investment in an unconsolidated real estate investment trust (the REIT). After subsequent offerings by the REIT and as of June 30, 2013, we held a 15.14% investment in the REIT. The Company previously received grants of restricted units in the REIT, one-third of which vested prior to June 30, 2013. Our remaining unvested restricted units will vest as follows: 25% in May 2014, 25% in May 2015 and 50% upon the REIT's achievement of certain performance criteria. Vesting of the restricted units will increase our investment in the REIT to approximately 18% (assuming no other share issuances by the REIT).

Subsequent to the initial REIT offering, we entered into a transition services agreement with the REIT under which we agreed to provide interim Chief Financial Officer (CFO) and various back office and administrative support on an as needed basis. During the quarter ended June 30, 2013, the REIT hired a CFO. In the future, we may continue to provide services including treasury operations, cash management, accounting and financial reporting support, legal services, human resources support, environmental and safety services, and tax support on an as needed basis. Fees received related to the transition services agreement billed at our cost and recognized as other income were not material to our consolidated financial results.
Guarantees
Our land development joint ventures typically obtain secured acquisition, development and construction financing. Generally, Beazer and our land development joint venture partners provide varying levels of guarantees of debt and other obligations for these unconsolidated entities.
As of September 30, 2012, we had recorded $0.7 million in Other Liabilities related to one repayment guarantee. During the nine months ended June 30, 2013, we entered into a guarantee release agreement and paid $0.5 million to settle our liability and recognized the remaining $0.2 million as other income.
We and our joint venture partners generally provide unsecured environmental indemnities to land development joint venture project lenders. In each case, we have performed due diligence on potential environmental risks. These indemnities obligate us to reimburse the project lenders for claims related to environmental matters for which they are held responsible. During the three and nine months ended June 30, 2013 and 2012, we were not required to make any payments related to environmental indemnities.
In assessing the need to record a liability for the contingent aspect of these guarantees, we consider our historical experience in being required to perform under the guarantees, the fair value of the collateral underlying these guarantees and the financial condition of the applicable unconsolidated entities. In addition, we monitor the fair value of the collateral of these unconsolidated entities to ensure that the related borrowings do not exceed the specified percentage of the value of the property securing the borrowings. We have not recorded a liability for the contingent aspects of any guarantees that we determined were reasonably possible but not probable.

(4) Inventory
(In thousands)
June 30, 2013
 
September 30, 2012
Homes under construction
$
324,619

 
$
251,828

Development projects in progress
498,363

 
391,019

Land held for future development
341,995

 
367,102

Land held for sale
10,648

 
10,149

Capitalized interest
50,019

 
38,190

Model homes
39,468

 
40,844

Total owned inventory
$
1,265,112

 
$
1,099,132


Homes under construction includes homes finished and ready for delivery and homes in various stages of construction. We had 85 ($20.9 million) and 174 ($39.7 million) substantially completed homes that were not subject to a sales contract (spec homes

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at June 30, 2013 and September 30, 2012, respectively. Development projects in progress consist principally of land and land improvement costs. Certain of the fully developed lots in this category are reserved by a deposit or sales contract. Land held for future development consists of communities for which construction and development activities are expected to occur in the future or have been idled and are stated at cost unless facts and circumstances indicate that the carrying value of the assets may not be recoverable. All applicable interest and real estate taxes on land held for future development are expensed as incurred. Land held for sale in Unallocated and Other includes land held for sale in the markets we have decided to exit including Jacksonville, Florida, Charlotte, North Carolina and Detroit, Michigan. Total owned inventory, by reportable segment, is set forth in the table below:
(In thousands)
Projects in
Progress
 
Held for Future
Development
 
Land Held
for Sale
 
Total Owned
Inventory
June 30, 2013
 
 
 
 
 
 
 
West Segment
$
335,239

 
$
292,881

 
$
3,639

 
$
631,759

East Segment
325,765

 
25,493

 
2,195

 
353,453

Southeast Segment
173,784

 
23,621

 
2,096

 
199,501

Unallocated and Other
77,681

 
—

 
2,718

 
80,399

Total
$
912,469

 
$
341,995

 
$
10,648

 
$
1,265,112

September 30, 2012
 
 
 
 
 
 
 
West Segment
$
261,239

 
$
318,351

 
$
2,553

 
$
582,143

East Segment
279,954

 
25,130

 
3,204

 
308,288

Southeast Segment
118,853

 
23,621

 
1,675

 
144,149

Unallocated and Other
61,835

 
—

 
2,717

 
64,552

Total
$
721,881

 
$
367,102

 
$
10,149

 
$
1,099,132


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

As of June 30, 2013, there were no communities on our quarterly watch list and therefore we did not perform any impairment analyses for the quarter ended June 30, 2013.
In our impairment analyses for the quarter ended June 30, 2012, we assumed limited market improvements in some communities beginning in fiscal 2014 and continuing improvement in these communities in subsequent years. For any communities scheduled to close out in fiscal 2013, we did not assume any market improvements. The discount rate used may be different for each community and ranged from 14.6% to 16.3% for the quarter ended June 30, 2012. The following tables represent the results, by reportable segment, of our community level review of the recoverability of our inventory assets held for development as of June 30, 2012. We have elected to aggregate our disclosure at the reportable segment level because we believe this level of disclosure is most meaningful to the readers of our financial statements. The aggregate undiscounted cash flow fair value as a percentage of book value for the communities represented below is consistent with our expectations given our “watch list” methodology.
($ in thousands)
 
 
Undiscounted Cash Flow Analyses Prepared
Segment
# of
Communities
on Watch List
 
# of
Communities
 
Pre-analysis
Book Value
(BV)
 
Aggregate
Undiscounted
Cash Flow as a
% of BV
Quarter Ended June 30, 2012
 
 
 
 
 
 
 
West
5

 
1

 
$
6,196

 
81.3
%
East
4

 
1

 
7,144

 
57.1
%
Southeast
3

 
1

 
3,087

 
79.0
%
Unallocated
—

 
—

 
1,228

 
n/a

Total
12

 
3

 
$
17,655

 
72.4
%


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There were no impairments recorded during the three and nine months ended June 30, 2013. The table below summarizes the results of our discounted cash flow analysis for the three and nine months ended June 30, 2012. The impairment charges below include impairments taken as a result of these discounted cash flow analyses and impairment charges recorded for individual homes sold and in backlog with net contribution margins below a minimum threshold of profitability in communities that were not otherwise impaired through our discounted cash flow analyses. The estimated fair value of the impaired inventory is determined immediately after a community’s impairment.
($ in thousands)
Communities Impaired As a Result of Discounted Cash
Flow Analyses Prepared
Segment
# of
Communities
Impaired
 
# of Lots
Impaired
 
Impairment
Charge
 
Estimated Fair
Value of
Impaired
Inventory at
Period End
 
# of
Communities
Impaired
 
# of Lots
Impaired
 
Impairment
Charge
 
Estimated Fair
Value of
Impaired
Inventory at
Period End
Quarter Ended June 30, 2012
 
 
 
 
 
 
 
Nine Months Ended June 30, 2012
West
1

 
65

 
$
1,590

 
$
4,680

 
2

 
116

 
$
3,788

 
$
11,058

East
1

 
68

 
3,122

 
4,050

 
2

 
93

 
3,809

 
7,342

Southeast
1

 
37

 
630

 
2,457

 
1

 
37

 
794

 
2,457

Unallocated
—

 
—

 
389

 
—

 
—

 
—

 
473

 
—

Continuing Operations
3

 
170

 
$
5,731

 
$
11,187

 
5

 
246

 
8,864

 
20,857

Discontinued Operations
—

 
—

 
42

 
—

 
—

 
—

 
60

 
—

Total
3

 
170

 
$
5,773

 
$
11,187

 
5

 
246

 
$
8,924

 
$
20,857


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. During the quarter ended June 30, 2012, for certain communities we determined that it was prudent to reduce sales prices or further increase sales incentives in response to factors, including competitive market conditions in those specific submarkets for the product and locations of these communities. Because the projected cash flows used to evaluate the fair value of inventory are significantly impacted by changes in market conditions, including decreased sales prices, the change in sales prices and changes in absorption estimates based on current market conditions and management’s assumptions relative to future results led to impairments in three communities during the quarter ended June 30, 2012. Market deterioration that exceeds our estimates may lead us to incur additional impairment charges on previously impaired homebuilding assets in addition to homebuilding assets not currently impaired but for which indicators of impairment may arise if markets deteriorate.
The impairments on land held for sale generally represent further write downs of these properties to net realizable value, less estimated costs to sell and are based on current market conditions and our review of recent comparable transactions at the applicable period end. For the nine months ended June 30, 2013, the land held for sale impairment in the Southeast Segment related to our decision to reposition one community in South Carolina to address consumer demand, including the decision to sell a portion of the lots in this community. Our assumptions about land sales prices require significant judgment because the current market is highly sensitive to changes in economic conditions. We calculated the estimated fair values of land held for sale based on current market conditions and assumptions made by management, which may differ materially from actual results and may result in additional impairments if market conditions deteriorate.
Also, we have determined the proper course of action with respect to a number of communities within each homebuilding segment was to not exercise certain options and to write-off the deposits securing the option takedowns and pre-acquisition costs, as applicable. In determining whether to abandon a lot option contract, we evaluate the lot option primarily based upon the expected cash flows from the property that is the subject of the option. If we intend to abandon or walk-away from a lot option contract, we record a charge to earnings in the period such decision is made for the deposit amount and any related capitalized costs associated with the lot option contract. Abandonment charges relate to our decision to abandon or not exercise certain option contracts that are not projected to produce adequate results or no longer fit in our long-term strategic plan.
The following table sets forth, by reportable homebuilding segment, the inventory impairments and lot option abandonment charges recorded for the three and nine months ended June 30, 2013 and 2012, as applicable:

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Three Months Ended June 30,
 
Nine Months Ended June 30,
(In thousands)
2013
 
2012
 
2013
 
2012
Development projects and homes in process (Held for Development)
 
 
 
 
 
 
West
$
—

 
$
1,590

 
$
46

 
$
3,788

East
—

 
3,122

 
13

 
3,809

Southeast
—

 
630

 
—

 
794

Unallocated
—

 
389

 
—

 
473

Subtotal
$
—

 
$
5,731

 
$
59

 
$
8,864

Land Held for Sale
 
 
 
 
 
 
 
West
$
—

 
$
—

 
$
—

 
$
—

East
—

 
—

 
—

 
—

Southeast
—

 
—

 
1,778

 
208

Subtotal
$
—

 
$
—

 
$
1,778

 
$
208

Lot Option Abandonments
 
 
 
 
 
 
 
West
$
—

 
$
19

 
$
104

 
$
191

East
—

 
10

 
20

 
574

Southeast
—

 
59

 
268

 
653

Unallocated
—

 
—

 
—

 
2

Subtotal
$
—

 
$
88

 
$
392

 
$
1,420

Continuing Operations
$
—

 
$
5,819

 
$
2,229

 
$
10,492

Discontinued Operations
 
 
 
 
 
 
 
Held for Development
$
—

 
$
42

 
$
—

 
$
60

Land Held for Sale
—

 
503

 
17

 
503

Lot Option Abandonments
—

 
—

 
—

 
16

Subtotal
$
—

 
$
545

 
$
17

 
$
579

Total Company
$
—

 
$
6,364

 
$
2,246

 
$
11,071


Lot Option Agreements and Variable Interest Entities (VIEs). As previously discussed, we also have access to land inventory through lot option contracts, which generally enable us to defer acquiring portions of properties owned by third parties and unconsolidated entities until we have determined whether to exercise our lot option. A majority of our lot option contracts require a non-refundable cash deposit or irrevocable letter of credit based on a percentage of the purchase price of the land for the right to acquire lots during a specified period of time at a certain price. Under lot option contracts, purchase of the properties is contingent upon satisfaction of certain requirements by us and the sellers. Our liability under option contracts is generally limited to forfeiture of the non-refundable deposits, letters of credit and other non-refundable amounts incurred. We expect to exercise, subject to market conditions and seller satisfaction of contract terms, most of our remaining option contracts. Various factors, some of which are beyond our control, such as market conditions, weather conditions and the timing of the completion of development activities, will have a significant impact on the timing of option exercises or whether lot options will be exercised.
For the VIEs in which we are the primary beneficiary, we have consolidated the VIE and reflected such assets and liabilities as land not owned under option agreements in our balance sheets. For VIEs we were required to consolidate, we recorded the remaining contractual purchase price under the applicable lot option agreement to land not owned under option agreements with an offsetting increase to obligations related to land not owned under option agreements. Also, to reflect the purchase price of this inventory consolidated, we present the related option deposits as land not owned under option agreement in the accompanying unaudited condensed consolidated balance sheets. Consolidation of these VIEs has no impact on the Company’s results of operations or cash flows.
The following provides a summary of our interests in lot option agreements as of June 30, 2013 and September 30, 2012:

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Table of Contents

(In thousands)
Deposits &
Non-refundable
Preacquisition
Costs Incurred
 
Remaining
Obligation
 
Land Not Owned
Under Option
Agreements
As of June 30, 2013
 
 
 
 
 
Consolidated VIEs
$
4,900

 
$
2,649

 
$
7,549

Other consolidated lot option agreements (a)
76

 
255

 
331

Unconsolidated lot option agreements
25,323

 
281,739

 
—

Total lot option agreements
$
30,299

 
$
284,643

 
$
7,880

As of September 30, 2012
 
 
 
 
 
Consolidated VIEs
$
7,203

 
$
3,346

 
$
10,549

Other consolidated lot option agreements (a)
430

 
1,441

 
1,871

Unconsolidated lot option agreements
17,290

 
193,711

 
—

Total lot option agreements
$
24,923

 
$
198,498

 
$
12,420


(a)
Represents lot option agreements with non-VIE entities that we have deemed to be “financing arrangements” pursuant to ASC 470-40, Product Financing Arrangements.

(5) Interest
Our ability to capitalize all interest incurred during the three and nine months ended June 30, 2013 and 2012 has been limited by our inventory eligible for capitalization. The following table sets forth certain information regarding interest:
 
Three Months Ended June 30,
 
Nine Months Ended June 30,
(In thousands)
2013
 
2012
 
2013
 
2012
Capitalized interest in inventory, beginning of period
$
45,501

 
$
47,242

 
$
38,190

 
$
45,973

Interest incurred
28,766

 
31,235

 
86,361

 
95,950

Capitalized interest impaired
—

 
(222
)
 
—

 
(275
)
Interest expense not qualified for capitalization and included as other expense
(14,252
)
 
(17,233
)
 
(46,709
)
 
(55,147
)
Capitalized interest amortized to house construction and land sales expenses
(9,996
)
 
(15,649
)
 
(27,823
)
 
(41,128
)
Capitalized interest in inventory, end of period
$
50,019

 
$
45,373

 
$
50,019

 
$
45,373


(6) Earnings Per Share

In computing diluted loss per share for the three and nine ended June 30, 2013 and 2012, all common stock equivalents were excluded from the computation of diluted loss per share as a result of their anti-dilutive effect. For the quarter ended June 30, 2013, these excluded common stock equivalents included options/stock-settled appreciation rights (SSARs) to purchase 0.6 million shares of common stock and 8.1 million shares issuable upon the conversion of our Tangible Equity Unit (TEU) prepaid stock purchase contracts (based on the maximum potential shares upon conversion).

During the nine months ended June 30, 2013, our stockholders approved the Company's proposal to amend our Amended and Restated Certificate of Incorporation to decrease the authorized number of shares of our common stock from 100 million to 63 million. Such decrease is reflected on our unaudited condensed consolidated balance sheet.

During the quarter ended March 31, 2012, we exchanged 2.2 million shares of our common stock for $48.1 million of our Mandatory Convertible Subordinated Notes and 2.8 million shares of our common stock for 2.8 million TEUs comprised of prepaid stock purchase contracts and senior amortizing notes. During the quarter ended September 30, 2012, we issued an additional 4.6 million TEUs. As of June 30, 2013, there were 4.8 million TEUs outstanding (including $18.1 million of amortizing notes). In January 2013, we issued 0.4 million shares of our common stock upon conversion of the Mandatory Convertible Subordinated Notes. If the remaining TEU instruments were converted at the maximum settlement factor under their respective agreements, we would be required to issue approximately 8.1 million shares of common stock to the instrument holders upon conversion. See Note 7 below for additional information related to the March 2012 conversion transactions and July 2012 TEU issuance.


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Table of Contents

(7) Borrowings

At June 30, 2013 and September 30, 2012 we had the following long-term debt, net of discounts:
(In thousands)
Maturity Date
 
June 30, 2013
 
September 30, 2012
6 7/8% Senior Notes
July 2015
 
$
—

 
$
172,454

8 1/8% Senior Notes
June 2016
 
172,879

 
172,879

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

 
300,000

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

 
300,000

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

 
235,000

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

 
—

TEU Senior Amortizing Notes
August 2013
 
81

 
316

TEU Senior Amortizing Notes
August 2015
 
18,028

 
23,500

Unamortized debt discounts
 
 
(2,341
)
 
(3,082
)
Total Senior Notes, net
 
 
1,221,647

 
1,201,067

Mandatory Convertible Subordinated Notes
January 2013
 
—

 
9,402

Junior subordinated notes
July 2036
 
53,153

 
51,603

Cash Secured Loan
November 2017
 
222,368

 
227,368

Other secured notes payable
Various Dates
 
8,488

 
8,758

Total debt, net
 
 
$
1,505,656

 
$
1,498,198


Secured Revolving Credit Facility — In September 2012, we amended and expanded our Secured Revolving Credit Facility from $22 million to $150 million. The three-year Amended Secured Revolving Credit Facility provides for future working capital and letter of credit needs collateralized by substantially all of the Company's personal property (excluding cash and cash equivalents) and real property. This facility is subject to various financial, collateral-based and negative covenants with which we are required to comply. As of June 30, 2013, we were in compliance with all such covenants and had $150 million of available borrowings under the Secured Revolving Credit Facility. We have elected to cash collateralize all letters of credit; however, as of June 30, 2013, we have also pledged approximately $1 billion of inventory assets to our Secured Revolving Credit Facility to collateralize potential future borrowings or letters of credit. The Secured Revolving Credit Facility contains certain covenants, including negative covenants and financial maintenance covenants, with which we are required to comply. Subject to our option to cash collateralize our obligations under the Secured Revolving Credit Facility upon certain conditions, our obligations under the Secured Revolving Credit Facility are secured by liens on substantially all of our personal property and a significant portion of our owned real properties. There were no outstanding borrowings under the Secured Revolving Credit Facility as of June 30, 2013 or September 30, 2012.
We have entered into stand-alone, cash-secured letter of credit agreements with banks to maintain our pre-existing letters of credit and to provide for the issuance of new letters of credit. The letter of credit arrangements combined with our Secured Revolving Credit Facility provide a total letter of credit capacity of approximately $220.0 million. As of June 30, 2013 and September 30, 2012, we have letters of credit outstanding of $22.7 million and $24.7 million, respectively, which are secured by cash collateral in restricted accounts. The Company may enter into additional arrangements to provide additional letter of credit capacity.
Senior Notes — The majority of our Senior Notes are unsecured or secured obligations ranking pari passu with all other existing and future senior indebtedness. Substantially all of our significant subsidiaries are full and unconditional guarantors of the Senior Notes and are jointly and severally liable for obligations under the Senior Notes and the Secured Revolving Credit Facility. Each guarantor subsidiary is a 100% owned subsidiary of Beazer Homes.
The Company's Senior Notes are subject to indentures containing certain restrictive covenants which, among other things, restrict our ability to pay dividends, repurchase our common stock, incur additional indebtedness and to make certain investments. Specifically, all of our Senior Notes contain covenants that restrict our ability to incur additional indebtedness unless it is refinancing indebtedness or non-recourse indebtedness. The incurrence of refinancing indebtedness and non-recourse indebtedness, as defined in the applicable indentures, are exempted from the covenant test. As of June 30, 2013, we were not able to incur additional indebtedness, except refinancing or non-recourse indebtedness. Compliance with our Senior Note covenants does not significantly impact our operations. We were in compliance with the covenants contained in all of our Senior Notes as of June 30, 2013.

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Table of Contents

Our Senior Notes due 2016 (the 2016 Notes) contain the most restrictive covenants, including the consolidated tangible net worth covenant, which states that should consolidated tangible net worth fall below $85 million for two consecutive quarters, the Company is required to make an offer to purchase 10% of the 2016 Notes at par. If triggered and fully subscribed, this could result in our having to purchase $27.5 million of the 2016 Notes, which may be reduced by certain 2016 Note repurchases (potentially at less than par) made in the open market after the triggering date. As of June 30, 2013 our consolidated tangible net worth was $202.4 million, well in excess of the minimum covenant requirement.
In February 2013, we issued and sold $200 million aggregate principal amount of 7.25% Senior Notes due 2023 (the 2023 Notes) at par (before underwriting and other issuance costs) through a private placement to qualified institutional buyers. Interest on the 2023 Notes is payable semi-annually in cash in arrears, beginning August 1, 2013. The 2023 Notes will mature on February 1, 2023.
The 2023 Notes were issued under an Indenture, dated as February 1, 2013 (the Indenture) that contains covenants which, subject to certain exceptions, limit the ability of the Company and its restricted subsidiaries (as defined in the Indenture) to, among other things, incur additional indebtedness, including secured indebtedness, and make certain types of restricted payments. The Indenture contains customary events of default. Upon the occurrence of an event of default, payments on the 2023 Notes may be accelerated and become immediately due and payable. Upon a change of control (as defined in the Indenture), the Indenture requires us to make an offer to repurchase the 2023 Notes at 101% of their principal amount, plus accrued and unpaid interest.
We may redeem the 2023 Notes at any time prior to August 1, 2018, in whole or in part, at a redemption price equal to 100% of the principal amount, plus a customary make-whole premium, plus accrued and unpaid interest to the redemption date. In addition, at any time on or prior to August 1, 2016, we may redeem up to 35% of the aggregate principal amount of 2023 Notes with the proceeds of certain equity offerings at a redemption price equal to 107.250% of the principal amount of the 2023 Notes plus accrued and unpaid interest, if any, to the date fixed for redemption; provided, that at least 65% of the aggregate principal amount of the 2023 Notes originally issued under the Indenture remain outstanding after such redemption. On or after August 1, 2018, we may redeem some or all of the 2023 Notes at redemption prices set forth in the Indenture. These percentages range from 100.000% to 103.625%.
The 2023 Notes rank equally in right of payment with all of our existing and future senior unsecured obligations, senior to all of the Company's existing and future subordinated indebtedness and effectively subordinated to the Company's existing and future secured indebtedness, including indebtedness under our revolving credit facility and our 6.625% Senior Secured Notes due 2018, to the extent of the value of the assets securing such indebtedness. The 2023 Notes and related guarantees are structurally subordinated to all indebtedness and other liabilities of all of the Company's subsidiaries that do not guarantee the 2023 Notes. The 2023 Notes are fully and unconditionally guaranteed jointly and severally on a senior basis by the Company's wholly-owned subsidiaries party to the Indenture. In July 2013, we called for the exchange of the 2023 Notes for notes that will be freely transferable and registered under the Securities Act of 1933.
During the nine months ended June 30, 2013, we used a portion of the net cash proceeds from the 2023 Notes offering to redeem all of our outstanding 6.875% Senior Notes due 2015 (the 2015 Notes). The 2015 Notes were redeemed at 101.146% of the principal amount, plus accrued and unpaid interest. During the nine months ended June 30, 2013, we also repurchased $2 million of our outstanding 9.125% Senior Notes due 2018 in open market transactions. These transactions resulted in a loss on debt extinguishment of $3.6 million, net of unamortized discounts and debt issuance costs. All Senior Notes redeemed/repurchased by the Company were canceled.
Senior Notes: Tangible Equity Units — In July 2012, we issued 4.6 million 7.5% TEUs (the 2012 TEUs), which were comprised of prepaid stock purchase contracts (PSPs) and senior amortizing notes. As the two components of the TEUs are legally separate and detachable, we have accounted for the two components as separate items for financial reporting purposes and valued them based on their relative fair value at the date of issuance. The amortizing notes are unsecured senior obligations and rank equally with all of our other unsecured indebtedness. Outstanding notes pay quarterly installments of principal and interest through maturity. The PSPs were originally accounted for as equity (additional paid in capital) at the initial fair value of these contracts based on the relative fair value method. The PSPs related to these July 2012 TEUs are scheduled to be settled in Beazer Homes' common stock on July 15, 2015. If on that date, our common stock price is (1) at or below $14.50 per share, the PSPs will convert to 1.72414 shares per unit, (2) at or above $17.75 per share, the PSPs will convert to 1.40746 shares per unit or (3) between $14.50 and $17.75 per share, the PSPs will convert to a number of shares of our common stock equal to $25.00 divided by the applicable market value of our common stock.
During May 2010, we issued 3.0 million 7.25% TEUs (the 2010 TEUs). In March 2012, we exchanged 2.8 million shares of our common stock for 2.8 million 2010 TEUs (comprised of prepaid stock purchase contracts and $7.2 million of senior amortizing notes). Since our offer to convert the 2010 TEUs included a premium share component and was not pursuant to the instrument's original conversion terms, we accounted for the exchange as an induced conversion of the 2010 TEUs. We compared the fair

15
Table of Contents

value of the common stock issued to the fair value of the 2010 TEU instruments at the date of acceptance in order to determine the premium of the consideration. This premium was then allocated between the debt and equity components of the 2010 TEUs based on each components relative fair value. The difference between the implied fair value of the amortizing notes (including the premium allocation) and the carrying value of the amortizing notes was recognized as a loss on extinguishment of debt and totaled approximately $0.7 million. The remaining related PSPs issued in May 2010 will be settled in Beazer Homes’ common stock on August 15, 2013.
Mandatory Convertible Subordinated Notes — On January 12, 2010, we issued $57.5 million aggregate principal amount of 7 1/2% Mandatory Convertible Subordinated Notes due 2013 (the Mandatory Convertible Subordinated Notes). Interest on the Mandatory Convertible Subordinated Notes was payable quarterly in cash in arrears. Holders of the Mandatory Convertible Subordinated Notes had the right to convert their notes, in whole or in part, at any time prior to maturity, into shares of our common stock at a fixed conversion rate of 0.8909 shares per $25 principal amount of notes.
During the quarter ended March 31, 2012, we exchanged 2.2 million shares of our common stock for $48.1 million of our Mandatory Convertible Subordinated Notes. Since our offer to convert these notes included a premium share component, we accounted for the exchange as an induced conversion of these notes. We recognized a $2.0 million inducement expense equal to the fair value of the premium shares issued based on our common stock price as of the date of acceptance. This expense was included in loss on extinguishment of debt for the fiscal year ended September 30, 2012.
On January 15, 2013, the remaining $9.4 million of outstanding Mandatory Convertible Subordinated Notes converted into 0.4 million shares of the Company’s common stock in accordance with the notes' conversion provisions.
Junior Subordinated Notes — $103.1 million of unsecured junior subordinated notes mature on July 30, 2036, are redeemable at par and pay a fixed rate of 7.987% for the first ten years ending July 30, 2016. Thereafter, the securities have a variable interest rate as defined in the junior subordinated notes agreement. The obligations relating to these notes and the related securities are subordinated to our Secured Revolving Credit Facility and Senior Notes. In January 2010, we modified the terms of $75 million of these notes and recorded these notes at their estimated fair value. Over the remaining life of the notes, we will increase their carrying value until this carrying value equals the face value of the notes. As of June 30, 2013, the unamortized accretion was $47.6 million and will be amortized over the remaining life of the notes.
As of June 30, 2013, we were in compliance with all covenants under our Junior Notes.
Cash Secured Loans — We have entered into two separate loan facilities, totaling $222.4 million as of June 30, 2013. Borrowing under the cash secured loan facilities will replenish cash used to repay or repurchase the Company’s debt and would be considered “refinancing indebtedness” under certain of the Company’s existing indentures and debt covenants. However, because the loans are fully collateralized by cash equal to the loan amount, the loans do not provide liquidity to the Company.
The lenders of these facilities may put the outstanding loan balances to the Company in November 2014. The loan matures in November 2017. Borrowings under the facilities are fully secured by cash held by the lender or its affiliates. This secured cash is included in restricted cash on our unaudited condensed consolidated balance sheet as of June 30, 2013 and September 30, 2012. The cash secured loan has an interest rate equivalent to LIBOR plus 0.4% per annum which is paid every three months following the effective date of each borrowing. During the quarter ended September 30, 2012, we repaid $20 million of the outstanding cash secured term loan. Further, during the nine months ended June 30, 2013, we repaid $5 million of the outstanding cash secured term loan.
Other Secured Notes Payable — We periodically acquire land through the issuance of notes payable. As of June 30, 2013 and September 30, 2012, we had outstanding notes payable of $8.5 million and $8.8 million respectively, primarily related to land acquisitions. These notes payable have varying expiration dates between 2013 and 2019 and have a weighted average fixed rate of 3.91% at June 30, 2013. These notes are secured by the real estate to which they relate.
The agreements governing these secured notes payable contain various affirmative and negative covenants. There can be no assurance that we will be able to obtain any future waivers or amendments that may become necessary without significant additional cost or at all. In each instance, however, a covenant default can be cured by repayment of the indebtedness.

(8) Income Taxes
For the three and nine months ended June 30, 2013, our non-cash tax benefit from continuing operations was $0.4 million and $1.0 million, respectively, primarily related to a decrease of our prior year's recognized tax benefits.
As of June 30, 2013 and September 30, 2012, we had $2.5 million of accrued interest and penalties related to our unrecognized tax benefits.

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Table of Contents

Our federal income tax returns for fiscal years 2007 through 2010 are under Internal Revenue Service (IRS) appeal. Certain state income tax returns for various fiscal years are under routine examination. The final outcome of these appeals and examinations are not yet determinable and therefore the change in our unrecognized tax benefits that could occur within the next 12 months cannot be estimated at this time.
During fiscal 2008, we determined that we did not meet the more likely than not standard that substantially all of our deferred tax assets would be realized and therefore, we established a valuation allowance for substantially all of our deferred tax assets.
Given the prolonged economic downturn affecting the homebuilding industry and the continued uncertainty regarding the recoverability of the remaining deferred tax assets, we continue to believe that a valuation allowance is needed for substantially all of our deferred tax assets. In future periods, the allowance could be modified based on sufficient evidence indicating that more likely than not a portion of our deferred tax assets will be realized. Changes in existing tax laws could also affect actual tax results and the valuation of deferred tax assets over time.
Further, we experienced an “ownership change” as defined in Section 382 of the Internal Revenue Code (Section 382) as of January 12, 2010. Section 382 contains rules that limit the ability of a company that undergoes an “ownership change” to utilize its net operating loss (NOL) carryforwards and certain built-in losses or deductions recognized during the five-year period after the ownership change to offset future taxable income. Therefore, our ability to utilize our pre-ownership change NOL carryforwards and recognize certain built-in losses or deductions is limited by Section 382. Specifically, as of June 30, 2013, $87.4 million of our deferred tax asset was subject to annual recognition limitations under Section 382, of which an estimated maximum amount of $11.4 million ($4 million tax-effected) may be recognized annually. In addition, due to a combination of Section 382 limitations and the maximum 20-year carryforward of our NOLs, we will be unable to fully recognize certain deferred tax assets.
As of June 30, 2013, our valuation allowance was $505.3 million. Upon the resumption of sustained profitability and the reversal of our valuation allowance, we currently expect to be able to utilize between $394.6 million and $453.6 million of our deferred tax asset for the reduction of future cash taxes. However, the actual realization of our deferred tax assets is difficult to predict and will be dependent on future events.

(9) Contingencies
Beazer Homes and certain of its subsidiaries have been and continue to be named as defendants in various construction defect claims, complaints and other legal actions. The Company is subject to the possibility of loss contingencies arising in its business. In determining loss contingencies, we consider the likelihood of loss as well as the ability to reasonably estimate the amount of such loss or liability. An estimated loss is recorded when it is considered probable that a liability has been incurred and when the amount of loss can be reasonably estimated.
Warranty Reserves. We currently provide a limited warranty (ranging from one to two years) covering workmanship and materials per our defined performance quality standards. In addition, we provide a limited warranty (generally ranging from a minimum of five years up to the period covered by the applicable statute of repose) covering only certain defined construction defects. We also provide a defined structural element warranty with single-family homes and townhomes in certain states.
We subcontract our homebuilding work to subcontractors whose contracts generally include an indemnity obligation and a requirement that certain minimum insurance requirements be met, including providing us with a certificate of insurance prior to receiving payments for their work. Therefore, many claims relating to workmanship and materials are the primary responsibility of the subcontractors.
Warranty reserves are included in other liabilities and the provision for warranty accruals is included in home construction and land sales expenses in the unaudited condensed consolidated financial statements. We record reserves covering anticipated warranty expense for each home closed. Management reviews the adequacy of warranty reserves each reporting period based on historical experience and management’s estimate of the costs to remediate the claims and adjusts these provisions accordingly. Our review includes a quarterly analysis of the historical data and trends in warranty expense by operating segment. An analysis by operating segment allows us to consider market specific factors such as our warranty experience, the number of home closings, the prices of homes, product mix and other data in estimating our warranty reserves. In addition, our analysis also contemplates the existence of any non-recurring or community-specific warranty related matters that might not be contemplated in our historical data and trends.
As a result of our quarterly analyses, we adjust our estimated warranty liabilities, if required. While we believe our warranty reserves are adequate as of June 30, 2013, historical data and trends may not accurately predict actual warranty costs or future developments could lead to a significant change in the reserve. Our warranty reserves are as follows:

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Table of Contents

 
Three Months Ended
 
Nine Months Ended
 
June 30,
 
June 30,
(In thousands)
2013
 
2012
 
2013
 
2012
Balance at beginning of period
$
13,601

 
$
16,133

 
$
15,477

 
$
17,916

Accruals for warranties issued
1,398

 
1,963

 
4,128

 
5,191

Changes in liability related to warranties existing in prior periods
256

 
(565
)
 
(1,483
)
 
(1,916
)
Payments made
(1,810
)
 
(1,497
)
 
(4,677
)
 
(5,157
)
Balance at end of period
$
13,445

 
$
16,034

 
$
13,445

 
$
16,034


Litigation
On June 3, 2009, Beazer Homes Corp., a wholly-owned subsidiary of the Company, was named as a defendant in a purported class action lawsuit in the Circuit Court for Lee County, State of Florida, filed by Bryson and Kimberly Royal, the owners of one of our homes in our Magnolia Lakes community in Ft. Myers, Florida. The complaint names the Company and certain distributors and suppliers of drywall and was on behalf of the named plaintiffs and other similarly situated owners of homes in Magnolia Lakes or alternatively in the State of Florida. The plaintiffs allege that the Company built their homes with defective drywall, manufactured in China, that contains sulfur compounds that allegedly corrode certain metals and that are allegedly capable of harming the health of individuals. Plaintiffs allege physical and economic damages and seek legal and equitable relief, medical monitoring and attorney's fees. This case has been transferred to the Eastern District of Louisiana pursuant to an order from the United States Judicial Panel on Multidistrict Litigation. In addition, the Company has been named in other multi-plaintiff complaints filed in the multidistrict litigation and individual state court actions. We believe that the claims asserted in these actions are governed by home warranties or are without merit. The Company has offered to repair all of these homes pursuant to a repair protocol that has been adopted by the multidistrict litigation court, including those homes involved in litigation. To date, the owners of all but two of the affected homes have accepted the Company's offer to repair. Furthermore, the Company has agreed to participate in a global class settlement with the plaintiff class counsel and numerous other defendants in the multidistrict litigation, which was approved by the Court on February 13, 2013. The class action settlement requires Beazer to make a settlement payment that is not material to our consolidated financial position or results of operations, and resolves all claims, including future claims, against Beazer related to Chinese drywall. The only exception would have been any claims by persons or entities that opted out of the settlement, but there were no opt outs by the Court’s deadline. The Company also continues to pursue recovery against responsible subcontractors, drywall suppliers and drywall manufacturers for its repair costs. As of June 30, 2013, we have recorded an immaterial amount related to our expected liability under the settlement.
As disclosed in prior SEC filings, we operated Beazer Mortgage Corporation (BMC) from 1998 through February 2008 to offer mortgage financing to buyers of our homes. BMC entered into various agreements with mortgage investors, pursuant to which BMC originated certain mortgage loans and ultimately sold these loans to investors. In general underwriting decisions were not made by BMC but by the investors themselves or third-party service providers. From time to time we have received claims from institutions which have acquired certain of these mortgages demanding damages or indemnity arising from BMC's activities or that we repurchase such mortgages. We have been able to resolve these claims for amounts that are not material to our consolidated financial position or results of operation. We currently have an insignificant number of such claims outstanding for which we believe we have no liability. However, we cannot rule out the potential for additional mortgage loan repurchase or indemnity claims in the future from other investors, although, at this time, we do not believe that the exposure related to any such claims would be material to our consolidated financial position or results of operations. As of June 30, 2013, no liability has been recorded for any such additional claims as such exposure is not both probable and reasonably estimable.
We cannot predict or determine the timing or final outcome of the lawsuits or the effect that any adverse findings or determinations in the 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 the above pending matters. An unfavorable determination in any of the pending lawsuits could result in the payment by us of substantial monetary damages which may not be fully covered by insurance. Further, the legal costs associated with the lawsuits and the amount of time required to be spent by management and the Board of Directors on these matters, even if we are ultimately successful, could have a material adverse effect on our business, financial condition and results of operations.
Other Matters
As disclosed in our 2009 Form 10-K, on July 1, 2009, the Company announced that it had resolved the criminal and civil investigations by the United States Attorney’s Office in the Western District of North Carolina (the U.S. Attorney) and other state and federal agencies concerning matters that were the subject of the independent investigation, initiated in April 2007 by the Audit Committee of the Board of Directors (the Investigation) and concluded in May 2008. Under the terms of a deferred prosecution agreement (DPA), the Company’s liability for each of the fiscal years after 2010 through a portion of fiscal 2014 (unless extended

18
Table of Contents

as previously described in our 2009 Form 10-K) will be equal to 4% of the Company’s adjusted EBITDA (as defined in the DPA). The total amount of such obligations will be dependent on several factors; however, the maximum liability under the DPA and other settlement agreements discussed above will not exceed $55.0 million, of which $16.6 million has been paid as of June 30, 2013. Positive adjusted EBITDA in future years will require us to incur additional expense in the future.
In 2006, we received two Administrative Orders issued by the New Jersey Department of Environmental Protection. The Orders allege certain violations of wetlands disturbance permits and assess proposed fines of $630,000 and $678,000, respectively. We have met with the Department to discuss their concerns on the two affected communities and have requested hearings on both matters. Although we believe that we have significant defenses to the alleged violations, we have reached a settlement with the Department, through an Administrative Consent Order, for an amount that is not material to our consolidated financial position or results of operations.
We and certain of our subsidiaries have been named as defendants in various claims, complaints and other legal actions, most relating to construction defects, moisture intrusion and product liability. Certain of the liabilities resulting from these actions are covered in whole or part by insurance. In our opinion, based on our current assessment, the ultimate resolution of these matters will not have a material adverse effect on our financial condition, results of operations or cash flows.
We have accrued $16.9 million and $19.4 million in other liabilities related to litigation and other matters, excluding warranty, as of June 30, 2013 and September 30, 2012, respectively.
We had outstanding letters of credit and performance bonds of approximately $22.7 million and $160.6 million, respectively, at June 30, 2013 related principally to our obligations to local governments to construct roads and other improvements in various developments. We have no outstanding letters of credit relating to our land option contracts as of June 30, 2013.

(10) Fair Value Measurements
As of June 30, 2013, we had no assets or liabilities in our unaudited condensed consolidated balance sheets that were required to be measured at fair value on a recurring basis. Certain of our assets are required to be recorded at fair value on a non-recurring basis when events and circumstances indicate that the carrying value may not be recovered. We use a fair value hierarchy that requires us to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value as follows: Level 1 – Quoted prices in active markets for identical assets or liabilities; Level 2 – Inputs other than quoted prices included in Level 1 that are observable either directly or indirectly through corroboration with market data; Level 3 – Unobservable inputs that reflect our own estimates about the assumptions market participants would use in pricing the asset or liability.
As previously disclosed, we review our long-lived assets, including inventory, for recoverability when factors that indicate an impairment may exist, but no less than quarterly. Fair value is based on estimated cash flows discounted for market risks associated with the long-lived assets. The fair values of our investments in unconsolidated entities are determined primarily using a discounted cash flow model to value the underlying net assets of the respective entities. See Notes 1, 3 and 4 for additional information related to the fair value accounting for the assets listed above. Determining which hierarchical level an asset or liability falls within requires significant judgment. We evaluate our hierarchy disclosures each quarter.
The following table presents our assets measured at fair value on a non-recurring basis for each hierarchy level and represents only those assets whose carrying values were adjusted to fair value during the nine months ended June 30, 2013 and 2012:
(In thousands)
Level 1
 
Level 2
 
Level 3
 
Total
Nine Months Ended June 30, 2013
 
 
 
 
 
 
 
Land held for sale
—

 
—

 
$
2,013

 
$
2,013

Nine Months Ended June 30, 2012
 
 
 
 
 
 
 
Development projects in progress
—

 
—

 
$
20,857

 
$
20,857

Land held for sale
—

 
—

 
$
1,780

 
$
1,780

The fair value of our cash and cash equivalents, restricted cash, accounts receivable, trade accounts payable, other liabilities, cash secured loan and other secured notes payable approximate their carrying amounts due to the short maturity of these assets and liabilities.
Obligations related to land not owned under option agreements approximate fair value. The carrying values and estimated fair values of other financial assets and liabilities were as follows:


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Table of Contents

(In thousands)
As of June 30, 2013
 
As of September 30, 2012
 
Carrying
Amount
 
Fair Value
 
Carrying
Amount
 
Fair Value
Senior Notes
$
1,221,707

 
$
1,270,003

 
$
1,201,067

 
$
1,228,745

Mandatory Convertible Subordinated Notes
—

 
—

 
9,402

 
7,465

Junior Subordinated Notes
53,153

 
53,153

 
51,603

 
51,603

 
$
1,274,860

 
$
1,323,156

 
$
1,262,072

 
$
1,287,813


The estimated fair values shown above for our publicly-held Senior Notes and Mandatory Convertible Subordinated Notes have been determined using quoted market rates (Level 2). Since there is no trading market for our junior subordinated notes, the fair value of these notes is estimated by discounting scheduled cash flows through maturity (Level 3). The discount rate is estimated using market rates currently being offered on loans with similar terms and credit quality. Judgment is required in interpreting market data to develop these estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts that we could realize in a current market exchange.


(11) Stock-based Compensation
For the three and nine months ended June 30, 2013, our total stock-based compensation, included in general and administrative expenses (G&A), was approximately $0.6 million ($0.5 million net of tax) and $2.3 million ($1.8 million net of tax), respectively. The fair value of each option/stock-based stock appreciation right (SSAR) grant is estimated on the date of grant using the Black-Scholes option-pricing model. The fair value of each performance-based, nonvested stock grant is estimated on the date of grant using the Monte Carlo valuation method. The cash-settled component of any awards granted to employees are accounted for as a liability award and the liability is adjusted to fair value each reporting period until vested. Non-performance based, nonvested stock is valued based on the market price of the common stock on the date of the grant.
During the nine months ended June 30, 2013 and 2012, employees surrendered 6,147 and 12,553 shares, respectively, to us in payment of minimum tax obligations upon the vesting of stock awards under our stock incentive plans. We valued the stock at the market price on the date of surrender, for an aggregate value of approximately $121,000 and $34,000 for the nine months ended June 30, 2013 and 2012, respectively.

Stock Options: We used the following weighted-average assumptions for our options granted during the nine months ended June 30, 2013:
Expected life of options
5.0 years

Expected volatility
46.15
%
Expected discrete dividends
—

Weighted average risk-free interest rate
0.63
%
Weighted average fair value
$
5.48


We considered the historic returns of our stock and the implied volatility of our publicly-traded options in determining expected volatility. We assumed no dividends would be paid since our Board of Directors has suspended payment of dividends indefinitely and payment of dividends is restricted under our Senior Note covenants. The risk-free interest rate is based on the term structure of interest rates at the time of the option grant and we have relied upon a combination of the observed exercise behavior of our prior grants with similar characteristics, the vesting schedule of the current grants, and an index of peer companies with similar grant characteristics to determine the expected life of the options.
The intrinsic value of a stock option/SSAR is the amount by which the market value of the underlying stock exceeds the exercise price of the option/SSAR. At June 30, 2013, our SSAR/stock options outstanding had an intrinsic value of $1.4 million. The intrinsic value of SSARs/stock options vested and expected to vest in the future was $1.4 million. The SSARS/stock options vested and expected to vest in the future had a weighted average expected life of 2.7 years. The aggregate intrinsic value of exercisable SSARs/stock options as of June 30, 2013 was $0.2 million.
The following table summarizes stock options and SSARs outstanding as of June 30, 2013, as well as activity during the three and nine months then ended:

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Table of Contents

 
Three Months Ended
 
Nine Months Ended
 
June 30, 2013
 
June 30, 2013
 
Shares
 
Weighted-
Average
Exercise
Price
 
Shares
 
Weighted-
Average
Exercise
Price
Outstanding at beginning of period
574,165

 
$
32.75

 
429,965

 
$
40.80

Granted
5,086

 
20.58

 
160,651

 
13.56

Exercised
(503
)
 
10.80

 
(608
)
 
10.80

Expired
—

 
—

 
(7,703
)
 
96.45

Forfeited
(763
)
 
12.56

 
(4,320
)
 
17.86

Outstanding at end of period
577,985

 
$
32.69

 
577,985

 
$
32.69

Exercisable at end of period
325,396

 
$
47.52

 
325,396

 
$
47.52

Vested or expected to vest in the future
574,752

 
$
32.79

 
574,752

 
$
32.79


Nonvested Stock Awards: Compensation cost arising from nonvested stock awards granted to employees is recognized as an expense using the straight-line method over the vesting period. As of June 30, 2013 and September 30, 2012, there was $1.4 million and $2.1 million, respectively, of total unrecognized compensation cost related to nonvested stock awards included in paid-in capital. The cost remaining at June 30, 2013 is expected to be recognized over a weighted average period of 1.3 years.
During the nine months ended June 30, 2013, we issued 31,532 shares of performance-based restricted stock (Performance Shares) to our executive officers and certain corporate employees. Each Performance Share represents a contingent right to receive one share of the Company’s common stock if vesting is satisfied at the end of the three-year performance period. The number of shares that will vest at the end of the three-year performance period will depend upon the level to which the following two performance criteria are achieved (1) Beazer’s total shareholder return (TSR) relative to a group of peer companies and (2) the compound annual growth rate (CAGR) during the three-year performance period of Beazer common stock. The target number of Performance Shares that vest may be increased by up to 50% based on the level of achievement of the above criteria as defined in the applicable award agreement. Payment for Performance Shares in excess of the target number (31,532) will be settled in cash. Any portion of the Performance Shares that do not vest at the end of the period will be forfeited. The grants of the performance-based, nonvested stock were valued using the Monte Carlo valuation method and had an estimated fair value of $5.02 per share, a portion of which is attributable to the potential cash-settled liability aspect of the grant which is included in Other Liabilities.
A Monte Carlo simulation model requires the following inputs: (1) expected dividend yield on the underlying stock, (2) expected price volatility of the underlying stock, (3) risk-free interest rate for the period corresponding with the expected term of the award and (4) fair value of the underlying stock. For the Company and each member of the peer group, the following inputs were used, as applicable, in the Monte Carlo simulation model to determine the fair value as of the grant date for the Performance Shares: 0% dividend yield for the Company, expected price volatility ranging from 35.6% to 60.4% and a risk-free interest rate of 0.34%. The methodology used to determine these assumptions is similar to that for the Black-Scholes Model used for stock option grants discussed above; however the expected term is determined by the model in the Monte Carlo simulation.
Activity relating to nonvested stock awards, including the Performance Shares for the three and nine months ended June 30, 2013 is as follows:
 
Three Months Ended
 
Nine Months Ended
 
June 30, 2013
 
June 30, 2013
 
Shares
 
Weighted
Average
Grant
Date Fair
Value
 
Shares
 
Weighted
Average
Grant
Date Fair
Value
Beginning of period
374,753

 
$
18.19

 
323,335

 
$
19.61

Granted
6,104

 
20.58

 
99,413

 
10.95

Vested
(94,471
)
 
33.22

 
(126,124
)
 
27.59

Forfeited
(3,615
)
 
13.30

 
(13,853
)
 
13.92

End of period
282,771

 
$
13.29

 
282,771

 
$
13.29



21
Table of Contents

(12) Segment Information
We have three homebuilding segments operating in 16 states. Beginning in the second quarter of fiscal 2011, through May 2, 2012, we operated our Pre-Owned Homes business in Arizona and Nevada. The results below include operating results of our Pre-Owned segment through May 2, 2012. Effective May 3, 2012, we contributed our Pre-Owned Homes business for an investment in an unconsolidated entity (see Note 3 for additional information). Revenues in our homebuilding segments are derived from the sale of homes which we construct and from land and lot sales. Revenues from our Pre-Owned segment were derived from the rental of previously owned homes purchased and improved by the Company. Our reportable segments have been determined on a basis that is used internally by management for evaluating segment performance and resource allocations. The reportable homebuilding segments and all other homebuilding operations, not required to be reported separately, include operations conducting business in the following states:
West: Arizona, California, Nevada and Texas
East: Delaware, Indiana, Maryland, New Jersey, New York, Pennsylvania, Tennessee (Nashville) and Virginia
Southeast: Florida, Georgia, North Carolina (Raleigh) and South Carolina
Management’s evaluation of segment performance is based on segment operating income. Operating income for our homebuilding segments is defined as homebuilding, land sale and other revenues less home construction, land development and land sales expense, commission expense, depreciation and amortization and certain general and administrative expenses which are incurred by or allocated to our homebuilding segments. Operating income for our Pre-Owned segment was historically defined as rental revenues less home repairs and operating expenses, home sales expense, depreciation and amortization and certain general and administrative expenses which are incurred by or allocated to the segment. The accounting policies of our segments are those described in Note 1 above and Note 1 to our consolidated financial statements in our 2012 Annual Report.
 
Three Months Ended
 
Nine Months Ended
 
June 30,
 
June 30,
(In thousands)
2013
 
2012
 
2013
 
2012
Revenue
 
 
 
 
 
 
 
West
$
133,519

 
$
99,092

 
$
362,641

 
$
247,726

East
111,556

 
98,930

 
325,224

 
255,940

Southeast
69,364

 
56,328

 
161,378

 
129,966

Pre-Owned
—

 
205

 
—

 
1,114

Continuing Operations
$
314,439

 
$
254,555

 
$
849,243

 
$
634,746


 
Three Months Ended
 
Nine Months Ended
 
June 30,
 
June 30,
(In thousands)
2013
 
2012
 
2013
 
2012
Operating income/(loss)
 
 
 
 
 
 
 
West
$
15,313

 
$
2,719

 
$
33,716

 
$
5,505

East
7,714

 
197

 
24,215

 
344

Southeast
7,644

 
3,339

 
12,024

 
5,304

Pre-Owned
—

 
(29
)
 
—

 
(229
)
Segment total
30,671

 
6,226

 
69,955

 
10,924

Corporate and unallocated (a)
(22,199
)
 
(27,381
)
 
(64,773
)
 
(66,472
)
Total operating income (loss)
8,472

 
(21,155
)
 
5,182

 
(55,548
)
Equity in (loss) income of unconsolidated entities
(310
)
 
48

 
(206
)
 
(25
)
Loss on extinguishment of debt
—

 
—

 
(3,638
)
 
(2,747
)
Other expense, net
(14,036
)
 
(16,804
)
 
(45,858
)
 
(53,342
)
Loss from continuing operations before income taxes
$
(5,874
)
 
$
(37,911
)
 
$
(44,520
)
 
$
(111,662
)


22
Table of Contents

 
Three Months Ended
 
Nine Months Ended
 
June 30,
 
June 30,
(In thousands)
2013
 
2012
 
2013
 
2012
Depreciation and amortization
 
 
 
 
 
 
 
West
$
1,263

 
$
1,685

 
$
3,470

 
$
3,555

East
750

 
728

 
2,333

 
2,038

Southeast
411

 
486

 
1,068

 
1,199

Pre-Owned
—

 
57

 
—

 
330

Segment total
2,424

 
2,956

 
6,871

 
7,122

Corporate and unallocated (a)
529

 
787

 
1,890

 
2,214

Continuing Operations
$
2,953

 
$
3,743

 
$
8,761

 
$
9,336


 
Nine Months Ended
 
June 30,
(In thousands)
2013
 
2012
Capital Expenditures
 
 
 
West
$
2,979

 
$
2,131

East
881

 
2,890

Southeast
1,087

 
1,620

Pre-Owned (b)
—

 
7,932

Corporate and unallocated
1,625

 
544

Consolidated total
$
6,572

 
$
15,117


(In thousands)
June 30, 2013
 
September 30, 2012
Assets
 
 
 
West
$
663,865

 
$
618,805

East
364,753

 
320,404

Southeast
212,340

 
160,868

Corporate and unallocated (c)
701,959

 
882,141

Consolidated total
$
1,942,917

 
$
1,982,218


(a)
Corporate and unallocated includes amortization of capitalized interest and numerous shared services functions that benefit all segments, the costs of which are not allocated to the operating segments reported above including information technology, national sourcing and purchasing, treasury, corporate finance, legal, branding and other national marketing costs. For the nine months ended June 30, 2012, corporate and unallocated also includes an $11 million recovery related to old water intrusion warranty and related legal expenditures.
(b)
Capital expenditures represent the purchase of previously owned homes during the nine months ended June 30, 2012.
(c)
Primarily consists of cash and cash equivalents, consolidated inventory not owned, deferred taxes, capitalized interest and other items that are not allocated to the segments.

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



23
Table of Contents

Beazer Homes USA, Inc.
Unaudited Consolidating Balance Sheet Information
June 30, 2013
(In thousands)
 
 
Beazer Homes
USA, Inc.
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Consolidating
Adjustments
 
Consolidated
Beazer Homes
USA, Inc.
ASSETS
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
295,769

 
$
5,729

 
$
888

 
$
(4,040
)
 
$
298,346

Restricted cash
245,651

 
362

 
—

 
—

 
246,013

Accounts receivable (net of allowance of $2,045)
—

 
26,059

 
7

 
—

 
26,066

Income tax receivable
3,080

 
—

 
—

 
—

 
3,080

Land not owned under option agreements
—

 
1,265,112

 
—

 
—

 
1,265,112

Consolidated inventory not owned
—

 
7,880

 
—

 
—

 
7,880

Investments in unconsolidated entities
773

 
41,704

 
—

 
—

 
42,477

Deferred tax assets, net
7,076

 
—

 
—

 
—

 
7,076

Property, plant and equipment, net
—

 
16,734

 
—

 
—

 
16,734

Investments in subsidiaries
93,173

 
—

 
—

 
(93,173
)
 
—

Intercompany
1,096,356

 
—

 
2,771

 
(1,099,127
)
 
—

Other assets
21,260

 
7,693

 
1,180

 
—

 
30,133

Total assets
$
1,763,138

 
$
1,371,273

 
$
4,846

 
$
(1,196,340
)
 
$
1,942,917

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
 
 
 
 
 
 
Trade accounts payable
$
—

 
$
79,625

 
$
—

 
$
—

 
$
79,625

Other liabilities
36,911

 
88,426

 
1,409

 
—

 
126,746

Intercompany
1,073

 
1,102,094

 
—

 
(1,103,167
)
 
—

Obligations related to land not owned under option agreements
—

 
2,904

 
—

 
—

 
2,904

Total debt (net of discounts of $2,341)
1,497,168

 
8,488

 
—

 
—

 
1,505,656

Total liabilities
1,535,152

 
1,281,537

 
1,409

 
$
(1,103,167
)
 
1,714,931

Stockholders’ equity
227,986

 
89,736

 
3,437

 
(93,173
)
 
227,986

Total liabilities and stockholders’ equity
$
1,763,138

 
$
1,371,273

 
$
4,846

 
$
(1,196,340
)
 
$
1,942,917


24
Table of Contents

Beazer Homes USA, Inc.
 
Unaudited Consolidating Balance Sheet Information
September 30, 2012
(In thousands)

 
Beazer Homes
USA, Inc.
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Consolidating
Adjustments
 
Consolidated
Beazer Homes
USA, Inc.
ASSETS
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
481,394

 
$
8,215

 
$
646

 
$
(2,460
)
 
$
487,795

Restricted cash
252,900

 
360

 
—

 
—

 
253,260

Accounts receivable (net of allowance of $2,235)
—

 
24,594

 
5

 
—

 
24,599

Income tax receivable
6,372

 
—

 
—

 
—

 
6,372

Owned inventory
—

 
1,099,132

 
—

 
—

 
1,099,132

Land not owned under option agreements
—

 
12,420

 
—

 
—

 
12,420

Investments in unconsolidated entities
773

 
41,305

 
—

 
—

 
42,078

Deferred tax assets, net
6,848

 
—

 
—

 
—

 
6,848

Property, plant and equipment, net
—

 
18,974

 
—

 
—

 
18,974

Investments in subsidiaries
63,120

 
—

 
—

 
(63,120
)
 
—

Intercompany
969,425

 
—

 
3,001

 
(972,426
)
 
—

Other assets
21,307

 
7,783

 
1,650

 
—

 
30,740

Total assets
$
1,802,139

 
$
1,212,783

 
$
5,302

 
$
(1,038,006
)
 
$
1,982,218

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
 
 
 
 
 
 
Trade accounts payable
$
—

 
$
69,268

 
$
—

 
$
—

 
$
69,268

Other liabilities
49,354

 
96,389

 
1,975

 
—

 
147,718

Intercompany
1,098

 
973,788

 
—

 
(974,886
)
 
—

Obligations related to land not owned under option agreements
—

 
4,787

 
—

 
—

 
4,787

Total debt (net of discounts of $3,082)
1,489,440

 
8,758

 
—

 
—

 
1,498,198

Total liabilities
1,539,892

 
1,152,990

 
1,975

 
$
(974,886
)
 
1,719,971

Stockholders’ equity
262,247

 
59,793

 
3,327

 
(63,120
)
 
262,247

Total liabilities and stockholders’ equity
$
1,802,139

 
$
1,212,783

 
$
5,302

 
$
(1,038,006
)
 
$
1,982,218




25
Table of Contents

Beazer Homes USA, Inc.
 
Unaudited Consolidating Statement of Operations Information
(In thousands)
 
Beazer Homes
USA, Inc.
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Consolidating
Adjustments
 
Consolidated
Beazer Homes
USA, Inc.
Three Months Ended June 30, 2013
 
 
 
 
 
 
 
 
 
Total revenue
$
—

 
$
314,439

 
$
173

 
$
(173
)
 
$
314,439

Home construction and land sales expenses
9,996

 
250,501

 
—

 
(173
)
 
260,324

Gross (loss) profit
(9,996
)
 
63,938

 
173

 
—

 
54,115

Commissions
—

 
13,078

 
—

 
—

 
13,078

General and administrative expenses
—

 
29,570

 
42

 
—

 
29,612

Depreciation and amortization
—

 
2,953

 
—

 
—

 
2,953

Operating (loss) income
(9,996
)
 
18,337

 
131

 
—

 
8,472

Equity in loss of unconsolidated entities
—

 
(310
)
 
—

 
—

 
(310
)
Other (expense) income, net
(14,252
)
 
211

 
5

 
—

 
(14,036
)
(Loss) income before income taxes
(24,248
)
 
18,238

 
136

 
—

 
(5,874
)
(Benefit from) provision for income taxes
(1,937
)
 
1,457

 
48

 
—

 
(432
)
Equity in income of subsidiaries
16,869

 
—

 
—

 
(16,869
)
 
—

(Loss) income from continuing operations
(5,442
)
 
16,781

 
88

 
(16,869
)
 
(5,442
)
Loss from discontinued operations
—

 
(344
)
 
(2
)
 
—

 
(346
)
Equity in loss of subsidiaries
(346
)
 
—

 
—

 
346

 
—

Net (loss) income
$
(5,788
)
 
$
16,437

 
$
86

 
$
(16,523
)
 
$
(5,788
)
 
Beazer Homes
USA, Inc.
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Consolidating
Adjustments
 
Consolidated
Beazer Homes
USA, Inc.
Three Months Ended June 30, 2012
 
 
 
 
 
 
 
 
 
Total revenue
$
—

 
$
254,555

 
$
240

 
$
(240
)
 
$
254,555

Home construction and land sales expenses
15,649

 
212,096

 
—

 
(240
)
 
227,505

Inventory impairments and option contract abandonments
222

 
5,597

 
—

 
—

 
5,819

Gross (loss) profit
(15,871
)
 
36,862

 
240

 
—

 
21,231

Commissions
—

 
10,776

 
—

 
—

 
10,776

General and administrative expenses
—

 
27,840

 
27

 
—

 
27,867

Depreciation and amortization
—

 
3,743

 
—

 
—

 
3,743

Operating (loss) income
(15,871
)
 
(5,497
)
 
213

 
—

 
(21,155
)
Equity in income of unconsolidated entities
—

 
48

 
—

 
—

 
48

Other (expense) income, net
(17,233
)
 
414

 
15

 
—

 
(16,804
)
(Loss) income before income taxes
(33,104
)
 
(5,035
)
 
228

 
—

 
(37,911
)
(Benefit from) provision for income taxes
(12,868
)
 
12,936

 
77

 
—

 
145

Equity in (loss) income of subsidiaries
(17,820
)
 
—

 
—

 
17,820

 
—

(Loss) income from continuing operations
(38,056
)
 
(17,971
)
 
151

 
17,820

 
(38,056
)
Loss from discontinued operations
—

 
(1,820
)
 
(8
)
 
—

 
(1,828
)
Equity in loss of subsidiaries
(1,828
)
 
—

 
—

 
1,828

 
—

Net (loss) income
$
(39,884
)
 
$
(19,791
)
 
$
143

 
$
19,648

 
$
(39,884
)





26
Table of Contents

Beazer Homes USA, Inc.
 
Unaudited Consolidating Statement of Operations Information
(In thousands)
 
Beazer Homes
USA, Inc.
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Consolidating
Adjustments
 
Consolidated
Beazer Homes
USA, Inc.
Nine Months Ended June 30, 2013
 
 
 
 
 
 
 
 
 
Total revenue
$
—

 
$
849,243

 
$
563

 
$
(563
)
 
$
849,243

Home construction and land sales expenses
27,823

 
685,670

 
—

 
(563
)
 
712,930

Inventory impairments and option contract abandonments
—

 
2,229

 
—

 
—

 
2,229

Gross (loss) profit
(27,823
)
 
161,344

 
563

 
—

 
134,084

Commissions
—

 
35,406

 
—

 
—

 
35,406

General and administrative expenses
—

 
84,633

 
102

 
—

 
84,735

Depreciation and amortization
—

 
8,761

 
—

 
—

 
8,761

Operating (loss) income
(27,823
)
 
32,544

 
461

 
—

 
5,182

Equity in loss of unconsolidated entities
—

 
(206
)
 
—

 
—

 
(206
)
Loss on extinguishment of debt
(3,638
)
 
—

 
—

 
—

 
(3,638
)
Other (expense) income, net
(46,709
)
 
839

 
12

 
—

 
(45,858
)
(Loss) income before income taxes
(78,170
)
 
33,177

 
473

 
—

 
(44,520
)
(Benefit from) provision for income taxes
(2,074
)
 
880

 
166

 
—

 
(1,028
)
Equity in income of subsidiaries
32,604

 
—

 
—

 
(32,604
)
 
—

(Loss) income from continuing operations
(43,492
)
 
32,297

 
307

 
(32,604
)
 
(43,492
)
(Loss) income from discontinued operations
—

 
(2,354
)
 
30

 
—

 
(2,324
)
Equity in loss of subsidiaries
(2,324
)
 
—

 
—

 
2,324

 
—

Net (loss) income
$
(45,816
)
 
$
29,943

 
$
337

 
$
(30,280
)
 
$
(45,816
)
 
Beazer Homes
USA, Inc.
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Consolidating
Adjustments
 
Consolidated
Beazer Homes
USA, Inc.
Nine Months Ended June 30, 2012
 
 
 
 
 
 
 
 
 
Total revenue
$
—

 
$
634,746

 
$
701

 
$
(701
)
 
$
634,746

Home construction and land sales expenses
41,128

 
520,137

 
—

 
(701
)
 
560,564

Inventory impairments and option contract abandonments
275

 
10,217

 
—

 
—

 
10,492

Gross (loss) profit
(41,403
)
 
104,392

 
701

 
—

 
63,690

Commissions
—

 
27,522

 
—

 
—

 
27,522

General and administrative expenses
—

 
82,291

 
89

 
—

 
82,380

Depreciation and amortization
—

 
9,336

 
—

 
—

 
9,336

Operating (loss) income
(41,403
)
 
(14,757
)
 
612

 
—

 
(55,548
)
Equity in loss of unconsolidated entities
—

 
(25
)
 
—

 
—

 
(25
)
Loss on extinguishment of debt
(2,747
)
 
—

 
—

 
—

 
(2,747
)
Other (expense) income, net
(55,147
)
 
1,780

 
25

 
—

 
(53,342
)
(Loss) income before income taxes
(99,297
)
 
(13,002
)
 
637

 
—

 
(111,662
)
(Benefit from) provision for income taxes
(38,597
)
 
1,936

 
223

 
—

 
(36,438
)
Equity in (loss) income of subsidiaries
(14,524
)
 
—

 
—

 
14,524

 
—

(Loss) income from continuing operations
(75,224
)
 
(14,938
)
 
414

 
14,524

 
(75,224
)
Loss from discontinued operations
—

 
(3,858
)
 
(11
)
 
—

 
(3,869
)
Equity in loss of subsidiaries
(3,869
)
 
—

 
—

 
3,869

 
—

Net (loss) income
$
(79,093
)
 
$
(18,796
)
 
$
403

 
$
18,393

 
$
(79,093
)



27
Table of Contents

Beazer Homes USA, Inc.
 
Unaudited Consolidating Statements of Cash Flow Information
(In thousands)
 
Beazer Homes
USA, Inc.
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Consolidating
Adjustments
 
Consolidated
Beazer Homes
USA, Inc.
Nine Months Ended June 30, 2013
 
 
 
 
 
 
 
 
 
Net cash (used in) provided by operating activities
$
(53,663
)
 
$
(144,770
)
 
$
239

 
$
—

 
$
(198,194
)
Cash flows from investing activities:
 
 
 
 
 
 
 
 
 
Capital expenditures
—

 
(6,572
)
 
—

 
—

 
(6,572
)
Investments in unconsolidated entities
—

 
(1,374
)
 
—

 
—

 
(1,374
)
Return of capital from unconsolidated entities
—

 
432

 
—

 
—

 
432

Increases in restricted cash
(1,237
)
 
(551
)
 
—

 
—

 
(1,788
)
Decreases in restricted cash
8,487

 
548

 
—

 
—

 
9,035

Net cash provided by (used in) investing activities
7,250

 
(7,517
)
 
—

 
—

 
(267
)
Cash flows from financing activities:
 
 
 
 
 
 
 
 
 
Repayment of debt
(185,161
)
 
(270
)
 
—

 
—

 
(185,431
)
Proceeds from issuance of new debt
200,000

 
—

 
—

 
—

 
200,000

Settlement of unconsolidated entity debt obligations
—

 
(500
)
 
—

 
—

 
(500
)
Debt issuance costs
(4,935
)
 
—

 
—

 
—

 
(4,935
)
Advances to/from subsidiaries
(148,994
)
 
150,571

 
3

 
(1,580
)
 
—

Payments for other financing activities
(122
)
 
—

 
—

 
—

 
(122
)
Net cash (used in) provided by financing activities
(139,212
)
 
149,801

 
3

 
(1,580
)
 
9,012

(Decrease) increase in cash and cash equivalents
(185,625
)
 
(2,486
)
 
242

 
(1,580
)
 
(189,449
)
Cash and cash equivalents at beginning of period
481,394

 
8,215

 
646

 
(2,460
)
 
487,795

Cash and cash equivalents at end of period
$
295,769

 
$
5,729

 
$
888

 
$
(4,040
)
 
$
298,346

 
Beazer Homes
USA, Inc.
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Consolidating
Adjustments
 
Consolidated
Beazer Homes
USA, Inc.
Nine Months Ended June 30, 2012
 
 
 
 
 
 
 
 
 
Net cash (used in) provided by operating activities
$
(109,339
)
 
$
2,225

 
$
702

 
$
—

 
$
(106,412
)
Cash flows from investing activities:
 
 
 
 
 
 
 
 
 
Capital expenditures
—

 
(15,117
)
 
—

 
—

 
(15,117
)
Investments in unconsolidated entities
—

 
(2,075
)
 
—

 
—

 
(2,075
)
Return of capital from unconsolidated entities
—

 
440

 
—

 
—

 
440

Increases in restricted cash
(645
)
 
(1,034
)
 
—

 
—

 
(1,679
)
Decreases in restricted cash
5,878

 
1,077

 
—

 
—

 
6,955

Net cash provided by (used in) investing activities
5,233

 
(16,709
)
 
—

 
—

 
(11,476
)
Cash flows from financing activities:
 
 
 
 
 
 
 
 
 
Repayment of debt
(2,460
)
 
(909
)
 
—

 
—

 
(3,369
)
Settlement of unconsolidated entity obligations
(15,862
)
 
—

 
—

 
—

 
(15,862
)
Debt issuance costs
(274
)
 
—

 
—

 
—

 
(274
)
Equity issuance costs
(1,296
)
 
—

 
—

 
—

 
(1,296
)
Dividends paid
(1,800
)
 
—

 
1,800

 
—

 
—

Advances to/from subsidiaries
(9,202
)
 
11,527

 
(1,847
)
 
(478
)
 
—

Payments for other financing activities
(98
)
 
—

 
—

 
—

 
(98
)
Net cash (used in) provided by financing activities
(30,992
)
 
10,618

 
(47
)
 
(478
)
 
(20,899
)
(Decrease) increase in cash and cash equivalents
(135,098
)
 
(3,866
)
 
655

 
(478
)
 
(138,787
)
Cash and cash equivalents at beginning of period
360,723

 
10,488

 
418

 
(1,226
)
 
370,403

Cash and cash equivalents at end of period
$
225,625

 
$
6,622

 
$
1,073

 
$
(1,704
)
 
$
231,616


28
Table of Contents

(14) Discontinued Operations
We continually review each of our markets in order to refine our overall investment strategy and to optimize capital and resource allocations in an effort to enhance our financial position and to increase shareholder value. This review entails an evaluation of both external market factors and our position in each market and over time has resulted in the decision to discontinue certain of our homebuilding operations.
We have classified the results of operations of our discontinued operations in the accompanying unaudited condensed consolidated statements of operations for all periods presented. There were no material assets or liabilities related to our discontinued operations as of June 30, 2013 or September 30, 2012. Discontinued operations were not segregated in the unaudited condensed consolidated statements of cash flows. Therefore, amounts for certain captions in the unaudited condensed consolidated statements of cash flows will not agree with the respective data in the unaudited condensed consolidated statements of operations. The results of our discontinued operations in the unaudited condensed consolidated statements of operations for the three and nine months ended June 30, 2013 and 2012 were as follows:

 
Three Months Ended
 
Nine Months Ended
 
June 30,
 
June 30,
(In thousands)
2013
 
2012
 
2013
 
2012
Total revenue
$
—

 
$
2,207

 
$
288

 
$
5,681

Home construction and land sales expenses
37

 
2,509

 
(29
)
 
5,444

Inventory impairments and lot option abandonments
—

 
545

 
17

 
579

Gross (loss) profit
(37
)
 
(847
)
 
300

 
(342
)
Commissions
—

 
46

 
—

 
217

General and administrative expenses
346

 
919

 
2,761

 
3,636

Depreciation and amortization
—

 
10

 
—

 
35

Operating loss
(383
)
 
(1,822
)
 
(2,461
)
 
(4,230
)
Other (loss) income, net
(1
)
 
(1
)
 
68

 
(47
)
Loss from discontinued operations before income taxes
(384
)
 
(1,823
)
 
(2,393
)
 
(4,277
)
(Benefit from) provision for income taxes
(38
)
 
5

 
(69
)
 
(408
)
Loss from discontinued operations, net of tax
$
(346
)
 
$
(1,828
)
 
$
(2,324
)
 
$
(3,869
)



29
Table of Contents

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations Executive Overview and Outlook

Over the past year, the housing market in the U.S. has been gaining further momentum in its recovery. Both new and used homes have experienced improved demand and, as a result, many markets are experiencing increased home prices. Although the recent increase in mortgage rates has tempered some of the urgency in homebuyer demand, we believe that this homebuyer reaction is temporary and that the fundamentals driving the housing market recovery remain. Over the next several years we expect to benefit from improved consumer confidence, a modest improvement in job growth, increasing residential rental rates, the impact of a constrained supply of new and existing homes for sale, as well as from projected growth in the number of households.
New home sales are, in large part, a function of highly localized factors, such as location, school district, neighborhood amenities, transportation access and individual home characteristics. To better position the Company to compete with both other new home providers and with used homes, we have adopted several operational elements, including: (i) industry leading energy efficiency features, primarily through our voluntary implementation of Energy Star 3.0 standards; (ii) floorplan choices, which enable homebuyers to select certain structural options to match their lifestyle at no, or limited, cost; and (iii) a mortgage choice program that requires a small number of locally selected preferred lenders to compete for our buyers' business. While each of these factors provide demonstrable value to consumers, we recognize that our approach to mortgage finance is the most differentiated from our competitors, most of whom rely on their own, captive mortgage affiliates to service their customers. We believe that by providing competitive mortgage choices, we have improved the prospects for our homebuyers to obtain a mortgage whose terms, fees and interest rate best meet their objectives.
Furthermore, we remain focused on returning to sustainable profitability as soon as possible. In that regard we have outlined four operational strategies as part of our “path-to-profitability” each of which is discussed below:
•
Drive sales per community per month;
•
Gradually expand our community count;
•
Generate higher gross margins; and
•
Further leverage our fixed costs.

Consistent with previous quarters, we continue to place significant emphasis on achieving year-over-year improvement in sales per community per month as well as broadening the base of our “performing” communities. Our trailing four quarter sales per active community per month increased from approximately 2.2 at June 30, 2012 to 2.7 at June 30, 2013. This improvement in sales per community per month was achieved due to an increase in performing communities despite a 17% decline in the number of active communities during the quarter versus a year ago. New home orders decreased 11% for the quarter ended June 30, 2013 as compared with a year earlier due to the decline in active communities.

Since the successful completion of our capital raising transactions in the summer of 2012, we have been more aggressively pursuing land acquisitions in an effort to increase our number of active communities in the coming years. During the current quarter, we spent $161.8 million on land and land development related to new land parcels and existing projects and brought an additional project with 225 lots out of land held for future development. Most of the newly acquired land parcels will require some level of development and therefore will not be available for homebuilding operations until fiscal 2014. During the quarter ended June 30, 2013, we added 17 new active communities and closed out of 21 previously active communities. Our active community count as of June 30, 2013 was 144. In addition, at that time, we had an additional 50 communities under development, which were not yet open for business. Although we expect to experience a modest decline in our active community count again next quarter, we expect this trend to turn in early fiscal 2014 as development is completed and new communities are open for business.

We have also continued to make progress on our last two operational path-to-profitability strategies. For the quarter ended June 30, 2013, our total gross margins improved both sequentially and year-over-year. Our homebuilding gross margins excluding impairments, abandonments and interest improved 360 basis points to 20.3% this quarter from 16.7% last year and by 120 basis points from 19.1% last quarter. Also, during the third quarter of fiscal 2013, we improved our overhead expense ratio. Compared with the third quarter of fiscal 2012, general and administrative expenses declined as a percentage of revenue, from 10.9% last year to 9.4% this year.

While significant challenges still confront the housing industry, including the possibility of increased regulation, higher labor and material costs, rising mortgage rates, continuing competitive pressures from distressed homes and significant procedural hurdles in obtaining mortgage financing, we are increasingly confident in both the likelihood of a sustained recovery and the effectiveness of our own operational strategies.


30
Table of Contents

Critical Accounting Policies: Some of our critical accounting policies require the use of judgment in their application or require estimates of inherently uncertain matters. Although our accounting policies are in compliance with accounting principles generally accepted in the United States of America (GAAP), a change in the facts and circumstances of the underlying transactions could significantly change the application of the accounting policies and the resulting financial statement impact. As disclosed in our 2012 Annual Report, our most critical accounting policies relate to inventory valuation (inventory held for development and land held for sale), homebuilding revenues and costs, warranty reserves, investments in unconsolidated entities and income tax valuation allowances. Since September 30, 2012, there have been no significant changes to those critical accounting policies.
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.

RESULTS OF CONTINUING OPERATIONS:
 
Three Months Ended
 
Nine Months Ended
 
June 30,
 
June 30,
($ in thousands)
2013
 
2012
 
2013
 
2012
Revenues:
 
 
 
 
 
 
 
Homebuilding
$
313,129

 
$
252,071

 
$
843,025

 
$
628,540

Land sales and other
1,310

 
2,484

 
6,218

 
6,206

Total
$
314,439

 
$
254,555

 
$
849,243

 
$
634,746

Gross profit:
 
 
 
 
 
 
 
Homebuilding
$
53,588

 
$
20,656

 
$
132,471

 
$
61,475

Land sales and other
527

 
575

 
1,613

 
2,215

Total
$
54,115

 
$
21,231

 
$
134,084

 
$
63,690

Gross margin:
 
 
 
 
 
 
 
Homebuilding
17.1
%
 
8.2
 %
 
15.7
%
 
9.8
 %
Land sales and other
40.2
%
 
23.1
 %
 
25.9
%
 
35.7
 %
Total
17.2
%
 
8.3
 %
 
15.8
%
 
10.0
 %
Commissions
$
13,078

 
$
10,776

 
$
35,406

 
$
27,522

General and administrative expenses (G&A):
$
29,612

 
$
27,867

 
$
84,735

 
$
82,380

G&A as a percentage of total revenue
9.4
%
 
10.9
 %
 
10.0
%
 
13.0
 %
Depreciation and amortization
$
2,953

 
$
3,743

 
$
8,761

 
$
9,336

Operating income (loss)
$
8,472

 
$
(21,155
)
 
$
5,182

 
$
(55,548
)
Operating income (loss) as a percentage of total revenue
2.7
%
 
(8.3
)%
 
0.6
%
 
(8.8
)%
Effective Tax Rate
7.4
%
 
(0.4
)%
 
2.3
%
 
32.6
 %
Equity in (loss) income of unconsolidated entities
$
(310
)
 
$
48

 
$
(206
)
 
$
(25
)
Loss on extinguishment of debt
$
—

 
$
—

 
$
(3,638
)
 
$
(2,747
)








31
Table of Contents

Homebuilding Operations Data
 
Three Months Ended June 30,
 
New Orders, net
 
Cancellation Rates
 
2013
 
2012
 
13 v 12
 
2013
 
2012
West
614


730

 
(15.9
)%
 
20.2
%
 
22.1
%
East
389


486

 
(20.0
)%
 
23.6
%
 
31.0
%
Southeast
378


339

 
11.5
 %
 
15.6
%
 
19.1
%
Total
1,381


1,555

 
(11.2
)%
 
20.0
%
 
24.5
%
 
 
 
 
 
 
 
 
 
 
 
Nine Months Ended June 30,
 
New Orders, net
 
Cancellation Rates
 
2013
 
2012
 
13 v 12
 
2013
 
2012
West
1,696

 
1,688

 
0.5
 %
 
22.1
%
 
24.2
%
East
1,140

 
1,237

 
(7.8
)%
 
24.4
%
 
32.4
%
Southeast
998

 
866

 
15.2
 %
 
15.2
%
 
19.1
%
Total
3,834

 
3,791

 
1.1
 %
 
21.1
%
 
26.0
%

As we foreshadowed in prior quarters, our active community count as of June 30, 2013 was down significantly as compared to the prior year (a 17% decrease). Our West and East segments were especially impacted by the lower active communities, experiencing 22% and 19% decreases, respectively. As a result, our net new orders for the three months ended June 30, 2013 decreased compared to the prior year. However, sales per active community per month increased 10% to 3.2 for the quarter ended June 30, 2013 from 2.9 for the quarter ended June 30, 2012. For the nine months ended June 30, 2013, our sales per active community increased 26% to 2.9 from 2.3 for the comparable period of the prior year.
 
As of June 30,
 
2013
 
2012
 
13 v 12
Backlog Units:
 
 
 
 
 
West
982

 
1,064

 
(7.7
)%
East
781

 
891

 
(12.3
)%
Southeast
595

 
466

 
27.7
 %
Total
2,358

 
2,421

 
(2.6
)%
Aggregate dollar value of homes in backlog (in millions)
$
646.1

 
$
572.8

 
12.8
 %
ASP in backlog (in thousands)
$
274.0

 
$
236.6

 
15.8
 %
Backlog above 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.
Our backlog may be impacted in the short-term due to our reduced number of active communities or by increased cycle times due to labor and/or supply shortages. During the housing downturn, many skilled workers left construction for other industries, and in certain of our markets, the smaller workforce and higher demand for trade labor has created shortages of certain skilled workers, driving up costs and/or extending land development and home construction schedules. The overall decrease in our backlog as of June 30, 2013 compared to the prior year primarily related to our decrease in active communities and the related impact on new orders. We expect new orders and backlog to increase over time as our active communities increase, the inventory of new and used homes decreases and consumer confidence in the economic recovery stabilizes.

32
Table of Contents

Homebuilding Revenues and Average Selling Price
The table below summarizes homebuilding revenues, the average selling prices (ASP) of our homes and closings by reportable segment:
 
Three Months Ended June 30,
 
Homebuilding Revenues
 
Average Selling Price
 
Closings
($ in thousands)
2013
 
2012
 
13 v 12
 
2013
 
2012
 
13 v 12
 
2013
 
2012
 
13 v 12
West
$
132,803

 
$
97,356

 
36.4
%
 
$
241.5

 
$
214.0

 
12.9
%
 
550

 
455

 
20.9
 %
East
111,333

 
98,850

 
12.6
%
 
300.9

 
258.8

 
16.3
%
 
370

 
382

 
(3.1
)%
Southeast
68,993

 
55,865

 
23.5
%
 
219.7

 
205.4

 
7.0
%
 
314

 
272

 
15.4
 %
Total
$
313,129

 
$
252,071

 
24.2
%
 
$
253.8

 
$
227.3

 
11.7
%
 
1,234

 
1,109

 
11.3
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Nine Months Ended June 30,
 
Homebuilding Revenues
 
Average Selling Price
 
Closings
($ in thousands)
2013
 
2012
 
13 v 12
 
2013
 
2012
 
13 v 12
 
2013
 
2012
 
13 v 12
West
$
360,052

 
$
245,420

 
46.7
%
 
$
231.8

 
$
205.5

 
12.8
%
 
1,553

 
1,194

 
30.1
 %
East
324,334

 
255,519

 
26.9
%
 
293.2

 
259.7

 
12.9
%
 
1,106

 
984

 
12.4
 %
Southeast
158,639

 
127,601

 
24.3
%
 
214.4

 
198.8

 
7.8
%
 
740

 
642

 
15.3
 %
Total
$
843,025

 
$
628,540

 
34.1
%
 
$
248.0

 
$
222.9

 
11.3
%
 
3,399

 
2,820

 
20.5
 %

Improved operational strategies and market conditions in our markets enhanced our ability to generate additional traffic, sales and higher ASP. We have been able to increase prices in response to market conditions in the majority of our markets in our West segment and select markets or communities in our East and Southeast segments. The increase in ASP for the three and nine months ended June 30, 2013 was also partially impacted by a change in mix in closings between products and among communities as compared to the prior year.
Homebuilding Gross Profit
The following table sets forth our homebuilding gross profit and gross margin by reportable segment and total homebuilding gross profit and gross margin, and such amounts excluding inventory impairments and abandonments and interest amortized to cost of sales for the three and nine months ended June 30, 2013 and 2012. Homebuilding gross profit is defined as homebuilding revenues less home cost of sales (which includes land and land development costs, home construction costs, capitalized interest, indirect costs of construction, estimated warranty costs, closing costs and inventory impairment and lot option abandonment charges).
($ in thousands)
Three Months Ended June 30, 2013
 
HB Gross
Profit (Loss)
 
HB Gross
Margin
 
Impairments &
Abandonments
(I&A)
 
HB Gross
Profit w/o
I&A
 
HB Gross
Margin w/o
I&A
 
Interest
Amortized to
COS
 
HB Gross Profit
w/o I&A and
Interest
 
HB Gross Margin
w/o I&A and
Interest
West
$
28,747

 
21.6
%
 
$
—

 
$
28,747

 
21.6
%
 
$
—

 
$
28,747

 
21.6
%
East
19,115

 
17.2
%
 
—

 
19,115

 
17.2
%
 
—

 
19,115

 
17.2
%
Southeast
13,979

 
20.3
%
 
—

 
13,979

 
20.3
%
 
—

 
13,979

 
20.3
%
Corporate & unallocated
(8,253
)
 
 
 
—

 
(8,253
)
 
 
 
9,996

 
1,743

 
 
Total homebuilding
$
53,588

 
17.1
%
 
$
—

 
$
53,588

 
17.1
%
 
$
9,996

 
$
63,584

 
20.3
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
($ in thousands)
Three Months Ended June 30, 2012
 
HB Gross
Profit (Loss)
 
HB Gross
Margin
 
Impairments &
Abandonments
(I&A)
 
HB Gross
Profit w/o
I&A
 
HB Gross
Margin w/o
I&A
 
Interest
Amortized to
COS
 
HB Gross Profit
w/o I&A and
Interest
 
HB Gross Margin
w/o I&A and
Interest
West
$
14,707

 
15.1
%
 
$
1,609

 
$
16,316

 
16.8
%
 
$
—

 
$
16,316

 
16.8
%
East
11,075

 
11.2
%
 
3,132

 
14,207

 
14.4
%
 
—

 
14,207

 
14.4
%
Southeast
9,163

 
16.4
%
 
689

 
9,852

 
17.6
%
 
—

 
9,852

 
17.6
%
Corporate & unallocated
(14,289
)
 
 
 
389

 
(13,900
)
 
 
 
15,649

 
1,749

 
 
Total homebuilding
$
20,656

 
8.2
%
 
$
5,819

 
$
26,475

 
10.5
%
 
$
15,649

 
$
42,124

 
16.7
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


33
Table of Contents

($ in thousands)
Nine Months Ended June 30, 2013
 
HB Gross
Profit (Loss)
 
HB Gross
Margin
 
Impairments &
Abandonments
(I&A)
 
HB Gross
Profit w/o
I&A
 
HB Gross
Margin w/o
I&A
 
Interest
Amortized to
COS
 
HB Gross Profit
w/o I&A and
Interest
 
HB Gross Margin
w/o I&A and
Interest
West
$
70,797

 
19.7
%
 
$
150

 
$
70,947

 
19.7
%
 
$
—

 
$
70,947

 
19.7
%
East
57,776

 
17.8
%
 
33

 
57,809

 
17.8
%
 
—

 
57,809

 
17.8
%
Southeast
28,999

 
18.3
%
 
2,046

 
31,045

 
19.6
%
 
—

 
31,045

 
19.6
%
Corporate & unallocated
(25,101
)
 
 
 
—

 
(25,101
)
 
 
 
27,823

 
2,722

 
 
Total homebuilding
$
132,471

 
15.7
%
 
$
2,229

 
$
134,700

 
16.0
%
 
$
27,823


$
162,523

 
19.3
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
($ in thousands)
Nine Months Ended June 30, 2012
 
HB Gross
Profit (Loss)
 
HB Gross
Margin
 
Impairments &
Abandonments
(I&A)
 
HB Gross
Profit w/o
I&A
 
HB Gross
Margin w/o
I&A
 
Interest
Amortized to
COS
 
HB Gross Profit
w/o I&A and
Interest
 
HB Gross Margin
w/o I&A and
Interest
West
$
37,564

 
15.3
%
 
$
3,979

 
$
41,543

 
16.9
%
 
$
—

 
$
41,543

 
16.9
%
East
30,431

 
11.9
%
 
4,383

 
34,814

 
13.6
%
 
—

 
34,814

 
13.6
%
Southeast
21,277

 
16.7
%
 
1,655

 
22,932

 
18.0
%
 
—

 
22,932

 
18.0
%
Corporate & unallocated
(27,797
)
 
 
 
475

 
(27,322
)
 
 
 
41,128

 
13,806

 
 
Total homebuilding
$
61,475

 
9.8
%
 
$
10,492

 
$
71,967

 
11.4
%
 
$
41,128


$
113,095

 
18.0
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Our overall homebuilding gross profit increased to $53.6 million for the three months ended June 30, 2013 from $20.7 million in the prior year. The increase was due primarily to improved operational efficiencies and improved market conditions in many of our markets which enabled us to increase prices to mitigate increases in material and labor costs. For the nine months ended June 30, 2013, the $71.0 million increase in homebuilding gross profit was due primarily to the 34.1% increase in homebuilding revenues including an 11.3% increase in ASP, an $8.3 million million decrease in impairments and abandonments and a $13.3 million decrease in interest amortized to cost of sales, offset partially by increases in material and labor costs. This increase for the nine months ended June 30, 2013 was offset partially by an $11 million insurance recovery recognized in the prior year related to previously recorded water intrusion related expenditures.
Total homebuilding gross profit and gross margin excluding inventory impairments and abandonments and interest amortized to cost of sales are not GAAP financial measures. These measures should not be considered alternatives to homebuilding gross profit determined in accordance with GAAP as an indicator of operating performance. The magnitude and volatility of non-cash inventory impairment and abandonment charges for the Company, and for other home builders, have been significant in recent periods and, as such, have made financial analysis of our industry more difficult. Homebuilding metrics excluding these charges, and other similar presentations by analysts and other companies, is frequently used to assist investors in understanding and comparing the operating characteristics of home building activities by eliminating many of the differences in companies' respective level of impairments and levels of debt. Management believes these non-GAAP measures enable holders of our securities to better understand the cash implications of our operating performance and our ability to service our debt obligations as they currently exist and as additional indebtedness is incurred in the future. These measures are also useful internally, helping management compare operating results and as a measure of the level of cash which may be available for discretionary spending.
In a given quarter, our reported gross margins arise from both communities previously impaired and communities not previously impaired. In addition as indicated above, certain gross margin 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 margins at each home closing are higher for a particular community after an impairment because the carrying value of the underlying land was previously reduced to the present value of future cash flows as a result of the impairment, leading to lower cost of sales at the home closing. This improvement in gross margin resulting from one or more prior impairments is frequently referred to in the aggregate as the “impairment turn” or “flow-back” of impairments within the reporting period. The amount of this impairment turn may exceed the gross margin for an individual impaired asset if the gross margin for that asset prior to the impairment would have been negative. The extent to which this impairment turn is greater than the reported gross margin for the individual asset is related to the specific historical cost basis of that individual asset.
The asset valuations which result from our impairment calculations are based on discounted cash flow analyses and are not derived by simply applying prospective gross margins to individual communities. As such, impaired communities may have gross margins that are somewhat higher or lower than the gross margin for unimpaired communities. The mix of home closings in any particular

34
Table of Contents

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 margins 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 the trailing 12-month period, the homebuilding gross margin from our continuing operations was 14.4% and excluding interest and inventory impairments, it was 18.6%. For the same trailing 12-month period, homebuilding gross margins were as follows in those communities that have previously been impaired and which represented 27.7% of total closings during this period:
Homebuilding Gross Margin from previously impaired communities:
 
Pre-impairment turn gross margin
(6.8
)%
Impact of interest amortized to COS related to these communities
4.4
 %
Pre-impairment turn gross margin, excluding interest amortization
(2.4
)%
Impact of impairment turns
20.3
 %
Gross margin (post impairment turns), excluding interest amortization
17.9
 %

The estimated fair value of our impaired inventory at each period end, the number of lots and number of communities impaired in each period are set forth in the table below as follows:
($ in thousands)
Estimated Fair Value of Impaired
Inventory at Period End
 
Lots Impaired
 
Communities
Impaired
Quarter Ended
2013
 
2012
 
2013
 
2012
 
2013
 
2012
June 30
$
—

 
$
11,187

 
—

 
170

 
—

 
3

March 31
$
—

 
$
3,292

 
—

 
25

 
—

 
1

December 31
$
—

 
$
6,377

 
—

 
51

 
—

 
1


Land Sales and Other Revenues and Gross Profit. The table below summarizes land sales and other revenues and gross profit by reportable segment for the three and nine months ended June 30, 2013 and 2012 (n/m in the table below indicates the percentage "not meaningful"):
 
Land Sales & Other Revenues

 
Land Sales and Other Gross Profit (Loss)

 
Three Months Ended June 30,
 
Three Months Ended June 30,
(In thousands)
2013
 
2012
 
13 v 12
 
2013
 
2012
 
13 v 12
West
$
716

 
$
1,736

 
(58.8
)%
 
$
103

 
$
2

 
n/m

East
223

 
80

 
178.8
 %
 
53

 
(8
)
 
n/m

Southeast
371

 
463

 
(19.9
)%
 
371

 
466

 
(20.4
)%
Pre-Owned
—

 
205

 
(100.0
)%
 
—

 
115

 
(100.0
)%
Total
$
1,310

 
$
2,484

 
(47.3
)%
 
$
527

 
$
575

 
(8.3
)%
 
 
 
 
 
 
 
 
 
 
 
 
 
Land Sales & Other Revenues

 
Land Sales and Other Gross Profit (Loss)

 
Nine Months Ended June 30,
 
Nine Months Ended June 30,
 
2013
 
2012
 
13 v 12
 
2013
 
2012
 
13 v 12
West
$
2,589

 
$
2,306

 
12.3
 %
 
$
291

 
$
62

 
369.4
 %
East
890

 
421

 
111.4
 %
 
190

 
63

 
201.6
 %
Southeast
2,739

 
2,365

 
15.8
 %
 
1,132

 
1,476

 
(23.3
)%
Pre-Owned
—

 
1,114

 
(100.0
)%
 
—

 
614

 
(100.0
)%
Total
$
6,218

 
$
6,206

 
0.2
 %
 
$
1,613

 
$
2,215

 
(27.2
)%

Land sales relate to land and lots sold that did not fit within our homebuilding programs and strategic plans in these markets. Other revenues include net fees we received for general contractor services we performed on behalf of a third party and broker fees and, in the three and nine months ended June 30, 2012, rental revenues earned by our former Pre-Owned operations.


35
Table of Contents

Operating Income. The table below summarizes operating income (loss) by reportable segment for the three and nine months ended June 30, 2013 and 2012:
(In thousands)
Three Months Ended June 30,
 
Nine Months Ended June 30,
 
2013
 
2012
 
13 v 12
 
2013
 
2012
 
13 v 12
West
$
15,313

 
$
2,719

 
$
12,594

 
$
33,716

 
$
5,505

 
$
28,211

East
7,714

 
197

 
7,517

 
24,215

 
344

 
23,871

Southeast
7,644

 
3,339

 
4,305

 
12,024

 
5,304

 
6,720

Pre-Owned
—

 
(29
)
 
29

 
—

 
(229
)
 
229

Corporate and Unallocated
(22,199
)
 
(27,381
)
 
5,182

 
(64,773
)
 
(66,472
)
 
1,699

Operating Income (Loss)
$
8,472

 
$
(21,155
)
 
$
29,627

 
$
5,182

 
$
(55,548
)
 
$
60,730

Our operating income improved by $29.6 million to $8.5 million for the three months ended June 30, 2013, compared to an operating loss of $21.2 million in fiscal 2012. For the nine months ended June 30, 2013, our operating income was $5.2 million compared to a loss of $55.5 million in the prior year. These improvements reflect higher homebuilding gross profits and decreased general and administrative expenses as a percentage of revenue, as we were able to better leverage our fixed costs with the increased revenue. As a percentage of revenue, our operating income (loss) was 2.7% and 0.6% for the three and nine months ended June 30, 2013 compared to -8.3% and -8.8% for the comparable periods of fiscal 2012. The year-over-year improvement for the nine months ended June 30, 2013 reflects operational efficiencies, market improvements and an $8.3 million decrease in impairments and abandonments offset by an $11.0 million recovery in fiscal 2012 related to old water intrusion warranty related expenditures.
Income taxes. Our income tax assets and liabilities and related effective tax rate are affected by various factors, the most significant of which is the valuation allowance recorded against substantially all of our deferred tax assets. Due to the effect of our valuation allowance adjustments beginning in fiscal 2008, a comparison of our annual effective tax rates must consider the changes in our valuation allowance.
Our overall effective tax rates from continuing operations were 7.4% and 2.3% for the three and nine months ended June 30, 2013, respectively, compared to -0.4% and 32.6% for the three and nine months ended June 30, 2012. The tax benefit recognized during the nine months ended June 30, 2012, and the related effective tax rate primarily reflected our release of the estimated liability for previously uncertain tax positions. Beginning on October 1, 2011, the Company entered into a "90-day window" during which the IRS allows taxpayers under continuous examination to elect different tax treatment for issues not under examination. We filed appropriate forms with the IRS in October 2011 to adopt a different tax method associated with the timing of various deductions and capitalized costs. Our adoption of a different tax treatment also removed the ability for the IRS to make adjustments to these positions in prior years (known as “audit protection”). Therefore, the change in tax treatment of these deductions provided certainty that allowed us to release uncertain tax positions and the associated unrecognized tax benefits in the quarter ended December 31, 2011.

Three months ended June 30, 2013 as compared to 2012
West Segment: Homebuilding revenues increased 36.4% for the three months ended June 30, 2013, compared to the prior year, primarily due to an increase in the number of closings and ASP in the majority of our markets. The 20.9% increase in the number of closings was primarily driven by a 16.3% higher beginning backlog. Our West segment was challenged by a decline in active communities compared to June 30, 2012, but did benefit from an increase in demand as evidenced by higher traffic volume in a majority of our communities as compared to the same period last year, resulting in an increase in our home sales per active community. As compared to the prior year, our homebuilding gross profit increased $14.0 million and homebuilding gross margins increased from 15.1% to 21.6% primarily due to decreased incentives, price appreciation in most of our submarkets and increased absorptions which enabled us to better absorb increases in direct construction costs per home related to increases in material and labor costs. The $12.6 million increase in operating income resulted from the aforementioned increase in homebuilding gross margins offset by a $1.7 million increase in commissions related to the increase in homebuilding revenues.
East Segment: Homebuilding revenues increased 12.6% for the three months ended June 30, 2013, compared to the prior year, primarily due to a 16.3% increase in ASP. Closings were down slightly compared to the prior year. The decline in net new orders for the quarter ended June 30, 2013 as compared to the prior year is due to the close out of a number of previously active communities in advance of new communities coming online. Sales per active community increased year-over-year in a few of our markets in the East Segment. As compared to the prior year, our homebuilding gross profit increased $8.0 million and homebuilding gross margins increased from 11.2% to 17.2% primarily due to changes in product mix and implementation of operational improvements.

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The $7.5 million increase in operating income resulted from the aforementioned increase in homebuilding gross margins offset partially by a $0.4 million increase in commissions related to the increase in homebuilding revenues.
Southeast Segment: As compared to the prior year, our homebuilding gross profit in the Southeast Segment increased $4.8 million driven primarily by a 23.5% increase in homebuilding revenues, reflecting a 15.4% increase in closings and a 7.0% increase in ASP. Homebuilding gross margins increased from 16.4% to 20.3% and excluding impairments and abandonments, the gross margins increased from 17.6% to 20.3%. Our fiscal 2013 and fiscal 2012 land sales and other revenue and gross profit in our Southeast Segment include net fees received for general contractor services we performed on behalf of a third party. The $4.3 million increase in operating income resulted from the aforementioned increase in homebuilding gross profit offset partially by a $0.2 million increase in commissions related to the increase in homebuilding revenues.
Corporate and Unallocated: Corporate and unallocated includes amortization of capitalized interest and numerous shared services functions that benefit all segments, including information technology, national sourcing and purchasing, treasury, corporate finance, legal, branding and other national marketing costs. The costs of these shared services are not allocated to the operating segments. Corporate and unallocated charges included in operating income increased slightly from the prior year due to an increase in personnel related expenses including an increase in headcount and variable compensation plans related to our actual and anticipated revenue growth offset partially by a $5.7 million decrease in interest amortized to cost of sales. The decrease in interest amortized to cost of sales is the result of lower interest incurred related to debt refinancing transactions and a decrease in inventory capitalized per unit.
Nine months ended June 30, 2013 as compared to 2012
West Segment: Homebuilding revenues increased 46.7% for the nine months ended June 30, 2013, compared to the prior year, driven by higher demand which facilitated price appreciation in a majority of our submarkets, increased absorptions and a decreased use of incentives. As compared to the prior year, our homebuilding gross profit increased $33.2 million (including a $3.8 million decrease in impairments and abandonments). Homebuilding gross margins without the impairments and abandonments, increased from 16.9% to 19.7% due to our increased revenues and our ability to absorb increases in direct construction costs per home related to increases in material and labor costs. The $28.2 million increase in operating income resulted from the aforementioned increase in homebuilding gross profit offset partially by a $4.9 million increase in commissions related to the increase in homebuilding revenues.
East Segment: Homebuilding revenues increased 26.9% for the nine months ended June 30, 2013, compared to the prior year, primarily due to a 12.4% increase in the number of closings and a 12.9% increase in ASP, driving the $27.3 million increase in our homebuilding gross profit (including a $4.4 million decrease in impairments and abandonments). As a result, homebuilding gross margins increased from 11.9% to 17.8% and, excluding impairments and abandonments, from 13.6% to 17.8%. The increase in operating income in the East Segment was driven primarily by our increased revenues and related gross profit.  These increases were offset partially by increases in commissions, sales and marketing and model refurbishment costs to drive absorptions in some of our underperforming communities.
Southeast Segment: Homebuilding revenues increased 24.3% for the nine months ended June 30, 2013. This increase in revenues, offset partially by a $0.4 million increase in impairments, drove a $7.7 million increase in homebuilding gross profit and $6.7 million increase in operating income. For the nine months ended June 30, 2013, operating income was offset slightly by increased commissions related to the revenue increase.
Corporate and Unallocated: For the nine months ended June 30, 2013, our corporate and unallocated expense decreased $1.7 million as compared to the prior year which included an $11 million insurance recovery related to previously recorded water intrusion warranty related expenditures. Excluding this prior year recovery, corporate and unallocated expense decreased $12.7 million primarily related to a $13.3 million decrease in interest amortized to cost of sales related to lower interest incurred and a change in the mix of homes closed.
Derivative Instruments and Hedging Activities. We are exposed to fluctuations in interest rates. From time to time, we enter into derivative agreements to manage interest costs and hedge against risks associated with fluctuating interest rates. As of June 30, 2013, we were not a party to any such derivative agreements. We do not enter into or hold derivatives for trading or speculative purposes.

Liquidity and Capital Resources. Our sources of liquidity include, but are not limited to, cash from operations, proceeds from Senior Notes, our Secured Revolving Credit Facility, and other bank borrowings, the issuance of equity and equity-linked securities and other external sources of funds. Our short-term and long-term liquidity depends primarily upon our level of net income, working capital management (cash, accounts receivable, accounts payable and other liabilities) and available credit facilities.

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As of June 30, 2013, our liquidity position consisted of $298.3 million in cash and cash equivalents, $150 million of capacity under our Secured Revolving Credit Facility, plus $246.0 million of restricted cash, $222.4 million of which related to our cash secured term loan.We expect to be able to meet our liquidity needs in the remainder of fiscal 2013 and to maintain a significant liquidity position, subject to changes in market conditions that would alter our expectations for land and land development expenditures or capital market transactions which could increase or decrease our cash balance on a quarterly basis.
We spent $161.8 million and $314.4 million on land and land development activities during the three and nine months ended June 30, 2013, respectively, as we continue to strive to replace close out communities and position the Company to increase our active community count. This spending on land and land development had a significant impact on our net cash used in operating activities in both years bringing net cash used in operating activities to $198.2 million for the nine months ended June 30, 2013 and $106.4 million for the nine months ended June 30, 2012. Also impacting cash used in operations in both years were the payment of other liabilities, interest obligations, and decreases in income tax receivables and other assets primarily related to the collection of reimbursable amounts due from land spending and other deposits.
Net cash used in investing activities was $0.3 million for the nine months ended June 30, 2013 primarily related to capital expenditures for model homes offset by a net decrease in restricted cash. Net cash used in investing activities was $11.5 million for the nine months ended June 30, 2012 which was primarily due to capital expenditures of $7.9 million for costs related to our purchase of previously owned homes by our Pre-Owned Homes business.
Net cash provided by financing activities of $9.0 million for the nine months ended June 30, 2013 primarily related to the proceeds from the issuance of the new 2023 Notes offset by the repayment of the 2015 Notes and the repurchase of $2 million of our 9 1/8% Senior Notes due 2019 (see Note 7 to the unaudited condensed consolidated financial statements). Net cash used in financing activities was $20.9 million for the nine months ended June 30, 2012 primarily related to the settlement paid to lenders of one of our unconsolidated entities in connection with a plan of reorganization (see Note 3 to the unaudited condensed consolidated financial statements).
In January 2013, Moody's increased the Company's long-term debt rating to Caa1. In December 2012, S&P reaffirmed the Company's long-term debt rating for the Company of B-. In September 2012, Fitch upgraded its rating of our debt one notch to B-. These ratings and our current credit condition affect, among other things, our ability to access new capital. Negative changes to these ratings may result in more stringent covenants and higher interest rates under the terms of any new debt. Our credit ratings could be lowered or rating agencies could issue adverse commentaries in the future, which could have a material adverse effect on our business, results of operations, financial condition and liquidity. In particular, a weakening of our financial condition, including any further increase in our leverage or decrease in our profitability or cash flows, could adversely affect our ability to obtain necessary funds, could result in a credit rating downgrade or change in outlook, or could otherwise increase our cost of borrowing.
We generally fulfill our short-term cash requirements with cash generated from our operations and available borrowings. While we believe we possess sufficient liquidity to participate in a housing recovery, we are mindful of potential short-term, or seasonal, requirements for enhanced liquidity that may arise, especially as we increase our land and land development spending to grow our business. To facilitate this objective, we expanded our Secured Revolving Credit Facility from $22 million to $150 million during the quarter ended September 30, 2012.
We have also entered into a number of stand-alone, cash secured letter of credit agreements with banks. These combined facilities will provide for letter of credit needs collateralized by either cash or assets of the Company. We currently have $22.7 million outstanding letters of credit under these facilities, secured with cash collateral which is maintained in restricted accounts totaling $23.3 million.
In the future, we may from time to time seek to continue to retire or purchase our outstanding debt through cash repurchases or in exchange for other debt securities, in open market purchases, privately negotiated transactions or otherwise. In an effort to accelerate our path to profitability, we may seek to expand our business through acquisition, which may be funded through cash, additional debt or equity. In addition, any material variance from our projected operating results could require us to obtain additional equity or debt financing. There can be no assurance that we will be able to complete any of these transactions in the future on favorable terms or at all.
Stock Repurchases and Dividends Paid — The Company did not repurchase any shares in the open market during the nine months ended June 30, 2013 or 2012. Any future stock repurchases, as allowed by our debt covenants, must be approved by the Company’s Board of Directors or its Finance Committee.
The indentures under which our Senior Notes were issued contain certain restrictive covenants, including limitations on the payment of dividends. At June 30, 2013, under the most restrictive covenants of each indenture, none of our retained earnings was available for cash dividends. Hence, there were no dividends paid during the nine months ended June 30, 2013 or 2012.

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Off-Balance Sheet Arrangements and Aggregate Contractual Commitments. At June 30, 2013, we controlled 26,966 lots (a 5.3-year supply based on our trailing twelve months of closings). We owned 79.4%, or 21,420 lots, and 5,546 lots, or 20.6%, were under option contracts which generally require the payment of cash or the posting of a letter of credit for the right to acquire lots during a specified period of time at a certain price. We historically have attempted to control a portion of our land supply through options. As a result of the flexibility that these options provide us, upon a change in market conditions we may renegotiate the terms of the options prior to exercise or terminate the agreement. Under option contracts, purchase of the properties is contingent upon satisfaction of certain requirements by us and the sellers and our liability is generally limited to forfeiture of the non-refundable deposits and other non-refundable amounts incurred, which aggregated approximately $30.3 million at June 30, 2013. The total remaining purchase price, net of cash deposits, committed under all options was $284.6 million as of June 30, 2013.
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.
We have historically funded the exercise of lot options through a combination of operating cash flows. We expect these sources to continue to be adequate to fund anticipated future option exercises. Therefore, we do not anticipate that the exercise of our lot options will have a material adverse effect on our liquidity.
We participate in several land development joint ventures and have investments in other entities in which we have less than a controlling interest. We enter into investments in joint ventures and other unconsolidated entities in order to acquire attractive land positions, to manage our risk profile and to leverage our capital base. Excluding our investment in a pre-owned rental homes REIT, the remainder of our investments in our unconsolidated entities have historically been entered into with developers, other homebuilders and financial partners to develop finished lots for sale to the unconsolidated entity’s members and other third parties. We account for our interest in our unconsolidated entities under the equity method. Our unaudited condensed consolidated balance sheets include investments in unconsolidated entities totaling $42.5 million and $42.1 million at June 30, 2013 and September 30, 2012, respectively.
Our unconsolidated entities periodically obtain secured acquisition and development financing. At June 30, 2013, our unconsolidated entities had borrowings outstanding totaling $66.6 million. Historically, we and our partners have provided varying levels of guarantees of debt or other obligations of our unconsolidated entities. At June 30, 2013, we had no repayment guarantees outstanding. See Note 3 to the unaudited condensed consolidated financial statements for further information.
We had outstanding performance bonds of approximately $160.6 million at June 30, 2013 related principally to our obligations to local governments to construct roads and other improvements in various developments.
Recently Adopted Accounting Pronouncements
See Note 1 to the Unaudited Condensed Consolidated Financial Statements included elsewhere in this Form 10-Q.

Item 3. Quantitative and Qualitative Disclosures about Market Risk
We are exposed to a number of market risks in the ordinary course of business. Our primary market risk exposure relates to fluctuations in interest rates. We do not believe that our exposure in this area is material to cash flows or earnings. As of June 30, 2013, we had variable rate debt outstanding totaling approximately $222.4 million. A one percent change in the interest rate would not be material to our financial statements. The estimated fair value of our fixed rate debt at June 30, 2013 was $1.33 billion, compared to a carrying value of $1.28 billion. In addition, the effect of a hypothetical one-percentage point decrease in our estimated discount rates would increase the estimated fair value of the fixed rate debt instruments from $1.33 billion to $1.39 billion at June 30, 2013.

Item 4. Controls and Procedures
Disclosure Controls and Procedures
As of the end of the period covered by this report, an evaluation was performed under the supervision and with the participation of the Company’s management, including the Chief Executive Officer (CEO) and Chief Financial Officer (CFO), of the effectiveness of the Company’s disclosure controls and procedures as defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the Act). Based on that evaluation, the CEO and CFO concluded that the Company’s disclosure controls and procedures were effective as of June 30, 2013, at a reasonable assurance level.
Attached as exhibits to this Quarterly Report on Form 10-Q are certifications of our CEO and CFO, which are required by Rule 13a-14 of the Act. This Disclosure Controls and Procedures section includes information concerning management’s evaluation

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of disclosure controls and procedures referred to in those certifications and, as such, should be read in conjunction with the certifications of the CEO and CFO.
Changes in Internal Control Over Financial Reporting
There have been no changes in the Company’s internal controls over financial reporting during the quarter ended June 30, 2013 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings
Litigation
On June 3, 2009, Beazer Homes Corp., a wholly-owned subsidiary of the Company, was named as a defendant in a purported class action lawsuit in the Circuit Court for Lee County, State of Florida, filed by Bryson and Kimberly Royal, the owners of one of our homes in our Magnolia Lakes community in Ft. Myers, Florida. The complaint names the Company and certain distributors and suppliers of drywall and was on behalf of the named plaintiffs and other similarly situated owners of homes in Magnolia Lakes or alternatively in the State of Florida. The plaintiffs allege that the Company built their homes with defective drywall, manufactured in China, that contains sulfur compounds that allegedly corrode certain metals and that are allegedly capable of harming the health of individuals. Plaintiffs allege physical and economic damages and seek legal and equitable relief, medical monitoring and attorney's fees. This case has been transferred to the Eastern District of Louisiana pursuant to an order from the United States Judicial Panel on Multidistrict Litigation. In addition, the Company has been named in other multi-plaintiff complaints filed in the multidistrict litigation and individual state court actions. We believe that the claims asserted in these actions are governed by home warranties or are without merit. The Company has offered to repair all of these homes pursuant to a repair protocol that has been adopted by the multidistrict litigation court, including those homes involved in litigation. To date, the owners of all but two of the affected homes have accepted the Company's offer to repair. Furthermore, the Company has agreed to participate in a global class settlement with the plaintiff class counsel and numerous other defendants in the multidistrict litigation, which was approved by the Court on February 13, 2013. The class action settlement requires Beazer to make a settlement payment that is not material to our consolidated financial position or results of operations, and resolves all claims, including future claims, against Beazer related to Chinese drywall. The only exception would have been any claims by persons or entities that opted out of the settlement, but there were no opt outs by the Court’s deadline. The Company also continues to pursue recovery against responsible subcontractors, drywall suppliers and drywall manufacturers for its repair costs. As of June 30, 2013, we have recorded an immaterial amount related to our expected liability under the settlement.
As disclosed in prior SEC filings, we operated Beazer Mortgage Corporation (BMC) from 1998 through February 2008 to offer mortgage financing to buyers of our homes. BMC entered into various agreements with mortgage investors, pursuant to which BMC originated certain mortgage loans and ultimately sold these loans to investors. In general underwriting decisions were not made by BMC but by the investors themselves or third-party service providers. From time to time we have received claims from institutions which have acquired certain of these mortgages demanding damages or indemnity arising from BMC's activities or that we repurchase such mortgages. We have been able to resolve these claims for amounts that are not material to our consolidated financial position or results of operation. We currently have an insignificant number of such claims outstanding for which we believe we have no liability. However, we cannot rule out the potential for additional mortgage loan repurchase or indemnity claims in the future from other investors, although, at this time, we do not believe that the exposure related to any such claims would be material to our consolidated financial position or results of operations.
We cannot predict or determine the timing or final outcome of the lawsuits or the effect that any adverse findings or determinations in the 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 the above pending matters. An unfavorable determination in any of the pending lawsuits could result in the payment by us of substantial monetary damages which may not be fully covered by insurance. Further, the legal costs associated with the lawsuits and the amount of time required to be spent by management and the Board of Directors on these matters, even if we are ultimately successful, could have a material adverse effect on our business, financial condition and results of operations.

Other Matters
As disclosed in our 2009 Form 10-K, on July 1, 2009, the Company announced that it had resolved the criminal and civil investigations by the United States Attorney’s Office in the Western District of North Carolina (the U.S. Attorney) and other state and federal agencies concerning matters that were the subject of the independent investigation, initiated in April 2007 by the Audit Committee of the Board of Directors (the Investigation) and concluded in May 2008. Under the terms of a deferred prosecution agreement (DPA), the Company’s liability for each of the fiscal years after 2010 through a portion of fiscal 2014 (unless extended as previously described in our 2009 Form 10-K) will be equal to 4% of the Company’s adjusted EBITDA (as defined in the DPA). The total amount of such obligations will be dependent on several factors; however, the maximum liability under the DPA and

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other settlement agreements discussed above will not exceed $55.0 million, of which $16.6 million has been paid as of June 30, 2013. Positive adjusted EBITDA in future years will require us to incur additional expense in the future.
In 2006, we received two Administrative Orders issued by the New Jersey Department of Environmental Protection. The Orders allege certain violations of wetlands disturbance permits and assess proposed fines of $630,000 and $678,000, respectively. We have met with the Department to discuss their concerns on the two affected communities and have requested hearings on both matters. Although we believe that we have significant defenses to the alleged violations, we have reached a settlement with the Department, through an Administrative Consent Order, for an amount that is not material to our consolidated financial position or results of operations.
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 6. Exhibits
31.1
Certification pursuant to 17 CFR 240.13a-14 promulgated under Section 302 of the Sarbanes-Oxley Act of 2002.
 
 
31.2
Certification pursuant to 17 CFR 240.13a-14 promulgated under Section 302 of the Sarbanes-Oxley Act of 2002.
 
 
32.1
Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
 
32.2
Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
 
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The following financial statements from Beazer Homes USA, Inc.'s Quarterly Report on Form 10-Q for the period ended June 30, 2013, filed on August 1, 2013, formatted in XBRL (Extensible Business Reporting Language): (i) Unaudited Condensed Consolidated Balance Sheets, (ii) Unaudited Condensed Consolidated Statements of Operations, (iii) Unaudited Condensed Consolidated Statements of Cash Flows and (iv) Notes to Unaudited Condensed Consolidated Financial Statements.


SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Date:
August 1, 2013
Beazer Homes USA, Inc.
 
 
 
 
 
 
 
By:
 
/s/    ROBERT L. SALOMON        
 
 
 
Name:
Robert L. Salomon
 
 
 
 
Executive Vice President and
Chief Financial Officer


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