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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of our financial condition and results of operations is intended to help the reader understand our Company, business, operations and present business environment and is provided as a supplement to, and should be read together with the sections entitled “Risk Factors,” and the financial statements and the accompanying notes included elsewhere in this Form 10-K.

In addition, the statements in this discussion and analysis regarding industry outlook, our expectations regarding the performance of our business, anticipated financial results, liquidity and the other non-historical statements are forward-looking statements. These forward-looking statements are subject to numerous risks and uncertainties, including, but not limited to, the risks and uncertainties described in “Forward-Looking Statements” and in “Risk Factors” above. Our actual results may differ materially from those contained in or implied by any forward-looking statements.

Executive Overview and Outlook

Market Conditions

During the first half of fiscal 2022, housing market conditions remained robust and demand remained relatively strong despite the geopolitical environment and increasing affordability concerns due to the substantial increase in home prices over the past two years. However, during the second half of fiscal 2022, housing demand sharply weakened due to a rapid and substantial increase in mortgage rates, significant inflation in the broader economy, stock market volatility, and other macro-economic conditions, which have negatively impacted buyer sentiment and behavior. We expect these factors to continue to negatively impact demand in fiscal 2023. We believe, however, that the long-term housing market outlook remains positive, supported by a demographic shift towards homeownership, robust employment market, and a multimillion unit housing deficit that has accumulated over the past decade.

We are focused on making the necessary adjustments to adapt to the weak demand environment. For instance, our sales process involves continuous analysis of competitive market data, including pricing, features and incentives, which enables us to adjust pricing, incentives and specification levels to enhance affordability and respond to competitive dynamics and to best position each of our communities. In relation to land acquisition, we are more conservative in our underwriting of new land deals and will continue to attempt to renegotiate or terminate deals if a project no longer meets our stricter underwriting standards.

Like many other homebuilders, we continue to experience production challenges due to supply chain disruptions and tightness in labor markets. These factors have resulted in elongated construction cycle times and decreased backlog conversion. We have been proactively working with our suppliers and trade partners to address these issues and expect to see some improvements in fiscal 2023.

Balanced Growth Strategy

Fiscal 2022 represented significant progress towards the execution of our balanced growth strategy. We successfully reached our goal of reducing total debt below $1.0 billion. We believe our improvements in operating margin, land position and use of lot option agreements, together with a less-leveraged and more efficient balance sheet, have positioned us well for the headwinds we expect to encounter in fiscal 2023.

As we look to fiscal 2023, we are anticipating continuing weakness in both demand and pricing in the quarters ahead. During fiscal 2022, we made sizable improvement in our land position and share of lots controlled through option agreements. In fiscal 2023, we plan to continue to invest in land strategically and increase our use of lot option agreements to position ourselves for long-term growth, while focusing on the appropriate balance between pursuing growth opportunities, controlling risk and maintaining a strong liquidity position.

Overview of Results for Our Fiscal 2022

The following is a summary of our performance against certain key operating and financial metrics during fiscal 2022:

•During the year ended September 30, 2022, sales per community per month was 2.8 compared to 3.7 in the prior year, and our net new orders were 4,061, down 27.0% from 5,564 in the prior year. The decrease in sales pace is a reflection of the previously discussed macro-economic factors adversely impacting homebuyers. As we navigate the current environment, we are focused on balancing sales pace, incentives and price adjustments to maximize return on capital over time.

•As of September 30, 2022, our land position includes 25,170 controlled lots, up 14.5% from 21,987 as of September 30, 2021. Excluding land held for future development and land held for sale lots, we controlled 24,397 active lots, up 13.9% from the prior year. As of September 30, 2022, we had 13,312 lots, or 54.6% of our total active lots, under option agreements as compared to 9,992 lots controlled, or 46.6% of our total active lots, under option agreements as of September 30, 2021.

•ASP for homes closed during the year ended September 30, 2022 was $484.1 thousand, up 20.3% from $402.4 thousand in the prior year. The year-over-year increase in ASP on closings was impacted primarily by price appreciation due to strong demand and limited supply of homes. However, higher mortgage interest rates and softening demand may temper ASP growth in the future.

•Homebuilding gross margin for the fiscal year ended September 30, 2022 was 23.1%, up from 18.9% in the prior year. Homebuilding gross margin excluding impairments, abandonments, and interest for the fiscal year ended September 30, 2022 was 26.3%, up from 23.0% in the prior year. Our homebuilding gross margin has been driven by a favorable pricing environment, although softening demand may temper gross margin in the future.

•Cancellation rate for the fiscal year ended September 30, 2022 was 17.6%, up from 11.1% in the prior year. Cancellation rates increased significantly during the second half of the fiscal year due to the previously discussed unfavorable macro-economic factors.

•SG&A for the fiscal year ended September 30, 2022 was 10.9% of total revenue compared with 11.4% a year earlier. The decrease in SG&A as a percentage of revenue is primarily due to increased homebuilding revenue. The dollar amount of SG&A increased by $8.2 million, or 3.4%, primarily due to increased personnel expense. We remain focused on improving overhead cost management in relation to our revenue growth.

Seasonal and Quarterly Variability: Our homebuilding operating cycle historically has reflected escalating new order activity in the second and third fiscal quarters and increased closings in the third and fourth fiscal quarters. However, these seasonal patterns may be impacted or reduced by a variety of factors, including periods of economic downturn, which result in decreased revenues and closings.

The following tables present new order and closings data for the periods presented:

New Orders (Net of Cancellations)

1st Qtr 2nd Qtr 3rd Qtr 4th Qtr Total

Closings

1st Qtr 2nd Qtr 3rd Qtr 4th Qtr Total

RESULTS OF CONTINUING OPERATIONS

The following table summarizes certain key income statement metrics for the periods presented:

Fiscal Year Ended September 30,

Revenue:

Gross profit (loss):

Gross margin:

Land sales and other(b) 37.0 % 20.1 % (4.6) %

G&A as a percentage of total revenue 7.7 % 7.6 % 8.0 %

Operating income as a percentage of total revenue 11.8 % 6.9 % 3.7 %

Inventory impairments and abandonments $ 2,963 $ 853 $ 2,903

Gain (loss) on extinguishment of debt, net $ 309 $ (2,025) $ —

(a) Excluding impairments, abandonments, and interest amortized to cost of sales, homebuilding gross margin was 26.3%, 23.0% and 21.0% for the fiscal years ended September 30, 2022, 2021 and 2020, respectively. Please see "Homebuilding Gross Profit and Gross Margin" section below for a reconciliation of homebuilding gross profit and the related gross margin excluding impairments and abandonments and interest amortized to cost of sales to homebuilding gross profit and gross margin, the most directly comparable GAAP measure.

(b) Calculated as land sales and other gross profit (loss) divided by land sales and other revenue.

(c) Calculated as tax expense for the period divided by income from continuing operations. Due to a variety of factors, our income tax expense is not always directly correlated to the amount of pre-tax income for the associated periods. Our effective tax rate was impacted by, among other factors, tax credits of $12.1 million, $12.1 million and $0.9 million for the fiscal years ended September 30, 2022, 2021 and 2020, respectively. Please see Note 13 of the notes to our consolidated financial statements in this Form 10-K for details of significant items that impact our effective tax rate.

Reconciliation of Net Income (Loss) to Adjusted EBITDA

Reconciliation of Adjusted EBITDA to total company net income (loss), the most directly comparable GAAP measure, is provided for each period discussed below. Management believes that Adjusted EBITDA assists investors in understanding and comparing the operating characteristics of homebuilding activities by eliminating many of the differences in companies' respective capitalization, tax position, and level of impairments. These EBITDA measures should not be considered alternatives to net income (loss) determined in accordance with GAAP as an indicator of operating performance.

The following table reconciles our net income (loss) to Adjusted EBITDA for the periods presented:

Fiscal Year Ended September 30,

Litigation settlement in discontinued operations — 120 1,260 — —

Restructuring and severance expenses — (10) 1,317 — —

Joint venture impairment and abandonment charges — — — — 341

(a) In periods during which we impaired certain of our inventory assets, capitalized interest that is impaired is included in the line above titled "Interest amortized to home construction and land sales expenses and capitalized interest impaired."

Homebuilding Operations Data

The following table summarizes new orders and cancellation rates by reportable segment for the periods presented:

New Orders, net Cancellation Rates

Net new orders for the year ended September 30, 2022 decreased to 4,061, down 27.0% from the year ended September 30, 2021. The decrease in net new orders was driven primarily by a decrease in average active community count from 127 in the prior year to 120, a decrease in sales pace from 3.7 sales per community per month in the prior year to 2.8, and an increase in cancellation rates from 11.1% in the prior year to 17.6%. The decreases in sales pace and the increases in cancellation rates across reportable segments were primarily driven by the sharp increase in mortgage rates as well as the previously discussed other macro-economic factors adversely impacting homebuyers. During the second half of fiscal 2022, cancellation rates increased significantly from the low teens in the first half of the fiscal year to 17.0% in fiscal third quarter and 32.8% in fiscal fourth quarter, although when compared to beginning backlog, cancellations for fiscal third quarter and fiscal fourth quarter 2022 only represented 6.0% and 11.4% of the respective fiscal quarter's beginning backlog.

The table below summarizes backlog units by reportable segment as well as the aggregate dollar value and ASP of homes in backlog as of September 30, 2022, 2021 and 2020:

As of September 30,

Backlog Units:

Backlog reflects the number of homes for which the Company has entered into a sales contract with a customer but has not yet delivered the home. Homes in backlog have historically been delivered within three to six months following commencement of construction. Ongoing supply chain disruptions, including the availability of certain materials and construction labor, has led to extended construction cycle times. While we are beginning to see improvements, we are still experiencing increased construction cycle times by an average of two to three months across our markets compared to the prior year. The aggregate dollar value of homes in backlog as of September 30, 2022 decreased 10.8% compared to the prior year due to a 24.9% decrease in backlog units, partially offset by an 18.8% increase in the ASP of homes in backlog.

Homebuilding Revenue, Average Selling Price, and Closings

The table below summarizes homebuilding revenue, ASP of our homes closed, and closings by reportable segment for the periods presented:

Homebuilding Revenue Average Selling Price

Closings

The increase in homebuilding revenue for fiscal 2022 as compared to fiscal 2021 is the result of an increase in ASP, partially offset by a decrease in closings.

The increase in ASP across all segments was primarily attributed to price appreciation due to strong demand, short supply of homes, and inflation. In the East segment, ASP changes were also impacted by a change in mix of closings between products and among communities within the markets as compared to the prior year period. On average, we anticipate that our ASP will continue to increase in the near-term as indicated by the ASP for homes in backlog as of September 30, 2022, although higher mortgage interest rates and softening demand may temper ASP growth in the future.

The decrease in closings was primarily due to a decrease in backlog conversion rates as a result of longer construction cycle times compared to the prior year. Among the three reportable segments, our Southeast segment has experienced the highest increase in construction cycle times by an average of 3.1 months, resulting in a significant decrease in backlog conversion rates and closings.

Homebuilding Gross Profit and Gross Margin

The following tables present our homebuilding (HB) gross profit and gross margin by reportable segment and in total. In addition, such amounts are presented excluding inventory impairments and abandonments and interest amortized to cost of sales (COS). Homebuilding gross profit is defined as homebuilding revenue less home cost of sales (which includes land and land development costs, home construction costs, capitalized interest, indirect costs of construction, estimated warranty costs, closing costs, and inventory impairments and abandonment charges).

Reconciliation of homebuilding gross profit and the related gross margin excluding impairments and abandonments, and interest amortized to cost of sales to homebuilding gross profit and gross margin, the most directly comparable GAAP measure, is provided for each period discussed below. Management believes that this information assists investors in comparing the operating characteristics of homebuilding activities by eliminating many of the differences in companies' respective level of impairments and level of debt. These measures should not be considered alternatives to homebuilding gross profit and gross margin determined in accordance with GAAP as an indicator of operating performance.

$ in thousands Fiscal Year Ended September 30, 2022

$ in thousands Fiscal Year Ended September 30, 2021

$ in thousands Fiscal Year Ended September 30, 2020

(a) Corporate and unallocated includes capitalized interest and capitalized indirect costs expensed to homebuilding cost of sale related to homes closed, as well as capitalized interest and capitalized indirect costs impaired in order to reflect projects in progress assets at fair value.

Our homebuilding gross profit increased by $130.4 million to $532.1 million for the fiscal year ended September 30, 2022, compared to $401.7 million in the prior year. The increase in homebuilding gross profit was primarily driven by an increase in homebuilding revenue of $174.8 million and an increase in gross margin of 420 basis points to 23.1%. However, as shown in the tables above, the comparability of our gross profit and gross margin was modestly impacted by impairments and abandonment charges which increased by $0.2 million and interest amortized to homebuilding cost of sales which decreased by $15.4 million year-over-year (refer to Note 5 and Note 6 of the notes to the consolidated financial statements in this Form 10-K for additional details). When excluding the impact of impairments and abandonment charges and interest amortized to homebuilding cost of sales, homebuilding gross profit increased by $115.3 million compared to the prior year while homebuilding gross margin increased by 330 basis points to 26.3%. The year-over-year improvement in gross margin for the fiscal year ending September 30, 2022 is primarily driven by lower sales incentives and pricing increases, although softening demand may temper gross margin in the future.

West Segment: Compared to the prior fiscal year, homebuilding gross profit increased by $82.7 million due to the increase in homebuilding revenue and higher gross margin. Homebuilding gross margin, excluding impairments and abandonments, increased to 26.6%, up from 24.4% in the prior year. The increase in gross margin was driven primarily by lower sales incentives and pricing increases.

East Segment: Compared to the prior fiscal year, homebuilding gross profit increased by $12.0 million due to higher gross margin, partially offset by a decrease in homebuilding revenue. Homebuilding gross margin, excluding impairments and abandonments, increased to 24.9%, up from 22.3% in the prior year. The increase in gross margin was driven primarily by lower sales incentives and pricing increases.

Southeast Segment: Compared to the prior fiscal year, homebuilding gross profit increased by $5.8 million due to higher gross margin, partially offset by a decrease in homebuilding revenue. Homebuilding gross margin, excluding impairments and abandonments, increased to 25.1%, up from 21.9% in the prior year. The increase in gross margin was driven primarily by lower sales incentives and pricing increases.

Measures of homebuilding gross profit and gross margin after excluding inventory impairments and abandonments, interest amortized to cost of sales, and other non-recurring items are not GAAP financial measures. These measures should not be considered alternatives to homebuilding gross profit and gross margin determined in accordance with GAAP as an indicator of operating performance.

In particular, the magnitude and volatility of non-cash inventory impairments and abandonment charges for the Company and other homebuilders have been significant historically and, as such, have made financial analysis of our industry more difficult. Homebuilding metrics excluding these charges, as well as interest amortized to cost of sales and other similar presentations by analysts and other companies, are frequently used to assist investors in understanding and comparing the operating characteristics of homebuilding activities by eliminating many of the differences in companies' respective level of impairments and levels of debt. Management believes these non-GAAP measures enable holders of our securities to better understand the cash implications of our operating performance and our ability to service our debt obligations as they currently exist and as additional indebtedness is incurred in the future. These measures are also useful internally, helping management to compare operating results and to measure cash available for discretionary spending.

In a given period, our reported gross profit is generated from both communities previously impaired and communities not previously impaired. In addition, as indicated above, certain gross profit amounts arise from recoveries of prior period costs, including warranty items that are not directly tied to communities generating revenue in the period. Home closings from communities previously impaired would, in most instances, generate very low or negative gross margins prior to the impact of the previously recognized impairment. Gross margin for each home closing is higher for a particular community after an impairment because the carrying value of the underlying land was previously reduced to the present value of future cash flows as a result of the impairment, leading to lower cost of sales at the home closing. This improvement in gross margin resulting from one or more prior impairments is frequently referred to in the aggregate as the “impairment turn” or “flow-back” of impairments within the reporting period. The amount of this impairment turn may exceed the gross margin for an individual impaired asset if the gross margin for that asset prior to the impairment would have been negative. The extent to which this impairment turn is greater than the reported gross margin for the individual asset is related to the specific historical cost basis of that individual asset.

The asset valuations that result from our impairment calculations are based on discounted cash flow analyses and are not derived by simply applying prospective gross margins to individual communities. As such, impaired communities may have gross margins that are somewhat higher or lower than the gross margins for unimpaired communities. The mix of home closings in any particular quarter varies to such an extent that comparisons between previously impaired and never impaired communities would not be a reliable way to ascertain profitability trends or to assess the accuracy of previous valuation estimates. In addition, since any amount of impairment turn is tied to individual lots in specific communities, it will vary considerably from period to period. As a result of these factors, we review the impairment turn impact on gross margin on a trailing 12-month basis rather than a quarterly basis as a way of considering whether our impairment calculations are resulting in gross margins for impaired communities that are comparable to our unimpaired communities. For fiscal 2022, our homebuilding gross margin was 23.1% and excluding interest and inventory impairments and abandonments, it was 26.3%. For the same period, homebuilding gross margin was as follows in those communities that have previously been impaired, which represented 3.4% of total closings during fiscal 2022:

Homebuilding Gross Margin from previously impaired communities:

Pre-impairment turn gross margin 11.3 %

Impact of interest amortized to COS related to these communities 2.4 %

Pre-impairment turn gross margin, excluding interest amortization 13.7 %

Impact of impairment turns 19.3 %

Gross margin (post impairment turns), excluding interest amortization 33.0 %

For further discussion of our impairment policies, refer to Note 2 and Note 5 of the notes to consolidated financial statements in this Form 10-K.

Land Sales and Other Revenue and Gross Profit (Loss)

Land sales relate to land and lots sold that do not fit within our homebuilding programs and strategic plans. We also have other revenue related to title examinations provided for our homebuyers in certain markets. The following tables summarize our land sales and other revenue and related gross profit (loss) by reportable segment for the periods presented:

$ in thousands Land Sales and Other Revenue

$ in thousands Land Sales and Other Gross Profit (Loss)

(a) Includes capitalized interest and capitalized indirect costs expensed to land cost of sale related to land sold, as well as capitalized interest and capitalized indirect costs impaired in order to reflect land held for sale assets at net realizable value.

To further support our efforts to improve capital efficiency, we continued to focus on closing a number of land sales for land positions that did not fit within our strategic plans. Future land and lot sales will depend on a variety of factors, including local market conditions, individual community performance, and changing strategic plans.

Operating Income

The table below summarizes operating income by reportable segment for the periods presented:

Fiscal Year Ended September 30,

(a) Includes amortization of capitalized interest, capitalization and amortization of indirect costs, impairment of capitalized interest and capitalized indirect costs, expenses related to numerous shared services functions that benefit all segments but are not allocated to the operating segments, and certain other amounts that are not allocated to our operating segments.

Our operating income increased by $125.6 million to $272.5 million for the year ended September 30, 2022, compared to operating income of $146.9 million for year ended September 30, 2021, primarily driven by the previously discussed increase in gross profit, partially offset by an increase in SG&A expense. The dollar amount of SG&A increased by $8.2 million, or 3.4%, primarily due to increased personnel expense. Additionally, SG&A as a percentage of total revenue decreased year-over-year by 50 basis points from 11.4% to 10.9% primarily due to the increase in homebuilding revenue.

West Segment: The $72.7 million increase in operating income compared to the prior year was primarily due to the increase in gross profit previously discussed, partially offset by higher commissions expense on higher homebuilding revenue, higher sales and marketing expenses, and higher other G&A expenses in the segment.

East Segment: The $17.5 million increase in operating income compared to the prior year was primarily due to the increase in gross profit previously discussed and lower commissions expense on lower homebuilding revenue in the segment. This increase to operating income is partially offset by higher sales and marketing expenses and higher other G&A expenses in the segment.

Southeast Segment: The $11.1 million increase in operating income compared to the prior year was primarily due to the increase in gross profit previously discussed andlower commissions expense on lower homebuilding revenue. This increase to operating income is partially offset by higher sales and marketing expenses and higher other G&A expenses in the segment.

Corporate and Unallocated: Our Corporate and unallocated results include amortization of capitalized interest, capitalization and amortization of indirect costs, impairment of capitalized interest and capitalized indirect costs, expenses for various shared services functions that benefit all segments but are not allocated, including information technology, treasury, corporate finance, legal, branding and national marketing, and certain other amounts that are not allocated to our operating segments. For the fiscal year ended September 30, 2022, corporate and unallocated net expenses decreased by $24.3 million from the prior fiscal year, primarily due to lower amortization of capitalized interest and capitalized indirect costs to cost of sales, partially offset by higher G&A costs.

Below operating income, we had two noteworthy fluctuations between fiscal 2022 and fiscal 2021 as follows: (1) we experienced an increase in other income and expense, net, as we had no interest expense not qualified for capitalization during fiscal 2022 compared to $2.8 million during fiscal 2021, and (2) we recorded a gain on extinguishment of debt of $0.3 million during fiscal 2022 compared to a loss on extinguishment of debt of $2.0 million in fiscal 2021. See Note 6 and Note 7 of the notes to our consolidated financial statements in this Form 10-K for further discussion of these items.

Income Taxes

We recognized income tax expense from continuing operations of $53.3 million for the fiscal year ended September 30, 2022, compared to income tax expense from continuing operations of $21.5 million and $18.0 million for our fiscal years ended September 30, 2021 and 2020, respectively. Income tax expense in our fiscal 2022, 2021 and 2020 primarily resulted from income generated in the fiscal year and permanent book/tax differences, partially offset by the generation of additional federal tax credits. Refer to Note 13 of the notes to the consolidated financial statements in this Form 10-K for a further discussion of our income taxes.

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 (the 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.

Net changes in cash, cash equivalents, and restricted cash are as follows for the periods presented:

Operating Activities

Net cash provided by operating activities was $81.1 million for the fiscal year ended September 30, 2022. The primary drivers of operating cash flows are typically cash earnings and changes in inventory levels, including land acquisition and development spending. Net cash provided by operating activities during the period was primarily driven by income before income taxes of $274.0 million, which included $24.0 million of non-cash charges, a net decrease in non-inventory working capital of $14.5 million, partially offset by an increase in inventory of $231.4 million resulting from land acquisition, land development, and house construction spending to support continued growth.

Net cash provided by operating activities was $31.7 million during the fiscal year ended September 30, 2021, primarily driven by income before income taxes of $143.5 million, which included $28.1 million of non-cash charges, a net decrease in non-inventory working capital of $7.6 million, and a decrease in inventory of $147.5 million as a result of home sales, partially offset by land acquisition, land development, and house construction spending to support continued growth.

Investing Activities

Net cash used in investing activities for the fiscal year ended September 30, 2022 and 2021 was $14.7 million and 14.2 million, respectively, primarily driven in both periods by capital expenditures for model homes and information systems infrastructure.

Financing Activities

Net cash used in financing activities was $88.7 million for the fiscal year ended September 30, 2022 primarily driven by repayment of the Senior Unsecured Term Loan (the Term Loan), repurchases of a portion of our 2025 and 2027 Senior Notes, common stock repurchases under our share repurchase program, and tax payments for stock-based compensation awards vesting.

Net cash used in financing activities was $85.9 million during the fiscal year ended September 30, 2021 primarily driven by installment payment of the Senior Unsecured Term Loan (the Term Loan), partial extinguishment of our 2027 Senior Notes, the payment of cash for debt issuance costs, and tax payments for stock-based compensation awards vesting.

Debt

We generally fulfill our short-term cash requirements with cash generated from our operations and available borrowings. Additionally, our Secured Revolving Credit Facility provides working capital and letter of credit capacity of $250.0 million. As of September 30, 2022, no borrowings were outstanding under the Facility, and after accounting for outstanding letters of credit under the Facility, there was a remaining capacity of $244.5 million.

On October 13, 2022, the Company entered into a Senior Unsecured Revolving Credit Facility (the “New Unsecured Facility”). The New Unsecured Facility replaces the Secured Revolving Credit Facility, and the Company expects to use the proceeds from the New Unsecured Facility for general corporate purposes. The New Unsecured Facility provides for a revolving credit facility with borrowing capacity up to $265.0 million. The Company also will have the right from time to time to request to increase the size of the commitments under the New Unsecured Facility by up to $135.0 million for a maximum of $400.0 million. The New Unsecured Facility terminates on October 13, 2026 (the “Termination Date”), and the Company may borrow, repay and reborrow amounts under the New Unsecured Facility until the Termination Date. See Note 8 of the notes to the consolidated financial statements in this Form 10-K for additional details related to the New Unsecured Facility.

We have also entered into a number of stand-alone, cash-secured letter of credit agreements with banks. These combined facilities provide for letter of credit needs collateralized by either cash or assets of the Company. We currently have $29.7 million of outstanding letters of credit under these facilities, which are secured by cash collateral that is maintained in restricted accounts totaling $31.5 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 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. See Note 8 of the notes to the consolidated financial statements in this Form 10-K for additional details related to our borrowings.

Financial Position

As of September 30, 2022, we had $459.1 million of available liquidity, including $214.6 million in cash and cash equivalents and $244.5 million of remaining capacity under our $250.0 million Secured Revolving Credit Facility, which was subsequently replaced and expanded by the new $265.0 million Senior Unsecured Revolving Credit Facility as noted above.

While we believe we possess sufficient liquidity, we are mindful of potential short-term or seasonal requirements for enhanced liquidity that may arise to operate and grow our business. As of the date of this report, we believe we have adequate capital resources and sufficient access to external financing sources to satisfy our current and reasonably anticipated requirements for funds to conduct our operations and meet other needs in the ordinary course of our business.

At times, we may also engage in capital markets, bank loan, project debt or other financial transactions, including the repurchase of debt or potential new issuances of debt or equity securities to support our business needs. The amounts involved in these transactions, if any, may be material. In addition, as necessary or desirable, we may adjust or amend the terms of and/or expand the capacity of the Facility, or enter into additional letter of credit facilities, or other similar facility arrangements, in each case with the same or other financial institutions, or allow any such facilities to mature or expire.

Supplemental Guarantor Information

As discussed in Note 8 of the notes to the consolidated financial statements in this Form 10-K, the Company's obligations to pay principal and interest under certain debt agreements are guaranteed on a joint and several basis by substantially all of the Company's subsidiaries. Some of the immaterial subsidiaries do not guarantee the Senior Notes. The guarantees are full and unconditional.

The following summarized financial information is presented for Beazer Homes USA, Inc. and the guarantor subsidiaries on a combined basis after elimination of intercompany transactions between entities in the combined group and amounts related to investments in any subsidiary that is a non-guarantor.

As of September 30,

Due from non-guarantor subsidiary $ 3,145 $ 1,532

Fiscal Year Ended September 30,

Credit Ratings

Our credit ratings are periodically reviewed by rating agencies. In July 2022, S&P reaffirmed the Company’s corporate credit rating of B and the Company's positive outlook. In October 2022, Moody's upgraded the ratings for our senior unsecured notes from B3 to B2, reaffirmed the Company's issuer corporate family rating of B2 and returned the Company's outlook from stable to positive. 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, financial condition, results of operations, 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.

Stock Repurchases and Dividends Paid

In May 2022, the Company's Board of Directors approved a new share repurchase program that authorizes the Company to repurchase up to $50.0 million of its outstanding common stock. This newly authorized program replaced the prior share repurchase program authorized in the first quarter of fiscal 2019 of up to $50.0 million of common stock repurchases, pursuant to which $12.0 million of the capacity remained prior to the replacement of the program. As part of this new program, the Company repurchased 570 thousand shares of its common stock for $8.2 million at an average price per share of $14.33 during the year ended September 30, 2022 through open market transactions. No share repurchases were made during fiscal year 2021. During the year ended September 30, 2020, the Company repurchased approximately 362 thousand shares of its common stock for $3.3 million at an average price per share of $9.20 through open market transactions, including 10b5-1 plans. All shares have been retired upon repurchase. The aggregate reduction to stockholders’ equity related to share repurchases during the fiscal years ended September 30, 2022 and 2020was $8.2 million and $3.3 million, respectively. As of September 30, 2022, the remaining availability of the new share repurchase program was $41.8 million. The repurchase program has no expiration date.

The indentures under which our Senior Notes were issued contain certain restrictive covenants, including limitations on our payment of dividends. There were no dividends paid during our fiscal years ended September 30, 2022, 2021 or 2020.

Off-Balance Sheet Arrangements and Aggregate Contractual Commitments

Lot Option Agreements

In addition to purchasing land directly, we control a portion of our land supply through lot option agreements. In recent years, we have focused on increasing our lot option agreement usage to minimize risk as we grow our land position. As of September 30, 2022, we controlled 25,170 lots, which includes 272 lots of land held for future development and 501 lots of land held for sale. Of the 24,397 total active lots, we owned 11,085, or 45.4%, of these lots and the remaining 13,312 of these lots, or 54.6%, were under option agreements, primarily through lot option agreements with land developers and land bankers, which generally require the payment of cash or the posting of a letter of credit or surety bond for the right to acquire lots during a specified period of time at a certain price. In comparison, we controlled 9,992 lots, or 46.6% of our total active lot position, through option agreements as of September 30, 2021. 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 agreements, 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 totaled approximately $142.4 million as of September 30, 2022. The total remaining purchase price, net of cash deposits, committed under all options was $827.6 million as of September 30, 2022. Subject to market conditions and our liquidity, we plan to further expand our use of option agreements to supplement our owned inventory supply.

We expect to exercise, subject to market conditions and seller satisfaction of contract terms, most of our option agreements. Various factors, some of which are beyond our control, such as market conditions, weather conditions, and the timing of the completion of development activities, will have a significant impact on the timing of option exercises or whether lot options will be exercised at all.

We have historically funded the exercise of lot options with 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.

Investments in Unconsolidated Entities

Occasionally, we use legal entities in which we have less than a controlling interest. We enter into the majority of these arrangements with land developers, other homebuilders, and financial partners to acquire attractive land positions, to manage our risk profile, and to leverage our capital base. The underlying land positions are developed into finished lots for sale to the unconsolidated entity’s members or other third parties. We account for our interest in unconsolidated entities under the equity method.

Historically, we and our partners have provided varying levels of guarantees of debt or other obligations of our unconsolidated entities. As of September 30, 2022, we had no repayment guarantees outstanding related to the debt of our unconsolidated entities. See Note 2 and Note 4 of the notes to the consolidated financial statements in this Form 10-K for more information.

Letters of Credit and Surety Bonds

In connection with the development of our communities, we are frequently required to provide performance, maintenance, and other bonds and letters of credit in support of our related obligations with respect to such developments. The amount of such obligations outstanding at any time varies in accordance with our pending development activities. In the event any such bonds or letters of credit are drawn upon, we would be obligated to reimburse the issuer of such bonds or letters of credit. We had outstanding letters of credit and surety bonds of $35.2 million and $279.6 million, respectively, as of September 30, 2022, primarily related to our obligations to local governments to construct roads and other improvements in various developments.

Contractual Commitments

The following table summarizes our aggregate contractual commitments as of September 30, 2022:

Payments Due by Period

in thousands Total Less than 1 Year 1-3 Years 3-5 Years More than 5 Years

Uncertain tax positions(c) — — — — —

(a) For a listing of our borrowings, refer to Note 8 of the notes to the consolidated financial statements in this Form 10-K.

(b) Interest on variable rate obligations is based on rates effective as of September 30, 2022.

(c) Based on its current inventory of uncertain tax positions and tax carryforward attributes, the Company does not expect a cash settlement of unrecognized tax benefits related to uncertain tax positions in future years. See Note 13 of the notes to the consolidated financial statements in this Form 10-K for additional information regarding the Company's unrecognized tax benefits related to uncertain tax positions as of September 30, 2022.

We had outstanding letters of credit and surety bonds of $35.2 million and $279.6 million, respectively, as of September 30, 2022, primarily related to our obligations to local governments to construct roads and other improvements in various developments.

Critical Accounting Estimates

Our critical accounting policies require the use of judgment in their application and in certain cases 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. Listed below are those policies that we believe are critical and require the use of complex judgment in their application.

Inventory Valuation - Projects in Progress

Projects in progress inventory includes homes under construction and land under development grouped together as communities. Generally, upon the commencement of land development activities, it may take three to five years (depending on, among other things, the size of the community and its sales pace) to fully develop, sell, construct and close all the homes in a typical community. Projects in progress are stated at cost unless facts and circumstances indicate that the carrying value of the assets may not be recoverable.

We assess our projects in progress inventory for indicators of impairment at the community level on a quarterly basis. We evaluate, among other things, the average sales price and margins on recent home closings, homes in backlog and expected future home sales for each community. If indicators of impairment are present for a community with more than ten homes remaining to close, we perform a recoverability test by comparing the expected undiscounted cash flows for the community to its carrying value. For those communities whose carrying values exceed the aggregate undiscounted cash flows, we perform a discounted cash flow analysis to determine the fair value of the community, and impairment charges are recorded if the fair value of the community's inventory is less than its carrying value.

There is uncertainty associated with preparing the undiscounted cash flow analyses because future market conditions will almost certainly be different, either better or worse, than current conditions. Significant valuation assumptions include expected pace of closings, average sales price, expected costs for land development, direct construction, overhead, and interest. The risk of over or under-stating any of the important cash flow variables is greater with longer-lived communities and within markets that have historically experienced greater home price volatility. To address these risks, we consider home price and construction cost appreciation in future years for certain communities that are expected to be selling for more than a year and/or if the market has typically exhibited high levels of price volatility. Absent these assumptions on cost and sales price appreciation, we believe the long-term cash flow analysis would be unrealistic. Finally, we also ensure that the pace of sales and closings used in our undiscounted cash flow analyses are reasonable by considering seasonal variations in sales and closings, our development schedules and what we have achieved historically, and by comparing to those achieved by our competitors for comparable communities.

The fair value of the community is estimated based on the present value of the estimated future cash flows using discount rates commensurate with the risk associated with the underlying community. The discount rate used may be different for each community. The factors considered when determining an appropriate discount rate for a community include, among others: (1) community specific factors such as product types, development stage and expected duration of the project, and the competitive factors influencing the sales performance of the community and (2) local market factors such as employment levels, consumer confidence and the existing supply of new and used homes for sale. The assumptions used in the determination of fair value of projects in progress communities are based on factors known to us at the time such estimates are made and our expectations of future operations and market conditions. Due to uncertainties in the estimation process, the significant volatility in market conditions, the long life cycles of many communities, and potential changes in our strategy related to certain communities, actual results could differ significantly from our estimates.

Warranty Reserves

The adequacy of our warranty reserves is based on historical experience and management's estimate of the costs to remediate any claims. Our review includes a quarterly analysis of the historical data and trends in warranty expense by division. An analysis by division 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 factors in the existence of any non-recurring or community-specific warranty matters that might not be contemplated in our historical data and trends that may need to be separately estimated based on management's judgment of the ultimate cost of repair for that specific issue.

At September 30, 2022, our warranty reserve was $13.9 million, reflecting an accrual range of 0.3% to 1.0% of total revenue recognized for each home closed depending on our loss history in the division in which the home was built. A ten basis point increase in our warranty reserve rate would have increased our accrual and corresponding cost of sales by $2.5 million as of September 30, 2022.

There were no material changes in assumptions in calculating our reserve balance for the year ended September 30, 2022.

Our estimation process is discussed in Note 9 of notes to the consolidated financial statements in this Form 10-K. While we believe that our current warranty reserves are adequate, there can be no assurances that historical data and trends will accurately predict our actual warranty costs or that future developments might not lead to a significant change in the reserve.

Income Taxes - Valuation Allowance

The carrying amounts of deferred tax assets are reduced by a valuation allowance if an assessment of their components indicates that it is more likely than not that all or some portion of these assets will not be realized. Judgment is required in estimating valuation allowances for deferred tax assets. The realization of a deferred tax asset ultimately depends on the existence of sufficient taxable income in either the carryback or carryforward periods under tax law. We assess the need for valuation allowances for deferred tax assets based on more-likely-than-not realization threshold criteria. In our assessment, appropriate consideration is given to all positive and negative evidence related to the realization of the deferred tax assets. This assessment considers, among other matters, (1) the nature, frequency and severity of any current and cumulative losses; (2) forecasts of future profitability; (3) the duration of statutory carryforward periods; (4) our experience with operating loss and tax credit carryforwards not expiring unused; (5) the Section 382 limitation on our ability to carryforward pre-ownership change net operating losses; (6) recognized built-in losses or deductions; and (7) tax planning alternatives.

Our assessment of the need for the valuation of deferred tax assets includes assessing the likely future tax consequences of events that have been recognized in our financial statements or tax returns. We base our estimate of deferred tax assets and liabilities on current tax laws and rates and, in certain cases, business plans and other expectations about future outcomes. Changes in existing tax laws or rates could affect actual tax results and future business results may affect the amount of deferred tax liabilities or the valuation of deferred tax assets over time. Our analysis includes several scenarios with both increases and decreases in our estimates of operating income across future periods. Routine or cyclical reductions in our pre-tax earnings would not have changed our assessment of our ability to utilize various tax carryforwards. In addition to various company-specific factors, we consider several positive and negative external factors that may impact our estimates. These factors may include broad economic considerations such as mortgage interest rates, the relative health of the U.S. economy and employment levels, as well as industry or market specific factors such as housing supply and demand outlook.

Our accounting for deferred tax consequences represents our best estimate of future events. It is possible there will be changes that are not anticipated in our current estimates. If those changes resulted in significant and sustained reduction in our pre-tax earnings or our utilization of existing tax carryforwards, it is likely such changes would have a material impact on our financial condition or results of operations. The nature and amounts of the various tax attributes comprising our deferred tax assets are discussed in Note 13 of notes to the consolidated financial statements in this Form 10-K.

Item 7A. 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 our cash flows or results of operations. As of September 30, 2022, we had variable-rate debt outstanding, totaling approximately $72.3 million. A one percent increase in the interest rate for these notes would result in an increase of our interest expense by approximately $1.0 million over the next twelve-month period. The estimated fair value of our fixed rate debt as of September 30, 2022 was $753.3 million, compared to a carrying value of $911.2 million. 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 $753.3 million to $784.2 million as of September 30, 2022.

Item 8. Financial Statements and Supplementary Data

BEAZER HOMES USA, INC.

CONSOLIDATED BALANCE SHEETS

ASSETS

Investments in unconsolidated entities 964 4,464

Operating lease right-of-use assets 9,795 12,344

LIABILITIES AND STOCKHOLDERS’ EQUITY

Stockholders’ equity:

Retained earnings (accumulated deficit) 79,399 (141,305)

See accompanying notes to consolidated financial statements.

BEAZER HOMES USA, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

Fiscal Year Ended September 30,

Equity in income of unconsolidated entities 521 594 347

Gain (loss) on extinguishment of debt, net 309 (2,025) —

Loss from discontinued operations, net of tax (14) (159) (1,090)

Weighted-average number of shares:

Basic income (loss) per share:

Discontinued operations — (0.01) (0.04)

Diluted income (loss) per share:

Discontinued operations — — (0.04)

See accompanying notes to consolidated financial statements.

BEAZER HOMES USA, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

Common Stock Paid-in Capital (Accumulated Deficit) Retained Earnings

in thousands Shares Amount Total

Net income and comprehensive income — — — 52,226 52,226

Stock-based compensation expense — — 10,036 — 10,036

Shares issued under employee stock plans, net 588 — — — —

Forfeiture and other settlements of restricted stock (26) — (2,058) — (2,058)

Common stock redeemed for tax liability (173) — (2,686) — (2,686)

Stock-based compensation expense — — 12,167 — 12,167

Shares issued under employee stock plans, net 417 — — — —

Forfeiture and other settlements of restricted stock (29) — — — —

Common stock redeemed for tax liability (304) — (3,044) — (3,044)

Stock-based compensation expense — — 8,478 — 8,478

Stock option exercises 1 — 5 — 5

Shares issued under employee stock plans, net 518 — — — —

Forfeiture and other settlements of restricted stock (55) — — — —

Common stock redeemed for tax liability (308) — (6,631) — (6,631)

See accompanying notes to consolidated financial statements.

BEAZER HOMES USA, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

Fiscal Year Ended September 30,

Cash flows from operating activities:

Gain on sale of fixed assets (332) (392) (335)

Change in allowance for doubtful accounts (6) (68) 54

Equity in income of unconsolidated entities (521) (594) (347)

Cash distributions of income from unconsolidated entities 380 132 306

(Gain) loss on extinguishment of debt, net (309) 2,025 —

Changes in operating assets and liabilities:

Decrease in income tax receivable — 460 315

(Increase) decrease in other assets (2,620) (1,922) 3

Cash flows from investing activities:

Proceeds from sale of fixed assets 339 456 478

Cash flows from financing activities:

Repayment of borrowings from credit facility (195,000) — (390,000)

Debt issuance costs — (901) (202)

Repurchase of common stock (8,154) — (3,327)

Tax payments for stock-based compensation awards (6,631) (3,044) (2,686)

Stock option exercises and other financing activities 5 569 (1,832)

See accompanying notes to consolidated financial statements.

BEAZER HOMES USA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(1) Description of Business

Beazer Homes USA, Inc. (“we,” “us,” “our,” “Beazer,” “Beazer Homes” and the “Company”) is a geographically diversified homebuilder with active operations in 13 states within three geographic regions in the United States: the West, East, and Southeast.

Our homes are designed to appeal to homeowners at different price points across various demographic segments, and are generally offered for sale in advance of their construction. Our objective is to provide our customers with homes that incorporate extraordinary value at an affordable price, delivered through our three strategic pillars discussed previously, while seeking to maximize our return on invested capital over the course of a housing cycle.

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

Basis of Consolidation

The accompanying consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP), and present the consolidated financial position, income, stockholders' equity, and cash flows of Beazer Homes USA, Inc. and its consolidated subsidiaries. Intercompany transactions and balances have been eliminated in consolidation. Our net income is equivalent to our comprehensive income, so we have not presented a separate statement of comprehensive income.

In the past, we have discontinued homebuilding operations in various markets. Results from certain of these exited markets are reported as discontinued operations in the accompanying consolidated statements of operations for all periods presented (see Note 19 for a further discussion of our discontinued operations).

Our fiscal year 2022 began on October 1, 2021 and ended on September 30, 2022. Our fiscal year 2021 began on October 1, 2020 and ended on September 30, 2021. Our fiscal year 2020 began on October 1, 2019 and ended on September 30, 2020.

Use of Estimates

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

Cash and Cash Equivalents and Restricted Cash

We consider highly liquid investments with maturities of three months or less when acquired to be cash equivalents. As of September 30, 2022, the majority of our cash and cash equivalents were on demand deposits with major banks. These assets were valued at par and had no withdrawal restrictions. Restricted cash includes cash restricted by state law or a contractual requirement, including cash collateral for our outstanding cash-secured letters of credit (refer to Note 8).

Accounts Receivable and Allowance

Accounts receivable include escrow deposits to be received from title companies associated with closed homes, receivables from municipalities related to the development of utilities or other infrastructure, land banker reimbursements to be received related to land development costs, rebates to be received from our suppliers and other miscellaneous receivables. Generally, we receive cash from title companies within a few days of the home being closed. We regularly review our receivable balances for collectability and record an allowance for expected credit losses.

Owned Inventory

Owned inventory includes land acquisition costs, land development costs, home construction costs, capitalized interest, real estate taxes, direct overhead costs and capitalized indirect costs incurred during land development and home construction, and common costs that benefit the entire community, less impairments, if any. Land acquisition, land development and other common costs (both incurred and estimated to be incurred) are allocated to individual lots on a pro-rata basis, and the cost of individual lots is transferred to homes under construction when home construction begins. Changes in estimated land and other common costs to be incurred in a community are generally allocated to the remaining lots on a prospective basis. Home construction costs are accumulated on a per-home basis. Cost of home closings includes the specific construction costs of the home and the allocated lot costs. Refer to Note 5 for a further discussion and detail of our inventory balance.

Inventory Valuation - Projects in Progress

We assess our projects in progress inventory for indicators of impairment at the community level on a quarterly basis. We evaluate, among other things, the average sales price and margins on recent home closings, homes in backlog and expected future home sales for each community. If indicators of impairment are present for a community with more than ten homes remaining to close, we perform a recoverability test by comparing the expected undiscounted cash flows for the community to its carrying value. This undiscounted cash flow analysis requires important assumptions including, among other things, the current and future home sale prices, margins and the pace of closings to occur in the future. For those communities whose carrying values exceed the aggregate undiscounted cash flows, we perform a discounted cash flow analysis to determine the fair value of the community, and impairment charges are recorded if the fair value of the community's inventory is less than its carrying value.

The assumptions used in the determination of fair value of projects in progress communities are based on factors known to us at the time such estimates are made and our expectations of future operations and market conditions. The fair value of the community is estimated using the present value of the estimated future cash flows using discount rates commensurate with the risk associated with the underlying community. Should the estimates or expectations used in determining estimated fair values deteriorate in the future, we may be required to recognize additional impairment charges and write-offs related to these assets, and such amounts could be material.

Inventory Valuation - Land Held for Future Development

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. All applicable carrying costs, such as interest and real estate taxes, are expensed as incurred. Land held for future development is stated at cost unless facts and circumstances indicate that the carrying value of the assets may not be recoverable, such as the future enactment of a development plan or the occurrence of outside events. We evaluate the potential plans for each community in land held for future development if changes in facts and circumstances occur that would give rise to a more detailed analysis for a change in the status of a community.

Inventory Valuation - Land Held for Sale

Land held for sale includes land and lots that do not fit within our homebuilding programs and strategic plans in certain markets. We record land held for sale at the lower of the asset's carrying value or fair value less costs to sell (net realizable value). Land is classified as held for sale when the following criteria are met:

•management has the authority and commits to a plan to sell the land;

•the land is available for immediate sale in its present condition, subject only to terms that are usual and customary for sales of land assets;

•there is an active program to locate a buyer and the plan to sell the property has been initiated;

•the sale of the land is probable within one year;

•the property is being actively marketed at a reasonable sale price relative to its current fair value; and

•it is unlikely that the plan to sell will be withdrawn or that significant changes to the plan will be made.

We evaluate the net realizable value of a land held for sale asset when indicators of impairment are present. In determining the fair value of the assets less cost to sell, we consider factors including current sales prices for comparable assets in the area, recent market analysis studies, appraisals, any recent legitimate offers and listing prices of similar properties. If the current carrying value of the asset exceeds the estimated fair value less cost to sell, the asset is impaired and written down to its estimated fair value less cost to sell.

Due to uncertainties in the estimation process, it is reasonably possible that actual results could differ from the estimates used in our analysis. Our assumptions about land sales prices require significant judgment because the market is highly sensitive to changes in economic conditions. We calculate 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.

Lot Option Agreements and Variable Interest Entities (VIE)

In addition to purchasing land directly, we utilize lot option agreements that enable us to defer acquiring portions of properties owned by third parties and unconsolidated entities until we have determined whether to exercise our lot option. The majority of our lot option agreements require a non-refundable cash deposit, irrevocable letter of credit or surety bond based on a percentage of the purchase price of the land for the right to acquire lots during a specified period at a specified price. Purchase of the properties under these agreements is contingent upon satisfaction of certain requirements by us and the sellers. Under lot option agreements, our liability is generally limited to forfeiture of the non-refundable deposits, letters of credit or surety bonds, and other non-refundable amounts incurred. If the Company cancels a lot option agreement, it would result in a write-off of the related deposits and pre-acquisition costs, but would not expose the Company to the overall risks or losses of the applicable entity we are purchasing from. We expect to exercise, subject to market conditions and seller satisfaction of contract terms, most of our remaining option agreements. Various factors, some of which are beyond our control, such as market conditions, weather conditions, and the timing of the completion of development activities, will have a significant impact on the timing of option exercises or whether lot options will be exercised at all.

The following table provides a summary of our interests in lot option agreements as of September 30, 2022 and 2021:

(a) Amount is included as a component of land under development within our owned inventory in the consolidated balance sheet.

In accordance with Accounting Standards Codification (ASC) Topic 810, Consolidation (ASC 810), if the entity holding the land under option is a variable VIE, the Company's deposit represents a variable interest in that entity. ASC 810 requires a company consolidate a VIE if the company is determined to be the primary beneficiary. To determine whether we are the primary beneficiary of the VIE, we first evaluate whether we have the ability to control the activities of the VIE that most significantly impact its economic performance. Such activities include, but are not limited to, (1) the ability to determine the budget and scope of land development work, if any; (2) the ability to control financing decisions for the VIE; (3) the ability to acquire additional land into the VIE or dispose of land in the VIE not under contract with Beazer; and (4) the ability to change or amend the existing option agreement with the VIE. If we are not determined to control such activities, we are not considered the primary beneficiary of the VIE and thus do not consolidate the VIE. If we do have the ability to control such activities, we will continue our analysis by determining if we are expected to absorb a potentially significant amount of the VIE's losses or, if no party absorbs the majority of such losses, if we will benefit from potentially a significant amount of the VIE's expected gains.

If we are the primary beneficiary of the VIE, we will consolidate the VIE even though creditors of the VIE have no recourse against the Company. For those we consolidate, we record the remaining contractual purchase price under the applicable lot option agreement, net of option deposits already paid, to consolidated inventory not owned with an offsetting increase to obligations related to consolidated inventory not owned on our consolidated balance sheets. Also, to reflect the total purchase price of this inventory on a consolidated basis, we present the related option deposits as consolidated inventory not owned. No VIEs required consolidation as of September 2022 and 2021 because we have determined that we were not the primary beneficiary of any VIEs.

Investments in Unconsolidated Entities

We participate in a number of joint ventures and other investments in which we have less than a controlling interest. We enter into the majority of these investments with land developers, other homebuilders and financial partners to acquire attractive land positions, to manage our risk profile and to leverage our capital base. The land positions are developed into finished lots for sale to the unconsolidated entity's members or other third parties. We recognize our share of equity in income (loss) and profits (losses) from the sale of lots to other buyers. Our share of profits from lots we purchase from the unconsolidated entities is deferred and treated as a reduction of the cost of the land purchased from the unconsolidated entity. Such profits are subsequently recognized at the time the home closes and title passes to the homebuyer. We evaluate our investments in unconsolidated entities for impairment during each reporting period. A series of operating losses of an investee or other factors may indicate that a decrease in the value of our investment in the unconsolidated entity has occurred that is other-than-temporary. The amount of impairment recognized is the excess of the investment’s carrying value over its estimated fair value, which is determined primarily using a discounted cash flow model. Our unconsolidated entities typically obtain secured acquisition, development and construction financing. We account for our interest in unconsolidated entities under the equity method. For additional discussion of these entities, refer to Note 4.

Property and Equipment, Net

Our property and equipment is recorded at cost, net of accumulated depreciation. Depreciation is computed on a straight-line basis based on estimated useful lives as follows:

Asset Class Useful Lives

Buildings and improvements 25 - 30 years

Information systems Lesser of estimated useful life of the asset or 5 years

Furniture, fixtures and computer and office equipment 3 - 7 years

Goodwill

Goodwill represents the excess of the purchase price over the fair value of the identifiable net assets from the businesses that we acquire. The Company's entire goodwill balance is recorded in our Southeast reportable segment. The Company evaluates goodwill for impairment at the reporting unit level annually during the fourth quarter or more often if indicators of impairment exist.

The Company has the option to perform a qualitative or quantitative assessment to determine whether the fair value of a reporting unit exceeds its carrying value. Qualitative factors may include, but are not limited to, economic conditions, industry and market considerations, cost factors, overall financial performance of the reporting unit and other entity and reporting unit specific events. If after assessing these qualitative factors, the Company determines it is more likely than not that the fair value of the reporting unit is less than the carrying value, then a quantitative assessment is performed.

The fair value of the reporting unit is estimated using a combination of the income approach, utilizing the discounted cash flow method, and the market approach, utilizing readily available market valuation multiples. If the estimated fair value of the reporting unit is less than its carrying value, an impairment will be recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value. Determining the fair value of a reporting unit under the quantitative goodwill impairment assessment requires the Company to make estimates and assumptions regarding future operating results, cash flows (including timing), discount rates, expected growth rates, capital expenditures and cost of capital, similar to those a market participant would use to assess fair value. We also make certain assumptions about future economic conditions and other data. Many of the factors used in assessing fair value are outside the control of management, and these assumptions and estimates may change in future periods.

During the fourth quarter of 2022, the Company performed its annual goodwill impairment analysis and concluded our goodwill was not impaired.

Other Assets

Our other assets principally include prepaid expenses, unamortized debt issuance costs on our Secured Revolving Credit Facility, and assets related to our deferred compensation plan (refer to Note 15 for a discussion of our deferred compensation plan).

Other Liabilities

Our other liabilities principally include accrued compensations and benefits, accrued interest on our outstanding borrowings, customer deposits, accrued warranty expense, litigation accruals, income tax liabilities and other accruals related to our operations. Refer to Note 12 for a detail of our other liabilities.

Income Taxes

Our provision for income taxes is comprised of taxes that are currently payable and deferred taxes that relate to temporary differences between financial reporting carrying values and tax bases of assets and liabilities. Deferred tax assets and liabilities result from deductible or taxable amounts in future years when such assets and liabilities are recovered or settled, and are measured using the enacted tax rates and laws that are expected to be in effect when the assets and liabilities are recovered or settled. We include any estimated interest and penalties on tax related matters in income taxes payable. We recognize the effect of income tax positions only if those positions are more likely than not of being sustained. Recognized income tax positions are measured at the largest amount that is greater than 50% likely of being realized. We record interest and penalties related to unrecognized tax benefits in income tax expense within our consolidated statements of operations. Changes in recognition of measurement are recorded in the period in which the change in judgment occurs. Refer to Note 13 for a detailed discussion of our tax provision, deferred tax assets and valuation allowance.

Our income tax receivable includes the refundable portion of our alternative minimum tax credit. The alternative minimum tax credit became a refundable credit when the alternative minimum tax was eliminated with the enactment of the Tax Cuts and Jobs Act on December 22, 2017. During fiscal 2019, we recorded our initial refund claim of $4.6 million, or half of our outstanding $9.2 million credit. During fiscal 2020, the enactment of the Coronavirus Aid, Relief and Economic Security (CARES) Act on March 27, 2020 enabled us to claim the entire $9.2 million alternative minimum tax credit with the filing of our fiscal 2019 return. As a result, we reduced our deferred tax asset by the remaining $4.6 million of alternative minimum tax credits and increased our tax receivable for the refund we expect to receive.

Revenue Recognition

We recognize revenue upon the transfer of promised goods to our customers in an amount that reflects the consideration to which we expect to be entitled by applying the process specified in ASC Topic 606, Revenue from Contracts with Customers.

The following table presents our total revenue disaggregated by revenue stream:

Fiscal Year Ended

September 30,

(a) Please see Note 18 for total revenue disaggregated by reportable segment.

Homebuilding revenue

Homebuilding revenue is reported net of any discounts and incentives and is generally recognized when title to and possession of the home is transferred to the buyer at the closing date. The performance obligation to deliver the home is generally satisfied in less than one year from the original contract date. Home sale contract assets consist of cash from home closings held by title companies in escrow for our benefit, typically for less than five days, and are considered accounts receivable. Contract liabilities include customer deposits related to sold but undelivered homes and totaled $34.3 million and $28.5 million as of September 30, 2022 and 2021, respectively. Of the customer liabilities outstanding as of September 30, 2021, $26.3 million was recognized in revenue during the year ended September 30, 2022, upon closing of the related homes, and $1.2 million was refunded to or forfeited by the buyer.

Land sales and other revenue

Land sales revenue relates to land that does not fit within our homebuilding programs and strategic plans. Land sales typically require cash consideration on the closing date, which is generally when performance obligations are satisfied. We also provide title examinations for our homebuyers in certain markets. Revenues associated with our title operations are recognized when closing services are rendered and title insurance policies are issued, both of which generally occur as each home is closed.

Home Construction Expenses

Home construction expenses includes the specific construction costs of the home and the allocated lot costs (land acquisition, land development and other common costs are allocated to individual lots on a pro-rata basis based on the number of lots remaining to close). All home closing costs are charged to home construction expenses in the period when the revenues from home closing are recognized.

Sales discounts and incentives include discounts on home prices, discounts on home building options and option upgrades, and seller-paid financing or closing costs. Home price discounts and option discounts are accounted for as a reduction in the sale price of the home, thereby decreasing the amount of revenue we recognize on that closing. All other sales incentives are recognized as a cost of selling the home and are included in home construction expenses.

Estimated future warranty costs are charged to home construction expense in the period when the revenues from home closings are recognized. Such estimated warranty costs generally range from 0.3% to 1.0% of total revenue recognized for each home closed. Additional warranty costs are charged to home construction expenses as necessary based on management's estimate of the costs to remediate existing claims. See Note 9 for a more detailed discussion of warranty costs and related reserves.

Advertising Costs

Advertising costs related to continuing operations of $14.4 million, $14.0 million and $15.9 million for our fiscal years 2022, 2021 and 2020, respectively, were expensed as incurred and were included in general and administrative (G&A) expenses in the consolidated statements of operations.

Fair Value Measurements

Certain of our assets are required to be recorded at fair value on a recurring basis, for example, the fair value of our deferred compensation plan assets are based on market-corroborated inputs (level 2). Certain of our assets are required to be recorded at fair value on a non-recurring basis when events and circumstances indicate that the carrying value may not be recovered (level 3). For example, we review our long-lived assets, including inventory, for recoverability when factors 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 value of certain of our financial instruments approximates their carrying amounts due to the short maturity of these assets and liabilities or the variable interest rates on such obligations. The fair value of our publicly-held debt is generally estimated based on quoted bid prices for these instruments (level 2). Certain of our other financial liabilities are estimated by discounting scheduled cash flows through maturity or using market rates currently being offered on loans with similar terms and credit quality. See Note 10 for additional discussion of our fair value measurements.

Stock-Based Compensation

We use the Black-Scholes option-pricing model to value our stock option grants. Restricted stock awards with market conditions are valued using the Monte Carlo valuation method. Other restricted stock awards without market conditions are valued based on the market price of the Company's common stock on the date of the grant. In addition, we reflect the benefits of tax deductions in excess of recognized compensation cost as an operating cash outflow. Compensation cost arising from all stock-based compensation awards is recognized as expense using the straight-line method over the vesting period and is included in G&A in our consolidated statements of operations. See Note 16 for additional discussion of our stock-based compensation.

Recent Accounting Pronouncements

Reference Rate Reform. In March 2020, the FASB issued ASU 2020-04, Facilitation of the Effects of Reference Rate Reform on Financial Reporting (ASU 2020-04). ASU 2020-04 provides companies with optional guidance to ease the potential accounting burden associated with transitioning away from reference rates that are expected to be discontinued. This guidance is effective beginning on March 12, 2020, and all entities may elect to apply the amendments prospectively through December 31, 2022. The Company is currently evaluating the impact but do not expect that the adoption of ASU 2020-04 will have a material impact on our consolidated financial statements and related disclosures.

(3) Supplemental Cash Flow Information

The following table presents supplemental disclosure of non-cash and cash activity as well as a reconciliation of total cash balances between the consolidated balance sheets and consolidated statements of cash flows for the periods presented:

Fiscal Year Ended September 30,

Supplemental disclosure of non-cash activity:

Beginning operating lease liabilities (ASC 842 adoption)(a) $ — $ — $ 16,028

Increase in operating lease right-of-use assets(b) $ 835 $ 2,905 $ 3,104

Increase in operating lease liabilities(b) $ 835 $ 2,905 $ 3,104

Derecognition of investment in unconsolidated entities(c) $ 3,641 $ — $ —

Supplemental disclosure of cash activity:

Tax refunds received $ — $ 1,078 $ 315

Reconciliation of cash, cash equivalents and restricted cash:

(a) On October 1, 2019, we adopted Accounting Standards Update (ASU) No. 2016-02, Leases (ASU 2016-02) and related amendments, collectively codified in ASC Topic 842, Leases (ASC 842). Upon adoption of ASC 842, we recorded net operating lease right-of-use (ROU) assets of $13.9 million and operating lease liabilities of $16.0 million. Existing prepaid rent and accrued rent were recorded as an offset to the gross operating lease ROU assets.

(b) Represents leases renewed or additional leases commenced during the fiscal years ended September 30, 2022,2021 and 2020.

(c) Represents the derecognition of investment in unconsolidated entities associated with the carrying value of previously held interest in Imagine Homes upon the acquisition of substantially all of the assets of Imagine Homes during the quarter ended June 30, 2022. Refer to Note 4 for further discussion.

(4) Investments in Unconsolidated Entities

Unconsolidated Entities

As of September 30, 2022, the Company participated in certain joint ventures and had investments in unconsolidated entities in which it had less than a controlling interest. The following table presents the Company's investment in these unconsolidated entities as well as the total equity and outstanding borrowings of these unconsolidated entities as of September 30, 2022 and 2021:

Investment in unconsolidated entities $ 964 $ 4,464

Total equity of unconsolidated entities $ 1,564 $ 7,316

Total outstanding borrowings of unconsolidated entities $ — $ 12,708

On May 20, 2022, the Company acquired substantially all of the assets of Imagine Homes, a private San Antonio-based homebuilder. For the past 16 years, Beazer has held a one-third ownership stake in Imagine Homes, recorded as an investment in unconsolidated entities on the consolidated balance sheet. The transaction was deemed an asset acquisition under the guidance of ASC Topic 805-50, Business Combinations - Related Issues. The Company accounted for the asset acquisition following the cost accumulation model, whereby the sum of the carrying value of the previously held interest, additional consideration paid and transaction costs were allocated to the acquired assets on a relative fair value basis. The reduction in balances of the Company's investment in unconsolidated entities, total equity and outstanding borrowings of unconsolidated entities reflects the Imagine Homes transaction.

Equity in income from unconsolidated entity activities included in income from continuing operations is as follows for the periods presented:

Fiscal Year Ended September 30,

Equity in income of unconsolidated entities $ 521 $ 594 $ 347

For the fiscal years ended September 30, 2022, 2021 and 2020, there were no impairments related to investments in unconsolidated entities.

Guarantees

Historically, the Company's joint ventures typically obtained secured acquisition, development, and construction financing. In addition, the Company and its joint venture partners provided varying levels of guarantees of debt and other debt-related obligations for these unconsolidated entities. However, as of September 30, 2022 and 2021, the Company had no outstanding guarantees or other debt-related obligations related to our investments in unconsolidated entities.

The Company and its joint venture partners generally provide unsecured environmental indemnities to land development joint venture project lenders. These indemnities obligate the Company to reimburse the project lenders for claims related to environmental matters for which they are held responsible. During our fiscal years ended September 30, 2022 and 2021, the Company was not required to make any payments related to environmental indemnities.

In assessing the need to record a liability for these guarantees, the Company considers its historical experience in being required to perform under the guarantees, the fair value of the collateral underlying these guarantees, and the financial condition of the applicable unconsolidated entities. In addition, the fair value of the collateral of unconsolidated entities is monitored to ensure that the related borrowings do not exceed the specified percentage of the value of the property securing the borrowings. As of September 30, 2022, no liability was recorded for the contingent aspects of any guarantees that were determined to be reasonably possible but not probable.

(5) Owned Inventory

The components of our owned inventory are as follows as of September 30, 2022 and 2021:

Homes under construction include homes substantially finished and ready for delivery and homes in various stages of construction, including costs of the underlying lot, direct construction costs and capitalized indirect costs. As of September 30, 2022, we had 2,688 homes under construction, including 887 spec homes totaling $246.5 million (793 in-process spec homes totaling $208.7 million, and 94 finished spec homes totaling $37.8 million). As of September 30, 2021, we had 2,912 homes under construction, including 576 spec homes totaling $116.4 million 542 in-process spec homes totaling $105.2 million, and 34 finished spec homes totaling $11.2 million).

Land under development consists principally of land acquisition, land development and other common costs. These land related costs are allocated to individual lots on a pro-rata basis, and the lot costs are transferred to homes under construction when home construction begins for the respective lots. Certain of the fully developed lots in this category are reserved by a customer deposit or sales contract.

Land held for future development consists of communities for which construction and development activities are expected to occur in the future or have been idled and are stated at cost unless facts and circumstances indicate that the carrying value of the assets may not be recoverable. All applicable carrying costs, such as interest and real estate taxes, are expensed as incurred.

Land held for sale includes land and lots that do not fit within our homebuilding programs and strategic plans in certain markets, and land is classified as held for sale once certain criteria are met (refer to Note 2). These assets are recorded at the lower of the carrying value or fair value less costs to sell (net realizable value).

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

Total owned inventory by reportable segment is presented in the table below as of September 30, 2022 and 2021:

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

(b) Projects in progress amount includes capitalized interest and indirect costs that are maintained within our Corporate and unallocated segment.

Inventory Impairments

The following table presents, by reportable segment, our total impairments and abandonment charges for the periods presented:

Fiscal Year Ended September 30,

Land Held for Sale:

Southeast — — 8

Corporate and unallocated(a) 565 — 1,160

Total impairment charges on land held for sale $ 1,868 $ — $ 1,257

Abandonments:

Total impairments and abandonment charges $ 2,963 $ 853 $ 2,903

(a) Amount represents capitalized interest and indirects balance that was impaired. Capitalized interest and indirects are maintained within our Corporate and unallocated segment.

Projects in Progress Impairments

We assess our projects in progress inventory for indicators of impairment at the community level on a quarterly basis. If indicators of impairment are present for a community with more than ten homes remaining to close, we perform a recoverability test by comparing the expected undiscounted cash flows for the community to its carrying value. If the aggregate undiscounted cash flows are in excess of the carrying value, the asset is considered to be recoverable and is not impaired. If the carrying value exceeds the aggregate undiscounted cash flows, we perform a discounted cash flow analysis to determine the fair value of the community, and impairment charges are recorded if the fair value of the community's inventory is less than its carrying value.

No project in progress impairments were recognized during the fiscal years ended September 30, 2022, 2021 and 2020.

Land Held for Sale Impairments

Impairments on land held for sale generally represent write downs of these properties to net realizable value based on sales contracts, letters of intent, current market conditions and recent comparable land sale transactions, as applicable. Absent an executed sales contract, our assumptions related to land sales prices require significant judgment because the real estate market is highly sensitive to changes in economic conditions, and our estimates of sale prices could differ significantly from actual results.

During the fiscal year ended September 30, 2022, we recognized $1.9 million land held for sale impairment charges related to two held for sale communities in the West segment. No land held for sale impairment charges were recognized during the fiscal year ended September 30, 2021. During the fiscal year ended September 30, 2020, we recognized $1.3 million land held for sale impairment charges related to two held for sale communities: one in the West segment and one in the Southeast segment.

Abandonments

From time-to-time, we may determine to abandon lots or not exercise certain option agreements that are not projected to produce adequate results or no longer fit with our long-term strategic plan. Additionally, in certain limited instances, we are forced to abandon lots due to seller non-performance, or permitting or other regulatory issues that do not allow us to build on those lots. If we intend to abandon or walk away from a property, we record an abandonment charge to earnings for the deposit amount and any related capitalized costs in the period such decision is made. During the fiscal years ended September 30, 2022, 2021 and 2020, we recognized $1.1 million, $0.9 million and 1.6 million in abandonment charges, respectively.

(6) Interest

Interest capitalized during the fiscal years ended September 30, 2022, 2021 and 2020 was limited by the balance of inventory eligible for capitalization. The following table presents certain information regarding interest for the periods presented:

Fiscal Year Ended September 30,

Capitalized interest impaired (439) — (792)

(a) The amount of interest capitalized depends on the qualified inventory balance, which considers the status of the Company's inventory holdings. Qualified inventory balance includes the majority of homes under construction and land under development but excludes land held for future development and land held for sale.

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

(7) Property and Equipment

The following table presents our property and equipment as of September 30, 2022 and 2021:

Model furnishings and sales office improvements $ 22,544 $ 19,617

Furniture, fixtures and office equipment 11,019 10,613

(8) Borrowings

The Company's debt, net of unamortized debt issuance costs consisted of the following as of September 30, 2022 and 2021:

in thousands Maturity Date September 30, 2022 September 30, 2021

Senior Unsecured Term Loan September 2022 $ — $ 50,000

Unamortized debt issuance costs (7,280) (8,983)

Secured Revolving Credit Facility February 2024(a) — —

(a) The Secured Revolving Credit Facility was scheduled to mature in February 2024; however, it was terminated early in conjunction with the Company entering into the new Senior Unsecured Revolving Credit Facility. Refer to below for further discussion.

As of September 30, 2022, the future maturities of our borrowings were as follows:

Fiscal Year Ended September 30,

in thousands

Secured Revolving Credit Facility

The Secured Revolving Credit Facility provides working capital and letter of credit capacity of $250.0 million. The Facility allows us to issue letters of credit against the undrawn capacity. Subject to our option to cash collateralize our obligations under the Facility upon certain conditions, our obligations under the Facility were secured by liens on substantially all of our personal property and a significant portion of our owned real property. We also pledged approximately $1.06 billion of inventory assets to the Facility to collateralize potential future borrowings or letters of credit (in addition to the letters of credit already issued under the Facility, if any).

As of September 30, 2022 and 2021, no borrowings were outstanding under the Facility. As of September 30, 2022, we had letters of credit outstanding of $5.5 million under the Facility, resulting in a remaining capacity of $244.5 million. We had no letters of credit outstanding under the Facility as of September 30, 2021. The Facility requires compliance with certain covenants, including negative covenants and financial covenants. As of September 30, 2022, the Company believes it was in compliance with all such covenants.

New Senior Unsecured Revolving Credit Facility

The New Unsecured Facility provides for a revolving credit facility with borrowing capacity up to $265.0 million. The Company also will have the right from time to time to request to increase the size of the commitments under the New Unsecured Facility by up to $135.0 million for a maximum of $400.0 million. The New Unsecured Facility terminates on October 13, 2026 (the “Termination Date”), and the Company may borrow, repay and reborrow amounts under the New Unsecured Facility until the Termination Date.

Obligations of the Company under the New Unsecured Facility are jointly and severally guaranteed by certain of the Company’s existing and future direct and indirect subsidiaries, excluding, among others, certain specified unrestricted subsidiaries.

The New Unsecured Facility contains customary financial covenants, including (i) a maximum leverage ratio, (ii) a minimum liquidity test, (iii) a minimum interest coverage ratio and (iv) a minimum net worth test. In addition, the New Unsecured Facility contains customary affirmative and negative covenants for a transaction of this type, including covenants that limit liens, asset sales and investments, in each case subject to negotiated exceptions and baskets. The New Unsecured Facility also contains representations and warranties and event of default provisions customary for a transaction of this type.

Letter of Credit Facilities

The Company has entered into stand-alone, cash-secured letter of credit agreements with banks to maintain pre-existing letters of credit and to provide for the issuance of new letters of credit (in addition to the letters of credit issued under the Facility). As of September 30, 2022 and 2021, the Company had letters of credit outstanding under these additional facilities of $29.7 million and $21.8 million, respectively, all of which were secured by cash collateral in restricted accounts totaling $31.5 million and $22.3 million, respectively. The Company may enter into additional arrangements to provide additional letter of credit capacity.

Senior Notes

The Company's Senior Notes are unsecured obligations ranking pari passu with all other existing and future senior indebtedness. Substantially all of the Company's significant subsidiaries are full and unconditional guarantors of the Senior Notes and are jointly and severally liable for obligations under the Senior Notes and the Facility. Each guarantor subsidiary is a wholly owned subsidiary of Beazer Homes.

All unsecured Senior Notes rank equally in right of payment with all existing and future senior unsecured obligations, senior to all of the Company's existing and future subordinated indebtedness and effectively subordinated to the Company's existing and future secured indebtedness, to the extent of the value of the assets securing such indebtedness. The unsecured Senior Notes and related guarantees are structurally subordinated to all indebtedness and other liabilities of all of the Company's subsidiaries that do not guarantee these notes, but are fully and unconditionally guaranteed jointly and severally on a senior basis by the Company's wholly-owned subsidiaries party to each applicable indenture.

The Company's Senior Notes are issued under indentures that contain certain restrictive covenants which, among other things, restrict our ability to pay dividends, repurchase our common stock, incur certain types of additional indebtedness, and make certain investments. Compliance with the Senior Note covenants does not significantly impact the Company's operations. The Company believes it was in compliance with the covenants contained in the indentures of all of its Senior Notes as of September 30, 2022.

During the fiscal year ended September 30, 2022, we repurchased $6.0 million of our outstanding 2027 Notes and $18.4 million of our outstanding 2025 Notes using cash on hand, resulting in a gain on extinguishment of debt of $0.3 million.

During the fiscal year ended September 30, 2021, we repurchased $30.7 million of our outstanding 2027 Notes using cash on hand, resulting in a loss on extinguishment of debt of $2.0 million.

During the fiscal year ended September 30, 2020, we made no repurchases of Senior Notes and thus, no gain or loss on extinguishment of debt was recognized.

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

Senior Note Description Issuance Date Maturity Date Redemption Terms

Junior Subordinated Notes

The Company's unsecured junior subordinated notes (Junior Subordinated Notes) mature on July 30, 2036 and have an aggregate principal balance of $100.8 million as of September 30, 2022. The securities have a floating interest rate as defined in the Junior Subordinated Notes Indentures, which was a weighted-average of 5.23% as of September 30, 2022. The obligations relating to these notes were subordinated to the Facility and the Senior Notes, and they are now subordinated to the New Unsecured Facility and the Senior Notes. In January 2010, the Company restructured $75.0 million of these notes and recorded them at their then estimated fair value. Over the remaining life of the restructured notes, we will increase their carrying value until this carrying value equals the face value of the notes. As of September 30, 2022, the unamortized accretion was $28.5 million and will be amortized over the remaining life of the restructured notes. The remaining $25.8 million of these notes are subject to the terms of the original agreement, have a floating interest rate equal to three-month LIBOR plus 2.45% per annum, resetting quarterly, and are redeemable in whole or in part at par value. The material terms of the $75.0 million restructured notes are identical to the terms of the original agreement except that the floating interest rate is subject to a floor of 4.25% and a cap of 9.25%. In addition, beginning on June 1, 2012, the Company has the option to redeem the $75.0 million principal balance in whole or in part at 75% of par value; beginning on June 1, 2022, the redemption price will increase by 1.785% annually. As of September 30, 2022, the Company believes it was in compliance with all covenants under the Junior Subordinated Notes.

(9) Contingencies

Beazer Homes and certain of its subsidiaries have been and continue to be named as defendants in various construction defect claims, complaints, and other legal actions. The Company is subject to the possibility of loss contingencies related to these defects as well as others arising from its business. In determining loss contingencies, we consider the likelihood of loss and our ability to reasonably estimate the amount of such loss. An estimated loss is recorded when it is considered probable that a liability has been incurred and the amount of loss can be reasonably estimated.

Warranty Reserves

We currently provide a limited warranty ranging from one to two years covering workmanship and materials per our defined quality standards. In addition, we provide a limited warranty for up to ten years covering only certain defined structural element failures.

Our homebuilding work is performed by subcontractors who typically must agree to indemnify us with regard to their work and provide certificates of insurance demonstrating that they have met our insurance requirements and have named us as an additional insured under their policies. Therefore, many claims relating to workmanship and materials that result in warranty spending are the primary responsibility of these subcontractors.

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

In addition, we maintain third-party insurance, subject to applicable self-insured retentions, for most construction defects that we encounter in the normal course of business. We believe that our warranty and litigation accruals and third-party insurance are adequate to cover the ultimate resolution of our potential liabilities associated with known and anticipated warranty and construction-defect related claims and litigation. However, there can be no assurance that the terms and limitations of the limited warranty will be effective against claims made by homebuyers; that we will be able to renew our insurance coverage or renew it at reasonable rates; that we will not be liable for damages, the cost of repairs, and/or the expense of litigation surrounding possible construction defects, soil subsidence, or building related claims; or that claims will not arise out of events or circumstances not covered by insurance and/or not subject to effective indemnification agreements with our subcontractors.

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

Fiscal Year Ended September 30,

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

Insurance Recoveries

The Company has insurance policies that provide for the reimbursement of certain warranty costs incurred above specified thresholds for each period covered. Amounts recorded for anticipated insurance recoveries are reflected within the consolidated statements of operations as a reduction of home construction expenses. Amounts not yet received from our insurer are recorded on a gross basis, without any reduction for the associated warranty expense, within accounts receivable on our consolidated balance sheets.

Litigation

In the normal course of business, we and certain of our subsidiaries are subject to various lawsuits and have been named as defendants in various claims, complaints, and other legal actions, most relating to construction defects, moisture intrusion, and product liability. Certain of the liabilities resulting from these actions are covered in whole or in part by insurance.

We cannot predict or determine the timing or final outcome of these lawsuits or the effect that any adverse findings or determinations in pending lawsuits may have on us. In addition, an estimate of possible loss or range of loss, if any, cannot presently be made with respect to certain of these pending matters. An unfavorable determination in any of the pending lawsuits could result in the payment by us of substantial monetary damages that may not be fully covered by insurance. Further, the legal costs associated with the lawsuits and the amount of time required to be spent by management and our Board of Directors on these matters, even if we are ultimately successful, could have a material adverse effect on our financial condition, results of operations, or cash flows.

We have an accrual of $9.8 million and $8.3 million in other liabilities on our consolidated balance sheets related to litigation matters as of September 30, 2022 and 2021, respectively.

Surety Bonds and Letters of Credit

We had outstanding letters of credit and surety bonds of $35.2 million and $279.6 million, respectively, as of September 30, 2022, related principally to our obligations to local governments to construct roads and other improvements in various developments.

(10) Fair Value Measurements

As of the dates presented, we had assets on our consolidated balance sheets that were required to be measured at fair value on a recurring or non-recurring basis. We use a fair value hierarchy that requires us to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value as follows:

•Level 1 – Quoted prices in active markets for identical assets or liabilities;

•Level 2 – Inputs other than quoted prices included in Level 1 that are observable either directly or indirectly through corroboration with market data; and

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

Certain of our assets are required to be recorded at fair value on a non-recurring basis when events and circumstances indicate that the carrying value of these assets may not be recoverable. We review our long-lived assets, including inventory, for recoverability when factors indicate an impairment may exist, but no less than quarterly. Fair value on assets deemed to be impaired is determined based upon the type of asset being evaluated. Fair value of our owned inventory assets, when required to be calculated, is further discussed within Notes 2 and 5. Due to the substantial use of unobservable inputs in valuing the assets on a non-recurring basis, they are classified within Level 3.

During the fiscal year ended September 30, 2022, we recognized no impairments on projects in progress and $1.9 million of impairments on land held for sale.

During the fiscal year ended September 30, 2021, we recognized no impairments on projects in progress and land held for sale.

During the fiscal year ended September 30, 2020, we recognized no impairments on projects in progress and $1.3 million of impairments on land held for sale.

Determining within which hierarchical level an asset or liability falls requires significant judgment. We evaluate our hierarchy disclosures each quarter. The following table presents the period-end balances of assets measured at fair value on a recurring basis and the impairment-date fair value of certain assets measured at fair value on a non-recurring basis for each hierarchy level. These balances represent only those assets whose carrying values were adjusted to fair value during the periods presented:

in thousands Level 1 Level 2 Level 3 Total

Deferred compensation plan assets(a) $ — $ 3,179 $ — $ 3,179

Land held for sale(b) — — 902 (c) 902

Deferred compensation plan assets(a) $ — $ 2,730 $ — $ 2,730

Deferred compensation plan assets(a) $ — $ 2,339 $ — $ 2,339

Land held for sale(b) — — 6,240 (c) 6,240

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

(b) Measured at fair value on a non-recurring basis, including the capitalized interest and indirect costs related to the asset.

(c) Amount represents the impairment-date fair value of land held for sale assets that were impaired during the period indicated.

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

The following table presents the carrying value and estimated fair value of certain other financial liabilities as of September 30, 2022 and 2021:

in thousands CarryingAmount(a) Fair Value CarryingAmount(a) Fair Value

(a)Carrying amounts are net of unamortized debt issuance costs or accretion.

(b)The estimated fair value for our publicly-held Senior Notes and the Term Loan have been determined using quoted market rates (Level 2).

(c) Since there is no trading market for our Junior Subordinated Notes, the fair value of these notes is estimated by discounting scheduled cash flows through maturity (Level 3). The discount rate is estimated using market rates currently being offered on loans with similar terms and credit quality. Judgment is required in interpreting market data to develop these estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts that we could realize in a current market exchange.

(11) Operating Leases

The Company leases certain office space and equipment under operating leases for use in our operations. We recognize operating lease expense on a straight-line basis over the lease term. Certain of our lease agreements include one or more options to renew. The exercise of lease renewal options is generally at our discretion. Variable lease expense primarily relates to maintenance and other monthly expense that do not depend on an index or rate.

We determine if an arrangement is a lease at contract inception. Lease and non-lease components are accounted for as a single component for all leases. Operating lease ROU assets and liabilities are recognized at the lease commencement date based on the present value of the future lease payments over the expected lease term, which includes optional renewal periods if we determine it is reasonably certain that the option will be exercised. As our leases do not provide an implicit rate, the discount rate used in the present value calculation represents our incremental borrowing rate determined using information available at the commencement date.

Operating lease expense is included as a component of general and administrative expenses in our consolidated statements of operations. Sublease income and variable lease expenses are de minimis. For the fiscal years ended September 30, 2022, 2021 and 2020, we recorded operating lease expense of $4.0 million, $4.3 million and $4.5 million, respectively. Cash payments on lease liabilities during the fiscal years ended September 30, 2022, 2021 and 2020 totaled $4.4 million, $4.8 million and $4.6 million, respectively.

At September 30, 2022 and 2021, weighted-average remaining lease term and discount rate were as follows:

Fiscal Year Ended September 30,

Weighted-average remaining lease term 4.3 years 4.8 years

Weighted-average discount rate 4.43% 4.56%

The following is a maturity analysis of the annual undiscounted cash flows reconciled to the carrying value of the operating lease liabilities as of September 30, 2022:

Fiscal Years Ending September 30,

in thousands

Total lease payments(a) 12,357

Less: imputed interest 1,149

Total operating lease liabilities $ 11,208

(a) Lease payments excludes $11.2 million legally binding minimum lease payments for an office lease signed but not yet commenced as of September 30, 2022. The related ROU asset and operating lease liability are not reflected on the Company's consolidated balance sheet as of September 30, 2022.

(12) Other Liabilities

Otherliabilities include the following as of September 30, 2022 and 2021:

Accrued compensations and benefits $ 57,781 $ 54,606

Income tax liabilities 320 —

(13) Income Taxes

The Company's expense (benefit) from income taxes from continuing operations consists of the following for the periods presented:

Fiscal Year Ended September 30,

Current federal(a) $ — $ — $ (4,641)

(a) Fiscal 2020 federal current benefit is primarily driven by the expected refund of our remaining alternative minimum tax credit balance due to the enactment of the CARES Act. Refer to Note 2 for further discussion.

The Company's expense (benefit) from income taxes from continuing operations differs from the amount computed by applying the federal income tax statutory rate as follows for the periods presented:

Fiscal Year Ended September 30,

Changes in uncertain tax positions — — (2)

The principal differences between our effective tax rate and the U.S. federal statutory rate for fiscal years 2022, 2021 and 2020 relate to state taxes, permanent differences and tax credits. Due to the effects of tax credits, our income tax expense is not always directly correlated to the amount of pre-tax income for the associated periods.

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of our assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The tax effects of significant temporary differences that give rise to the net deferred tax assets are as follows as of September 30, 2022 and 2021:

Deferred tax assets:

Federal and state net operating loss carryforwards $ 149,299 $ 177,611

Property, equipment and other assets 771 2,085

Uncertain tax positions 705 705

As of September 30, 2022, our gross deferred tax assets above included $61.0 million of federal net operating loss (NOL) carryforwards, $57.8 million of federal tax credits, and $33.9 million of state NOL carryforwards. The majority of our federal NOL carryforwards expire at various dates through our fiscal 2033, our federal tax credits expire at various dates through our fiscal 2042, and a majority of our state NOL carryforwards expire at various dates through our fiscal 2041. As of September 30, 2022, valuation allowance of $25.4 million remains on various state NOL carryforwards for which the Company has concluded it is not more likely than not that these attributes would be realized.

We experienced an “ownership change” as defined in Section 382 of the Internal Revenue Code (Section 382) as of January 12, 2010. Section 382 contains rules that limit the ability of a company that undergoes an “ownership change” to utilize its net operating loss carryforwards, tax credits and certain built-in losses or deductions recognized during the five-year period after the ownership change to offset future taxable income. Because the five-year period has expired, we have determined the actual impact and final classification of those amounts, which are properly reflected in the amounts presented above. There can be no assurance that another ownership change, as defined in the tax law, will not occur. If another “ownership change” occurs, a new annual limitation on the utilization of net operating loss carryforwards, tax credits and built-in losses would be determined as of that date. This limitation, should one be required in the future, is subject to assumptions and estimates that could differ from actual results.

Valuation Allowance

A reduction of the carrying amounts of deferred tax assets by a valuation allowance is required if, based on the available evidence, it is more likely than not that such assets will not be realized. Accordingly, we assess the need to establish valuation allowances for deferred tax assets periodically based on the more-likely-than-not realization threshold criterion. In our assessment, appropriate consideration is given to all positive and negative evidence related to the realization of the deferred tax assets. This assessment considers, among other matters, the nature, frequency and severity of current and cumulative losses, forecasts of future profitability, the duration of statutory carryforward periods, the Company's experience with operating loss carryforwards and tax credit carryforwards not expiring unused, the Section 382 limitation on our ability to carryforward pre-ownership change net operating losses, recognized built-in losses or deductions and tax planning alternatives. Our assessment, while rooted in actual Company performance, are highly subjective and rely on certain estimates, including forecasts, which could differ materially from actual results.

In fiscal 2022, our conclusions about our ability to more likely than not realize all of our federal and certain state tax attributes remain consistent with our prior determinations. We considered positive factors including significant increases in our current earnings, interest savings from our debt reduction strategies, shortage in housing supply, and our backlog. The negative factors included the overall health of the broader economy, significant increases in mortgage interest rates, and weakened housing demand. As of September 30, 2022, the Company will have to cumulatively generate approximately $907.1 million in pre-tax income over the course of its carryforward period to realize its deferred tax assets prior to their expiration, which, as previously discussed, is the Company's fiscal 2042.

Unrecognized Tax Benefits

A reconciliation of our unrecognized tax benefits is as follows for the beginning and end of each period presented:

Fiscal Year Ended September 30,

Additions for tax positions related to current year — — —

Additions for tax positions related to prior years — — —

Reductions in tax positions of prior years — — —

Lapse of statute of limitations — (83) (32)

If we were to recognize our $3.4 million of gross unrecognized tax benefits remaining as of September 30, 2022, substantially all would impact our effective tax rate. Additionally, we had no accrued interest and penalties as of September 30, 2022, 2021 and 2020. If applicable, we would record interest and penalties related to unrecognized tax benefits in income tax expense within our consolidated statements of operations.

In the normal course of business, we are subject to audits by federal and state tax authorities regarding various tax liabilities. The statute of limitations for our major tax jurisdictions remains open for examination for fiscal year 2007 and subsequent years. As of September 30, 2022, we do not expect that any of our uncertain tax positions will reverse within the next twelve months.

(14) Stockholders' Equity

Preferred Stock

The Company currently has no shares of preferred stock outstanding.

Common Stock

As of September 30, 2022, the Company had 63,000,000 shares of common stock authorized and 30,880,138 shares both issued and outstanding.

Common Stock Repurchases

The aggregate reduction to stockholders’ equity related to share repurchases during the fiscal years ended September 30, 2022, 2021 and2020 was $8.2 million, $0.0 million and $3.3 million, respectively. As of September 30, 2022, the remaining availability of the new share repurchase program was $41.8 million. The repurchase program has no expiration date.

Dividends

Section 382 Rights Agreement

Our certificate of incorporation prohibits certain transfers of our common stock that could result in an ownership change as defined in Section 382. In addition, we are party to a rights agreement intended to act as a deterrent to any person desiring to acquire 4.95% or more of our common stock. These instruments are designed to preserve the value of certain tax assets associated with our net operating loss carryforwards, tax credits and built-in losses under Section 382. In February 2022, our stockholders approved an extension of these protective provisions in our certificate of incorporation and the rights agreement.

(15) Retirement and Deferred Compensation Plans

401(k) Retirement Plan

The Company sponsors a defined-contribution plan that is a tax-qualified retirement plan under section 401(k) of the Internal Revenue Code (the Plan). Substantially all employees are eligible for participation in the Plan. Participants may defer and contribute from 1% to 80% of their salary to the Plan, with certain limitations on highly compensated individuals. The Company matches up to 50% of the participant's contributions limited to 6% of the participant's earnings. The participant's contributions vest immediately, while the Company's contributions vest over five years. The total Company contributions for the fiscal years ended September 30, 2022, 2021 and 2020 were approximately $3.5 million, $3.2 million and $3.4 million, respectively. During fiscal 2022, 2021 and 2020, participants forfeited $0.3 million, $0.8 million and $1.0 million, respectively, of unvested matching contributions.

Deferred Compensation Plan

The Beazer Homes USA, Inc. Deferred Compensation Plan (the DCP) is a non-qualified deferred compensation plan for a select group of executives and highly compensated employees. The DCP allows the executives to defer current compensation on a pre-tax basis to a future year, until termination of employment. The objectives of the DCP are to assist executives with financial planning and capital accumulation and to provide the Company with a method of attracting, rewarding and retaining executives. Participation in the DCP is voluntary. Beazer Homes may voluntarily make a contribution to the participants' DCP accounts. Deferred compensation assets of $3.2 million and $2.7 million as of September 30, 2022 and 2021, respectively, are included in other assets on our consolidated balance sheets and are recorded at fair value. Deferred compensation liabilities of $5.5 million and $7.2 million as of September 30, 2022 and 2021, respectively, are included in other liabilities on our consolidated balance sheets. For the years ended September 30, 2022, 2021 and 2020, the Company contributed approximately $0.2 million, $0.2 million and $0.2 million, respectively, to the DCP in the form of voluntary contributions.

(16) Stock-Based Compensation

The Company has shares available for grant under the Amended and Restated 2014 Beazer Homes USA, Inc. Long-Term Incentive Plan. We issue new shares upon the exercise of stock options and the grant of restricted stock awards. In cases of forfeitures and cancellations, those shares are returned to the share pool for future issuance. As of September 30, 2022, we had 1.5 million shares of common stock for issuance under our various equity incentive plans, of which 1.5 million shares are available for future grants.

Stock-based compensation expense is included in general and administrative expenses in our consolidated statements of operations. The following is a summary of stock-based compensation expense related to stock options and restricted stock awards for the fiscal years ended 2022, 2021 and 2020, respectively.

Fiscal Year Ended September 30,

Stock options expense $ 1 $ 25 $ 133

Stock Options

Stock options have an exercise price equal to the fair market value of the common stock on the grant date, generally vest two or three years after the date of grant, and may be exercised thereafter until their expiration, subject to forfeiture upon termination of employment as provided in the applicable plan. Under certain conditions of retirement, eligible participants may receive a partial vesting of stock options. Stock options generally expire on the eighth anniversary from the date such options were granted, depending on the terms of the award.

The fair value of each stock option granted is estimated on the date of grant using the Black-Scholes option-pricing model (Black-Scholes Model). As of September 30, 2022, the intrinsic value of our stock options outstanding and vested and exercisable were less than $0.1 million and less than $0.1 million, respectively. As of both September 30, 2022 and 2021, there was less than $0.1 million of total unrecognized compensation cost related to unvested stock options. The cost remaining as of September 30, 2022 is expected to be recognized over a weighted-average period of 1.4 years.

During fiscal 2018, the Compensation Committee of our Board of Directors approved the Employee Stock Option Program (ESOP). This program is available to all full-time employees and is designed to enable employees to share in potential price appreciation of the Company's stock. The ESOP matches stock purchases made by eligible employees meeting certain conditions with an option to purchase an additional share of the Company's shares on a one-to-one basis. The exercise price of the options granted is equal to the closing price of the Company's stock on the day the underlying shares are purchased by the employee, which is also the ESOP grant date. The options will vest on the second anniversary of the date of grant but are forfeited if (1) the eligible employee no longer works for the Company or (2) the underlying shares are sold before the two-year vesting period is over. The total number of options available under the ESOP is limited to 100,000, each for one share of the Company's common stock, of which 31,968 options were granted through the end of fiscal 2022.

During the year ended September 30, 2022, we issued 236 stock options, all were issued under the ESOP. No stock options were issued during the year ended September 30, 2021, and 950 stock options were issued during the year ended September 30, 2020. We used the following valuation assumptions for stock options granted for the periods presented:

Fiscal Year Ended September 30,

Expected life of options 5.7 years 5.7 years

Expected dividends — —

Weighted-average risk-free interest rate 1.88 % 0.43 %

Weighted-average fair value $ 8.54 $ 4.99

We relied upon a combination of the observed exercise behavior of our prior grants with similar characteristics, the vesting schedule of the current grants, and an index of peer companies with similar grant characteristics to determine the expected life of the options granted. We considered historic returns of our stock and the implied volatility of our publicly-traded options in determining expected volatility. We assumed no dividends would be paid since our Board of Directors has suspended payment of dividends indefinitely and payment of dividends is restricted under our Senior Notes covenants. The risk-free interest rate is based on the term structure of interest rates at the time of the option grant.

A summary of stock option activity for the periods presented is as follows:

Information pertaining to the intrinsic value of options exercised and the fair market value of options that vested is below:

Fiscal Year Ended September 30,

Intrinsic value of options exercised $ 6 $ 1,402 $ 587

Fair market value of options vested $ 5 $ 173 $ 144

Restricted Stock Awards

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

Compensation cost arising from restricted stock awards granted to employees is recognized as an expense using the straight-line method over the vesting period. As of September 30, 2022 and 2021, there was $7.3 million and $7.2 million, respectively, of total unrecognized compensation cost related to unvested restricted stock awards. The cost remaining as of September 30, 2022 is expected to be recognized over a weighted-average period of 1.7 years.

During fiscal 2022, we issued time-based restricted stock awards and performance-based restricted stock awards with a payout subject to certain performance and market conditions. Each award type is discussed below.

Performance-Based Restricted Stock Awards

During the year ended September 30, 2022, we issued 91,858 shares of performance-based restricted stock (2022 Performance Shares), containing market conditions, to our executive officers and certain other employees. The 2022 Performance Shares are structured to be awarded based on the Company's performance under three pre-determined financial and operational metrics at the end of the three-year performance period. After determining the number of shares earned based on the financial and operational metrics, which can range from 0% to 175% of the targeted number of shares, the award will be subject to further upward or downward adjustment by as much as 20% based on the Company's relative total shareholder return (TSR) compared against a selected small to mid-cap homebuilder peers during the three-year performance period. The 2022 Performance Shares were valued using the Monte Carlo valuation model due to the existence of the TSR market condition and had an estimated fair value of $23.36 per share on the date of grant.

A Monte Carlo valuation model requires the following inputs: (1) the expected dividend yield on the underlying stock; (2) the

expected price volatility of the underlying stock; (3) the risk-free interest rate for the period corresponding with the expected

term of the award; and (4) the fair value of the underlying stock. For the Company and each member of the peer group, the

following inputs were used, as applicable, in the Monte Carlo valuation model to determine the fair value as of the grant date

for performance-based restricted stock granted in each of the fiscal years ended.

Fiscal Year Ended September 30,

Dividend yield — — —

Each of our performance shares represent a contingent right to receive one share of the Company's common stock if vesting is satisfied at the end of the three-year performance period. Our performance stock award plans provide that any performance shares earned in excess of the target number of performance shares issued may be settled in cash or additional shares at the discretion of the Compensation Committee. In November 2019, we cash settled 135,337 shares earned above target level based on the performance level achieved under our 2017 performance-based award plan. The cash payment totaled $2.1 million, which was reflected as a reduction to paid-in capital in the accompanying consolidated statements of stockholders' equity. We have not cash settled any such performance-based awards prior to or subsequent to the November 2019 transaction, and we have no current plans to cash settle any additional performance-based restricted shares in the future.

The performance criteria of the 2020 Performance Share grant were satisfied as of September 30, 2022. Based on the actual performance level achieved, 334,736 performance-based restricted stock awards from the 2020 Performance Share grant cliff vested at the end of the three-year vesting period on November 15, 2022. Of the total $7.0 million compensation cost related to these awards, we have recognized $2.1 million, $3.3 million and $1.3 million during the fiscal years ended September 30, 2022, 2021 and 2020, respectively. The remaining $0.3 million of unrecognized compensation cost will be recognized in the first quarter of fiscal 2023.

BZH US Equity

BZH · 10-K · period ended 2022-09-30

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

Item 8. Financial Statements and Supplementary Data

BZH US Equity☆

BZH · 10-K · period ended 2022-09-30

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

Item 8. Financial Statements and Supplementary Data

BZH US Equity