BEAZER HOMES USA INC (BZH)

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

At the outset of fiscal 2024, mortgage rates fluctuated at high levels with a notable peak in October 2023, which led to subdued housing market activity. As the first fiscal quarter progressed, mortgage rates began to decline gradually, influenced by the expectations of future interest rate reductions by the Federal Reserve. Entering the second fiscal quarter, we began to see the benefit of the mortgage rate reductions as homebuyer traffic and demand improved. We observed healthy demand and sales pace during the spring selling season, even as mortgage rates continued to modestly fluctuate. However, as we progressed through the second half of fiscal 2024, despite the downward trend in mortgage rates, many potential buyers remained hesitant amid uncertainty surrounding future interest rate cuts and economic expectations.

Home affordability remains a concern and a central risk to our industry's outcomes. We continue to adjust prices and features to align with the current market, including offering incentives. We also continue to refine our product offerings by adjusting home sizes and specification levels to address pricing and affordability concerns across each of our markets.

Although we expect uncertainty around mortgage interest rates in near-term market conditions to persist, we are optimistic in

the long-term outlook of the housing market, anchored by supply and demand factors at a macroeconomic level. The shortfalls in new home production over the past decade have contributed to an underproduction of housing in the country, and demand for housing remains resilient characterized by low unemployment and wage growth, although still limited by affordability and mortgage rate volatility.

Balanced Growth Strategy

Fiscal 2024 represented continued progress towards the execution of our balanced growth strategy, which is characterized by growing profitability, improving balance sheet efficiency, and generating returns above our cost of capital. This strategy provides us with the flexibility to reduce leverage through debt reduction, increase return of capital to investors through stock repurchases, or increase investment in land and other operating assets in response to changing market conditions.

In line with our balanced growth strategy, during fiscal 2023 we established a set of multi-year strategic goals that would allow us to create significant value for our shareholders. Specifically, our three multi-year strategic goals include the following:

•increasing active communities to more than 200 by the end of fiscal 2026,

•reducing our net debt to net capitalization ratio to below 30% by the end of fiscal 2026, and

•reaching our target of 100% Zero Energy Ready home starts by the end of calendar year 2025.

During fiscal 2024, as we laid the groundwork to meet our multi-year active community count goal, we achieved significant growth, with our year-end active community count increasing by more than 20% compared to the prior year.

In March 2024, we successfully refinanced our remaining outstanding 2025 Notes of $197.9 million through the issuance of $250.0 million of Senior Notes due 2031 and extended the maturity of our Senior Unsecured Revolving Credit Facility. With a strong balance sheet and ample liquidity, we believe we are well-equipped to navigate the evolving market dynamics as we continue to make strides in reducing our net debt to net capitalization ratio.

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During fiscal 2024, we also made steady progress towards our goal of reaching 100% Zero Energy Ready home starts by the end of calendar year 2025. We are substantially ahead of schedule with 91% of our home starts being built to Zero Energy Ready standards during the quarter ended September 30, 2024. Notably, Beazer Homes has now certified more Zero Energy Ready homes to the DOE's Single Family National Program requirements than any other home builder. We believe these homes should command a premium compared to our previous series, driven by their innovative designs, superior quality, and durable construction.

As we look to fiscal 2025, we expect to take further steps to achieve our multi-year strategic goals by continuing to position our business for durable long-term growth, while focusing on the appropriate balance between pursuing growth opportunities, controlling risk, and maintaining a strong liquidity position. We believe our balanced growth strategy has created and will continue to create significant value for our shareholders.

Overview of Results for Our Fiscal 2024

The following is a summary of our performance against certain key operating and financial metrics during fiscal 2024, as compared to fiscal 2023.

•As of September 30, 2024, our land position included 28,538 controlled lots, up 9.0% from 26,189 as of September 30, 2023. Our fiscal 2024 marks the fourth consecutive year of year-over-year growth in land position as we build a strong foundation to meet our active community count growth. Excluding land held for future development and land held for sale lots, we controlled 27,904 active lots, up 9.1% from the prior year. The majority of the growth in controlled lots was through the usage of lot option agreements, which allow us to position for future growth while providing the flexibility to respond to market conditions. As of September 30, 2024, we had 16,125 lots, or 57.8% of our total active lots, under option agreements as compared to 14,490 lots, or 56.7% of our total active lots, under option agreements as of September 30, 2023.

•During the fiscal year ended September 30, 2024, our average active community count of 144 was up 15.7% from 125 in the prior year. As of September 30, 2024, our ending active community count was 162, up 20.9% from 134 in the prior year. Our fiscal fourth quarter marks the tenth consecutive quarter of year-over-year growth in community count as we work towards our goal of reaching more than 200 active communities by the end of fiscal 2026. We invested $776.5 million in land acquisition and land development during the year ended September 30, 2024, representing an increase of 35.5% compared to $573.1 million in land spend during the year ended September 30, 2023.

•During the fiscal year ended September 30, 2024, sales per community per month was 2.4 compared to 2.6 in the prior year, and our net new orders were 4,221, up 9.2% from 3,866 in the prior year. The expanded average active community count allowed us to deliver higher net new orders year-over-year despite a decline in sales pace to 2.4 orders per community per month during the year ended September 30, 2024 due to elevated mortgage rates and affordability challenges.

•During the fiscal year ended September 30, 2024, we closed 4,450 homes, up 4.8%, from 4,246 in the prior year, leading to an increase in homebuilding revenue to $2.29 billion, up 4.3%, from $2.20 billion in the prior year. The increase in closings was primarily due to due to higher community count, higher volume of spec homes that sold and closed within the current year, and improved construction cycle times.

•ASP for homes closed during the fiscal year ended September 30, 2024 was $515.3 thousand, down 0.5% from $517.8 thousand in the prior year. Backlog ASP as of September 30, 2024 was $537.9 thousand, up 3.8% from $518.0 thousand in the prior year. The increase in backlog ASP compared to the prior year was primarily due to changes in product and community mix as well as price appreciation in certain communities.

•Homebuilding gross margin for the fiscal year ended September 30, 2024 was 18.0%, down from 19.9% in the prior year. Homebuilding gross margin excluding impairments, abandonments, and interest for the fiscal year ended September 30, 2024 was 21.1%, down from 23.1% in the prior year. The year-over-year decrease in gross margin for the fiscal year ended September 30, 2024 was primarily driven by changes in product and community mix and an increase in closing cost incentives. If market conditions deteriorate due to unfavorable mortgage rate movements, gross margin may be compressed in the future.

•SG&A for the fiscal year ended September 30, 2024 was 11.4% of total revenue compared with 11.5% a year earlier. SG&A expense was $266.4 million for the fiscal year ended September 30, 2024, up 5.2% compared to prior year primarily due to higher commissions expense and higher sales and marketing costs as we continue to grow community count. We remain focused on prudently managing overhead costs.

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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 by a variety of factors, including periods of market volatility and changes in mortgage interest rates, which may result in increased or decreased new orders and/or revenues and closings that are outside of the normal ranges typically realized on account of seasonality.

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

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RESULTS OF CONTINUING OPERATIONS

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

(a) Excluding impairments, abandonments, and interest amortized to cost of sales, homebuilding gross margin was 21.1%, 23.1% and 26.3% for the fiscal years ended September 30, 2024, 2023 and 2022, respectively. Please see the "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 (non-GAAP measures) to homebuilding gross profit and gross margin, the most directly comparable GAAP measure.

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

(c) Calculated as tax expense for the period divided by income from continuing operations. Our income tax expenses are not always directly correlated to the amount of pre-tax income for the associated period due to a variety of factors, including, but not limited to, the impact of tax credits and permanent differences. Our tax credits are predominantly due to the energy efficiency of our homes and, historically, were valued at $2,000 per single family home. The Inflation Reduction Act increased these credits to $2,500 or $5,000 per single family home meeting Energy Star or Zero Energy Ready qualifications, respectively. As we work towards our goal of building 100% Zero Energy Ready homes, we expect our energy efficiency tax credits to shift increasingly towards $5,000 per single family home in the current and future years.

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Reconciliation of Net Income (GAAP) to Adjusted EBITDA (Non-GAAP)

Reconciliation of Net Income (GAAP measure) to Adjusted EBITDA (Non-GAAP measure) is provided for each period discussed below. Management believes that Adjusted EBITDA assists investors in understanding and comparing core operating results and underlying business trends by eliminating many of the differences in companies' respective capitalization, tax position, level of impairments, and other non-recurring items. This non-GAAP financial measure may not be comparable to other similarly titled measures of other companies and should not be considered in isolation or as a substitute for, or superior to, financial measures prepared in accordance with GAAP.

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

(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."

(b) We previously held a minority interest in a technology company specializing in digital marketing for new home communities, which was sold during the quarter ended March 31, 2024. In exchange for the previously held investment, we received cash in escrow along with a minority partnership interest in the acquiring company, which was recorded within other assets in our consolidated balance sheets. The resulting gain of $8.6 million from this transaction was recognized in other income, net on our consolidated statement of operations. The Company believes excluding this one-time gain from Adjusted EBITDA provides a better reflection of the Company's performance as this item is not representative of our core operations.

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Reconciliation of Total Debt to Total Capitalization Ratio (GAAP) to Net Debt to Net Capitalization Ratio (Non-GAAP)

Reconciliation of total debt to total capitalization ratio (GAAP measure) to net debt to net capitalization ratio (non-GAAP measure) is provided for each period below. Management believes that net debt to net capitalization ratio is useful in understanding the leverage employed in our operations and as an indicator of our ability to obtain financing. This non-GAAP financial measure may not be comparable to other similarly titled measures of other companies and should not be considered in isolation or as a substitute for, or superior to, financial measures prepared in accordance with GAAP.

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Homebuilding Operations Data

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

Net new orders for the year ended September 30, 2024 increased to 4,221, up 9.2% from the year ended September 30, 2023. The increase in net new orders was driven primarily by an increase in average active community count from 125 in the prior year to 144, partially offset by a decrease in sales pace from 2.6 orders per community per month in the prior year to 2.4.

West Segment: Net new orders for the year ended September 30, 2024 was 2,753, up 22.7% from the year ended September 30, 2023. The increase in net new orders compared to the prior year was driven by a 24.0% increase in average active community count from 75 in the prior year to 93, while sales pace remained flat year-over-year at 2.5 orders per community.

East Segment: Net new orders for the year ended September 30, 2024 was 912, up 6.2% from the year ended September 30, 2023. The increase in net new orders compared to the prior year was driven by a 25.0% increase in average active community count from 24 in the prior year to 30, partially offset by a 16.7% decrease in sales pace from 3.0 orders per community per month in the prior year to 2.5. The decrease in sales pace was due to a softening in demand in various sub-markets due to affordability challenges.

Southeast Segment: Net new orders for the year ended September 30, 2024 was 556, down 27.1% from the year ended September 30, 2023. The decrease in net new orders compared to the prior year was driven by a 16.0% decrease in average active community count from 25 in the prior year to 21, and a 12.0% decrease in sales pace from 2.5 orders per community per month in the prior year to 2.2. The decrease in sales pace was due to a softening in demand in various sub-markets due to affordability challenges.

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, 2024, 2023 and 2022:

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. The aggregate dollar value of homes in backlog as of September 30, 2024 decreased 10.1% compared to the prior year due to a 13.4% decrease in backlog units, partially offset by a 3.8% increase in the ASP of homes in backlog. The decrease in backlog units was due to closings exceeding net new orders for the year ended September 30, 2024. The increase in backlog ASP was primarily due to changes in product and community mix as well as price appreciation in certain communities.

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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:

West Segment: Homebuilding revenue increased by 12.1% for the fiscal year ended September 30, 2024 compared to the prior fiscal year due to a 14.3% increase in closings, partially offset by a 1.9% decrease in ASP. The year-over-year increase in closings in the West segment was primarily due to higher community count, higher volume of spec homes that sold and closed within the current year, and improved construction cycle times for fiscal 2024 compared to fiscal 2023.

East Segment: Homebuilding revenue decreased by 3.9% for the fiscal year ended September 30, 2024 compared to the prior fiscal year due to a 2.7% decrease in closings as well as a 1.2% decrease in ASP. The year-over-year decrease in closings in the East segment was primarily due to lower beginning backlog, partially offset by improved construction cycle times for fiscal 2024 compared to fiscal 2023.

Southeast Segment: Homebuilding revenue decreased by 10.4% for the fiscal year ended September 30, 2024 compared to the prior fiscal year due to a 14.8% decrease in closings, partially offset by a 5.1% increase in ASP. The year-over-year decrease in closings in the Southeast segment is primarily due to lower beginning backlog, partially offset by improved construction cycle times for fiscal 2024 compared to fiscal 2023.

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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 homebuilding gross margin (GAAP measures) to homebuilding gross profit and the related gross margin excluding impairments and abandonments and interest amortized to cost of sales (non-GAAP measures) 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 non-GAAP financial measures may not be comparable to other similarly titled measures of other companies and should not be considered in isolation or as a substitute for, or superior to, financial measures prepared in accordance with GAAP.

(a) Corporate and unallocated includes amortization of capitalized interest, capitalization and amortization of indirect costs related to homebuilding activities, as well as capitalized interest and capitalized indirect costs impaired in order to reflect projects in progress assets at fair value, when applicable.

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Our homebuilding gross profit decreased by $24.5 million to $413.6 million for the fiscal year ended September 30, 2024, compared to $438.1 million in the prior year. The decrease in homebuilding gross profit was primarily driven by a decrease in gross margin of 190 basis points to 18.0%, partially offset by an increase in homebuilding revenue of $94.6 million. 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 $1.4 million and interest amortized to homebuilding cost of sales which decreased by $0.8 million year-over-year (refer to Note 4 and Note 5 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 decreased by $24.0 million compared to the prior year while homebuilding gross margin decreased by 200 basis points to 21.1%. The year-over-year decrease in gross margin for the fiscal year ended September 30, 2024 was primarily driven by changes in product and community mix and an increase in closing cost incentives.

West Segment: Compared to the prior fiscal year, homebuilding gross profit decreased by $0.9 million due to lower gross margin, partially offset by an increase in homebuilding revenue. Homebuilding gross margin, excluding impairments and abandonments, decreased to 21.3%, down from 23.8% in the prior year. The decrease in gross margin was primarily driven by changes in product and community mix and an increase in closing cost incentives.

East Segment: Compared to the prior fiscal year, homebuilding gross profit decreased by $15.6 million due to a decrease in homebuilding revenue and lower gross margin. Homebuilding gross margin, excluding impairments and abandonments, decreased to 18.1%, down from 20.5% in the prior year. The decrease in gross margin was primarily driven by changes in product and community mix, an increase in price concessions, and an increase in closing cost incentives.

Southeast Segment: Compared to the prior fiscal year, homebuilding gross profit decreased by $13.0 million due to a decrease in homebuilding revenue and lower gross margin. Homebuilding gross margin, excluding impairments and abandonments, decreased to 22.0%, down from 22.9% in the prior year. The decrease in gross margin was primarily driven by changes in product and community mix and an increase in closing cost incentives.

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 non-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.

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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 2024, our homebuilding gross margin was 18.0% and excluding interest and inventory impairments and abandonments, it was 21.1%. For the same period, homebuilding gross margin was as follows in those communities that have previously been impaired, which represented 88 homes and 2.0% of total closings during fiscal 2024:

For further discussion of our impairment policies, refer to Note 2 and Note 4 of the notes to consolidated financial statements in this Form 10-K.

Land Sales and Other Revenue and Gross Profit

Land sales relate to land and lots sold that do not fit within our homebuilding programs or 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 by reportable segment for the periods presented:

(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.

(b) n/m - indicates the percentage is "not meaningful."

For the fiscal year ended September 30, 2024, land sales and other revenue increased by 343.8% to $37.2 million, and land sales and other gross profit increased by 133.5% to $10.7 million compared to the prior year. Year-over-year fluctuations on land sales and other revenue are primarily driven by the timing and volume of land and lot sales closings. Land sales and other gross profit are primarily impacted by the profitability of individual land and lot sale transactions as well as the volume of our title examinations operations. Future land and lot sales will depend on a variety of factors, including local market conditions, individual community performance, and changing strategic plans.

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Operating Income

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

(a) Includes amortization of capitalized interest, capitalization and amortization of indirect costs, impairment of capitalized interest and capitalized indirect costs, when applicable, expenses related to numerous shared services functions that benefit all segments but are not allocated to the operating segments reported above, including information technology, treasury, corporate finance, legal, branding and national marketing, and certain other amounts that are not allocated to our operating segments.

Our operating income decreased by $34.2 million to $143.0 million for the year ended September 30, 2024, compared to operating income of $177.3 million for year ended September 30, 2023, primarily driven by the previously discussed decrease in gross profit, higher commissions expense on higher homebuilding revenue, and higher sales and marketing costs, partially offset by lower other G&A expenses.

West Segment: The $16.1 million decrease in operating income compared to the prior year was primarily due to higher commissions on higher homebuilding revenue, higher sales and marketing expenses, and higher other G&A expenses, partially offset by an increase in gross profit in the segment.

East Segment: The $12.1 million decrease in operating income compared to the prior year was primarily due to the decrease in gross profit previously discussed and higher sales and marketing expenses in the segment.

Southeast Segment: The $11.7 million decrease in operating income compared to the prior year was primarily due to the decrease in gross profit previously discussed, partially offset by lower 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, 2024, corporate and unallocated net expenses decreased by $5.7 million from the prior fiscal year, primarily due to lower amortization of capitalized indirect costs to cost of sales.

Below operating income, we had the following noteworthy year-over-year fluctuations for the fiscal year ended September 30, 2024 compared to the prior year. Specifically, within other income, net, (1) we recognized a gain on sale of investment of $8.6 million during the year ended September 30, 2024 compared to no such transaction in the prior year period (See the "Reconciliation of Net Income (GAAP) to Adjusted EBITDA (Non-GAAP)" section above for further discussion on this transaction), and (2) we recognized higher investment income year-over year due to changes in fair value of our deferred compensation plan assets and higher distributions of income from unconsolidated entities during the year-ended September 30, 2024 compared to the prior year.

Income Taxes

We recognized income tax expense from continuing operations of $18.9 million for the fiscal year ended September 30, 2024, compared to income tax expense from continuing operations of $24.0 million and $53.3 million for our fiscal years ended September 30, 2023 and 2022, respectively. Income tax expense in our fiscal 2024, 2023 and 2022 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 12 of the notes to the consolidated financial statements in this Form 10-K for a further discussion of our income taxes.

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Liquidity and Capital Resources

Our sources of liquidity include, but are not limited to, cash from operations, proceeds from Senior Notes, our Senior Unsecured Revolving Credit Facility (the Unsecured 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 used in operating activities was $137.5 million for the fiscal year ended September 30, 2024. The primary drivers of operating cash flows are typically cash earnings and changes in inventory levels, including land acquisition and development spending. Net cash used in operating activities during the period was primarily driven by an increase in inventory of $282.1 million resulting from land acquisition, land development, and house construction spending to support continued growth and a net increase in non-inventory working capital of $30.2 million, partially offset by income before income taxes of $159.1 million, which included $15.7 million of non-cash charges.

Net cash provided by operating activities was $178.1 million for the fiscal year ended September 30, 2023. Net cash provided by operating activities during the period was primarily driven by income before income taxes of $182.5 million, which included $21.8 million of non-cash charges, partially offset by a net increase in non-inventory working capital of $11.5 million and an increase in inventory of $14.7 million resulting from 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, 2024 was $30.0 million, primarily driven by capital expenditures for model homes and information systems infrastructure, and investments in securities.

Net cash used in investing activities for the fiscal year ended September 30, 2023 was $29.7 million, primarily driven by capital expenditures for model homes and information systems infrastructure, and investments in securities.

Financing Activities

Net cash provided by financing activities was $23.9 million for the fiscal year ended September 30, 2024, primarily driven by inflows from the issuance of the 2031 Notes, partially offset by outflows from redemption of our 2025 Notes, debt issuance costs related to the 2031 Notes and extension of the term of our Unsecured Facility (see Note 7), repurchases of common stock, and tax payments for stock-based compensation awards vesting.

Net cash used in financing activities was $13.9 million for the fiscal year ended September 30, 2023, primarily driven by the repurchases of a portion of our 2025 Notes, debt issuance costs for the Unsecured Facility, and tax payments for stock-based compensation awards vesting.

Financial Position

As of September 30, 2024, our liquidity position consisted of $203.9 million in cash and cash equivalents and $300.0 million of remaining capacity under the Unsecured Facility, compared to $345.6 million in cash and cash equivalents and $265.0 million of remaining capacity under the Unsecured Facility as of September 30, 2023. Meanwhile, we invested $776.5 million and $573.1 million in land acquisition and land development during the fiscal years ended September 30, 2024 and September 30, 2023, respectively.

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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 long-term liquidity needs for funds to conduct our operations and meet other needs in the ordinary course of our business, however, we are continually reviewing our capital resources to determine whether we can meet our short- and long-term goals, and we may require additional capital to do so.

At times, we may also engage in capital markets, bank loans, 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 Unsecured 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.

Debt

We generally fulfill our short-term cash requirements with cash generated from our operations and available borrowings. Additionally, our Unsecured Facility provides working capital and letter of credit capacity of $300.0 million, which includes a letter of credit capacity of $100.0 million. As of September 30, 2024, no borrowings and no letters of credit were outstanding under the Unsecured Facility, resulting in a remaining borrowing capacity of $300.0 million. See Note 7 of the notes to the consolidated financial statements in this Form 10-K for further discussion.

We have also entered into a number of stand-alone letter of credit agreements with banks, secured with cash or certificates of deposit. These combined facilities provide for letter of credit needs collateralized by either cash or assets of the Company. We currently have $36.4 million of outstanding letters of credit under these facilities.

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 7 of the notes to the consolidated financial statements in this Form 10-K for additional details related to our borrowings.

Supplemental Guarantor Information

As discussed in Note 7 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. Summarized financial information is not presented for Beazer Homes USA, Inc. and the guarantor subsidiaries on a combined basis as the assets, liabilities and results of operations of the combined issuer and guarantors of the guaranteed security are not materially different than corresponding amounts presented in the consolidated financial statements of the parent company.

Credit Ratings

Our credit ratings are periodically reviewed by rating agencies. In June 2024, S&P reaffirmed the Company’s corporate credit rating of B+ and reaffirmed the Company's outlook of stable. In October 2024, Moody's reaffirmed the Company's issuer corporate family rating of B1 and reaffirmed the Company's outlook of stable. In addition, our Senior Notes have a rating of B+ and B1 per S&P and Moody's, respectively. These ratings and our current credit condition affect, among other things, our ability to access new capital. These ratings are not recommendations to buy, sell or hold debt securities. 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.

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Stock Repurchases and Dividends Paid

In May 2022, the Company's Board of Directors approved a share repurchase program that authorizes the Company to repurchase up to $50.0 million of its outstanding common stock. The repurchase program has no expiration date. During the fiscal year ended September 30, 2024, the Company repurchased 455 thousand shares of its common stock for $12.9 million at an average price per share of $28.41 through open market transactions. All shares have been retired upon repurchase. As of September 30, 2024, the remaining availability of the share repurchase program was $28.9 million.

No share repurchases were made during fiscal year 2023. During the fiscal year ended September 30, 2022, the Company repurchased 570 thousand shares of its common stock for $8.2 million at an average price per share of $14.33 through open market transactions.

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, 2024, 2023 or 2022.

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 with land developers and land bankers, which generally require the payment of cash or issuance of an irrevocable letter of credit or surety bond for the right to acquire lots during a specified period of time at a specified price. 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, 2024, we controlled 28,538 lots, which includes 272 lots of land held for future development and 362 lots of land held for sale. Of the 27,904 total active lots, we controlled 16,125 of these lots, or 57.8%, through option agreements, as compared to 14,490 active lots controlled, or 56.7% of our total active lots, through option agreements as of September 30, 2023. Lot option agreements allow us to position for future growth while providing the flexibility to respond to market conditions by renegotiating the terms of the options prior to exercise or terminating 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, letters of credit or surety bonds, and other non-refundable amounts incurred, which totaled $227.8 million as of September 30, 2024. The total remaining purchase price, net of cash deposits, committed under all options was $1.46 billion as of September 30, 2024. Subject to market conditions and our liquidity, we may 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.

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 $36.4 million and $332.2 million, respectively, as of September 30, 2024, primarily related to our obligations to local governments to construct roads and other improvements in various developments.

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Contractual Commitments

The following table summarizes our aggregate contractual commitments as of September 30, 2024:

(a) For a listing of our borrowings, refer to Note 7 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, 2024.

(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 12 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, 2024.

We had outstanding letters of credit and surety bonds of $36.4 million and $332.2 million, respectively, as of September 30, 2024, 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.

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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, 2024, our warranty reserve was $12.7 million, reflecting an accrual range of 0.3% to 1.1% 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, 2024.

There were no material changes in assumptions in calculating our reserve balance for the year ended September 30, 2024.

Our estimation process is discussed in Note 8 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.

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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.

In fiscal 2024, 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 our recent earnings levels, 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, elevated mortgage interest rates, and softening housing demand due to affordability challenges.

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 reductions 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 12 of notes to the consolidated financial statements in this Form 10-K.

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 second half of fiscal 2022, mortgage interest rates began to increase sharply, pushing mortgage payments as a percentage of income substantially above their long-term average. This lack of affordability, along with inflation, an uncertain economic outlook and other macro-economic conditions, led to a significant decrease in new and used home sales that persisted through the first quarter of fiscal 2023. During this time period, sales pace decreased significantly, cancellation rates reached historically high levels, and home prices declined. Starting the second quarter of fiscal 2023, interest rates became less volatile and homebuyers began to adjust to the higher rate environment. As a result, homebuyer traffic and demand improved, leading to a recovery in sales pace and a reduction in cancellation rates. Additionally, the new home market benefited from low levels of resale inventory on the market. Against this backdrop of an evolving economic environment, we were able to generate historically solid financial results during fiscal 2023, with margins and profitability reaching a level that represented our second best year in more than a decade, only behind fiscal 2022.

Towards the end of September 2023, interest rates began to rapidly rise again which further strained affordability. If mortgage rates persist at current levels or continue to increase, housing market conditions may deteriorate and temper demand. We remain disciplined in our approach to the business and are focused on making the necessary adjustments to adapt in this changing operating environment.

It is difficult to predict the near-term direction of mortgage rates, consumer confidence and the overall economy, and the corresponding impact on demand for our homes. While we expect uncertainty in market conditions to persist for some time, we believe the long-term housing market outlook remains positive, supported by a demographic shift towards homeownership and a multimillion unit housing deficit that has accumulated over the past decade.

Further, as supply chain conditions have normalized in recent quarters, our construction cycle times have decreased and backlog conversion rates have improved. We continue to strive to reduce build costs through renegotiation and rebidding of construction jobs, reduce cycle times, and prudently manage our overhead costs.

Balanced Growth Strategy

Fiscal 2023 represented continued progress towards the execution of our balanced growth strategy, which is characterized by growing profitability, improving balance sheet efficiency, and generating returns above our cost of capital. We believe our balanced growth strategy has created significant value for our shareholders. During fiscal 2023, our total stockholders' equity of $1.1 billion exceeded the outstanding balance of our total debt for the first time in over 15 years.

As we look to fiscal 2024, we continue to position our business for longer-term growth, while focusing on the appropriate balance between pursuing growth opportunities, controlling risk, and maintaining a strong liquidity position. Our long-term strategic business objectives include increasing active communities to more than 200 by the end of fiscal 2026, reducing our net debt to net capitalization ratio to below 30% by the end of fiscal 2026, and reaching our target of 100% Zero Energy Ready starts by the end of the calendar year 2025.

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Overview of Results for Our Fiscal 2023

The following is a summary of our performance against certain key operating and financial metrics during fiscal 2023:

•During the fiscal year ended September 30, 2023, sales per community per month was 2.6 compared to 2.8 in the prior year, and our net new orders were 3,866, down 4.8% from 4,061 in the prior year. The decrease in sales pace year-over-year was primarily due to a depressed sales pace of 1.3 in the first quarter of fiscal 2023 driven by the challenging housing market conditions at the time, as discussed above. With mortgage interest rates stabilizing and homebuyers adapting to the market, fiscal second, third, and fourth quarter sales paces of 3.2, 3.2, and 2.6, respectively, were strong by historical standards and reflected typical seasonality, although the recent rise of mortgage rates may temper sales pace in the near-term.

•Cancellation rate for the fiscal year ended September 30, 2023 was 20.3%, up from 17.6% in the prior year. Following a period of elevated cancellation rates in the fourth quarter of fiscal 2022 and first quarter of fiscal 2023, cancellation rates decreased and returned to a level within our normal historical range as buyer sentiment improved. The cancellation rate for the quarter ended September 30, 2023 was 16.5%.

•ASP for homes closed during the fiscal year ended September 30, 2023 was $517.8 thousand, up 7.0% from $484.1 thousand in the prior year. The increase in closing ASP year-over-year was primarily driven by price appreciation due to existing demand and low levels of resale inventory in the market. Our backlog ASP of $518.0 thousand as of September 30, 2023 was down from $547.5 thousand year-over-year. Our objective to improve new home affordability has led us to slightly alter our product strategy in certain markets by reducing home sizes and/or features included in our base price. These efforts are likely to reduce or eliminate growth in ASP in fiscal 2024. In addition, if mortgage rates continue to rise, challenging market conditions may lead to lower ASP.

•Homebuilding gross margin for the fiscal year ended September 30, 2023 was 19.9%, down from 23.1% in the prior year. Homebuilding gross margin excluding impairments, abandonments, and interest for the fiscal year ended September 30, 2023 was 23.1%, down from 26.3% in the prior year. Homebuilding gross margin peaked in the third quarter of fiscal 2022 followed by a period of decline as we increased price concessions and closing cost incentives in response to rising interest rates and affordability challenges. Although down year-over-year, homebuilding gross margin stabilized during fiscal 2023 and remained strong by historical standards. If market conditions deteriorate due to elevated mortgage rates, gross margin may be compressed in the future.

•During the fiscal year ended September 30, 2023, our average active community count of 125 was up 3.9% from 120 in the prior year. We ended the year with an active community count of 134, compared to 123 at the prior year quarter end. We have been working to grow community counts by increasing investments in new communities strategically with a goal of reaching more than 200 active communities by the end of 2026.

•As of September 30, 2023, our land position included 26,189 controlled lots, up 4.0% from 25,170 as of September 30, 2022. Excluding land held for future development and land held for sale lots, we controlled 25,567 active lots, up 4.8% from the prior year. As of September 30, 2023, we had 14,490 lots, or 56.7% of our total active lots, under option agreements as compared to 13,312 lots, or 54.6% of our total active lots, under option agreements as of September 30, 2022.

•SG&A for the fiscal year ended September 30, 2023 was 11.5% of total revenue compared with 10.9% a year earlier. The increase in SG&A as a percentage of total revenue was primarily due to lower revenues. We remain focused on prudently managing overhead costs.

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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 may result in decreased revenues and closings.

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

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RESULTS OF CONTINUING OPERATIONS

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