Beazer Homes USA has decided not to wait for its legal issues related to purported mortgage fraud to be resolved before launching into a restructuring of its debt and capital structures, CEO Ian McCarthy announced Friday, May 8, during the company’s quarterly conference call.

With the company’s tangible net worth falling closer to levels that would violate covenant violations and trigger cash infusions and potential loss of credit, Beazer officials have decided it is necessary to move forward with the restructuring immediately.

“The company has had several discussions with the U.S. Attorney for the Western District of North Carolina to negotiate a possible resolution of its investigation,” McCarthy said. But no settlement agreement has been reached, and the company still doesn’t know for sure how much a settlement will cost.
But executives made a guess and set aside $11 million for 2009 and $2 million for 2010 to cover fines that the company “believes are probable and reasonably estimable.”
There could be more. The total payments to settle the issue could reach as high as $50 million over 60 months, but that the future payments are likely to be linked to the company’s return to profitability, McCarthy said.
In other news, the Atlanta-based Beazer reported a loss of $114.8 million, or $2.97 a share, considerably higher than the $1.60 analysts had expected. Profitability took a big hit from non-cash pre-tax charges, including $60.1 million in inventory impairments and abandoned land option contracts as well as joint-venture impairments.
The company’s cash was up to $559.5 million from $436.9 the quarter before, thanks to a tax refund of $168.5 million. It still was short of the $584 million it had at the end of its Sept. 30 fiscal year.
Closings were down to 814 compared to 1,568 in 2008. While new orders at 1,129 were up compared to the last quarter of 2008, they were down 42% year-over-year. And cancellation rates showed a considerable improvement from the quarter before, moving down to 29.8% compared to 46.1% in the last quarter of 2008. There were quarterly improvements in backlog as well, up 1,280 from 965. But year over year, backlog was down more than 50% from 2,619 in the first quarter of last year.  
“It is certainly premature to assume a recovery is on the way," McCarthy said.
But he added that the California tax credit is helping sales in that state. In the meantime, the mid-Atlantic market is improving, and the builder saw positive signs in Indianapolis, where it has gained market share in the face of other companies folding, and some small improvement in Phoenix. Texas is also holding its own.
“We have to recognize, though, that nearly all of the Southeast is not doing well,” McCarthy said.
Despite that, the CEO thinks that Beazer is on its way to returning to profitability, thanks to a combination of improved sales and measures that have allowed the company to cut the costs of building homes. “I feel very confident as we get into next year we will be back to profitability,” McCarthy said. “That’s what we’re trying to model.”
CFO Allan P. Merrill said Beazer's goal is to have as much cash on hand at the end of its fiscal year as it did the year before. “In order to hit that target, we will need to close 4,000 homes this year,” he said. So far the company has sold 1,752 in the first half of its year, and it has another 1,280 in backlog. “That’s just over 3,000 homes. So we need to sell and close another 1,000 homes.”
That’s manageable if the company sells 80% as many houses as it did during its second half last year, Merrill said.
Of course, it could cost Beazer some cash to recapitalize itself, Merrill noted.
Previously, Beazer said it planned to wait before embarking on the chore of restructuring its debt and recapitalizing the company. The uncertainty of the outcome of the government investigations was likely to make that process more difficult and expensive.
But the builder's eroding net worth is creeping closer to levels that would trigger debt covenant violations, which would trigger more cash inputs and violations of other covenants, which also would require cash input or inspire its lenders to ask for their money back immediately.
Recently the company had to seek another waiver of provisions in its revolving line of credit because its tangible net worth had slipped to $143.8 million by the end of March from $314.4 at the end of its fiscal year. That decrease would have required the company to increase the collateral it is required to put up to secure the line of credit as well as the costs.
If Beazer’s tangible net worth slips below $85 million for two quarters in a row, a trigger on some of its other debt is pulled, creating even more odious problems.
So the company has decided to “address” its capital structure immediately with the goals of “reducing indebtedness and interest costs, increasing net worth and protecting liquidity,” said Merrill, offering no details about how the company would choose to do that.

Teresa Burney is a senior editor at BIG BUILDER and BUILDER magazines.

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