Ian J. McCarthy has resigned as CEO and president of Beazer Homes USA at the surprise request of the company’s board of directors, which replaced him with Allan Merrill, the company’s chief financial officer for the past four years.
Merrill is replaced by Robert Salomon, the company’s chief accounting officer since 2008.
“This was very much a board-driven decision,” said Carey Phelps, the company’s director of investor relations. “They are looking to the future, to the objective of returning the company to profitability.”
Phelps said that the Beazer board made the decision recently and called in McCarthy and Merrill on Friday. “It was a surprise to Ian. It was a surprise to Allan,” she said.
By the terms of McCarthy’s employment agreement, he was “terminated without cause,” said Phelps.
McCarthy, age 57, is the only CEO Beazer Homes USA has had since its initial public stock offering in 1994. Before that he had been president of the company since 1991.
“Over many years Ian McCarthy has ably guided the company to its current position as one of the 10 largest home builders in the United States,” said Brian Beazer, the company’s chairman, in a release announcing the management changes. “During this time, the home building industry and the company have experienced many complex issues which Ian has dealt with to the benefit of the company. The board appreciates his leadership and many contributions to the company. For these efforts we would like to thank him and wish him all the success in the future.”
Brian Beazer said he was pleased that Merrill and Salomon accepted their new appointments. “Both possess many years of industry experience and have demonstrated a commitment to the success of our stakeholders,” Beazer said.
The Beazer board has asked Merrill and Salomon to “conduct a thorough review of the company’s operations and potential growth opportunities.”
Merrill’s background is on the financial side of the business, versus sales and operations. He has spent more than 20 years in executive positions directly related to home building and residential real estate, including positions in investment banking and Internet real estate marketing. Before joining Beazer, he had strategic and operational leadership roles with Move, Inc. Before that he worked for 13 years for Dillon Read & Co. and its successors, including UBS where he managed the firm’s Housing, Construction, and Building Materials group. In that capacity he was lead advisor to Beazer on its initial public offering in 1994 and on several major acquisitions.
“We view these changes as positive, noting the significant contribution Mr. Merrill has made in improving the company’s financial flexibility over the last few years,” UBS analyst David I. Goldberg wrote in reaction to the news of Merrill’s appointment on Monday.
For the past four years Beazer has been beset with adversity beyond the home building market’s collapse. In 2007 federal investigators launched an investigation into its mortgage lending practices designed to increase the profit margin for its mortgage subsidiary and to sell its houses, as well as for accounting practices designed to “smooth earnings, through cookie-jar accounting,” the Department of Justice said.
Beazer cooperated in the investigations, admitted its guilt after its own internal investigation discovered the improprieties, closed its mortgage subsidiary, and adopted remedial measures including the firing of executives and employees it identified as responsible.
Two years later, the investigation was settled when investigators agreed not to prosecute the company for criminal mortgage and securities fraud if it met certain conditions and paid between $48 million and $50 million in restitution over the next five years.
It took almost another two years for McCarthy to settle with the Securities and Exchange Commission. He agreed in March to return his entire 2006 compensation, including $6.5 million in cash, 40,103 restricted stock units, and 78,763 shares of restricted stock that he had received while the company was in non-compliance with financial reporting requirements due to misconduct.
The investigation behind it, Beazer successfully restructured its considerable debt load and recapitalized itself. Under the direction of Merrill, the company was able to increase equity, reduce debt, and push back debt maturities to 2015 and beyond.
That done, the company’s focus has switched to operations, selling enough homes at high-enough margins to become profitable again. That goal has proven more elusive. In the quarter ended March 31, the company logged a $54 million loss of 73 cents per share.
Home closings were down by 31.1% to 573 homes. And gross profit margin, including land impairments and abandonments, was a scant 12.3%. The company recently announced a plan to diversify its income stream by buying foreclosed homes, fixing them up, and renting them out to people who can’t qualify to buy a new home.
In recent weeks Beazer has announced a staff reduction of 130 employees to save $20 million this year. And those reductions clearly bite into the bone and flesh of Beazer, cutting the company's purchasing, marketing, IT, and product development and design departments.
"We're going to stand still for the moment," McCarthy said of the effect of the cuts on certain programs during the earnings conference call.
Teresa Burney is a senior editor for Builder magazine.
Learn more about markets featured in this article: Atlanta, GA.