Ian McCarthy has laryngitis.
The Queen's English-accented 56-year-old chief executive of Beazer Homes USA escorts two guests into an executive conference room one bright Monday morning in late July, assuring them that he sounds much worse than he feels and that he's not contagious.
Vocal strain aside, McCarthy professes he's game to talk publicly and expansively about Beazer for the first time in more than two years. Because he can.
He assembles his management brain trust to answer for the company leadership's accountability in connection with Beazer's high-profile, unwanted notoriety, their crisis action plan to keep the $2 billion Top 10 home building enterprise from coming apart while it crawled for months with government agency investigators, their operational transformation amid the housing and financial system meltdowns, and their strategy to emerge from dire financial straits and become again a trusted name in home building.
Understandably, McCarthy is less than keen to dwell on what went wrong in the past, not to mention that Beazer continues to observe binding constraints with regard to ongoing federal investigations and legal proceedings. He'd prefer his tender vocal chords get to make a strong, fully formed case toward proving that the company he has piloted from its beginning has a future one can bet on.
“I'm about looking forward,” he explains, slicing his hand toward some distance beyond the company's tinted board room windows. Still, whatever he envisions for Beazer's tomorrow, McCarthy knows that, fairly or not, he and his company have been pinned up as poster boys for the recklessness, greed, and chicanery that pervaded residential real estate's run-up to the mid-2000s.
To secure a future, he's aware that taking full responsibility and sincerely atoning for past company sins are a necessary part of winning trust back from those who may remain suspicious. This is critically what Beazer needs to do to wrest confidence from the throes of doubt.
“We did some things wrong, and we accepted responsibility,” McCarthy says simply and succinctly. Beyond that, he politely but firmly declines his guests' overtures to share any personal introspection the ordeal might have stirred in him. Under McCarthy and his senior management team's triage master plan, Beazer tore open its past 60 months of business practices and processes down to granular, home-by-home, neighborhood-by-neighborhood detail to fully cooperate with federal investigators. Keeping company managers, associates, shareholders, debtors, trades, manufacturers, and, most of all, customers on board during the probe's trauma was no mean feat.
“We had to continue to focus on the business,” even as investigators lay siege to the financial and data underpinnings of the company, says McCarthy. He and his senior managers describe developing ways to “compartmentalize” an otherwise schizophrenic experience—cooperating with accusers while simultaneously operating a business. After all, there was a Great Recession going on, fierce enough to challenge even the strongest, most well-positioned, and most agile players in home building, let alone ones enduring the dark cloud of suspicion and torturous legal wrangling.
BESET, NOT BESIEGED
Twelve floors up, in the company's glass tower headquarters on Atlanta's northern perimeter, McCarthy surrounds himself with Beazer senior management, almost to a person recruited since the legal troubles descended in March 2007.
The fact that such a highly pedigreed team agreed to join the company, even as it swooned from rising-star status among public builders into a bucket containing those whose survival may be doubtful, McCarthy holds up as evidence of the company's viability.
“These are people who didn't have to join us,” he says. “This company does have a future.”
The company's inglorious days past are part of why Beazer's often mentioned high on industry observers' watch lists.
Less than a month earlier—in early July—the company at last extricated itself from a protracted and costly legal investigation involving an array of federal agencies led by the U.S. Attorney's Office, including the FBI, the Department of Housing and Urban Development, the Securities and Exchange Commission (SEC), and the U.S. Postal Service.
Beazer commissioned its own costly independent internal investigation, and together with the government agencies, determined the company was guilty on several charges of mortgage and accounting fraud, most relating to its mortgage origination business in North Carolina.
In return for not prosecuting the company, the federal agencies accepted Beazer's apology and what is likely to be $50 million in settlement fines over time. The company spent an additional $50 million in legal and professional fees to investigate and defend itself in the matter as well, and those books are still open.
“There was no budget, and we exceeded it,” says Beazer's CFO Allan P. Merrill, grimacing from just beyond McCarthy's right hand.
Merrill joined the company a scant week before the legal issues erupted in spring 2007, in the wake of newspaper accounts of high foreclosure rates in Beazer's Charlotte neighborhoods, long before they began en masse nationwide.
Merrill, who jumped into the breach to sustain financial practices continuity amid multiple government probes, leads the charge on one of the company's most urgent priorities, restructuring the company's substantial debt.
That $1.59 billion in debt—the underpinnings of which rapidly weakened as the company's net worth eroded as the market cliff-dived—combined with the profound legal uncertainties made Beazer one of public home building's prime candidates for oblivion. As everyone knows, perception weighs on stock prices and debt ratings.
“Put it this way, it is one of the lowest rated companies that we have among home builders,” says Bob Curran, managing director and lead home building analyst for Fitch Ratings. Beazer's debt carries a CCC rating, indicating “a substantial credit risk and default is a possibility,” he adds.
Standard & Poor's also reduced Beazer's rating to CCC, saying the company's sharp reduction in shareholder equity and tangible net worth outweighed the company's cash and efforts to resolve its legal issues. “Barring a substantial equity infusion, we are unlikely to revise the outlook to stable in the near term,” Standard & Poor's credit analyst James Fielding wrote in a research note.
Beazer does have nearly $500 million in cash on hand, and its shortest-term bonds aren't due until 2011. Still, the amount of debt it carries, for a company its size, is substantial, with a debt to capitalization ratio of 91 percent. Its net worth decline, in turn, triggers loan covenant noncompliance. Clearly, capital restructuring was in order at Beazer sooner than now, but its legal woes got in the way of progress on that front.