Beazer homes

[TheBreeze]

Since Cramer said that one or more of the homebuilders may fail within a couple of weeks, and since Beazer recently issued a media statement refuting “scurrilous and unfounded rumors” about a prospective bankruptcy filing, I decided to take a look at Beazer’s financial statements to see if they gave any indication to the trouble Beazer might be in.

During the search, I was able to find a couple of items that hint at some potential trouble. The first was a couple of statements made during an April conference call.

At the beginning of the call, the Chief Accounting Officer stated that: “At March 31 net debt to total capitalizations stood at 49.1%, down slightly from the December level, and within our target of 50% or lower.”

Later in the call, the CEO stated that “We have made commitments to the rating agencies and to all of our fixed debt holders that we are going to keep our debt to cap under 50% — at or under 50%.”

So, as of March 31, Beazer was just barely fulfilling one of the commitments they had made to their debt holders.

Fast forward to the July call, and we discover that the net debt to capitalization ratio stood at 52.6%. Uh-oh. I assume this means that the debt is currently callable. Thus, that may be why Cramer said that one or more of the builders is in danger of failing within a couple of days or weeks. Interestingly though, in that same call, the CFO refers to the 50% ratio as just a “target”, so it’s unclear from this call whether that debt can be called in based on breach of that 50% ratio.

Another interesting item that I found in the July call is that Beazer negotiated a new revolving line of credit. However, this line of credit is dependent upon Beazer maintaining a “minimum tangible net worth” of $1 billion. The CEO went on to say that the company had a tangible net worth of $1.3 billion as of June 30. However, the current market cap of the company is only $441 million. Thus, either the market is willing to give away $1.3 billion for $441 million or the market is saying that the CEO’s net worth calculation is not well calculated.

In that same call, the company mentioned that they were being investigated by the SEC. Beazer may also be under investigation by the FBI for mortgage fraud.

So, it appears that Beazer is close to being at the mercy of its creditors. If Beazer can continue to renegotiate it’s debt obligations, they may be able to stay in business. If not, it looks like they are kaput. Even if Beazer’s creditors don’t call in the loans, it looks like Beazer is still in trouble. In the July conference call, Beazer said they had $129 million of cash on hand. According to their latest 10-Q (filed on 4-26; it appears the 7-26 10-Q is late), they burnt through $100 million in selling, general and adminstrative expenses. So, assuming a similar burn rate and that Beazer can’t access the revolving credit line due to violation of the net worth covenant, Beazer may be able to survive one, or at most two, quarters with the cash it has on hand. So it looks like either bankruptcy or fire sales for Beazer.

[Allan from Fallbrook]

As an accountant, one of the warning signs you heed when it comes to a company in extremis is when they “draw (down) the revolvers”.

In Beazer’s case, this might be a sign that the jig is up.

Several of the other key players, such as Lennar, Pulte, KB, Horton, Toll, etc have also been bleeding pretty badly when it comes to quarterly losses. I think Beazer is in a more financially precarious position and I think another significant reverse might be the end – the end being BK, of course.

If that happens, it will be interesting to see what happens to other homebuilders as regards market reaction and stock price(s).

[Allan from Fallbrook]

As an accountant, one of the warning signs you heed when it comes to a company in extremis is when they “draw (down) the revolvers”.

In Beazer’s case, this might be a sign that the jig is up.

Several of the other key players, such as Lennar, Pulte, KB, Horton, Toll, etc have also been bleeding pretty badly when it comes to quarterly losses. I think Beazer is in a more financially precarious position and I think another significant reverse might be the end – the end being BK, of course.

If that happens, it will be interesting to see what happens to other homebuilders as regards market reaction and stock price(s).

[Allan from Fallbrook]

As an accountant, one of the warning signs you heed when it comes to a company in extremis is when they “draw (down) the revolvers”.

In Beazer’s case, this might be a sign that the jig is up.

Several of the other key players, such as Lennar, Pulte, KB, Horton, Toll, etc have also been bleeding pretty badly when it comes to quarterly losses. I think Beazer is in a more financially precarious position and I think another significant reverse might be the end – the end being BK, of course.

If that happens, it will be interesting to see what happens to other homebuilders as regards market reaction and stock price(s).

[bsrsharma]

When you say “kaput” or “BK” are you meaning Chapter 11 reorg or liquidation (Chapter 7)? If it is Chapter 11, it is no biggie; they can ride through the down turn. I think all builders will go through some sort of bankruptcy during the big bang – the question is can they reorganize or liquidate.

[bsrsharma]

When you say “kaput” or “BK” are you meaning Chapter 11 reorg or liquidation (Chapter 7)? If it is Chapter 11, it is no biggie; they can ride through the down turn. I think all builders will go through some sort of bankruptcy during the big bang – the question is can they reorganize or liquidate.

[bsrsharma]

When you say “kaput” or “BK” are you meaning Chapter 11 reorg or liquidation (Chapter 7)? If it is Chapter 11, it is no biggie; they can ride through the down turn. I think all builders will go through some sort of bankruptcy during the big bang – the question is can they reorganize or liquidate.

[Allan from Fallbrook]

This is a pure WAG, but a cursory look at their financials (provided in the post) would indicate the latter (Chap 7), rather than the former.

Risk is being punished on Wall Street right now, and there is little patience or mercy being shown. Given their rate of burn and the amount of exposure shown on their Balance Sheet, I would imagine they are in an extremely vulnerable position right now.

Add that credit crunch to the picture, and it becomes somewhat hard to imagine that someone is going to ride to their rescue in the instance of a margin call.

Again, just a guess.

[Allan from Fallbrook]

This is a pure WAG, but a cursory look at their financials (provided in the post) would indicate the latter (Chap 7), rather than the former.

Risk is being punished on Wall Street right now, and there is little patience or mercy being shown. Given their rate of burn and the amount of exposure shown on their Balance Sheet, I would imagine they are in an extremely vulnerable position right now.

Add that credit crunch to the picture, and it becomes somewhat hard to imagine that someone is going to ride to their rescue in the instance of a margin call.

Again, just a guess.

[Allan from Fallbrook]

This is a pure WAG, but a cursory look at their financials (provided in the post) would indicate the latter (Chap 7), rather than the former.

Risk is being punished on Wall Street right now, and there is little patience or mercy being shown. Given their rate of burn and the amount of exposure shown on their Balance Sheet, I would imagine they are in an extremely vulnerable position right now.

Add that credit crunch to the picture, and it becomes somewhat hard to imagine that someone is going to ride to their rescue in the instance of a margin call.

Again, just a guess.

[TheBreeze]

When you say “kaput” or “BK” are you meaning Chapter 11 reorg or liquidation (Chapter 7)? If it is Chapter 11, it is no biggie; they can ride through the down turn. I think all builders will go through some sort of bankruptcy during the big bang – the question is can they reorganize or liquidate.

No idea. I’m not an accountant, just a layman trying to see if I can figure out what’s going to happen to Beazer. According to their March 10-Q, Beazer had $2.9 billion in inventory (land and homes), $462 million in what appear to be options on real estate, $200 million in cash, $66 million in receivables, and $526 million in miscellaneous assets. In that same quarter Beazer had $2.6 billion in total liabilities.

On the call, Beazer stated that their “tangible net worth” was $1.3 billion as of June 30. However, their current market cap is only $441 million. Thus, the market is saying that Beazer is worth ~$859 million less than what Beazer said on the call. My guess is that the market is saying that the $462 million in option contracts is worthless and that the inventory is now only worth around $2.5 billion. Is that enough of a write-down? That would be about %16.

My guess is that a 16% write-down is not enough. Although Beazer is still making sales ($800 million worth in the March quarter), I would bet that the inventory that they have left is stuff that is hard to turn and will get harder to turn. If the inventory turns about to be worth 70% of what it is listed at on the balance sheet, then Beazer’s debt is basically greater than it’s assets and they would be chapter 7 (right?)

I’ve made a lot of assumptions in this post, and I’m not an expert, so I would appreciate feedback from you experts out there to point out places where I’ve steered down the wrong path in this post. And thanks for the responses so far.

[TheBreeze]

When you say “kaput” or “BK” are you meaning Chapter 11 reorg or liquidation (Chapter 7)? If it is Chapter 11, it is no biggie; they can ride through the down turn. I think all builders will go through some sort of bankruptcy during the big bang – the question is can they reorganize or liquidate.

No idea. I’m not an accountant, just a layman trying to see if I can figure out what’s going to happen to Beazer. According to their March 10-Q, Beazer had $2.9 billion in inventory (land and homes), $462 million in what appear to be options on real estate, $200 million in cash, $66 million in receivables, and $526 million in miscellaneous assets. In that same quarter Beazer had $2.6 billion in total liabilities.

On the call, Beazer stated that their “tangible net worth” was $1.3 billion as of June 30. However, their current market cap is only $441 million. Thus, the market is saying that Beazer is worth ~$859 million less than what Beazer said on the call. My guess is that the market is saying that the $462 million in option contracts is worthless and that the inventory is now only worth around $2.5 billion. Is that enough of a write-down? That would be about %16.

My guess is that a 16% write-down is not enough. Although Beazer is still making sales ($800 million worth in the March quarter), I would bet that the inventory that they have left is stuff that is hard to turn and will get harder to turn. If the inventory turns about to be worth 70% of what it is listed at on the balance sheet, then Beazer’s debt is basically greater than it’s assets and they would be chapter 7 (right?)

I’ve made a lot of assumptions in this post, and I’m not an expert, so I would appreciate feedback from you experts out there to point out places where I’ve steered down the wrong path in this post. And thanks for the responses so far.

[TheBreeze]

When you say “kaput” or “BK” are you meaning Chapter 11 reorg or liquidation (Chapter 7)? If it is Chapter 11, it is no biggie; they can ride through the down turn. I think all builders will go through some sort of bankruptcy during the big bang – the question is can they reorganize or liquidate.

No idea. I’m not an accountant, just a layman trying to see if I can figure out what’s going to happen to Beazer. According to their March 10-Q, Beazer had $2.9 billion in inventory (land and homes), $462 million in what appear to be options on real estate, $200 million in cash, $66 million in receivables, and $526 million in miscellaneous assets. In that same quarter Beazer had $2.6 billion in total liabilities.

On the call, Beazer stated that their “tangible net worth” was $1.3 billion as of June 30. However, their current market cap is only $441 million. Thus, the market is saying that Beazer is worth ~$859 million less than what Beazer said on the call. My guess is that the market is saying that the $462 million in option contracts is worthless and that the inventory is now only worth around $2.5 billion. Is that enough of a write-down? That would be about %16.

My guess is that a 16% write-down is not enough. Although Beazer is still making sales ($800 million worth in the March quarter), I would bet that the inventory that they have left is stuff that is hard to turn and will get harder to turn. If the inventory turns about to be worth 70% of what it is listed at on the balance sheet, then Beazer’s debt is basically greater than it’s assets and they would be chapter 7 (right?)

I’ve made a lot of assumptions in this post, and I’m not an expert, so I would appreciate feedback from you experts out there to point out places where I’ve steered down the wrong path in this post. And thanks for the responses so far.

[temeculaguy]

I would worry about WCI because it is all over the florida condo market (current stock at $6 compared to years in the twenties), D.R. horton has a 5 year supply of land that is killing them, but, (and I hate to repeat anything cramer says) he mentioned Standard Pacific (SPF) as a company he wouldn’t loan a nickel to right now if he was a lender. Of course he also thinks KB may go out of business but the Wall Street journal says they have a good cash flow. WSJ says Lennar has the best cash flow in the industry, I wouldn’t short them right now, they may fall with the industry but not at the same percentage and they also look to be one of the survivors on the other side, in a five year comparison to the industry they are performing 50% better and only lost 1% in friday’s slide when the other got killed.

[temeculaguy]

I would worry about WCI because it is all over the florida condo market (current stock at $6 compared to years in the twenties), D.R. horton has a 5 year supply of land that is killing them, but, (and I hate to repeat anything cramer says) he mentioned Standard Pacific (SPF) as a company he wouldn’t loan a nickel to right now if he was a lender. Of course he also thinks KB may go out of business but the Wall Street journal says they have a good cash flow. WSJ says Lennar has the best cash flow in the industry, I wouldn’t short them right now, they may fall with the industry but not at the same percentage and they also look to be one of the survivors on the other side, in a five year comparison to the industry they are performing 50% better and only lost 1% in friday’s slide when the other got killed.

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