Meritage Corporation 10-Q Summary: Quarter Ended September 30, 2001
Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended September 30, 2001, for Meritage Corporation, a developer and builder of single-family homes in Texas, Arizona, and California. The company operates under brands including Legacy Homes, Monterey Homes, Hancock Communities, and Meritage Homes. A significant event during the period was the acquisition of Hancock Communities on May 30, 2001, which expanded operations in the Phoenix, Arizona market.
Key Financial Metrics
| Metric | Three Months Ended Sep 30, 2001 | Nine Months Ended Sep 30, 2001 |
|---|---|---|
| Home Sales Revenue | $207.2 million | $497.7 million |
| Total Revenue | $207.2 million | $499.3 million |
| Net Earnings | $14.9 million | $34.8 million |
| Diluted EPS | $2.50 | $5.98 |
| Home Sales Gross Margin | 22.1% | 21.5% |
| Cash and Equivalents | $1.5 million (Sep 30, 2001) | N/A |
| Total Debt (Notes Payable) | $186.1 million | N/A |
| Net Sales Backlog | $433.0 million (1,849 homes) | N/A |
Material Changes vs. Prior Period
- Revenue Growth: Home sales revenue increased 54% in the quarter and 43% for the nine-month period compared to 2000, driven by higher volume (60% increase in homes closed for the quarter) and the Hancock acquisition.
- Profitability: Net earnings rose 41% for the quarter and 46% for the nine-month period. Gross profit margins improved slightly to 22.1% for the quarter from 21.4% in the prior year.
- Operating Expenses: General and administrative costs surged 113% in the quarter and 71% for the nine months, largely due to an earn-out payment related to the Northern California acquisition and general cost increases.
- Balance Sheet: Total assets grew from $267.1 million to $440.2 million, primarily due to increased real estate under development ($346.3 million) and goodwill ($29.4 million) from the Hancock acquisition. Notes payable increased from $86.2 million to $186.1 million, reflecting new senior unsecured notes and acquisition financing.
- Backlog: Net sales backlog increased 26% to $433.0 million, with the number of homes in backlog rising 33% to 1,849.
Guidance, Outlook, and Risks
- Market Conditions: Management noted that sales contracts in the third quarter decreased 7% compared to the prior year, attributed to difficult comparisons, slowing in high-end markets, and the impact of the September 11 events, which also increased cancellation rates to 31%.
- Liquidity: The company maintains $185.0 million in short-term secured revolving construction and acquisition facilities, with approximately $123.7 million in unborrowed funds available. Management believes current resources are sufficient for foreseeable needs.
- Debt Management: In September 2001, the company retired $10 million of its 9.75% senior notes, resulting in an extraordinary gain of $212,000. The company also issued $155 million in new senior unsecured notes maturing in 2011.
- Accounting Changes: The filing discusses upcoming FASB Statements 141 and 142 regarding business combinations and goodwill, which will require testing goodwill for impairment rather than amortization starting in 2002.
- Risks: Forward-looking statements are subject to risks including economic conditions, interest rate fluctuations on variable-rate debt, and the ability to secure financing.
Investor Verification Checklist
- Verify the sustainability of the 22.1% gross margin given the increase in general and administrative costs.
- Confirm the impact of the September 11 events on future cancellation rates and sales contract velocity.
- Review the terms and covenants of the new $155 million senior unsecured notes issued in 2001.
- Assess the integration progress and performance of the Hancock Communities acquisition against pro forma expectations.
- Monitor the company's ability to maintain liquidity given the high level of debt relative to cash on hand ($1.5 million).