Meritage Homes Corporation — FY 2011 Form 10-K
Reporting period: Fiscal year ended December 31, 2011. The filing also reports unaudited fourth-quarter results. Meritage designs and builds single-family homes across the West, Central and East regions in seven states.
Financial performance and position
| Metric | FY 2011 | FY 2010 |
|---|---|---|
| Total closing revenue | $861.2 million | $941.7 million |
| Net income (loss) | $(21.1) million | $7.2 million |
| Basic and diluted EPS | $(0.65) | $0.22 |
| Home-closing gross margin | 17.1%; 18.2% excluding impairments | 17.8%; 18.5% excluding impairments |
| Cash used in operating activities | $(74.1) million | Cash provided: $32.6 million |
| Cash, investments and securities, and restricted cash | $333.2 million | $412.6 million |
| Notes and other borrowings | $606.4 million | $605.8 million |
| Net debt-to-capital | 35.8% | 27.9% |
At year-end, total assets were $1.22 billion, real estate inventory was $815.4 million and stockholders’ equity was $488.9 million. The company reported no debt principal maturities before 2015 and was in compliance with note covenants. Its fixed-charge coverage ratio was 1.177 against a 2.0 covenant threshold; the filing says failure of both specified financial ratios, not one alone, would restrict additional borrowing.
For Q4 2011, total closing revenue was $246.0 million, gross profit was $33.2 million, pretax loss was $11.6 million and net loss was $11.8 million; diluted loss per share was $0.36.
Changes versus the prior year
- Annual revenue fell 8.5%, primarily because home closings declined 11.7% to 3,268; average closing price rose 3.6% to $263,400.
- Net results moved from $7.2 million income to a $21.1 million loss. Real-estate-related impairments were $15.3 million, up from $6.5 million in 2010; 2011 included $6.5 million of land impairments, largely related to Nevada.
- Home orders increased 0.7% to 3,405 units, while order value rose 6.2% to $907.9 million. Year-end backlog increased 17.6% to 915 homes, worth $248.9 million.
- The cancellation rate declined to 17.0% from 20.9%. Active communities increased to 157 from 151. Controlled home sites rose 9.8% to 16,722.
- Operating cash flow swung to a $74.1 million use, reflecting, among other items, increased investment in real estate inventory. Cash, investments and restricted cash declined by $79.5 million.
- Home-closing gross margin excluding impairments eased to 18.2% from 18.5%. General and administrative expense increased to $64.2 million from $59.8 million; interest expense declined to $30.4 million from $33.7 million.
Outlook, commentary and risks
Management described signs of stabilization and improving sales in some markets, but emphasized that any recovery would likely be uneven. It entered 2012 with higher backlog than a year earlier and anticipated margin improvement in California. Management expects to invest in land and development to replenish lots and grow communities; as the business expands, cash expenditures may exceed cash generated by operations. No quantified earnings or revenue guidance is provided.
- The company entered Raleigh-Durham in 2011 and announced entry into Tampa; it was winding down Las Vegas operations while continuing sales in two remaining communities there.
- Management’s strategy emphasized cash discipline, selective land purchases, cost controls, energy-efficient homes and adapting products and prices to local buyer demand. All new homes were stated to meet at least 2011 ENERGY STAR standards.
- Principal risks include weak housing demand, foreclosures and resale competition, restricted mortgage availability, interest-rate increases, cancellations, construction and land costs, further inventory impairments, and regulatory or environmental delays.
- The company disclosed a disputed South Edge/Inspirada joint-venture guarantee demand of $13.2 million. Meritage contests liability; litigation was ongoing, and the filing says the company had established reserves but does not state their amount here. The company said it did not expect the matter to materially affect its financial condition.
- Chinese drywall issues involved approximately 100 homes built in 2005–2006. The company reported repairs completed on 80 homes and repairs in progress on approximately 10, with reserves and anticipated insurance and other recoveries; additional exposure was not ruled out.
- Warranty reserves were $23.1 million, after a $2.6 million favorable adjustment in 2011. The company also reported $10.2 million of accrued legal expenses and settlement costs for matters considered probable and estimable.
- A full valuation allowance remained against deferred tax assets; the company reported $94.1 million of valuation allowance. State net operating loss carryforwards began expiring in 2012. The independent auditor gave unqualified opinions on the financial statements and internal control over financial reporting.
Investor verification priorities
- Review the drivers and sustainability of negative operating cash flow, declining liquidity and the increase in net debt-to-capital.
- Assess whether backlog converts to closings and whether the lower cancellation rate, stronger orders and community growth persist across regions.
- Examine the assumptions behind inventory valuations and the $15.3 million of impairments, especially the Las Vegas wind-down and land held for sale.
- Track the South Edge guarantee litigation, related reserves and any changes to the disputed $13.2 million exposure.
- Monitor warranty and Chinese drywall claims, recoveries, and the adequacy of reserves, as well as debt covenant headroom and 2015 maturities.