Meritage Homes Corp. 10-Q Summary (Period Ended Sep 30, 2009)
Business Context and Reporting Period
This is a Quarterly Report (Form 10-Q) for Meritage Homes Corporation, a designer and builder of single-family detached homes in the western and southern United States. The report covers the three and nine months ended September 30, 2009. The company operates in three reporting segments: West (California, Nevada), Central (Texas, Arizona, Colorado), and East (Florida). As of September 30, 2009, the company was actively selling homes in 162 communities.
Key Financial Metrics
| Metric | Three Months Ended Sep 30, 2009 | Nine Months Ended Sep 30, 2009 | Three Months Ended Sep 30, 2008 | Nine Months Ended Sep 30, 2008 |
|---|---|---|---|---|
| Total Closing Revenue | $231.8 million | $684.5 million | $374.8 million | $1,123.5 million |
| Net Loss | $(17.8) million | $(109.7) million | $(144.0) million | $(212.8) million |
| Loss Per Share (Basic/Diluted) | $(0.56) | $(3.52) | $(4.69) | $(7.37) |
| Real Estate & Land Impairments | $13.2 million | $90.3 million | $55.1 million | $154.3 million |
| Cash & Cash Equivalents | $347.0 million | $347.0 million (End of Period) | $119.0 million (End of Period) | $119.0 million (End of Period) |
| Restricted Cash | $18.6 million | $18.6 million | $0 | $0 |
| Total Debt (Senior Notes) | $605.0 million | $605.0 million | $629.0 million | $629.0 million |
| Operating Cash Flow (9 Months) | N/A | $157.4 million | N/A | $106.2 million |
Liquidity & Margins: The company reported a record-high adjusted gross margin of 14.5% for the quarter (excluding impairments). Total cash, cash equivalents, and restricted cash stood at $365.6 million. The net debt-to-capital ratio improved to 35.2% from 44.5% at year-end 2008.
Material Changes vs. Prior Period
- Revenue Decline: Total closing revenue decreased 37.8% year-over-year for the quarter and 38.9% for the nine-month period, driven by lower sales volumes, reduced average selling prices, and a strategic reduction in active communities (down 21.7% year-over-year).
- Improved Profitability: Net loss narrowed significantly compared to the prior year, primarily due to a substantial reduction in real estate impairments ($13.2 million in Q3 2009 vs. $55.1 million in Q3 2008).
- Cash Position: Cash and cash equivalents increased by $141.0 million during the nine-month period, bolstered by $107.7 million in income tax refunds collected and positive operating cash flows.
- Debt Restructuring: The company voluntarily terminated its Senior Unsecured Credit Facility in September 2009 and replaced it with secured letter of credit arrangements. Additionally, $24.1 million of senior subordinated notes were retired via a stock-for-debt exchange, resulting in a $9.4 million gain.
Outlook, Risks, and Contingencies
- Market Outlook: Management observes signs of stabilization and a potential bottoming of the housing market, citing increased home orders (up 8.4% in Q3) and improved absorption rates. However, the company remains cautious regarding the economic recession and excess supply of foreclosures.
- Strategy: The company is focusing on first-time and first move-up buyers by redesigning products for affordability, reducing construction cycle times, and acquiring deeply discounted lots. Spec starts are being temporarily increased to meet demand for immediate move-in homes.
- Chinese Drywall Contingency: Approximately 60 homes in the Ft. Myers, Florida area are suspected of containing defective Chinese drywall, with up to 30 additional homes under inspection. The company has one pending lawsuit and believes existing warranty reserves ($29.5 million) and insurance coverage are sufficient to cover costs, though total exposure cannot be reasonably estimated.
- Joint Venture Risks: Several joint ventures are in default of debt agreements. While the company's investment in these ventures is fully impaired, there are outstanding "bad boy" guarantees totaling approximately $60.9 million and limited repayment guarantees of $8.5 million.
- Legal Proceedings: The company is defending against lawsuits regarding completion guarantees for a joint venture in Nevada (South Edge Litigation) and has reached a settlement with a former executive (Hancock Settlement) subject to bankruptcy court approval.
Key Facts for Investor Verification
- Impairment Volatility: Verify the sustainability of the reduced impairment charges, as a significant portion of the 2009 loss was driven by a $55.4 million write-off of a terminated optioned project in Arizona.
- Backlog Trends: Monitor the backlog, which decreased 34.0% year-over-year to $404.8 million, though it has improved sequentially for four consecutive quarters.
- Debt Covenants: Confirm continued compliance with debt covenants, specifically the Fixed Charge Coverage Ratio (actual 1.15 vs. required 2.00) and Leverage Ratio (actual 1.46 vs. required 3.00). Failure to meet the Fixed Charge Coverage Ratio restricts additional indebtedness.
- Joint Venture Exposure: Assess the risk associated with the $60.9 million in "bad boy" guarantees related to joint ventures in default, which could be triggered by specific actions beyond the company's control.
- Inventory Turnover: Evaluate the effectiveness of the strategy to reduce unsold inventory, which dropped from $158.4 million (768 homes) at year-end 2008 to $67.9 million (407 homes) at September 30, 2009.