Meritage Homes Corporation — 2012 Form 10-K Summary
Business context and reporting period
This annual filing covers the fiscal year ended December 31, 2012; it is not a standalone fourth-quarter report. Meritage designs and builds single-family homes across the West, Central and East regions, operating in Arizona, California, Nevada, Colorado, Texas, Florida and the Carolinas. At year-end, it was selling in 158 communities. Its homes span entry-level through luxury, and the company states that all new homes meet at least ENERGY STAR standards.
Financial and operating performance
| Metric | 2012 | 2011 |
|---|---|---|
| Total closing revenue | $1,193.7 million | $861.2 million |
| Net income (loss) | $105.2 million | ($21.1 million) |
| Diluted earnings (loss) per share | $3.00 | ($0.65) |
| Home closings | 4,238 | 3,268 |
| Average home closing price | $279,500 | $263,400 |
| Home closing gross margin, including impairments | 18.4% | 17.1% |
| Cash used in operating activities | $220.5 million | $74.1 million |
| Cash, investments and securities, and restricted cash | $295.5 million | $333.2 million |
| Debt carrying amount | $722.8 million | $606.4 million |
Home closing revenue rose 37.6%, reflecting 29.7% more closings and a 6.1% increase in average closing price. Home orders increased 40.8% to 4,795 units, and year-end backlog rose to 1,472 homes valued at $479.3 million; backlog value increased 92.6% year over year. The cancellation rate improved to 13.2% from 17.0%. Gross margin excluding impairments, a non-GAAP measure reported by the company, was 18.5%, versus 18.2%.
Reported net income includes a $76.3 million income tax benefit, primarily from reversing most of the deferred tax valuation allowance. The company also recorded $2.0 million of real-estate-related impairments, a $5.8 million loss on debt extinguishment, and an $8.7 million litigation accrual. Without the tax benefit, reported earnings would have been substantially lower; the filing does not present an adjusted net income figure that removes these items.
Operating cash outflow widened as real estate inventory increased by $299.2 million, with the company citing land purchases, development spending and homes under construction. It purchased about 9,000 lots for approximately $374.6 million and spent $106.0 million on land development. Debt-to-capital was 51.0%, down from 55.4%; net debt-to-capital was 38.1%, up from 35.8%.
Material changes and financing
- In April, Meritage issued $300 million of 7.00% senior notes due 2022 and redeemed its $285 million of 6.25% notes due 2015, along with about $26.1 million of 2017 subordinated notes. Management said this extended the earliest debt maturity to 2017.
- In the third quarter, the company issued $126.5 million of 1.875% convertible senior notes due 2032 and sold 2.645 million shares, generating approximately $122.3 million and $87.1 million in net proceeds, respectively.
- It established a $125 million unsecured revolving credit facility, with no borrowings outstanding at year-end. The company reported compliance with the facility’s covenants and its note covenants at December 31.
- Controlled lots increased 24.5% to 20,817. Meritage entered the Charlotte market, expanded in Raleigh and Tampa, and continued winding down Nevada operations, where it expected to complete construction activity in 2013.
Outlook, risks and contingencies
Management described housing conditions as stabilizing and said it expected improved operating results in 2013, citing stronger orders, backlog, pricing and buyer confidence. It expected to deliver substantially all year-end backlog during 2013. Management also said cash outlays for land, development and construction could exceed cash generated by operations in the near term as it grows its business. These are forward-looking statements, not guarantees; the filing provides no specific 2013 revenue or earnings guidance.
Key risks include a reversal in housing recovery, higher mortgage rates or restricted mortgage availability, reduced buyer affordability, construction labor and material cost increases, slower sales or higher cancellations, and potential real estate impairments. The business is geographically concentrated in seven states and depends on subcontractors, permits, land availability and access to financing. Warranty reserves were $22.1 million; actual defect costs may differ from estimates.
A significant contingency is the South Edge/Inspirada joint-venture dispute. A court ruled in September 2012 that JP Morgan had standing to pursue a repayment-guarantee claim and that Meritage was liable, with damages still to be determined. Meritage disputes the ruling and is pursuing claims against former co-venturers. Related arbitration also includes a $9.8 million claim for alleged future infrastructure costs; the company denies liability and said the hearing was expected to conclude in mid-2013. The filing reports a $13.2 million guarantee claim and says reserves were established for amounts management considered appropriate; it does not make the ultimate outcome certain.
The company reversed most of its deferred tax valuation allowance in 2012, leaving an $8.7 million state-related allowance. Realization of deferred tax assets depends on future taxable income. Meritage also expected a $2.5 million to $4.0 million tax benefit in first-quarter 2013 from the extension of the energy-efficient home tax credit. The auditor issued unqualified opinions on the financial statements and internal control over financial reporting.
Important facts for investors to verify
- How much of 2012 net income and earnings per share depended on the non-cash tax valuation allowance reversal, and whether future taxable income supports realization of deferred tax assets.
- Whether operating cash flow improves as inventory investment and land-development spending continue, and how the company funds that spending.
- Whether rising orders and backlog convert to closings at stated prices, while cancellations, incentives and construction costs remain controlled.
- The final damages and resolution of South Edge/Inspirada litigation and arbitration, including whether additional liabilities arise beyond current reserves.
- Debt covenant headroom and liquidity under the revolving facility, particularly as its interest-coverage requirement increased beginning January 1, 2013.
- Progress in newer markets and the Nevada wind-down, as well as any further impairments, warranty claims or changes in lot commitments.