Meritage Homes Corporation — Q3 2017 Form 10-Q
Reporting period: Three and nine months ended September 30, 2017; comparative periods ended September 30, 2016. Meritage designs and builds single-family homes across nine states in the West, Central and East regions, and operates a title company. It was actively selling in 250 communities, with base prices of approximately $170,000 to $1.39 million.
Financial performance and position
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Home closing revenue | $805.0m | $735.9m | $2,263.4m | $2,127.3m |
| Net earnings | $42.6m | $36.9m | $107.7m | $97.7m |
| Diluted EPS | $1.02 | $0.88 | $2.55 | $2.33 |
| Home closing gross margin | 18.1% | 17.8% | 17.4% | 17.5% |
- Q3 home closings rose 9.4% to 1,969 homes; average selling price was $408,800, essentially unchanged year over year. Nine-month closings increased 4.2% to 5,456 and average price rose 2.1% to $414,800.
- Q3 total closing gross profit was $144.6m, up from $131.9m. Financial-services profit was $5.5m versus $6.0m. For the nine-month period, financial-services profit was $15.4m versus $15.8m.
- Q3 pretax earnings were $63.5m and income-tax provision was $20.9m; the effective tax rate was 32.9%, compared with 31.4%. Nine-month effective tax rate was 34.1% versus 31.0%, reflecting the absence of 2016 federal energy-credit benefits for homes sold in 2017.
- Operating cash flow was negative $174.4m for the first nine months, compared with negative $148.3m in 2016, principally because real estate investment increased $336.1m. Investing cash flow was negative $10.9m; financing cash flow was positive $168.8m. Cash ended at $115.2m, down from $131.7m at year-end 2016.
- At September 30, 2017, total assets were $3.25bn, total liabilities $1.71bn and stockholders’ equity $1.54bn. Real estate inventory was $2.76bn.
- Total notes and other borrowings were approximately $1.304bn; debt-to-capital was 45.9% and net debt-to-capital 43.6%, versus 44.2% and 41.2% at December 31, 2016. The company had $25m drawn on its $625m revolving facility and reported $533.5m available after letters of credit. It reported compliance with facility covenants.
Changes versus prior year
- Q3 home closing revenue grew 9.4%, driven by 169 additional closings; management attributed the improvement in earnings to higher closing gross profit and lower general and administrative expense, partly offset by higher interest expense and taxes.
- Nine-month home orders increased 6.3% to 6,162 homes, with order value up 7.2% to $2.54bn. September 30 backlog was 3,333 homes valued at $1.41bn, up 2.5% in units and 2.4% in value year over year.
- Regional results diverged: Q3 homebuilding revenue increased 18.5% in the West and 18.7% in Central, but declined 12.0% in the East. East-region nine-month closings fell 15.6%; management linked this partly to delayed community openings during the rollout of updated products.
- In June, Meritage issued $300m of 5.125% senior notes due 2027 and repurchased $51.9m of convertible notes. The remaining convertible notes were redeemed in September. Reported senior and convertible notes, net, rose to $1.266bn from $1.095bn at year-end.
Outlook, commentary and risks
- Management described housing demand as healthy in most markets, supported by low interest rates, consumer confidence and limited resale-home supply. It is emphasizing first-time-buyer and entry-level products, community growth, land acquisition and development, and energy-efficient and connected-home features.
- Management did not provide specific numerical earnings or revenue guidance in the supplied filing text. It expects near-term land, development and construction cash outlays to exceed operating cash generation, and intends to reinvest proceeds from home sales in strategic lots.
- Hurricanes Harvey and Irma caused temporary sales-office and community closures and delayed orders, construction and closings in Houston and Florida. Management reported minimal physical damage but was still assessing possible effects on cycle times, labor availability, material costs and margins.
- Rising land, labor and construction-material costs may constrain margin expansion. The company also cited sensitivity to mortgage and borrowing interest rates, homebuyer financing, cancellations, slower absorption, land availability, inventory impairments, severe weather and construction-defect or warranty claims.
- Q3 asset write-offs of approximately $1.8m reduced home closing margin by about 20 basis points. East-region impairment charges, including charges related to terminated land contracts, weighed on regional margins. The company reported routine legal and warranty proceedings and stated it did not believe unreserved matters would materially harm its financial condition, results or cash flows.
- Meritage said it had strong liquidity and may seek additional debt or equity capital; such financing is not assured and could increase interest costs or dilute shareholders. It had no third-quarter common-stock repurchases and stated it does not intend to pay cash dividends in the foreseeable future.
Most important facts for investors to verify
- Whether hurricane-related delays and potential labor or material inflation affect subsequent closings, costs and margins, especially in Houston and Florida.
- Whether order growth and backlog convert into closings, and whether East-region recovery and planned community openings proceed as expected.
- Whether higher real-estate investment and negative operating cash flow remain manageable given debt levels, interest costs and facility covenants.
- How land and construction cost trends, impairments, entry-level product mix and tax-credit changes affect gross margins and the effective tax rate.