Meritage Homes Corporation — Q3 2015 Form 10-Q
Reporting period: Three and nine months ended September 30, 2015; unaudited. Meritage designs and builds single-family homes across nine states and ended the quarter with 250 actively selling communities.
Financial performance
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Home closing revenue | $661.9m | $545.5m | $1,770.2m | $1,454.1m |
| Total closing revenue, including land | $670.0m | $556.8m | $1,786.5m | $1,470.7m |
| Net earnings | $30.3m | $32.6m | $75.8m | $93.0m |
| Diluted EPS | $0.73 | $0.79 | $1.83 | $2.27 |
| Home closing gross margin | 19.0% | 20.4% | 18.9% | 21.6% |
- Q3 home closings rose 12.5% to 1,712 homes; average selling price increased 7.9% to $386,600. Nine-month closings increased 15.1% to 4,603 homes.
- Q3 orders increased 4.5% to 1,567 homes, while order value rose 9.8% to $630.0m. September 30 backlog was 3,043 homes valued at $1.265bn, up 12.5% in units and 21.2% in value year over year.
- Financial services profit was $5.6m in Q3 and $13.5m year to date, up from $4.3m and $10.9m, respectively.
- Net cash used in operating activities was $53.2m for nine months, versus $229.6m used in the prior-year period. Real estate inventory rose to $2.089bn from $1.878bn at year-end, reflecting land and development investment. Investing used $12.5m; financing provided $197.9m.
- Cash and equivalents were $235.4m at September 30, up from $103.3m at December 31, 2014. Total debt and other borrowings were $1.146bn; debt-to-capital was 48.8% and net debt-to-capital 43.1%.
Changes versus the prior year
- Revenue and home closings grew, but earnings declined: Q3 net earnings fell 7.0%, and nine-month earnings fell 18.5%.
- Gross margin compression reflected higher land and labor costs, weather-related delays and labor shortages, impairment charges, and a greater contribution from the lower-margin East Region. The East Region’s growth also reflects the 2014 Legendary Communities acquisition and a larger community base.
- Q3 homebuilding revenue growth was strongest in the East; Texas orders and closings weakened. Q3 cancellation rates were 15% overall versus 14% a year earlier, including 19% in Texas versus 15%.
- Interest expense increased to $4.2m in Q3 and $12.0m year to date, largely due to first-half credit-facility borrowings and the June 2015 senior-note issuance.
Outlook, risks and unusual items
- Management said the new-home market remained generally positive, supported by job growth, household formation and low interest rates. It expects strong Q4 closings and revenue growth, citing higher community count and backlog; no specific full-year earnings or revenue guidance was provided.
- Management expects near-term land acquisition, development and construction outlays to exceed operating cash generation, and intends to redeploy cash into strategic lots. It described liquidity as strong and said it may seek additional debt or equity capital, with no assurance of acceptable terms.
- Weather delays and labor shortages pressured production and costs; management also cited higher land prices, competition, mortgage-rate sensitivity, oil-price-related uncertainty in Houston, construction costs, warranty claims, land availability and acquisition-integration risks.
- Impairment charges were approximately $2.0m in Q3 and $4.0m year to date, versus approximately $1.0m and $1.2m in the comparable 2014 periods. Year-to-date G&A included approximately $3.1m of executive severance and $2.1m of accelerated stock-compensation expense.
- South Edge litigation: On October 26, 2015, the Ninth Circuit affirmed a ruling supporting the lender’s repayment-guarantee claim. Meritage reported a $16.63m judgment, had posted a $16.93m appeal bond, recorded an additional $4.1m litigation charge in Q3, and said it believes its reserve covers maximum potential exposure while planning to challenge the ruling. Related arbitration claims remain pending; the company disputes liability and seeks recovery from former joint-venture partners.
- Meritage issued $200m of 6.00% senior notes due 2025. Its $500m unsecured revolving facility matures in July 2019; $482.8m was available at quarter-end after letters of credit. The company reported compliance with facility covenants and no outstanding revolver borrowings at September 30.
Important facts for investors to verify
- Whether backlog converts to closings as expected, particularly given regional differences, cancellation rates and construction delays.
- Whether gross margins stabilize as land, labor and development costs rise and newer East Region operations scale up.
- Operating cash use, inventory investment and liquidity needs as the company continues to acquire and develop lots.
- Final exposure and reserve adequacy for South Edge litigation, including the outcome of further challenges and related arbitration.
- Debt-service capacity and compliance with credit-facility and note covenants; the filing reports no debt maturities before 2018.