Meritage Homes Corporation — FY 2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016. The filing also reports fourth-quarter results; this is an annual report, not a standalone quarterly filing. Meritage builds single-family homes across nine states in the West, Central and East regions and operates a title-services business.
Key financial and operating metrics
| Metric | 2016 | 2015 |
|---|---|---|
| Total closing revenue | $3.029 billion | $2.568 billion |
| Home closing revenue | $3.003 billion | $2.532 billion |
| Net earnings | $149.5 million | $128.7 million |
| Diluted EPS | $3.55 | $3.09 |
| Home closing gross margin | 17.6% | 19.0% |
| Cash used in operating activities | $103.4 million | $3.3 million |
| Cash and cash equivalents at year-end | $131.7 million | $262.2 million |
| Debt, including notes and other borrowings | $1.127 billion | $1.117 billion |
| Net debt-to-capital | 41.2% | 40.4% |
Closings increased 12.8% to 7,355 homes; average closing price rose 5.2% to $408,400. Home orders increased 2.7% to 7,290 units, with average order price up 3.6% to $411,700. Year-end backlog was 2,627 homes valued at $1.136 billion, down 2.4% in units and approximately flat in value. The cancellation rate was 13.1%, versus 12.1% in 2015.
Fourth-quarter total closing revenue was $880.7 million, compared with $781.6 million in Q4 2015; net earnings were $51.8 million, compared with $52.9 million.
Material changes and drivers
- Revenue growth reflected higher closing volume and prices. West led regional growth, with homebuilding revenue up 25.1%; Central rose 10.4% and East 17.6%.
- Gross margin fell 140 basis points year over year. Management cited higher labor, construction and land costs, with limited ability to raise prices as quickly; Florida product mix and lower overhead absorption in newer East divisions also weighed on margins.
- Operating cash use widened as real estate investment rose $311.4 million, primarily from land acquisition, development and home construction. Real estate on the balance sheet increased to $2.422 billion from $2.098 billion.
- Cash declined by $130.5 million. Meritage controlled 29,815 home sites, up 7.3%, while active communities declined to 243 from 254. Unsold homes increased to 1,692 from 1,270, reflecting a strategy to offer more quick-move-in homes.
Liquidity, outlook and risks
- The unsecured revolving credit facility was expanded to $540 million and extended: $60 million matures in July 2019 and the remainder in July 2020. At year-end, $15 million was drawn, with $481.2 million available after letters of credit. The company reported compliance with its credit covenants.
- Management expects new community openings to increase in the first half of 2017 after delays in 2016, supporting further order and revenue growth. It also expects cash outlays for land, development and construction to exceed operating cash generated in the near term. No specific earnings or revenue guidance was provided.
- Meritage had $126.5 million of 1.875% convertible notes that holders could require the company to repurchase at par plus accrued interest on September 15, 2017. The filing identifies this as a potential liquidity requirement.
- The federal energy-efficient home tax credit was extended through 2016, but no extension for 2017 and beyond had been enacted as of the filing. Loss of the credit could increase the effective tax rate.
- Key risks include higher mortgage rates or tighter mortgage availability, land and construction cost inflation, labor shortages, weaker home prices or demand, cancellations, inventory impairments, weather and natural disasters, and regulatory or environmental delays. Management also cited market concentration and exposure to Houston’s energy-related economy.
- Routine construction-defect and other legal matters were disclosed; management said no unreserved pending matter was expected to materially affect financial condition or results. A Nevada joint-venture lender dispute was concluded after Meritage paid the judgment in 2016; the company was pursuing arbitration against former co-venturers to recover amounts.
- The independent auditor issued an unqualified opinion on the financial statements and internal control over financial reporting. Management also concluded disclosure controls were effective.
Important facts for investors to verify
- Whether margin pressure from labor, land and construction costs continues, and whether pricing offsets those increases.
- Whether planned 2017 community openings occur on schedule and rebuild orders and backlog after the year-end unit decline.
- How land spending, unsold-home inventory and operating cash flow evolve as the company expands its lot pipeline.
- The timing and funding plan for the September 2017 convertible-note put right, and the company’s liquidity after any repurchase.
- Whether the energy-efficient home tax credit is extended and the resulting effect on tax expense.
- Developments in warranty claims, the co-venturer arbitration, and any changes to land-option commitments, deposits or credit-facility availability.