Meritage Homes Corporation — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015; unaudited consolidated results compared with Q1 2014. Meritage builds single-family homes across nine states. Its 229 active communities included recently acquired Atlanta and Greenville operations.
Financial and operating performance
| Metric | Q1 2015 | Q1 2014 | Change |
|---|---|---|---|
| Home closing revenue | $517.3 million | $405.8 million | +27.5% |
| Total closing revenue | $518.7 million | $408.3 million | +27.0% |
| Home closing gross profit / margin | $95.5 million / 18.5% | $92.6 million / 22.8% | Margin down 4.3 percentage points |
| Net earnings | $16.4 million | $25.4 million | Down 35.4% |
| Diluted EPS | $0.40 | $0.62 | Down 35.5% |
| Cash used in operations | $38.2 million | $129.5 million | Lower cash use |
- Closings rose 20.4% to 1,335 homes; average closing price increased 5.9% to $387,500. Net orders increased 29.8% to 1,979 homes, with order value up 41.0% to $782.8 million.
- Quarter-end backlog increased 21.6% to 2,758 homes and 33.0% in value to $1.112 billion; average backlog price was $403,200, up 9.4%. The cancellation rate declined to 11% from 13%.
- Financial services profit increased to $3.8 million from $3.0 million. Commissions and other sales costs were $41.6 million; G&A was $29.7 million. G&A growth included higher compensation, new-market overhead, and approximately $2.1 million of accelerated stock compensation.
- Cash and cash equivalents were $89.2 million at March 31, down from $103.3 million at year-end. Operating cash use primarily reflected a $58.9 million increase in real estate inventory.
- Debt comprised $904.3 million of senior and convertible notes and $61.4 million of loans and other borrowings. Debt-to-capital was 46.0% and net debt-to-capital 43.6%. The company drew $27.0 million on its $500 million revolving facility; $453.3 million remained available after outstanding borrowings and letters of credit.
Material changes and management commentary
- Revenue growth did not translate into higher earnings: management attributed lower net income chiefly to higher land costs, less home-price appreciation on closings, and a greater contribution from the lower-margin East Region, including newer and recently acquired divisions.
- Consolidated home closing gross margin fell to 18.5% from 22.8%. Management cited rising land costs, softer prior-year conditions in Arizona, less price appreciation, regional sales mix, and acquisition-accounting adjustments related to Legendary Communities. It said those adjustments should weigh on year-over-year East Region comparisons in the first half of 2015, with the effect expected to dissipate in the second half.
- East Region closings and orders grew substantially, partly because of the Legendary acquisition and increased community count. Texas orders declined 12.1% in units, although orders per average community improved; management said Houston’s pace held steady despite lower oil prices. West Region orders increased 33.6%.
Outlook, liquidity, and risks
- Management described the spring selling season as starting strongly and said it anticipated growth in new communities during 2015. It gave no specific full-year revenue or earnings guidance in the provided filing text.
- The company expects land acquisition, development, and construction cash outlays to exceed operating cash generation in the near term. It plans to redeploy cash from inventory sales toward revolver repayment and strategic lot acquisition and development; it may seek additional debt or equity capital, with no assurance of acceptable terms.
- Management reported compliance with credit-facility covenants at quarter-end. The facility includes a maximum leverage covenant of 60%; reported actual leverage was 43%. The company also faces mortgage-rate, labor and material cost, land availability, absorption, cancellation, construction-defect, and acquisition-integration risks.
- Land and lot contracts/options covered 13,975 lots with a stated purchase price of $905.5 million and $91.9 million of deposits. The company generally does not have to purchase lots under option agreements; exposure is typically limited to non-refundable deposits and related capitalized costs. Surety bonds outstanding totaled $249.5 million.
- South Edge joint-venture litigation remained under appeal. A court judgment and attorneys’ fee award had been entered against Meritage, and an amended $16.9 million bond stayed enforcement. Meritage disputes liability and is pursuing an appeal and claims against co-venturers. The company had $15.1 million reserved for non-warranty litigation and asserted claims; the ultimate outcome remains uncertain.
- The company reported no cash dividends and said it did not intend to declare them in the foreseeable future. It also reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether order and backlog growth converts into closings while cancellations remain low.
- Whether gross margins recover as land costs, regional mix, and Legendary acquisition-accounting effects evolve.
- How continued land investment and near-term operating cash use affect cash, revolver borrowings, and leverage.
- Developments in the South Edge appeal, including potential exposure beyond recorded reserves and the status of the bond.
- Whether newer East Region divisions achieve the scale and overhead leverage management expects.