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MTH > SEC Filings for MTH > Form 10-Q on 1-May-2014All Recent SEC Filings

Show all filings for MERITAGE HOMES CORP

Form 10-Q for MERITAGE HOMES CORP


1-May-2014

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations

Overview and Outlook

Most housing markets continued to benefit from generally favorable conditions in the first quarter of 2014, with relatively low inventories of homes available for sale and steady housing demand. While sales pace moderated over the past several quarters and overall housing affordability has declined somewhat, we are still benefiting from high customer interest and traffic in our communities that translate into generally strong orders and sales prices.

We remain focused on strategically positioning ourselves in well-located and highly-desired communities in many of the top real-estate markets in the United States. During the last few quarters, we have placed more emphasis on increasing prices over sales pace in order to maximize our profitability in top producing markets. This has resulted in increasing margins and a corresponding slowdown in orders pace. We believe we successfully differentiate ourselves from our competition by offering a line-up of plans that highlight the benefits of our industry-leading energy efficient homes. We also offer our buyers the ability to personalize their homes and we provide a home warranty, successfully setting us apart from the competition we face with resale homes. Our solid operating and financial results during the first three months of 2014 are reflected in our improved profitability.
Company Actions and Positioning
As the homebuilding market has stabilized, we remain focused on our main goals of growing our orders and revenue, and generating profit while maintaining a strong balance sheet. To help meet these goals we continue to execute on the following initiatives:

• Strengthening our balance sheet - completed two new senior note issuances in 2013, and extending our earliest debt maturities until 2018;

• Generating additional working capital and improved liquidity year over year:

•            Increased the capacity of our unsecured revolving credit facility
             and eliminated our cash secured letter of credit facilities,
             transferring all outstanding letters of credit to be supported by
             our increased credit facility in the fourth quarter of 2013;

• Completed an equity offering in January 2014;

• Increased the percentage of controlled lots through optioned contracts in order to minimize initial cash outlays for land purchases;

• Continuing to actively acquire and develop lots in markets we deem key to our success in order to maintain and grow our lot supply and active community count; increasing controlled lots by 22.7% year over year;

• Utilizing our enhanced market research to capitalize on the knowledge of our buyers' demands in each community, tailoring our pricing, product and amenities offered;

• Continuing to innovate and promote the Meritage Green energy efficiency program, where every new home we construct, at a minimum, meets ENERGY STAR® standards, certified by the U.S. Environmental Protection Agency, for indoor air quality, water conservation and overall energy efficiency;

• Focusing our purchasing efforts to manage cost increases;

• Striving for excellence in construction; and monitoring our customers' satisfaction as measured by survey scores and working toward improving them based on the results of the surveys.

Additionally, we are continually evaluating opportunities for expansion into new markets that indicate positive long-term growth trends. We are looking to redeploy our capital into projects both within our geographic footprint and through entry into new markets. Most recently, in connection with these efforts, we entered the Nashville, Tennessee market through the acquisition of the assets and operations of Phillips Builders in August 2013. With this acquisition, we acquired approximately 500 lots. We also continue to acquire lot positions through option contracts, more specifically through land banking arrangements that have become more available recently and that allow us to leverage our balance sheet by securing additional land through limited initial cash outlays. (See Note 3 to the unaudited consolidated financial statements for additional information related to option contracts). We are now closed out of the Las Vegas, Nevada market, only providing on-going warranty support for our homeowners.

In the first quarter of 2014, we opened 20 new communities while closing out 19 communities, ending the quarter with 189 active communities. Year over year, our average active community count increased by 15.6%, and we expect active community count to continue to grow at a moderate pace throughout 2014 as we continue to focus on growing our land positions and strategically increasing our active community count in preferred locations.


Table of Contents

We also may continue to opportunistically access the capital markets through various debt and equity transactions, providing additional liquidity, extending our debt maturities and strengthening our balance sheet. During 2013, we also took steps to strengthen our balance sheet and extend debt maturities through three capital transactions. In March 2013, we concurrently issued $175.0 million of 4.50% senior notes due 2018 and redeemed all of our $99.8 million senior subordinated notes due 2017, extending our earliest debt maturities to 2018. During the fourth quarter of 2013, we completed a $100 million add-on debt issuance to our existing 7.15% senior notes due 2020. In addition, we increased the capacity of our unsecured revolving credit facility to $200 million during the fourth quarter of 2013 to provide additional liquidity. Finally, in the first quarter of 2014 we further strengthened our balance sheet by raising $110.4 million, net of offering costs, in a public offering. (See Note 5 to the accompanying unaudited consolidated financial statements for further discussion regarding our debt and equity transactions). Summary Company Results
Along with most of the homebuilding industry, we began 2014 with a solid start, with year-over-year gains in home closing revenue and net earnings of 22.7% and 110.8%, respectively, over the first quarter of 2013. We believe these positive trends are attributable to our focus on community placement, coupled with our Meritage Green energy efficiency product offerings that appeal to homebuyers, as well as positive general and economic conditions.
In the first quarter of 2014, we experienced improvements in many of our key operating and financial metrics. We recorded 1,109 closings and $405.8 million in associated revenue, reflecting a moderate 5.4% rise in closing units and a 16.4% increase in averages sales prices over the first quarter of 2013. We experienced nearly flat home orders year over year with 1,525 and 1,547 orders in the first three months of 2014 and 2013, respectively. Our average orders pace was 8.1 units per month in the first three months of 2014 as compared to 9.5 for the same period in 2013. The slow-down in orders pace, to some extent, reflects the effect that recent interest rate and home price increases have had on consumers as they adjust to the recovering market, as well as general slowing in specific markets. Individual markets have responded to the changes in the real estate environment differently, but to date we have continued to experience growth in demand in both our Central and East Regions that has nearly offset the moderated pace in the West Region.
Through our efforts of focusing on maximizing profitability, we recorded a significant increase year-over year in home closing gross margin during the three months ended March 31, 2014, up from 19.5% in 2013 to 22.8%. Our higher gross margins stem largely from the higher average sales prices we generated from orders in the latter half of 2013. We believe that the current housing environment still has room for growth, although comparative positive trends are and will continue to be difficult as we began experiencing notable and sustained improvement throughout all of 2013. Accordingly, we anticipate the comparative results in units, average sales prices and margins to be more tempered as we progress further into the homebuilding recovery.
The $75.1 million increase in home closing revenue is primarily driven by the $51,500 or 16.4% increase in average sales price as well as the 57 additional closing units for the three months ended March 31, 2014 as compared to the same period in the prior year. The increased average sales prices for homes closed were realized in every state in which we operate. We reported net earnings of $25.4 million for the three months ended March 31, 2014, as compared to $12.0 million for the same period in 2013, highlighting our ability to leverage the higher average sales prices we earned. While direct costs have increased year over year, we continue to remain focused on cost containment. We expect improving revenue and profitability for the remainder of the year, as indicated by our 25.0% and 15.4% higher ending backlog dollars and units, respectively, although the continuing growth in margins is not expected to sustain as we are starting to experience slowing in certain markets.
At March 31, 2014, our backlog of $835.9 million reflects an increase of $167.0 million, when compared to backlog at March 31, 2013. The improvement is largely the result of increased sales prices on orders for the first three months of 2014, as well as the higher beginning backlog year over year. In the first quarter of 2014, we maintained a low cancellation rate on home orders at 13% of gross orders, as compared to 11% in the first quarter of 2013, both of which were below our historical averages.
Critical Accounting Policies
The accounting policies we deem most critical to us and that involve the most difficult, subjective or complex judgments include revenue recognition, valuation of real estate and warranty reserves. There have been no significant changes to our critical accounting policies during the three months ended March 31, 2014 compared to those disclosed in Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations, included in our 2013 Annual Report on Form 10-K.


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The composition of our closings, home orders and backlog is constantly changing and is based on a dissimilar mix of communities between periods as new projects open and existing projects wind down. Further, individual homes within a community can range significantly in price due to differing square footage, option selections, lot sizes and quality of lots (e.g. cul-de-sac, view lots, greenbelt lots). These variations result in a lack of meaningful comparability between our home orders, closings and backlog due to the changing mix between periods. The tables below present operating and financial data that we consider most critical to managing our operations (dollars in thousands):
Home Closing Revenue

                             Three Months Ended March 31,           Quarter over Quarter
                                  2014                  2013          Chg $         Chg %
Total
Dollars                $       405,779               $ 330,710    $     75,069      22.7  %
Homes closed                     1,109                   1,052              57       5.4  %
Avg sales price        $         365.9               $   314.4    $       51.5      16.4  %
West Region
Arizona
Dollars                $        71,782               $  57,149    $     14,633      25.6  %
Homes closed                       211                     192              19       9.9  %
Avg sales price        $         340.2               $   297.7    $       42.5      14.3  %
California
Dollars                $        79,927               $  90,642    $    (10,715 )   (11.8 )%
Homes closed                       165                     228             (63 )   (27.6 )%
Avg sales price        $         484.4               $   397.6    $       86.8      21.8  %
Colorado
Dollars                $        39,922               $  32,204    $      7,718      24.0  %
Homes closed                        89                      94              (5 )    (5.3 )%
Avg sales price        $         448.6               $   342.6    $      106.0      30.9  %
Nevada
Dollars                            N/A               $   3,569             N/M       N/M
Homes closed                       N/A                      16             N/M       N/M
Avg sales price                    N/A               $   223.1             N/M       N/M
West Region Totals
Dollars                $       191,631               $ 183,564    $      8,067       4.4  %
Homes closed                       465                     530             (65 )   (12.3 )%
Avg sales price        $         412.1               $   346.3    $       65.8      19.0  %
Central Region - Texas
Central Region Totals
Dollars                $       118,199               $  90,705    $     27,494      30.3  %
Homes closed                       403                     354              49      13.8  %
Avg sales price        $         293.3               $   256.2    $       37.1      14.5  %
East Region
Carolinas
Dollars                $        22,579               $  14,215    $      8,364      58.8  %
Homes closed                        55                      40              15      37.5  %
Avg sales price        $         410.5               $   355.4    $       55.1      15.5  %
Florida
Dollars                $        67,098                  42,226    $     24,872      58.9  %
Homes closed                       163                     128              35      27.3  %
Avg sales price        $         411.6                   329.9    $       81.7      24.8  %
Tennessee
Dollars                $         6,272                     N/A             N/M       N/M
Homes closed                        23                     N/A             N/M       N/M
Avg sales price        $         272.7                     N/A             N/M       N/M
East Region Totals
Dollars                $        95,949               $  56,441    $     39,508      70.0  %
Homes closed                       241                     168              73      43.5  %
Avg sales price        $         398.1               $   336.0    $       62.1      18.5  %


Table of Contents

Home Orders (1)

                             Three Months Ended March 31,           Quarter over Quarter
                                  2014                  2013          Chg $         Chg %
Total
Dollars                $       555,040               $ 520,403    $     34,637       6.7  %
Homes ordered                    1,525                   1,547             (22 )    (1.4 )%
Avg sales price        $         364.0               $   336.4    $       27.6       8.2  %
West Region
Arizona
Dollars                $        75,647               $  97,708    $    (22,061 )   (22.6 )%
Homes ordered                      228                     318             (90 )   (28.3 )%
Avg sales price        $         331.8               $   307.3    $       24.5       8.0  %
California
Dollars                $       120,052               $ 133,631    $    (13,579 )   (10.2 )%
Homes ordered                      237                     314             (77 )   (24.5 )%
Avg sales price        $         506.5               $   425.6    $       80.9      19.0  %
Colorado
Dollars                $        54,758               $  56,795    $     (2,037 )    (3.6 )%
Homes ordered                      124                     141             (17 )   (12.1 )%
Avg sales price        $         441.6               $   402.8    $       38.8       9.6  %
Nevada
Dollars                            N/A               $   5,506             N/M       N/M
Homes ordered                      N/A                      23             N/M       N/M
Avg sales price                    N/A               $   239.4             N/M       N/M
West Region Totals
Dollars                $       250,457               $ 293,640    $    (43,183 )   (14.7 )%
Homes ordered                      589                     796            (207 )   (26.0 )%
Avg sales price        $         425.2               $   368.9    $       56.3      15.3  %
Central Region - Texas
Central Region Totals
Dollars                $       192,231               $ 131,130    $     61,101      46.6  %
Homes ordered                      634                     503             131      26.0  %
Avg sales price        $         303.2               $   260.7    $       42.5      16.3  %
East Region
Carolinas
Dollars                $        34,019               $  26,886    $      7,133      26.5  %
Homes ordered                       81                      69              12      17.4  %
Avg sales price        $         420.0               $   389.7    $       30.3       7.8  %
Florida
Dollars                $        64,616               $  68,747    $     (4,131 )    (6.0 )%
Homes ordered                      173                     179              (6 )    (3.4 )%
Avg sales price        $         373.5               $   384.1    $      (10.6 )    (2.8 )%
Tennessee
Dollars                $        13,717                     N/A             N/M       N/M
Homes ordered                       48                     N/A             N/M       N/M
Avg sales price        $         285.8                     N/A             N/M       N/M
East Region Totals
Dollars                $       112,352               $  95,633    $     16,719      17.5  %
Homes ordered                      302                     248              54      21.8  %
Avg sales price        $         372.0               $   385.6    $      (13.6 )    (3.5 )%

(1) Home orders and home order dollars for any period represent the aggregate units or sales price of all homes ordered, net of cancellations. We do not include orders contingent upon the sale of a customer's existing home or any other material contingency as a sales contract until the contingency is removed.


Table of Contents

                                   Three Months Ended March 31,
                                    2014                        2013
                            Beginning         Ending    Beginning    Ending
Active Communities
Total                     188                    189          158       168
West Region
Arizona                    40                     41           38        40
California                 22                     17           17        15
Colorado                   14                     13           12        11
Nevada                      -                      -            1         -
West Region Total          76                     71           68        66
Central Region - Texas     70                     77           65        69
Central Region Total       70                     77           65        69
East Region
Carolinas                  17                     18            7        11
Florida                    20                     17           18        22
Tennessee                   5                 6                 -         -
East Region Total          42                     41           25        33




                         Three Months Ended March 31,
Cancellation Rates (1)      2014                2013
Total                          13 %                 11 %
West Region
Arizona                        13 %                  8 %
California                     15 %                 10 %
Colorado                       13 %                  7 %
Nevada                        N/A                    8 %
West Region Total              14 %                  9 %
Central Region - Texas         14 %                 16 %
Central Region Total           14 %                 16 %
East Region
Carolinas                      10 %                  6 %
Florida                        10 %                 11 %
Tennessee                       2 %                N/A
East Region Total               9 %                  9 %

(1) Cancellation rates are computed as the number of canceled units for the period divided by the gross order units for the same period.


Table of Contents

Order Backlog (1)
                          At March 31, 2014          Year over Year
                          2014         2013         Chg $       Chg %
Total
Dollars                $ 835,933    $ 668,959    $ 166,974      25.0  %
Homes in backlog           2,269        1,967          302      15.4  %
Avg sales price        $   368.4    $   340.1    $    28.3       8.3  %
West Region
Arizona
Dollars                $ 101,104    $ 121,375    $ (20,271 )   (16.7 )%
Homes in backlog             295          375          (80 )   (21.3 )%
Avg sales price        $   342.7    $   323.7    $    19.0       5.9  %
California
Dollars                $ 147,588    $ 167,577    $ (19,989 )   (11.9 )%
Homes in backlog             297          401         (104 )   (25.9 )%
Avg sales price        $   496.9    $   417.9    $    79.0      18.9  %
Colorado
Dollars                $ 107,220    $  74,680    $  32,540      43.6  %
Homes in backlog             237          189           48      25.4  %
Avg sales price        $   452.4    $   395.1    $    57.3      14.5  %
Nevada
Dollars                      N/A    $   5,042          N/M       N/M
Homes in backlog             N/A           21          N/M       N/M
Avg sales price              N/A    $   240.1          N/M       N/M
West Region Totals
Dollars                $ 355,912    $ 368,674    $ (12,762 )    (3.5 )%
Homes in backlog             829          986         (157 )   (15.9 )%
Avg sales price        $   429.3    $   373.9    $    55.4      14.8  %
Central Region - Texas
Central Region Totals
Dollars                $ 319,687    $ 172,742    $ 146,945      85.1  %
Homes in backlog           1,023          649          374      57.6  %
Avg sales price        $   312.5    $   266.2    $    46.3      17.4  %
East Region
Carolinas
Dollars                $  54,658    $  30,012    $  24,646      82.1  %
Homes in backlog             134           78           56      71.8  %
Avg sales price        $   407.9    $   384.8    $    23.1       6.0  %
Florida
Dollars                $  86,790    $  97,531    $ (10,741 )   (11.0 )%
Homes in backlog             218          254          (36 )   (14.2 )%
Avg sales price        $   398.1    $   384.0    $    14.1       3.7  %
Tennessee
Dollars                $  18,886          N/A          N/M       N/M
Homes in backlog              65          N/A          N/M       N/M
Avg sales price        $   290.6          N/A          N/M       N/M
East Region Totals
Dollars                $ 160,334    $ 127,543    $  32,791      25.7  %
Homes in backlog             417          332           85      25.6  %
Avg sales price        $   384.5    $   384.2    $     0.3       0.1  %

(1) Our backlog represented net orders that have not yet closed.


Table of Contents

Operating Results
Companywide. Home closings revenue for the three months ended March 31, 2014 increased 22.7% to $405.8 million on 1,109 units when compared to the prior year, due to a 57-unit increase in units closed and a $51,500 increase in average closing price. Home orders units dipped slightly to 1,525 units for the quarter ended March 31, 2014 as compared to 1,547 units in the 2013 period, offset by an increased average sales price of $27,600, or 8.2%. The results year over year for orders were difficult comparatively, as 2013 results were particularly strong with 68.8% and 35.2% increases over 2012 in order dollars and units, respectively. Sales pace of orders per average active community dropped to 8.1 versus 9.5 in 2013, as consumers continue to adjust to higher interest rates and rising prices. The sales pace decline further reflects our focus on asset maximization over absorptions pace. Our active community count increased to 189 communities as of March 31, 2014 as compared to 168 at March 31, 2013. The results for the three months ended March 31, 2014 generated a 302-unit, or 15.4%, increase in our ending backlog with 2,269 homes as compared to 1,967 homes at March 31, 2013. Additionally, the value of orders in backlog at March 31, 2014 increased 25.0% due to a $28,300 or 8.3% improvement in average sales price versus the same period a year ago.
West. In the three months ended March 31, 2014, home closings decreased to 465 units, a drop of 12.3% or 65 units over prior year, offset by an average sales price increases of 19.0%, ending the 2014 period with closings generating a value of $191.6 million, an increase of 4.4% from 2013. Despite the increase in actively selling communities during the first quarter of 2014, the Region had a 207-unit decrease in orders partially offset by a $56,300 increase in average sales price, resulting in a net decrease in order dollar value of $43.2 million. The increase in average sales price is a result of our community locations with higher-priced homes that have also had successive periods of price increases due to strong buyer demand, although demand in certain markets has softened as evidenced by the decrease in units. These results led to ending backlog in the Region valued at $355.9 million on 829 units, a $12.8 million or 3.5% decrease over the same period in the prior year. The first quarter year-over-year comparisons are largely the result of demand leveling out from buyers adjusting to the new homebuilding market trends. The first quarter of 2013 for the West region boasted the best growth in the Company, providing an exceedingly difficult comparative base for 2014 results.

Our orders per average active community in the Region maintained a healthy pace of 8.0 units, although that does represent a decrease of 32.8% over the prior year, largely due to the exceptional and unsustainable demand the California market experienced in 2013. California orders pace did decline from 2013, although it is still performing at the highest pace in of all of our markets with 12.2 orders per average community. We plan to continue to tap into the strong demand the California market is generating by strategically increasing our active community count in both Northern and Southern California throughout the year. While demand is still good, orders in Arizona have moderated in recent quarters and home prices there have begun to moderate accordingly. Our orders pace in Arizona was noticeably softer throughout the first quarter declining 31.7% compared to the first quarter of 2013. An 8.0% increase in our average sales price offset some of that decline. We still believe the fundamentals in the Arizona market are strong in the long-run, but we expect our ability to initiate price increases to be impacted short-term while buyers are adjusting to the current environment. Colorado's demand also dipped slightly in the first three months of 2014 as compared to the prior year, although the continued growth in average sales prices nearly offset the slight decline in units. We believe that the severe weather the Denver area experienced in the first three months of 2014 impacted demand, contributing to the year-over-year decline. Colorado's contribution to overall results in the Region increased to 21.1% of total order volume helping to drive the overall average sales price growth the Region continues to experience.

As previously discussed, we wound down our operations in Nevada and the only business we are currently conducting in Nevada is servicing warranty calls for our existing homeowners. We closed our final home there in the third quarter of 2013. . . .

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