MERITAGE HOMES CORP
10-Ks and 10-Qs
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Table of Contents
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
| þ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2010
OR
| o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from
to
Commission File Number 1-9977
(Exact Name of Registrant as Specified in its Charter)
| Maryland | 86-0611231 | |
| (State or Other Jurisdiction of Incorporation or Organization) | (IRS Employer Identification No.) | |
| 17851 North 85th Street, Suite 300, Scottsdale, Arizona | 85255 | |
| (Address of Principal Executive Offices) | (Zip Code) |
(480) 515-8100
(Registrant’s telephone number, including area code)
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
| Title of Each Class | Name of Each Exchange on which Registered | |
| Common Stock, $.01 par value | New York Stock Exchange |
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule
405 of the Securities Act.
Yes
o
No
þ
Indicate by check mark if the registrant is not required to file reports pursuant to Section
13 or Section 15(d) of the Act.
Yes
o
No
þ
Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes
þ
No
o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files). Yes
o
No
o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation
S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in
definitive proxy or information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K.
o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large
accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act. (Check one):
| Large accelerated filer o | Accelerated Filer þ | Non-accelerated filer o | Smaller reporting company o | |||
| (Do not check if a smaller reporting company) |
Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act). Yes
o
No
þ
The aggregate market value of common stock held by non-affiliates of the registrant
(29,577,052 shares) as of June 30, 2010, was $481,514,407, based on the closing sales price per
share as reported by the New York Stock Exchange on such date.
The
number of shares outstanding of the registrant’s common stock on
February 25, 2011 was 32,304,386.
DOCUMENTS INCORPORATED BY REFERENCE
Portions from the registrant’s Proxy Statement relating to the 2011 Annual Meeting of
Stockholders have been incorporated by reference into Part III, Items 10, 11, 12, 13 and 14.
MERITAGE HOMES CORPORATION
FORM 10-K
TABLE OF CONTENTS
FORM 10-K
TABLE OF CONTENTS
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| Exhibit 23.1 | ||||||||
| Exhibit 31.1 | ||||||||
| Exhibit 31.2 | ||||||||
| Exhibit 32.1 | ||||||||
2
Table of Contents
PART I
| Item 1. | Business |
The Company
Meritage Homes is a leading designer and builder of single-family attached and detached homes
based on the number of home closings. We operate in the historically high-growth southern and
western United States. We offer a variety of homes that are designed to appeal to a wide range of
homebuyers, including first-time, move-up, luxury and active adult buyers. We have operations in
three regions: West, Central and East, which are comprised of 12 metropolitan areas in six states:
Arizona, California, Nevada, Texas, Colorado and Florida. These three regions are our principal
business segments. Please refer to Note 13 of the consolidated financial statements for
information regarding our operating and reporting segments.
Our homebuilding and marketing activities are conducted primarily under the Meritage Homes
brand, except for Arizona and Texas where we also operate under the name Monterey Homes. At
December 31, 2010, we were actively selling homes in 151 communities, with base prices ranging from
approximately $90,000 to $972,000.
Available Information; Corporate Governance
Meritage Homes Corporation was incorporated in 1988 as a real estate investment trust in the
State of Maryland. On December 31, 1996, through a merger, we acquired the homebuilding operations
of our predecessor company. We currently focus exclusively on homebuilding and related activities
and no longer operate as a real estate investment trust.
Information about our company and communities is provided on our Internet website at
www.meritagehomes.com
. The information contained on our website is not considered part of this
Annual Report on Form 10-K. Our periodic and current reports, including any amendments, filed or
furnished pursuant to section 13(a) or 15(d) of the Securities Exchange Act of 1934 (the “Exchange
Act”) are available, free of charge, on our website as soon as reasonably practicable after they
are electronically filed with or furnished to the Securities and Exchange Commission (“SEC”).
Meritage operates within a comprehensive plan of corporate governance for the purpose of
defining responsibilities and setting high standards for ethical conduct. Our Board of Directors
has established an audit committee, executive compensation committee and nominating/governance
committee. The charters for each of these committees are available on our website, along with our
Code of Ethics and our Corporate Governance Principles and Practices. Our committee charters, Code
of Ethics and Corporate Governance Principles and Practices are also available in print, free of
charge, to any stockholder who requests any of them by calling us or by writing to us at our
principal executive offices at the following address: Meritage Homes Corporation, 17851 North
85
th
Street, Suite 300, Scottsdale, Arizona 85255, Attention: General Counsel. Our
telephone number is (480) 515-8100.
Strategy
All facets of Meritage Homes’ operations are governed by the principles of our strategic
model, Meritage Forward. Meritage Forward defines our culture and operational parameters, to
ensure that our actions are aligned around the achievement of our goals. It combines our
entrepreneurial spirit, cutting-edge innovation and organizational agility to strive for
industry-leading results in all of our functional areas, including: management, land acquisition
and development, finance, marketing, sales, purchasing, construction and customer care. The main
tenets of Meritage Forward are to:
| • | Maximize our state-of-the-art market research tools to make informed decisions about land purchases; | ||
| • | Utilize our knowledge of customer preferences to align our product offerings with market expectations; | ||
| • | Customize our sales techniques for today’s buyers and educate our sales team on the availability of mortgage products; | ||
| • | Continuously improve our construction process by working with our vendors to find mutual efficiencies; |
| • | Re-engineer and constantly evaluate our product while incorporating our Meritage Green concepts and technologies into routine construction practices; |
| • | Shorten sales to close cycle time by refining our processes and streamlining scheduling and production; |
| • | Provide the highest level of customer service and care by working closely with our buyers throughout the sales and construction process and monitoring their satisfaction routinely after delivery of their homes; and |
| • | Ensure that we have the best team available by hiring and nurturing top talent, expecting top level performance and allocating proper resources to drive execution of our business plan. |
All of these directives are focused on our key priority of sustaining and increasing our
profitability as the economy stabilizes and recovers.
3
Table of Contents
In connection with our Meritage Forward strategy, we implemented several initiatives over the
last several quarters. Our Simply Smart Series ™ is a collection of homes that are specifically designed to appeal to the renter and first-time buyer
demographic that are marketed on the basis of low monthly payments, which compare favorably to
rent payments. We believe these homes compete favorably in our submarkets where low prices are the
key determinant of sales activity. The Simply Smart Series™ offers a base level of standard
features while allowing buyers to customize their purchase with a reasonable range of options and
upgrades.
To address the influx of available existing home inventory, we have initiated our “
Your Home.
Your Way. 99 Days Guaranteed
” promise in many of our communities. This program provides our buyers
with all the benefits of new home construction, including customization and a warranty, and delivery in
99 days or less from the date the buyer signs the sales contract to the close of their new home.
This allows us to effectively compete with the typical closing cycle for resale and foreclosure
homes. The expedited timeline works in concert with our streamlined processes driven by Meritage
Forward, while maintaining Meritage quality.
Last year, we also launched Meritage Green, our energy-efficiency program, and since January
1, 2010, every new home we construct, at a minimum, meets ENERGY STAR
®
standards.
Incorporating these energy standards into all of our homes has resulted in our achievement of
design, purchasing and production efficiencies and have allowed us to offer these standard features to
our home buyers for either nominal or no additional cost. Beginning in mid 2010, we also opened
several extreme “green” communities that have homes with standard solar features that can save up
to 80% on a homeowner’s utility bills. Our “green” strategy effectively differentiates our product
in the marketplace when compared against both new and resale homes, providing us with a competitive
advantage and allows us to be
a responsible steward of the environment. Our commitment to green is publicly recognized, and we
have received several awards for our leadership in advanced green building, including the 2010
Alliance Home Quality and Performance Leadership Award
, the
Pubby Award for Community of the Year”,
the 2011
Energy Value Housing Award
from the National Association of Homebuilders for our Lyon’s
Gate community located in Gilbert, Arizona, and the 2011
People’s Choice Award
, recognizing
Meritage for voluntarily incorporating energy efficiency in the design, construction and marketing
of our homes.
We believe our Meritage Forward strategy and our Meritage Green commitment provides us with
unique competitive advantages and will drive our success in attaining our key objectives of
maintaining and growing our profitability.
Markets and Products
We currently build and sell homes in the following markets:
| Markets | Year Entered | |
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Phoenix, AZ
|
1985 | |
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Dallas/Ft. Worth, TX
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1987 | |
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Austin, TX
|
1994 | |
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Tucson, AZ
|
1995 | |
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Houston, TX
|
1997 | |
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East Bay/Central Valley, CA
|
1998 | |
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Sacramento, CA
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1998 | |
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Las Vegas, NV
|
2002 | |
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San Antonio, TX
|
2003 | |
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Inland Empire, CA
|
2004 | |
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Denver, CO
|
2004 | |
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Orlando, FL
|
2004 |
4
Table of Contents
Our homes range from entry level to luxury. A summary of activity by region as of and for the
years ended December 31, 2010 and 2009 follows (dollars in thousands):
| Year Ended December 31, 2010 | At December 31, 2010 | |||||||||||||||||||||||
| # of | ||||||||||||||||||||||||
| # of | Average | # Homes | Actively | |||||||||||||||||||||
| Homes | Closing | in | $ Value of | # Home Sites | Selling | |||||||||||||||||||
| Closed | Price | Backlog | Backlog | Controlled (1) | Communities | |||||||||||||||||||
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West Region
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California
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417 | $ | 353.0 | 45 | $ | 15,295 | 1,696 | 14 | ||||||||||||||||
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Nevada
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81 | 197.6 | 12 | 2,369 | 488 | 4 | ||||||||||||||||||
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West Region Total
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498 | 327.7 | 57 | 17,664 | 2,184 | 18 | ||||||||||||||||||
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Central Region
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Arizona
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700 | 223.0 | 125 | 31,980 | 6,686 | 32 | ||||||||||||||||||
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Texas
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2,028 | 240.5 | 463 | 111,607 | 4,759 | 82 | ||||||||||||||||||
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Colorado
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162 | 301.4 | 52 | 16,964 | 596 | 9 | ||||||||||||||||||
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Central Region Total
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2,890 | 239.7 | 640 | 160,551 | 12,041 | 123 | ||||||||||||||||||
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East Region
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Florida
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312 | 270.7 | 81 | 23,601 | 999 | 10 | ||||||||||||||||||
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Total Company
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3,700 | $ | 254.2 | 778 | $ | 201,816 | 15,224 | 151 | ||||||||||||||||
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| Year Ended December 31, 2009 | At December 31, 2009 | |||||||||||||||||||||||
| # of | ||||||||||||||||||||||||
| # of | Average | # Homes | Actively | |||||||||||||||||||||
| Homes | Closing | in | $ Value of | # Home Sites | Selling | |||||||||||||||||||
| Closed | Price | Backlog | Backlog | Controlled (1) | Communities | |||||||||||||||||||
|
West Region
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California
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348 | $ | 333.9 | 89 | $ | 34,322 | 817 | 7 | ||||||||||||||||
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Nevada
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130 | 208.1 | 14 | 2,671 | 621 | 6 | ||||||||||||||||||
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West Region Total
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478 | 299.7 | 103 | 36,993 | 1,438 | 13 | ||||||||||||||||||
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Central Region
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Arizona
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781 | 199.9 | 147 | 32,110 | 5,589 | 26 | ||||||||||||||||||
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Texas
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2,405 | 235.7 | 715 | 181,564 | 5,238 | 98 | ||||||||||||||||||
|
Colorado
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145 | 305.0 | 39 | 11,456 | 190 | 6 | ||||||||||||||||||
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Central Region Total
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3,331 | 230.3 | 901 | 225,130 | 11,017 | 130 | ||||||||||||||||||
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East Region
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Florida
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230 | 227.6 | 91 | 25,412 | 451 | 10 | ||||||||||||||||||
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Total Company
|
4,039 | $ | 238.4 | 1,095 | $ | 287,535 | 12,906 | 153 | ||||||||||||||||
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| (1) | “Home Sites Controlled” is the estimated number of homes that could be built on unstarted lots we control, both on lots available for sale and on land expected to be developed into lots. |
The 18.0% overall increase in our homesites controlled as of December 31, 2010 as compared to
the prior year reflects our efforts to execute on our strategy to reposition and re-grow our
business in key markets. During the past two years, we have exited under-performing markets, sold
excess owned lots, terminated lot contracts in less successful subdivisions, purchased and
contracted for new projects with smaller lot positions and recalibrated our holdings to be more in
line with our current operation volumes.
The average closing price increase in 2010 versus 2009 highlights our successful efforts to
acquire lots in more desirable locations where we believe there are fewer foreclosures, stronger
demand and more marketplace stability, so that we can achieve a higher sales price, as well as the
intentional shift of our business back to California, Colorado and Florida, all markets with higher
closing prices than our recent concentration of operations in Texas.
5
Table of Contents
Recent Industry and Company Developments
During the first half of 2010, the combined effect of the spring selling season and the
extended homebuyer tax credit helped our operations achieve bottom-line profitability and
year-over-year growth in both closing volume and dollars. The latter half of 2010, however,
experienced reduced demand caused by the tax credit expiration as well as continuing uncertainty
regarding the state of the economy and elevated unemployment expectations. Competition for home
buyers remained intense in 2010 due to the continued excess supply of re-sale and foreclosure homes
on the market. In addition, mortgage financing products have become limited, and underwriting
standards are more restrictive. Therefore, even though home affordability has significantly
improved over the past several years, benefiting from both low prices and low interest rates, we
have not yet seen a significant market improvement from the start of the economic downturn,
although we believe we are beginning to see signs of stabilization in some of our markets. While
anticipating another difficult but profitable year in 2011, we remain cautious in our projections
as the national recovery signs have been erratic, and we expect continued volatility for the next
several quarters.
During 2010, we continued to focus on our goals of returning to profitability, generating
positive cash flow and strengthening our balance sheet. We grew our cash, cash equivalents,
restricted cash and investments and securities balances to $412.6 million at December 31, 2010. We
also increased gross margins excluding impairments to 18.5% for the year ending December 31, 2010,
as compared to 13.5% for the same period in 2009. We continue to rebuild our lot positions with
well-located, low-cost lots to supplement and replace our older communities as they close out. We
believe our strategy provides us with flexibility given the current difficult market conditions,
and also allows us to take advantage of unique opportunities to continue to purchase
well-positioned lots in select markets.
During this downturn and in line with our Meritage Forward strategy, we have conducted an
in-depth market review of each one of our submarkets and have repositioned and redesigned much of
our product to increase affordability to appeal to customers at lower price points. Our lower cost
structure has enabled us, in certain communities, to decrease the selling price of these new homes
and compete successfully with foreclosures and distressed re-sales. In some locations, we designed
smaller and more efficient floor plans, reduced or eliminated certain standard features from our
base home models to re-align them with current market demands and reduced the number of floor plans
offered, while continuing to provide an ample selection of options and upgrades, allowing our
customers to personalize their new homes with the features they consider most important. In other
communities, we are able to capitalize on our construction efficiencies and offer a larger product
at a reasonable price point, increasing the breadth of our buyer demographics. Our divisions have
been working with their subcontractors to achieve additional price concessions through both
materials and labor bid renegotiations, and also through reviews of our entire construction cycle,
including even-flow scheduling and process improvement initiatives.
Our active community count remained relatively consistent at 151 versus 153 a year ago.
Although our average sales per community during 2010 was 22.3, a slight decrease from 23.3 during
2009, our average sales price increased by $15,800, or 6.7%, year over year. Our unsold inventory
consisted of 519 homes as of December 31, 2010, consistent with prior year of 514 unsold homes,
approximately half of which were complete in both 2010 and 2009. At December 31, 2010, we averaged
only 3.4 unsold homes per active community.
Land Acquisition and Development
Our
goal is to maintain an approximate three-to-four year supply of lots, which we believe
provides an appropriate planning horizon to address regulatory matters and land development;
although, during the current downturn in the homebuilding industry, we have primarily purchased
finished lot positions with a two-to-three year life cycle. To better leverage our existing
overhead, we are currently focused on expanding our market share in our key markets and their
adjacent submarkets, although we will explore exceptional opportunities outside of our existing
markets if and when they arise. As of December 31, 2010 we have a 4.5-year supply of lots, based
on 2010 orders. In the near term, we plan to continue to acquire well-positioned finished lots in
our key markets with short land positions while analyzing opportunities for partially developed
land. We continually evaluate our markets, monitoring our lot supplies to ensure we have a
sufficient pipeline, and are committed to growing our active community count in key locations.
Today, we are mainly purchasing finished lots, on which the development has already been
completed, although we are beginning to acquire opportunities in
partially-developed or undeveloped
lot positions. These lots are ready for immediate home construction and are the primary focus of
our limited purchases in the current financial environment. For land or finished lots we intend to
purchase, our selection is based upon a variety of factors, including:
| • | demographic factors, based on extensive marketing studies; | ||
| • | existing concentration of contracted lots in surrounding markets, including nearby Meritage communities; |
| • | suitability for development, generally within a one to four-year time period from the beginning of the development process to the delivery of the last home; |
6
Table of Contents
| • | financial feasibility of the proposed project, including projected profit margins, returns on capital invested, and the capital payback period; |
| • | the ability to secure governmental approvals and entitlements; | ||
| • | results of environmental and legal due diligence; | ||
| • | proximity to local traffic corridors and amenities; |
| • | availability of seller-provided purchase options that allow us to defer lot purchases until needed for production; and |
| • | management’s judgment as to the real estate market and economic trends, and our experience in particular markets. |
The factors used to evaluate finished lot purchases are similar to those for land we intend to
develop ourselves, although as the development risks associated with the undeveloped land —
financial, environmental, legal and governmental — have been
borne by others. Therefore, these
finished lots are more attractive to us, even though the price of these finished lots may be
higher, reflecting their finished status, which allows us to immediately begin home construction.
When purchasing undeveloped or partially developed land, we generally acquire land only after
necessary entitlements have been obtained so that development or construction may begin as market
conditions dictate. The term “entitlements” refers to development agreements and tentative maps or
recorded plats, depending on the jurisdiction within which the land is located. Entitlements
generally give the developer the right to obtain building permits upon compliance with conditions
that are ordinarily within the developer’s control. Even though entitlements are usually obtained
before land is purchased, we are still required to secure a variety of other governmental approvals
and permits prior to and during development. The process of obtaining such approvals and permits
can substantially delay the development process. We may consider, on a limited basis, the purchase
of unentitled property when we can do so in a manner consistent with our business strategy.
Historically, we have developed parcels ranging from 100 to 300 lots, although in the current
economic environment we are primarily focused on limited lot purchases of smaller groups of lots,
most of which are finished. In order to achieve and maintain an adequate lot inventory, we have
also historically purchased larger parcels, in some cases with joint venture partners. In some
cases, these joint ventures purchase undeveloped land and develop the land themselves. In select
cases, we may also acquire distressed assets from banks, governmental entities, or opportunity
funds.
Once we secure undeveloped land, we generally initiate development through contractual
agreements with subcontractors. These activities include site planning and engineering, as well as
constructing road, sewer, water, utilities, drainage, recreation facilities and other improvements
and refinements. We frequently build homes in master-planned communities with home sites that are
along or near major amenities, such as golf courses or recreation facilities.
We develop a design and marketing concept tailored to each community, which includes the
determination of size, style and price range of homes. We may also determine street layout,
individual lot size and layout, and overall community design for these projects. The product lines
offered depend upon many factors, including the guidelines, if any, of an existing community,
housing generally available in the area, the needs and desired housing product for a particular
market, and our lot sizes, though we are increasingly able to use standardized design plans for a
product line.
We also may acquire land through land purchase and option contracts. Purchases are generally
financed through our working capital or corporate borrowings. Acquiring our land through option
contracts, when available, allows us to control the timing and volume of lot and land purchases
from the third parties who own or buy properties on which we plan to build homes and minimize our
up-front cash outlay. We typically enter into option contracts to purchase finished lots at
pre-determined prices during a specified period of time from these third parties, usually
structured to approximate our projected absorption rate at the time the contract is negotiated.
These contracts are generally non-recourse and typically require the payment of non-refundable
deposits of 5% to 15% of the sales price. We believe the use of options limits the market risks
associated with land ownership by allowing us to re-negotiate option terms or terminate options in
the event of declines in land value and/or market downturns. The recent availability of such
option lots has been drastically reduced. If market conditions change, we might attempt to
re-negotiate the option or purchase contracts to achieve terms more consistent with market
conditions. Such adjustments could include deferment, or reduction in or acceleration of lot
takedown requirements and price concessions. If we are not successful in these re-negotiations, we
might determine that a project is no longer feasible or desirable and cancel these contracts,
usually resulting in the forfeiture of our option deposits and any associated capitalized
pre-acquisition costs.
As of December 31, 2010, we believe that all of our option contracts that were initially
entered into before the housing downturn and that had terms that currently could make them
economically not viable have been either renegotiated or terminated.
During 2010, we terminated options on about 1,050 lots and wrote off option deposits and
pre-acquisition costs of $1.0 million. At December 31, 2010, we had 2,630 lots under option or
contract for a total purchase price of approximately $110.9 million, with $10.4 million in cash
deposits. Additional information relating to our impairments is discussed in Note 2 — Real Estate
and
Capitalized Interest, and information related to lots and land under option is presented in
Note 3 — Variable Interest Entities and Consolidated Real Estate Not Owned in the accompanying
consolidated financial statements.
All lot acquisitions are reviewed by our corporate land acquisition committee, which is
comprised of key operating and financial executives. All land acquisitions exceeding pre-specified
limits must also be approved by our Board of Directors.
7
Table of Contents
The following table presents information as of December 31, 2010 (dollars in thousands):
| Number of | Number of | Total Number | ||||||||||||||
| Lots Owned (1) | Lots Under Contract | of Lots | ||||||||||||||
| Finished | Under Development | or Option (1)(2) | Controlled | |||||||||||||
|
West Region
|
||||||||||||||||
|
California
|
987 | 461 | 248 | 1,696 | ||||||||||||
|
Nevada
|
488 | 0 | 0 | 488 | ||||||||||||
|
|
||||||||||||||||
|
West Region Total
|
1,475 | 461 | 248 | 2,184 | ||||||||||||
|
|
||||||||||||||||
|
Central Region
|
||||||||||||||||
|
Arizona
|
2,800 | 3,571 | 315 | 6,686 | ||||||||||||
|
Texas
|
1,679 | 1,569 | 1,511 | 4,759 | ||||||||||||
|
Colorado
|
235 | 233 | 128 | 596 | ||||||||||||
|
|
||||||||||||||||
|
Central Region Total
|
4,714 | 5,373 | 1,954 | 12,041 | ||||||||||||
|
|
||||||||||||||||
|
East Region
|
||||||||||||||||
|
Florida
|
274 | 599 | 126 | 999 | ||||||||||||
|
|
||||||||||||||||
|
|
274 | 599 | 126 | 999 | ||||||||||||
|
Total Company
|
6,463 | 6,433 | 2,328 | 15,224 | ||||||||||||
|
|
||||||||||||||||
|
Total book cost (3)
|
$ | 335,797 | $ | 182,452 | $ | 10,178 | $ | 528,427 | ||||||||
|
|
||||||||||||||||
| (1) | Excludes lots with finished homes or homes under construction. The number of lots is an estimate and is subject to change. | |
| (2) | There can be no assurance that we will actually acquire any lots under option or purchase contract. These amounts do not include approximately 311 lots under contract with $181,000 of refundable earnest money deposits, for which we have not completed due diligence and, accordingly, have no money at risk and are under no obligation to perform under the contract. | |
| (3) | For Lots Owned, book cost primarily represents land, development and capitalized interest. For Lots under Contract or Option, book cost primarily represents earnest and option deposits. |
Investments in Unconsolidated Entities — Joint Ventures
We have historically participated in joint ventures with independent third parties, although
at December 31, 2010, we have only two active joint ventures relating to the purchase and development of
land. We typically have less than a controlling interest in our joint ventures. We typically enter
into these joint ventures with other homebuilders, land sellers or other real estate investors to
provide us and the other joint venture partners with a means of accessing larger parcels and lot
positions, expanding our market opportunities, managing our risk profile and leveraging our capital
base. The typical joint venture acquires raw land and manages the property through the entitlement
process and, in some cases, develops the property into partially or fully finished lots. These
joint ventures are usually obligated to sell all or a part of the property or lots to the joint
venture members (at the respective member’s option), generally at prevailing fair market values
(either at the time of acquisition or the time of sale). In some cases, part of the property is
sold to non-member homebuilders, commercial developers and other third parties. Our participation
in these types of joint ventures has historically been an important part of our business model, and
although in light of the current homebuilding environment, while we do view our involvement with
joint ventures to be beneficial, we do not believe such involvement is critical to the success of
our homebuilding operations.
In connection with these land joint ventures, we and/or our joint venture partners typically
provide certain types of guarantees, indemnification arrangements with surety and performance bond
providers and environmental indemnities. Reference is made to Part II, Item 8 in this Annual
Report, “Financial Statements and Supplementary Data — Note 4 — “Investments in Unconsolidated
Entities” for a detailed discussion of these items.
We also participate in three mortgage and three title business joint ventures. The mortgage
joint ventures are engaged in mortgage activities, and they provide services to both our clients
and other homebuyers. Although some of these ventures originate mortgages on a limited basis, we
believe we have limited recourse related to any such loans.
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At December 31, 2010, we had approximately $9.9 million invested in joint ventures involved in
the purchase, development and/or sale of land. We also had approximately $1.1 million invested in
mortgage brokerage and title service joint ventures. In 2010,
we reported pre-tax losses of $1.9 million related to our share of the loss of our land joint
ventures and $7.1 million in income related to our share of the earnings of our mortgage-brokerage
and title service joint ventures. The land joint venture losses include $300,000 of impairments
recorded against our venture investments. For our land joint ventures, we do not recognize profits
on lots or land that we acquire from the joint venture, but instead defer profits, if applicable,
until we sell the related homes to third party homebuyers.
Construction Operations
We act as the general contractor for our projects and typically hire subcontractors on a
geographic basis to complete construction at a fixed price. We usually enter into agreements with
subcontractors and materials suppliers on an individual basis after receiving competitive bids. We
obtain information from prospective subcontractors and suppliers with respect to their financial
condition and ability to perform their agreements before formal bidding begins. We also enter into
longer-term contracts with subcontractors and suppliers, where possible, to obtain more favorable
terms, minimizing construction costs. Following our Meritage Forward strategy, purchasing and
construction managers coordinate and supervise the activities of subcontractors and suppliers,
subject the development and construction work to quality and cost controls, and monitor compliance
with zoning and building codes. At December 31, 2010, we employed approximately 152 full-time
construction operations personnel.
We specify that quality durable materials be used in construction of our homes and we do not
maintain significant inventories of construction materials, except for work in process materials
for homes under construction. When possible, we negotiate price and volume discounts and rebates
with manufacturers and suppliers on behalf of our subcontractors so we can take advantage of
production volume. Our raw materials consist primarily of lumber, concrete and similar construction
materials and are generally purchased on a regional level. Such materials have historically been
available from multiple suppliers and therefore we do not believe there is a supplier risk
concentration. Because such materials are comprised substantially of commodities, however, their
cost and availability is subject to national and worldwide price fluctuations and inflation, each
of which could be impacted by legislation relating to energy and climate change.
We generally build and sell homes in phases within our larger projects, which we believe
creates efficiencies in land development and home construction operations and cash management, and
improves customer satisfaction by reducing the number of vacant lots and construction activity
surrounding a completed home. Our homes are typically completed within two to four months from the
start of construction, depending upon the geographic location and the size and complexity of the
home; although, as previously discussed, we have a 99-day guarantee at select communities where the
entire home purchase cycle from the time a buyer signs a contract to close is just 99 days or less.
Construction schedules may vary depending on the size of the home, availability of labor, materials
and supplies, product type, location and weather. Our homes are usually designed to promote
efficient use of space and materials, and to minimize construction costs and time. We typically
have not entered into any derivative contracts to hedge against weather or materials fluctuations
as we do not believe they are particularly advantageous to our operations, although we do lock in
long-term pricing with our vendors for certain key construction commodities.
Marketing and Sales
We believe that we have an established reputation for developing high quality homes, which
helps generate interest in each new project. We also use advertising and other promotional
activities, including our website at
www.meritagehomes.com
, social media outlets, magazine and
newspaper advertisements, brochures, direct mailings and the placement of strategically located
signs in the vicinities around our developments.
We use furnished model homes as a marketing tool to demonstrate to prospective homebuyers the
advantages of the designs and features of our homes. We generally employ or contract with interior
and landscape designers who create attractive model homes and complexes that highlight the options
available for the product line within a project. We generally build between one and three model
homes for each actively selling community, depending upon the number of homes to be built in the
project and the products to be offered. In our Meritage Green communities, we have built
“de-constructed” models in order to provide our buyers with the ability to see first-hand what
“green” features are included in their home and the impact these features have on their utility
bills. Historically, we sold our model homes to, and leased them back from, institutional investors
who purchased the homes for investment purposes, although currently, we lease some of our model
homes from individual buyers who do not intend to occupy the home immediately. At December 31,
2010, we owned 160 and leased 41 model homes and had an additional six models under construction.
Our homes generally are sold by our commissioned employees who typically work primarily from a
sales office located in one of the model homes for each project. We also employ a team of online
sales associates who offer assistance to potential buyers viewing our products over the Internet.
At December 31, 2010, we had approximately 270 full-time sales and marketing personnel. Our goal is
to ensure that our sales force has extensive knowledge of our sales strategies, our Meritage
Forward strategy, housing products and “green” features. To achieve this goal, we train our sales
associates and conduct regular meetings to update them on sales techniques, competitive products in
the area, financing availability and credit score repair opportunities, construction schedules,
marketing and advertising plans and the available product lines, pricing, options and warranties
offered. Our sales associates are licensed real estate agents where required by law. Independent
brokers may also sell our homes, and are usually paid a sales commission based on the price of the
home. Our sales and design studio associates assist our customers in selecting options and
upgrades or in adding available customization features to their homes, which we design to
appeal to local consumer demands. We may also offer various sales incentives, including price
concessions, assistance with closing costs, and landscaping or interior upgrades, to attract
buyers. The use and type of incentives depends largely on economic and local competitive market
conditions.
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Backlog
We generally require a signed sales contract to release a lot to start construction, although
we may elect to start a certain number of homes for speculative sales inventory. Our sales
contracts require cash deposits and are usually subject to certain contingencies such as the
buyer’s ability to qualify for financing. Additional deposits are usually collected upon the
selection of options and upgrades. Homes covered by such sales contracts but which are not yet
closed are considered “backlog.” Started homes are excluded from backlog until a sales contract is
signed and are referred to as unsold or “spec” inventory. Sales contingent upon the sale of a
customer’s existing home are not considered a sale until the contingency is removed. We start
homes without sales contracts in order to increase inventory levels to meet demand for quick
move-ins for the renter and first-time buyer demographic and, on a limited basis, to close out a
community.
We do not recognize any revenue from home sales until a finished home is delivered to the
homebuyer, payment is collected and other criteria for sale and profit recognition are met. At
December 31, 2010, of our total homes in inventory, 22.1% were under construction without sales
contracts and 25.9% were completed homes without sales contracts. A substantial majority of the
unsold homes resulted from homesites that began construction with a valid sales contract that was
subsequently cancelled. We believe that during 2011 we will deliver to customers substantially all
homes in backlog at December 31, 2010 under existing or, in the case of cancellations, replacement
sales contracts.
Our backlog decreased to 778 units with a value of approximately $201.8 million at December
31, 2010 from 1,095 units with a value of approximately $287.5 million at December 31, 2009. These
decreases are due to our slightly lower community count, slower sales volume from the continuing
difficulties in the general economy and homebuilding industry as well as our reduced construction
and delivery timelines, which contribute to quicker inventory turns.
Customer Financing
We attempt to help qualified homebuyers who require financing to obtain loans from mortgage
lenders that offer a variety of financing options. We have entered into several joint venture
arrangements with established mortgage brokers in most of our markets that allow those ventures to
primarily act as a preferred mortgage broker to our buyers to help facilitate the sale and closing
process as well as generate additional fee income. In some markets we use unaffiliated preferred
mortgage lenders. We may pay a portion of the closing costs and discount mortgage points to assist
homebuyers with financing. Since many customers use long-term mortgage financing to purchase homes,
the current decrease of availability of mortgage loans, tighter underwriting standards and the
collapse of the sub-prime loan market have reduced the availability of such loans to our
homebuyers, although recent decreases in interest rates have increased the affordability of
mortgage payments for our potential buyers.
Customer Relations, Quality Control and Warranty Programs
We believe that positive customer relations and an adherence to stringent quality control
standards are fundamental to our continued success, and that our commitment to buyer satisfaction
and quality control has significantly contributed to our reputation as a high-quality builder.
In accordance with our company-wide standards, a Meritage project manager or project
superintendent and a customer relations representative generally monitor compliance with quality
control standards for each community. These representatives perform the following tasks:
| • | oversee home construction; | ||
| • | oversee subcontractor and supplier performance; | ||
| • | manage the scheduling and stage of completion deadlines; | ||
| • | conduct formal inspections as specific stages of construction are completed; and | ||
| • | regularly update buyers on the progress of their homes and coordinate the closing process. |
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We generally provide for each home a one-to-two-year limited warranty on workmanship and
building materials and a ten-year warranty for structural defects. We generally require our
subcontractors to provide an indemnity and a certificate of insurance before beginning work, and
therefore any claims relating to workmanship and materials are generally the subcontractors’
responsibility. With the assistance of an actuary, we establish reserves for future structural
warranty costs based on our historical experience within each division or region, and record such
reserves at home closing. Warranty reserves generally range from 0.2% to 0.7% of a home’s sale
price. Historically, these reserves have been sufficient to cover out-of-pocket costs we were
required to absorb for warranty repairs.
Competition and Market Factors
The development and sale of residential property is a highly-competitive industry. We compete
for sales in each of our markets with national, regional and local developers and homebuilders,
although recently our primary competition has been existing home resales, foreclosures, and to a
lesser extent, condominiums and rental housing. Some of our competitors have significantly greater
financial resources and may have lower costs than we do. Competition among both small and large
residential homebuilders is based on a number of interrelated factors, including location,
reputation, amenities, design, quality and price. We believe that we compare favorably to other
homebuilders in the markets in which we operate due to our:
| • | experience within our geographic markets which allows us to develop and offer new products that are in line with the needs and wants of the targeted demographic; |
| • | streamlined construction processes that allow us to save on material, labor and time and pass those savings to our customers in the form of lower prices; |
| • | ENERGY STAR ® standards in all of our communities and incremental “green” features offered as a standard option in selected communities that create additional benefits to our customers and differentiate our product from competing new and existing homes inventory |
| • | ability to recognize and adapt to changing market conditions, including from a capital and human resource perspective; |
| • | ability to capitalize on opportunities to acquire land on favorable terms; and | ||
| • | reputation for outstanding service and quality products. |
Although the current economic uncertainty has negatively impacted our sales efforts, our new
product offerings and strategic locations are successfully competing with both existing homes
inventory and surrounding new-home communities, and we expect that once the market stabilizes, the
strengths noted above will continue to provide us with long-term competitive advantages.
Over the last couple of years, we have extensively expanded our market research department,
whose immediate goal is to assist our local markets to better compete with the influx of
foreclosure and re-sale homes in surrounding neighborhoods. The community-level reviews include
analysis of existing inventory, pricing, buyer demographics and the identification of each
location’s key buyer metrics. The long-term strategy analyses the department provides include
analytical tools to assist in decision-making regarding product designs, positioning, and pricing
and underwriting standards for lot purchases and land development.
Government Regulation and Environmental Matters
Although we are currently acquiring mostly finished lots, to the extent that we do acquire
undeveloped land, it is primarily acquired after entitlements have been obtained. Construction may
begin almost immediately on such entitled land upon compliance with and receipt of specified
permits, approvals and other conditions, which generally are within our control. The time needed to
obtain such approvals and permits affects the carrying costs of unimproved property acquired for
development and construction. The continued effectiveness of permits already granted is subject to
factors such as changes in government policies, rules and regulations, and their interpretation and
application. To date, the government approval processes discussed above have not had a material
adverse effect on our development activities, although there is no assurance that these and other
restrictions will not adversely affect future operations as, among other things, sunset clauses may
exist on some of our entitlements and could lapse.
Local and state governments have broad discretion regarding the imposition of development fees
for projects under their jurisdictions. These fees are normally established when we receive
recorded maps or plats and building permits. Communities may also require concessions or may
require the builder to construct certain improvements to public places such as parks and streets.
In addition, communities occasionally impose construction moratoriums. Because most of our land is
entitled, construction moratoriums generally would not affect us in the near term unless they arise
from health, safety or welfare issues, such as insufficient water, electric or sewage facilities.
In the long term, we could become subject to delays or may be precluded entirely from developing
communities due to building moratoriums, “no growth” or “slow growth” initiatives or building
permit allocation ordinances, which could be implemented in the future.
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In addition, there is a variety of new legislation being enacted, or considered for enactment
at the federal, state and local level relating to energy and climate change. This legislation
relates to items such as “cap and trade” and building codes that impose energy efficiency
standards. New building code requirements that impose stricter energy efficiency standards could
significantly increase our cost to construct homes, although our “green” initiatives meet, and in
many instances exceed, current and expected energy efficiency thresholds. As climate change
concerns continue to grow, legislation and regulations of this nature are expected to continue and
may result in increased costs. Similarly, energy related initiatives affect a wide variety of
companies throughout the United States and the world, and because our operations are heavily
dependent on significant amounts of raw materials, such as lumber, steel, and concrete, they could
have an indirect adverse impact on our operations and profitability to the extent the manufacturers
and suppliers of our materials are burdened with expensive cap and trade and similar energy related
regulations.
We are also subject to a variety of local, state, and federal statutes, ordinances, rules and
regulations concerning the protection of health and the environment. In some markets, we are
subject to environmentally sensitive land ordinances that mandate open space areas with public
elements in housing developments, and prevent development on hillsides, wetlands and other
protected areas. We must also comply with flood plain restrictions, desert wash area restrictions,
native plant regulations, endangered species acts and view restrictions. These and similar laws may
result in delays, cause substantial compliance and other costs, and prohibit or severely restrict
development in certain environmentally sensitive regions or areas. To date, compliance with such
ordinances has not materially affected our operations, although it may do so in the future.
We usually will condition our obligation to acquire property on, among other things, an
environmental review of the land. To date, we have not incurred any unanticipated liabilities
relating to the removal of unknown toxic wastes or other environmental matters. However, there is
no assurance that we will not incur material liabilities in the future relating to toxic waste
removal or other environmental matters affecting land currently or previously owned.
In order for our homebuyers to finance their home purchases with FHA-insured or VA-guaranteed
or USDA-guaranteed mortgages, we are required to build such homes in accordance with the regulatory
requirements of those agencies.
Some states have statutory disclosure requirements governing the marketing and sale of new
homes. These requirements vary widely from state to state.
Some
states require us to be registered as a licensed contractor, a
licensed real estate broker and in some markets our sales
agents are required to be registered as licensed real estate agents.
Employees, Subcontractors and Consultants
At December 31, 2010, we had approximately 650 full-time employees, including approximately
228 in management and administration, 270 in sales and marketing, and 152 in construction
operations. Our employees are not unionized, and we believe that we have good employee
relationships. We pay for a substantial portion of our employees’ insurance costs, with the balance
contributed by the employees. We also have a 401(k) savings plan, which is available to all
employees who meet the plan’s participation requirements. All of our employees, including officers
and directors, are required to comply with our Code of Ethics and to immediately report through the
appropriate channels, any known instances of non-compliance.
We act solely as a general contractor, and all construction operations are supervised by our
project managers and field superintendents who manage third party subcontractors. We use
independent consultants and contractors for architectural, engineering, advertising and some legal
services, and we strive to maintain good relationships with our subcontractors and independent
consultants and contractors.
Seasonality
We typically experience seasonal variations in our quarterly operating results and capital
requirements. Historically, we sell more homes in the first half of the fiscal year than in the
second half, which results in increased working capital requirements in the second and third
quarters as homes are constructed. We typically benefit from the cash generated from home closings
in the third and fourth quarters. We expect this seasonal pattern to continue, although it may be
affected by the current volatility in the homebuilding industry.
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| Item 1A. | Risk Factors |
The risk factors discussed below are factors that we believe could significantly impact our
business, if they occur. These factors could cause results to differ materially from our
historical results or our future expectations.
Risk Factors Related to our Business
If the current downturn becomes more severe or continues for an extended period of time, it
would have continued negative consequences on our operations, financial position and cash
flows.
Continued weakness in the homebuilding industry could have an adverse effect on us. It could
require that we write off or write down more assets, dispose of assets, reduce operations,
restructure our debt and/or raise new equity or debt to pursue our business plan, any of which
could have a detrimental effect on our current stakeholders.
Although in 2010 we achieved our goal of returning to profitability and generating positive
cash flows, which allowed us to build cash reserves and reduce our net-debt to capital ratio, in
the last five years we recorded sizable real-estate impairments that eroded gross margin from our
historical pre-downturn levels. Additional external factors, such as the duration of the economic
downturn and high foreclosure and employment rates could put additional downward pressure on our
results. It is uncertain how much longer the current economic instability will continue and what
the negative effect may be to our financial results.
Mortgage availability decreases and interest rate increases may make purchasing a home more
difficult and may cause an increase in the number of new and existing homes available for
sale.
In general, housing demand is adversely affected by the lack of availability of mortgage
financing and increases in interest rates. Continued high levels of foreclosures and sales of
existing inventories of previously foreclosed homes could increase the available home inventory
supply, which may result in price reductions. Most of our buyers finance their home purchases
through third-party lenders providing mortgage financing. If mortgage interest rates increase and,
consequently, the ability of prospective buyers to finance home purchases is adversely affected,
home sales, gross margins and cash flow may also be adversely affected and the impact may be
material. Although long-term interest rates currently remain at low levels, it is impossible to
predict future increases or decreases in market interest rates.
Homebuilding activities depend, in part, upon the availability and costs of mortgage financing
for buyers of homes owned by potential customers, as those customers (move-up buyers) often must
sell their residences before they purchase our homes. Mortgage lenders continue to be subject to
more restrictive underwriting standards by the regulatory authorities which oversee them as a
consequence of the sub-prime mortgage market failures, among other reasons. More stringent
underwriting standards could have a material adverse effect on our business if certain buyers are
unable to obtain mortgage financing. A prolonged tightening of the financial markets would also
negatively impact our business.
Expirations, amendments or changes to tax laws, incentives or credits currently available to
our homebuyers may negatively impact our business.
Significant changes to existing tax laws that currently benefit our homebuyers, such as the
ability to deduct mortgage interest and real property taxes, may result in an increase in the total
cost of home ownership and may make the purchase of a home less attractive to our buyers.
If home prices decline, potential buyers may not be able to sell their existing homes, which
may negatively impact our sales.
As a participant in the homebuilding industry, we are subject to market forces beyond our
control. In general, housing demand is impacted by the affordability of housing. Many homebuyers
need to sell their existing homes in order to purchase a new home from us, and continued weakness
in the home resale market or further decreases in home sale prices could adversely affect that
ability. Declines in home prices would have an adverse effect on our homebuilding business margins
and cash flows.
High cancellation rates may negatively impact our business.
Our backlog reflects the number and value of homes for which we have entered into
non-contingent sales contracts with customers but have not yet delivered those homes. Although
these sales contracts typically require a cash deposit and do not make the sale contingent on the
sale of the customer’s existing home, a customer may in certain circumstances cancel the contract
and receive a complete or partial refund of the deposit as a result of local laws or contract
provisions. If home prices decline, the national or local homebuilding environment remains weak or
declines further or interest rates increase, homebuyers may have an incentive to cancel
their contracts with us, even where they might be entitled to no refund or only a partial
refund. Significant cancellations have previously had, and could in the future have, a material
adverse effect on our business as a result of lost sales revenue and the accumulation of unsold
housing inventory.
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Our future operations may be adversely impacted by high inflation.
We, like other homebuilders, may be adversely affected during periods of high inflation,
mainly from higher land and construction and materials costs. Also, higher mortgage interest rates
may significantly affect the affordability of mortgage financing to prospective buyers. Inflation
increases our cost of financing, materials and labor and could cause our financial results or
growth to decline. Traditionally, we have attempted to pass cost increases on to our customers
through higher sales prices. Although inflation has not historically had a material adverse effect
on our business, sustained increases in material costs would have a material adverse effect on our
business if we are unable to correspondingly increase home sale prices.
A reduction in our sales absorption levels may force us to incur and absorb additional
community-level costs.
We incur certain overhead costs associated with our communities, such as marketing expenses
and costs associated with the upkeep and maintenance of our model and sales complexes. If our
sales absorptions pace decreases and the time required to close out our communities is extended, we
may incur additional overhead costs, which would negatively impact our financial results.
The value of our real estate inventory may further decline, leading to impairments and
reduced profitability.
A limited portion of our remaining owned land was purchased at prices that reflected the
strong homebuilding and real estate markets experienced during the mid 2000s. As such, we wrote
down the value of certain inventory over the last several years to reflect current market
conditions and have abandoned certain projects. To the extent that we still own or have
options/purchase agreements related to such land parcels, a further decline in the homebuilding
market may require us to re-evaluate the value of our land holdings and we could incur additional
impairment charges, which would decrease both the book value of our assets and stockholders’
equity. We incur various land development improvement costs for a community prior to the
commencement of home construction. Such costs include infrastructure, utilities, taxes and other
related expenses. Reduction in home absorption rates increases the associated holding costs, our
time to recover such costs, and the value of such assets. Further declines in the homebuilding
market may also require us to evaluate the recoverability of costs relating to land acquired more
recently.
Reduced levels of sales may impair our ability to recover pre-acquisition costs and may cause
further impairment charges.
Historically, a significant portion of our lots were controlled under option contracts. Such
options generally require a cash deposit that will be forfeited if we do not exercise the option.
During the last several years, we forfeited significant amounts of deposits and wrote off related
pre-acquisition costs related to projects we no longer deemed feasible, as they were not generating
acceptable returns. Although our remaining pool of optioned projects has significantly decreased
due to abandonments, a further downturn in the homebuilding market may cause us to re-evaluate the
feasibility of our remaining optioned projects, which may result in additional writedowns that
would reduce our assets and stockholders’ equity.
Our business may be negatively impacted by natural disasters.
We have homebuilding operations in Texas, California and Florida. Some of our markets in Texas
and Florida occasionally experience extreme weather conditions such as tornadoes and/or hurricanes.
California has experienced a significant number of earthquakes, wildfires, flooding, landslides and
other natural disasters in recent years. We do not insure against some of these risks. These
occurrences could damage or destroy some of our homes under construction or our building lots,
which may result in uninsured or underinsured losses. We could also suffer significant construction
delays or substantial fluctuations in the pricing or availability of building materials. Any of
these events could cause a decrease in our revenue, cash flows and earnings.
Our joint ventures with independent third parties may be illiquid, and we may be adversely
impacted by our joint venture partners’ failure to fulfill their obligations.
We occasionally participate in land acquisition and development joint ventures with
independent third parties, in which we have less than a controlling interest. Our participation in
these types of joint ventures has decreased over the last few years due to current market
conditions and the reduced need for lots, and we have reduced our involvement in such ventures.
Historically, these joint ventures were structured to provide us with a means of accessing larger
parcels and lot positions and to help us expand our marketing opportunities and manage our risk
profile. However, these joint ventures often acquire parcels of raw land without entitlements and
as such are subject to a number of development risks that our business does not face directly.
These risks include the risk that anticipated projects could be delayed or terminated because
applicable governmental approvals cannot be obtained, timely obtained or obtained at reasonable
costs. In addition, the risk of construction and development cost overruns can be greater for a
joint
venture where it acquires raw land compared to our typical acquisition of entitled lots. These
increased development and entitlement risks could have a material adverse effect on our financial
position or results of operations if one or more joint venture projects is delayed, cancelled or
terminated or we are required, whether contractually or for business reasons, to invest additional
funds in the joint venture to facilitate the success of a particular project.
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Our joint venture investments are generally very illiquid both because we lack a controlling
interest in the ventures and because most of our joint ventures are structured to require
super-majority or unanimous approval of the members to sell a substantial portion of the joint
venture’s assets or for a member to receive a return of their invested capital. Our lack of a
controlling interest also results in the risk that the joint venture will take actions that we
disagree with, or fail to take actions that we desire, including actions regarding the sale or
financing of the underlying property. In the ordinary course of our business, we provide letters of
credit and performance, maintenance and other bonds in support of our related obligations with
respect to the development of our projects. In limited cases, we may also offer pro-rata limited
repayment guarantees on our portion of the joint venture debt or other debt repayment guarantees.
Our limited repayment guarantees were $12.5 million as of December 31, 2010.
With respect to certain of our joint ventures, we and our joint venture partners may be
obligated to complete land development improvements if the joint venture does not perform the
required development, which could require significant expenditures. In addition, we and our joint
venture partners sometimes agree to indemnify third party surety providers with respect to
performance bonds issued on behalf of certain of our joint ventures. In the event the letters of
credit or bonds are drawn upon, we, and in the case of a joint venture, our joint venture partners,
would be obligated to reimburse the surety or other issuer of the letter of credit or bond if the
obligations the bond or guarantee secures are not performed by us (or the joint venture). If one or
more bonds, letters of credit or other guarantees were drawn upon or otherwise invoked, we could
have additional financial obligations.
As
of December 31, 2010, we were involved in legal proceedings
over certain guarantees relating to a large joint venture in which we hold less than a
4% interest. We cannot guarantee that additional events will not occur or that such obligations
will not be invoked, although at December 31, 2010 we have a very limited number of such guarantees
related to our existing joint ventures.
If we are unable to successfully compete in the highly competitive housing industry, our
financial results and growth may suffer.
The housing industry is highly competitive. We compete for sales in each of our markets with
national, regional and local developers and homebuilders, existing home resales (including
foreclosures) and, to a lesser extent, condominiums and available rental housing. Some of our
competitors have significantly greater financial resources and some may have lower costs than we
do. Competition among both small and large residential homebuilders is based on a number of
interrelated factors, including location, reputation, amenities, design, quality and price.
Competition is expected to continue and may become more intense, and there may be new entrants in
the markets in which we currently operate and in markets we may enter in the future. If we are
unable to successfully compete, our financial results and growth could suffer.
Some homebuyers may cancel their home purchase contracts with us because their deposits are
generally a small percentage of the purchase price and are potentially refundable.
In connection with the purchase of a home, our policy is to generally collect a deposit from
our customers, although typically, this deposit reflects a small percentage of the total purchase
price, and due to local regulations, the deposit may, in certain circumstances, be fully or
partially refundable prior to closing. If the prices for our homes in a given community decline
further, our neighboring competitors increase their sales incentives, interest rates increase, the
availability of mortgage financing tightens or there is a further downturn in local, regional or
national economies, homebuyers may cancel their home purchase contracts with us. In past years, we
experienced above-normal cancellation rates, although in 2010 cancellation rates returned to
historical levels. Continued uncertainty in the homebuilding market could adversely impact our
cancellation rates, which would have a negative effect on our results of operations.
We are subject to construction defect and home warranty claims arising in the ordinary course
of business, which may lead to additional reserves or expenses.
Construction defect and home warranty claims are common in the homebuilding industry and can
be costly. Therefore, in order to account for future potential obligations, we establish a
warranty reserve in connection with every home closing. Additionally, we maintain general
liability insurance and generally require our subcontractors to provide insurance coverage and
indemnify us for liabilities arising from their work; however, we cannot be assured that our
warranty reserves and those insurance rights and indemnities will be adequate to cover all
construction defect and warranty claims for which we may be held liable. For example, we may be
responsible for applicable self-insured retentions, and certain claims may not be covered by
insurance or may exceed applicable coverage limits.
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During 2009 we recorded a charge of $6.0 million associated with the repair of less than 100
homes built by us in 2005 and 2006 in the Fort Myers, Florida area that we had then confirmed to
contain defective drywall manufactured in China and other homes in Ft. Myers, Florida that we had
identified as being drywalled during the same time period and may contain such defective drywall.
We have more recently determined that one home we constructed in Orlando and five homes we
constructed in the Houston, Texas area during 2005 and 2006 also contain the defective drywall. We
have been named as a defendant in one Federal Court lawsuit and one Florida State Court lawsuit
relating to Chinese drywall. It is possible that we may, in the future, be subject to additional
litigation relating to defective Chinese drywall. Based on our investigations to date and our
evaluation of defective Chinese drywall issues, we believe our existing warranty reserves are
sufficient to cover costs and claims associated with the repair of the above-mentioned homes which
contain or could contain defective Chinese drywall. As of December 31, 2010, we completed our
repair of a majority of these homes and have spent most of the anticipated costs associated with
such repair programs. However, if and to the extent the scope of the defective Chinese drywall
issue proves to be significantly greater than we currently anticipate, or in the event defective
Chinese drywall is, through credible evidence, linked to significant adverse health effects of the
occupants of the homes containing such defective drywall, or if it is determined that our existing
warranty reserves together with anticipated recoveries from our insurance carrier and from other
responsible parties and their insurance carriers are not sufficient to cover claims, losses or
other issues related to Chinese drywall, then it is possible that we could incur additional costs
or liabilities related to this issue that may have a material adverse effect on the results of our
operations, financial position and cash flows.
Our income tax provision and other tax liabilities may be insufficient if taxing authorities
initiate and are successful in asserting tax positions that are contrary to our position.
Additionally, loss from operations in future reporting periods may require us to continue to
adjust the valuation allowance against our deferred tax assets.
In the normal course of business, we are audited by various federal, state and local
authorities regarding income tax matters. Significant judgment is required to determine our
provision for income taxes and our liabilities for federal, state, local and other taxes. Our
audits are in various stages of completion; however, no outcome for a particular audit can be
determined with certainty prior to the conclusion of the audit, appeal and, in some cases,
litigation process. Although we believe our approach to determining the appropriate tax treatment
is supportable and in accordance with tax laws and regulations and relevant accounting literature,
it is possible that the final tax authority will take a tax position that is materially different
than ours. As each audit is conducted, adjustments, if any, are appropriately recorded in our
consolidated financial statements in the period determined. Such differences could have a material
adverse effect on our income tax provision or benefit, or other tax reserves, in the reporting
period in which such determination is made and, consequently, on our results of operations,
financial position and/or cash flows for such period.
Our net operating loss carryforwards could be substantially limited if we experience an
ownership change as defined in the Internal Revenue Code.
From 2007 to 2009, we generated significant net operating losses, (“NOLs”), and we may
generate additional NOLs in the future. Under federal tax laws, we can use our NOLs (and certain
related tax credits) to offset ordinary income tax on our future taxable income for up to 20 years,
after which they expire for such purposes. Until they expire, we can carry forward our NOLs (and
certain related tax credits) that we do not use in any particular year to offset income tax in
future years. The benefits of our NOLs would be reduced or eliminated if we experience an
“ownership change,” as determined under Section 382 of the Internal Revenue Code. A Section 382
“ownership change” occurs if a stockholder or a group of stockholders who are deemed to own at
least 5% of our common stock increase their ownership by more than 50 percentage points over their
lowest ownership percentage within a rolling three-year period. If an “ownership change” occurs,
Section 382 would impose an annual limit on the amount of NOLs we can use to offset income tax
equal to the product of the total value of our outstanding equity immediately prior to the
“ownership change” (reduced by certain items specified in Section 382) and the federal long-term
tax-exempt interest rate in effect for the month of the “ownership change.” A number of special and
complex rules apply to calculating this annual limit.
While the complexity of Section 382’s provisions and the limited knowledge any public company
has about the ownership of its publicly-traded stock make it difficult to determine whether an
“ownership change” has occurred, we currently believe that an “ownership change” has not occurred.
However, if an “ownership change” were to occur, the annual limit Section 382 may impose could
result in some of our NOLs expiring unused. This may limit the future value of our NOL assets;
however, these assets are only $63.4 million at December 31, 2010, and therefore the annual
limitation is not expected to have a material impact on our financial results. In 2009, we amended
our articles of incorporation to enable us to nullify transactions creating additional 5% holders
in an effort to mitigate the risk associated with ownership changes under Section 382. Such
restrictions, however, may be waived by us, and there is uncertainty about whether such
restrictions would be enforceable or effective under all circumstances.
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Our ability to acquire and develop raw or partially finished lots may be negatively impacted
if we are unable to secure additional performance bonds.
In connection with land development work we are required to complete on our raw or
partially-finished land purchases, we oftentimes provide performance bonds or other assurances for
the benefit of the respective municipalities or governmental authorities. These performance bonds
provide assurance to the beneficiaries that the development will be completed, or that in case we
do not perform, that funds from the bonds are available to finish such work. In the future,
additional performance bonds may be difficult to obtain, or may be difficult to obtain on terms
that are acceptable to us. The limited availability is due to the current state of the industry
and the economy, as well as various surety providers who have in
recent years significantly reduced bonding capacities made
available to the homebuilding industry. If we are unable to secure such required
bonds, progress on affected projects may be delayed or halted or we may be required to expend
additional cash to secure other forms of sureties which may adversely affect our financial position
and ability to grow our operations.
The loss of key personnel may negatively impact us.
Our success largely depends on the continuing services of certain key employees, including our
Chief Executive Officer, Steven J. Hilton, and our ability to attract and retain qualified
personnel. We have an employment agreement with Mr. Hilton and we have employment agreements with
certain other key employees. We believe that Mr. Hilton possesses valuable industry knowledge,
experience and leadership abilities that would be difficult in the short term to replicate. The
loss of the services of Mr. Hilton and other key employees could harm our operations and business
plans.
Failure to comply with regulations by our employees or representatives may harm us.
We are required to comply with applicable laws and regulations that govern all aspects of our
business including land acquisition, development, home construction, mortgage origination, sales
and warranty. It is possible that individuals acting on our behalf could intentionally or
unintentionally violate some of these regulations. Although we endeavor to take immediate action
if we become aware of such violations, we may incur fines or penalties as a result of these actions
and our reputation with governmental agencies and our customers may be damaged.
Shortages in the availability of subcontract labor may delay construction schedules and
increase our costs.
We conduct our construction operations only as a general contractor. Virtually all
architectural, construction and development work is performed by unaffiliated third-party
subcontractors. As a consequence, we depend on the continued availability of and satisfactory
performance by these subcontractors for the design and construction of our homes and to provide
related materials. We cannot be assured that there will be satisfactory performance by these
unaffiliated third-party subcontractors, which could have a material adverse affect on our
business.
Our lack of geographic diversification could adversely affect us if the homebuilding industry
in our market declines.
We have operations in Texas, Arizona, California, Nevada, Colorado and Florida. Some of our
geographic operations are located in regions that were most severely impacted by the homebuilding
downturn. Our limited geographic diversification could adversely impact us if the homebuilding
business in our current markets should further decline, since we do not currently have a balancing
opportunity in other geographic regions. Additionally, as Texas has comprised more than half of
our operations for the past several years, further economic pressure in this state may have a
significant adverse impact on our financial results.
We experience fluctuations and variability in our operating results on a quarterly basis and,
as a result, our historical performance may not be a meaningful indicator of future results.
We historically have experienced, and expect to continue to experience, variability in home
sales and results of operations on a quarterly basis. As a result of such variability, our
historical performance may not be a meaningful indicator of future results. Factors that contribute
to this variability include:
| • | timing of home deliveries and land sales; | ||
| • | the changing composition and mix of our asset portfolio; |
| • | delays in construction schedules due to adverse weather, acts of God, reduced subcontractor availability and governmental restrictions; |
| • | timing of write-offs and impairments | ||
| • | conditions of the real estate market in areas where we operate and of the general economy; |
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| • | the cyclical nature of the homebuilding industry, changes in prevailing interest rates and the availability of mortgage financing; |
| • | our ability to acquire additional land or options for additional land on acceptable terms; and |
| • | costs and availability of materials and labor. |
Our level of indebtedness may adversely affect our financial position and prevent us from
fulfilling our debt obligations.
The homebuilding industry is capital intensive and requires significant up-front expenditures
to secure land and pursue development and construction on such land. Accordingly, we incur
substantial indebtedness to finance our homebuilding activities. At December, 31, 2010, we had
approximately $605.8 of indebtedness and $412.6 million of cash, restricted cash, and investments
and securities. If we require working capital greater than that provided by operations and our
current liquidity position, we may be required to seek additional capital in the form of equity or
debt financing from a variety of potential sources, including bank financing and securities
offerings. There can be no assurance we would be able to obtain such additional capital on terms
acceptable to us, if at all. The level of our indebtedness could have important consequences to our
stockholders, including the following:
| • | our ability to obtain additional financing for working capital, capital expenditures, acquisitions or general corporate purposes could be impaired; |
| • | we could have to use a substantial portion of our cash flow from operations to pay interest and principal on our indebtedness, which would reduce the funds available to us for other purposes such as capital expenditures; |
| • | we have a moderate level of indebtedness and a lower volume of cash and cash equivalents than some of our competitors, which may put us at a competitive disadvantage and reduce our flexibility in planning for, or responding to, changing conditions in our industry, including increased competition; and |
| • | we may be more vulnerable to economic downturns and adverse developments in our business than some of our competitors. |
We expect to generate cash flow to pay our expenses and to pay the principal and interest on
our indebtedness with cash flow from operations or from existing cash reserves. Our ability to meet
our expenses thus depends, to a large extent, on our future performance, which will be affected by
financial, business, economic and other factors. We will not be able to control many of these
factors, such as economic conditions in the markets where we operate and pressure from competitors.
If we do not have sufficient funds, we may be required to refinance all or part of our existing
debt, sell assets or borrow additional funds. We cannot guarantee that we will be able to do so on
terms acceptable to us, if at all. In addition, the terms of existing or future debt agreements may
restrict us from pursuing any of these alternatives.
Our debt levels may place limits on our ability to comply with the terms of our debt and may
restrict our ability to complete certain transactions.
The indentures for our senior and senior subordinated notes impose significant operating and
financial restrictions on us. These restrictions limit our ability and the ability of our
subsidiaries, among other things, to:
| • | incur additional indebtedness or liens; | ||
| • | pay dividends or make other distributions; | ||
| • | repurchase our stock; | ||
| • | make investments (including investments in joint ventures); or | ||
| • | consolidate, merge or sell all or substantially all of our assets. |
A breach of any of our covenants or our inability to maintain the required financial ratios
could limit our ability to incur additional debt.
Our ability to obtain third-party financing may be negatively affected by any downgrade of
our credit rating from a rating agency
Although we do not currently have any short-term borrowing facilities, we consider the
availability of third-party financing to be a key component of our long-term strategy to grow our
business either through acquisitions or through internal expansion. As of December 31, 2010, our
credit ratings were B+, B1 and B+ by Standard and Poor’s Financial Services, Moody’s Investor
Services
and Fitch Ratings, respectively, the three primary rating agencies. Any downgrades from these
ratings may impact our ability in the future to obtain additional financing, or to obtain such
financing at terms that are favorable to us and therefore, may adversely impact our future
operations.
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We may not be successful in integrating future acquisitions.
We may consider growth or expansion of our operations in our current markets or in other areas
of the country. Our expansion into new or existing markets could have a material adverse effect on
our cash flows and/or profitability. The magnitude, timing and nature of any future expansion will
depend on a number of factors, including suitable additional markets and/or acquisition candidates,
the negotiation of acceptable terms, our financial capabilities and general economic and business
conditions. New acquisitions may result in the incurrence of additional debt. Acquisitions also
involve numerous risks, including difficulties in the assimilation of the acquired company’s
operations, the incurrence of unanticipated liabilities or expenses, the diversion of management’s
attention from other business concerns, risks of entering markets in which we have limited or no
direct experience and the potential loss of key employees of the acquired company.
We are subject to extensive government regulations that could cause us to incur significant
liabilities or restrict our business activities.
Regulatory requirements could cause us to incur significant liabilities and costs and could
restrict our business activities. We are subject to local, state and federal statutes and rules
regulating certain developmental matters, as well as building and site design. We are subject to
various fees and charges of government authorities designed to defray the cost of providing certain
governmental services and improvements. We may be subject to additional costs and delays or may be
precluded entirely from building projects because of “no-growth” or “slow-growth” initiatives,
building permit ordinances, building moratoriums, or similar government regulations that could be
imposed in the future due to health, safety, climate, welfare or environmental concerns. We must
also obtain licenses, permits and approvals from government agencies to engage in certain
activities, the granting or receipt of which are beyond our control and could cause delays in our
homebuilding projects.
We are also subject to a variety of local, state and federal statutes, ordinances, rules and
regulations concerning the protection of health and the environment. Environmental laws or permit
restrictions may result in project delays, may cause substantial compliance and other costs and may
prohibit or severely restrict development in certain environmentally sensitive regions or
geographic areas. Environmental regulations can also have an adverse impact on the availability and
price of certain raw materials, such as lumber.
In addition, there is a variety of new legislation being enacted, or considered for enactment
at the federal, state and local level relating to energy and climate change. This legislation
relates to items such as “cap and trade” and building codes that impose energy efficiency
standards. New building code requirements that impose stricter energy efficiency standards could
significantly increase our cost to construct homes. As climate change concerns continue to grow,
legislation and regulations of this nature are expected to continue and become more costly to
comply with. Similarly, energy related initiatives affect a wide variety of companies throughout
the United States and the world and because our operations are heavily dependent on significant
amounts of raw materials, such as lumber, steel, and concrete, they could have an indirect adverse
impact on our operations and profitability to the extent the manufacturers and suppliers of our
materials are burdened with expensive cap and trade and similar energy related regulations.
Acts of war may seriously harm our business.
Acts of war or any outbreak or escalation of hostilities throughout the world may cause
disruption to the economy, our company, our employees and our customers, which could impact our
revenue, costs and expenses and financial condition.
Our ability to build “Green” technologies at a profitable price point may be replicated by
other builders in the future, which could reduce our competitive advantage.
We believe we currently have a competitive advantage over other production homebuilders with
the rollout of our Meritage Green technology. Our “green” communities offer a high level of
energy-saving features at minimal or no additional cost to a homebuyer. If other builders are able
to replicate our “green” technologies and offer them at a similar price point, it could diminish
our competitive advantage in the marketplace.
Any of the above risk factors could have a material adverse effect on your investment in our
common stock. As a result, you could lose some or all of your investment.
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Special Note of Caution Regarding Forward-Looking Statements
In passing the Private Securities Litigation Reform Act of 1995 (“PSLRA”), Congress encouraged
public companies to make “forward-looking statements” by creating a safe-harbor to protect
companies from securities law liability in connection with forward-looking statements. We intend to
qualify both our written and oral forward-looking statements for protection under the PSLRA.
The words “believe,” “expect,” “anticipate,” “forecast,” “plan,” “intend,” “estimate,” and
“project” and similar expressions identify forward-looking statements, which speak only as of the
date the statement was made. All statements we make other than statements of historical fact are
forward-looking statements within the meaning of that term in Section 27A of the Securities Act of
1933, as amended, and Section 21E of the Exchange Act. Forward-looking statements in this Annual
Report include statements concerning our belief that we have ample liquidity if current market
conditions persist or become more pronounced; our intentions and the expected benefits of our
Meritage Forward and Meritage Green strategies; our construction of homes to meet ENERGY
STAR
®
standards; our perceptions that the homebuilding market has stabilized; that we
anticipate a difficult but profitable year in 2011 and that we expect continued volatility for the
next several quarters; the extent and magnitude of our exposure to defective Chinese drywall and
the sufficiency of our reserves relating thereto; our strategy to re-design our products with lower
price points; our delivery of substantially all of our backlog existing as of year-end; management
estimates regarding future impairments and joint venture exposure, including our exposure to joint
ventures that are in default of their debt agreements; whether certain guarantees relating to our
joint ventures will be triggered and our belief that reimbursements due from lenders to our joint
ventures will be repaid; expectations regarding our industry and our business into 2011 and beyond,
and that we expect our cash expenditures may exceed our cash generated by operations as we expand
our business; the demand for and the pricing of our homes; our land and lot acquisition strategy
(including that we will redeploy cash to acquire well-positioned finished lots and that we may
participate in joint ventures or opportunities outside of our existing markets if opportunities
arise); that all of our option contracts initially entered into before the housing downturn have
either been renegotiated or terminated; trends relating to cancellations and our general and
administrative expenses; the sufficiency of our warranty reserves; demographic and other trends
related to the homebuilding industry in general; the future supply of housing inventory; our
expectation that existing guarantees, letters of credit and performance and surety bonds will not
be drawn on; the adequacy of our insurance coverage and warranty reserves; the expected outcome of
legal proceedings (including tax audits) we are involved in; the sufficiency of our capital
resources to support our business strategy; our ability and willingness to acquire land under
option or contract; the future impact of deferred tax assets or liabilities; the impact of new
accounting standards and changes in accounting estimates; trends and expectations concerning sales
prices, sales orders, cancellations, construction costs and gross margins and future home
inventories; our future cash needs; the expected vesting periods of unrecognized compensation
expense; trends and expectations relating to our community count and lot inventory; the impact of
seasonality; and our future compliance with debt covenants and actions we may take with respect
thereto.
Important factors currently known to management that could cause actual results to differ
materially from those in forward-looking statements, and that could negatively affect our business
are discussed in this report under the heading “Risk Factors.”
Forward-looking statements express expectations of future events. All forward-looking
statements are inherently uncertain as they are based on various expectations and assumptions
concerning future events and they are subject to numerous known and unknown risks and uncertainties
that could cause actual events or results to differ materially from those projected. Due to these
inherent uncertainties, the investment community is urged not to place undue reliance on
forward-looking statements. In addition, we undertake no obligations to update or revise
forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events
or changes to projections over time. As a result of these and other factors, our stock and note
prices may fluctuate dramatically.
| Item 1B. | Unresolved Staff Comments |
None.
| Item 2. | Properties |
Our corporate office is in a leased building located in Scottsdale, Arizona. The lease expires
in March 2014.
We lease an aggregate of approximately 346,000 square feet of office space (of which
approximately 103,000 square feet is currently subleased by us to third parties) in our markets
for our operating divisions, corporate and executive offices.
| Item 3. | Legal Proceedings |
We are involved in various routine legal and regulatory proceedings, including, without
limitation, claims and litigation alleging construction defects. In general, the proceedings are
incidental to our business, and some are covered by insurance. With respect to the majority of
pending litigation matters, our ultimate legal and financial responsibility, if any, cannot be
estimated with certainty and, in most cases, any potential losses related to these matters are not
considered probable. At December 31, 2010, we had approximately $13.2 million in accrued legal
expenses and settlement costs, and an additional $29.3 million of warranty costs reserved
for losses related to warranty claims and litigation where our ultimate exposure is considered
probable and the potential loss can be reasonably estimated. Historically, most warranty claims and
disputes are resolved prior to litigation. We believe there are not any pending matters that could
have a material adverse impact upon our consolidated financial condition, results of operations or
cash flows.
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As previously reported on Form 8-K filed on September 29, 2008, we were awarded a unanimous
jury verdict in Federal District Court in Phoenix against Greg Hancock, a former division president
of Meritage Homes. In 2001, Mr. Hancock sold his homebuilding business to us, at which time he
concurrently entered into an employment agreement with us which the jury found he violated.
Subsequent to the jury award, Mr. Hancock filed a voluntary petition for Bankruptcy, under Chapter
11 of the United States Bankruptcy Code (United States Bankruptcy Court for the District of
Arizona; Case No. 2:08-bk-14253-GBN). In early 2010, we entered
into a Settlement Agreement with
Mr. Hancock that was approved by Bankruptcy Court in March 2010. Pursuant to the Agreement, to date we
have recognized approximately $3 million in cash and other assets in total satisfaction of our judgment,
which is reflected in our 2010 results.
Joint Venture Litigation
We, along with our joint venture partners (and their respective parent companies) in an
unconsolidated joint venture, are defendants in lawsuits initiated by the lender group
regarding a large Nevada-based land acquisition and development joint venture in which the
lenders are seeking damages on the basis of enforcement of completion guarantees and other
related claims
(JP Morgan Chase Bank, N.A. v. KB HOME Nevada, et al., U.S. District Court,
District of Nevada (Case No. 08-CV-01711 PMP)).
While our interest in this joint venture is
comparatively small, totaling 3.53%, we are vigorously defending and otherwise seeking
resolution of these actions. Meritage is the only builder joint venture partner to have fully
performed its obligations with respect to takedowns of lots from the joint venture, having
completed its first takedown in April 2007 and having tendered full performance of its second
and final takedown in April 2008. The joint venture and the lender group rejected Meritage’s
tender of performance, and Meritage contends, among other things,
that the rejection by the joint
venture and the lender group of Meritage’s tender of full performance was wrongful and should
release Meritage of liability with respect to the takedown and the springing repayment
guarantee. We have fully impaired our investment in this joint venture in prior periods. In
one of the ongoing lawsuits related to this venture, all members of the joint venture
participated in an arbitration regarding their respective performance obligations in response
to one of the members’ claims. On July 6, 2010, the arbitration decision was issued, which
denied the specific performance claim, but did award approximately $37 million of damages to
one member on other claims. The parties involved have jointly appealed the arbitration panel’s decision
(Meritage has also appealed on independent grounds) to the United States Courts of Appeal for the Ninth Circuit,
Focus South Group, LLC, et al. v.
KB HOME Nevada Inc, et al., (Case No. 10-17562),
and the case is pending. We believe our
potential share of the award, if any, will not be material to our financial position and that
our existing legal reserves are sufficient to cover the expected claim. Certain lenders in the
lender group recently filed an involuntary bankruptcy petition against the joint venture in the
United States Bankruptcy Court, District of Nevada
, (JPMorgan Chase Bank, N.A. v. South Edge,
LLC (Case No. 10-32968-bam))
, and it is anticipated that the lender group may try to use that
bankruptcy filing as a means to trigger springing repayment guarantees of the partners. The
initial balance of the loan with the springing guarantees was $585 million and as of December
31, 2010, the outstanding principal balance was approximately $328 million. Although the final
disposition of these suits and related actions, claims and demands remains uncertain, we do
not, at this time, anticipate outcomes that will have a material impact on our financial
position or results of operations.
Chinese Drywall Litigation
We have been named as a defendant in U.S. District Court lawsuits with 15 homeowners whose
homes contain defective Chinese drywall. Among those 15, we have received repair authorizations
and releases from seven homeowners and anticipate dismissal of their claims against us. The
remaining eight plaintiffs allege physical and economic damages and seek legal and equitable
relief, medical monitoring and legal fees. One of the plaintiffs in the U.S. District Court
litigation has also sued us in Florida State Court. The $2.0 million of remaining Chinese drywall
warranty reserves we have accrued as of December 31, 2010 include costs associated with the repair
of these homes and costs to defend this litigation. No accrual has been made for any amounts
beyond such repair and defense costs because of the inherent uncertainty in this litigation and the
inability to determine the probability of a loss resulting from this litigation or to estimate the
range of possible loss, if any.
| Item 4. | Reserved |
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PART II
| Item 5. | Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities |
Our common stock is listed on the New York Stock Exchange (“NYSE”) under the symbol “MTH”. The
high and low sales prices per share of our common stock for the periods indicated, as reported by
the NYSE, follow.
| 2010 | 2009 | |||||||||||||||
| Quarter Ended | High | Low | High | Low | ||||||||||||
|
|
||||||||||||||||
|
March 31
|
$ | 23.73 | $ | 19.30 | $ | 17.04 | $ | 8.40 | ||||||||
|
June 30
|
$ | 25.44 | $ | 16.11 | $ | 23.51 | $ | 10.67 | ||||||||
|
September 30
|
$ | 20.25 | $ | 15.19 | $ | 24.35 | $ | 14.51 | ||||||||
|
December 31
|
$ | 23.48 | $ | 17.73 | $ | 21.91 | $ | 16.03 | ||||||||
The
following Performance Graph and related information shall not be
deemed to be “soliciting
material” or to be “filed” with the Securities and Exchange Commission, nor shall such information be
incorporated by reference into any filing under the Securities Act of 1933 or Securities Exchange
Act of 1934, each as amended, except to the extent that we specifically incorporate it by reference
into such filing.
| 2005 | 2006 | 2007 | 2008 | 2009 | 2010 | |||||||||||||||||||
|
Meritage Homes Corp
|
100 | 75.84 | 23.16 | 19.34 | 30.72 | 35.28 | ||||||||||||||||||
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S&P 500 Index
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100 | 113.59 | 117.76 | 73.33 | 89.53 | 100.78 | ||||||||||||||||||
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Dow Jones US Home
Construction Index
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100 | 79.42 | 35.14 | 23.91 | 27.74 | 27.86 | ||||||||||||||||||
On February 25, 2011, the closing sales price of our common stock as reported by the NYSE
was $25.82 per share. At that date, there were approximately 302 owners of record and
approximately 15,200 beneficial owners of common stock.
The transfer agent for our common stock is BNY Mellon Shareowner Services, 480 Washington
Blvd, Jersey City, NJ 07310
(www.bnymellon.com/shareowner/isd).
We have not declared cash dividends for the past ten years, nor do we intend to declare cash
dividends in the foreseeable future. We plan to retain our earnings to finance the continuing
development of the business. Future cash dividends, if any, will depend upon our financial
condition, results of operations, capital requirements, compliance with certain restrictive debt
covenants, as well as other factors considered relevant by our Board of Directors. Our senior and
senior subordinated note indentures contain restrictions on the payment of cash dividends. See
“Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity
and Capital Resources” and Note 5 — Senior and Senior Subordinated Notes, in the accompanying
consolidated financial statements.
Reference is made to Note 9 in the accompanying consolidated financial statements for a
description of our compensation plans.
22
Table of Contents
Issuer Purchases of Equity Securities
We did not acquire any shares of our common stock during the three months ended December 31,
2010.
On February 21, 2006, we announced that the Board of Directors approved a stock repurchase
program, authorizing the expenditure of up to $100 million to repurchase shares of our common
stock. In August 2006, the Board of Directors authorized an additional $100 million under this
program. There is no stated expiration date for this program. As of December 31, 2009 and 2010,
we had approximately $130.2 million of the authorized amount available to repurchase shares under
this program. We have no plans to purchase additional shares under this program in the foreseeable
future.
Executive Officers of the Registrant
The names, ages, positions and business experience of our executive officers are listed below
(all ages are as of March 1, 2011). Other than the terms and
provisions of various Employment and Change of Control Agreements
between the Company
and the officer, there are no understandings between any of our executive officers and any other
person pursuant to which any executive officer was selected to his office.
| Name | Age | Position | ||
|
|
||||
|
Steven J. Hilton
|
49 | Chairman of the Board and Chief Executive Officer | ||
|
Larry W. Seay
|
55 | Chief Financial Officer, Executive Vice President | ||
|
C. Timothy White
|
50 | General Counsel, Executive Vice President and Secretary | ||
|
Steven M. Davis
|
52 | Chief Operating Officer, Executive Vice President |
Steven J. Hilton co-founded Monterey Homes in 1985, which merged with our predecessor in
December 1996. Mr. Hilton served as Co-Chairman and CEO from July 1997 to May 2006 and has been the
Chairman and Chief Executive Officer since May 2006.
Larry W. Seay has been Chief Financial Officer since December 1996 and was appointed Executive
Vice President in October 2005.
C. Timothy White has been General Counsel, Executive Vice President and Secretary since
October 2005 and served on our Board of Directors from December 1996 until October 2005.
Steven M. Davis has been Executive Vice President of National Home Building Operations since
October 2006. From 2000 to September 2006, Mr. Davis was employed by KB Home as a Regional General
Manager, with various other management roles at KB Home from 1995 to 2000.
Each member of our Executive management team has in excess of 25 years of residential real estate experience.
Securities Authorized for Issuance under Equity Compensation Plans
The following table summarizes our equity compensation under all of our equity compensation
plans as of December 31, 2010:
| (b) | (c) | |||||||||||
| (a) | Weighted Average, | Number of Securities Remaining | ||||||||||
| Number of Shares to be | Exercise Price of | Available for Future Issuance | ||||||||||
| Issued Upon Exercise | Outstanding | under Equity Compensation | ||||||||||
| of Outstanding Options, | Options, Warrants | Plans (Excluding Securities | ||||||||||
| Plan Category | Warrants and Rights (1) | and Rights | Reflected in Column (a)) (2) | |||||||||
|
Equity compensation
plans approved by
stockholders
|
2,000,518 | $ | 15.86 | 941,559 | ||||||||
|
Equity compensation
plans not approved
by stockholders
|
0 | 0 | 0 | |||||||||
|
|
||||||||||||
|
Total
|
2,000,518 | $ | 15.86 | 941,559 | ||||||||
|
|
||||||||||||
| (1) | Balance includes 1,332,767 options, 465,251 time-vested restricted stock awards, and 202,500 performance-based restricted stock awards | |
| (2) | The number of securities remaining available for issuance under existing or future grants is comprised of shares under our 2006 Stock Incentive Plan. In addition to stock options, stock appreciation rights and performance share awards, the 2006 Stock Incentive Plan allows for the grant of stock shares. Under the 2006 Stock Incentive Plan, awards other than stock options and stock appreciation rights are counted against the shares for grant as 1.38 shares for every one share issued in connection with such awards. |
23
Table of Contents
| Item 6. | Selected Financial Data |
The following table presents selected historical consolidated financial and operating data of
Meritage Homes Corporation and subsidiaries as of and for each of the last five years ended
December 31, 2010. The financial data has been derived from our audited consolidated financial
statements and related notes for the periods presented. This table should be read in conjunction
with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and
the consolidated financial statements and related notes included elsewhere in this Annual Report.
These historical results may not be indicative of future results.
| Historical Consolidated Financial Data | ||||||||||||||||||||
| Years Ended December 31, | ||||||||||||||||||||
| ($ in thousands, except per share amounts) | ||||||||||||||||||||
| 2010 | 2009 | 2008 | 2007 | 2006 | ||||||||||||||||
|
Statement of Operations Data:
|
||||||||||||||||||||
|
Total closing revenue
|
$ | 941,656 | $ | 970,313 | $ | 1,523,068 | $ | 2,343,594 | $ | 3,461,320 | ||||||||||
|
Total cost of closings
|
(767,509 | ) | (840,046 | ) | (1,322,544 | ) | (1,990,190 | ) | (2,670,422 | ) | ||||||||||
|
Impairments
|
(6,451 | ) | (126,216 | ) | (237,439 | ) | (340,358 | ) | (78,268 | ) | ||||||||||
|
|
||||||||||||||||||||
|
Gross profit/(loss)
|
167,696 | 4,051 | (36,915 | ) | 13,046 | 712,630 | ||||||||||||||
|
|
||||||||||||||||||||
|
Commissions and other sales costs
|
(76,798 | ) | (78,683 | ) | (136,860 | ) | (196,464 | ) | (216,341 | ) | ||||||||||
|
General and administrative expenses
|
(59,784 | ) | (59,461 | ) | (64,793 | ) | (104,745 | ) | (163,087 | ) | ||||||||||
|
Goodwill and intangible asset impairments
|
0 | 0 | (1,133 | ) | (130,490 | ) | 0 | |||||||||||||
|
Earnings/(loss) from unconsolidated
entities, net (1)
|
5,243 | 4,013 | (17,038 | ) | (40,229 | ) | 20,364 | |||||||||||||
|
Interest expense
|
(33,722 | ) | (36,531 | ) | (23,653 | ) | (6,745 | ) | 0 | |||||||||||
|
(Loss)/gain on extinguishment of debt
|
(3,454 | ) | 9,390 | 0 | 0 | 0 | ||||||||||||||
|
Other income, net
|
3,303 | 2,422 | 4,426 | 9,145 | 10,443 | |||||||||||||||
|
|
||||||||||||||||||||
|
Earnings/(loss) before income taxes
|
2,484 | (154,799 | ) | (275,966 | ) | (456,482 | ) | 364,009 | ||||||||||||
|
Benefit/(provision) for income taxes
|
4,666 | 88,343 | (15,969 | ) | 167,631 | (138,655 | ) | |||||||||||||
|
|
||||||||||||||||||||
|
|
||||||||||||||||||||
|
Net earnings/(loss)
|
$ | 7,150 | $ | (66,456 | ) | $ | (291,935 | ) | $ | (288,851 | ) | $ | 225,354 | |||||||
|
|
||||||||||||||||||||
|
|
||||||||||||||||||||
|
Earnings/(loss) per common share:
|
||||||||||||||||||||
|
Basic
|
$ | 0.22 | $ | (2.12 | ) | $ | (9.95 | ) | $ | (11.01 | ) | $ | 8.52 | |||||||
|
Diluted
|
$ | 0.22 | $ | (2.12 | ) | $ | (9.95 | ) | $ | (11.01 | ) | $ | 8.32 | |||||||
|
|
||||||||||||||||||||
|
Balance Sheet Data (December 31):
|
||||||||||||||||||||
|
Cash, cash equivalents, investments and
securities and restricted cash
|
$ | 412,642 | $ | 391,378 | $ | 205,923 | $ | 27,677 | $ | 56,710 | ||||||||||
|
Real estate
|
$ | 738,928 | $ | 675,037 | $ | 859,305 | $ | 1,267,879 | $ | 1,530,602 | ||||||||||
|
Total assets
|
$ | 1,224,938 | $ | 1,242,667 | $ | 1,326,249 | $ | 1,748,381 | $ | 2,170,525 | ||||||||||
|
Senior and senior subordinated notes,
loans payable and other borrowings
|
$ | 605,780 | $ | 605,009 | $ | 628,968 | $ | 729,875 | $ | 733,276 | ||||||||||
|
Total liabilities
|
$ | 724,943 | $ | 757,242 | $ | 799,043 | $ | 1,018,217 | $ | 1,163,693 | ||||||||||
|
Stockholders’ equity
|
$ | 499,995 | $ | 485,425 | $ | 527,206 | $ | 730,164 | $ | 1,006,832 | ||||||||||
|
|
||||||||||||||||||||
|
Cash Flow Data:
|
||||||||||||||||||||
|
Cash provided by/(used in):
|
||||||||||||||||||||
|
Operating activities
|
$ | 32,551 | $ | 184,074 | $ | 199,829 | $ | (20,613 | ) | $ | (21,964 | ) | ||||||||
|
Investing activities
|
$ | (174,515 | ) | $ | (145,419 | ) | $ | (23,263 | ) | $ | (9,677 | ) | $ | (57,720 | ) | |||||
|
Financing activities
|
$ | (3,414 | ) | $ | 4,753 | $ | 1,680 | $ | 1,257 | $ | 70,582 | |||||||||
| (1) | Earnings/(loss) from unconsolidated entities in 2010, 2009, 2008 and 2007 includes $300,000, $2.8 million, $26.0 million and $57.9 million, respectively, of joint venture investment impairments. Refer to Notes 1, 2 and 4 of our consolidated financial statements for more detail. |
24
Table of Contents
| Item 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
Overview and Outlook
Industry Conditions
During 2010, the economic downturn and high unemployment rates persisted, which continued to
negatively impact demand in the homebuilding industry. Based on statistics from RealtyTrac,
processed foreclosures reached over one million in 2010, the highest annual number of foreclosures
since the downturn began. These record-high foreclosure rates contributed to the continued high
housing inventory levels and, coupled with limited availability of mortgage financing resulting
from the turmoil in the financial industry in prior years, exerted further pressure on home prices.
Consumer confidence remained weak, despite the affordability of new homes and historic low
interest rates. We believe that the demand we experienced in the
second half of 2010 after the expiration of the federal homebuyer tax credit
reflected
homebuyers’ reluctance to make a purchasing decision until they are comfortable that economic
conditions have stabilized. Although we
are seeing some signs of the beginning of a recovery in certain markets and expect the second half
of 2011 to improve as the economy begins to recover, we believe the current conditions could
continue, and we expect that our operations will remain relatively flat until the entire U.S.
economy rebounds.
Summary Company Results
Total home closing revenue was $940.4 million for the year ended December 31, 2010, decreasing
2.3% from $962.8 million for 2009 and 37.5% from $1.5 billion in 2008. We generated net income for
2010 of $7.2 million compared to a loss of ($66.5) million in 2009 and ($291.9) million in 2008.
Our 2010 results include $6.7 million of real estate-related impairments, a $3.5 million loss from
early extinguishment of debt, and a $4.7 million tax benefit. In 2009, results included $129.0
million of real estate-related impairments, $9.4 million gain from early extinguishment of debt,
and an $88.3 million deferred tax valuation allowance charge. In 2008, we incurred $263.4 million
of real estate-related impairments, and had an additional charge of
$118.6 million related to our deferred tax asset valuation. Higher
average home prices from the prior years are indicative of a shift to in-fill markets and different
geographies, such as California, Florida, and Colorado during 2010 as compared to 2009 and 2008.
At December 31, 2010, our backlog of $201.8 million was down 29.8% from $287.5 million at
December 31, 2009. Our December 31, 2008 backlog was $338.0 million. Fewer home sales per
community and a slightly lower active community count in the second half of 2010 were primarily
responsible for the decline in ending backlog. Our average sales price for homes in backlog
decreased from $262,600 at December 31, 2009 to $259,400 at December 31, 2010, primarily due to mix
of homes. Our cancellation rate on sales orders as a percentage of gross sales decreased in 2010 to
20.9%, from 24.3% and 35.3%, respectively, for the years ended December 31, 2009 and 2008,
reflecting some stabilization of home prices and consumer confidence during the year. Our
cancellation rates during 2010 returned to their historical levels.
Company Actions and Positioning
In response to the sustained and extended downturn in our industry, to strengthen our balance
sheet we continue to focus on the following initiatives:
| • | Redesigning product offering to reduce costs and sales prices, tailoring our product to meet today’s buyers’ affordability demands; |
| • | Changing sales and marketing efforts to generate additional traffic; | ||
| • | Renegotiating construction costs with our subcontractors where possible; | ||
| • | Exercising tight control over cash flows; | ||
| • | Managing our total lot supply by actively contracting new well-priced lots in strategic submarkets; | ||
| • | Monitoring our customer satisfaction scores and working toward improving them based on the results of the surveys; |
| • | Executing our company-wide operating strategy, Meritage Forward, and the roll-out of associated initiatives such as the Simply Smart Series™, 99-day closing guarantee and Meritage Green that create market differentiation for our product offerings; and |
| • | Continuing to consolidate overhead functions at all of our divisions and corporate offices to hold down general and administrative cost burden. |
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Table of Contents
In a response to our strategy to take advantage of capital-raising opportunities we completed
the following transactions:
| • | During 2010, we completed an offering of $200 million aggregate principal amount of 7.15% senior notes due 2020. The notes were issued at 97.567% of par value to yield 7.50%. Concurrent with the issuance of the 2020 notes, we purchased all of our $130 million 7.0% senior notes maturing 2014 and $65 million of our 6.25% senior notes maturing 2015. In connection with these transactions, we recorded a $3.5 million loss on early extinguishment of debt, which is reflected in our statement of operations for the year ended December 31, 2010. This transaction pushed out our earliest maturity from 2014 to 2015 and reduced our 2015 maturity by $65 million. |
| • | During 2009 we retired $24.1 million of our 7.731% senior subordinated notes maturing in 2017 by issuing approximately 783,000 shares of our common stock in privately negotiated transactions at a 41% average discount from the face value of the notes, resulting in a $9.4 million gain on early extinguishment of debt for the year ended December 31, 2009. |
| • | During 2008, we completed a public offering of 4,297,544 shares of our common stock at $20.50 per share. We used the proceeds received from this offering for working capital and other general corporate purposes. The net proceeds from this offering were $82.8 million. |
Critical Accounting Policies
We have established various accounting policies that govern the application of United States
generally accepted accounting principles (“GAAP”) in the preparation and presentation of our
consolidated financial statements. Our significant accounting policies are described in Note 1 of
the consolidated financial statements included in this Form 10-K. Certain of these policies involve
significant judgments, assumptions and estimates by management that may have a material impact on
the carrying value of certain assets and liabilities, and revenue and costs. We are subject to
uncertainties such as the impact of future events, economic, environmental and political factors
and changes in our business environment; therefore, actual results could differ from these
estimates. Accordingly, the accounting estimates used in the preparation of our financial
statements will change as new events occur, as more experience is acquired, as additional
information is obtained and as our operating environment changes. Changes in estimates are revised
when circumstances warrant. Such changes in estimates and refinements in methodologies are
reflected in our reported results of operations and, if material, the effects of changes in
estimates are disclosed in the notes to our consolidated financial statements. The judgments,
assumptions and estimates we use and believe to be critical to our business are based on historical
experience, knowledge of the accounts and other factors, which we believe to be reasonable under
the circumstances. Because of the nature of the judgments and assumptions we have made, actual
results may differ from these judgments and estimates and could have a material impact on the
carrying values of assets and liabilities and the results of our operations.
The accounting policies that we deem most critical to us and involve the most difficult,
subjective or complex judgments are as follows:
Revenue Recognition
We recognize revenue from a home sale when title passes to the homeowner, the homeowner’s
initial and continuing investment is adequate to demonstrate a commitment to pay for the home, the
receivable, if any, from the homeowner is not subject to future subordination and we do not have a
substantial continuing involvement with the sold home. These conditions are typically achieved
when a home closes.
Revenue from land sales is recognized when a significant down payment is received, the
earnings process is relatively complete, title passes and collectability of the receivable is
reasonably assured. Although there is limited subjectivity in this accounting policy, we have
designated revenue recognition as a critical accounting policy due to the significance of this
balance in our statements of operations.
Real Estate
Real estate is stated at cost unless the community or land is determined to be impaired, at
which point the inventory is written down to fair value as required by Financial Accounting
Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 360-10,
Property, Plant and
Equipment.
Inventory includes the costs of land acquisition, land development and home
construction, capitalized interest, real estate taxes, direct overhead costs incurred during
development and home construction that benefit the entire community, less impairments, if any.
Land and development costs are typically allocated to and transferred to homes under construction
when construction begins. Home construction costs are accumulated on a per-home basis. Cost of
home closings includes the specific construction costs of the home and all related land
acquisition, land development and other common costs (both incurred and estimated to be incurred)
based upon the total number of homes expected to be closed in each community or phase. Any changes
to the estimated total development costs of a community or phase are allocated to the remaining
homes in the community or
phase. When a home closes, we may have incurred costs for goods and services that have not
yet been paid. Therefore, an accrual to capture such obligations is recorded in connection with
the home closing and charged directly to cost of sales.
26
Table of Contents
Typically,
an entitled community’s life cycle ranges from three to five years, commencing with the
acquisition of the land and continuing through the land development phase and concluding
with the sale, construction and closing of the homes. Actual community lives will vary based on
the size of the community, the absorption rates and whether the land purchased was raw land or
finished lots. Master-planned communities encompassing several phases and super-block land parcels
may have significantly longer lives and projects involving finished lot purchases may be
significantly shorter. Additionally, the current slow-down in the housing market has negatively
impacted our sales pace, thereby extending the lives of certain communities.
All of our land inventory and related real estate assets are reviewed for recoverability at
least quarterly, or more frequently if impairment indicators are present, as our inventory is
considered “long-lived” in accordance with U.S. generally accepted accounting principles. If an
asset is deemed not recoverable, we are required to record impairment charges to the extent the
fair value of such assets is less than their carrying amounts. Our determination of fair value is
based on projections and estimates. Changes in these expectations may lead to a change in the
outcome of our impairment analysis and actual results may also differ from our assumptions. Our
analysis is completed at a community level with each community or land parcel evaluated
individually. We pay particular attention to communities experiencing a larger-than-anticipated
reduction in their absorption rates or averages sales prices or where gross margins are trending
lower than anticipated. For those assets deemed to be impaired, the impairment to be recognized is
measured by the amount by which the assets’ carrying balance exceeds their fair value. The
impairment of a community is allocated to each lot on a straight-line basis.
Existing and continuing communities:
When projections for the remaining income expected to be
earned from existing communities are no longer positive, the underlying real estate assets are
deemed not fully recoverable, and further analysis is performed to determine the required
impairment. The fair value of the community’s assets is determined using either a discounted cash
flow model for projects we intend to build out or a market-based approach for projects to be sold.
Impairments are charged to cost of home closings in the period during which the fair value is less
than the assets’ carrying amount. If a market-based approach is used, we determine fair value
based on recent comparable purchase and sales activity in the local market, adjusted for known
variances as determined by our knowledge of the region and general real estate expertise. If a
discounted cash flow approach is used, we compute fair value based on a proprietary model. Our key
estimates in deriving fair value under our cash flow model are (i) home selling prices in the
community adjusted for current and expected sales discounts and incentives, (ii) costs related to
the community — both land development and home construction — including costs spent to date and
budgeted remaining costs to spend, (iii) projected sales absorption rates, reflecting any product
mix change strategies implemented to stimulate the sales pace and expected cancellation rates, (iv)
alternative land uses including disposition of all or a portion of the land owned and (v) our
discount rate, which is currently 14-16% and varies based on the perceived risk inherent in the
community’s other cash flow assumptions. These assumptions vary widely across different
communities and geographies and are largely dependent on local market conditions. Community-level
factors that may impact our key estimates include:
| • | The presence and significance of local competitors, including their offered product type and competitive actions; | ||
| • | Economic and related demographic conditions for the population of the surrounding community; | ||
| • | Desirability of the particular community, including unique amenities or other favorable or unfavorable attributes; and | ||
| • | Existing home inventory supplies. |
These local circumstances may significantly impact our assumptions and the resulting
computation of fair value, and are, therefore, closely evaluated by our division personnel in their
creation of the discounted cash flow models. The models are also evaluated by regional and
corporate personnel for consistency and integration, as decisions that affect pricing or absorption
at one community may have resulting consequences for neighboring communities. We typically do not
project market improvements in our discounted cash flow models, but may do so in limited
circumstances in the latter years of a long-lived community. In certain cases, we may elect to
stop development of (mothball) an existing community if we believe the economic performance of the
community would be maximized by deferring development for a period of time to allow market
conditions to improve. The decision may be based on financial and/or operational metrics. If we
decide to mothball a project, we will impair it to its fair value as discussed above and then cease
future development activity until such a time where management believes that market conditions will
improve and economic performance will be maximized. Quarterly, we review all communities,
including mothballed communities, for potential impairments.
27
Table of Contents
Option deposits and pre-acquisition costs:
We also evaluate assets associated with future
communities for impairments on a quarterly basis. Using similar techniques described in the
existing and continuing communities section above, we determine if the contributions to be
generated by our future communities are acceptable to us. If the projections indicate that a
community is still
meeting our internal investment guidelines and is generating a profit, those assets are
determined to be fully recoverable and no impairments are required. In cases where we decide to
abandon the project, we will fully impair all assets related to such project and will expense and
accrue any additional costs that we are contractually obligated to incur. In certain
circumstances, we may also elect to continue with a project because it is expected to generate
positive future cash flows, even though it may not be generating an accounting profit, or because
of other strategic factors. In such cases, we will impair our pre-acquisition costs and deposits,
as necessary, to record an impairment to bring the book value to fair value.
Due to the complexity and subjectivity of these fair value computations, as well as the
significance of associated impairments to our financial statements for the past several years, we
have concluded that the valuation of our real-estate and associated assets is a critical accounting
policy.
During 2010, we recorded $5.7 million of such impairment charges related to our home and land
inventories and real estate-related joint venture investments. Additionally, we wrote off
approximately $1.0 million of deposits and pre-acquisition costs relating to projects that were no
longer economically feasible. Refer to Note 2 of these consolidated financial statements in this
Annual Report on Form 10-K for further discussion regarding these impairments and the associated
remaining fair values of impaired communities.
The impairment charges were based on our fair value calculations, which are affected by
current market conditions, assumptions and expectations, all of which are highly subjective and may
differ significantly from actual results if market conditions change.
Due to the volume of possible outcomes that can be generated from changes in the various model
inputs for each community, we do not believe it is possible to create a sensitivity analysis that
can provide meaningful information for the users of our financial statements.
Warranty Reserves
We use subcontractors for nearly all aspects of home construction. Although our
subcontractors are generally required to repair and replace any product or labor defects, we are, during applicable warranty periods, ultimately
responsible to the homeowner for making such repairs. As such, warranty reserves are
recorded to cover our exposure to absorb the costs for materials
and labor not expected to be covered by our subcontractors as they relate to warranty-type claims
subsequent to the delivery of a home to the homeowner. Reserves are reviewed on a regular basis
and, with the assistance of an actuary, we determine their sufficiency based on our and
industry-wide historical data and trends with respect to product types and geographical areas.
At December 31, 2010, our warranty reserve was $29.3 million, reflecting an accrual of 0.2% to
0.7% of a home’s sale price depending on our loss history in the geographic area in which the home
was built. A 10% increase in our warranty reserve rate would have increased our accrual and
corresponding cost of sales by approximately $700,000 in 2010. While we believe that the warranty
reserve is sufficient to cover our projected costs, there can be no assurances that historical data
and trends will accurately predict our actual warranty costs. Furthermore, there can be no
assurances that future economic or financial developments might not lead to a significant change in
the reserve.
Off-Balance Sheet Arrangements
Historically, we have invested in entities that acquire and develop land for sale to us in
connection with our homebuilding operations or for sale to third parties. Our partners generally
are unaffiliated homebuilders, land sellers and financial or other strategic partners.
All unconsolidated entities through which we acquire and develop land are accounted for by
either the cost or the equity method of accounting as the criteria for consolidation set forth in
ASC 860-10,
Consolidation,
have not been met. We record our investments in these entities in our
consolidated balance sheets as “Investments in unconsolidated entities” and our pro rata share of
the entities’ earnings or losses in our consolidated statements of earnings as “Earnings/(loss)
from unconsolidated entities, net.”
In order to determine if we should consolidate equity-basis joint ventures, we determine if
the ventures are VIEs and if we are the primary beneficiary of the unconsolidated entity. Factors
considered in our determination include our ability to control the activities of the entity that
most significantly impact its economic performance, and in cases where we do control such
activities, if we also are expected to absorb the majority of the expected losses or expected gains
of the entity.
As of December 31, 2010, we believe that the equity method of accounting is appropriate for
our investments in unconsolidated entities where we are not the primary beneficiary, we have a
significant influence, and our ownership interest exceeds 20%. At December 31, 2010, we had
investments of $11.0 million related to equity-method unconsolidated entities with total assets of
$56.0 million and total liabilities of $30.1 million. See Note 4 in the accompanying consolidated
financial statements for additional information related to these investments.
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Table of Contents
We enter into option or purchase agreements to acquire land or lots, for which we generally
pay non-refundable deposits. We also analyze these agreements under ASC 860-10 to determine whether
we are the primary beneficiary of the variable interest entity (“VIE”), if applicable, using a
similar analysis, as noted above. If we are deemed to be the primary beneficiary of the VIE, we
will consolidate the VIE in our consolidated financial statements. See Note 3 in the accompanying
financial statements for additional information related to our off-balance-sheet arrangements. In
cases where we are the primary beneficiary, even though we do not have title to such land, we are
required to consolidate these purchase/option agreements and reflect such assets and liabilities as
“Real estate not owned” in our consolidated balance sheets. The liabilities related to
consolidated VIEs are excluded from our debt covenant calculations.
Valuation of Deferred Tax Assets
We account for income taxes using the asset and liability method, which requires that deferred
tax assets and liabilities be recognized based on future tax consequences of both temporary
differences between the financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax
rates expected to apply in the years in which the temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates
is recognized in earnings in the period when the changes are enacted.
In accordance with ASC 740-10,
Income Taxes
, we evaluate our deferred tax assets, including
the benefit from NOLs, to determine if a valuation allowance is
required. Companies must assess,
using significant judgments, whether a valuation allowance should be established based on the
consideration of all available evidence using a “more likely than not” standard with significant
weight being given to evidence that can be objectively verified. This assessment considers, among
other matters, the nature, frequency and severity of current and cumulative losses, forecasts of
future profitability, the length of statutory carryforward periods, our experience with operating
losses and our experience of utilizing tax credit carryforwards and tax planning alternatives.
Based upon a review of all available evidence, we recorded a full valuation allowance against our
deferred tax assets during 2008. We continue to maintain a full non-cash valuation allowance
against the entire amount of our remaining net deferred tax assets at December 31, 2010 as we have
determined that the weight of the negative evidence exceeds that of the positive evidence and it
continues to be more likely than not that we will not be able to utilize all of our deferred tax
assets and NOL carryovers.
At December 31, 2010 and 2009, we had a valuation allowance of $90.0 million ($63.4 million
federal and $26.6 million state) and $92.6 million ($65.2 million federal and $27.4 million state),
respectively, against deferred tax assets which include the tax benefit from NOL carryovers. Our
future deferred tax asset realization depends on sufficient taxable income in the carryforward
periods under existing tax laws. Federal net operating loss carryforwards may be used to offset
future taxable income for 20 years and expire in 2030. State net operating loss carryforwards may
be used to offset future taxable income for a period of time ranging from 5 to 20 years, depending
on the state, and begin to expire in 2012. Deferred tax assets include tax-effected federal and
state net operating loss carryforwards of $25.6 million and $21.4 million in 2010 and 2009,
respectively. On an ongoing basis, we will continue to review all available evidence to determine
if and when we expect to realize our deferred tax assets and NOL carryovers.
Share-Based Payments
We have stock options and restricted common stock units (“nonvested shares”) outstanding under
two stock compensation plans. Per the terms of these plans, the exercise price of our stock
options may not be less than the closing market value of our common stock on the date of grant, nor
may options granted under the plans be exercised within one year from the date of the grant. After
one year, exercises are permitted in pre-determined installments based upon a vesting schedule
established at the time of grant. Each stock option expires on a date determined at the time of
the grant, but not to exceed seven years from the date of the grant. Our restricted stock generally
vests on a pro-rata basis over either three or five years.
The calculation of employee compensation expense involves estimates that require management
judgments. These estimates include determining the value of each of our stock options on the date
of grant using a Black-Scholes option-pricing model discussed in Note 9 in the accompanying
consolidated financial statements. The fair value of our stock options, which typically vest
ratably over a five-year period, is determined at the time of grant and is expensed on a
straight-line basis over the vesting life of the options. Expected volatility is based on a
composite of historical volatility of our stock and implied volatility from our traded options.
The risk-free rate for periods within the contractual life of the stock option award is based on
the rate of a zero-coupon Treasury bond on the date the stock option is granted with a maturity
equal to the expected term of the stock option. We use historical data to estimate stock option
exercises and forfeitures within our valuation model. The expected life of our stock option awards
is derived from historical experience under our share-based payment plans and represents the period
of time that we expect our stock options to be outstanding. A 10% decrease in our forfeiture rate
would have increased our stock compensation by approximately $26,000 in 2010.
29
Table of Contents
Home Closing Revenue, Home Orders and Order Backlog — Segment Analysis
The tables provided below show operating and financial data regarding our homebuilding
activities (dollars in thousands).
| Years Ended December 31, | Year Over Year | |||||||||||||||
| 2010 | 2009 | Chg $ | Chg % | |||||||||||||
|
Home Closing Revenue
|
||||||||||||||||
|
Total
|
||||||||||||||||
|
Dollars
|
$ | 940,406 | $ | 962,797 | $ | (22,391 | ) | (2.3 | )% | |||||||
|
Homes closed
|
3,700 | 4,039 | (339 | ) | (8.4 | )% | ||||||||||
|
Average sales price
|
$ | 254.2 | $ | 238.4 | $ | 15.8 | 6.6 | % | ||||||||
|
|
||||||||||||||||
|
West Region
|
||||||||||||||||
|
|
||||||||||||||||
|
California
|
||||||||||||||||
|
Dollars
|
$ | 147,194 | $ | 116,197 | $ | 30,997 | 26.7 | % | ||||||||
|
Homes closed
|
417 | 348 | 69 | 19.8 | % | |||||||||||
|
Average sales price
|
$ | 353.0 | $ | 333.9 | 19.1 | 5.7 | % | |||||||||
|
|
||||||||||||||||
|
Nevada
|
||||||||||||||||
|
Dollars
|
$ | 16,006 | $ | 27,049 | $ | (11,043 | ) | (40.8 | )% | |||||||
|
Homes closed
|
81 | 130 | (49 | ) | (37.7 | )% | ||||||||||
|
Average sales price
|
$ | 197.6 | $ | 208.1 | $ | (10.5 | ) | (5.0 | )% | |||||||
|
|
||||||||||||||||
|
West Region Totals
|
||||||||||||||||
|
Dollars
|
$ | 163,200 | $ | 143,246 | $ | 19,954 | 13.9 | % | ||||||||
|
Homes closed
|
498 | 478 | 20 | 4.2 | % | |||||||||||
|
Average sales price
|
$ | 327.7 | $ | 299.7 | $ | 28.0 | 9.3 | % | ||||||||
|
|
||||||||||||||||
|
Central Region
|
||||||||||||||||
|
|
||||||||||||||||
|
Arizona
|
||||||||||||||||
|
Dollars
|
$ | 156,117 | $ | 156,107 | $ | 10 | 0.0 | % | ||||||||
|
Homes closed
|
700 | 781 | (81 | ) | (10.4 | )% | ||||||||||
|
Average sales price
|
$ | 223.0 | $ | 199.9 | $ | 23.1 | 11.6 | % | ||||||||
|
|
||||||||||||||||
|
Texas
|
||||||||||||||||
|
Dollars
|
$ | 487,797 | $ | 566,879 | $ | (79,082 | ) | (14.0 | )% | |||||||
|
Homes closed
|
2,028 | 2,405 | (377 | ) | (15.7 | )% | ||||||||||
|
Average sales price
|
$ | 240.5 | $ | 235.7 | $ | 4.8 | 2.0 | % | ||||||||
|
|
||||||||||||||||
|
Colorado
|
||||||||||||||||
|
Dollars
|
$ | 48,820 | $ | 44,225 | $ | 4,595 | 10.4 | % | ||||||||
|
Homes closed
|
162 | 145 | 17 | 11.7 | % | |||||||||||
|
Average sales price
|
$ | 301.4 | $ | 305.0 | $ | (3.6 | ) | (1.2 | )% | |||||||
|
|
||||||||||||||||
|
Central Region Totals
|
||||||||||||||||
|
Dollars
|
$ | 692,734 | $ | 767,211 | $ | (74,477 | ) | (9.7 | )% | |||||||
|
Homes closed
|
2,890 | 3,331 | (441 | ) | (13.2 | )% | ||||||||||
|
Average sales price
|
$ | 239.7 | $ | 230.3 | $ | 9.4 | 4.1 | % | ||||||||
|
|
||||||||||||||||
|
East Region
|
||||||||||||||||
|
|
||||||||||||||||
|
Florida
|
||||||||||||||||
|
Dollars
|
$ | 84,472 | $ | 52,340 | $ | 32,132 | 61.4 | % | ||||||||
|
Homes closed
|
312 | 230 | 82 | 35.7 | % | |||||||||||
|
Average sales price
|
$ | 270.7 | $ | 227.6 | $ | 43.1 | 18.9 | % | ||||||||
30
Table of Contents
| Years Ended December 31, | Year Over Year | |||||||||||||||
| 2009 | 2008 | Chg $ | Chg % | |||||||||||||
|
Home Closing Revenue
|
||||||||||||||||
|
Total
|
||||||||||||||||
|
Dollars
|
$ | 962,797 | $ | 1,505,117 | $ | (542,320 | ) | (36.0 | )% | |||||||
|
Homes closed
|
4,039 | 5,627 | (1,588 | ) | (28.2 | )% | ||||||||||
|
Average sales price
|
$ | 238.4 | $ | 267.5 | $ | (29.1 | ) | (10.9 | )% | |||||||
|
|
||||||||||||||||
|
West Region
|
||||||||||||||||
|
|
||||||||||||||||
|
California
|
||||||||||||||||
|
Dollars
|
$ | 116,197 | $ | 241,792 | $ | (125,595 | ) | (51.9 | )% | |||||||
|
Homes closed
|
348 | 581 | (233 | ) | (40.1 | )% | ||||||||||
|
Average sales price
|
$ | 333.9 | $ | 416.2 | (82.3 | ) | (19.8 | )% | ||||||||
|
|
||||||||||||||||
|
Nevada
|
||||||||||||||||
|
Dollars
|
$ | 27,049 | $ | 65,734 | $ | (38,685 | ) | (58.9 | )% | |||||||
|
Homes closed
|
130 | 247 | (117 | ) | (47.4 | )% | ||||||||||
|
Average sales price
|
$ | 208.1 | $ | 266.1 | $ | (58.0 | ) | (21.8 | )% | |||||||
|
|
||||||||||||||||
|
West Region Totals
|
||||||||||||||||
|
Dollars
|
$ | 143,246 | $ | 307,526 | $ | (164,280 | ) | (53.4 | )% | |||||||
|
Homes closed
|
478 | 828 | (350 | ) | (42.3 | )% | ||||||||||
|
Average sales price
|
$ | 299.7 | $ | 371.4 | $ | (71.7 | ) | (19.3 | )% | |||||||
|
|
||||||||||||||||
|
Central Region
|
||||||||||||||||
|
|
||||||||||||||||
|
Arizona
|
||||||||||||||||
|
Dollars
|
$ | 156,107 | $ | 271,646 | $ | (115,539 | ) | (42.5 | )% | |||||||
|
Homes closed
|
781 | 1,084 | (303 | ) | (28.0 | )% | ||||||||||
|
Average sales price
|
$ | 199.9 | $ | 250.6 | $ | (50.7 | ) | (20.2 | )% | |||||||
|
|
||||||||||||||||
|
Texas
|
||||||||||||||||
|
Dollars
|
$ | 566,879 | $ | 783,835 | $ | (216,956 | ) | (27.7 | )% | |||||||
|
Homes closed
|
2,405 | 3,217 | (812 | ) | (25.2 | )% | ||||||||||
|
Average sales price
|
$ | 235.7 | $ | 243.7 | $ | (8.0 | ) | (3.3 | )% | |||||||
|
|
||||||||||||||||
|
Colorado
|
||||||||||||||||
|
Dollars
|
$ | 44,225 | $ | 50,213 | $ | (5,988 | ) | (11.9 | )% | |||||||
|
Homes closed
|
145 | 145 | 0 | 0.0 | % | |||||||||||
|
Average sales price
|
$ | 305.0 | $ | 346.3 | $ | (41.3 | ) | (11.9 | )% | |||||||
|
|
||||||||||||||||
|
Central Region Totals
|
||||||||||||||||
|
Dollars
|
$ | 767,211 | $ | 1,105,694 | $ | (338,483 | ) | (30.6 | )% | |||||||
|
Homes closed
|
3,331 | 4,446 | (1,115 | ) | (25.1 | )% | ||||||||||
|
Average sales price
|
$ | 230.3 | $ | 248.7 | $ | (18.4 | ) | (7.4 | )% | |||||||
|
|
||||||||||||||||
|
East Region
|
||||||||||||||||
|
|
||||||||||||||||
|
Florida
|
||||||||||||||||
|
Dollars
|
$ | 52,340 | $ | 91,897 | $ | (39,557 | ) | (43.0 | )% | |||||||
|
Homes closed
|
230 | 353 | (123 | ) | (34.8 | )% | ||||||||||
|
Average sales price
|
$ | 227.6 | $ | 260.3 | $ | (32.7 | ) | (12.6 | )% | |||||||
31
Table of Contents
| Years Ended December 31, | Year Over Year | |||||||||||||||
| 2010 | 2009 | Chg $ | Chg % | |||||||||||||
|
Home Orders (1)
|
||||||||||||||||
|
Total
|
||||||||||||||||
|
Dollars
|
$ | 854,687 | $ | 912,301 | $ | (57,614 | ) | (6.3 | )% | |||||||
|
Homes ordered
|
3,383 | 3,853 | (470 | ) | (12.2 | )% | ||||||||||
|
Average sales price
|
$ | 252.6 | $ | 236.8 | $ | 15.8 | 6.7 | % | ||||||||
|
|
||||||||||||||||
|
West Region
|
||||||||||||||||
|
|
||||||||||||||||
|
California
|
||||||||||||||||
|
Dollars
|
$ | 128,167 | $ | 116,609 | $ | 11,558 | 9.9 | % | ||||||||
|
Homes ordered
|
373 | 350 | 23 | 6.6 | % | |||||||||||
|
Average sales price
|
$ | 343.6 | $ | 333.2 | 10.4 | 3.1 | % | |||||||||
|
|
||||||||||||||||
|
Nevada
|
||||||||||||||||
|
Dollars
|
$ | 15,704 | $ | 23,267 | $ | (7,563 | ) | (32.5 | )% | |||||||
|
Homes ordered
|
79 | 119 | (40 | ) | (33.6 | )% | ||||||||||
|
Average sales price
|
$ | 198.8 | $ | 195.5 | $ | 3.3 | 1.7 | % | ||||||||
|
|
||||||||||||||||
|
West Region Totals
|
||||||||||||||||
|
Dollars
|
$ | 143,871 | $ | 139,876 | $ | 3,995 | 2.9 | % | ||||||||
|
Homes ordered
|
452 | 469 | (17 | ) | (3.6 | )% | ||||||||||
|
Average sales price
|
$ | 318.3 | $ | 298.2 | $ | 20.1 | 6.7 | % | ||||||||
|
|
||||||||||||||||
|
Central Region
|
||||||||||||||||
|
|
||||||||||||||||
|
Arizona
|
||||||||||||||||
|
Dollars
|
$ | 155,987 | $ | 146,006 | $ | 9,981 | 6.8 | % | ||||||||
|
Homes ordered
|
678 | 738 | (60 | ) | (8.1 | )% | ||||||||||
|
Average sales price
|
$ | 230.1 | $ | 197.8 | $ | 32.3 | 16.3 | % | ||||||||
|
|
||||||||||||||||
|
Texas
|
||||||||||||||||
|
Dollars
|
$ | 417,840 | $ | 518,288 | $ | (100,448 | ) | (19.4 | )% | |||||||
|
Homes ordered
|
1,776 | 2,233 | (457 | ) | (20.5 | )% | ||||||||||
|
Average sales price
|
$ | 235.3 | $ | 232.1 | $ | 3.2 | 1.4 | % | ||||||||
|
|
||||||||||||||||
|
Colorado
|
||||||||||||||||
|
Dollars
|
$ | 54,328 | $ | 42,416 | $ | 11,912 | 28.1 | % | ||||||||
|
Homes ordered
|
175 | 140 | 35 | 25.0 | % | |||||||||||
|
Average sales price
|
$ | 310.4 | $ | 303.0 | $ | 7.4 | 2.4 | % | ||||||||
|
|
||||||||||||||||
|
Central Region Totals
|
||||||||||||||||
|
Dollars
|
$ | 628,155 | $ | 706,710 | $ | (78,555 | ) | (11.1 | )% | |||||||
|
Homes ordered
|
2,629 | 3,111 | (482 | ) | (15.5 | )% | ||||||||||
|
Average sales price
|
$ | 238.9 | $ | 227.2 | $ | 11.7 | 5.1 | % | ||||||||
|
|
||||||||||||||||
|
East Region
|
||||||||||||||||
|
|
||||||||||||||||
|
Florida
|
||||||||||||||||
|
Dollars
|
$ | 82,661 | $ | 65,715 | $ | 16,946 | 25.8 | % | ||||||||
|
Homes ordered
|
302 | 273 | 29 | 10.6 | % | |||||||||||
|
Average sales price
|
$ | 273.7 | $ | 240.7 | $ | 33.0 | 13.7 | % | ||||||||
| (1) | Home orders for any period represent the aggregate sales price of all homes ordered, net of cancellations. We do not include orders contingent upon the sale of a customer’s existing home as a sales contract until the contingency is removed. |
32
Table of Contents
| Years Ended December 31, | Year Over Year | |||||||||||||||
| 2009 | 2008 | Chg $ | Chg % | |||||||||||||
|
Home Orders (1)
|
||||||||||||||||
|
Total
|
||||||||||||||||
|
Dollars
|
$ | 912,301 | $ | 1,173,163 | (260,862 | ) | (22.2 | )% | ||||||||
|
Homes ordered
|
3,853 | 4,620 | (767 | ) | (16.6 | )% | ||||||||||
|
Average sales price
|
$ | 236.8 | $ | 253.9 | $ | (17.1 | ) | (6.7 | )% | |||||||
|
|
||||||||||||||||
|
West Region
|
||||||||||||||||
|
|
||||||||||||||||
|
California
|
||||||||||||||||
|
Dollars
|
$ | 116,609 | $ | 194,170 | $ | (77,561 | ) | (39.9 | )% | |||||||
|
Homes ordered
|
350 | 504 | (154 | ) | (30.6 | )% | ||||||||||
|
Average sales price
|
$ | 333.2 | $ | 385.3 | $ | (52.1 | ) | (13.5 | )% | |||||||
|
|
||||||||||||||||
|
Nevada
|
||||||||||||||||
|
Dollars
|
$ | 23,267 | $ | 53,527 | $ | (30,260 | ) | (56.5 | )% | |||||||
|
Homes ordered
|
119 | 208 | (89 | ) | (42.8 | )% | ||||||||||
|
Average sales price
|
$ | 195.5 | $ | 257.3 | $ | (61.8 | ) | (24.0 | )% | |||||||
|
|
||||||||||||||||
|
West Region Totals
|
||||||||||||||||
|
Dollars
|
$ | 139,876 | $ | 247,697 | $ | (107,821 | ) | (43.5 | )% | |||||||
|
Homes ordered
|
469 | 712 | (243 | ) | (34.1 | )% | ||||||||||
|
Average sales price
|
$ | 298.2 | $ | 347.9 | $ | (49.7 | ) | (14.3 | )% | |||||||
|
|
||||||||||||||||
|
Central Region
|
||||||||||||||||
|
|
||||||||||||||||
|
Arizona
|
||||||||||||||||
|
Dollars
|
$ | 146,006 | $ | 193,299 | $ | (47,293 | ) | (24.5 | )% | |||||||
|
Homes ordered
|
738 | 884 | (146 | ) | (16.5 | )% | ||||||||||
|
Average sales price
|
$ | 197.8 | $ | 218.7 | $ | (20.9 | ) | (9.6 | )% | |||||||
|
|
||||||||||||||||
|
Texas
|
||||||||||||||||
|
Dollars
|
$ | 518,288 | $ | 629,639 | $ | (111,351 | ) | (17.7 | )% | |||||||
|
Homes ordered
|
2,233 | 2,632 | (399 | ) | (15.2 | )% | ||||||||||
|
Average sales price
|
$ | 232.1 | $ | 239.2 | $ | (7.1 | ) | (3.0 | )% | |||||||
|
|
||||||||||||||||
|
Colorado
|
||||||||||||||||
|
Dollars
|
$ | 42,416 | $ | 45,341 | $ | (2,925 | ) | (6.5 | )% | |||||||
|
Homes ordered
|
140 | 136 | 4 | 2.9 | % | |||||||||||
|
Average sales price
|
$ | 303.0 | $ | 333.4 | $ | (30.4 | ) | (9.1 | )% | |||||||
|
|
||||||||||||||||
|
Central Region Totals
|
||||||||||||||||
|
Dollars
|
$ | 706,710 | $ | 868,279 | $ | (161,569 | ) | (18.6 | )% | |||||||
|
Homes ordered
|
3,111 | 3,652 | (541 | ) | (14.8 | )% | ||||||||||
|
Average sales price
|
$ | 227.2 | $ | 237.8 | $ | (10.6 | ) | (4.5 | )% | |||||||
|
|
||||||||||||||||
|
East Region
|
||||||||||||||||
|
|
||||||||||||||||
|
Florida
|
||||||||||||||||
|
Dollars
|
$ | 65,715 | $ | 57,187 | $ | 8,528 | 14.9 | % | ||||||||
|
Homes ordered
|
273 | 256 | 17 | 6.6 | % | |||||||||||
|
Average sales price
|
$ | 240.7 | $ | 223.4 | $ | 17.3 | 7.7 | % | ||||||||
| (1) | Home orders for any period represent the aggregate sales price of all homes ordered, net of cancellations. We do not include orders contingent upon the sale of a customer’s existing home as a sales contract until the contingency is removed. |
33
Table of Contents
| December 31, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
|
|
||||||||||||
|
Active Communities
|
||||||||||||
|
Total
|
151 | 153 | 178 | |||||||||
|
|
||||||||||||
|
West Region
|
||||||||||||
|
California
|
14 | 7 | 12 | |||||||||
|
Nevada
|
4 | 6 | 12 | |||||||||
|
|
||||||||||||
|
West Region Totals
|
18 | 13 | 24 | |||||||||
|
|
||||||||||||
|
Central Region
|
||||||||||||
|
Arizona
|
32 | 26 | 31 | |||||||||
|
Texas
|
82 | 98 | 109 | |||||||||
|
Colorado
|
9 | 6 | 3 | |||||||||
|
|
||||||||||||
|
Central Region Totals
|
123 | 130 | 143 | |||||||||
|
|
||||||||||||
|
East Region (Florida)
|
10 | 10 | 11 | |||||||||
| Years Ended December 31, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
|
Cancellation Rates (1)
|
||||||||||||
|
Total
|
20.9 | % | 24.3 | % | 35.3 | % | ||||||
|
|
||||||||||||
|
West Region
|
||||||||||||
|
California
|
18.7 | % | 19.2 | % | 33.2 | % | ||||||
|
Nevada
|
17.7 | % | 20.1 | % | 22.1 | % | ||||||
|
West Region Totals
|
18.6 | % | 19.4 | % | 30.3 | % | ||||||
|
|
||||||||||||
|
Central Region
|
||||||||||||
|
Arizona
|
12.9 | % | 12.9 | % | 25.6 | % | ||||||
|
Texas
|
25.1 | % | 29.4 | % | 39.6 | % | ||||||
|
Colorado
|
15.0 | % | 15.2 | % | 23.2 | % | ||||||
|
Central Region Totals
|
21.6 | % | 25.5 | % | 36.2 | % | ||||||
|
|
||||||||||||
|
East Region (Florida)
|
17.7 | % | 17.3 | % | 35.8 | % | ||||||
| (1) | Cancellation rates are computed as the number of cancelled units for the period divided by the gross sales units for the same period. |
34
Table of Contents
| Years Ended December 31, | Year Over Year | |||||||||||||||
| 2010 | 2009 | Chg $ | Chg % | |||||||||||||
|
Order Backlog (1)
|
||||||||||||||||
|
Total
|
||||||||||||||||
|
Dollars
|
$ | 201,816 | $ | 287,535 | $ | (85,719 | ) | (29.8 | )% | |||||||
|
Homes in backlog
|
778 | 1,095 | (317 | ) | (28.9 | )% | ||||||||||
|
Average sales price
|
$ | 259.4 | $ | 262.6 | $ | (3.2 | ) | (1.2 | )% | |||||||
|
|
||||||||||||||||
|
West Region
|
||||||||||||||||
|
|
||||||||||||||||
|
California
|
||||||||||||||||
|
Dollars
|
$ | 15,295 | $ | 34,322 | $ | (19,027 | ) | (55.4 | )% | |||||||
|
Homes in backlog
|
45 | 89 | (44 | ) | (49.4 | )% | ||||||||||
|
Average sales price
|
$ | 339.9 | $ | 385.6 | $ | (45.7 | ) | (11.9 | )% | |||||||
|
|
||||||||||||||||
|
Nevada
|
||||||||||||||||
|
Dollars
|
$ | 2,369 | $ | 2,671 | $ | (302 | ) | (11.3 | )% | |||||||
|
Homes in backlog
|
12 | 14 | (2 | ) | (14.3 | )% | ||||||||||
|
Average sales price
|
$ | 197.4 | $ | 190.8 | $ | 6.6 | 3.5 | % | ||||||||
|
|
||||||||||||||||
|
West Region Totals
|
||||||||||||||||
|
Dollars
|
$ | 17,664 | $ | 36,993 | $ | (19,329 | ) | (52.3 | )% | |||||||
|
Homes in backlog
|
57 | 103 | (46 | ) | (44.7 | )% | ||||||||||
|
Average sales price
|
$ | 309.9 | $ | 359.2 | $ | (49.3 | ) | (13.7 | )% | |||||||
|
|
||||||||||||||||
|
Central Region
|
||||||||||||||||
|
|
||||||||||||||||
|
Arizona
|
||||||||||||||||
|
Dollars
|
$ | 31,980 | $ | 32,110 | $ | (130 | ) | (0.4 | )% | |||||||
|
Homes in backlog
|
125 | 147 | (22 | ) | (15.0 | )% | ||||||||||
|
Average sales price
|
$ | 255.8 | $ | 218.4 | $ | 37.4 | 17.1 | % | ||||||||
|
|
||||||||||||||||
|
Texas
|
||||||||||||||||
|
Dollars
|
$ | 111,607 | $ | 181,564 | $ | (69,957 | ) | (38.5 | )% | |||||||
|
Homes in backlog
|
463 | 715 | (252 | ) | (35.2 | )% | ||||||||||
|
Average sales price
|
$ | 241.1 | $ | 253.9 | $ | (12.8 | ) | (5.0 | )% | |||||||
|
|
||||||||||||||||
|
Colorado
|
||||||||||||||||
|
Dollars
|
$ | 16,964 | $ | 11,456 | $ | 5,508 | 48.1 | % | ||||||||
|
Homes in backlog
|
52 | 39 | 13 | 33.3 | % | |||||||||||
|
Average sales price
|
$ | 326.2 | $ | 293.7 | $ | 32.5 | 11.1 | % | ||||||||
|
|
||||||||||||||||
|
Central Region Totals
|
||||||||||||||||
|
Dollars
|
$ | 160,551 | $ | 225,130 | $ | (64,579 | ) | (28.7 | )% | |||||||
|
Homes in backlog
|
640 | 901 | (261 | ) | (29.0 | )% | ||||||||||
|
Average sales price
|
$ | 250.9 | $ | 249.9 | $ | 1.0 | 0.4 | % | ||||||||
|
|
||||||||||||||||
|
East Region
|
||||||||||||||||
|
|
||||||||||||||||
|
Florida
|
||||||||||||||||
|
Dollars
|
$ | 23,601 | $ | 25,412 | $ | (1,811 | ) | (7.1 | )% | |||||||
|
Homes in backlog
|
81 | 91 | (10 | ) | (11.0 | )% | ||||||||||
|
Average sales price
|
$ | 291.4 | $ | 279.3 | $ | 12.1 | 4.3 | % | ||||||||
| (1) | Our backlog represents net sales that have not closed. |
35
Table of Contents
| Years Ended December 31, | Year Over Year | |||||||||||||||
| 2009 | 2008 | Chg $ | Chg % | |||||||||||||
|
Order Backlog (1)
|
||||||||||||||||
|
Total
|
||||||||||||||||
|
Dollars
|
$ | 287,535 | $ | 338,031 | $ | (50,496 | ) | (14.9 | )% | |||||||
|
Homes in backlog
|
1,095 | 1,281 | (186 | ) | (14.5 | )% | ||||||||||
|
Average sales price
|
$ | 262.6 | $ | 263.9 | $ | (1.3 | ) | (0.5 | )% | |||||||
|
|
||||||||||||||||
|
West Region
|
||||||||||||||||
|
|
||||||||||||||||
|
California
|
||||||||||||||||
|
Dollars
|
$ | 34,322 | $ | 33,910 | $ | 412 | 1.2 | % | ||||||||
|
Homes in backlog
|
89 | 87 | 2 | 2.3 | % | |||||||||||
|
Average sales price
|
$ | 385.6 | $ | 389.8 | $ | (4.2 | ) | (1.1 | )% | |||||||
|
|
||||||||||||||||
|
Nevada
|
||||||||||||||||
|
Dollars
|
$ | 2,671 | $ | 6,453 | $ | (3,782 | ) | (58.6 | )% | |||||||
|
Homes in backlog
|
14 | 25 | (11 | ) | (44.0 | )% | ||||||||||
|
Average sales price
|
$ | 190.8 | $ | 258.1 | $ | (67.3 | ) | (26.1 | )% | |||||||
|
|
||||||||||||||||
|
West Region Totals
|
||||||||||||||||
|
Dollars
|
$ | 36,993 | $ | 40,363 | $ | (3,370 | ) | (8.3 | )% | |||||||
|
Homes in backlog
|
103 | 112 | (9 | ) | (8.0 | )% | ||||||||||
|
Average sales price
|
$ | 359.2 | $ | 360.4 | $ | (1.2 | ) | (0.3 | )% | |||||||
|
|
||||||||||||||||
|
Central Region
|
||||||||||||||||
|
|
||||||||||||||||
|
Arizona
|
||||||||||||||||
|
Dollars
|
$ | 32,110 | $ | 42,211 | $ | (10,101 | ) | (23.9 | )% | |||||||
|
Homes in backlog
|
147 | 190 | (43 | ) | (22.6 | )% | ||||||||||
|
Average sales price
|
$ | 218.4 | $ | 222.2 | $ | (3.8 | ) | (1.7 | )% | |||||||
|
|
||||||||||||||||
|
Texas
|
||||||||||||||||
|
Dollars
|
$ | 181,564 | $ | 230,155 | $ | (48,591 | ) | (21.1 | )% | |||||||
|
Homes in backlog
|
715 | 887 | (172 | ) | (19.4 | )% | ||||||||||
|
Average sales price
|
$ | 253.9 | $ | 259.5 | $ | (5.6 | ) | (2.2 | )% | |||||||
|
|
||||||||||||||||
|
Colorado
|
||||||||||||||||
|
Dollars
|
$ | 11,456 | $ | 13,265 | $ | (1,809 | ) | (13.6 | )% | |||||||
|
Homes in backlog
|
39 | 44 | (5 | ) | (11.4 | )% | ||||||||||
|
Average sales price
|
$ | 293.7 | $ | 301.5 | $ | (7.8 | ) | (2.6 | )% | |||||||
|
|
||||||||||||||||
|
Central Region Totals
|
||||||||||||||||
|
Dollars
|
$ | 225,130 | $ | 285,631 | $ | (60,501 | ) | (21.2 | )% | |||||||
|
Homes in backlog
|
901 | 1,121 | (220 | ) | (19.6 | )% | ||||||||||
|
Average sales price
|
$ | 249.9 | $ | 254.8 | $ | (4.9 | ) | (1.9 | )% | |||||||
|
|
||||||||||||||||
|
East Region
|
||||||||||||||||
|
|
||||||||||||||||
|
Florida
|
||||||||||||||||
|
Dollars
|
$ | 25,412 | $ | 12,037 | $ | 13,375 | 111.1 | % | ||||||||
|
Homes in backlog
|
91 | 48 | 43 | 89.6 | % | |||||||||||
|
Average sales price
|
$ | 279.3 | $ | 250.8 | $ | 28.5 | 11.4 | % | ||||||||
| (1) | Our backlog represents net sales that have not closed. |
36
Table of Contents
Fiscal 2010 Compared to Fiscal 2009
Companywide
. Home closings revenue for the year ended December 31, 2010 remained relatively
flat at $940.4 million, a 2.3% decrease when compared to the prior year, primarily due to a
339-unit reduction in units closed, mostly offset by a $15,800 increase in average closing price.
Lower sales volume of 3,383 units in 2010 as compared to 3,853 in 2009, reflects the weakened
demand caused by the expiration of the federal homebuyer tax credit and continuing economic
instability. Absorptions in 2010 were partially aided by our lower cancellation rate of 20.9% as
compared to 24.3% in 2009. Closings exceeded sales in the latter part of the year, resulting in a
317 unit decrease in our backlog in 2010, down to 778 homes as compared to 1,095 homes in 2009.
Our active community count dipped slightly from prior year, as did our average sales per community
at 22.3 during 2010, as compared to 23.3 during 2009.
West
In 2010, home closings grew to 498 units with a value of $163.2 million, increases of
$20.0 million and 20 units, or 13.9% and 4.2%, respectively, over 2009. The Nevada market
experienced continued weakness with a 40 sales unit decrease, more than offsetting our 23-unit gain
in California. The California improvements were aided by a doubling of our active community count
in 2010, up to 14 as of year-end. The Region had success early in the year, as sales orders and
closings increased due in part to the extension of the homebuyer tax credit. In the latter part of
the year, the expiration of the federal homebuyer tax credit and uncertain economy negatively
impacted operations, resulting in sales of 452 units, a 3.6% decline from 2009. The higher closing
volume and decrease in sales directly impacted ending backlog of 57 units, down from 103 the prior
year.
Central
The Central Region’s 2010 closings of 2,890 deliveries totaling $692.7 million in
revenues are 13.2% and 9.7%, respectively, lower than those reported in 2009. Largely impacting
the Region’s results is the slowing of our Texas markets, as indicated by the 377 unit or 15.7%
decrease in home closings from the same period a year ago, and due primarily to its 16.3% decrease
in active communities. Offsetting some of the closing declines in Texas were increased closings
in Colorado, while Arizona’s results remained mostly flat as unit decreases were primarily offset
by closing price increases. The decrease in active communities in Texas is a result of scheduled
closing of our older communities and redeployment of capital to select markets that present better
opportunities to generate higher margins. This strategy has resulted in the rebalancing of assets
from Texas into other markets, primarily Arizona, California and Colorado. The increased pricing
in Arizona is due to the in-fill communities that have been acquired and opened over the last 18
months.
The Region’s sales declined 482 units in 2010, resulting in a 29.0% or 261 unit decrease in
ending backlog at December 31, 2010 as compared to prior year. Arizona operations had a 15.0%
decrease in ending backlog to 125 units. However, the new communities that opened in the latter
part of 2009 and in 2010 are generating higher average sales prices, nearly offsetting the unit
decline and resulting in a relatively flat backlog of
$32.0 million, down only $130,000 but 22 units from
2009. Colorado continued to be the only state in the Region that did not experience any sales or
backlog deterioration from 2009 to 2010. This is primarily due to an increase in active community
count of 50.0%, which contributed $11.9 million of additional sales volume and $5.5 million of
additional backlog in 2010 versus 2009. Texas sales reflected the same trends as its revenue, with
$100.5 million and 457 unit declines from the prior year.
East
We generated 312 closings with $84.5 million of home revenue in 2010, a 35.7% and 61.4%
increase from the same period a year ago. Our East Region experienced similar sales improvements
generating $16.9 million of additional sales volume, due to both a 10.6% increase in unit sales as
well as a $33,000 increase in average sales price in 2010 vs. 2009. We ended 2010 with 81 units in
backlog with a value of $23.6 million, 11.0% and 7.1% decreases from 2009, and an increased average
sales price of $12,100 as closings outpaced sales in the final half of the year. We believe that
our community locations have helped the overall performance of this Region, as the Region’s lot
supply is primarily comprised of well-located lots purchased in the last two years.
Fiscal 2009 Compared to Fiscal 2008
Companywide
. Home closings for the year ended December 31, 2009 decreased $542.3 million or
36.0% when compared to the prior year, primarily due to the 1,588 reduction in units closed with a
$29,100 lower average closing price. Lower sales volume of 3,853 units in 2009 as compared to
4,620 in 2008, reflected the reduced demand caused by the industry downturn and the economic
recession. Absorptions in 2009 were partially aided by our lower cancellation rate of 24.3% as
compared to 35.3% in 2008. Closings exceeded sales in the latter part of the year due to the
initial November 2009 homebuyer tax credit deadline and resulted in a decrease of 186 units in our
backlog in 2009, down to 1,095 homes as compared to 1,281 homes in 2008. In addition, the
decreases in our actively-selling communities from 178 at December 31, 2008 to 153 at December 31,
2009 also impacted our sales, closings and backlog levels during 2009. However, although we had
fewer active communities, we did maintain our average sales per active community at 23.3 during
2009, in line with 23.2 in 2008.
37
Table of Contents
Our increased selling efforts and retooled product offerings to attract the first-time and
first-time move-up buyer were offset by continuing lower demand as a result of the homebuilding
industry downturn. The economic recession further amplified the pressure
on sales prices and the lack of potential homebuyers’ interest in purchasing a new home during
2009’s uncertain times. Additionally, the influx of foreclosures, increases in unemployment rates
and the tighter lending standards for obtaining mortgage financing — both for our homebuyers as
well as for the buyers of their existing homes — also dampened demand.
West
. In 2009, home closings decreased to 478 units with a value of $143.2 million, a 53.4% or
$164.3 million decrease in home closing revenue as compared to 2008, driven by continued weakness
in California and Nevada. The Region’s 45.8% decrease in active communities was the primary
contributor to the 350 unit decrease in 2009 closings as compared to 2008. The Region’s ending
backlog of $37.0 million only decreased 8.3% when compared to the prior year’s $40.4 million,
reflecting our late-year successes with our newly-opened communities and revised product offerings
in California.
Central
. The Central Region’s closings of 3,331 deliveries generating $767.2
million of revenues in 2009 were 25.1% and 30.6% lower than those reported in 2008, respectively. Although
Texas remained our strongest market during 2009, it had also begun to experience slowing as
indicated by its cancellation rate of 29.4% in 2009, our highest rate experienced in all the states
in which we operate. Arizona continued to struggle with an oversupply of existing and foreclosure
home inventory contributing to the Region’s 541 unit decline in home orders in 2009. Successful
marketing campaigns and new replacement subdivisions coming on line in the latter part of 2009 kept
the Arizona backlog reduction to only a 43 unit decline as of December 31, 2009, with average sales
prices in the Region of $249,900 in 2009, consistent with $254,800 in 2008.
East.
We generated 230 closings with $52.3 million of corresponding home revenue in 2009. The
34.8% decline in deliveries from 2008 is attributed to the slowing market in the early part of
2009. In mid-2009, we acquired several bargain-priced parcels in prime locations in Orlando and
have had a high level of success in our new communities. We sold 273 homes in this Region, a 6.6%
increase over prior years with a $17,300 increase in average sales price. The increased demand led
to higher ending backlog with 91 units for a sales value of $25.4 million as of December 31, 2009,
as compared to 48 units with a sales value of $12.0 million as of December 31, 2008. Our decreases
in cancellation rates from 35.8% for 2008 to less than half that rate for 2009, coupled with a
steady active community count, demonstrated some of the positive trends that we experienced in
select markets.
Other Operating Information (dollars in thousands)
| Years ended December 31, | ||||||||||||||||||||||||
| 2010 | 2009 | 2008 | ||||||||||||||||||||||
| Dollars | Percent | Dollars | Percent | Dollars | Percent | |||||||||||||||||||
|
Home Closing
Gross Profit/(Loss)
Total (1)
|
$ | 167,456 | 17.8 | % | $ | 18,693 | 1.9 | % | $ | 5,280 | 0.4 | % | ||||||||||||
|
|
||||||||||||||||||||||||
|
Add back impairments
|
6,434 | 111,490 | 194,955 | |||||||||||||||||||||
|
|
||||||||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Adjusted Gross Margin
|
173,890 | 18.5 | % | 130,183 | 13.5 | % | 200,235 | 13.3 | % | |||||||||||||||
|
|
||||||||||||||||||||||||
|
|
||||||||||||||||||||||||
|
West
|
$ | 29,062 | 17.8 | % | $ | (7,151 | ) | (5.0 | )% | $ | (66,217 | ) | (21.5 | )% | ||||||||||
|
|
||||||||||||||||||||||||
|
Add back impairments
|
274 | 25,497 | 92,566 | |||||||||||||||||||||
|
|
||||||||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Adjusted Gross Margin
|
29,336 | 18.0 | % | 18,346 | 12.8 | % | 26,349 | 8.6 | % | |||||||||||||||
|
|
||||||||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Central
|
$ | 119,061 | 17.2 | % | $ | 30,876 | 4.0 | % | $ | 81,440 | 7.4 | % | ||||||||||||
|
|
||||||||||||||||||||||||
|
Add back impairments
|
5,839 | 77,389 | 81,999 | |||||||||||||||||||||
|
|
||||||||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Adjusted Gross Margin
|
124,900 | 18.0 | % | 108,265 | 14.1 | % | 163,439 | 14.8 | % | |||||||||||||||
|
|
||||||||||||||||||||||||
|
|
||||||||||||||||||||||||
|
East
|
$ | 19,333 | 22.9 | % | $ | (5,032 | ) | (9.6 | )% | $ | (9,943 | ) | (10.8 | )% | ||||||||||
|
|
||||||||||||||||||||||||
|
Add back impairments
|
321 | 8,604 | 20,390 | |||||||||||||||||||||
|
|
||||||||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Adjusted Gross Margin
|
$ | 19,654 | 23.3 | % | 3,572 | 6.8 | % | 10,447 | 11.4 | % | ||||||||||||||
|
|
||||||||||||||||||||||||
| (1) | Home closing gross profit represents home closing revenue less cost of home closings, including impairments. Cost of home closings include land and lot development costs, direct home construction costs, an allocation of common community costs (such as model complex costs and architectural, legal and zoning costs), interest, sales tax, impact fees, warranty, construction overhead and closing costs. |
38
Table of Contents
Fiscal 2010 Compared to Fiscal 2009
Companywide.
Home closing gross margin improved to 17.8% for the year ended December 31, 2010
as compared to 1.9% for the year ended December 31, 2009. Gross margins excluding impairments were
18.5% and 13.5% for 2010 and 2009, respectively. Our new communities with well-priced lots located
in good submarkets contributed to the gross margin gains in 2010. Our margins also benefited from
the continued cost-cutting measures and building efficiencies we have achieved over the last two
years. Our impairment charges reflect the write-down to fair value of certain real-estate and
related assets. We recorded only $6.4 million of impairments in 2010, a $105.1 million decrease
from 2009. Our impairments in 2010 reflect the continuation of soft market conditions in some of
our geographies, particularly in our legacy communities in Texas as we push to close them out.
We provide gross margins excluding impairments — a non-GAAP term — as we use it to evaluate
our performance and believe it is a widely-accepted financial measure by users of our financial
statements in analyzing our operating results and provides comparability to similar calculations by
our peers in the homebuilding industry.
West
.
Our West Region improved its home closing gross margin to 17.8% for 2010 from a
negative margin of (5.0)% in 2009. These margins included impairments of $0.3 million in 2010
versus $25.5 million in the prior year. Excluding these impairments, the gross margins for 2010
and 2009 were 18.0% and 12.8%, respectively. The improvement in our pre-impairment gross margins
is mostly attributable to our desirable locations in our California markets that achieved more
normalized margins.
Central
.
The Central Region’s 17.2% home closing gross profit increased 1,320 basis points as
compared to 4.0% in 2009, primarily due to fewer community impairments recorded in 2010 as compared
to the same period a year ago and cost savings in materials and construction costs. During 2010,
we were successful in earning near-normal margins in many of our new communities in Arizona and
Colorado as the lots were well priced and were located in more desirable submarkets. The Central
Region’s home closing gross margins include $5.8 million of real estate-related impairments for
2010 compared to $77.4 million for 2009. Excluding these impairments, the gross margin in this
Region increased to 18.0% in 2010 versus 14.1% in 2009.
East
.
Our East region experienced a significant increase in gross margins earning 22.9% for
2010 versus a negative margin of (9.6)% for 2009. The increase in home closing margins is
primarily due to reduced impairments recorded, $0.3 million and $8.6 million during 2010 and 2009,
respectively. Gross margins also increased due to the closings generated by our new communities,
which tend to earn higher margins and higher average closing prices of $43,100. Excluding these
impairments, gross margins would have been 23.3% for the Region for 2010 and 6.8% for 2009
benefitting from our new communities as previously discussed.
Fiscal 2009 Compared to Fiscal 2008
Companywide.
Home closing gross margin improved to 1.9% for the year ended December 31, 2009
as compared to 0.4% for the year ended December 31, 2008. Margins in 2009 benefited from a lower
basis for our inventory resulting from prior period impairments. Our impairment charges reflect
the write-down to fair value of certain real-estate and related assets. The prolonged downturn in
the general economy and homebuilding industry in particular, led to declines in the values of these
assets and the abandonment and corresponding write-off of certain of our investments. Excluding
impairments, gross margins were 13.5% and 13.3% for 2009 and 2008, respectively. The relatively
flat gross margins excluding impairments are primarily the result of declines in average sales
prices of home deliveries in 2009, partially offset by cost savings from re-negotiated construction
contracts and reductions in our asset basis caused by impairments taken in prior periods for homes
closed in the current period.
West
.
Our West Region improved its home closing gross loss to a negative margin of (5.0)% for
2009 from a negative margin of (21.5)% in 2008. These margins included impairments of $25.5
million in 2009 versus $92.6 million in the prior year. Excluding these impairments, the gross
margins for 2009 and 2008 were 12.8% and 8.6%, respectively. The improvement in our pre-impairment
gross margins was due to the lower basis in our homes from prior impairments, as well as the
benefits realized from the cost reductions noted above, as well as the lower lot basis for new
communities.
Central
.
The Central Region’s 4.0% home closing gross profit decreased 340 basis points as
compared to 7.4% in 2008, primarily due to the shift of activity to our lower margin Texas markets
from Arizona, which historically had enjoyed higher margins. Despite these decreases, margins in
this Region remained positive due to the relatively stronger market and lower levels of impairments
recorded in Texas. The Central Region’s home closing gross margins included $77.4 million of real
estate-related impairments for 2009 compared to $82.0 million for 2008. Excluding these
impairments, the gross margin in this Region remained somewhat consistent year over year with 14.1%
margins in 2009 versus 14.8% in the prior year, with the slight decrease mostly due to mix of
homes.
East
.
This Region, like the West, experienced a home closing gross loss, with negative gross
margins of (9.6)% for 2009 as compared to (10.8)% for the prior year. The home closing gross
losses were primarily due to $8.6 million and $20.4 million of real estate-related impairments
during 2009 and 2008. Gross margins were also impacted by price concessions and product mix, as
evidenced by the reduced average closing prices year over year. Excluding these impairments, gross
margins would have been 6.8% for the Region for 2009 and 11.4% for 2008.
39
Table of Contents
| Years Ended December 31, | ||||||||||||
| ($ in thousands) | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
|
Commissions and Other Sales Costs
|
||||||||||||
|
Dollars
|
$ | 76,798 | $ | 78,683 | $ | 136,860 | ||||||
|
Percent of home closing revenue
|
8.2 | % | 8.2 | % | 9.1 | % | ||||||
|
|
||||||||||||
|
General and Administrative Expenses
|
||||||||||||
|
Dollars
|
$ | 59,784 | $ | 59,461 | $ | 64,793 | ||||||
|
Percent of total closing revenue
|
6.3 | % | 6.1 | % | 4.3 | % | ||||||
|
|
||||||||||||
|
Goodwill and Intangible Asset Impairments
|
||||||||||||
|
Dollars
|
$ | 0 | $ | 0 | $ | 1,133 | ||||||
|
|
||||||||||||
|
Interest Expense
|
||||||||||||
|
Dollars
|
$ | 33,722 | $ | 36,531 | $ | 23,653 | ||||||
|
|
||||||||||||
|
Benefit/(provision) for Income Taxes
|
||||||||||||
|
Dollars
|
$ | 4,666 | $ | 88,343 | $ | (15,969 | ) | |||||
|
Percent of earnings/(loss) before
benefit/(provision) for income taxes
|
188 | % | 57.1 | % | (5.8 | )% | ||||||
Fiscal 2010 Compared to Fiscal 2009
Commissions and Other Sales Costs.
Commissions and other sales costs are comprised of
internal and external commissions and related sales and marketing expenses such as advertising and
sales office costs. These costs decreased by $1.9 million for 2010 versus 2009. The decrease
primarily relates to reduced commission expense attributable to lower closing units and revenue
dollars as well as reduced sales office and model maintenance costs. Over the past several
quarters, we have migrated to a more efficient field marketing structure by reducing the number of
models and corresponding operating costs in our model and sales complexes. In 2010, these savings
were partially offset by increased grand opening and marketing costs associated with our extreme
“green” communities.
General and Administrative Expenses.
General and administrative expenses represent corporate
and divisional overhead expenses such as salaries and bonuses, occupancy, insurance and travel
expenses. General and administrative expenses increased slightly to $59.8 million for 2010 versus
$59.5 million in 2009. Meritage was one of the first homebuilders to aggressively cut overhead
and associated general and administrative expenses as the market began its downward cycle in late
2006 and therefore, is continuing to operate under this efficient, lean structure, resulting in
relatively flat year-over-year dollar comparisons. We expect to be able to capitalize on our
centralized operations as the economy improves with limited general and administrative expense
increases. General and administrative expenses were 6.3% and 6.1% of total revenue for 2010 and
2009, respectively, primarily due to the decrease in revenues in 2010.
Interest Expense.
Interest expense is comprised of interest incurred, but not capitalized, on
our senior and senior subordinated notes, credit facility and other borrowings. During 2010 and
2009, our non-capitalizable interest expense was $33.7 million and $36.5 million, respectively.
Due to our concentrated efforts to reduce inventory through faster cycle times and to sell
under-performing assets, the balance of our inventory that is eligible for interest capitalization
dropped below the corresponding volume of our debt, resulting in significant amounts of interest
expense being charged directly to our statement of operations. Additionally, our new senior notes
bear a slightly higher interest rate than the notes that were retired. Interest expense in 2009
also includes $3.1 million related to the amendment of and subsequent termination of our Credit
Facility.
Income
Taxes
.
Our overall effective tax rates were a benefit
of 188% for 2010, compared to 57.1% for 2009. The 2009 tax rate reflects the tax benefit we received from federal
tax legislation that enabled us to carry back our 2009 NOL five years.
Fiscal 2009 Compared to Fiscal 2008
Commissions and Other Sales Costs.
As a percentage of home closing revenue, these costs
decreased to 8.2% for 2009 from 9.1% for 2008. The decrease primarily related to reduced
advertising spending as we focused on targeted national and regional campaigns where we were able
to achieve economies of scale while continuing to derive benefit from these efforts at the local
level. We also reduced the size of our model complexes and outfitting homes with fewer options and
upgrades to highlight a payment-
oriented sales approach, demonstrating what a homebuyer can truly afford rather than an
options-loaded model complex, which reduced our model home costs.
40
Table of Contents
General and Administrative Expenses.
General and administrative expenses decreased $5.3
million for 2009 versus 2008. Although we continued to execute on our cost-cutting and
streamlining strategy, particularly in headcount and salary expense reductions, the significant
revenue decline resulted in our general and administrative expenses increasing as a percentage of
home closing revenue. General and administrative expenses were 6.1% and 4.3% of total revenue for
2009 and 2008, respectively.
Interest Expense.
During 2009 and 2008, our non-capitalizable interest expense was $36.5
million and $23.7 million, respectively. Due to our concentrated efforts to reduce inventory
through faster cycle times and to sell under-performing assets, the balance of our inventory that
was eligible for interest capitalization dropped below the corresponding volume of our debt,
resulting in a charge of a significantly larger portion of our interest incurred being expensed
directly to our statements of operations. Interest expense in 2009 also includes $3.1 million
related to the amendment of and subsequent termination of our Credit Facility. Similar amendment
charges in 2008 were $1.4 million.
Income
Taxes
.
Our overall effective tax rates were 57.1% for
2009, compared to (5.8)% for
2008. The change in our tax rate during 2009 was primarily attributable to the tax benefit from
federal tax legislation that enabled us to carry back our 2009 NOL five years. The 2008 tax rate
was lower due to the recording of a full valuation allowance against deferred tax assets in that
year.
Liquidity and Capital Resources
Overview
Our principal uses of capital for 2010 were operating expenses, home construction, the payment
of routine liabilities and the acquisition of new lot positions. We used funds generated by
operations to meet our short-term working capital requirements. Cash flows for each of our
communities depend on the status of the development cycle, and can differ substantially from
reported earnings. Early stages of development or expansion require significant cash outlays for
land acquisitions and construction of model homes for finished lot acquisitions. For raw land
purchases, we also need to fund plat and other approvals, roads, utilities, general landscaping and
other amenities. Because these costs are a component of our inventory and not recognized as an
expense in our statement of operations until a home closes, we incur significant cash outlays prior
to recognition of earnings. In the later stages of a community, cash inflows may significantly
exceed earnings reported for financial statement purposes, as the cash outflow associated with home
and land construction was previously incurred. From a liquidity standpoint, we experienced the
positive effects of the homebuilding cash flow cycle during 2008 and 2009 as our cash balances
increased as our community count declined. As these older communities are closing out and our
inventory volumes decrease, we have begun to acquire new lots. Accordingly, on a go-forward basis,
we expect that cash outlays for land purchases may exceed our cash generated by operations as
demand for new homes stabilizes and improves and we actively grow our community count. During
2010, we purchased about 5,800 lots for $236.4 million, started homes on about 3,600 lots and
closed 3,700 homes.
We exercise strict controls and believe we have a prudent strategy for Company-wide cash
management, particularly as related to cash outlays for land and inventory acquisition development.
We generated $32.6 million of positive operating cash flows after our lot purchases during 2010.
At December 31, 2010, we had a cash and cash equivalents
restricted cash and investments and securities balance of $412.6 million at
December 31, 2010. As we have no bond maturities until 2015, we intend to generate cash from the
sale of our inventory, but we plan to redeploy that cash to acquire well-positioned lots that
represent opportunities to generate more normal margins and increase our active communities.
In addition, we continue to evaluate our capital needs in light of ongoing developments in
homebuilding markets and our existing capital structure. We believe that we currently have strong
liquidity. Nevertheless, we may seek additional capital to strengthen our liquidity position,
enable us to opportunistically acquire additional land inventory in anticipation of improving
market conditions, and/or strengthen our long-term capital structure. Such additional capital may
be in the form of equity or debt financing and may be from a variety of sources. There can be no
assurances that we would be able to obtain such additional capital on terms acceptable to us, if at
all, and such additional equity or debt financing could dilute the interests of our existing
stockholders and increase our interest costs.
41
Table of Contents
We believe that our leverage ratios provide useful information to the users of our financial
statements regarding our financial position and cash and debt management. Debt-to-capital and net
debt-to-capital are calculated as follows (dollars in thousands):
| At | At | |||||||
| December 31, 2010 | December 31, 2009 | |||||||
|
|
||||||||
|
Notes payable and other borrowings
|
$ | 605,780 | $ | 605,009 | ||||
|
Stockholders’ equity
|
499,995 | 485,425 | ||||||
|
|
||||||||
|
Total capital
|
$ | 1,105,775 | $ | 1,090,434 | ||||
|
Debt-to-capital (1)
|
54.8 | % | 55.5 | % | ||||
|
|
||||||||
|
Notes payable and other borrowings
|
$ | 605,780 | $ | 605,009 | ||||
|
Less: cash, cash equivalents, restricted cash and investments and securities
|
(412,642 | ) | (391,378 | ) | ||||
|
|
||||||||
|
Net debt
|
193,138 | 213,631 | ||||||
|
Stockholders’ equity
|
499,995 | 485,425 | ||||||
|
|
||||||||
|
Total net capital
|
$ | 693,133 | $ | 699,056 | ||||
|
Net debt-to-capital (2)
|
27.9 | % | 30.6 | % | ||||
| (1) | Debt-to-capital is computed as notes payable and other borrowing divided by the aggregate of total notes payable and stockholders’ equity. | |
| (2) | Net debt-to-capital is computed as net debt divided by the aggregate of net debt and stockholders’ equity. |
Senior and Senior Subordinated Notes
6.25% Senior Notes
In March 2005, we issued $350.0 million in aggregate principal amount of 6.25% senior notes
due 2015. In April 2010, we repurchased $65 million of our 6.25% senior notes, resulting in $285
million in aggregate principal remaining on the notes. The indenture which governs the 6.25% senior
notes requires us to comply with a number of covenants that restrict certain transactions,
including:
| • | limiting the amount of additional indebtedness we can incur unless after giving effect to such additional indebtedness, either (i) our fixed charge coverage ratio would be at least 2.0 to 1.0 or (ii) our ratio of unconsolidated debt to consolidated tangible net worth would be less than 3.0 to 1.0, provided, however, this limitation does not generally apply to most types of inter-company indebtedness, purchase money indebtedness, other indebtedness up to $25 million and non-recourse indebtedness; |
| • | generally limiting the amount of dividends, redemptions of equity interests and certain investments we can make to $25 million plus (i) 50% of our net income since June 1, 2001 plus (ii) 100% of the net cash proceeds from the sale of qualified equity interests, plus other items and subject to other exceptions; |
| • | limiting our ability to incur or create certain liens; |
| • | placing limitations on the sale of assets, mergers and consolidations and transactions with affiliates; and |
| • | limiting the amount of investments we can make in joint ventures in a permitted business with unaffiliated third parties to 30% of our consolidated tangible net worth (as defined in the indenture). |
7.731% Senior Subordinated Notes
In February 2007, we completed a $150.0 million private placement of 7.731% senior
subordinated notes due 2017. These notes were issued at par, and their associated proceeds were
used to pay down our Credit Facility. The covenants related to these senior subordinated notes are
substantially similar to the covenants of our 6.25% senior notes discussed in this footnote.
7.15% Senior Notes
During the second quarter of 2010, we completed an offering of $200 million aggregate
principal amount of 7.15% senior notes due 2020. The notes were issued at 97.567% of par value
to yield 7.50%. The indenture for our 7.15% senior notes contains covenants including, among
others, limitations on the amount of secured debt we may incur, and limitations on sale and
leaseback transactions of non-model home assets and mergers. The covenants contained in the
7.15% senior notes are generally no more restrictive, and in many cases less restrictive, than
the covenants contained in the indentures for the 6.25% senior notes and 7.731% senior
subordinated notes.
42
Table of Contents
7.0% Senior Notes
In April 2004, we issued $130.0 million in principal amount of 7.0% senior notes due 2014. In
April 2010, we repurchased all of the $130.0 million of 7.0% senior notes.
Covenant
Compliance
We were in compliance with all Senior and Senior Subordinated Note covenants as of December
31, 2010. Failure to maintain both the Fixed Charge Coverage Ratio and the Leverage Ratio does not
result in a default under our senior and senior subordinated notes. Rather, it results in a
prohibition (subject to exceptions) from incurring additional indebtedness. As of December 31,
2010, we were in compliance with our Leverage Ratio and therefore, the prohibition against
incurring additional debt is not applicable. Our actual Fixed Charge Ratio and Ratio of
Consolidated Indebtedness to Consolidated Tangible Net Worth as of December 31, 2010 are reflected
in the table below:
| Covenant | ||||||||||||
| Financial Covenant | Requirement | Actual | ||||||||||
| ($ in millions) | ||||||||||||
|
Fixed Charge Coverage
|
> | 2.0 | 1.691 | |||||||||
|
Leverage Ratio
|
< | 3.0 | 1.275 | |||||||||
See Note 5 of the Consolidated Financial Statements included in this Annual Report on Form
10-K for all further information on our senior and senior subordinated notes.
Land under Control
We enter into various options and purchase contracts for land in the normal course of
business. Generally, our options to purchase lots remain effective so long as we purchase a
pre-established minimum number of lots each month or quarter, as determined by the respective
agreement. The pre-established number is typically structured to approximate our expected rate of
home construction starts, although as demand slows, in some instances starts may fall below the
pre-established minimum number of lot purchases. Over the past several years, the slower sales
rate caused us to take certain actions, including purchasing lots in advance of corresponding
sales, re-negotiating the takedown schedules, and discontinuing lot purchases and forfeiting the
related non-refundable option deposit. Additional information regarding our purchase agreements
and related deposits is presented in Note 3 in the accompanying consolidated financial statements
in this Annual Report on Form 10-K.
The total number of lots under control at December 31, 2010 was 15,224 as compared to 12,906
at December 31, 2009. In 2010 and 2009, respectively, 84.7% and 77.4% of our controlled lots were
owned. The increase in our lot position from prior year was due to an intentional effort to grow
our lot positions in strategic submarkets during 2010, as we entered into new land contracts for
approximately 6,800 lots for $239.2 million as compared to approximately 4,000 lots for $148.5
million in 2009. At December 31, 2010, our total option and purchase contracts had purchase prices
in the aggregate of approximately $111.8 million, on which we had made deposits of approximately
$10.4 million in cash.
Off-Balance Sheet Arrangements
Reference is made to Notes 1, 3, 4 and 14 in the accompanying Notes to consolidated financial
statements included in this Annual Report on Form 10-K. These Notes discuss our off-balance sheet
arrangements with respect to land acquisition contracts and option agreements, and land development
joint ventures, including the nature and amounts of financial obligations relating to these items.
In addition, these Notes discuss the nature and amounts of certain types of commitments that arise
in connection with the ordinary course of our land development and homebuilding operations,
including commitments of land development joint ventures for which we might be obligated.
43
Table of Contents
Contractual Obligations
The following is a summary of our contractual obligations at December 31, 2010, and the effect
such obligations are expected to have on our liquidity and cash flows in future periods (in
thousands):
| Payments Due by Period | ||||||||||||||||||||
| Less than | More Than | |||||||||||||||||||
| Total | 1 Year | 1-3 Years | 4-5 Years | 5 Years | ||||||||||||||||
|
Principal, senior and senior subordinated notes
|
$ | 610,875 | $ | 0 | $ | 0 | $ | 285,000 | $ | 325,875 | ||||||||||
|
Interest, senior and senior subordinated notes
|
266,321 | 41,844 | 83,688 | 68,903 | 71,886 | |||||||||||||||
|
Liabilities related to real estate not owned
|
866 | 866 | 0 | 0 | 0 | |||||||||||||||
|
Operating lease obligations
|
21,422 | 6,610 | 12,196 | 2,616 | 0 | |||||||||||||||
|
|
||||||||||||||||||||
|
|
||||||||||||||||||||
|
Total (1)
|
$ | 899,484 | $ | 49,320 | $ | 95,884 | $ | 356,519 | $ | 397,761 | ||||||||||
|
|
||||||||||||||||||||
| (1) | See Notes 3 and 14 to our consolidated financial statements included in this report for additional information regarding our contractual obligations. |
We do not engage in commodity trading or other similar activities. We had no derivative
financial instruments at December 31, 2010 or 2009.
Recent Accounting Standards
See Note 1 to our consolidated financial statements included in this report for discussion of
recently-issued accounting standards.
| Item 7A. | Quantitative and Qualitative Disclosures about Market Risk |
Our fixed rate debt is made up primarily of $285.0 million in principal of our 6.25% senior
notes, $125.9 million of our 7.731% senior subordinated notes and $200.0 million in principal of
our 7.15% senior notes. Except in limited circumstances, we do not have an obligation to prepay
our fixed-rate debt prior to maturity and, as a result, interest rate risk and changes in fair
value should not have a significant impact on our fixed rate borrowings until we would be required
to repay such debt.
The following table presents our long-term debt obligations, principal cash flows by maturity,
weighted average interest rates and estimated fair market value. Information regarding interest
rate sensitivity principal (notional) amount by expected maturity and average interest rates for
the year ended December 31, 2010 follows:
| Fair Value at | ||||||||||||||||||||||||||||||||
| December 31, 2010 For the Years Ended December 31, | December 31, | |||||||||||||||||||||||||||||||
| 2011 | 2012 | 2013 | 2014 | 2015 | Thereafter | Total | 2010 (a) | |||||||||||||||||||||||||
| (dollars in millions) | ||||||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
|
Fixed rate
|
$ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 285.0 | $ | 325.9 | $ | 610.9 | $ | 598.4 | ||||||||||||||||
|
Average interest rate
|
0 | 0 | 0 | 0 | 6.25 | 7.375 | 6.85 | n/a | ||||||||||||||||||||||||
| (a) | Fair value of our fixed rate debt at December 31, 2010, is derived from quoted market prices by independent dealers. |
Our operations are interest rate sensitive. As overall housing demand is adversely affected by
increases in interest rates, a significant increase in mortgage interest rates may negatively
affect the ability of homebuyers to secure adequate financing. Higher interest rates could
adversely affect our revenues, gross margins and net income and would also increase our variable
rate borrowing costs. We do not enter into, or intend to enter into, derivative financial
instruments for trading or speculative purposes.
| Item 8. | Financial Statements and Supplementary Data |
Our consolidated financial statements as of December 31, 2010 and 2009 and for each of the
years in the three-year period ended December 31, 2010, together with related notes and the report
of Deloitte & Touche LLP, independent registered public accounting firm, are on the following
pages.
44
Table of Contents
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Meritage Homes Corporation
Scottsdale, Arizona
Meritage Homes Corporation
Scottsdale, Arizona
We have audited the accompanying consolidated balance sheets of Meritage Homes Corporation and
subsidiaries (the “Company”) as of December 31, 2010 and 2009, and the related consolidated
statements of operations, stockholders’ equity, and cash flows for each of the three years in the
period ended December 31, 2010. These financial statements are the responsibility of the Company’s
management. Our responsibility is to express an opinion on these financial statements based on our
audits.
We conducted our audits in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, such consolidated financial statements present fairly, in all material
respects, the financial position of Meritage Homes Corporation and subsidiaries as of December 31,
2010 and 2009, and the results of their operations and their cash flows for each of the three years
in the period ended December 31, 2010, in conformity with accounting principles generally accepted
in the United States of America.
As discussed in Note 3 to the consolidated financial statements, as of January 1, 2010, the
Company adopted the amended consolidation guidance applicable to variable interest entities in
accordance with Accounting Standards Codification 810,
Consolidation
, which resulted in the
deconsolidation of certain variable interest entities.
We have also audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the Company’s internal control over financial reporting as of
December 31, 2010, based on the criteria established in
Internal Control—Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated
February 28, 2011 expressed an unqualified opinion on the Company’s internal control over financial
reporting.
/s/ DELOITTE & TOUCHE LLP
Phoenix, Arizona
February 28, 2011
February 28, 2011
45
Table of Contents
MERITAGE HOMES CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
CONSOLIDATED BALANCE SHEETS
| December 31, | ||||||||
| 2010 | 2009 | |||||||
| (In thousands, except share data) | ||||||||
|
Assets
|
||||||||
|
Cash and cash equivalents
|
$ | 103,953 | $ | 249,331 | ||||
|
Investments and securities
|
299,345 | 125,699 | ||||||
|
Restricted cash
|
9,344 | 16,348 | ||||||
|
Income tax receivable
|
0 | 92,509 | ||||||
|
Other receivables
|
20,835 | 22,934 | ||||||
|
Real estate
|
738,928 | 675,037 | ||||||
|
Real estate not owned
|
866 | 10,527 | ||||||
|
Deposits on real estate under option or contract
|
10,359 | 8,636 | ||||||
|
Investments in unconsolidated entities
|
10,987 | 11,882 | ||||||
|
Property and equipment, net
|
14,602 | 15,251 | ||||||
|
Intangibles, net
|
2,143 | 3,590 | ||||||
|
Prepaid expenses and other assets
|
13,576 | 10,923 | ||||||
|
|
||||||||
|
|
||||||||
|
Total assets
|
$ | 1,224,938 | $ | 1,242,667 | ||||
|
|
||||||||
|
|
||||||||
|
Liabilities
|
||||||||
|
Accounts payable
|
$ | 23,589 | $ | 30,296 | ||||
|
Accrued liabilities
|
87,811 | 103,236 | ||||||
|
Home sale deposits
|
6,897 | 9,501 | ||||||
|
Liabilities related to real estate not owned
|
866 | 9,200 | ||||||
|
Senior and senior subordinated notes
|
605,780 | 605,009 | ||||||
|
|
||||||||
|
|
||||||||
|
Total liabilities
|
724,943 | 757,242 | ||||||
|
|
||||||||
|
|
||||||||
|
Stockholders’ Equity
|
||||||||
|
Preferred stock, par value $0.01. Authorized 10,000,000 shares; none
issued and outstanding at December 31, 2010 and 2009
|
0 | 0 | ||||||
|
Common stock, par value $0.01. Authorized 125,000,000 shares; issued
40,030,136 and 39,710,958 shares at December 31, 2010 and 2009,
respectively
|
400 | 397 | ||||||
|
Additional paid-in capital
|
468,820 | 461,403 | ||||||
|
Retained earnings
|
219,548 | 212,398 | ||||||
|
Treasury stock at cost 7,891,250 shares at December 31, 2010 and 2009
|
(188,773 | ) | (188,773 | ) | ||||
|
|
||||||||
|
|
||||||||
|
Total stockholders’ equity
|
499,995 | 485,425 | ||||||
|
|
||||||||
|
|
||||||||
|
Total liabilities and stockholders’ equity
|
$ | 1,224,938 | $ | 1,242,667 | ||||
|
|
||||||||
See accompanying notes to consolidated financial statements
46
Table of Contents
MERITAGE HOMES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
CONSOLIDATED STATEMENTS OF OPERATIONS
| Years Ended December 31, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
| (In thousands, except per share data) | ||||||||||||
|
|
||||||||||||
|
Home closing revenue
|
$ | 940,406 | $ | 962,797 | $ | 1,505,117 | ||||||
|
Land closing revenue
|
1,250 | 7,516 | 17,951 | |||||||||
|
|
||||||||||||
|
Total closing revenue
|
941,656 | 970,313 | 1,523,068 | |||||||||
|
|
||||||||||||
|
|
||||||||||||
|
Cost of home closings
|
(766,516 | ) | (832,614 | ) | (1,304,882 | ) | ||||||
|
Cost of land closings
|
(993 | ) | (7,432 | ) | (17,662 | ) | ||||||
|
Home impairments
|
(6,434 | ) | (111,490 | ) | (194,955 | ) | ||||||
|
Land impairments
|
(17 | ) | (14,726 | ) | (42,484 | ) | ||||||
|
|
||||||||||||
|
Total cost of closings and impairments
|
(773,960 | ) | (966,262 | ) | (1,559,983 | ) | ||||||
|
|
||||||||||||
|
|
||||||||||||
|
Home closing gross profit
|
167,456 | 18,693 | 5,280 | |||||||||
|
Land closing gross profit/(loss)
|
240 | (14,642 | ) | (42,195 | ) | |||||||
|
|
||||||||||||
|
Total closing gross profit/(loss)
|
167,696 | 4,051 | (36,915 | ) | ||||||||
|
|
||||||||||||
|
Commissions and other sales costs
|
(76,798 | ) | (78,683 | ) | (136,860 | ) | ||||||
|
General and administrative expenses
|
(59,784 | ) | (59,461 | ) | (64,793 | ) | ||||||
|
Goodwill and intangible asset impairments
|
0 | 0 | (1,133 | ) | ||||||||
|
Earnings/(loss) from unconsolidated entities, net
|
5,243 | 4,013 | (17,038 | ) | ||||||||
|
Interest expense
|
(33,722 | ) | (36,531 | ) | (23,653 | ) | ||||||
|
(Loss)/gain on extinguishment of debt
|
(3,454 | ) | 9,390 | 0 | ||||||||
|
Other income, net
|
3,303 | 2,422 | 4,426 | |||||||||
|
|
||||||||||||
|
|
||||||||||||
|
Earnings/(loss) before income taxes
|
2,484 | (154,799 | ) | (275,966 | ) | |||||||
|
Benefit/(provision) for income taxes
|
4,666 | 88,343 | (15,969 | ) | ||||||||
|
|
||||||||||||
|
|
||||||||||||
|
Net income/(loss)
|
$ | 7,150 | $ | (66,456 | ) | $ | (291,935 | ) | ||||
|
|
||||||||||||
|
|
||||||||||||
|
Earnings/(loss) per share:
|
||||||||||||
|
Basic
|
$ | 0.22 | $ | (2.12 | ) | $ | (9.95 | ) | ||||
|
Diluted
|
$ | 0.22 | $ | (2.12 | ) | $ | (9.95 | ) | ||||
|
|
||||||||||||
|
Weighted average number of shares:
|
||||||||||||
|
Basic
|
32,060 | 31,350 | 29,330 | |||||||||
|
Diluted
|
32,322 | 31,350 | 29,330 | |||||||||
See accompanying notes to consolidated financial statements
47
Table of Contents
MERITAGE HOMES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
| Years Ended December 31, 2010, 2009 and 2008 | ||||||||||||||||||||||||
| (In thousands) | ||||||||||||||||||||||||
| Additional | ||||||||||||||||||||||||
| Number of | Common | Paid-In | Retained | Treasury | ||||||||||||||||||||
| Shares | Stock | Capital | Earnings | Stock | Total | |||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Balance at January 1, 2008
|
34,145 | $ | 341 | $ | 347,796 | $ | 570,789 | $ | (188,762 | ) | $ | 730,164 | ||||||||||||
|
|
||||||||||||||||||||||||
|
Net loss
|
0 | 0 | 0 | (291,935 | ) | 0 | (291,935 | ) | ||||||||||||||||
|
Income tax deficiency from
stock option exercises
|
0 | 0 | (209 | ) | 0 | 0 | (209 | ) | ||||||||||||||||
|
Exercise of stock options
|
146 | 2 | 917 | 0 | 0 | 919 | ||||||||||||||||||
|
Purchase of treasury shares
|
0 | 0 | 0 | 0 | (11 | ) | (11 | ) | ||||||||||||||||
|
Stock option expense
|
0 | 0 | 5,506 | 0 | 0 | 5,506 | ||||||||||||||||||
|
Issuance of common stock, net
|
4,298 | 43 | 82,729 | 0 | 0 | 82,772 | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Balance at December 31, 2008
|
38,589 | 386 | 436,739 | 278,854 | (188,773 | ) | 527,206 | |||||||||||||||||
|
|
||||||||||||||||||||||||
|
Net loss
|
0 | 0 | 0 | (66,456 | ) | 0 | (66,456 | ) | ||||||||||||||||
|
Tax valuation adjustment
related to stock option
exercises
|
0 | 0 | (602 | ) | 0 | 0 | (602 | ) | ||||||||||||||||
|
Exercise of stock options
|
339 | 3 | 4,750 | 0 | 0 | 4,753 | ||||||||||||||||||
|
Stock option expense
|
0 | 0 | 6,204 | 0 | 0 | 6,204 | ||||||||||||||||||
|
Issuance of common stock, net
|
783 | 8 | 14,312 | 0 | 0 | 14,320 | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Balance at December 31, 2009
|
39,711 | $ | 397 | $ | 461,403 | $ | 212,398 | $ | (188,773 | ) | $ | 485,425 | ||||||||||||
|
|
||||||||||||||||||||||||
|
Net income
|
0 | 0 | 0 | 7,150 | 0 | 7,150 | ||||||||||||||||||
|
Exercise of stock options
|
133 | 1 | 2,061 | 0 | 0 | 2,062 | ||||||||||||||||||
|
Stock option expense
|
0 | 0 | 5,358 | 0 | 0 | 5,358 | ||||||||||||||||||
|
Issuance of common stock, net
|
186 | 2 | (2 | ) | 0 | 0 | 0 | |||||||||||||||||
|
|
||||||||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Balance at December 31, 2010
|
40,030 | $ | 400 | $ | 468,820 | $ | 219,548 | $ | (188,773 | ) | $ | 499,995 | ||||||||||||
|
|
||||||||||||||||||||||||
See accompanying notes to consolidated financial statements
48
Table of Contents
MERITAGE HOMES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
CONSOLIDATED STATEMENTS OF CASH FLOWS
| Years Ended December 31, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
| (In thousands) | ||||||||||||
|
Cash flows from operating activities:
|
||||||||||||
|
Net income/(loss)
|
$ | 7,150 | $ | (66,456 | ) | $ | (291,935 | ) | ||||
|
Adjustments to reconcile net income/(loss) to net cash provided by
operating activities:
|
||||||||||||
|
Depreciation and amortization
|
7,974 | 8,843 | 15,669 | |||||||||
|
Real estate-related impairments
|
6,451 | 126,216 | 237,439 | |||||||||
|
Goodwill and tangible asset impairments
|
0 | 0 | 1,133 | |||||||||
|
Decrease in deferred taxes
|
0 | 0 | 20,494 | |||||||||
|
Deferred tax asset valuation allowance
|
0 | 0 | 118,563 | |||||||||
|
Stock-based compensation
|
5,358 | 6,204 | 5,506 | |||||||||
|
Loss/(gain) on early extinguishment of senior subordinated debt
|
3,454 | (9,390 | ) | 0 | ||||||||
|
Equity in (earnings)/losses of unconsolidated entities (includes
$295,000, $2.8 million and $26.0 million of impairments to joint
ventures in 2010, 2009 and 2008, respectively)
|
(5,243 | ) | (4,013 | ) | 17,038 | |||||||
|
Distributions of earnings from unconsolidated entities
|
7,263 | 8,286 | 10,049 | |||||||||
|
Other operating expenses
|
(37 | ) | 0 | 0 | ||||||||
|
Changes in assets and liabilities:
|
||||||||||||
|
(Increase)/decrease in real estate
|
(68,910 | ) | 98,453 | 195,759 | ||||||||
|
(Increase)/decrease in deposits on real estate under option or contract
|
(1,054 | ) | 10,175 | 15,645 | ||||||||
|
Decrease/(increase) in receivables and prepaid expenses and other
assets
|
94,474 | 28,954 | (16,296 | ) | ||||||||
|
(Decrease) in accounts payable and accrued liabilities
|
(21,725 | ) | (24,213 | ) | (118,237 | ) | ||||||
|
(Decrease)/increase in home sale deposits
|
(2,604 | ) | 1,015 | (10,998 | ) | |||||||
|
|
||||||||||||
|
Net cash provided by operating activities
|
32,551 | 184,074 | 199,829 | |||||||||
|
|
||||||||||||
|
|
||||||||||||
|
Cash flows from investing activities:
|
||||||||||||
|
Investments in unconsolidated entities
|
(1,034 | ) | (1,284 | ) | (16,666 | ) | ||||||
|
Distributions of capital from unconsolidated entities
|
232 | 1,370 | 2,323 | |||||||||
|
Purchases of property and equipment
|
(6,389 | ) | (3,609 | ) | (9,693 | ) | ||||||
|
Proceeds from sales of property and equipment
|
121 | 151 | 773 | |||||||||
|
Payments to purchase investments and securities
|
(424,639 | ) | (125,699 | ) | 0 | |||||||
|
Proceeds from sales and maturities of investment securities
|
250,190 | 0 | 0 | |||||||||
|
Decrease/(increase) in restricted cash
|
7,004 | (16,348 | ) | 0 | ||||||||
|
|
||||||||||||
|
Net cash used in investing activities
|
(174,515 | ) | (145,419 | ) | (23,263 | ) | ||||||
|
|
||||||||||||
|
|
||||||||||||
|
Cash flows from financing activities:
|
||||||||||||
|
Net repayments under Credit Facility
|
0 | 0 | (82,000 | ) | ||||||||
|
Proceeds from issuance of senior and senior subordinated notes
|
195,134 | 0 | 0 | |||||||||
|
Debt issuance costs
|
(3,067 | ) | 0 | 0 | ||||||||
|
Proceeds from issuance of common stock, net of transaction fees
|
0 | 0 | 82,772 | |||||||||
|
Purchase of treasury stock
|
0 | 0 | (11 | ) | ||||||||
|
Repayment of senior notes
|
(197,543 | ) | 0 | 0 | ||||||||
|
Proceeds from stock option exercises
|
2,062 | 4,753 | 919 | |||||||||
|
|
||||||||||||
|
Net cash (used in)/provided by financing activities
|
(3,414 | ) | 4,753 | 1,680 | ||||||||
|
|
||||||||||||
|
|
||||||||||||
|
Net (decrease)/increase in cash and cash equivalents
|
(145,378 | ) | 43,408 | 178,246 | ||||||||
|
Cash and cash equivalents, beginning of year
|
249,331 | 205,923 | 27,677 | |||||||||
|
|
||||||||||||
|
Cash and cash equivalents, end of year
|
$ | 103,953 | $ | 249,331 | $ | 205,923 | ||||||
|
|
||||||||||||
See Supplemental Disclosure of Cash Flow Information at Note 11.
See accompanying notes to consolidated financial statements
49
Table of Contents
MERITAGE HOMES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2010, 2009 and 2008
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2010, 2009 and 2008
NOTE 1 — BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization.
Meritage Homes is a leading designer and builder of single-family detached homes
in the historically high-growth regions of the southern and western United States, based on the
number of home closings. We offer first-time, move-up, luxury and active adult homes to our
targeted customer base. We have operations in three regions: West, Central and East, which are
comprised of 12 metropolitan areas in Arizona, Texas, California, Nevada, Colorado and Florida.
Through our successors, we commenced our homebuilding operations in 1985. Meritage Homes
Corporation was incorporated in 1988 in the State of Maryland.
Our homebuilding and marketing activities are conducted under the name of Meritage Homes in
each of our markets, except for Arizona and Texas, where we also operate under the name of Monterey
Homes. At December 31, 2010, we were actively selling homes in 151 communities, with base prices
ranging from approximately $90,000 to $972,000.
Basis of Presentation
. The accompanying consolidated financial statements have been prepared
in accordance with accounting principles generally accepted in the United States (“GAAP”) and
include the accounts of Meritage Homes Corporation and those of our consolidated subsidiaries,
partnerships and other entities in which we have a controlling financial interest, and of variable
interest entities (see Note 3) in which we are deemed the primary beneficiary (collectively, “us”,
“we”, “our” and the “Company”). Intercompany balances and transactions have been eliminated in
consolidation. In the opinion of Management, the accompanying financial statements include all
adjustments necessary for the fair presentation of our results. Certain reclassifications were
made to prior years’ financial statements to conform to the current year presentation. These
adjustments consist of a reduction of general and administrative
expenses of $3.7 million and $3.4
million for 2009 and 2008, respectively, with offsetting decreases to other income, net for the
same period of time due to the reclassification of certain legal settlements. There was no impact
to the net loss reported for these periods from this reclassification.
Cash and Cash Equivalents.
Liquid investments with an initial maturity of three months or
less are classified as cash equivalents. Amounts in transit from title companies for home closings
of approximately $2.0 million and $10.6 million are included in cash and cash equivalents at
December 31, 2010 and 2009, respectively. Included in our balance as of December 31, 2010 are
$60.0 million of money market funds that are invested in short term (90 days or less) government
securities.
Restricted Cash
. Restricted cash consists of amounts held in restricted accounts as
collateral for our letter of credit arrangements that were established to replace those previously
available under our Senior Unsecured Credit Facility (the “Credit Facility”). See Note 5 for
additional discussion of the termination of our Credit Facility during 2009.
Investments and Securities.
Our investments and securities are comprised of both treasury
securities and deposits with money center banks that are FDIC-insured and secured by
treasury-backed investments (see additional discussion regarding such deposits in Note 12 to these
consolidated financial statements). All of our investments are classified as held-to-maturity and
are recorded at amortized cost as we have both the ability and intent
to hold them until their
respective maturities. The contractual lives of these investments are typically less than 18
months. The amortized cost of the investments approximates fair value.
Real Estate.
Real estate is stated at cost unless the community or land is determined to be
impaired, at which point the inventory is written down to fair value as required by Accounting
Standards Codification (ASC) 360-10,
Property, Plant and Equipment (ASC 360-10).
Inventory
includes the costs of land acquisition, land development, home construction, capitalized interest,
real estate taxes, direct overhead costs incurred during development and home construction that
benefit the entire community, less impairments, if any. Land and development costs are typically
allocated and transferred to homes under construction when home construction begins. Home
construction costs are accumulated on a per-home basis. Cost of home closings includes the
specific construction costs of the home and all related land acquisition, land development and
other common costs (both incurred and estimated to be incurred) that are allocated based upon the
total number of homes expected to be closed in each community or phase. Any changes to the
estimated total development costs of a community or phase are allocated to the remaining homes in
the community or phase. When a home closes, we may have incurred costs for goods and services that
have not yet been paid. Therefore, an accrual to capture such obligations is recorded in
connection with the home closing and charged directly to cost of sales.
Typically, a community’s life cycle ranges from three to five years, commencing with the
acquisition of the land and continuing through the land development phase and concluding with the
sale, construction and closing of the homes. Actual community lives will vary based on the size of
the community, the sales absorption rate and whether the land purchased was raw or finished lots.
Master-planned communities encompassing several phases and super-block land parcels may have
significantly longer lives and projects involving smaller finished lot purchases may be
significantly shorter.
50
Table of Contents
All of our land inventory and related real estate assets are reviewed for recoverability
quarterly, as our inventory is considered “long-lived” in accordance with GAAP. Impairment
charges are recorded if the fair value of an asset is less than its carrying amount. Our
determination of fair value is based on projections and estimates. Changes in these expectations
may lead to a change in the outcome of our impairment analysis and actual results may also differ
from our assumptions. Our analysis is completed on a quarterly basis at a community level with
each community or land parcel evaluated individually. For those assets deemed to be impaired, the
impairment recognized is measured as the amount by which the assets’ carrying value exceeds their
fair value. The impairment of a community is allocated to each lot on a straight-line basis.
Existing and continuing communities
.
When projections for the remaining income expected to
be earned from existing communities are no longer positive, the underlying real estate assets are
deemed not fully recoverable, and further analysis is performed to determine the required
impairment. The fair value of the community’s assets is determined using either a discounted cash
flow model for projects we intend to build out or a market-based approach for projects to be sold.
Impairments are charged to cost of home closings in the period during which it is determined that
the fair value is less than the assets’ carrying amount. If a market-based approach is used, we
determine fair value based on recent comparable purchase and sale activity in the local market,
adjusted for known variances as determined by our knowledge of the region and general real estate
expertise. If a discounted cash flow approach is used, we compute fair value based on a
proprietary model. Our key estimates in deriving fair value under our cash flow model are (i) home
selling prices in the community adjusted for current and expected sales discounts and incentives,
(ii) costs related to the community — both land development and home construction — including costs
spent to date and budgeted remaining costs to spend, (iii) projected sales absorption rates,
reflecting any product mix change strategies implemented to stimulate the sales pace and expected
cancellation rates, (iv) alternative land uses including disposition of all or a portion of the
land owned and (v) our discount rate, which is currently 14-16% and varies based on the perceived
risk inherent in the community’s other cash flow assumptions. These assumptions vary widely across
different communities and geographies and are largely dependent on local market conditions.
Community-level factors that may impact our key estimates include:
| • | The presence and significance of local competitors, including their offered product type and competitive actions; | ||
| • | Economic and related demographic conditions for the population of the surrounding community; |
| • | Desirability of the particular community, including unique amenities or other favorable or unfavorable attributes; and |
| • | Existing home inventory supplies. |
These local circumstances may significantly impact our assumptions and the resulting
computation of fair value, and are, therefore, closely evaluated by our division personnel in their
creation of the discounted cash flow models. The models are also evaluated by regional and
corporate personnel for consistency and integration, as decisions that affect pricing or absorption
at one community may have resulting consequences for neighboring communities. We typically do not
project market improvements in our discounted cash flow models, but may do so in limited
circumstances in the latter years of a long-lived community. In certain cases, we may elect to
stop development of (mothball) an existing community if we believe the economic performance of the
community would be maximized by deferring development for a period of time to allow market
conditions to improve. The decision may be based on financial and/or operational metrics. If we
decide to mothball a project, we will impair it to its fair value as discussed above and then cease
future development activity until such a time where management believes that market conditions will
improve and economic performance will be maximized. Quarterly, we review all communities,
including mothballed communities, for potential impairments.
Option deposits and pre-acquisition costs
.
We also evaluate assets associated with future
communities for impairments on a quarterly basis. Using similar techniques described in the
existing and continuing communities section above, we determine if the contribution margins to be
generated by our future communities are acceptable to us. If the projections indicate that a
community is still meeting our internal investment guidelines and is generating a profit, those
assets are determined to be fully recoverable and no impairments are required. In cases where we
decide to abandon a project, we will fully impair all assets related to such project and will
expense and accrue any additional costs that we are contractually obligated to incur. In certain
circumstances, we may also elect to continue with a project because it is expected to generate
positive cash flows, even though it may not be generating an accounting profit, or due to other
strategic factors. In such cases, we will impair our pre-acquisition costs and deposits, as
necessary, to record an impairment to bring the book value to fair value. Refer to Note 2 of these
consolidated financial statements for further information regarding our impairments.
Deposits.
Deposits paid related to land options and contracts to purchase land are capitalized
when incurred and classified as deposits on real estate under option or contract until the related
land is purchased. Deposits are reclassified to a component of real estate at the time the deposit
is used to offset the acquisition price of the lots based on the terms of the underlying
agreements. To the extent they are non-refundable, deposits are charged to expense if the land
acquisition is terminated or no longer considered probable. As our exposure associated with these
non-refundable deposits is limited to the deposit amount as the acquisition contracts do not
typically require specific performance, we do not consider the options a contractual
obligation to purchase the land. The review of the likelihood of the acquisition of contracted
lots is completed quarterly in conjunction with the real estate impairment analysis noted above and
therefore, if impaired, the deposits are recorded as the lower of cost or fair value. Our deposits
were $10.4 million and $8.6 million as of December 31, 2010 and 2009, respectively.
51
Table of Contents
Property and Equipment, net.
Gross property and equipment at December 31, 2010 and 2009
consists of approximately $29.6 million and $30.3 million, respectively, of computer and office
equipment and approximately $23.4 million and $23.9 million, respectively, of model home
furnishings. Accumulated depreciation related to these assets amounted to approximately $38.4
million and $38.9 million at December 31, 2010 and 2009, respectively. Depreciation is generally
calculated using the straight-line method over the estimated useful lives of the assets, which
range from three to seven years. Maintenance and repair costs are expensed as incurred.
Deferred Costs.
At December 31, 2010 and 2009, deferred costs representing debt issuance costs
totaled approximately $5.9 million and $4.3 million, net of accumulated amortization of
approximately $5.0 million and $3.6 million, respectively, and are included on our consolidated
balance sheets within prepaid expenses and other assets. The costs are primarily amortized to
interest expense using the straight line method which approximates the effective interest method.
Investments in Unconsolidated Entities
.
We use the equity method of accounting for investments
in unconsolidated entities over which we exercise significant influence but do not have a
controlling interest. Under the equity method, our share of the unconsolidated entities’ earnings
or loss is included in Earnings/(loss) from unconsolidated entities, net, in our statements of
operations. We use the cost method of accounting for investments in unconsolidated entities over
which we do not have significant influence. See Note 4 for further discussion. We track
cumulative earnings and distributions from each of our ventures. For cash flow classification, to
the extent distributions do not exceed earnings, we designate such distributions as return on
capital. Distributions in excess of cumulative earnings are treated as return of capital. We
evaluate our investments in unconsolidated entities for impairment at least quarterly.
Accrued Liabilities
. Accrued liabilities at December 31, 2010 and 2009 consisted of the
following (in thousands):
| At December 31, | ||||||||
| 2010 | 2009 | |||||||
|
Accruals related to real estate development and construction activities
|
$ | 10,689 | $ | 19,832 | ||||
|
Payroll and other benefits
|
12,146 | 9,714 | ||||||
|
Accrued taxes
|
2,820 | 4,592 | ||||||
|
Warranty reserves
|
29,265 | 33,541 | ||||||
|
Other accruals
|
32,891 | 35,557 | ||||||
|
|
||||||||
|
Total
|
$ | 87,811 | $ | 103,236 | ||||
|
|
||||||||
Revenue Recognition.
Revenue from closings of residential real estate is recognized when
closings have occurred, the buyer has made the required minimum down payment, obtained necessary
financing, the risks and rewards of ownership are transferred to the buyer, and we have no
continuing involvement with the property, which is generally the close of escrow. Revenue is
reported net of any discounts and incentives.
Cost of Home Closings
.
Cost of home closings includes direct home construction costs, closing
costs, land acquisition and development costs, development period interest and common costs. Direct
construction costs are accumulated during the period of construction and charged to cost of
closings under specific identification methods, as are closing costs. Estimates of costs incurred
or to be incurred but not paid are accrued and expensed at the time of closing. Land development,
acquisition and common costs are allocated to each lot based on the number of lots remaining to
close.
Income Taxes.
We account for income taxes using the asset and liability method, which
requires that deferred tax assets and liabilities be recognized based on future tax consequences of
both temporary differences between the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply in the years in which the temporary differences are expected to
be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in earnings in the period when the changes are enacted.
We record net deferred tax assets to the extent we believe these assets will more likely than
not be realized. In making such determination, we consider all available positive and negative
evidence, including scheduled reversals of deferred tax liabilities, whether we are in a cumulative
loss position, projected future taxable income, tax planning strategies and recent financial
operations. We evaluate our cumulative loss position over a four-year period, based on the current
and prior three years. If we determine that we will not be able to realize our deferred income tax
assets in the future, we make an adjustment to the valuation allowance, which increases the
provision for income taxes.
52
Table of Contents
We recognize interest and penalties related to unrecognized tax benefits within the income tax
expense line in the accompanying consolidated statement of operations. Accrued interest and
penalties are included within the related tax liability line in the consolidated balance sheets.
Advertising Costs.
The Company expenses advertising costs as they are incurred. Advertising
expense was approximately $7.7 million, $6.1 million and $15.0 million in fiscal 2010, 2009 and
2008, respectively.
Earnings/(Loss) Per Share.
We compute basic earnings/(loss) per share by dividing net
earnings/(loss) available to common stockholders by the weighted average number of common shares
outstanding during the period. Diluted earnings per share gives effect to the potential dilution
that could occur if securities or contracts to issue common stock that are dilutive were exercised
or converted into common stock or resulted in the issuance of common stock that then shared in our
earnings. In periods of net losses, no dilution is computed.
Stock-Based Compensation
.
We account for stock-based compensation in accordance with ASC
718-10,
Compensation — Stock Compensation.
We use the Black-Scholes model to value stock options
granted or modified after January 1, 2006, under this guidance. We have applied the “modified
prospective method” for grants outstanding at January 1, 2006, which requires us to value stock
options prior to our adoption of SFAS No. 123R under the fair value method and expense the unvested
portion over the remaining vesting period. This guidance also requires us to estimate forfeitures
in calculating the expense related to stock-based compensation and to reflect the benefits of tax
deductions in excess of recognized compensation expense as both a financing inflow and an operating
cash outflow. Awards with either a graded or cliff vesting are expensed on a straight-line basis
over the life of the award. See Note 9 for additional discussion.
Off-Balance-Sheet Arrangements — Joint Ventures.
Historically, we have participated in land
development joint ventures as a means of accessing larger parcels of land and lot positions,
expanding our market opportunities, managing our risk profile and leveraging our capital base;
however, in recent years, they have not been a significant avenue for us to access desired lots.
We currently have only two such active ventures. We also participate in six mortgage and title
business joint ventures. The mortgage joint ventures are engaged in mortgage brokerage activities,
and they originate and provide services to both our clients and other homebuyers. See Note 4 for
additional information.
Off-Balance-Sheet Arrangements — Other.
We often acquire lots from various development
entities pursuant to option and purchase agreements. The purchase price typically approximates the
market price at the date the contract is executed, although in light of the recent economic
condition, over the last several years we have been successful in renegotiating more preferential
terms on some of the lots that we still have under contract. See Note 3 for further discussion.
We provide letters of credit and performance, maintenance and other bonds in support of our
related obligations with respect to joint ventures, option deposits, the development of our
projects and other corporate purposes. The amount of these obligations outstanding at any time
varies depending on the stage and level of our development activities. In the event a letter of
credit or bond is drawn upon, we would be obligated to reimburse the issuer. We believe it is
unlikely that any significant amounts of these letters of credit or bonds will be drawn upon. The
table below outlines our letter of credit and surety bond obligations (in thousands):
| December 31, 2010 | December 31, 2009 | |||||||||||||||
| Estimated work | Estimated work | |||||||||||||||
| remaining to | remaining to | |||||||||||||||
| Outstanding | complete | Outstanding | complete | |||||||||||||
|
Sureties:
|
||||||||||||||||
|
Sureties related to joint
ventures
|
$ | 1,594 | $ | 32 | $ | 1,672 | $ | 32 | ||||||||
|
Sureties related to owned
projects and lots under
contract
|
57,399 | 26,968 | 93,744 | 31,145 | ||||||||||||
|
|
||||||||||||||||
|
|
||||||||||||||||
|
Total Sureties
|
$ | 58,993 | $ | 27,000 | $ | 95,416 | $ | 31,177 | ||||||||
|
|
||||||||||||||||
|
|
||||||||||||||||
|
Letters of Credit (“LOCs”):
|
||||||||||||||||
|
LOCs in lieu of deposit
for contracted lots
|
$ | 0 | N/A | $ | 4,414 | N/A | ||||||||||
|
LOCs for land development
|
2,488 | N/A | 3,977 | N/A | ||||||||||||
|
LOCs for general
corporate operations
|
6,460 | N/A | 6,607 | N/A | ||||||||||||
|
|
||||||||||||||||
|
|
||||||||||||||||
|
Total LOCs
|
$ | 8,948 | N/A | $ | 14,998 | N/A | ||||||||||
|
|
||||||||||||||||
53
Table of Contents
Warranty Reserves.
We have certain obligations related to post-construction warranties and
defects for closed homes. With the assistance of an actuary, we have estimated these reserves
based on the number of home closings and historical data and trends for our communities. We also
use industry data with respect to similar product types and geographic areas in markets where our
experience is incomplete to draw a meaningful conclusion. We regularly review our warranty
reserves and adjust them, as necessary, to reflect changes in trends as information becomes
available. A summary of changes in our warranty reserves follows (in thousands):
| Year Ended December 31, | ||||||||
| 2010 | 2009 | |||||||
|
Balance, beginning of period
|
$ | 33,541 | $ | 28,891 | ||||
|
Additions to reserve from new home deliveries
|
7,016 | 4,196 | ||||||
|
Warranty claims
|
(11,173 | ) | (5,564 | ) | ||||
|
Adjustments to pre-existing reserves
|
(119 | ) | 6,018 | |||||
|
|
||||||||
|
Balance, end of period
|
$ | 29,265 | $ | 33,541 | ||||
|
|
||||||||
Warranty reserves are included in accrued liabilities on the accompanying consolidated balance
sheets, and additions to the reserves are included in cost of sales within the accompanying
consolidated statements of operations. The 2009 adjustment to pre-existing reserves as well as the
increase in the 2010 warranty claims are both due mainly to our Chinese drywall liabilities, as
further discussed below.
Our warranty represents reserves for post-construction warranties and defects for closed
homes. These reserves are intended to cover costs associated with our contractual and statutory
warranty obligations, which include, among other items, claims involving defective workmanship and
materials. We believe that our total reserves, coupled with the general liability insurance we
maintain, are sufficient to cover our general warranty obligations.
During the first quarter of 2009, we became aware that a limited number of the homes we
constructed were exhibiting symptoms typical of defective Chinese drywall. As of December 31, 2010,
we have confirmed that 92 homes we built in 2005 and 2006 were constructed using defective Chinese
drywall installed by subcontractors. Of those homes, 88 are located in Florida and four are located
in the Houston, Texas area. We recently discovered the four Houston area homes and we are still
conducting investigations to determine if other Texas homes are impacted, although it currently
appears that the exposure in Texas may be limited. As of December 31, 2010, we have completed the
repair of 61 homes and we are in the process of repairing an additional 13 homes. The $29.3
million of warranty reserves we have recorded as of December 31, 2010 includes $2.0 million of
reserves for the completion of our repair of the remaining affected homes and the resulting damage related to
defective Chinese drywall. If our continuing investigations reveal other homes containing defective
Chinese drywall, it may be necessary to increase our warranty reserves. We are seeking recovery of
the costs we have incurred or expect to incur related to defective Chinese drywall from the
manufacturers, suppliers, and installers of the defective drywall and their insurers as well as
from our general liability insurance carrier.
Recently Issued Accounting Pronouncements.
In January 2010, the Financial Accounting
Standards Board (“FASB”) amended ASC 820-10,
Fair Value Measurements and Disclosures — Overall
.
The amendment requires additional disclosures and provides clarification regarding existing
disclosures for recurring and nonrecurring fair value measurements. The amendment became effective
on January 1, 2010 for us and did not have any material impact to our existing disclosures.
In May 2009, the FASB issued ASC 810-10,
Consolidation
(ASC 810-10)
.
This Statement amends
prior guidance and revises accounting and reporting requirements for entities’ involvement with
variable interest entities. The provisions of ASC 810-10 are effective for financial statements
issued for fiscal years and interim periods beginning after November 15, 2009. We adopted this
guidance, effective January 1, 2010 which did not have a material impact on our financial
statements.
54
Table of Contents
NOTE 2 — REAL ESTATE AND CAPITALIZED INTEREST
Real estate at December 31 consists of the following (in thousands):
| 2010 | 2009 | |||||||
|
Homes under contract under construction (1)
|
$ | 96,844 | $ | 114,769 | ||||
|
Unsold homes, completed and under construction (1)
|
86,869 | 73,442 | ||||||
|
Model homes (1)
|
36,966 | 37,601 | ||||||
|
Finished home sites and home sites under development
|
454,718 | 407,592 | ||||||
|
Land held for development or sale (2)
|
63,531 | 41,633 | ||||||
|
|
||||||||
|
|
$ | 738,928 | $ | 675,037 | ||||
|
|
||||||||
| (1) | Also includes the allocated land and land development costs associated with each lot for these homes. | |
| (2) | Includes communities where we have decided to stop development (mothball) as we have determined that the current economic performance would be maximized by deferring development. In the future, such communities may either be re-opened or sold to third parties. We do not capitalize interest for such mothballed assets, and all costs of land ownership (i.e., property taxes, homeowner association dues, etc.) are expensed as incurred. |
As previously noted, in accordance with ASC 360-10, each of our land inventory and related
real estate assets is reviewed for recoverability when impairment indicators are present, as our
inventory is considered “long-lived” in accordance with GAAP. Due to the current environment, we
evaluate all of our real estate assets for impairment on a quarterly basis. ASC 360-10 requires
impairment charges to be recorded if the fair value of such assets is less than their carrying
amounts. Our determination of fair value is based on projections and estimates. Based on these
reviews of all our communities, we recorded the following real-estate and joint-venture impairment
charges during the years ended December 31, 2010, 2009 and 2008 (in thousands):
| Years Ended December 31, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
|
Terminated option/purchase contracts:
|
||||||||||||
|
West
|
$ | 0 | $ | 7,038 | $ | 42,985 | ||||||
|
Central
|
1,030 | 60,645 | 28,481 | |||||||||
|
East
|
0 | 3,270 | 2,668 | |||||||||
|
|
||||||||||||
|
Total
|
$ | 1,030 | $ | 70,953 | $ | 74,134 | ||||||
|
|
||||||||||||
|
|
||||||||||||
|
Real estate inventory impairments (1):
|
||||||||||||
|
West
|
$ | 274 | $ | 18,459 | $ | 49,581 | ||||||
|
Central
|
4,809 | 16,744 | 53,518 | |||||||||
|
East
|
321 | 5,334 | 17,722 | |||||||||
|
|
||||||||||||
|
Total
|
$ | 5,404 | $ | 40,537 | $ | 120,821 | ||||||
|
|
||||||||||||
|
|
||||||||||||
|
Impairments of joint venture investments:
|
||||||||||||
|
West
|
$ | 295 | $ | 274 | $ | 2,768 | ||||||
|
Central
|
0 | 2,558 | 18,862 | |||||||||
|
East
|
0 | 0 | 4,371 | |||||||||
|
|
||||||||||||
|
Total
|
$ | 295 | $ | 2,832 | $ | 26,001 | ||||||
|
|
||||||||||||
|
|
||||||||||||
|
Impairments of land held for sale:
|
||||||||||||
|
West
|
$ | 0 | $ | 7,815 | $ | 17,900 | ||||||
|
Central
|
17 | 6,911 | 23,642 | |||||||||
|
East
|
0 | 0 | 942 | |||||||||
|
|
||||||||||||
|
Total
|
$ | 17 | $ | 14,726 | $ | 42,484 | ||||||
|
|
||||||||||||
|
|
||||||||||||
|
Total impairments:
|
||||||||||||
|
West
|
$ | 569 | $ | 33,586 | $ | 113,234 | ||||||
|
Central
|
5,856 | 86,858 | 124,503 | |||||||||
|
East
|
321 | 8,604 | 25,703 | |||||||||
|
|
||||||||||||
|
Total
|
$ | 6,746 | $ | 129,048 | $ | 263,440 | ||||||
|
|
||||||||||||
| (1) | Included in the real estate inventory impairments are impairments of individual homes in a community where the underlying community was not also impaired, as follows (in thousands): |
55
Table of Contents
| Years Ended December 31, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
|
Individual home impairments:
|
||||||||||||
|
West
|
$ | 274 | $ | 7,969 | $ | 32,366 | ||||||
|
Central
|
2,912 | 6,136 | 29,901 | |||||||||
|
East
|
321 | 3,208 | 12,102 | |||||||||
|
|
||||||||||||
|
Total
|
$ | 3,507 | $ | 17,313 | $ | 74,369 | ||||||
|
|
||||||||||||
The tables below reflect the number of communities with real estate inventory impairments for
the years ended December 31, 2010, 2009 and 2008, excluding home-specific impairments (as noted
above) and the fair value of these communities (dollars in thousands):
| Fair Value of Communities | ||||||||||||
| Number of Communities | Impairment | Impaired | ||||||||||
| Impaired | Charges | (Carrying Value less Impairments) | ||||||||||
| Year Ended December 31, 2010 | ||||||||||||
|
|
||||||||||||
|
West
|
0 | $ | 0 | $ | N/A | |||||||
|
Central
|
7 | 1,897 | 13,073 | |||||||||
|
East
|
0 | 0 | N/A | |||||||||
|
|
||||||||||||
|
Total
|
7 | $ | 1,897 | $ | 13,073 | |||||||
|
|
||||||||||||
|
|
||||||||||||
| Year Ended December 31, 2009 | ||||||||||||
|
|
||||||||||||
|
West
|
12 | $ | 10,490 | $ | 43,542 | |||||||
|
Central
|
17 | 10,608 | 28,845 | |||||||||
|
East
|
6 | 2,126 | 7,476 | |||||||||
|
|
||||||||||||
|
Total
|
35 | $ | 23,224 | $ | 79,863 | |||||||
|
|
||||||||||||
|
|
||||||||||||
| Year Ended December 31, 2008 | ||||||||||||
|
|
||||||||||||
|
West
|
22 | $ | 17,215 | $ | 99,028 | |||||||
|
Central
|
47 | 23,617 | 88,027 | |||||||||
|
East
|
11 | 5,620 | 20,799 | |||||||||
|
|
||||||||||||
|
Total
|
80 | $ | 46,452 | $ | 207,854 | |||||||
|
|
||||||||||||
Subject to sufficient qualifying assets, we capitalize our development period interest costs
incurred in connection with the development and construction of real estate. Capitalized interest
is allocated to real estate when incurred and charged to cost of closings when the related property
is delivered. A summary of our capitalized interest is as follows (in thousands):
| Years Ended December 31, | ||||||||
| 2010 | 2009 | |||||||
|
Capitalized interest, beginning of year
|
$ | 14,187 | $ | 29,779 | ||||
|
Interest incurred (1)
|
43,442 | 46,890 | ||||||
|
Interest expensed
|
(33,722 | ) | (36,531 | ) | ||||
|
Interest amortized to cost of home, land closings and impairments
|
(12,228 | ) | (25,951 | ) | ||||
|
|
||||||||
|
Capitalized interest, end of year
|
$ | 11,679 | $ | 14,187 | ||||
|
|
||||||||
| (1) | Includes $3.1 million in 2009 related to voluntary amendments and/or termination charges related to our Credit Facility. These charges were primarily the non-cash write-off of previously-capitalized costs. |
At December 31, 2010 and 2009, approximately $747,000 and $786,000, respectively, of the
capitalized interest is related to our joint venture investments and is a component of “Investments
in unconsolidated entities” on our consolidated balance sheets.
56
Table of Contents
NOTE 3 — VARIABLE INTEREST ENTITIES AND CONSOLIDATED REAL ESTATE NOT OWNED
In June 2009, FASB revised its guidance regarding the determination of a primary beneficiary
of a variable interest entity (“VIE”). In December 2009, ASC 810-10,
Consolidation
, was amended to
incorporate this guidance. The amendments to ASC 810-10 replace the prior quantitative computations
for determining which entity, if any, is the primary beneficiary of the VIE with a methodology
based on both (1) the ability of an entity to control the activities of a VIE that most
significantly impact the VIE’s economic performance and (2) the obligation to absorb losses of the
VIE and/or the right to receive benefits from the VIE. The amendments also increased the required
disclosures about a reporting entity’s involvement with VIEs. We adopted the amended provisions of
ASC 810-10 on January 1, 2010. The adoption resulted in a deconsolidation of several VIEs that were
previously reported as “Real estate not owned” in our consolidated balance sheets, the impact of
which was immaterial.
Based on the provisions of the relevant accounting guidance, we have concluded that when we
enter into an option or purchase agreement to acquire land or lots from an entity and pay a
non-refundable deposit, a VIE may be created because we are deemed to have provided subordinated
financial support that will absorb some or all of an entity’s expected losses if they occur. Since
adopting the new provisions of ASC 810-10, for each VIE, we assess whether we are the primary
beneficiary by first determining if we have the ability to control the activities of the VIE that
most significantly impact its economic performance. Such activities include, but are not limited
to, the ability to determine the budget and scope of land development work, if any; the ability to
control financing decisions for the VIE; the ability to acquire additional land into the VIE or
dispose of land in the VIE not under contract with Meritage; and the ability to change or amend the
existing option contract with the VIE. If we are not determined to control such activities, we are
not considered the primary beneficiary of the VIE. If we do have the ability to control such
activities, we will continue our analysis by determining if we are expected to absorb a potentially
significant amount of the VIE’s losses or, if no party absorbs the majority of such losses, if we
will potentially benefit from a significant amount of the VIE’s expected gains. If we are the
primary beneficiary of the VIE, we will consolidate the VIE in our financial statements and reflect
such assets and liabilities as “Real estate not owned.” The liabilities related to consolidated
VIEs are excluded from our debt covenant calculations. Prior to the adoption of the amended
guidance of ASC 810-10, we determined if we were the primary beneficiary of a VIE solely by
reviewing the expected losses and residual returns based on a probability of future cash flows.
In substantially all cases, creditors of the entities with which we have option agreements
have no recourse against us and the maximum exposure to loss in our option agreements is limited to
non-refundable option deposits and any capitalized pre-acquisition costs. Often, we are at risk for
items over budget related to land development on property we have under option if we are the land
developer. In these cases, we have contracted to complete development at a fixed cost on behalf of
the land owner and any budget savings or shortfalls are borne by us. Some of our option deposits
may be refundable to us if certain contractual conditions are not performed by the party selling
the lots.
The table below presents a summary of our lots under option at December 31, 2010 (dollars in
thousands):
| Option/Earnest | ||||||||||||||||
| Money Deposits | ||||||||||||||||
| Number | Purchase | Letters | ||||||||||||||
| of Lots | Price | Cash | of Credit | |||||||||||||
|
Option contracts recorded on balance sheet as real estate not owned (1)(2)
|
9 | $ | 866 | $ | 0 | $ | 0 | |||||||||
|
|
||||||||||||||||
|
Option contracts not recorded on balance sheet — non-refundable deposits,
committed (1)
|
1,923 | 84,420 | 9,275 | 0 | ||||||||||||
|
Purchase contracts not recorded on balance sheet — non-refundable deposits,
committed (1)
|
281 | 9,088 | 494 | 0 | ||||||||||||
|
Purchase contracts not recorded on balance sheet — refundable deposits
committed
|
115 | 5,235 | 409 | 0 | ||||||||||||
|
|
||||||||||||||||
|
Total committed (on and off balance sheet)
|
2,328 | 99,609 | 10,178 | 0 | ||||||||||||
|
|
||||||||||||||||
|
|
||||||||||||||||
|
Purchase contracts not recorded on balance sheet — refundable deposits,
uncommitted (3)
|
311 | 12,166 | 181 | 0 | ||||||||||||
|
|
||||||||||||||||
|
Total uncommitted
|
311 | 12,166 | 181 | 0 | ||||||||||||
|
|
||||||||||||||||
|
Total lots under option or contract
|
2,639 | 111,775 | 10,359 | 0 | ||||||||||||
|
|
||||||||||||||||
|
|
||||||||||||||||
|
Total option contracts not recorded on balance sheet
|
2,630 | $ | 110,909 | $ | 10,359 | (4) | $ | 0 | ||||||||
|
|
||||||||||||||||
| (1) | Deposits are non-refundable except if certain contractual conditions are not performed by the selling party. | |
| (2) | The purpose and nature of these consolidated lot option contracts (VIEs) is to provide us with the option to purchase these lots in the future. Specific performance contracts, if any, are included in this balance. | |
| (3) | Deposits are refundable at our sole discretion. We have not completed our acquisition evaluation process and we have not internally committed to purchase these lots. | |
| (4) | Amount is reflected in our consolidated balance sheet in the line item “Deposits on real estate under option or contract” as of December 31, 2010. |
57
Table of Contents
Generally, our options to purchase lots remain effective so long as we purchase a
pre-established minimum number of lots each month or quarter, as determined by the respective
agreement. Although the pre-established number is typically structured to approximate our expected
rate of home construction starts, during a weakened homebuilding market, as we have experienced
over the last several years, we may purchase lots at an absorption level that exceeds our sales and
home starts pace needed to meet the pre-established minimum number of lots or restructure our
original contract to terms that more accurately reflect our revised sales pace expectations.
NOTE 4 — INVESTMENTS IN UNCONSOLIDATED ENTITIES
In the past, we have entered into land development joint ventures as a means of accessing
larger parcels of land and lot positions, expanding our market opportunities, managing our risk
profile and leveraging our capital base. Based on the structure of these joint ventures, they may
or may not be consolidated into our results. Our joint venture partners generally are other
homebuilders, land sellers or other real estate investors. We generally do not have a controlling
interest in these ventures, which means our joint venture partners could cause the venture to take
actions we disagree with, or fail to take actions we believe should be undertaken, including the
sale of the underlying property to repay debt or recoup all or part of the partners’ investments.
As of December 31, 2010, we had two active equity-method land ventures. Due to the current
homebuilding environment, although we view our involvement with land joint ventures to be
beneficial, we do not view such involvement as critical to the success of our homebuilding
operations.
We also participate in six mortgage and title business joint ventures. The mortgage joint
ventures are engaged in mortgage activities and they provide services to both our clients and other
homebuyers. Although some of these ventures originate mortgage loans, we have limited recourse
related to any mortgages originated by these ventures. Our investments in mortgage and title joint
ventures as of December 31, 2010 and 2009 were $1.1 million and $1.0 million, respectively.
For land development joint ventures, we, and in some cases our joint venture partners, usually
receive an option or other similar arrangement to purchase portions of the land held by the joint
venture. Option prices are generally negotiated prices that approximate market value when we enter
into the option contract. For these ventures, our share of the joint venture profit relating to
lots we purchase from the joint ventures is deferred until homes are delivered by us and title
passes to a homebuyer. Therefore, we allocate the portion of such joint venture profit to the land
acquired by us as a reduction in the basis of the property.
In connection with our joint venture involvement, we may also provide certain types of
guarantees to associated lenders and municipalities. These guarantees can be classified into three
categories: (i) Repayment Guarantees, (ii) “Bad Boy” Guarantees, and (iii) Completion Guarantees.
Additionally, see Note 1 to these consolidated financial statements for a summary of our joint
venture surety obligations.
| At December | At December | |||||||
| 31, 2010 | 31, 2009 | |||||||
| (in thousands) | ||||||||
|
Repayment guarantees (1)
|
$ | 12,491 | $ | 8,188 | ||||
|
“Bad Boy” guarantees
|
0 | 60,917 | ||||||
|
Completion guarantees (2)
|
0 | 0 | ||||||
|
|
||||||||
|
Total guarantees
|
$ | 12,491 | $ | 69,105 | ||||
|
|
||||||||
| (1) | Balance includes $11.8 million and $7.1 million of “Bad Boy” guarantees at December 31, 2010 and 2009, respectively, but since the triggering of such guarantee is beyond our control, this guarantee is classified as a repayment guarantee. | |
| (2) | As our completion guarantees typically require funding from a third party, we believe these guarantees do not represent a potential cash obligation for us, as they require only non-financial performance. |
Repayment Guarantees.
We and/or our land development joint venture partners occasionally
provide limited repayment guarantees on a pro rata basis on the debt of the land development joint
ventures. If such a guarantee were ever to be called, the maximum exposure to Meritage would
generally be only our pro-rata share of the amount of debt outstanding that was in excess of the
fair value of the underlying land securing the debt. Our share of these limited pro rata repayment
guarantees as of the years ended December 31, 2010 and 2009 are illustrated in the table above.
58
Table of Contents
“Bad Boy” Guarantees.
In addition, we and/or our joint venture partners occasionally provide
guarantees that are only applicable if and when the joint venture directly, or indirectly through
agreement with its joint venture partners or other third parties, causes the joint venture to
voluntarily file a bankruptcy or similar liquidation or reorganization action or take other actions
that limit a lender’s right to exercise remedies against its collateral or which are fraudulent
or improper (commonly referred to as “bad boy” guarantees). These types of guarantees typically
are on a pro rata basis among the joint venture partners and are designed to protect the secured
lender’s remedies with respect to its mortgage or other secured lien on the joint venture or the
joint venture’s underlying property. We believe these guarantees, as defined, unless invoked as
described above, are not considered guarantees of indebtedness under our senior and senior
subordinated indentures.
Completion Guarantees.
If there is development work to be completed, we and our joint venture
partners are also typically obligated to the project lenders to complete construction of the land
development improvements if the joint venture does not perform the required development. Provided
we and the other joint venture partners are in compliance with these completion obligations, the
project lenders are generally obligated to fund these improvements through any financing
commitments available under the applicable joint venture development and construction loans. In
addition, we and our joint venture partners have from time to time provided unsecured indemnities
to joint venture project lenders. These indemnities generally obligate us to reimburse the project
lenders only for claims and losses related to matters for which such lenders are held responsible
and our exposure under these indemnities is limited to specific matters such as environmental
claims. As part of our project acquisition due diligence process to determine potential
environmental risks, we generally obtain, or the joint venture entity generally obtains, an
independent environmental review. Per guidance of ASC 460-10,
Guarantees,
we believe these other
guarantees are either not applicable or not material to our financial results.
Surety Bonds.
We and our joint venture partners also indemnify third party surety providers
with respect to performance bonds issued on behalf of certain of our joint ventures. If a joint
venture does not perform its obligations, the surety bond could be called. If these surety bonds
are called and the joint venture fails to reimburse the surety, we and our joint venture partners
would be obligated to make such payments. These surety indemnity arrangements are generally joint
and several obligations with our joint venture partners. Although a majority of the required work
may have been performed, these bonds are typically not released until all development
specifications have been met. None of these bonds have been called to date and we believe it is
unlikely that any of these bonds will be called or if called, that any such amounts would be
material to us. See Note 1 to these consolidated financial statements for a detail of our surety
bonds.
The joint venture obligations, guarantees and indemnities discussed above are generally
provided by us or one or more of our subsidiaries. In joint ventures involving other homebuilders
or developers, support for these obligations is generally provided by the parent companies of the
joint venture partners. In connection with our periodic real estate impairment reviews, we may
accrue for any such commitments where we believe our obligation to pay is probable and can be
reasonably estimated. In such situations, our accrual represents the portion of the total joint
venture obligation related to our relative ownership percentage. In the limited cases where our
venture partners, some of whom are homebuilders or developers who may be experiencing financial
difficulties as a result of current market conditions, may be unable to fulfill their pro rata
share of a joint venture obligation, we may be fully responsible for these commitments if such
commitments are joint and several. We continue to monitor these matters and reserve for these
obligations if and when they become probable and can be reasonably estimated. As of December 31,
2010 and 2009, we did not have any such reserves. See discussion below regarding outstanding
litigation for certain of our joint ventures and corresponding reserves.
59
Table of Contents
Summarized condensed financial information related to unconsolidated joint ventures that are
accounted for using the equity method was as follows:
| At December 31, | ||||||||
| 2010 | 2009 | |||||||
| (in thousands) | ||||||||
|
Assets:
|
||||||||
|
Cash
|
$ | 5,692 | $ | 6,734 | ||||
|
Real estate
|
45,575 | 512,931 | ||||||
|
Other assets
|
4,741 | 6,023 | ||||||
|
|
||||||||
|
Total assets
|
$ | 56,008 | $ | 525,688 | ||||
|
|
||||||||
|
|
||||||||
|
Liabilities and equity:
|
||||||||
|
Accounts payable and other liabilities
|
$ | 7,962 | $ | 8,899 | ||||
|
Notes and mortgages payable
|
22,114 | 350,966 | ||||||
|
Equity of:
|
||||||||
|
Meritage (1)
|
8,141 | 40,516 | ||||||
|
Other
|
17,791 | 125,307 | ||||||
|
|
||||||||
|
Total liabilities and equity
|
$ | 56,008 | $ | 525,688 | ||||
|
|
||||||||
| Years Ended December 31, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
| (in thousands) | ||||||||||||
|
|
||||||||||||
|
Revenue
|
$ | 24,754 | $ | 22,937 | $ | 38,348 | ||||||
|
Costs and expenses
|
(152,873 | ) | (33,479 | ) | (26,015 | ) | ||||||
|
|
||||||||||||
|
Net earnings/(loss) of unconsolidated entities
|
$ | (128,119 | ) | $ | (10,542 | ) | $ | 12,333 | ||||
|
|
||||||||||||
|
Meritage’s share of pre-tax earnings (1)(2)(3)
|
$ | 5,653 | $ | 6,914 | $ | 8,810 | ||||||
|
|
||||||||||||
| (1) | Balance represents Meritage’s interest, as reflected in the financial records of the respective joint ventures. This balance may differ from the balance reflected in our condensed consolidated balance sheets due to the following reconciling items: (i) timing differences for revenue and distributions recognition, (ii) step-up basis and corresponding amortization, (iii) income deferrals as discussed in Note (3) below and (iv) differences in timing or amounts of joint-venture asset impairments recorded by us and the joint venture, including cessation of allocation of losses from joint ventures in which we have previously impaired our investment balance to zero. | |
| (2) | The joint venture financial statements above represent the most recent information available to us. For joint ventures where we have impaired our investment, the joint venture partners may have not yet reached a consensus or finalized the write-down amount or reached that conclusion in a different accounting period than us and, therefore, the financial statements of the ventures may not yet reflect any real estate impairment charges or reflect them in a different fiscal year. For the year ended December 31, 2010, 2009 and 2008, we recorded $295,000, $2.8 million and $26.0 million, respectively, of such impairments. As our portion of pre-tax earnings is recorded on the accrual basis and included both actual earnings reported to us as well as accrued expected earnings for the period noted above not yet provided to us by our joint venture partners, our relative portion of total net earnings of the unconsolidated joint ventures in the table may reflect a different time frame than that represented by the joint venture financials. See Note 2 of these consolidated financial statements for detail of our joint venture-related impairments. | |
| (3) | Our share of pre-tax earnings is recorded in “Earnings/(loss)” from unconsolidated entities, net” on our consolidated statements of operations and excludes joint venture profit related to lots we purchased from the joint ventures. Such profit is deferred until homes are delivered by us and title passes to a homebuyer. |
Our investments in unconsolidated entities include $0.9 million at December 31, 2010 and 2009
related to the difference between the amounts at which our investments are carried and the amount
of our portion of the venture’s equity. These amounts are amortized as the assets of the
respective joint ventures are sold. We amortized approximately $0, $0.2 and $0.2 million of these
assets in 2010, 2009 and 2008, respectively.
60
Table of Contents
Of the 2009 joint venture assets and liabilities, $433.0 and $307.3 million, respectively,
related to one inactive joint venture in which we had a 20% interest.
In 2010, the joint venture was
dis-possessed of all of its holdings. Of our 2009 “Bad Boy” debt guarantees, the entire
$60.9 million relates to this venture. This venture owned one large asset that was purchased near
the peak of the market and at December 31, 2009 was in default of its debt agreements. All of this
debt was non-recourse to the partners, and our associated joint venture was fully impaired as of
December 31, 2009. During the last quarter of 2010, all associated “Bad Boy” guarantees have been
nullified in connection with that transaction.
The joint venture assets and liabilities noted in the table above primarily represent two
active land ventures, six mortgage and title ventures and various inactive ventures in which we
have a total investment of $11.0 million. As of December 31, 2010, we believe these ventures are
in compliance with their respective debt agreements, if applicable, and except for $11.8 million of
our limited repayment guarantees, the debt is non-recourse to us. (These ventures have no “Bad Boy”
guarantees.)
We, along with our joint venture partners (and their respective parent companies) in an
unconsolidated joint venture, are defendants in lawsuits initiated by the lender group
regarding a large Nevada-based land acquisition and development joint venture in which the
lenders are seeking damages on the basis of enforcement of completion guarantees and other
related claims
(JP Morgan Chase Bank, N.A. v. KB HOME Nevada, et al., U.S. District Court,
District of Nevada (Case No. 08-CV-01711 PMP)).
While our interest in this joint venture is
comparatively small, totaling 3.53%, we are vigorously defending and otherwise seeking
resolution of these actions. Meritage is the only builder joint venture partner to have fully
performed its obligations with respect to takedowns of lots from the joint venture, having
completed its first takedown in April 2007 and having tendered full performance of its second
and final takedown in April 2008. The joint venture and the lender group rejected Meritage’s
tender of performance, and Meritage contends, among other things,
that the rejection by the joint
venture and the lender group of Meritage’s tender of full performance was wrongful and should
release Meritage of liability with respect to the takedown and the springing repayment
guarantee. We have fully impaired our investment in this joint venture in prior periods. In
one of the ongoing lawsuits related to this venture, all members of the joint venture
participated in an arbitration regarding their respective performance obligations in response
to one of the members’ claims. On July 6, 2010, the arbitration decision was issued, which
denied the specific performance claim, but did award approximately $37 million of damages to
one member on other claims. The parties involved have jointly appealed the arbitration panel’s decision
(Meritage has also appealed on independent grounds) to the United States Courts of Appeal for the Ninth Circuit,
Focus South Group, LLC, et al. v.
KB HOME Nevada Inc, et al., (Case No. 10-17562),
and the case is pending. We believe our
potential share of the award, if any, will not be material to our financial position and that
our existing legal reserves are sufficient to cover the expected claim. Certain lenders in the
lender group recently filed an involuntary bankruptcy petition against the joint venture in the
United States Bankruptcy Court, District of Nevada
, (JPMorgan Chase Bank, N.A. v. South Edge,
LLC (Case No. 10-32968-bam))
, and it is anticipated that the lender group may try to use that
bankruptcy filing as a means to trigger springing repayment guarantees of the partners. The
initial balance of the loan with the springing guarantees was $585 million and as of December
31, 2010, the outstanding principal balance was approximately $328 million. Although the final
disposition of these suits and related actions, claims and demands remains uncertain, we do
not, at this time, anticipate outcomes that will have a material impact on our financial
position or results of operations.
NOTE 5 — SENIOR AND SENIOR SUBORDINATED NOTES
Senior and senior subordinated notes consist of the following (in thousands):
| At | At | |||||||
| December 31, | December 31, | |||||||
| 2010 | 2009 | |||||||
|
7.0% senior notes due 2014. At December 31, 2010 and 2009, there was approximately
$0 and $38 in unamortized premium, respectively
|
$ | 0 | $ | 130,038 | ||||
|
6.25% senior notes due 2015. At December 31, 2010 and 2009, there was approximately
$594 and $904 in unamortized discount, respectively
|
284,406 | 349,096 | ||||||
|
7.731% senior subordinated notes due 2017
|
125,875 | 125,875 | ||||||
|
7.15% senior notes due 2020. At December 31, 2010 and 2009, there was approximately
$4,500 and $0 in unamortized discount, respectively
|
195,499 | 0 | ||||||
|
|
||||||||
|
|
$ | 605,780 | $ | 605,009 | ||||
|
|
||||||||
The indentures for our 6.25% senior notes and 7.731% senior subordinated notes contain
covenants that require maintenance of certain minimum financial ratios, place limitations on
investments we can make, and the payment of dividends and redemptions of equity, and limit the
incurrence of additional indebtedness, asset dispositions, mergers, certain investments and
creations of liens, among other items. As of December 31, 2010, we believe we were in compliance
with our covenants. The indenture for our 7.15% senior notes contains covenants including, among
others, limitations on the amount of secured debt we may incur, and limitations on sale and
leaseback transactions and mergers. The covenants contained in the 7.15% senior notes are
generally no more restrictive, and in many cases less restrictive, than the covenants contained in
the indentures for the 6.25% senior notes and 7.731% senior subordinated notes.
61
Table of Contents
Obligations to pay principal and interest on the senior and senior subordinated notes are
guaranteed by all of our wholly-owned subsidiaries (collectively, the “Guarantor Subsidiaries”),
each of which is directly or indirectly 100% owned by Meritage Homes Corporation. Such guarantees
are full and unconditional, and joint and several. We do not provide separate financial statements
of the Guarantor Subsidiaries because Meritage (the parent company) has no independent assets or
operations, the guarantees are full and unconditional and joint and several, and any subsidiaries
of Meritage Homes Corporation other than the non-guarantor subsidiaries are, individually and in
the aggregate, minor. There are no significant restrictions on the ability of the Company or any
Guarantor Subsidiary to obtain funds from their respective subsidiaries, as applicable, by dividend
or loan.
During 2010, we completed an offering of $200 million aggregate principal amount of 7.15%
senior notes due 2020. The notes were issued at a 97.567% discount to par value. Concurrent
with the issuance of the 2020 notes, we repurchased all of our $130 million 7.0% senior notes
maturing 2014 and $65 million of our 6.25% senior notes maturing 2015. In connection with these
transactions, we recorded a $3.5 million net loss on early extinguishment of debt, which is
reflected in our statement of operations for the year ending December 31, 2010.
During 2009, we retired $24.1 million of our 7.731% senior subordinated notes maturing in 2017
by issuing approximately 783,000 shares of our common stock in a privately negotiated transaction.
The transaction was completed at an average discount of 41% from the face value of the notes,
resulting in a net $9.4 million gain on early extinguishment of debt which is reflected in our
statement of operations for the year ending December 31, 2009.
Scheduled principal maturities of our senior and subordinated notes as of December 31, 2010
follow (in thousands):
| Year Ended December 31, | ||||
|
2011
|
$ | 0 | ||
|
2012
|
0 | |||
|
2013
|
0 | |||
|
2014
|
0 | |||
|
2015
|
285,000 | |||
|
Thereafter
|
325,875 | |||
|
|
||||
|
|
$ | 610,875 | ||
|
|
||||
The aggregate capacity of our secured letters of credit facilities is approximately $40
million. These outstanding letters of credit are secured by corresponding pledges of restricted
cash accounts totaling $9.3 million and $16.3 million as of December 31, 2010 and 2009,
respectively, and are reflected as restricted cash on our consolidated balance sheets.
NOTE 6 — FAIR VALUE DISCLOSURES
Effective January 1, 2009, we adopted ASC 820-10
Fair Value Measurement and Disclosures
for
non-recurring fair value measurements of our non-financial assets and liabilities. This guidance
defines fair value, establishes a framework for measuring fair value and expands disclosures about
fair value measurements. This standard establishes a three-level hierarchy for fair value
measurements based upon the significant inputs used to determine fair value. Observable inputs are
those which are obtained from market participants external to the company while unobservable inputs
are generally developed internally, utilizing management’s estimates, assumptions and specific
knowledge of the assets/liabilities and related markets. The three levels are defined as follows:
| • | Level 1 — Valuation is based on quoted prices in active markets for identical assets and liabilities. |
| • | Level 2 —Valuation is determined from quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar instruments in markets that are not active, or by model-based techniques in which all significant inputs are observable in the market. |
| • | Level 3 — Valuation is derived from model-based techniques in which at least one significant input is unobservable and based on the company’s own estimates about the assumptions that market participants would use to value the asset or liability. |
If the only observable inputs are from inactive markets or for transactions which the company
evaluates as “distressed”, the use of Level 1 inputs should be modified by the company to properly
address these factors, or the reliance of such inputs may be limited, with a greater weight
attributed to Level 3 inputs.
62
Table of Contents
A summary of our assets re-measured at fair value on December 31, 2010 and 2009 is as follows
(in thousands):
| As of | ||||||||||||||||
| December 31, | Fair Value Measurements of Reporting Date Using | |||||||||||||||
| 2010 | Level 1 | Level 2 | Level 3 | |||||||||||||
|
Description:
|
||||||||||||||||
|
Long-lived assets held and used
|
$ | 35,781 | $ | 0 | $ | 0 | $ | 35,781 | ||||||||
|
Investments in unconsolidated entities
|
$ | 0 | $ | 0 | $ | 0 | $ | 0 | ||||||||
| As of | ||||||||||||||||
| December 31, | Fair Value Measurements of Reporting Date Using | |||||||||||||||
| 2009 | Level 1 | Level 2 | Level 3 | |||||||||||||
|
Description:
|
||||||||||||||||
|
Long-lived assets held and used
|
$ | 100,539 | $ | 0 | $ | 0 | $ | 100,539 | ||||||||
|
Investments in unconsolidated entities
|
$ | 0 | $ | 0 | $ | 0 | $ | 0 | ||||||||
Of the total $738.9 million of long-lived real-estate assets, some of which have previously
been written down to fair value, long-lived assets held and used with an initial basis of $41.2
million were impaired and written down to their fair value of $35.8 million during 2010, resulting
in an impairment of $5.4 million, which is included in our consolidated statement of operations.
Additionally, $295,000 of investments in unconsolidated entities were fully impaired to a net zero
value during 2010.
Financial Instruments
: The fair value of our fixed-rate debt is derived from quoted market
prices by independent dealers and is as follows (in thousands):
| December 31, 2010 | December 31, 2009 | |||||||||||||||
| Aggregate | Estimated Fair | Aggregate | Estimated Fair | |||||||||||||
| Principal | Value | Principal | Value | |||||||||||||
|
Financial Liabilities
|
||||||||||||||||
|
7.00% senior notes
|
N/A | N/A | $ | 130,000 | $ | 124,150 | ||||||||||
|
6.25% senior notes
|
$ | 285,000 | $ | 285,000 | $ | 350,000 | $ | 322,000 | ||||||||
|
7.731% senior subordinated notes
|
$ | 125,875 | $ | 114,861 | $ | 125,875 | $ | 104,004 | ||||||||
|
7.15% senior notes
|
$ | 200,000 | $ | 198,500 | N/A | N/A | ||||||||||
Due to the short-term nature of other financial assets and liabilities, we consider the
carrying amounts of our other short-term financial instruments to approximate fair value.
NOTE 7 — STOCKHOLDERS’ EQUITY
In April 2008, we completed a public offering of 4,297,544 shares of our common stock at
$20.50 per share. We used the proceeds received from this offering for working capital and other
general corporate purposes. The net proceeds from this offering were $82.8 million. There were no
such transactions in 2009 or 2010.
NOTE 8 — EARNINGS/(LOSS) PER SHARE
Basic and diluted earnings/(loss) per share for the years ended December 31, 2010, 2009 and
2008 were calculated as follows (in thousands, except per share amounts):
| 2010 | 2009 | 2008 | ||||||||||
|
|
||||||||||||
|
Basic weighted average number of shares outstanding
|
32,060 | 31,350 | 29,330 | |||||||||
|
|
||||||||||||
|
Effect of dilutive securities:
|
||||||||||||
|
Options to acquire common stock and unvested restricted stock (1)
|
262 | 0 | 0 | |||||||||
|
|
||||||||||||
|
Diluted average shares outstanding
|
32,322 | 31,350 | 29,330 | |||||||||
|
|
||||||||||||
|
|
||||||||||||
|
Net income/(loss)
|
$ | 7,150 | $ | (66,456 | ) | $ | (291,935 | ) | ||||
|
|
||||||||||||
|
|
||||||||||||
|
Basic earnings/(loss) per share
|
$ | 0.22 | $ | (2.12 | ) | $ | (9.95 | ) | ||||
|
|
||||||||||||
|
|
||||||||||||
|
Diluted earnings/(loss) per share
|
$ | 0.22 | $ | (2.12 | ) | $ | (9.95 | ) | ||||
|
|
||||||||||||
|
|
||||||||||||
|
Antidilutive stock options not included in the calculation of
diluted earnings per share
|
699 | 2,128 | 2,155 | |||||||||
|
|
||||||||||||
| (1) | For periods with a net loss, basic weighted average shares outstanding is used for diluted calculations as required by GAAP because all options and non-vested shares outstanding are considered anti-dilutive. |
63
Table of Contents
NOTE 9 — INCENTIVE AWARDS AND RETIREMENT PLAN
Stock Based Compensation
We have two stock compensation plans, the Meritage Stock Option Plan, which was adopted in
1997 and has been amended from time to time (the “1997 Plan”), and the 2006 Stock Incentive Plan
that was adopted in 2006 and has also been amended from time to time (the “2006 Plan” and together
with the 1997 Plan, the “Plans”). The Plans were approved by our stockholders and are administered
by our Board of Directors. The provisions of the Plans are generally consistent with the exception
that the 2006 Plan allows for the grant of stock appreciation rights, restricted stock awards,
performance share awards and performance-based awards in addition to the non-qualified and
incentive stock options allowed under the 1997 Plan. The Plans authorize awards to officers, key
employees, non-employee directors and consultants for up to 7,750,000 shares of common stock, of
which 941,559 shares remain available for grant at December 31, 2010. We believe that such awards
provide a means of performance-based compensation to attract and retain qualified employees and
better align the interests of our employees with those of our stockholders. Option awards are
granted with an exercise price equal to the market price of Meritage stock at the date of grant,
and generally have a five-year ratable vesting period and a seven-year contractual term.
Restricted stock awards are usually granted with either a three-year or five-year ratable vesting
period.
The fair value of option awards is estimated using a Black-Scholes option pricing model that
uses the assumptions noted in the following table. Expected volatilities are based on a
combination of implied volatilities from traded options on our stock and historical volatility of
our stock. Expected term/life, which represents the period of time that options granted are
expected to be outstanding, is estimated using historical data. The risk-free interest rate is
based on the U.S. Treasury yield curve for the expected term of the grant. Groups of employees
that have similar historical exercise behavior are considered separately for valuation purposes.
We only granted non-vested shares in 2010.
| 2010 | 2009 | 2008 | ||||||||||
|
Expected dividend yield
|
N/A | 0 | % | 0 | % | |||||||
|
Risk-free interest rate
|
N/A | 1.66 | % | 3.03 | % | |||||||
|
Expected volatility
|
N/A | 86.60 | % | 56.05 | % | |||||||
|
Expected life (in years)
|
N/A | 4 | 4 | |||||||||
|
Weighted average fair value of options
|
N/A | $ | 8.75 | $ | 8.01 | |||||||
Summary of Stock Option Activity:
| Year Ended December 31, 2010 | ||||||||||||||||
| Weighted | ||||||||||||||||
| Weighted | Average | |||||||||||||||
| Average | Remaining | |||||||||||||||
| Exercise | Contractual | Aggregate | ||||||||||||||
| Options | Price | Life | Intrinsic Value | |||||||||||||
| (In thousands) | ||||||||||||||||
|
|
||||||||||||||||
|
Options outstanding at beginning of year
|
1,620,167 | $ | 23.19 | |||||||||||||
|
Granted
|
0 | $ | N/A | |||||||||||||
|
Exercised
|
(133,400 | ) | $ | 15.46 | ||||||||||||
|
Cancelled
|
(154,000 | ) | $ | 24.58 | ||||||||||||
|
|
||||||||||||||||
|
Outstanding at end of year
|
1,332,767 | $ | 23.80 | 3.37 | $ | 5,339 | ||||||||||
|
|
||||||||||||||||
|
|
||||||||||||||||
|
Vested and expected to vest at end of year
|
1,265,486 | $ | 24.14 | 3.31 | $ | 4,933 | ||||||||||
|
|
||||||||||||||||
|
Exercisable at end of year
|
740,376 | $ | 26.79 | 2.67 | $ | 2,125 | ||||||||||
|
|
||||||||||||||||
|
Price range of options exercised
|
$ | 8.06 - $21.10 | ||||||||||||||
|
|
||||||||||||||||
|
Price range of options outstanding
|
$ | 8.06 - $44.44 | ||||||||||||||
|
|
||||||||||||||||
|
Total shares reserved for existing or future
grants at end of year
|
3,195,822 | |||||||||||||||
64
Table of Contents
| Years Ended December 31, | ||||||||||||||||
| 2009 | 2008 | |||||||||||||||
| Weighted | Weighted | |||||||||||||||
| Average | Average | |||||||||||||||
| Exercise | Exercise | |||||||||||||||
| Options | Price | Options | Price | |||||||||||||
|
|
||||||||||||||||
|
Options outstanding at beginning of year:
|
2,017,527 | $ | 24.16 | 2,253,155 | $ | 24.71 | ||||||||||
|
Granted
|
369,500 | $ | 14.75 | 379,376 | $ | 16.68 | ||||||||||
|
Exercised
|
(275,140 | ) | $ | 17.30 | (118,194 | ) | $ | 7.77 | ||||||||
|
Cancelled
|
(491,720 | ) | $ | 24.07 | (496,810 | ) | $ | 24.80 | ||||||||
|
|
||||||||||||||||
|
Outstanding at end of year
|
1,620,167 | $ | 23.19 | 2,017,527 | $ | 24.16 | ||||||||||
|
|
||||||||||||||||
|
|
||||||||||||||||
|
Exercisable at end of year
|
668,442 | $ | 26.83 | 805,968 | $ | 24.63 | ||||||||||
|
|
||||||||||||||||
|
Price range of options exercised
|
$ | 8.06 - $19.30 | $ | 3.59 - $19.30 | ||||||||||||
|
|
||||||||||||||||
|
Price range of options outstanding
|
$ | 8.06 - $44.44 | $ | 8.06 - $45.21 | ||||||||||||
Stock options Outstanding at December 31, 2010:
| Stock Options Outstanding | ||||||||||||||||||||
| Weighted | Stock Options Exercisable | |||||||||||||||||||
| Average | Weighted | Weighted | ||||||||||||||||||
| Number | Contractual | Average | Number | Average | ||||||||||||||||
| Range of Exercise Prices | Outstanding | Life | Exercise Price | Exercisable | Exercise Price | |||||||||||||||
|
|
||||||||||||||||||||
|
$8.06 - $14.00
|
334,936 | 4.59 | $ | 13.64 | 82,415 | $ | 13.71 | |||||||||||||
|
$14.87 - $14.87
|
19,000 | 0.87 | $ | 14.87 | 19,000 | $ | 14.87 | |||||||||||||
|
$15.98 - $15.98
|
315,014 | 3.95 | $ | 15.98 | 184,029 | $ | 15.98 | |||||||||||||
|
$17.98 - $31.31
|
385,990 | 2.27 | $ | 26.14 | 272,636 | $ | 28.62 | |||||||||||||
|
$33.17 - $44.44
|
277,827 | 2.92 | $ | 42.30 | 182,296 | $ | 42.12 | |||||||||||||
|
|
||||||||||||||||||||
|
|
||||||||||||||||||||
|
|
1,332,767 | 740,376 | ||||||||||||||||||
|
|
||||||||||||||||||||
The total intrinsic value of option exercises for the years ended December 31, 2010, 2009 and
2008 was $0.8 million, $1.2 million and $0.9 million, respectively. The intrinsic value of a stock
option is the amount by which the market value of the underlying stock exceeds the exercise price
of the stock option.
Summary of Nonvested (Restricted) Shares Activity:
| Years Ended December 31, | ||||||||||||||||||||||||
| 2010 | 2009 | 2008 | ||||||||||||||||||||||
| Weighted | Weighted | Weighted | ||||||||||||||||||||||
| Average | Average | Average | ||||||||||||||||||||||
| Grant Date | Grant Date | Grant Date | ||||||||||||||||||||||
| Nonvested Shares | Shares | Fair Value | Shares | Fair Value | Shares | Fair Value | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Nonvested at beginning of year
|
305,279 | $ | 19.11 | 137,832 | $ | 44.93 | 166,276 | $ | 44.50 | |||||||||||||||
|
Granted
|
315,000 | $ | 21.30 | 234,000 | $ | 14.36 | 0 | $ | 0 | |||||||||||||||
|
Vested
|
(118,278 | ) | $ | 24.75 | (64,553 | ) | $ | 38.47 | (28,444 | ) | $ | 42.82 | ||||||||||||
|
Cancelled
|
(36,750 | ) | $ | 20.99 | (2,000 | ) | $ | 42.82 | 0 | $ | 0 | |||||||||||||
|
|
||||||||||||||||||||||||
|
Nonvested at end of year
|
465,251 | $ | 19.01 | 305,279 | $ | 19.11 | 137,832 | $ | 44.93 | |||||||||||||||
|
|
||||||||||||||||||||||||
65
Table of Contents
Summary of Nonvested (Restricted) Performance Share Activity:
In addition to the nonvested shares in the tables above, we also had the following nonvested
shares with performance criteria outstanding:
| Years Ended December 31, | ||||||||||||||||||||||||
| 2010 | 2009 | 2008 | ||||||||||||||||||||||
| Weighted | Weighted | Weighted | ||||||||||||||||||||||
| Average | Average | Average | ||||||||||||||||||||||
| Grant Date | Grant Date | Grant Date | ||||||||||||||||||||||
| Nonvested Shares | Shares | Fair Value | Shares | Fair Value | Shares | Fair Value | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Nonvested at
beginning of
year
|
202,500 | $ | 14.27 | 0 | $ | N/A | 0 | $ | N/A | |||||||||||||||
|
Granted
|
67,500 | 22.18 | 202,500 | 14.27 | 0 | N/A | ||||||||||||||||||
|
Released (1)
|
(67,500 | ) | 14.27 | 0 | N/A | 0 | N/A | |||||||||||||||||
|
Forfeited
|
0 | N/A | 0 | N/A | 0 | N/A | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Nonvested at
end of year
|
202,500 | 16.91 | 202,500 | 14.27 | 0 | N/A | ||||||||||||||||||
|
|
||||||||||||||||||||||||
| Years Ended December 31, | ||||||||
| 2010 | 2009 | |||||||
|
|
||||||||
|
Performance shares eligible to vest based on
current year performance metrics
|
67,500 | 67,500 | ||||||
|
|
||||||||
|
Performance
criteria met — shares released (1)
|
33,750 | 67,500 | ||||||
|
|
||||||||
|
Performance
criteria not met — shares forfeited (1)
|
33,750 | 0 | ||||||
| (1) | 2010 amounts to be released/forfeited during the first quarter of 2011. |
In 2009, we began granting restricted shares with performance requirements to our executive
management group. The 2009 awards vest in equal tranches over three years from the anniversary of
the date of grant. The 2010 awards vest in total on the third anniversary of the date of grant.
All performance shares only vest upon the attainment of certain financial and operational criteria
as established and approved by our Board of Directors.
As of December 31, 2010, we had $7.8 million of total unrecognized compensation cost related
to non-vested stock-based compensation arrangements granted under the Plans that will be recognized
on a straight-line basis over the remaining vesting periods. That cost is expected to be
recognized over a weighted-average period of 2.16 years.
Stock Based Compensation (in thousands)
| Years Ended December 31, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
|
|
||||||||||||
|
Stock Based Compensation Expense
|
$ | 5,358 | $ | 6,200 | $ | 5,500 | ||||||
Cash received from exercises under the Plans and the actual tax (deficiency)/benefits realized
from those exercises is summarized below (in thousands):
| Years Ended December 31, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
|
|
||||||||||||
|
Cash received from exercises
|
$ | 2,000 | $ | 4,800 | $ | 900 | ||||||
66
Table of Contents
401(k) Retirement Plan
We have a 401(k) plan for all full-time Meritage employees (the “Plan”). Employees hired on
or after January 1, 2010 are automatically enrolled in the Plan. We match portions of employees’
voluntary contributions, and contributed to the plan approximately $553,000, $602,000 and $1.1
million for the years ended 2010, 2009 and 2008, respectively. Company common stock was
an investment option for the Company match contributions in 2008 and 2009. Starting in January
2010, we eliminated our Company common stock as a possible matching contribution election. Meritage
stock comprised 2.4% and 3.1% of the total plan assets as of December 31, 2010 and 2009,
respectively.
NOTE 10 — INCOME TAXES
Components of income tax (benefit)/expense follow (in thousands):
| Years Ended December 31, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
|
Current taxes:
|
||||||||||||
|
Federal
|
$ | (5,526 | ) | $ | (88,343 | ) | $ | (123,138 | ) | |||
|
State
|
860 | 0 | 50 | |||||||||
|
|
||||||||||||
|
|
(4,666 | ) | (88,343 | ) | (123,088 | ) | ||||||
|
|
||||||||||||
|
|
||||||||||||
|
Deferred taxes:
|
||||||||||||
|
Federal
|
0 | 0 | 123,703 | |||||||||
|
State
|
0 | 0 | 15,354 | |||||||||
|
|
||||||||||||
|
|
0 | 0 | 139,057 | |||||||||
|
|
||||||||||||
|
|
||||||||||||
|
Total
|
$ | (4,666 | ) | $ | (88,343 | ) | $ | 15,969 | ||||
|
|
||||||||||||
Income taxes differ for the years ended December 31, 2010, 2009 and 2008, from the amounts
computed using the expected federal statutory income tax rate of 35% as a result of the following
(in thousands):
| Years Ended December 31, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
|
Expected taxes at current federal statutory income tax rate
|
$ | 869 | $ | (54,180 | ) | $ | (96,588 | ) | ||||
|
State income taxes, net of federal tax benefit
|
559 | (2,414 | ) | 9,859 | ||||||||
|
Change in valuation allowance
|
(2,570 | ) | (34,494 | ) | 102,379 | |||||||
|
Recognition of tax benefits
|
(4,592 | ) | 0 | 0 | ||||||||
|
Non-deductible costs and other
|
1,068 | 2,745 | 319 | |||||||||
|
|
||||||||||||
|
Income tax (benefit)/expense
|
$ | (4,666 | ) | $ | (88,343 | ) | $ | 15,969 | ||||
|
|
||||||||||||
Due to the effects of the deferred tax asset valuation allowance, carrybacks of NOLs, and
changes in unrecognized tax benefits, the effective tax rates in 2010, 2009 and 2008 are not
meaningful percentages as there is no correlation between the effective tax rates and the amount of
pretax income or losses for those periods.
67
Table of Contents
Deferred tax assets and liabilities have been recognized in the consolidated balance sheets
due to the following temporary differences at December 31 (in thousands):
| 2010 | 2009 | |||||||
|
Deferred tax assets:
|
||||||||
|
Real estate
|
$ | 30,537 | $ | 37,393 | ||||
|
Goodwill
|
15,536 | 18,450 | ||||||
|
Warranty reserve
|
13,028 | 9,844 | ||||||
|
Wages payable
|
804 | 750 | ||||||
|
Reserves and allowances
|
493 | 1,287 | ||||||
|
Equity-based compensation
|
3,587 | 2,924 | ||||||
|
Accrued expenses
|
5,050 | 3,113 | ||||||
|
Net operating loss carry-forwards
|
25,585 | 21,353 | ||||||
|
State franchise taxes
|
301 | 0 | ||||||
|
Other
|
0 | 3,306 | ||||||
|
|
||||||||
|
Total deferred tax assets
|
94,921 | 98,420 | ||||||
|
Valuation allowance
|
(89,999 | ) | (92,569 | ) | ||||
|
|
||||||||
|
Total deferred tax assets net of valuation allowance
|
4,922 | 5,851 | ||||||
|
|
||||||||
|
|
||||||||
|
Deferred tax liabilities:
|
||||||||
|
State franchise taxes
|
0 | 774 | ||||||
|
Deferred revenue
|
3,729 | 3,380 | ||||||
|
Prepaids
|
210 | 654 | ||||||
|
Fixed assets
|
835 | 1,008 | ||||||
|
Other
|
148 | 35 | ||||||
|
|
||||||||
|
Total deferred tax liabilities
|
4,922 | 5,851 | ||||||
|
|
||||||||
|
|
||||||||
|
Net deferred tax asset
|
$ | 0 | $ | 0 | ||||
|
|
||||||||
The following is a tabular reconciliation of the total amounts of unrecognized tax benefits
for the years ended December 31 (in thousands):
| 2010 | 2009 | |||||||
|
Beginning of year
|
$ | 4,592 | $ | 2,913 | ||||
|
Increases of prior year items
|
100 | 2,296 | ||||||
|
Decreases due to lapse of statute of limitations
|
(4,692 | ) | (617 | ) | ||||
|
|
||||||||
|
|
||||||||
|
End of year
|
$ | 0 | $ | 4,592 | ||||
|
|
||||||||
At December 31, 2010, we have no unrecognized tax benefits due to the lapse of the statue of
limitations and completion of audits for prior years. The unrecognized tax benefits at December
31, 2009 related to items in prior years. We believe that our current income tax filing positions
and deductions will be sustained on audit and do not anticipate any adjustments that will result in
a material change. Interest and penalties are accrued on unrecognized tax benefits and included in
federal income tax expense.
In accordance with ASC 740-10,
Income Taxes
, we evaluate our deferred tax assets, including
the benefit from net operating losses (“NOLs”), to determine if a valuation allowance is required.
Companies must assess whether a valuation allowance should be established based on the
consideration of all available evidence using a “more likely than not” standard with significant
weight being given to evidence that can be objectively verified. This assessment considers, among
other matters, the nature, frequency and severity of current and cumulative losses, forecasts of
future profitability, the length of statutory carryforward periods, our experience with operating
losses and our experience of utilizing tax credit carryforwards and tax planning alternatives.
Based upon a review of all available evidence, we recorded a full valuation allowance against our
deferred tax assets during 2008. We continue to maintain a full non-cash valuation allowance
against the entire amount of our remaining net deferred tax assets at December 31, 2010 as we have
determined that the weight of the negative evidence exceeds that of the positive evidence and it
continues to be more likely than not that we will not be able to utilize all of our deferred tax
assets and NOL carryovers.
At December 31, 2010 and 2009, we had a valuation allowance of $90.0 million ($63.4 million
federal and $26.6 million state) and $92.6 million ($65.2 million federal and $27.4 million state),
respectively, against deferred tax assets which include the tax benefit from NOL carryovers. Our
future deferred tax asset realization depends on sufficient taxable income in the carryforward
periods under existing tax laws. Federal net operating loss carryforwards may be used to offset
future taxable income for 20 years and expire in 2030. State net operating loss carryforwards may
be used to offset future taxable income for a period of time ranging from 5 to 20 years, depending
on the state, and begin to expire in 2012. Deferred tax assets include tax-effected federal and
state net
operating loss carryforwards of $25.6 million and $21.4 million in 2010 and 2009,
respectively. On an ongoing basis, we will continue to review all available evidence to determine
if and when we expect to realize our deferred tax assets and NOL carryovers.
68
Table of Contents
We conduct business and are subject to tax in the U.S. and several states. With few
exceptions, we are no longer subject to U.S. federal, state, or local income tax examinations by
taxing authorities for years prior to 2006. The federal tax audit that began in 2008 was expanded
to include 2004 through 2009 due to our carryback of the 2009 net operating loss to prior tax
years. The federal audit was completed in 2010. Unrelated to the federal audit, we amended our
2006 federal and state tax returns for a tax accounting error discovered in reviewing a prior
acquisition. Additional tax and interest on the amended returns are expected to offset the federal
audit benefit. Taken together, we do not believe there will be a material effect on our deferred
tax assets, which are subject to a full valuation allowance.
The tax benefits from the Company’s net operating losses, built-in losses, and tax credits
would be materially reduced or potentially eliminated if the Company experienced an “ownership
change” as defined under IRC §382. Based on the Company’s analysis performed as of December 31,
2010, the Company does not believe that it has experienced an ownership change as of December 31,
2010. As a protective measure, our stockholders held a Special Meeting of Stockholders on
February 16, 2009 and approved an amendment to our Articles of Incorporation that restricts certain
transfers of our common stock. The amendment helps us avoid an unintended ownership change and
thereby preserve the value of our tax benefits for future utilization.
NOTE 11 — SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
The following table presents certain supplemental cash flow information (in thousands):
| 2010 | 2009 | 2008 | ||||||||||
|
Cash paid during the year for:
|
||||||||||||
|
Interest, net of interest capitalized
|
$ | 31,971 | $ | 32,462 | $ | 20,482 | ||||||
|
Income taxes
|
$ | 4,915 | $ | 17 | $ | 2,960 | ||||||
|
|
||||||||||||
|
Non-cash operating activities (decrease)/increase:
|
||||||||||||
|
Real estate not owned
|
$ | (9,661 | ) | $ | 4,765 | $ | (7,867 | ) | ||||
|
|
||||||||||||
|
Non-cash investing activities:
|
||||||||||||
|
Distributions from unconsolidated entities
|
$ | 294 | $ | 279 | $ | 7,580 | ||||||
|
|
||||||||||||
|
Non-cash financing activities:
|
||||||||||||
|
Equity issued for debt extinguishment
|
$ | 0 | $ | 14,320 | $ | 0 | ||||||
|
Reductions in model home lease program
|
$ | 0 | $ | 0 | $ | 19,073 | ||||||
NOTE 12 — RELATED PARTY TRANSACTIONS
From time to time, in the normal course of business, we have transacted with related or
affiliated companies and with certain of our officers and directors. We believe that the terms and
fees negotiated for all transactions listed below are no less favorable than those that could be
negotiated in arm’s length transactions.
During 2009, we entered into an FDIC insured bank deposit account agreement with Alliance Bank
of Arizona (“Alliance Bank”) through the Certificate of Deposit Account Registry Service (“CDARS”).
CDARS is an accepted and recognized service through which participating banks may accept and
provide FDIC insurance coverage for large deposits that would otherwise exceed FDIC insurance
limits (currently $250,000) by placing, as custodian for the deposit customer (Meritage), that
portion of the deposit exceeding FDIC insurance limits with other CDARS banks participating in the
program such that for FDIC insurance purposes, the deposit is divided into insured amounts and
deposited with other network banks to allow for full FDIC coverage. At December 31, 2010 and 2009,
we placed cash deposits in the aggregate amount of $89.3 million and $50.1 million, respectively,
through Alliance Bank as the CDARS custodian or relationship bank. Alliance Bank has divided this
amount into FDIC insured amounts deposited with other CDARS participating FDIC insured
institutions. We do not pay any separate fees to Alliance Bank for this program. Rather, Alliance
Bank receives a small fee from the other CDARS institutions for certain funds placed. Robert
Sarver, a Meritage director, is a director and the chief executive officer of Western Alliance
Bancorporation, the parent company of Alliance Bank. In addition, Steven Hilton, our Chairman and
CEO is also a director of Western Alliance Bancorporation. We earned interest on deposits placed
with Western Alliance Bancorporation pursuant to the CDARS program of $653,000 and $93,000 in 2010
and 2009, respectively.
During 2004 the Company entered into an advertising/sponsorship agreement with the National
Basketball Association’s Phoenix Suns organization. In 2004, Mr. Sarver became and remains the
Controlling Owner and Managing Partner of the Phoenix Suns, and our CEO, Steven Hilton, became and
remains a minority owner of the team. In 2008, we paid approximately $170,000 in
advertising/sponsorship costs related to the agreement. We terminated our
advertising/sponsorship agreement during 2007 and therefore had no such payments in 2009 or 2010.
The 2008 amounts are recorded as general and administrative expenses in our consolidated statement
of operations.
69
Table of Contents
NOTE 13 — OPERATING AND REPORTING SEGMENTS
As defined in ASC 280-10,
Segment Reporting
, we have six operating segments (the six states in
which we operate). These segments are engaged in the business of acquiring and developing land,
constructing homes, marketing and selling those homes and providing warranty and customer services.
We aggregate our operating segments into a reporting segment based on similar long-term economic
characteristics and geographical proximity. Our reportable homebuilding segments are as follows:
|
West:
|
California and Nevada | |
|
Central:
|
Texas, Arizona and Colorado | |
|
East:
|
Florida |
Management’s evaluation of segment performance is based on segment operating income/(loss),
which we define as homebuilding and land revenues less cost of home construction, commissions and
other sales costs, land development and other land sales costs and other costs incurred by or
allocated to each segment, including impairments. Each reportable segment follows the same
accounting policies described in Note 1, “Business and Summary of Significant Accounting Policies.”
Operating results for each segment may not be indicative of the results for such segment had it
been an independent, stand-alone entity for the periods presented. The following segment
information is in thousands:
| Year Ended December 31, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
|
Revenue (1):
|
||||||||||||
|
West
|
$ | 163,200 | $ | 146,151 | $ | 311,370 | ||||||
|
Central
|
693,984 | 771,822 | 1,119,256 | |||||||||
|
East
|
84,472 | 52,340 | 92,442 | |||||||||
|
|
||||||||||||
|
Consolidated total
|
941,656 | 970,313 | 1,523,068 | |||||||||
|
|
||||||||||||
|
Operating income/(loss) (2):
|
||||||||||||
|
West
|
9,479 | (38,463 | ) | (133,461 | ) | |||||||
|
Central
|
33,133 | (62,361 | ) | (69,146 | ) | |||||||
|
East
|
8,924 | (13,471 | ) | (25,303 | ) | |||||||
|
|
||||||||||||
|
Segment operating earnings/(loss)
|
51,536 | (114,295 | ) | (227,910 | ) | |||||||
|
Corporate and unallocated costs (3)
|
(20,422 | ) | (23,485 | ) | (14,096 | ) | ||||||
|
Goodwill and intangible asset impairments
|
0 | 0 | (1,133 | ) | ||||||||
|
Earnings/(loss) from unconsolidated entities, net
|
5,243 | 4,013 | (17,038 | ) | ||||||||
|
Interest expense
|
(33,722 | ) | (36,531 | ) | (23,653 | ) | ||||||
|
(Loss)/gain on extinguishment of debt, net of transaction costs
|
(3,454 | ) | 9,390 | 0 | ||||||||
|
Other income, net
|
3,303 | 6,109 | 7,864 | |||||||||
|
|
||||||||||||
|
|
||||||||||||
|
Net income/(loss) before income taxes
|
$ | 2,484 | $ | (154,799 | ) | $ | (275,966 | ) | ||||
|
|
||||||||||||
70
Table of Contents
| At December 31, 2010 | ||||||||||||||||||||
| Corporate and | ||||||||||||||||||||
| West | Central | East | Unallocated (4) | Total | ||||||||||||||||
|
Deposits on real estate under
option or contract
|
$ | 50 | $ | 9,754 | $ | 555 | $ | 0 | $ | 10,359 | ||||||||||
|
Real estate
|
191,882 | 499,176 | 47,870 | 0 | 738,928 | |||||||||||||||
|
Investments in unconsolidated entities
|
110 | 10,507 | 29 | 341 | 10,987 | |||||||||||||||
|
Other assets
|
3,501 | 32,961 | 7,873 | 420,329 | 464,664 | |||||||||||||||
|
|
||||||||||||||||||||
|
Total assets
|
$ | 195,543 | $ | 552,398 | $ | 56,327 | $ | 420,670 | $ | 1,224,938 | ||||||||||
|
|
||||||||||||||||||||
| At December 31, 2009 | ||||||||||||||||||||
| Corporate and | ||||||||||||||||||||
| West | Central | East | Unallocated (4) | Total | ||||||||||||||||
|
Deposits on real estate under
option or contract
|
$ | 25 | $ | 8,340 | $ | 271 | $ | 0 | $ | 8,636 | ||||||||||
|
Real estate
|
142,829 | 499,319 | 32,889 | 0 | 675,037 | |||||||||||||||
|
Investments in unconsolidated entities
|
260 | 11,339 | 64 | 219 | 11,882 | |||||||||||||||
|
Other assets
|
10,498 | 41,529 | 1,248 | 493,837 | 547,112 | |||||||||||||||
|
|
||||||||||||||||||||
|
Total assets
|
$ | 153,612 | $ | 560,527 | $ | 34,472 | $ | 494,056 | $ | 1,242,667 | ||||||||||
|
|
||||||||||||||||||||
| (1) | Revenue includes the following land closing revenue, by segment: 2010 — $1.3 million in the Central Region; 2009 — $2.9 million in the West Region and $4.6 million in the Central Region; 2008 — $3.8 million in the West Region, $13.6 million in the Central Region and $0.5 million in the East Region. | |
| (2) | See Note 2 to these consolidated financial statements for breakout of real estate-related impairment by Region. | |
| (3) | Balance consists primarily of corporate costs and numerous shared service functions such as finance and treasury that are not allocated to the reporting segments. | |
| (4) | Balance consists primarily of cash and other corporate assets not allocated to the segments. |
NOTE 14 — COMMITMENTS AND CONTINGENCIES
We are involved in various routine legal proceedings incidental to our business, some of which
are covered by insurance. With respect to the majority of pending litigation matters, our ultimate
legal and financial responsibility, if any, cannot be estimated with certainty and, in most cases,
any potential losses related to those matters are not considered probable. We have reserved
approximately $13.2 million for losses related to litigation and asserted claims where our ultimate
exposure is considered probable and the potential loss can be reasonably estimated, which is
classified within accrued liabilities, “other” accruals, on our December 31, 2010 balance sheet as
discussed in Note 1 to these financial statements. Additionally, we have $29.3 million of warranty
reserves, primarily relating to the correction of home construction defects, foundation issues and
general customer claims. Historically, most of these matters are resolved prior to litigation. We
believe that none of these matters will have a material adverse impact upon our consolidated
financial condition, results of operations or cash flows.
Joint Venture Litigation
We, along with our joint venture partners (and their respective parent companies) in an
unconsolidated joint venture, are defendants in lawsuits initiated by the lender group
regarding a large Nevada-based land acquisition and development joint venture in which the
lenders are seeking damages on the basis of enforcement of completion guarantees and other
related claims
(JP Morgan Chase Bank, N.A. v. KB HOME Nevada, et al., U.S. District Court,
District of Nevada (Case No. 08-CV-01711 PMP)).
While our interest in this joint venture is
comparatively small, totaling 3.53%, we are vigorously defending and otherwise seeking
resolution of these actions. Meritage is the only builder joint venture partner to have fully
performed its obligations with respect to takedowns of lots from the joint venture, having
completed its first takedown in April 2007 and having tendered full performance of its second
and final takedown in April 2008. The joint venture and the lender group rejected Meritage’s
tender of performance, and Meritage contends, among other things,
that the rejection by the joint
venture and the lender group of Meritage’s tender of full performance was wrongful and should
release Meritage of liability with respect to the takedown and the springing repayment
guarantee. We have fully impaired our investment in this joint venture in prior periods. In
one of the ongoing lawsuits related to this venture, all members of the joint venture
participated in an arbitration regarding their respective performance obligations in response
to one of the members’ claims. On July 6, 2010, the arbitration decision was issued, which
denied the specific performance claim, but did award approximately $37 million of damages to
one member on other claims. The parties involved have jointly appealed the arbitration panel’s decision
(Meritage has also appealed on independent grounds) to the United States Courts of Appeal for the Ninth Circuit,
Focus South
71
Table of Contents
Group, LLC, et al. v.
KB HOME Nevada Inc, et al., (Case No. 10-17562),
and the case is pending. We believe our
potential share of the award, if any, will not be material to our financial position and that
our existing legal reserves are sufficient to cover the expected claim. Certain lenders in the
lender group recently filed an involuntary bankruptcy petition against the joint venture in the
United States Bankruptcy Court, District of Nevada
, (JPMorgan Chase Bank, N.A. v. South Edge,
LLC (Case No. 10-32968-bam))
, and it is anticipated that the lender group may try to use that
bankruptcy filing as a means to trigger springing repayment guarantees of the partners. The
initial balance of the loan with the springing guarantees was $585 million and as of December
31, 2010, the outstanding principal balance was approximately $328 million. Although the final
disposition of these suits and related actions, claims and demands remains uncertain, we do
not, at this time, anticipate outcomes that will have a material impact on our financial
position or results of operations.
Chinese Drywall Litigation
We have been named as a defendant in U.S. District Court lawsuits with 15 homeowners whose
homes contain defective Chinese drywall. Among those 15, we have received repair authorizations
and releases from seven homeowners and anticipate dismissal of their claims against us. The
remaining eight plaintiffs allege physical and economic damages and seek legal and equitable
relief, medical monitoring and legal fees. One of the plaintiffs in the U.S. District Court
litigation has also sued us in Florida State Court. The $2.0 million of remaining Chinese drywall
warranty reserves we have accrued as of December 31, 2010 include costs associated with the repair
of these homes and costs to defend this litigation. No accrual has been made for any amounts
beyond such repair and defense costs because of the inherent uncertainty in this litigation and the
inability to determine the probability of a loss resulting from this litigation or to estimate the
range of possible loss, if any.
In the normal course of business, we provide standby letters of credit and performance bonds
issued to third parties to secure performance under various contracts and commitments. See Notes 1
and 4 to these consolidated financial statements for additional discussion.
We lease office facilities, model homes and equipment under various operating lease
agreements. Approximate future minimum lease payments for non-cancelable operating leases as of
December 31, 2010, are as follows (in thousands):
| Years Ended December 31, | ||||
|
2011
|
$ | 6,610 | ||
|
2012
|
6,223 | |||
|
2013
|
5,973 | |||
|
2014
|
2,283 | |||
|
2015
|
333 | |||
|
Thereafter
|
0 | |||
|
|
||||
|
|
$ | 21,422 | ||
|
|
||||
Rent expense approximated $7.5 million, $9.7 million and $12.8 million in 2010, 2009 and 2008,
respectively, and is included within general and administrative expense or in commissions and other
sales costs on our consolidated statements of operations. Included in our 2010 and 2009 results
are $0.6 million and $1.3 million, respectively, of charges related to the early termination or
vacant space expense for some of our facilities.
See Note 1 for contingencies related to our warranty obligations.
72
Table of Contents
NOTE 15 — SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
Quarterly results for the years ended December 31, 2010 and 2009 follow (in thousands, except per
share amounts):
| First | Second | Third | Fourth | |||||||||||||
|
2010
|
||||||||||||||||
|
Total closing revenue
|
$ | 201,804 | $ | 291,405 | $ | 233,803 | $ | 214,644 | ||||||||
|
Gross profit/(loss) (1)
|
$ | 38,256 | $ | 52,896 | $ | 42,561 | $ | 33,983 | ||||||||
|
Earnings/(loss) before income taxes
|
$ | 2,781 | $ | 4,391 | $ | 731 | $ | (5,419 | ) | |||||||
|
Net earnings/(loss)
|
$ | 2,660 | $ | 4,166 | $ | 1,219 | $ | (895 | ) | |||||||
|
Per Share Data:
|
||||||||||||||||
|
Basic earnings/(loss) per share (2)
|
$ | 0.08 | $ | 0.13 | $ | 0.04 | $ | (0.03 | ) | |||||||
|
Diluted earnings/(loss) per share (2)
|
$ | 0.08 | $ | 0.13 | $ | 0.04 | $ | (0.03 | ) | |||||||
|
|
||||||||||||||||
|
2009
|
||||||||||||||||
|
Total closing revenue
|
$ | 231,138 | $ | 221,539 | $ | 231,816 | $ | 285,820 | ||||||||
|
Gross profit/(loss) (3)
|
$ | 17,322 | $ | (39,225 | ) | $ | 22,902 | $ | 3,052 | |||||||
|
Loss before income taxes
|
$ | (18,269 | ) | $ | (71,894 | ) | $ | (17,639 | ) | $ | (46,997 | ) | ||||
|
Net (loss)/earnings (4)
|
$ | (18,355 | ) | $ | (73,602 | ) | $ | (17,785 | ) | $ | 43,286 | |||||
|
Per Share Data:
|
||||||||||||||||
|
Basic (loss)/earnings per share (2)
|
$ | (0.60 | ) | $ | (2.37 | ) | $ | (0.56 | ) | $ | 1.36 | |||||
|
Diluted (loss)/earnings per share (2)
|
$ | (0.60 | ) | $ | (2.37 | ) | $ | (0.56 | ) | $ | 1.35 | |||||
| (1) | In accordance with ASC 360-10 and as previously discussed in Note 1, in the fourth quarter of 2010, we recorded $3.9 million of inventory impairments, $1.0 million of option deposit and pre-acquisition write-offs, $183,000 of joint venture impairments and $17,000 of impairments on land held for sale. | |
| (2) | Due to the computation of earnings/(loss) per share, the sum of the quarterly amounts may not equal the full-year results. | |
| (3) | In the fourth quarter of 2009 we recorded $19.3 million of inventory impairments, $5.3 million of option deposit and pre-acquisition write-offs and $14.2 million of impairments on land held for sale. | |
| (4) | Included in our fourth quarter results is a $90.3 million tax benefit due to the NOL carryback laws, as previously discussed. |
We typically experience seasonal variability in our quarterly operating results and capital
requirements. Historically, we sell more homes in the first half of the year, which results in
more working capital requirements and home closings in the third and fourth quarters. However,
during the current economic downturn and the enactment and expiration of certain government
incentives, our results may not follow our historical trends.
| Item 9. | Changes in and Disagreements With Accountants on Accounting and Financial Disclosure |
None
| Item 9A. | Controls and Procedures |
As of the end of the period covered by this report, management, including our Chief Executive
Officer (“CEO”) and Chief Financial Officer (“CFO”), evaluated the effectiveness of the design and
operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e)
under the Exchange Act). Based upon, and as of the date of that evaluation, our CEO and CFO
concluded that our disclosure controls and procedures were effective to ensure that information
required to be disclosed in the reports we file and submit under the Exchange Act is recorded,
processed, summarized and reported as and when required. Further, our CEO and CFO concluded that
our disclosure controls and procedures were effective to ensure that information required to be
disclosed in reports filed by us under the Exchange Act, is accumulated and communicated to
management, including the CEO and CFO, in a manner to allow timely decisions regarding the required
disclosure.
There was no change in our internal control over financial reporting (as defined in Rules
13a-15(f) and 15d-15(f) under the Exchange Act) identified in connection with the foregoing
evaluation that occurred during our last fiscal quarter that has materially affected, or is
reasonably likely to materially affect, our internal control over financial reporting.
73
Table of Contents
Management’s Annual Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over
financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). Internal control over
financial reporting is a process to provide reasonable assurance regarding the reliability of our
financial reporting and the preparation of financial statements for external purposes in accordance
with accounting principles generally accepted in the United States. Because of its inherent
limitations, internal control over financial reporting is not intended to provide absolute
assurance that a misstatement of our financial statements would be prevented or detected. Also,
projections of any evaluation of internal control effectiveness to future periods are subject to
the risk that controls may become inadequate because of changes in conditions, or that the degree
of compliance with internal control policies or procedures may deteriorate. Under the supervision
and with the participation of our management, including our CEO and CFO, we conducted an evaluation
of the effectiveness of our internal control over financial reporting based on the framework in
Internal Control — Integrated Framework
issued by the Committee of Sponsoring Organizations of the
Treadway Commission. Based on this evaluation, our management concluded that our internal control
over financial reporting was effective as of December 31, 2010. The effectiveness of our internal
control over financial reporting as of December 31, 2010 has been audited by Deloitte & Touche LLP,
an independent registered accounting firm, as stated in their attestation report, which is included
herein.
74
Table of Contents
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
Meritage Homes Corporation
Scottsdale, Arizona
Meritage Homes Corporation
Scottsdale, Arizona
We have audited the internal control over financial reporting of Meritage Homes Corporation
and subsidiaries (the “Company”) as of December 31, 2010, based on criteria established in
Internal
Control — Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway
Commission. The Company’s management is responsible for maintaining effective internal control
over financial reporting and for its assessment of the effectiveness of internal control over
financial reporting, included in the accompanying Management’s Annual Report on Internal Control
over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal
control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether effective internal control over financial reporting was
maintained in all material respects. Our audit included obtaining an understanding of internal
control over financial reporting, assessing the risk that a material weakness exists, testing and
evaluating the design and operating effectiveness of internal control based on the assessed risk,
and performing such other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed by, or under the
supervision of, the company’s principal executive and principal financial officers, or persons
performing similar functions, and effected by the company’s board of directors, management, and
other personnel to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles. A company’s internal control over financial reporting includes
those policies and procedures that (1) pertain to the maintenance of records that, in reasonable
detail, accurately and fairly reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted accounting principles,
and that receipts and expenditures of the company are being made only in accordance with
authorizations of management and directors of the company; and (3) provide reasonable assurance
regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the
company’s assets that could have a material effect on the financial statements.
Because of the inherent limitations of internal control over financial reporting, including
the possibility of collusion or improper management override of controls, material misstatements
due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any
evaluation of the effectiveness of the internal control over financial reporting to future periods
are subject to the risk that the controls may become inadequate because of changes in conditions,
or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the Company maintained, in all material respects, effective internal control
over financial reporting as of December 31, 2010, based on the criteria established in
Internal
Control — Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway
Commission.
We have also audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated financial statements as of and for the year ended
December 31, 2010 of the Company and our report dated February 28, 2011 expressed an unqualified
opinion on those consolidated financial statements and included an explanatory paragraph regarding
the adoption of amended consolidation guidance applicable to variable interest entities in
accordance with Accounting Standards Codification 810,
Consolidation
, which resulted in the
deconsolidation of certain variable interest entities.
/s/ DELOITTE & TOUCHE LLP
Phoenix, Arizona
February 28, 2011
February 28, 2011
75
Table of Contents
| Item 9B. | Reserved |
PART III
| Item 10. | Directors, Executive Officers and Corporate Governance |
Except as set forth herein, the information required by this item regarding our directors and
compliance with Section 16 of the Exchange Act is incorporated by reference from the information
contained in our 2011 Proxy Statement (which will be filed with the Securities and Exchange
Commission no later than 120 days following the Company’s fiscal year end). The information
required by Item 10 regarding our executive officers appears in Part I of this Annual Report as
permitted by General Instruction G(3).
| Item 11. | Executive Compensation |
Information required in response to this item is incorporated by reference to our 2011 Proxy
Statement, which will be filed with the SEC within 120 days following the Company’s fiscal year
end.
| Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters |
Information required in response to this item is incorporated by reference from our 2011 Proxy
Statement, which will be filed with the SEC within 120 days following the Company’s fiscal year
end.
| Item 13. | Certain Relationships and Related Transactions, and Director Independence |
Information required in response to this item is incorporated by reference from our 2011 Proxy
Statement, which will be filed with the SEC within 120 days following the Company’s fiscal year
end.
| Item 14. | Principal Accountant Fees and Services |
Information required in response to this item is incorporated by reference from our 2011 Proxy
Statement, which will be filed with the SEC within 120 days following the Company’s fiscal year
end.
PART IV
| Item 15. | Exhibits and Financial Statement Schedules |
| (a) | Financial Statements and Schedules |
| (i) | Financial Statements: |
| (1) | Report of Deloitte & Touche LLP | ||
| (2) | Consolidated Financial Statements and Notes to Consolidated Financial Statements of the Company, including Consolidated Balance Sheets as of December 31, 2010 and 2009 and related Consolidated Statements of Operations, Stockholders’ Equity and Cash Flows for each of the years in the three-year period ended December 31, 2010 |
| (ii) | Financial Statement Schedules: |
Schedules have been omitted because of the
absence of conditions under which they are
required or because the required information
is included in the Consolidated Financial
Statements or Notes thereto.
76
Table of Contents
(b) Exhibits
| Exhibit | ||||||
| Number | Description | Page or Method of Filing | ||||
| 2.1 |
Agreement and Plan of Reorganization, dated as of
September 13, 1996, by and among Homeplex, the
Monterey Merging Companies and the Monterey
Stockholders
|
Incorporated by reference to Appendix A of Form S-4 Registration Statement No. 333-15937. | ||||
|
|
||||||
| 3.1 |
Restated Articles of Incorporation of Meritage
Homes Corporation
|
Incorporated by reference to Exhibit 3 of Form 8-K dated June 20, 2002. | ||||
|
|
||||||
| 3.1.1 |
Amendment to Articles of Incorporation of Meritage
Homes Corporation
|
Incorporated by reference to Exhibit 3.1 of Form 8-K dated September 15, 2004. | ||||
|
|
||||||
| 3.1.2 |
Amendment to Articles of Incorporation of Meritage
Homes Corporation
|
Incorporated by reference to Appendix A of the Proxy Statement for the 2006 Annual Meeting of Stockholders. | ||||
|
|
||||||
| 3.1.3 |
Amendment to Articles of Incorporation of Meritage
Homes Corporation
|
Incorporated by reference to Appendix B of Proxy Statement for the 2008 Annual Meeting of Stockholders. | ||||
|
|
||||||
| 3.1.4 |
Amendment to Articles of Incorporation of Meritage
Homes Corporation
|
Incorporated by reference to Appendix A of the Definitive Proxy Statement filed with the Securities and Exchange Commission on January 9, 2009. | ||||
|
|
||||||
| 3.2 |
Amended and Restated Bylaws of Meritage Homes
Corporation
|
Incorporated by reference to Exhibit 3.1 of Form 8-K dated August 21, 2007. | ||||
|
|
||||||
| 3.2.1 |
Amendment to Amended and Restated Bylaws of
Meritage Homes Corporation
|
Incorporated by reference to Exhibit 3.1 of Form 8-K filed on December 24, 2008. | ||||
|
|
||||||
| 4.1 |
Form of Specimen of Common Stock Certificate
|
Incorporated by reference to Exhibit 4.1 of Form 10-K for the year ended December 31, 2007. | ||||
|
|
||||||
| 4.2 |
Indenture dated March 10, 2005 (re 6
1
/
4
% Senior
Notes due 2015) and form of 6
1
/
4
% Senior Notes due
2015
|
Incorporated by reference to Exhibit 4.4 of Form 10-K for the year ended December 31, 2004. | ||||
|
|
||||||
| 4.2.1 |
First Supplemental Indenture, dated April 18, 2005
(re 6
1
/
4
% Senior Notes due 2015)
|
Incorporated by reference to Exhibit 4.1.1 of Form S-4 Registration Statement No. 333-123661. | ||||
|
|
||||||
| 4.2.2 |
Second Supplemental Indenture, dated September 22,
2005 (re 6
1
/
4
% Senior Notes due 2015)
|
Incorporated by reference to Exhibit 4.2 of Form 10-Q for the quarterly period ended September 30, 2005. | ||||
|
|
||||||
| 4.2.3 |
Third Supplemental Indenture, dated July 10, 2007
(re 6
1
/
4
% Senior Notes due 2015)
|
Incorporated by reference to Exhibit 4.3.3 of Form 10-K for the year ended December 31, 2008. | ||||
|
|
||||||
| 4.2.4 |
Instrument of Resignation, Appointment and
Acceptance, dated as of May 27, 2008 (re 7% Senior
Notes due 2014 and 6.25% Senior Notes due 2015)
|
Incorporated by reference to Exhibit 4.1 of Form 8-K filed on May 28, 2008. | ||||
|
|
||||||
| 4.2.5 |
Fourth Supplemental Indenture, dated March 6, 2009
(re 6.25% Senior Notes due 2015)
|
Incorporated by reference to Exhibit 4.2 of Form 10-Q for the quarter ended March 31, 2009. | ||||
|
|
||||||
| 4.3 |
Indenture, dated February 23, 2007 (re 7.731%
Senior Subordinated Notes due 2017)
|
Incorporated by reference to Exhibit 4.1 of Form 8-K dated February 23, 2007. | ||||
|
|
||||||
| 4.3.1 |
First Supplemental Indenture, dated July 10, 2007
(re 7.731% Senior Subordinated Notes due 2017)
|
Incorporated by reference to Exhibit 4.4.1 of Form 10-K for the year ended December 31, 2008. | ||||
|
|
||||||
| 4.3.2 |
Instrument of Resignation, Appointment and
Acceptance, dated as of May 27, 2008 (re 7.731%
Senior Subordinated Notes due 2017)
|
Incorporated by reference to Exhibit 4.2 of Form 8-K filed on May 28, 2008. | ||||
77
Table of Contents
| Exhibit | ||||||
| Number | Description | Page or Method of Filing | ||||
| 4.3.3 |
Second Supplemental Indenture, dated March 6, 2009
(re 7.731% Senior Subordinated Notes due 2017)
|
Incorporated by reference to Exhibit 4.1 of Form 10-Q for the quarter ended March 31, 2009 | ||||
|
|
||||||
| 4.4 |
Indenture, dated April 13, 2010 (re 7.15% Senior
Notes due 2020)
|
Incorporated by reference to Exhibit 4.1 of Form 8-K filed on April 14, 2010 | ||||
|
|
||||||
| 10.1 |
2006 Annual Incentive Plan*
|
Incorporate by reference to Appendix B of the Proxy Statement for the 2010 Annual Meeting of Stockholders | ||||
|
|
||||||
| 10.2 |
Amended 1997 Meritage Stock Option Plan *
|
Incorporated by reference to Exhibit 10.3 of Form 10-K for the year ended December 31, 2004. | ||||
|
|
||||||
| 10.3 |
Meritage Homes Corporation 2006 Stock Incentive
Plan, as amended * |
Incorporated by reference to Exhibit 4.8 of Form S-8 Registration Statement No. 333-166991 | ||||
|
|
||||||
| 10.3.1 |
Representative Form of Restricted Stock Agreement *
|
Incorporated by reference to Exhibit 4.9 of Form S-8 Registration Statement No. 333-166991. | ||||
|
|
||||||
| 10.3.2 |
Representative Form of Restricted Stock Agreement
(2006 Plan; Executive Officer) *
|
Incorporated by reference to Exhibit 4.9.1 of Form S-8 Registration Statement No. 333-166991 | ||||
|
|
||||||
| 10.3.3 |
Representative Form of Restricted Stock Agreement
(2006 Plan; Non-Employee Director) *
|
Incorporated by reference to Exhibit 4.9.2 of Form S-8 Registration Statement No. 333-166991 | ||||
|
|
||||||
| 10.3.4 |
Representative Form of Non-Qualified Stock Option
Agreement (2006 Plan) *
|
Incorporated by reference to Exhibit 4.10 of Form S-8 Registration Statement No. 333-166991 | ||||
|
|
||||||
| 10.3.5 |
Representative Form of Incentive Stock Option
Agreement (2006 Plan)*
|
Incorporated by reference to Exhibit 4.4 of Form S-8 Registration Statement No. 333-134637. | ||||
|
|
||||||
| 10.3.6 |
Representative Form of Stock Appreciation Rights
Agreement (2006 Plan)*
|
Incorporated by reference to Exhibit 4.5 of Form S-8 Registration Statement No. 333-134637. | ||||
|
|
||||||
| 10.4 |
Third Amended and Restated Employment Agreement
between the Company and Steven J. Hilton*
|
Incorporated by reference to Exhibit 10.1 of Form 8-K dated January 19, 2010. | ||||
|
|
||||||
| 10.4.1 |
Third Amended and Restated Change of Control
Agreement between the Company and Steven J.
Hilton*
|
Incorporated by reference to Exhibit 10.5 of Form 8-K dated January 19, 2010. | ||||
|
|
||||||
| 10.5 |
Third Amended and Restated Employment Agreement
between the Company and Larry W. Seay*
|
Incorporated by reference to Exhibit 10.2 of Form 8-K dated January 19, 2010. | ||||
|
|
||||||
| 10.5.1 |
Third Amended and Restated Change of Control
Agreement between the Company and Larry W. Seay*
|
Incorporated by reference to Exhibit 10.6 of Form 8-K dated January 19, 2010. | ||||
|
|
||||||
| 10.6 |
Amended and Restated Employment Agreement between
the Company and Steven Davis*
|
Incorporated by reference to Exhibit 10.4 of Form 8-K dated January 19, 2010. | ||||
|
|
||||||
| 10.6.1 |
Amended and Restated Change of Control Agreement
between the Company and Steven Davis*
|
Incorporated by reference to Exhibit 10.8 of Form 8-K dated January 19, 2010. | ||||
|
|
||||||
| 10.7 |
Amended and Restated Employment Agreement between
the Company and C. Timothy White *
|
Incorporated by reference to Exhibit 10.3 of Form 8-K dated January 19, 2010. | ||||
|
|
||||||
| 10.7.1 |
Amended and Restated Change of Control Agreement
between the Company and C. Timothy White *
|
Incorporated by reference to Exhibit 10.7 of Form 8-K dated January 19, 2010. | ||||
|
|
||||||
| 21 |
List of Subsidiaries
|
Filed herewith. | ||||
|
|
||||||
| 23.1 |
Consent of Deloitte & Touche LLP
|
Filed herewith. | ||||
78
Table of Contents
| Exhibit | ||||||
| Number | Description | Page or Method of Filing | ||||
| 24 |
Powers of Attorney
|
See Signature Page. | ||||
|
|
||||||
| 31.1 |
Rule 13a-14(a/15d-14(a) Certification of Steven J.
Hilton, Chief Executive Officer
|
Filed herewith. | ||||
|
|
||||||
| 31.2 |
Rule 13a-14(a/15d-14(a) Certification of Larry W.
Seay, Chief Financial Officer
|
Filed herewith. | ||||
|
|
||||||
| 32.1 |
Section 1350 Certification of Chief Executive
Officer and Chief Financial Officer
|
Filed herewith. | ||||
| * | Indicates a management contract or compensation plan. |
79
Table of Contents
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934,
the registrant has duly caused this report on Form 10-K to be signed on its behalf by the
undersigned, thereunto duly authorized, this 25
th
day of February 2011.
| MERITAGE HOMES CORPORATION, | ||||||
| a Maryland Corporation | ||||||
|
|
||||||
|
|
By |
/s/ STEVEN J. HILTON
|
||||
|
|
Chairman and Chief Executive Officer | |||||
|
|
||||||
|
|
By |
/s/ LARRY W. SEAY
|
||||
|
|
Executive Vice President and Chief Financial Officer | |||||
|
|
(Principal Financial Officer) | |||||
KNOW ALL MEN BY THESE PRESENTS
, that each person whose signature appears below constitutes and
appoints Steve J. Hilton and Larry W. Seay, and each of them, his or her true and lawful
attorneys-in-fact and agents, with full power of substitution and resubstitution, for him or her
and in his or her name, place and stead, in any and all capacities, to sign any and all amendments
to this Annual Report on Form 10-K, and to file the same, with all exhibits thereto and other
documents in connection therewith the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about the premises, as fully and to
all intents and purposes as he or she might or could do in person hereby ratifying and confirming
all that said attorneys-in-fact and agents, or his or her substitute or substitutes, may lawfully
do or cause to be done by virtue hereof.
Pursuant to these requirements of the Securities Exchange Act of 1934, the following persons
on behalf of the registrant and in the capacities and on the dates indicated have signed this
report on Form 10-K below:
| Signature | Title | Date | ||
|
|
||||
|
/s/ STEVEN J. HILTON
|
Chairman and Chief Executive Officer | February 25, 2011 | ||
|
|
||||
|
/s/ LARRY W. SEAY
|
Executive Vice President, Chief Financial Officer
(Principal Financial Officer) |
February 25, 2011 | ||
|
|
||||
|
/s/ HILLA SFERRUZZA
|
Vice President, Corporate Controller and Chief Accounting Officer (Principal Accounting Officer) | February 25, 2011 | ||
|
|
||||
|
/s/ PETER L. AX
|
Director | February 25, 2011 | ||
|
|
||||
|
/s/ RAYMOND OPPEL
|
Director | February 25, 2011 | ||
|
|
||||
|
/s/ ROBERT G. SARVER
|
Director | February 25, 2011 | ||
|
|
||||
|
/s/ RICHARD T. BURKE, SR.
|
Director | February 25, 2011 | ||
|
|
||||
|
/s/ GERALD W. HADDOCK
|
Director | February 25, 2011 | ||
|
|
||||
|
/s/ DANA BRADFORD
|
Director | February 25, 2011 |
80
TABLE OF CONTENTS
Part IItem 1. BusinessItem 1A. Risk FactorsItem 1B. Unresolved Staff CommentsItem 2. PropertiesItem 3. Legal ProceedingsItem 4. ReservedPart IIItem 5. Market For Registrant S Common Equity, Related Stockholder Matters and Issuer Purchases Of Equity SecuritiesItem 6. Selected Financial DataItem 7. Management S Discussion and Analysis Of Financial Condition and Results Of OperationsItem 7A. Quantitative and Qualitative Disclosures About Market RiskItem 8. Financial Statements and Supplementary DataNote 1 Business and Summary Of Significant Accounting PoliciesNote 2 Real Estate and Capitalized InterestNote 3 Variable Interest Entities and Consolidated Real Estate Not OwnedNote 4 Investments in Unconsolidated EntitiesNote 5 Senior and Senior Subordinated NotesNote 6 Fair Value DisclosuresNote 7 Stockholders EquityNote 8 Earnings/(loss) Per ShareNote 9 Incentive Awards and Retirement PlanNote 10 Income TaxesNote 11 Supplemental Disclosure Of Cash Flow InformationNote 12 Related Party TransactionsNote 13 Operating and Reporting SegmentsNote 14 Commitments and ContingenciesNote 15 Selected Quarterly Financial Data (unaudited)Item 9. Changes in and Disagreements with Accountants on Accounting and Financial DisclosureItem 9A. Controls and ProceduresItem 9B. ReservedPart IIIItem 10. Directors, Executive Officers and Corporate GovernanceItem 11. Executive CompensationItem 12. Security Ownership Of Certain Beneficial Owners and Management and Related Stockholder MattersItem 13. Certain Relationships and Related Transactions, and Director IndependenceItem 14. Principal Accountant Fees and ServicesPart IVItem 15. Exhibits and Financial Statement Schedules