NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2016, 2015 and 2014
NOTE 1 — BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization.
Meritage Homes is a leading designer and builder of single-family homes. We primarily build in historically high-growth regions of the United States and offer a variety of homes that are designed to appeal to a wide range of homebuyers, including first-time, move-up, active adult and luxury. We have homebuilding operations in
three
regions: West, Central and East, which are comprised of
nine
states: Arizona, California, Colorado, Texas, Florida, Georgia, North Carolina, South Carolina and Tennessee. We also operate a wholly-owned title company, Carefree Title Agency, Inc. ("Carefree Title"). Carefree Title's core business includes title insurance and closing/settlement services we offer to our homebuyers. 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 homebuilding markets. We also operate under the name Monterey Homes in some markets. At
December 31, 2016
, we were actively selling homes in
243
communities, with base prices ranging from approximately
$162,000
to
$1,440,000
.
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.
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
$75.3 million
and
$74.5 million
are included in cash and cash equivalents at
December 31, 2016
and
2015
, respectively. Included in our balance as of
December 31, 2016
and
December 31, 2015
is
$0.1 million
and
$20.0 million
, respectively, of money market funds that are invested in short term (
three
months or less) government securities.
Real Estate.
Real estate is stated at cost unless the asset 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, capitalized 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 construction begins. Home construction costs are accumulated on a per-home basis, while selling costs are expensed as incurred. Cost of home closings includes the specific construction costs of the home and all related allocated 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. An accrued liability to capture such obligations is recorded in connection with the home closing and charged directly to cost of sales.
We rely on certain estimates to determine our construction and land development costs. Construction and land costs are comprised of direct and allocated costs, including estimated future costs. In determining these costs, we compile project budgets that are based on a variety of assumptions, including future construction schedules and costs to be incurred. Actual results can differ from budgeted amounts for various reasons, including construction delays, labor or material shortages, increases in costs that have not yet been committed, changes in governmental requirements, or other unanticipated issues encountered during construction and development and other factors beyond our control. To address uncertainty in these budgets, we assess, update and revise project budgets on a regular basis, utilizing the most current information available to estimate construction and land costs.
Typically, a community's life cycle ranges from
three
to
five
years, commencing with the acquisition of the land, continuing through the land development phase, if applicable, 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, partially-developed or in finished status. 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.
All of our land inventory and related real estate assets are reviewed for recoverability, as our inventory is considered “long-lived” in accordance with GAAP. Impairment charges are recorded to write down an asset to its estimated fair value if the undiscounted cash flows expected to be generated by the asset are lower 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 conducted if indication of a decline in value of our land and real estate assets exist. If an asset is deemed to be impaired, the impairment recognized is measured as the amount by which the assets' carrying amount exceeds their fair value. The impairment of a community is allocated to each lot on a straight-line basis.
Deposits.
Deposits paid related to land option and purchase contracts are recorded and classified as Deposits on real estate under option or contract until the related land is purchased. Deposits are reclassified as a component of real estate inventory 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. Since our acquisition contracts typically do not require specific performance, we do not consider such contracts to be contractual obligations to purchase the land and our total exposure under such contracts is limited to the loss of any non-refundable deposits and any ancillary capitalized costs. Our deposits were
$85.6 million
and
$87.8 million
as of
December 31, 2016
and
December 31, 2015
, respectively.
Goodwill.
In accordance with ASC 350,
Intangibles, Goodwill and Other
("ASC 350"), we analyze goodwill on an annual basis (or whenever indicators of impairment exist) through a qualitative assessment to determine whether it is necessary to perform a two-step goodwill impairment test. ASC 350 states that an entity may assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount, including goodwill. Such qualitative factors include: (1) macroeconomic conditions, such as a deterioration in general economic conditions, (2) industry and market considerations such as deterioration in the environment in which the entity operates, (3) cost factors such as increases in raw materials, labor costs, etc., and (4) overall financial performance such as negative or declining cash flows or a decline in actual or planned revenue or earnings. If the qualitative analysis determines that additional impairment testing is required, the two-step impairment testing in accordance with ASC 350 would be initiated. We continually evaluate our qualitative inputs to assess whether events and circumstances have occurred that indicate the goodwill balance may not be recoverable. See Note 9 for additional information related to goodwill.
Property and Equipment, net.
Property and equipment, net consists of computer and office equipment and model home furnishings. Depreciation is generally calculated using the straight-line method over the estimated useful lives of the assets, which range from
3
to
7
years. Depreciation expense was
$14.3 million
,
$12.7 million
, and
$10.4 million
for the years ended December 31,
2016
,
2015
and
2014
, respectively. Maintenance and repair costs are expensed as incurred. At
December 31, 2016
and
2015
, property and equipment, net consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
At December 31,
|
|
|
2016
|
|
2015
|
Computer and office equipment
|
|
$
|
35,288
|
|
|
$
|
32,216
|
|
Model home furnishings
|
|
45,767
|
|
|
41,252
|
|
Gross property and equipment
|
|
81,055
|
|
|
73,468
|
|
Accumulated depreciation
|
|
(47,853
|
)
|
|
(39,498
|
)
|
Total
|
|
$
|
33,202
|
|
|
$
|
33,970
|
|
Deferred Costs.
At
December 31, 2016
and
2015
, deferred costs representing debt issuance costs related to our Credit Facility totaled approximately
$2.7 million
and
$2.9 million
, net of accumulated amortization of approximately
$5.6 million
and
$4.4 million
respectively, and are included on our consolidated balance sheets within Prepaids, other assets and goodwill. 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 other unconsolidated entities, net, or Earnings from financial services, unconsolidated entities and other, 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. We track cumulative
earnings and distributions from each of our ventures. For cash flow classification, to the extent distributions do not exceed cumulative 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 when events that trigger an evaluation of recoverability present themselves. See Note 4 for additional information related to investments in unconsolidated entities.
Accrued Liabilities
. Accrued liabilities at
December 31, 2016
and
2015
consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
At December 31,
|
|
|
2016
|
|
2015
|
Accruals related to real estate development and construction activities
|
|
$
|
53,778
|
|
|
$
|
37,509
|
|
Payroll and other benefits
|
|
52,941
|
|
|
41,240
|
|
Accrued taxes
|
|
9,637
|
|
|
9,950
|
|
Warranty reserves
|
|
22,660
|
|
|
21,615
|
|
Legal reserves
|
|
673
|
|
|
18,812
|
|
Other accruals
|
|
31,163
|
|
|
32,037
|
|
Total
|
|
$
|
170,852
|
|
|
$
|
161,163
|
|
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, and impairments, if any. 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 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 objectively verifiable 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. If we determine that we will not be able to realize our deferred tax assets in the future, we will record a valuation allowance, which increases the provision for income taxes.
We recognize interest and penalties related to unrecognized tax benefits within the Provision for income taxes line in the accompanying consolidated statement of operations. Accrued interest and penalties are included within the Accrued liabilities line in the accompanying consolidated balance sheets. See Note 11 for additional information related to income taxes.
Advertising Costs.
We expense advertising costs as they are incurred. Advertising expense was approximately
$15.0 million
,
$14.8 million
and
$11.8 million
in fiscal
2016
,
2015
and
2014
, respectively.
Earnings Per Share.
We compute basic earnings per share by dividing net earnings 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. See Note 8 for additional information related to earnings per share.
Stock-Based Compensation
.
We account for stock-based compensation in accordance with ASC 718-10,
Compensation—Stock Compensation ("ASC 718").
This guidance 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 10 for additional information on stock-based compensation.
401(k) Retirement Plan.
We have a 401(k) plan for all full-time Meritage employees. We match portions of employees’ voluntary contributions, and contributed to the plan approximately
$2.7 million
,
$2.4 million
and
$1.9 million
for the years ended
2016
,
2015
and
2014
, respectively.
Off-Balance Sheet Arrangements - Joint Ventures
. We may participate 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. See Note 4 for additional discussion of our investments in unconsolidated entities.
Off-Balance Sheet Arrangements - Other.
In the normal course of business, we may acquire lots from various development entities pursuant purchase and option agreements. The purchase price generally approximates the market price at the date the contract is executed (with possible future escalators). See Note 3 for additional information on off-balance sheet arrangements.
Surety Bonds and Letters of Credit.
We provide letters of credit in support of our obligations relating to the development of our projects and other corporate purposes. Surety bonds are generally posted in lieu of letters of credit or cash deposits. The amount of these obligations outstanding at any time varies depending on the stage and level of our development activities. Bonds are generally not released until all development activities under the bond are complete. In the event a bond or letter of credit is drawn upon, we would be obligated to reimburse the issuer for any amounts advanced under the bond. We believe it is unlikely that any significant amounts of these bonds or letters of credit will be drawn upon. The table below outlines our surety bond and letter of credit obligations (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31,
|
|
|
2016
|
|
2015
|
|
|
Outstanding
|
|
Estimated work
remaining to
complete (unaudited)
|
|
Outstanding
|
|
Estimated work
remaining to
complete (unaudited)
|
Sureties:
|
|
|
|
|
|
|
|
|
Sureties related to joint ventures
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
87
|
|
|
$
|
87
|
|
Sureties related to owned projects and lots under contract
|
|
239,246
|
|
|
85,706
|
|
|
250,639
|
|
|
103,200
|
|
Total Sureties
|
|
$
|
239,246
|
|
|
$
|
85,706
|
|
|
$
|
250,726
|
|
|
$
|
103,287
|
|
Letters of Credit (“LOCs”):
|
|
|
|
|
|
|
|
|
LOCs in lieu of deposits for contracted lots
|
|
$
|
250
|
|
|
N/A
|
|
|
$
|
—
|
|
|
N/A
|
|
LOCs for land development
|
|
39,839
|
|
|
N/A
|
|
|
23,934
|
|
|
N/A
|
|
LOCs for general corporate operations
|
|
3,750
|
|
|
N/A
|
|
|
3,750
|
|
|
N/A
|
|
Total LOCs
|
|
$
|
43,839
|
|
|
N/A
|
|
|
$
|
27,684
|
|
|
N/A
|
|
Warranty Reserves.
We provide home purchasers with limited warranties against certain building defects and have certain obligations related to those post-construction warranties for closed homes. The specific terms and conditions of these limited warranties vary by state, but overall the nature of the warranties include a complete workmanship and materials warranty typically during the first
one
to
two years
after the close of the home and a structural warranty that typically extends up to
10
years subsequent to the close of the home. With the assistance of an actuary, we have estimated these reserves for the structural warranty based on the number of homes still under warranty 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. Based on such reviews of warranty costs incurred, we decreased our warranty reserve balance by
$1.0 million
in the twelve months ended December 31, 2016, which decreased our cost of sales. In the twelve months ended December 31, 2015 we increased our warranty reserve balance by
$1.1 million
, which increased our cost of sales.
A summary of changes in our warranty reserves follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
2016
|
|
2015
|
Balance, beginning of year
|
|
$
|
21,615
|
|
|
$
|
22,080
|
|
Additions to reserve from new home deliveries
|
|
16,776
|
|
|
12,924
|
|
Warranty claims
|
|
(14,719
|
)
|
|
(14,508
|
)
|
Adjustments to pre-existing reserves
|
|
(1,012
|
)
|
|
1,119
|
|
Balance, end of year
|
|
$
|
22,660
|
|
|
$
|
21,615
|
|
Warranty reserves are included in Accrued liabilities on the accompanying consolidated balance sheets, and additions and adjustments to the reserves are included in Cost of home closings within the accompanying consolidated statements of operations. 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 our contractual relationships and rights with our trades and the general liability insurance we maintain, are sufficient to cover our general warranty obligations. However, as unanticipated changes in legal, weather, environmental or other conditions could have an impact on our actual warranty costs, future costs could differ significantly from our estimates.
Recent Accounting Pronouncements.
In August 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2016-15,
Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments
, ("ASU 2016-15"). ASU 2016-15 adds and clarifies guidance on the classification of certain cash receipts and payments in the statement of cash flows, reducing the existing diversity in practice that has resulted from the lack of consistent principles on this topic. ASU 2016-15 is effective for us beginning January 1, 2018. Early adoption is permitted and a retrospective transition method is required on adoption. We are currently evaluating the impact adopting this guidance will have on classifications in our statement of cash flows.
In March 2016, the FASB issued ASU No. 2016-09,
Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting
("ASU 2016-09"). ASU 2016-09 simplifies several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. ASU 2016-09 is effective for us beginning January 1, 2017. Amendments to the presentation of employee taxes paid on the statement of cash flows should be applied retrospectively, and amendments requiring the recognition of excess tax benefits and tax deficiencies in the income statement are to be applied prospectively. Amendments related to the presentation of excess tax benefits on the statement of cash flows can be applied using either a prospective or retrospective transition method. We do not expect the adoption of ASU 2016-09 to have a material impact on our consolidated financial statements.
In February 2016, the FASB issued ASU No. 2016-02,
Leases (Topic 842)
("ASU 2016-02"), which amends the existing accounting standards for lease accounting, including requiring lessees to recognize most leases on their balance sheets. ASU 2016-02 will be effective for us beginning January 1, 2019, and early adoption is permitted. ASU 2016-02 requires a modified retrospective transition approach for all leases existing at, or entered into after, the date of initial application, with an option to use certain transition relief. We are currently evaluating the impact adopting this guidance will have on our financial statements.
In April 2015, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2015-03,
Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs
(“ASU 2015-03”). ASU 2015-03 requires that debt issuance costs related to a recognized debt liability, other than those related to a revolving debt arrangement, be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. In August 2015, the FASB issued ASU 2015-15,
Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements - Amendments to SEC Paragraphs Pursuant to Staff Announcement at June 18, 2015 EITF Meeting
ASU 2015-15, which clarifies that the SEC staff would not object to an entity deferring and presenting debt issuance costs related to a line-of-credit arrangement as an asset and subsequently amortizing the deferred debt issuance costs ratably over the term of the line-of-credit arrangement, regardless of whether there are any outstanding borrowings on the line-of-credit arrangement. ASU 2015-03 was effective for us beginning January 1, 2016 and was applied on a retrospective basis. The adoption of ASU 2015-03 resulted in a retrospective reclassification of our debt costs as described above from Prepaids, others assets and goodwill to Senior and convertible senior notes, net on our balance sheet in the amount of
$8.2 million
at December 31, 2016 and
$10.7 million
at December 31, 2015.
As allowed by ASU 2015-15, we elected not to reclassify deferred debt issuance costs associated with our Credit Facility and continue to present these capitalized costs as an asset.
In May 2014, the FASB issued ASU 2014-09,
Revenue from Contracts with Customers (Topic 606)
, (“ASU 2014-09”). ASU 2014-09 requires entities to recognize revenue that depicts the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services by applying the following steps: (1) identify the contract(s) with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations in the contract; and (5) recognize revenue when (or as) the entity satisfies a performance obligation. ASU 2014-09 supersedes the revenue recognition requirements in ASU 605, Revenue Recognition, most industry-specific guidance throughout the industry topics of the ASC, and some cost guidance related to construction-type and production-type contracts. ASU 2014-09 is effective for us on January 1, 2018 and the guidance allows for full retrospective or modified retrospective methods of adoption. Early adoption is permitted only as of annual reporting periods beginning after December 15, 2016. We are currently evaluating the potential impact of adopting this guidance on our consolidated financial statements. We do not believe the adoption of ASU 2014-09 will have an impact on the amount or timing of our homebuilding revenues. We are still evaluating the potential impact the adoption of ASU 2014-09 will have on the timing and recognition of certain marketing costs we incur to obtain a sales contract.
NOTE 2 — REAL ESTATE AND CAPITALIZED INTEREST
Real estate consists of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
At December 31,
|
|
|
2016
|
|
2015
|
Homes under contract under construction (1)
|
|
$
|
508,927
|
|
|
$
|
456,138
|
|
Unsold homes, completed and under construction (1)
|
|
431,725
|
|
|
307,425
|
|
Model homes (1)
|
|
147,406
|
|
|
138,546
|
|
Finished home sites and home sites under development (2)
|
|
1,334,005
|
|
|
1,196,193
|
|
|
|
$
|
2,422,063
|
|
|
$
|
2,098,302
|
|
|
|
(1)
|
Includes the allocated land and land development costs associated with each lot for these homes.
|
|
|
(2)
|
Includes raw land, land held for development and land held for sale. Land held for development primarily reflects land and land development costs related to land where development activity is not currently underway but is expected to begin in the future. For these parcels, we may have chosen not to currently develop certain land holdings as they typically represent a portion or phases of a larger land parcel that we plan to build out over several years. We do not capitalize interest for inactive assets, and all ongoing costs of land ownership (i.e. property taxes, homeowner association dues, etc.) are expensed as incurred.
|
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 active 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,
|
|
|
2016
|
|
2015
|
|
2014
|
Capitalized interest, beginning of year
|
|
$
|
61,202
|
|
|
$
|
54,060
|
|
|
$
|
32,992
|
|
Interest incurred
|
|
70,348
|
|
|
67,542
|
|
|
58,374
|
|
Interest expensed
|
|
(5,172
|
)
|
|
(15,965
|
)
|
|
(5,163
|
)
|
Interest amortized to cost of home and land closings
|
|
(58,182
|
)
|
|
(44,435
|
)
|
|
(32,143
|
)
|
Capitalized interest, end of year (1)
|
|
$
|
68,196
|
|
|
$
|
61,202
|
|
|
$
|
54,060
|
|
|
|
(1)
|
Approximately
$130,000
,
$445,000
and
$490,000
of the capitalized interest is related to our joint venture investments and is a component of “Investments in unconsolidated entities” in our consolidated balance sheet as of
December 31, 2016
,
2015
and
2014
, respectively.
|
NOTE 3 — VARIABLE INTEREST ENTITIES AND CONSOLIDATED REAL ESTATE NOT OWNED
We enter into purchase and option agreements for land or lots as part of the normal course of business. These purchase and option agreements enable us to acquire properties at one or multiple future dates at pre-determined prices. We believe these acquisition structures reduce our financial risk associated with land acquisitions and holdings and allow us to better leverage our balance sheet.
Based on the provisions of the relevant accounting guidance, we have concluded that when we enter into a purchase agreement to acquire land or lots from an entity, a variable interest entity, or “VIE”, may be created. We evaluate all option and purchase agreements for land to determine whether they are a VIE. ASC 810,
Consolidation
, requires that for each VIE, we assess whether we are the primary beneficiary and, if we are, we 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.
In order to determine if we are the primary beneficiary, we must first assess whether 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 also 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 benefit from a potentially significant amount of the VIE’s expected gains.
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 that are not recorded on the balance sheet at
December 31, 2016
(dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Projected Number
of Lots (unaudited)
|
|
Purchase
Price
(unaudited)
|
|
Option/
Earnest Money
Deposits–Cash
|
|
|
Option contracts — non-refundable deposits, committed (1)
|
|
4,608
|
|
|
$
|
413,812
|
|
|
$
|
59,380
|
|
|
|
Purchase contracts — non-refundable deposits, committed (1)
|
|
3,861
|
|
|
222,741
|
|
|
16,463
|
|
|
|
Purchase and option contracts —refundable deposits, committed
|
|
1,966
|
|
|
60,028
|
|
|
3,844
|
|
|
|
Total committed
|
|
10,435
|
|
|
696,581
|
|
|
79,687
|
|
|
|
Purchase and option contracts — refundable deposits, uncommitted (2)
|
|
6,744
|
|
|
289,500
|
|
|
5,869
|
|
|
|
Total purchase and option contracts
|
|
17,179
|
|
|
$
|
986,081
|
|
|
$
|
85,556
|
|
|
(3)
|
|
|
(1)
|
Deposits are non-refundable except if certain contractual conditions are not performed by the selling party.
|
|
|
(2)
|
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.
|
|
|
(3)
|
Amount is reflected in our consolidated balance sheet in the line item “Deposits on real estate under option or contract” as of
December 31, 2016
.
|
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, 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
We may enter into joint ventures as a means of accessing larger parcels of land, expanding our market opportunities, managing our risk profile and leveraging our capital base. While purchasing land through a joint venture can be beneficial, currently we do not view joint ventures as critical to the success of our homebuilding operations. In 2016, we entered into our first new joint venture since 2008. 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, 2016
, we had
three
active equity-method land ventures.
As of
December 31, 2016
, we also participated in
one
mortgage joint venture, which is engaged in mortgage activities and provides services to both our homebuyers as well as other buyers. Our investment in this mortgage joint venture as of
December 31, 2016
and
December 31, 2015
was $
2.3 million
and $
2.5 million
, respectively.
Summarized condensed financial information related to unconsolidated joint ventures that are accounted for using the equity method was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
At December 31,
|
|
2016
|
|
2015
|
Assets:
|
|
|
|
Cash
|
$
|
7,446
|
|
|
$
|
7,888
|
|
Real estate
|
54,319
|
|
|
33,366
|
|
Other assets
|
6,461
|
|
|
4,514
|
|
Total assets
|
$
|
68,226
|
|
|
$
|
45,768
|
|
Liabilities and equity:
|
|
|
|
Accounts payable and other liabilities
|
$
|
7,339
|
|
|
$
|
7,331
|
|
Notes and mortgages payable
|
23,000
|
|
|
13,345
|
|
Equity of:
|
|
|
|
Meritage (1)
|
14,245
|
|
|
8,194
|
|
Other
|
23,642
|
|
|
16,898
|
|
Total liabilities and equity
|
$
|
68,226
|
|
|
$
|
45,768
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
2016
|
|
2015
|
|
2014
|
Revenue
|
$
|
72,486
|
|
|
$
|
35,510
|
|
|
$
|
28,458
|
|
Costs and expenses
|
(34,080
|
)
|
|
(16,240
|
)
|
|
(13,009
|
)
|
Net earnings of unconsolidated entities
|
$
|
38,406
|
|
|
$
|
19,270
|
|
|
$
|
15,449
|
|
Meritage’s share of pre-tax earnings (1) (2)
|
$
|
19,357
|
|
|
$
|
12,805
|
|
|
$
|
10,443
|
|
|
|
(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 consolidated financial statements due to the following reconciling items: (i) timing differences for revenue and distributions recognition, (ii) step-up basis and corresponding amortization, (iii) capitalization of interest on qualified assets, (iv) income deferrals as discussed in Note (2) below and (v) the cessation of allocation of losses from joint ventures in which we have previously written down our investment balance to zero and where we have no commitment to fund additional losses. As discussed in Note 2 to these consolidated financial statements, balances do not include
$130,000
,
$445,000
and
$490,000
of capitalized interest that is a component of our investment balances at December 31, 2016, 2015 and 2014, respectively.
|
|
|
(2)
|
Our share of pre-tax earnings is recorded in Earnings from financial services unconsolidated entities and other, net or Earnings/(loss) from other unconsolidated entities, net, as applicable, on our consolidated statement 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.
|
The joint venture assets and liabilities noted in the table above represent the
three
active land ventures,
one
mortgage and various inactive ventures. Our total investment in all of these joint ventures is
$17.1 million
as of
December 31, 2016
. We believe these ventures are in compliance with their respective debt agreements, if applicable, and such debt is non-recourse to us.
NOTE 5 — LOANS PAYABLE AND OTHER BORROWINGS
Loans payable and other borrowings consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
At December 31,
|
|
|
2016
|
|
2015
|
Other borrowings, real estate note payable (1)
|
|
$
|
17,195
|
|
|
$
|
23,867
|
|
$540.0 million unsecured revolving credit facility with interest approximating LIBOR (approximately 0.77% at December 31, 2016) plus 1.75% or Prime (3.75% at December 31, 2016) plus 0.75%
|
|
15,000
|
|
|
—
|
|
Total
|
|
$
|
32,195
|
|
|
$
|
23,867
|
|
|
|
(1)
|
Reflects balance of non-recourse notes payable in connection with land purchases, with interest rates ranging from
0%
to
8%
.
|
The Company has a
$540.0 million
unsecured revolving credit facility ("Credit Facility"), with an accordion feature that permits the size of the facility to increase to a maximum of
$600.0 million
. In June 2016, we amended the Credit Facility to extend the maturity date of a substantial portion of the Credit Facility whereby
$60.0 million
matures in July 2019 with the remainder maturing in July 2020. Borrowings under the Credit Facility are unsecured but availability is subject to, among other things, a borrowing base. The Credit Facility also contains certain financial covenants, including (a) a minimum tangible net worth requirement of
$670.3 million
(which amount is subject to increase over time based on subsequent earnings and proceeds from equity offerings), and (b) a maximum leverage covenant that prohibits the leverage ratio (as defined therein) from exceeding
60%
. In addition, we are required to maintain either (i) an interest coverage ratio (EBITDA to interest expense, as defined therein) of at least
1.50
to
1.00
or (ii) liquidity (as defined therein) of an amount not less than our consolidated interest incurred during the trailing 12 months. We were in compliance with all Credit Facility covenants as of December 31, 2016.
We had
$15.0 million
of outstanding borrowings under the Credit Facility as of
December 31, 2016
with
no
borrowings outstanding at
December 31, 2015
. During the twelve months ended
December 31, 2016
, we had
$286.0 million
and
$271.0 million
of gross borrowings and repayments, respectively. During the
twelve
months ended
December 31, 2015
we had
$210.0 million
of gross borrowings and repayments each. Borrowings and repayments during the twelve months ended
December 31, 2014
totaled
$111.0 million
each. As of
December 31, 2016
we had outstanding letters of credit issued under the Credit Facility totaling
$43.8 million
, respectively, leaving
$481.2 million
available under the Credit Facility to be drawn.
NOTE 6 — SENIOR AND CONVERTIBLE SENIOR NOTES
Senior and convertible senior notes consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
At December 31,
|
|
|
2016
|
|
2015
|
4.50% senior notes due 2018
|
|
$
|
175,000
|
|
|
$
|
175,000
|
|
7.15% senior notes due 2020. At December 31, 2016 and December 31, 2015 there was approximately $1,849 and $2,418 in net unamortized premium, respectively
|
|
301,849
|
|
|
302,418
|
|
7.00% senior notes due 2022
|
|
300,000
|
|
|
300,000
|
|
6.00% senior notes due 2025
|
|
200,000
|
|
|
200,000
|
|
1.875% convertible senior notes due 2032
|
|
126,500
|
|
|
126,500
|
|
Net debt issuance costs
|
|
(8,230
|
)
|
|
(10,745
|
)
|
Total
|
|
$
|
1,095,119
|
|
|
$
|
1,093,173
|
|
The indentures for all of our senior notes contain covenants including, among others, limitations on the amount of secured debt we may incur, and limitations on sale and leaseback transactions and mergers. We believe we are in compliance with all such covenants as of
December 31, 2016
. Our convertible senior notes do not have any financial covenants.
Obligations to pay principal and interest on the senior and convertible notes are guaranteed by substantially all of our wholly-owned subsidiaries (each a “Guarantor” and, 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. In the event of a sale or other disposition of all of the assets of any Guarantor, by way of merger, consolidation or otherwise, or a sale or other disposition of all of the equity interests of any Guarantor then held by Meritage and its subsidiaries, then that Guarantor will be released and relieved of any obligations under its note guarantee. There are no significant restrictions on our ability or the ability of any Guarantor to obtain funds from their respective subsidiaries, as applicable, by dividend or loan. We do not provide separate financial statements of the Guarantor Subsidiaries because Meritage (the parent company) has no independent assets or operations and the guarantees are full and unconditional and joint and several. Subsidiaries of Meritage Homes Corporation that are nonguarantor subsidiaries, if any, are, individually and in the aggregate, minor.
During 2010, we completed an offering of
$200.0 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%
. In November 2013, we completed a
$100.0 million
add-on to the existing
7.50%
senior notes due 2020. The add-on was issued at
106.699%
of par value to yield
5.875%
.
In September 2012, we issued
$126.5 million
aggregate principal amount of
1.875%
Convertible Senior Notes due 2032 (the “Convertible Notes”). The Convertible Notes are convertible into shares of our common stock at an initial conversion rate of 17.1985 shares of our common stock per $1,000 principal amount of Convertible Notes. This corresponds to an initial conversion price of
$58.14
per share and represents a
47.5%
conversion premium based on the closing price of our common stock on September 12, 2012. The conversion rate is subject to adjustments upon the occurrence of specific events. The Convertible Notes may be redeemed by the note-holders on the fifth, tenth and fifteenth anniversary dates of the Convertible Notes. On such dates, the note-holders may require a repurchase for any portion or all of their outstanding notes. The fifth anniversary of the Convertible Notes is September 15, 2017. The amount due to the note-holders in the event of a repurchase is equal to
100%
of the principal amount plus any accrued and unpaid interest. The table below assumes redemption by the note-holders on the fifth anniversary date. We may call the Convertible Notes at any time after the fifth anniversary.
In April 2012, we completed an offering of
$300.0 million
aggregate principal amount of
7.00%
Senior Notes due 2022. Concurrent with this offering, we repurchased all
$285.0 million
outstanding of our
6.25%
Senior Notes due 2015. We also repurchased the remaining aggregate principal amount of approximately
$26.1 million
of our
7.731%
Senior Subordinated Notes due 2017.
In March 2013, we issued
$175.0 million
aggregate principal amount of
4.50%
senior notes due 2018. These notes were issued at par and the proceeds were partially used to pay off the remaining
$99.8 million
balance of our
7.731%
senior subordinated notes due 2017.
On June 2, 2015, we completed an offering of
$200.0 million
aggregate principal amount of Senior Notes due 2025. The 2025 Notes bear interest at
6.00%
per annum, payable on June 1 and December 1 of each year, commencing on December 1, 2015.
Scheduled principal maturities of our senior and senior convertible notes as of
December 31, 2016
follow (in thousands):
|
|
|
|
|
Year Ended December 31,
|
|
2017
|
$
|
126,500
|
|
2018
|
175,000
|
|
2019
|
—
|
|
2020
|
300,000
|
|
2021
|
—
|
|
Thereafter
|
500,000
|
|
Total
|
$
|
1,101,500
|
|
NOTE 7 — FAIR VALUE DISCLOSURES
We account for non-recurring fair value measurements of our non-financial assets and liabilities in accordance with ASC 820-10
Fair Value Measurement
. This guidance defines fair value, establishes a framework for measuring fair value and addresses required 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. Refer to Notes 1 and 2 for additional information regarding the valuation of our non-financial assets.
Financial Instruments
: The fair value of our fixed-rate debt is derived from quoted market prices by independent dealers (level 2 inputs as per the discussion above) and is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31,
|
|
|
|
2016
|
|
2015
|
|
|
|
Aggregate
Principal
|
|
Estimated Fair
Value
|
|
Aggregate
Principal
|
|
Estimated Fair
Value
|
4.50% senior notes
|
|
|
$
|
175,000
|
|
|
$
|
177,625
|
|
|
$
|
175,000
|
|
|
$
|
175,000
|
|
7.15% senior notes
|
|
|
$
|
300,000
|
|
|
$
|
325,500
|
|
|
$
|
300,000
|
|
|
$
|
315,750
|
|
7.00% senior notes
|
|
|
$
|
300,000
|
|
|
$
|
324,750
|
|
|
$
|
300,000
|
|
|
$
|
313,500
|
|
6.00% senior notes
|
|
|
$
|
200,000
|
|
|
$
|
202,500
|
|
|
$
|
200,000
|
|
|
$
|
197,500
|
|
1.875% convertible senior notes
|
|
|
$
|
126,500
|
|
|
$
|
126,105
|
|
|
$
|
126,500
|
|
|
$
|
124,128
|
|
Due to the short-term nature of other financial assets and liabilities including our Loans payable and other borrowings, we consider the carrying amounts of our other short-term financial instruments to approximate fair value.
NOTE 8 — EARNINGS PER SHARE
Basic and diluted earnings per common share were calculated as follows (in thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
2016
|
|
2015
|
|
2014
|
Basic weighted average number of shares outstanding
|
|
39,976
|
|
|
39,593
|
|
|
39,017
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
Convertible debt (1)
|
|
2,176
|
|
|
2,176
|
|
|
2,176
|
|
Stock options and unvested restricted stock
|
|
433
|
|
|
395
|
|
|
421
|
|
Diluted average shares outstanding
|
|
42,585
|
|
|
42,164
|
|
|
41,614
|
|
Net earnings as reported
|
|
$
|
149,541
|
|
|
$
|
128,738
|
|
|
$
|
142,241
|
|
Interest attributable to convertible senior notes, net of income taxes
|
|
1,615
|
|
|
1,597
|
|
|
1,573
|
|
Net earnings for diluted earnings per share
|
|
$
|
151,156
|
|
|
$
|
130,335
|
|
|
$
|
143,814
|
|
Basic earnings per share
|
|
$
|
3.74
|
|
|
$
|
3.25
|
|
|
$
|
3.65
|
|
Diluted earnings per share (1)
|
|
$
|
3.55
|
|
|
$
|
3.09
|
|
|
$
|
3.46
|
|
Antidilutive stock options not included in the calculation of diluted earnings per share
|
|
4
|
|
|
—
|
|
|
26
|
|
|
|
(1)
|
In accordance with ASC 260-10,
Earnings Per Share
, ("ASC 260-10") we calculate the dilutive effect of convertible securities using the "if-converted" method.
|
NOTE 9 — ACQUISITIONS AND GOODWILL
Goodwill.
Over the past several years, we entered new markets through the acquisition of the homebuilding assets and operations of local/regional homebuilders in Georgia, South Carolina and Tennessee. As a result of these transactions, we recorded
$33.0 million
of goodwill. Goodwill represents the excess of the purchase price of our acquisitions over the fair value of the net assets acquired. The acquisitions were recorded in accordance with ASC 805,
Business Combination
s ("ASC 805") and ASC 820, using the acquisition method of accounting. The purchase price for the acquisitions were allocated based on estimated fair value of the assets and liabilities at the date of the acquisition. The combined excess purchase price over the fair value of the net assets of
$33.0 million
was recorded as goodwill, which is included in our consolidated balance sheet in Prepaids, other assets and goodwill. In accordance with ASC 350, we assess the recoverability of goodwill annually, or more frequently, if impairment triggers are present. Our quantitative analysis included both a market and an income based approach, the ending result was the fair value of each reporting unit exceeding their carrying amount, including goodwill, and therefore our goodwill balance was not deemed impaired.
A summary of changes in the carrying amount of goodwill follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
West
|
|
Central
|
|
East
|
|
Financial Services
|
|
Corporate
|
|
Total
|
Balance at January 1, 2015
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
32,962
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
32,962
|
|
Additions
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Balance at December 31, 2015
|
—
|
|
|
—
|
|
|
32,962
|
|
|
—
|
|
|
—
|
|
|
32,962
|
|
Additions
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Balance at December 31, 2016
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
32,962
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
32,962
|
|
NOTE 10 — STOCK BASED AND DEFERRED COMPENSATION
We have a stock compensation plan, the Amended and Restated 2006 Stock Incentive Plan (the “Plan”), that was adopted in 2006 and has been amended or restated from time to time. The Plan was approved by our stockholders and is administered by our Board of Directors. The provisions of the Plan allow for the grant of stock appreciation rights, restricted stock awards, restricted stock units, performance share awards and performance-based awards in addition to non-qualified and incentive stock options. The Plan authorizes awards to officers, key employees, non-employee directors and consultants for up to
5,350,000
shares of common stock, of which
1,752,775
shares remain available for grant at
December 31, 2016
, excluding any shares
under prior plans which have since expired. The total shares reserved for existing or future grants at December 31, 2016 was
2,900,046
. 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. Non-vested stock awards are usually granted with a
five
-year ratable vesting period for employees and with a
three
-year cliff vesting for both non-vested stock and performance-based awards granted to executive officers and non-employee directors.
We have
no
t granted any stock options since 2009 and have
no
stock options outstanding as of
December 31, 2016
. A summary of remaining stock option activity from stock options granted prior to 2010 is provided below.
Summary of Stock Option Activity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2016
|
|
|
Options
|
|
Weighted
Average
Exercise
Price
|
|
Weighted
Average
Remaining
Contractual
Life
|
|
Aggregate
Intrinsic
Value
|
|
|
|
|
|
|
|
|
(In thousands)
|
Options outstanding at beginning of year
|
|
14,400
|
|
|
$
|
16.11
|
|
|
|
|
|
Granted
|
|
—
|
|
|
N/A
|
|
|
|
|
|
Exercised
|
|
(14,400
|
)
|
|
$
|
16.11
|
|
|
|
|
|
Cancelled
|
|
—
|
|
|
N/A
|
|
|
|
|
|
Outstanding at end of year
|
|
—
|
|
|
N/A
|
|
|
—
|
|
|
$
|
—
|
|
Vested at end of year
|
|
—
|
|
|
N/A
|
|
|
—
|
|
|
$
|
—
|
|
Exercisable at end of year
|
|
—
|
|
|
N/A
|
|
|
—
|
|
|
$
|
—
|
|
Price range of options exercised
|
|
$ 11.48 - $22.11
|
|
|
|
|
Price range of options outstanding
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
2015
|
|
2014
|
|
|
Options
|
|
Weighted
Average
Exercise
Price
|
|
Options
|
|
Weighted
Average
Exercise
Price
|
Options outstanding at beginning of year:
|
|
181,440
|
|
|
$
|
18.69
|
|
|
258,815
|
|
|
$
|
19.63
|
|
Granted
|
|
—
|
|
|
N/A
|
|
|
—
|
|
|
N/A
|
|
Exercised
|
|
(147,040
|
)
|
|
$
|
19.62
|
|
|
(60,695
|
)
|
|
$
|
17.16
|
|
Cancelled
|
|
(20,000
|
)
|
|
$
|
13.69
|
|
|
(16,680
|
)
|
|
$
|
38.86
|
|
Outstanding at end of year
|
|
14,400
|
|
|
$
|
16.11
|
|
|
181,440
|
|
|
$
|
18.69
|
|
Exercisable at end of year
|
|
14,400
|
|
|
$
|
16.11
|
|
|
181,440
|
|
|
$
|
18.69
|
|
Price range of options exercised
|
|
$ 11.48 - $22.11
|
|
|
|
|
$ 11.48 - $42.82
|
|
|
|
Price range of options outstanding
|
|
$ 11.48 - $22.11
|
|
|
|
|
$ 11.48 - $22.11
|
|
|
|
The total intrinsic value of option exercises for the years ended
December 31, 2016
,
2015
and
2014
was
$0.2 million
,
$3.5 million
and
$1.7 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 and Units Activity:
In addition to the stock options discussed above, we grant time-based and performance-based restricted shares. Performance-based restricted shares are only granted to executive officers. All performance shares only vest upon the attainment of certain financial and operational criteria as established and approved by our Board of Directors.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonvested
Restricted Share
Activity
(time-based)
|
|
Weighted
Average
Grant Date
Fair Value
|
|
Nonvested
Restricted
Share Activity
(performance-
Based)
|
|
Weighted
Average
Grant Date
Fair Value
|
Outstanding at January 1, 2014
|
|
883,895
|
|
|
$
|
32.22
|
|
|
175,000
|
|
|
$
|
30.10
|
|
Granted
|
|
374,683
|
|
|
45.23
|
|
|
52,083
|
|
|
45.60
|
|
Vested (Earned/Released)
|
|
(256,137
|
)
|
|
45.34
|
|
|
(56,250
|
)
|
|
45.56
|
|
Forfeited (1)
|
|
(99,000
|
)
|
|
38.77
|
|
|
—
|
|
|
N/A
|
|
Outstanding as of December 31, 2014
|
|
903,441
|
|
|
37.51
|
|
|
170,833
|
|
|
35.43
|
|
Granted
|
|
434,387
|
|
|
40.48
|
|
|
66,187
|
|
|
41.17
|
|
Vested (Earned/Released)
|
|
(318,651
|
)
|
|
41.14
|
|
|
(56,250
|
)
|
|
40.34
|
|
Forfeited (1)
|
|
(135,470
|
)
|
|
40.53
|
|
|
—
|
|
|
N/A
|
|
Outstanding at December 31, 2015
|
|
883,707
|
|
|
40.75
|
|
|
180,770
|
|
|
42.93
|
|
Granted
|
|
499,865
|
|
|
31.60
|
|
|
66,698
|
|
|
34.39
|
|
Vested (Earned/Released)
|
|
(305,359
|
)
|
|
30.87
|
|
|
(41,665
|
)
|
|
31.02
|
|
Forfeited (1)
|
|
(115,910
|
)
|
|
36.79
|
|
|
(20,835
|
)
|
|
42.56
|
|
Outstanding at December 31, 2016
|
|
962,303
|
|
|
37.00
|
|
|
184,968
|
|
|
34.84
|
|
|
|
(1)
|
Forfeitures on time-based nonvested shares are a result of terminations of employment, while forfeitures on performance-based nonvested shares are a result of failing to attain certain goals as outlined in our executive officers' compensation agreements.
|
Compensation cost related to time-based restricted stock awards is measured as of the closing price on the date of grant and is expensed on a straight-line basis over the vesting period of the award. Compensation cost related to performance-based restricted stock awards is also measured as of the closing price on the date of grant but is expensed in accordance with ASC 718, which requires an assessment of probability of attainment of the performance target. As our performance targets are dependent on performance over a specified measurement period, once we determine that the performance target outcome is probable, the cumulative expense is recorded immediately with the remaining expense and recorded on a straight-line basis through the end of the award’s vesting period. Beginning with grants in 2014, a portion of the performance-based restricted stock awards granted contain market conditions as defined by ASC 718. The guidance in ASC 718 requires that compensation expense for stock awards with market conditions be expensed based on a derived grant date fair value and expensed over the service period. We engaged a third party to perform a valuation analysis on the awards containing market conditions and our associated expense with those awards is based on the derived fair value from that analysis and is being expensed straight line over the service period of the awards. Below is a summary of compensation expense and stock award activity (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
2016
|
|
2015
|
|
2014
|
Stock-based compensation expense
|
|
$
|
13,741
|
|
|
$
|
15,781
|
|
|
$
|
12,211
|
|
Cash received by Company from exercises
|
|
$
|
232
|
|
|
$
|
2,886
|
|
|
$
|
1,042
|
|
The following table includes additional information regarding our Plan (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
At December 31,
|
|
|
2016
|
|
2015
|
Unrecognized stock-based compensation cost
|
|
$
|
18,528
|
|
|
$
|
18,545
|
|
Weighted average years expense recognition period
|
|
2.56
|
|
|
2.34
|
|
Total equity awards outstanding
|
|
1,147,271
|
|
|
1,078,877
|
|
We also offer a non-qualified deferred compensation plan ("deferred compensation plan") to highly compensated employees in order to allow them additional pre-tax income deferrals above and beyond the limits that qualified plans, such as 401k plans, impose on highly compensated employees. We do not currently offer a contribution match on the deferred compensation plan. All contributions to the plan to date have been funded by the employees and, therefore, we have no associated expense related to the deferred compensation plan for the years ended December 31, 2016, 2015 and 2014, other than minor administrative costs.
NOTE 11 — INCOME TAXES
Components of income tax expense are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
2016
|
|
2015
|
|
2014
|
Current taxes:
|
|
|
|
|
|
|
Federal
|
|
$
|
55,547
|
|
|
$
|
53,510
|
|
|
$
|
58,461
|
|
State
|
|
7,075
|
|
|
2,726
|
|
|
1,133
|
|
|
|
62,622
|
|
|
56,236
|
|
|
59,594
|
|
Deferred taxes:
|
|
|
|
|
|
|
Federal
|
|
4,064
|
|
|
(1,652
|
)
|
|
(3,470
|
)
|
State
|
|
1,833
|
|
|
6,142
|
|
|
10,052
|
|
|
|
5,897
|
|
|
4,490
|
|
|
6,582
|
|
Total
|
|
$
|
68,519
|
|
|
$
|
60,726
|
|
|
$
|
66,176
|
|
Income taxes differ for the years ended
December 31, 2016
,
2015
and
2014
, 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,
|
|
|
2016
|
|
2015
|
|
2014
|
Expected taxes at current federal statutory income tax rate
|
|
$
|
76,321
|
|
|
$
|
66,312
|
|
|
$
|
72,946
|
|
State income taxes, net of federal tax benefit
|
|
5,791
|
|
|
5,764
|
|
|
7,271
|
|
Manufacturing deduction
|
|
(6,708
|
)
|
|
(5,917
|
)
|
|
(6,499
|
)
|
Federal tax credits
|
|
(7,229
|
)
|
|
(6,172
|
)
|
|
(7,835
|
)
|
Non-deductible costs and other
|
|
344
|
|
|
739
|
|
|
293
|
|
Income tax expense
|
|
$
|
68,519
|
|
|
$
|
60,726
|
|
|
$
|
66,176
|
|
The effective tax rate was
31.4%
,
32.1%
and
31.8%
for
2016
,
2015
and 2014, respectively. The effective tax rate for
2016
,
2015
and 2014 reflects the benefit of energy tax credits and the homebuilder manufacturing deduction for qualified domestic production activities.
Deferred tax assets and liabilities are netted on our balance sheet by tax jurisdiction. Net overall tax assets for all jurisdictions are grouped and included as a separate asset. Net overall deferred tax liabilities for all jurisdictions are grouped and included in other liabilities. At
December 31, 2016
, we have a net deferred tax asset of
$53.3 million
. We also have net deferred tax liabilities of
$3.1 million
. Deferred tax assets and liabilities are comprised of timing differences (in thousands) as follows:
|
|
|
|
|
|
|
|
|
|
|
|
At December 31,
|
|
|
2016
|
|
2015
|
Deferred tax assets:
|
|
|
|
|
Real estate
|
|
$
|
21,525
|
|
|
$
|
19,622
|
|
Goodwill
|
|
6,153
|
|
|
9,263
|
|
Warranty reserve
|
|
8,408
|
|
|
8,115
|
|
Wages payable
|
|
11,002
|
|
|
10,633
|
|
Equity-based compensation
|
|
7,030
|
|
|
7,040
|
|
Accrued expenses
|
|
250
|
|
|
7,063
|
|
Net operating loss carry-forwards
|
|
1,366
|
|
|
1,495
|
|
Other
|
|
3,695
|
|
|
2,325
|
|
Total deferred tax assets
|
|
59,429
|
|
|
65,556
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
Deferred revenue
|
|
1,455
|
|
|
2,209
|
|
Prepaids
|
|
933
|
|
|
925
|
|
Fixed assets
|
|
3,721
|
|
|
3,275
|
|
Total deferred tax liabilities
|
|
6,109
|
|
|
6,409
|
|
|
|
|
|
|
Deferred tax assets, net
|
|
53,320
|
|
|
59,147
|
|
Other deferred tax liability - state franchise taxes
|
|
3,128
|
|
|
3,058
|
|
|
|
|
|
|
Net deferred tax assets and liabilities
|
|
$
|
50,192
|
|
|
$
|
56,089
|
|
At
December 31, 2016
and
December 31, 2015
, we have
no
unrecognized tax benefits due to the lapse of the statute of limitations and completion of audits for 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. Our policy is to accrue interest and penalties on unrecognized tax benefits and include them in federal income tax expense.
We determine our deferred tax assets and liabilities in accordance with ASC 740-10,
Income Taxes
("ASC 740"
)
. We evaluate our deferred tax assets, including the benefit from NOLs, by jurisdiction 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 cumulative losses, forecasts of future profitability, the length of statutory carryforward periods, experiences with operating losses and experiences of utilizing tax credit carryforwards and tax planning alternatives. We have
no
valuation allowance on our deferred tax assets and NOL carryovers at
December 31, 2016
.
Our future NOL and deferred tax asset realization depends on sufficient taxable income in the carryforward periods under existing tax laws. Federal NOL carryforwards may be used to offset future taxable income for
20
years. State NOL carryforwards may be used to offset future taxable income for a period of time ranging from
5
to
20
years, depending on the state jurisdiction. At
December 31, 2016
, we had
no
remaining un-utilized federal NOL carryforward or federal tax credits. At
December 31, 2016
, we had tax benefits for state NOL carryforwards of
$1.4 million
that begin to expire in 2028.
At
December 31, 2016
, we have income taxes payable of
$3.2 million
, which primarily consists of current federal and state tax accruals, net of estimated tax payments. This amount is recorded in Accrued liabilities in the accompanying balance sheet at
December 31, 2016
.
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
2012
. We have
one
state income tax examination covering various years pending resolution at this time.
The tax benefits from NOLs, built-in losses, and tax credits would be materially reduced or potentially eliminated if we experience an “ownership change” as defined under Internal Revenue Code (“IRC”) §382. Based on our analysis performed as of
December 31, 2016
we do not believe that we have experienced an ownership change. 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 is intended to help us avoid an unintended ownership change and thereby preserve the value of any tax benefit for future utilization.
On December 16, 2014, Congress passed the Tax Increase Prevention Act of 2014 (the "Extenders Act"), which the President signed into law on December 19, 2014. The Extenders Act extended the availability of the IRC §45L new energy efficient homes credit to the end of 2014. On December 18, 2015, Congress passed the Protecting Americans from Tax Hikes ("PATH") Act of 2015. The PATH Act further extended the availability of the IRC §45L new energy efficient homes credit through the end of 2016. Under ASC 740, the effects of new legislation are recognized in the period that includes the date of enactment, regardless of the retroactive benefit. In accordance with this guidance, we recorded tax effected benefits based on estimates for qualifying new energy efficient homes that we closed in 2014, 2015 and 2016. The estimated tax effected benefits as adjusted for actual experience are reflected in our effective tax rate reconciliation as the benefit from federal tax credits.
NOTE 12 — SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
The following table presents certain supplemental cash flow information (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
2016
|
|
2015
|
|
2014
|
Cash paid during the year for:
|
|
|
|
|
|
|
Interest, net of interest capitalized
|
|
$
|
1,760
|
|
|
$
|
9,915
|
|
|
$
|
830
|
|
Income taxes
|
|
$
|
65,020
|
|
|
$
|
56,186
|
|
|
$
|
71,321
|
|
Non-cash operating activities decrease:
|
|
|
|
|
|
|
Real estate not owned
|
|
$
|
—
|
|
|
$
|
4,999
|
|
|
$
|
4,710
|
|
Real estate acquired through notes payable
|
|
$
|
14,199
|
|
|
$
|
16,371
|
|
|
$
|
25,176
|
|
NOTE 13 — 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.
We charter aircraft services from companies that use the private plane of Steven Hilton, our Chairman and CEO, although Mr. Hilton does not have an ownership interest in the companies. Payments made to these companies were approximately
$711,000
,
$695,000
and
$598,000
for the years ended
December 31, 2016
,
2015
and
2014
, respectively. In addition, in 2016 we chartered aircraft services from a company that uses the private plane of Robert Sarver, a Meritage director. During the year ended
December 31, 2016
, these payments totaled
$43,000
with no prior year activity.
In 2012, we entered into an FDIC insured bank deposit account agreement with Alliance Bank of Arizona (“Alliance Bank”) through the Insured Cash Sweep Service ("ICS"). ICS 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 ICS 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. We had
no
cash deposits at
December 31, 2016
and cash deposits in the aggregate amount of
$100.1 million
at
December 31, 2015
, through Alliance Bank as the ICS custodian or relationship bank. Alliance Bank had divided these amounts into FDIC insured amounts deposited with other ICS participating FDIC insured institutions. We do not pay any separate fees to Alliance Bank for these programs. Rather, Alliance Bank receives a small fee from the other ICS institutions for certain funds placed. Robert Sarver, a Meritage director, is a director and the chief executive officer of Western Alliance Bancorporation ("Western Alliance"), the parent company of Alliance Bank. In addition, Steven Hilton, our Chairman and CEO is also a director of
Western Alliance. We earned market-rate interest on deposits placed with Western Alliance pursuant to the ICS program of
$48,000
,
$137,000
and
$430,000
in
2016
,
2015
, and
2014
, respectively. We had
no
cash deposits at an Alliance Bank checking account as of
December 31, 2016
and a nominal amount of
$9,678
of cash deposits as of
December 31, 2015
.
NOTE 14 — OPERATING AND REPORTING SEGMENTS
We operate with
two
principal business segments: homebuilding and financial services. As defined in ASC 280-10,
Segment Reporting
, we have
nine
homebuilding operating segments. The homebuilding 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 homebuilding operating segments into reporting segments based on similar long-term economic characteristics and geographical proximity. Our current reportable homebuilding segments are as follows:
West:
Arizona, California and Colorado (1)
Central:
Texas
East:
Florida, Georgia, North Carolina, South Carolina and Tennessee
|
|
(1)
|
Activity for our wind-down Nevada operations is reflected in the West Region's results.
|
Management’s evaluation of segment performance is based on segment operating income, 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
2016
|
|
2015
|
|
2014
|
Homebuilding revenue (1):
|
|
|
|
|
|
|
West
|
|
$
|
1,300,906
|
|
|
$
|
1,029,801
|
|
|
$
|
920,244
|
|
Central
|
|
787,849
|
|
|
731,766
|
|
|
692,320
|
|
East
|
|
940,472
|
|
|
806,515
|
|
|
557,079
|
|
Consolidated total
|
|
3,029,227
|
|
|
2,568,082
|
|
|
2,169,643
|
|
Homebuilding segment operating income:
|
|
|
|
|
|
|
West
|
|
103,801
|
|
|
85,760
|
|
|
102,640
|
|
Central
|
|
74,253
|
|
|
80,444
|
|
|
75,372
|
|
East
|
|
48,126
|
|
|
56,141
|
|
|
46,510
|
|
Total homebuilding segment operating income
|
|
226,180
|
|
|
222,345
|
|
|
224,522
|
|
Financial services segment profit
|
|
21,902
|
|
|
19,271
|
|
|
16,178
|
|
Corporate and unallocated costs (2)
|
|
(33,863
|
)
|
|
(34,903
|
)
|
|
(33,245
|
)
|
Earnings/(loss) from other unconsolidated entities, net
|
|
4,060
|
|
|
(338
|
)
|
|
(447
|
)
|
Interest expense
|
|
(5,172
|
)
|
|
(15,965
|
)
|
|
(5,163
|
)
|
Other income/(expense), net
|
|
4,953
|
|
|
(946
|
)
|
|
6,572
|
|
Net earnings before income taxes
|
|
$
|
218,060
|
|
|
$
|
189,464
|
|
|
$
|
208,417
|
|
|
|
(1)
|
Homebuilding revenue includes the following land closing revenue, by segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
Land closing revenue:
|
|
2016
|
|
2015
|
|
2014
|
West
|
|
$
|
15,608
|
|
|
$
|
2,131
|
|
|
$
|
11,155
|
|
Central
|
|
8,885
|
|
|
26,448
|
|
|
8,603
|
|
East
|
|
1,308
|
|
|
7,947
|
|
|
7,494
|
|
Total
|
|
$
|
25,801
|
|
|
$
|
36,526
|
|
|
$
|
27,252
|
|
|
|
(2)
|
Balance consists primarily of corporate costs and numerous shared service functions such as finance and treasury that are not allocated to the homebuilding or financial reporting segments.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2016
|
|
|
West
|
|
Central
|
|
East
|
|
Financial Services
|
|
Corporate and
Unallocated
|
|
Total
|
Deposits on real estate under option or contract
|
|
$
|
25,863
|
|
|
$
|
27,669
|
|
|
$
|
32,024
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
85,556
|
|
Real estate
|
|
1,120,038
|
|
|
595,485
|
|
|
706,540
|
|
|
—
|
|
|
—
|
|
|
2,422,063
|
|
Investments in unconsolidated entities
|
|
7,362
|
|
|
7,450
|
|
|
—
|
|
|
—
|
|
|
2,285
|
|
|
17,097
|
|
Other assets
|
|
45,624
|
|
|
94,299
|
|
(1
|
)
|
93,245
|
|
(2
|
)
|
812
|
|
|
129,995
|
|
(3
|
)
|
363,975
|
|
Total assets
|
|
$
|
1,198,887
|
|
|
$
|
724,903
|
|
|
$
|
831,809
|
|
|
$
|
812
|
|
|
$
|
132,280
|
|
|
$
|
2,888,691
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2015
|
|
|
West
|
|
Central
|
|
East
|
|
Financial Services
|
|
Corporate and
Unallocated
|
|
Total
|
Deposits on real estate under option or contract
|
|
$
|
28,488
|
|
|
$
|
30,241
|
|
|
$
|
29,110
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
87,839
|
|
Real estate
|
|
1,008,457
|
|
|
505,954
|
|
|
583,891
|
|
|
—
|
|
|
—
|
|
|
2,098,302
|
|
Investments in unconsolidated entities
|
|
204
|
|
|
8,704
|
|
|
—
|
|
|
—
|
|
|
2,462
|
|
|
11,370
|
|
Other assets
|
|
55,112
|
|
|
87,313
|
|
(1
|
)
|
77,548
|
|
(2
|
)
|
898
|
|
|
261,395
|
|
(3
|
)
|
482,266
|
|
Total assets
|
|
$
|
1,092,261
|
|
|
$
|
632,212
|
|
|
$
|
690,549
|
|
|
$
|
898
|
|
|
$
|
263,857
|
|
|
$
|
2,679,777
|
|
|
|
(1)
|
Balance consists primarily of development reimbursements from local municipalities and cash.
|
|
|
(2)
|
Balance consists primarily of goodwill (see Note 9), prepaid permits and fees to local municipalities and cash.
|
|
|
(3)
|
Balance consists primarily of cash and our deferred tax asset.
|
NOTE 15 — COMMITMENTS AND CONTINGENCIES
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 most exposure is subject to and should be covered by warranty and indemnity obligations of our consultants and subcontractors. Additionally, some such claims are also 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. Historically, most disputes regarding warranty claims are resolved prior to litigation. We believe there are not any pending legal or warranty matters that could have a material adverse impact upon our consolidated financial condition, results of operations or cash flows that have not been sufficiently reserved.
Joint Venture Litigation
From 2008 through January 2016, we were involved in litigation initiated by the lender group for a large Nevada-based land acquisition and development joint venture in which we held a
3.53%
interest. We were the only builder joint venture partner to have fully performed its obligations with respect to takedowns of lots from the joint venture, having completed our first takedown in April 2007 and having tendered full performance of our second and final takedown in April 2008. The joint venture and the lender group rejected our tender of performance for our second and final takedown, and we contended, among other things, that the rejection by the joint venture and the lender group of our tender of full performance was wrongful and constituted a breach of contract and should release us of liability with respect to the takedown and extinguish or greatly reduce our exposure under all guarantees. On December 9, 2010,
three
of the lenders filed a petition seeking to place the venture into an involuntary bankruptcy (JP Morgan Chase Bank, N.A. v. South Edge, LLC (Case No. 10-32968-bam)). On June 6, 2011, we received a demand letter from the lenders requesting full payment of
$13.2 million
the lenders claimed to be owed under the springing repayment guarantee, including past-due interest and penalties. The lenders claimed that the involuntary bankruptcy filed by
three
of the co-lenders triggered the springing repayment guarantee. We contested the Lenders’ claim on the basis that the lenders breached their contract with us by refusing to accept the April 2008 tender of our performance, by refusing to release their lien in connection with our second and final takedown in this project, and the repayment guarantee was not properly triggered by the lenders’ filing of the involuntary bankruptcy. On August 25, 2011, the US District Court of Nevada
entered judgments in favor of JP Morgan in a combined amount of
$16.6
million, which included prejudgment interest and attorneys' fees. We appealed that ruling and on October 26, 2015, the Ninth Circuit Court of Appeals issued an unpublished Memorandum Opinion affirming the trial court's ruling in favor of JP Morgan. We incurred an incremental
$4.1 million
in charges in the third quarter of 2015 for litigation reserves related to this matter to fully reserve the entire judgment and we subsequently paid the entire judgment amount in 2016, thus concluding the litigation with the lender group.
We believe that
four
of our co-venturers in the South Edge entity (KB Home, Toll Brothers, Pardee Homes and Beazer Homes) are liable to Meritage for certain amounts that Meritage has paid or may hereafter pay pursuant to or related to the above-mentioned litigation with the lender group and we have filed an arbitration claim against those builders to recover such amounts from them based on breach of contract, breach of the implied covenant of good faith and fair dealing, unjust enrichment, indemnity, and other claims.
Lease Agreements
We lease office facilities, model homes and equipment under various operating lease agreements. Approximate future minimum lease payments for non-cancellable operating leases as of
December 31, 2016
, are as follows (in thousands):
|
|
|
|
|
Years Ended December 31,
|
|
2017
|
$
|
7,176
|
|
2018
|
5,410
|
|
2019
|
4,124
|
|
2020
|
3,659
|
|
2021
|
2,741
|
|
Thereafter
|
4,029
|
|
|
$
|
27,139
|
|
Rent expense was
$7.8 million
,
$6.6 million
and
$6.5 million
in
2016
,
2015
and
2014
, respectively, and is included within general and administrative expense or in commissions and other sales costs on our consolidated statements of operations. Sublease income was
$0.6 million
,
$0.5 million
and
$0.6 million
in
2016
,
2015
and
2014
, respectively. Sublease income is included within other income/(expense), net on our consolidated statements of operations.
See Note 1 for information related to our warranty obligations.
NOTE 16 — SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
Quarterly results for the years ended
December 31, 2016
and
2015
follow (in thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
|
|
Second
|
|
Third
|
|
Fourth
|
2016
|
|
|
|
|
|
|
|
|
Total closing revenue
|
|
$
|
597,766
|
|
|
$
|
797,896
|
|
|
$
|
752,857
|
|
|
$
|
880,708
|
|
Total closing gross profit
|
|
$
|
103,796
|
|
|
$
|
138,104
|
|
|
$
|
131,874
|
|
|
$
|
157,438
|
|
Earnings before income taxes
|
|
$
|
28,885
|
|
|
$
|
59,036
|
|
|
$
|
53,802
|
|
|
$
|
76,337
|
|
Net earnings
|
|
$
|
20,969
|
|
|
$
|
39,878
|
|
|
$
|
36,887
|
|
|
$
|
51,807
|
|
Per Share Data:
|
|
|
|
|
|
|
|
|
Basic earnings per share (1)
|
|
$
|
0.53
|
|
|
$
|
1.00
|
|
|
$
|
0.92
|
|
|
$
|
1.29
|
|
Diluted earnings per share (1)
|
|
$
|
0.50
|
|
|
$
|
0.95
|
|
|
$
|
0.88
|
|
|
$
|
1.22
|
|
2015
|
|
|
|
|
|
|
|
|
Total closing revenue
|
|
$
|
518,712
|
|
|
$
|
597,801
|
|
|
$
|
669,956
|
|
|
$
|
781,613
|
|
Total closing gross profit
|
|
$
|
95,641
|
|
|
$
|
114,749
|
|
|
$
|
126,244
|
|
|
$
|
152,075
|
|
Earnings before income taxes
|
|
$
|
25,297
|
|
|
$
|
41,414
|
|
|
$
|
46,668
|
|
|
$
|
76,085
|
|
Net earnings
|
|
$
|
16,400
|
|
|
$
|
29,133
|
|
|
$
|
30,308
|
|
|
$
|
52,897
|
|
Per Share Data:
|
|
|
|
|
|
|
|
|
Basic earnings per share (1)
|
|
$
|
0.42
|
|
|
$
|
0.73
|
|
|
$
|
0.76
|
|
|
$
|
1.33
|
|
Diluted earnings per share (1)
|
|
$
|
0.40
|
|
|
$
|
0.70
|
|
|
$
|
0.73
|
|
|
$
|
1.26
|
|
|
|
(1)
|
Due to the computation of earnings per share, the sum of the quarterly amounts may not equal the full-year results.
|
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 economic downturns or times of certain government incentives, our results may not follow our historical trends.