Toggle SGML Header (+)


Section 1: 10-Q (10-Q)

Document


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 FORM 10-Q 
(Mark One)
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2018
OR 
¨
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
 
 395525035_mhlogo1linetaga12.jpg
Meritage Homes Corporation
(Exact Name of Registrant as Specified in its Charter)
Maryland
 
86-0611231
(State or Other Jurisdiction of
Incorporation or Organization)
 
(IRS Employer
Identification No.)
 
 
8800 E. Raintree Drive, Suite 300,
Scottsdale, Arizona
 
85260
(Address of Principal Executive Offices)
 
(Zip Code)
(480) 515-8100
(Registrant’s telephone number, including area code)
N/A
(Former Name, Former Address and Formal Fiscal Year, if Changed Since Last Report)
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  ý No  ¨
Indicate by a checkmark whether the registrant has submitted electronically every Interactive Date File required to be submitted 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 such files).    Yes  ý    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
ý
Accelerated filer
¨
Non-accelerated filer
¨ 
Smaller reporting company
¨
 
 
Emerging growth company
¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by a checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  ý

Common shares outstanding as of October 25, 2018: 39,966,166




MERITAGE HOMES CORPORATION
FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 2018
TABLE OF CONTENTS
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Items 3-5. Not Applicable
 
 
 
 
 


2






PART I - FINANCIAL INFORMATION

Item 1.    Financial Statements

MERITAGE HOMES CORPORATION AND SUBSIDIARIES
UNAUDITED CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
 
 
 
 
 
 
 
 
September 30, 2018
 
December 31, 2017
Assets
 
 
 
 
Cash and cash equivalents
 
$
205,762

 
$
170,746

Other receivables
 
79,573

 
79,317

Real estate
 
2,887,293


2,731,380

Real estate not owned
 
36,562

 
38,864

Deposits on real estate under option or contract
 
49,893

 
59,945

Investments in unconsolidated entities
 
16,294

 
17,068

Property and equipment, net
 
53,371

 
33,631

Deferred tax asset
 
36,674

 
35,162

Prepaids, other assets and goodwill
 
82,837

 
85,145

Total assets
 
$
3,448,259

 
$
3,251,258

Liabilities
 
 
 
 
Accounts payable
 
$
156,772

 
$
140,516

Accrued liabilities
 
200,445


181,076

Home sale deposits
 
34,159

 
34,059

Liabilities related to real estate not owned
 
32,676

 
34,978

Loans payable and other borrowings
 
16,669

 
17,354

Senior notes, net
 
1,295,054

 
1,266,450

Total liabilities
 
1,735,775

 
1,674,433

Stockholders’ Equity
 
 
 
 
Preferred stock, par value $0.01. Authorized 10,000,000 shares; none issued and outstanding at September 30, 2018 and December 31, 2017
 

 

Common stock, par value $0.01. Authorized 125,000,000 shares; 39,966,166 and 40,330,741 shares issued and outstanding at September 30, 2018 and December 31, 2017, respectively
 
400

 
403

Additional paid-in capital
 
568,976

 
584,578

Retained earnings
 
1,143,108

 
991,844

Total stockholders’ equity
 
1,712,484

 
1,576,825

Total liabilities and stockholders’ equity
 
$
3,448,259

 
$
3,251,258

See accompanying notes to unaudited consolidated financial statements



3



MERITAGE HOMES CORPORATION AND SUBSIDIARIES
UNAUDITED CONSOLIDATED INCOME STATEMENTS
(in thousands, except per share amounts)
 
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2018
 
2017
 
2018
 
2017
Homebuilding:
 
 
 
 
 
 
 
 
Home closing revenue
 
$
877,734

 
$
805,008

 
$
2,478,649

 
$
2,263,405

Land closing revenue
 
6,847

 
589

 
25,991

 
16,942

Total closing revenue
 
884,581

 
805,597

 
2,504,640

 
2,280,347

Cost of home closings
 
(719,142
)
 
(659,350
)
 
(2,036,212
)
 
(1,869,569
)
Cost of land closings
 
(6,922
)
 
(1,646
)
 
(27,963
)
 
(15,504
)
Total cost of closings
 
(726,064
)
 
(660,996
)
 
(2,064,175
)
 
(1,885,073
)
Home closing gross profit
 
158,592

 
145,658

 
442,437

 
393,836

Land closing gross (loss)/profit
 
(75
)
 
(1,057
)
 
(1,972
)
 
1,438

Total closing gross profit
 
158,517

 
144,601

 
440,465

 
395,274

Financial Services:
 
 
 
 
 
 
 
 
Revenue
 
3,832

 
3,549

 
10,750

 
10,142

Expense
 
(1,659
)
 
(1,524
)
 
(4,836
)
 
(4,454
)
Earnings from financial services unconsolidated entities and other, net
 
4,148

 
3,489

 
10,278

 
9,673

Financial services profit
 
6,321

 
5,514

 
16,192

 
15,361

Commissions and other sales costs
 
(60,282
)
 
(55,845
)
 
(173,857
)
 
(158,866
)
General and administrative expenses
 
(35,906
)
 
(31,636
)
 
(101,004
)
 
(90,849
)
Earnings/(loss) from other unconsolidated entities, net
 
894

 
(91
)
 
692

 
852

Interest expense
 
(53
)
 
(1,116
)
 
(233
)
 
(3,561
)
Other income, net
 
1,918

 
2,028

 
9,223

 
5,218

Earnings before income taxes
 
71,409

 
63,455

 
191,478

 
163,429

Provision for income taxes
 
(17,274
)
 
(20,905
)
 
(39,631
)
 
(55,727
)
Net earnings
 
$
54,135

 
$
42,550

 
$
151,847

 
$
107,702

Earnings per common share:
 
 
 
 
 
 
 
 
Basic
 
$
1.34

 
$
1.06

 
$
3.75

 
$
2.67

Diluted
 
$
1.33

 
$
1.02

 
$
3.69

 
$
2.55

Weighted average number of shares:
 
 
 
 
 
 
 
 
Basic
 
40,283

 
40,323

 
40,472

 
40,273

Diluted
 
40,855

 
42,011

 
41,100

 
42,585

See accompanying notes to unaudited consolidated financial statements



4




MERITAGE HOMES CORPORATION AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
 
 
 
Nine Months Ended September 30,
 
 
2018
 
2017
Cash flows from operating activities:
 
 
 
 
Net earnings
 
$
151,847

 
$
107,702

Adjustments to reconcile net earnings to net cash provided by/(used in) operating activities:
 
 
 
 
Depreciation and amortization
 
19,458

 
12,071

Stock-based compensation
 
13,737

 
9,898

Equity in earnings from unconsolidated entities
 
(11,160
)
 
(10,525
)
Distributions of earnings from unconsolidated entities
 
11,898

 
10,410

Other
 
2,197

 
1,265

Changes in assets and liabilities:
 
 
 
 
Increase in real estate
 
(161,816
)
 
(336,069
)
Decrease in deposits on real estate under option or contract
 
10,080

 
13,633

Decrease/(increase) in other receivables, prepaids and other assets
 
1,686

 
(15,207
)
Increase in accounts payable and accrued liabilities
 
35,625

 
21,298

Increase in home sale deposits
 
100

 
11,098

Net cash provided by/(used in) operating activities
 
73,652

 
(174,426
)
Cash flows from investing activities:
 
 
 
 
Investments in unconsolidated entities
 
(551
)
 
(404
)
Distributions of capital from unconsolidated entities
 
597

 
1,250

Purchases of property and equipment
 
(23,754
)
 
(12,038
)
Proceeds from sales of property and equipment
 
107

 
251

Maturities/sales of investments and securities
 
1,065

 
1,297

Payments to purchase investments and securities
 
(1,065
)
 
(1,297
)
Net cash used in investing activities
 
(23,601
)
 
(10,941
)
Cash flows from financing activities:
 
 
 
 
Proceeds from Credit Facility, net
 

 
10,000

Repayment of loans payable and other borrowings
 
(13,484
)
 
(10,491
)
Repayment of senior notes and senior convertible notes
 
(175,000
)
 
(126,691
)
Proceeds from issuance of senior notes
 
206,000

 
300,000

Payment of debt issuance costs
 
(3,198
)
 
(3,986
)
Repurchase of shares
 
(29,353
)
 

Net cash (used in)/provided by financing activities
 
(15,035
)
 
168,832

Net increase/(decrease) in cash and cash equivalents
 
35,016

 
(16,535
)
Cash and cash equivalents, beginning of period
 
170,746

 
131,702

Cash and cash equivalents, end of period
 
$
205,762

 
$
115,167

See Supplemental Disclosure of Cash Flow Information in Note 13.
See accompanying notes to unaudited consolidated financial statements


5




MERITAGE HOMES CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 — ORGANIZATION AND BASIS OF PRESENTATION
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 homebuyers primarily focused on first-time and first move-up buyers. 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 predecessors, 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. In limited cases, we also offer luxury homes under the brand name of Monterey Homes in some markets. At September 30, 2018, we were actively selling homes in 264 communities, with base prices ranging from approximately $182,000 to $1,173,000.
Basis of Presentation. The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. These financial statements should be read in conjunction with the consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, 2017. The consolidated financial statements 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 unaudited financial statements include all adjustments (consisting only of normal recurring entries), necessary for the fair presentation of our results for the interim periods presented. Results for interim periods are not necessarily indicative of results to be expected for the full year.
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 or closing agents for home closings of approximately $68.4 million and $107.1 million are included in cash and cash equivalents at September 30, 2018 and December 31, 2017, respectively.
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 and marketing 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 that 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 home closings.
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. It is possible that actual results could differ from budgeted amounts for various reasons, including construction and weather 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.

6



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 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. Such an analysis is conducted if there is an indication of a decline in value of our land and real estate assets. If an impairment of a community is required, the impairment charges are allocated to each lot on a straight-line basis.
Deposits. Deposits paid for land options 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 applied to the acquisition price of the land based on the terms of the underlying agreements. To the extent they are non-refundable, deposits are charged to expense if the land acquisition contract 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 the non-refundable deposits and any ancillary capitalized costs. Our deposits on real estate under option or contract were $49.9 million and $59.9 million as of September 30, 2018 and December 31, 2017, respectively.
Goodwill. In accordance with ASC 350, Intangibles, Goodwill and Other ("ASC 350"), we analyze goodwill on an annual basis (or whenever indication of impairment exists) through a qualitative assessment to determine whether it is necessary to perform a goodwill impairment test. ASC 350 states that an entity may first assess qualitative factors to determine whether it is necessary to perform a goodwill impairment test. 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 and labor costs, 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, 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.
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 to option and purchase 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 surety bonds or 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 completion 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 or letter of credit. We believe it is unlikely that any significant amounts of these bonds or letters of credit will be drawn upon.

7



The table below outlines our surety bond and letter of credit obligations (in thousands):
 
As of
 
September 30, 2018
 
December 31, 2017
 
Outstanding
 
Estimated work
remaining to
complete
 
Outstanding
 
Estimated work
remaining to
complete
Sureties:
 
 
 
 
 
 
 
Sureties related to owned projects and lots under contract
$
353,125

 
$
169,702

 
$
296,387

 
$
120,320

Total Sureties
$
353,125

 
$
169,702

 
$
296,387

 
$
120,320

Letters of Credit (“LOCs”):
 
 
 
 
 
 
 
LOCs for land development
72,419

 
N/A

 
70,922

 
N/A

LOCs for general corporate operations
3,750

 
N/A

 
3,750

 
N/A

Total LOCs
$
76,169

 
N/A

 
$
74,672

 
N/A

Accrued Liabilities. Accrued liabilities at September 30, 2018 and December 31, 2017 consisted of the following (in thousands):
 
 
As of
 
 
September 30, 2018
 
December 31, 2017
Accruals related to real estate development and construction activities
 
$
70,874

 
$
53,522

Payroll and other benefits
 
47,605

 
58,186

Accrued interest
 
33,881

 
15,369

Accrued taxes
 
8,676

 
14,067

Warranty reserves
 
22,864


23,328

Other accruals
 
16,545

 
16,604

Total
 
$
200,445

 
$
181,076

Warranty Reserves. We provide home purchasers with limited warranties against certain building defects and we 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 the 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. Included in the warranty reserve balances at September 30, 2018 and December 31, 2017 reflected in the table below are case-specific reserves for three warranty matters related to (1) alleged stucco defects in Florida; (2) a potentially faulty solar component in various locations provided by a bankrupt manufacturer; and (3) a foundation design matter affecting a single community in Texas.
A summary of changes in our warranty reserves follows (in thousands):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
Balance, beginning of period
$
23,659

 
$
23,620

 
$
23,328

 
$
22,660

Additions to reserve from new home deliveries
4,092

 
4,366

 
11,645

 
12,491

Warranty claims
(4,887
)
 
(3,554
)
 
(12,109
)
 
(10,719
)
Adjustments to pre-existing reserves

 

 

 

Balance, end of period
$
22,864


$
24,432

 
$
22,864

 
$
24,432

Warranty reserves are included in Accrued liabilities on the accompanying unaudited consolidated balance sheets, and additions and adjustments to the reserves, if any, are included in Cost of home closings within the accompanying unaudited consolidated income statements. 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 trade partners and the general liability

8



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.
We have received claims related to stucco installation from homeowners in certain Florida communities and we established reserves to cover our anticipated net exposure related to the repairs based on the information available to us. Our review of these stucco related matters is ongoing and our estimate of future costs of repairs is based on our judgment, various assumptions and internal data. Due to the degree of judgment and the potential for variability in our underlying assumptions and data, as we obtain additional information, we may revise our estimate. As of September 30, 2018, after taking into account potential recovery under our general liability insurance policies and potential recoveries from the contractors involved and their insurers, we believe our reserves are sufficient to cover the repairs related to the existing stucco claims. Additionally, we have received claims related to a foundation design matter affecting a single community in Texas requiring repairs to be made to homes within that community. Our estimate of costs is ongoing and updated regularly as information becomes available to us.  As of September 30, 2018, taking into account sources of potential recovery from the consultant and contractors involved with the design and construction of the homes and their insurers as well as from our general liability insurer, we believe our reserves are sufficient to cover repairs and related claims. See Note 15 in the accompanying unaudited consolidated financial statements for additional information regarding both of these matters.
Revenue Recognition. In accordance with ASC 606 Revenue from Contracts with Customers, we apply the following steps in determining the timing and amount of revenue to recognize: (1) identify the contract with our customer; (2) identify the performance obligation(s) in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations in the contract, if applicable; and (5) recognize revenue when (or as) we satisfy the performance obligation. The performance obligation and subsequent revenue recognition for our three sources of revenue are outlined below:

Revenue from closings of residential real estate is recognized when closings have occurred, the risks and rewards of ownership are transferred to the buyer, and we have no continuing involvement with the property, which is generally upon the close of escrow. Revenue is reported net of any discounts and incentives.    
Revenue from land sales is recognized when a significant down payment is received, title passes and collectability of the receivable is reasonably assured, and we have no continuing involvement with the property, which is generally upon the close of escrow.
Revenue from financial services is recognized when closings have occurred and all financial services have been rendered, which is generally upon the close of escrow.
Revenue expected to be recognized in any future year related to remaining performance obligations (if any) and contract liabilities expected to be recognized as revenue, excluding revenue pertaining to contracts that have an original expected duration of one year or less, is not material. Our three sources of revenue are disaggregated by type in the accompanying unaudited consolidated income statements.
Recent Accounting Pronouncements.
In August 2018, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2018-15, Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract ("ASU 2018-15"), which aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. ASU 2018-15 is effective for us beginning January 1, 2020. ASU 2018-15 is required to be applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption. We are currently evaluating the impact adopting this guidance will have on our financial statements.
In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement ("ASU 2018-13"), which modifies the disclosure requirements of fair value measurements. ASU 2018-13 is effective for us beginning January 1, 2020. Certain disclosures are required to be applied on a retrospective basis and others on a prospective basis. We are currently evaluating the impact adopting this guidance will have on our financial statement disclosures.
In January 2017, the FASB issued ASU No. 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Accounting for Goodwill Impairment ("ASU 2017-04"), which simplifies the accounting for goodwill impairments by eliminating the second step of the goodwill impairment test. Under the new guidance, an impairment loss will reflect the amount by which the carrying amount of a reporting unit exceeds its fair value, not to exceed the carrying amount of goodwill.

9



ASU 2017-04 is effective for us beginning January 1, 2020, with early adoption permitted. We have elected to early adopt ASU 2017-04 effective January 1, 2018 and it did not have a material impact on our financial statements.
In August 2016, the FASB issued 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 was effective for us beginning January 1, 2018. A retrospective transition method was required on adoption and it did not have a material impact on our statement of cash flows.
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 with lease terms of greater than twelve months on their balance sheets. ASU 2016-02 will be effective for us beginning January 1, 2019. 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. In July 2018, the FASB issued ASU No. 2018-11, Leases (Topic 842): Targeted Improvements ("ASU 2018-11"), which provides entities with an additional transition method that allows entities to initially apply the new leases standard at the adoption date and recognize a cumulative-effect adjustment to the opening balance of retained earnings while continuing to present all prior periods under the previous lease accounting guidance. Also in July 2018, the FASB issued Accounting Standards Update No. 2018-10, Codification Improvements to Topic 842, Leases (“ASU 2018-10”), which provides clarification about the proper implementation of several topics in ASU 2016-02. We are in the process of evaluating our population of leases and related systems and internal control considerations. Our consolidated balance sheets will be impacted by the recording of a right of use asset and associated lease liability for virtually all of our current operating leases, which is primarily comprised of office space leases. The liability will be equal to the present value of the remaining lease payments while the right-of-use asset will be based on the liability, subject to adjustment, such as for initial direct costs.  The right of use asset and lease liability are expected to have a gross-up impact on our consolidated balance sheets, however, we do not expect a material impact on our consolidated income statements.
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. We adopted ASU 2014-09 on January 1, 2018 using a modified retrospective method.
The adoption of ASU 2014-09 did not have an impact on the amount or timing of our homebuilding revenues, although forfeited customer deposits, typically an immaterial amount on an annual basis, that were previously included in Other income, net are reported as Home closing revenue in our consolidated statements of operations effective January 1, 2018. Additionally, as a result of the adoption of ASU 2014-09, there was an immaterial adjustment to our opening balance of Retained earnings with respect to the timing of expenses resulting from ceasing the capitalization of certain selling costs we incur as part of the selling process. The majority of these previously capitalized costs were allocated to either Real estate or Property and equipment, net on our opening 2018 consolidated balance sheet, with an immaterial amount recognized as a cumulative effect adjustment to the opening balance of Retained earnings. See "Revenue Recognition" in this Note 1 for further information.
As of and for the three and nine months ended September 30, 2018 the adoption of ASU 2014-09 did not have a material impact on our balance sheet, net earnings, stockholders' equity or our statement of cash flows. The comparative information has not been restated and continues to be reported under the accounting standards in effect for those periods.

10



NOTE 2 — REAL ESTATE AND CAPITALIZED INTEREST
Real estate consists of the following (in thousands):
 
 
As of
 
 
September 30, 2018
 
December 31, 2017
Homes under contract under construction (1)
 
$
660,944

 
$
566,474

Unsold homes, completed and under construction (1)
 
646,709

 
516,577

Model homes (1)
 
136,291

 
142,026

Finished home sites and home sites under development (2)
 
1,443,349

 
1,506,303

Total
 
$
2,887,293


$
2,731,380


(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, less impairments, if any. 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 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 our real estate development and construction activities. 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):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
Capitalized interest, beginning of period
$
84,443

 
$
72,327

 
$
78,564

 
$
68,196

Interest incurred
21,545

 
21,024

 
63,788

 
58,199

Interest expensed
(53
)
 
(1,116
)
 
(233
)
 
(3,561
)
Interest amortized to cost of home and land closings
(17,871
)
 
(15,462
)
 
(54,055
)
 
(46,061
)
Capitalized interest, end of period
$
88,064

 
$
76,773

 
$
88,064

 
$
76,773

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 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 or option agreement to acquire land or lots from an entity, a variable interest entity, or “VIE”, may be created. We evaluate all purchase and option 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 so, 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 generally 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 of the VIE to acquire additional land or dispose of land 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 to determine 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.

11



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 for our benefit, but on behalf of the land owner, and any budget savings or shortfalls are typically 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 September 30, 2018 (dollars in thousands): 
 
Projected Number
of Lots
 
Purchase
Price
 
Option/
Earnest  Money
Deposits–Cash
 
Purchase and option contracts recorded on balance sheet as Real estate not owned
212

 
$
36,562

 
$
3,886

 
Option contracts — non-refundable deposits, committed (1)
4,105

 
262,689

 
27,569

 
Purchase contracts — non-refundable deposits, committed (1)
5,925

 
191,356

 
16,753

 
Purchase and option contracts —refundable deposits, committed
1,375

 
71,916

 
987

 
Total committed
11,617

 
562,523

 
49,195

 
Purchase and option contracts — refundable deposits, uncommitted (2)
15,041

 
406,151

 
4,584

 
Total lots under contract or option
26,658

 
$
968,674

 
$
53,779

 
Total purchase and option contracts not recorded on balance sheet (3)
26,446

 
$
932,112

 
$
49,893

(4)
 
(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)
Except for our specific performance contracts recorded on our balance sheet as Real estate not owned, none of our purchase or option contracts require us to purchase lots.
(4)
Amount is reflected on our consolidated balance sheet in Deposits on real estate under option or contract as of September 30, 2018.
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 and sales absorptions, during a weakened homebuilding market, we may purchase lots at an absorption level that exceeds our sales and home starts pace in order to meet the pre-established minimum number of lots or we will work to restructure our original contract to include terms that more accurately reflect our revised orders pace expectations.
NOTE 4 - INVESTMENTS IN UNCONSOLIDATED ENTITIES
We may enter into land development 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. Based on the structure of each joint venture, it may or may not be consolidated into our results. Our joint venture partners are generally 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 September 30, 2018, we had three active equity-method land ventures.
As of September 30, 2018, 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 September 30, 2018 and December 31, 2017 was $1.7 million and $2.2 million, respectively.

12


Summarized condensed combined financial information related to unconsolidated joint ventures that are accounted for using the equity method was as follows (in thousands):
 
As of
 
September 30, 2018
 
December 31, 2017
Assets:
 
 
 
Cash
$
7,817

 
$
8,942

Real estate
56,808

 
55,552

Other assets
3,835

 
4,323

Total assets
$
68,460

 
$
68,817

Liabilities and equity:
 
 
 
Accounts payable and other liabilities
$
6,514

 
$
7,516

Notes and mortgages payable
26,798

 
25,194

Equity of:
 
 
 
Meritage (1)
14,690

 
14,521

Other
20,458

 
21,586

Total liabilities and equity
$
68,460

 
$
68,817

 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
Revenue
$
13,722

 
$
9,593

 
$
31,036

 
$
30,622

Costs and expenses
(5,107
)
 
(4,138
)
 
(12,450
)
 
(14,724
)
Net earnings of unconsolidated entities
$
8,615

 
$
5,455

 
$
18,586

 
$
15,898

Meritage’s share of pre-tax earnings (1) (2)
$
5,245

 
$
3,398

 
$
11,223

 
$
10,648


(1)
Balance represents Meritage’s interest, as reflected in the financial records of the respective joint ventures. This balance may differ from the balance reported 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.
(2)
Our share of pre-tax earnings is recorded in Earnings from financial services unconsolidated entities and other, net and Earnings/(loss) from other unconsolidated entities, net on our unaudited consolidated income statements and excludes joint venture profit related to lots we purchased from the joint ventures, if any. Such profit is deferred until homes are delivered by us and title passes to a homebuyer.
Our total investment in all of these joint ventures is $16.3 million and $17.1 million as of September 30, 2018 and December 31, 2017, respectively. We believe these ventures are in compliance with their respective debt agreements, if applicable, and such debt is non-recourse to us.

13



NOTE 5 — LOANS PAYABLE AND OTHER BORROWINGS
Loans payable and other borrowings consist of the following (in thousands):
 
 
As of
 
 
September 30, 2018
 
December 31, 2017
Other borrowings, real estate notes payable (1)
 
$
16,669

 
$
17,354

$780 million unsecured revolving credit facility with interest approximating LIBOR (approximately 2.26% at September 30, 2018) plus 1.75% or Prime (5.25% at September 30, 2018) plus 0.75%
 

 

Total
 
$
16,669

 
$
17,354

(1)
Reflects balance of non-recourse notes payable in connection with land purchases, with interest rates ranging from 0% to 8%.
The Company entered into an amended and restated unsecured revolving credit facility ("Credit Facility") in 2014 that has been amended from time to time. In June 2018 the aggregate commitment was increased to $780.0 million, and the maturity date extended to July 2022. The accordion feature was also refreshed permitting the size of the facility to increase to a maximum of $880.0 million. 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 $1.1 billion (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 had no outstanding borrowings under the Credit Facility as of September 30, 2018 or December 31, 2017. During the nine months ended September 30, 2018, we had $285.0 million in gross borrowings and repayments. During the nine months ended September 30, 2017, we had $320.0 million of gross borrowings and $310.0 million of repayments. As of September 30, 2018, we had outstanding letters of credit issued under the Credit Facility totaling $76.2 million, leaving $703.8 million available under the Credit Facility to be drawn.
NOTE 6 — SENIOR NOTES, NET
Senior notes, net consist of the following (in thousands):
 
 
As of
 
 
September 30, 2018
 
December 31, 2017
4.50% senior notes due 2018
 
$

 
$
175,000

7.15% senior notes due 2020. At September 30, 2018 and December 31, 2017 there was approximately $853 and $1,280 in net unamortized premium, respectively.
 
300,853

 
301,280

7.00% senior notes due 2022
 
300,000

 
300,000

6.00% senior notes due 2025. At September 30, 2018 there was approximately $5,523 in net unamortized premium. (1)
 
405,523

 
200,000

5.125% senior notes due 2027
 
300,000

 
300,000

Net debt issuance costs
 
(11,322
)
 
(9,830
)
Total
 
$
1,295,054

 
$
1,266,450

(1)
$200.0 million of the total $400.0 million 6.00% Senior Notes due 2025 outstanding at September 30, 2018 was issued at par and had no unamortized premium.
In March 2018, the Company completed an offering of $200.0 million aggregate principal amount of 6.00% Senior Notes due 2025 (the "Additional Notes"). The Additional Notes were issued as an add-on to the existing $200.0 million of 6.00% Senior Notes due 2025 that were issued in June 2015 which resulted in a combined $400.0 million aggregate principal amount of 6.00% Senior Notes due 2025 outstanding as of September 30, 2018. The Additional Notes were issued at a premium of 103% of the principal amount and the net proceeds were used to repay outstanding borrowings under the Credit Facility, which included borrowings used for the redemption of the Company's $175.0 million of 4.50% Senior Notes that were due to mature on March 1, 2018.

14



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 September 30, 2018.
Obligations to pay principal and interest on the senior 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 may 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 non-guarantor subsidiaries are, individually and in the aggregate, minor.
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 ("ASC 820"). 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.
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):
 
 
As of
 
 
September 30, 2018
 
December 31, 2017
 
 
Aggregate
Principal
 
Estimated  Fair
Value
 
Aggregate
Principal
 
Estimated  Fair
Value
4.50% senior notes
 
N/A

 
N/A

 
$
175,000

 
$
175,228

7.15% senior notes
 
$
300,000

 
$
314,250

 
$
300,000

 
$
326,250

7.00% senior notes
 
$
300,000

 
$
322,500

 
$
300,000

 
$
337,500

6.00% senior notes
 
$
400,000

 
$
404,000

 
$
200,000

 
$
214,000

5.125% senior notes
 
$
300,000

 
$
276,390

 
$
300,000

 
$
305,250

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.

15



NOTE 8 — EARNINGS PER SHARE
Basic and diluted earnings per common share were calculated as follows (in thousands, except per share amounts):
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
Basic weighted average number of shares outstanding
40,283

 
40,323

 
40,472

 
40,273

Effect of dilutive securities:
 
 
 
 
 
 
 
Convertible debt (1)

 
1,105

 

 
1,754

Unvested restricted stock
572

 
583

 
628

 
558

Diluted average shares outstanding
40,855

 
42,011

 
41,100

 
42,585

Net earnings as reported
$
54,135

 
$
42,550

 
$
151,847

 
$
107,702

Interest attributable to Convertible Notes, net of income taxes (1)

 
201

 

 
942

Net earnings for diluted earnings per share
$
54,135

 
$
42,751

 
$
151,847

 
$
108,644

Basic earnings per share
$
1.34

 
$
1.06

 
$
3.75

 
$
2.67

Diluted earnings per share (1)
$
1.33

 
$
1.02

 
$
3.69

 
$
2.55

Antidilutive stock not included in the calculation of diluted earnings per share

 
2

 
1

 
4

 
(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 based on the number of days our Convertible Notes were outstanding during the period. All of the Convertible Notes were retired in the second half of 2017.
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 approximately $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. Our acquisitions are recorded in accordance with ASC 805, Business Combinations and ASC 820, using the acquisition method of accounting. The purchase price for acquisitions is allocated based on estimated fair value of the assets and liabilities at the date of the acquisition. The combined excess purchase price of our acquisitions over the fair value of the net assets is classified as goodwill and is included on 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 indicators are present.
A summary of the carrying amount of goodwill follows (in thousands):    
 
West
 
Central
 
East
 
Financial Services
 
Corporate
 
Total
Balance at December 31, 2017
$

 
$

 
$
32,962

 
$

 
$

 
$
32,962

Additions

 

 

 

 

 

Impairments

 

 

 

 

 

Balance at September 30, 2018
$

 
$

 
$
32,962

 
$

 
$

 
$
32,962


16



NOTE 10 — STOCKHOLDERS’ EQUITY
A summary of changes in stockholders’ equity is presented below (in thousands): 
 
 
Nine Months Ended September 30, 2018
 
 
(In thousands)
 
 
Number of
Shares
 
Common
Stock
 
Additional
Paid-In
Capital
 
Retained
Earnings
 
Total
Balance at December 31, 2017
 
40,331

 
$
403

 
$
584,578

 
$
991,844

 
$
1,576,825

Adoption of ASU 2014-09 (1)
 

 

 

 
(583
)
 
(583
)
Net earnings
 

 

 

 
151,847

 
151,847

Stock-based compensation expense
 

 

 
13,748

 

 
13,748

Issuance of stock
 
321

 
4

 
(4
)
 

 

Share repurchases
 
(686
)
 
(7
)
 
(29,346
)
 

 
(29,353
)
Balance at September 30, 2018
 
39,966

 
$
400

 
$
568,976

 
$
1,143,108

 
$
1,712,484

(1)
Refer to Note 1 for additional information related to the adoption of ASU 2014-09.
 
 
Nine Months Ended September 30, 2017
 
 
(In thousands)
 
 
Number of
Shares
 
Common
Stock
 
Additional
Paid-In
Capital
 
Retained
Earnings
 
Total
Balance at December 31, 2016
 
40,031

 
$
400

 
$
572,506

 
$
848,589

 
$
1,421,495

Net earnings
 

 

 

 
107,702

 
107,702

Issuance of stock
 
295

 
3

 
(3
)
 

 

Stock-based compensation expense
 

 

 
9,911

 

 
9,911

Balance at September 30, 2017
 
40,326

 
$
403

 
$
582,414

 
$
956,291

 
$
1,539,108


17



NOTE 11 — STOCK BASED AND DEFERRED COMPENSATION
We have two stock-based compensation plans, the Amended and Restated 2006 Stock Incentive Plan (the “2006 Plan”) and the Meritage Homes Corporation 2018 Stock Incentive Plan (the “2018 Plan"), collectively the "Stock Plans". The 2006 Plan was approved by our Board of Directors and adopted in 2006 and has been amended or restated from time to time. The 2018 Plan was approved by our Board of Directors and our stockholders and adopted in May 2018. Both plans are administered by our Board of Directors and 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 Stock Plans authorize awards to officers, key employees, non-employee directors and consultants. The 2006 Plan authorizes 5,350,000 shares of common stock to be awarded, of which 685,234 shares remain available for grant at September 30, 2018. Upon expiration of the 2006 Plan in May 2019, any available shares from expired, terminated or forfeited awards that remain under the 2006 Plan and prior plans will be available for grant under the 2018 Plan. The 2018 Plan authorizes 1,250,000 shares of stock to be awarded, of which 1,240,917 shares remain available at September 30, 2018. 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 senior executive officers and non-employee directors.    
Compensation cost related to time-based restricted stock awards is measured as of the closing price on the date of grant and is expensed, less forfeitures, 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 718-10-25-20, Compensation – Stock Compensation ("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 recorded on a straight-line basis through the end of the award vesting period. For the three and nine months ended September 30, 2018, stock compensation increased as compared to prior year partially due to a change in the compensation structure for certain executives to all performance-based equity grants. 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 engage 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 (dollars in thousands):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
Stock-based compensation expense
$
4,761

 
$
4,113

 
$
13,737

 
$
9,898

Non-vested shares granted
9,083

 
14,075

 
315,247

 
430,575

Performance-based non-vested shares granted

 

 
157,637

 
154,120

Restricted stock awards vested (includes performance-based awards)
2,710

 
5,780

 
321,422

 
295,544

The following table includes additional information regarding our Stock Plans (dollars in thousands):
 
 
As of
 
 
September 30, 2018
 
December 31, 2017
Unrecognized stock-based compensation cost
 
$
22,742

 
$
18,439

Weighted average years expense recognition period
 
2.46

 
2.48

Total equity awards outstanding (1)
 
1,308,289

 
1,269,657


(1)
Includes unvested restricted stock, performance-based awards (assuming 100% payout) and restricted stock units.


18



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 401(k) 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 three and nine months ended September 30, 2018 or 2017, other than minor administrative costs.
NOTE 12 — INCOME TAXES
Components of the income tax provision are as follows (in thousands): 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
Federal
$
14,501

 
$
18,890

 
$
31,872

 
$
49,678

State
2,773

 
2,015

 
7,759

 
6,049

Total
$
17,274

 
$
20,905

 
$
39,631

 
$
55,727


The effective tax rate for the three and nine months ended September 30, 2018 was 24.2% and 20.7%, respectively, and for the three and nine months ended September 30, 2017 was 32.9% and 34.1%, respectively. The lower 2018 effective tax rates reflect lower corporate tax rates as a result of the Tax Cuts and Jobs Act of 2017 (the "Tax Act") passed in December 2017. The lower year-to-date rate also reflects the impact from the President signing the Bipartisan Budget Act of 2018 in February 2018, which included a retroactive extension of the Internal Revenue Code ("IRC") §45L new energy efficient homes credit that had previously expired in 2016. This extension provision provides for a single year extension of energy tax credits for homes sold in 2017 that meet the qualification criteria. Under ASC 740, the effects of these tax credits were required to be recorded in 2018, based on the date of enactment, regardless of the retroactive treatment. Our tax rate for 2017 does not include energy credits, but was favorably impacted by the homebuilding manufacturing deduction, which was eliminated for 2018 under the Tax Act. We anticipate that with the completion of our 2017 income tax returns, future guidance and additional information and interpretations with respect to the Tax Act may cause us to further adjust the provisional amounts recorded as of December 31, 2017. In accordance with SEC Staff Accounting Bulletin No. 118, we will record such adjustments in the period that relevant guidance or additional information becomes available and our analysis is completed.
At September 30, 2018 and December 31, 2017, we have no unrecognized tax benefits. 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. We evaluate our deferred tax assets, including the benefit from net operating losses ("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 carry forward periods, experiences with operating losses and experiences of utilizing tax credit carry forwards and tax planning alternatives. We have no valuation allowance on our deferred tax assets and NOL carryovers at September 30, 2018.
At September 30, 2018, we had no remaining federal NOL carry forward or un-utilized federal tax credits. At September 30, 2018, and December 31, 2017 we had tax benefits for state NOL carry forwards of $1.8 million, net of federal benefit, that begin to expire in 2028.
At September 30, 2018, we have income taxes payable of $1.2 million, which primarily consists of current federal and state tax accruals, net of estimated tax payments and tax credits. This amount is recorded in Accrued liabilities on the accompanying unaudited balance sheet at September 30, 2018.
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 2014.
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 IRC §382. Based on our analysis performed as of September 30, 2018 we do not believe that we have experienced an ownership change. As a protective measure, our stockholders held a Special

19



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.
NOTE 13 — SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
The following table presents certain supplemental cash flow information (in thousands):
 
 
 
Nine Months Ended September 30,
 
 
2018
 
2017
Cash paid during the year for:
 
 
 
 
Interest, net of interest capitalized
 
$
(16,366
)
 
$
(14,454
)
Income taxes
 
$
46,348

 
$
61,034

Non-cash operating activities:
 
 
 
 
Real estate not owned (decrease)/increase
 
$
(2,302
)
 
$
39,793

Real estate acquired through notes payable
 
$
12,799

 
$
6,378

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
 
 
Central:
Texas
 
 
East:
Florida, Georgia, North Carolina, South Carolina and Tennessee
 
Management’s evaluation of segment performance is based on segment operating income, which we define as home and land closing revenues less cost of home and land closings, 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, “Organization and Basis of Presentation.” 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.

20



The following segment information is in thousands: 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
Homebuilding revenue (1):
 
 
 
 
 
 
 
West
$
366,347

 
$
373,708

 
$
1,035,222

 
$
1,055,086

Central
261,636

 
236,884

 
713,612

 
637,394

East
256,598

 
195,005

 
755,806

 
587,867

Consolidated total
$
884,581

 
$
805,597

 
$
2,504,640

 
$
2,280,347

Homebuilding segment operating income:
 
 
 
 
 
 
 
West
$
34,671

 
$
35,026

 
$
88,854

 
$
94,169

Central
24,319

 
26,404

 
64,162

 
63,524

East
14,682

 
4,954

 
40,605

 
12,675

Total homebuilding segment operating income
73,672

 
66,384

 
193,621

 
170,368

Financial services segment profit
6,321

 
5,514

 
16,192

 
15,361

Corporate and unallocated costs (2)
(11,343
)
 
(9,264
)
 
(28,017
)
 
(24,809
)
Earnings/(loss) from other unconsolidated entities, net
894

 
(91
)
 
692

 
852

Interest expense
(53
)
 
(1,116
)
 
(233
)
 
(3,561
)
Other income, net (3)
1,918

 
2,028

 
9,223

 
5,218

Net earnings before income taxes
$
71,409

 
$
63,455

 
$
191,478

 
$
163,429

 
(1)
Homebuilding revenue includes the following land closing revenue, by segment, as outlined in the table below:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
Land closing revenue:
 
 
 
 
 
 
 
West
$
268

 
$

 
$
14,658

 
$
11,800

Central
5,328

 
125

 
6,215

 
247

East
1,251

 
464

 
5,118

 
4,895

Total
$
6,847

 
$
589

 
$
25,991

 
$
16,942

(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 services reporting segments.
(3)
For the nine months ended September 30, 2018, Other income, net includes a favorable $4.8 million legal settlement from long-standing litigation related to a previous joint venture in Nevada.
 
 
At September 30, 2018
 
 
West
 
Central
 
East
 
Financial Services
 
Corporate  and
Unallocated
 
Total
Deposits on real estate under option or contract
 
$
8,509

 
$
15,269

 
$
26,115

 
$

 
$

 
$
49,893

Real estate
 
1,258,824

 
722,418

 
906,051

 

 

 
2,887,293

Investments in unconsolidated entities
 
8,162

 
6,413

 

 

 
1,719

 
16,294

Other assets
 
68,469

(1)
103,369

(2)
119,773

(3)
623

 
202,545

(4)
494,779

Total assets
 
$
1,343,964

 
$
847,469

 
$
1,051,939

 
$
623

 
$
204,264

 
$
3,448,259


(1)
Balance consists primarily of cash and property and equipment.
(2)
Balance consists primarily of development reimbursements from local municipalities and cash.
(3)
Balance consists primarily of real estate not owned, goodwill (see Note 9), property and equipment and cash.

21



(4)
Balance consists primarily of cash and our deferred tax asset. 
 
 
At December 31, 2017
 
 
West
 
Central
 
East
 
Financial Services
 
Corporate  and
Unallocated
 
Total
Deposits on real estate under option or contract
 
$
15,557

 
$
21,309

 
$
23,079

 
$

 
$

 
$
59,945

Real estate
 
1,174,285

 
700,460

 
856,635

 

 

 
2,731,380

Investments in unconsolidated entities
 
7,833

 
6,999

 

 

 
2,236

 
17,068

Other assets
 
58,470

(1)
110,173

(2)
144,681

(3)
1,249

 
128,292

(4)
442,865

Total assets
 
$
1,256,145

 
$
838,941

 
$
1,024,395

 
$
1,249

 
$
130,528

 
$
3,251,258

(1)
Balance consists primarily of cash and property and equipment.
(2)
Balance consists primarily of development reimbursements from local municipalities and cash.
(3)
Balance consists primarily of real estate not owned, cash, and goodwill (see Note 9).
(4)
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, warranty claims and litigation and arbitration proceedings 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 no 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.    
As discussed in Note 1 under the heading “Warranty Reserves”, we have case specific reserves within our $22.9 million of total warranty reserves related to a foundation design matter affecting a single community in Texas. In addition to the repairs required to be made to homes within that community, we have been named as a defendant in several lawsuits filed by homeowners in that community. As of September 30, 2018, the claim we made for this matter under our general liability insurance policies has initially been denied, which we vehemently disagree with and have disputed with our insurance carrier. We regularly review our reserves, and adjust them, as necessary to reflect changes as more information becomes available. As of September 30, 2018, taking into account sources of potential recovery from the consultant and contractors involved with the design and construction of these homes and their insurers as well as from our general liability insurer, we believe our reserves are sufficient to cover repairs and related claims.
Also included within our case specific reserves and as discussed in Note 1 under the heading “Warranty Reserves” are reserves for alleged stucco defects in homes in certain Florida communities we developed prior to 2016. We are involved in legal proceedings relating to such stucco defects. Our review of these stucco related matters is ongoing and our estimate of and reserve for future costs of repairs is based on our judgment, various assumptions and internal data. Due to the degree of judgment and the potential for variability in our underlying assumptions and data, as we obtain additional information, we may revise our estimate and thus our related reserves. As of September 30, 2018, after considering potential recovery under our general liability insurance policies and potential recoveries from the contractors involved and their insurers, we believe our reserves are sufficient to cover the existing stucco related repairs and claims.


22



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,” "may," "will," "should," "could," “estimate,” “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 and Section 21E of the Securities Exchange Act of 1934 (the "Exchange Act"). Forward-looking statements in this Quarterly Report include: statements concerning trends and economic factors in the homebuilding industry in general, and our markets and results specifically; our operating strategy and initiatives, including our strategy to expand the number of communities that target the first-time buyer segment; demand and pricing trends in the short-term throughout our geographies; that we may opportunistically repurchase our debt and equity securities; the benefits of our land acquisition strategy and structures, including the use and the benefits of option contracts and joint ventures; that we expect to redeploy cash generated from operations to acquire and develop lot positions; 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 we are involved in and the sufficiency of our reserves relating thereto; the sufficiency of our liquidity and capital resources to support our business strategy; our ability and willingness to acquire land under option or contract; our strategy and trends and expectations concerning sales prices, sales pace, closings, orders, cancellations, material and labor costs for land development and home construction, gross margins, gross profit, revenues, net earnings, operating leverage, backlog, land prices, changes in and location of active communities, and the amount, type and timing of new community openings; seasonality; our future cash needs; that we may seek to raise additional debt and equity capital; our intentions regarding the payment of dividends and the use of derivative contracts; our perceptions about the importance of joint ventures to our business; and the impact of changes in interest rates.
Important factors that could cause actual results to differ materially from those in forward-looking statements, and that could negatively affect our business include, but are not limited to, the following: the availability and cost of finished lots and undeveloped land; shortages in the availability and cost of labor; changes in interest rates and the availability and pricing of residential mortgages; changes in tax laws that adversely impact us or our homebuyers; inflation in the cost of materials used to develop communities and construct homes; the success of strategic initiatives; the ability of our potential buyers to sell their existing homes; cancellation rates; the adverse effect of slow absorption rates; slowing in the growth of first-time homebuyers; competition; impairments of our real estate inventory; a change to the feasibility of projects under option or contract that could result in the write-down or write-off of earnest money or option deposits; our potential exposure to and impacts from natural disasters or severe weather conditions; home warranty and construction defect claims; failures in health and safety performance; our success in prevailing on contested tax positions; our ability to obtain performance and surety bonds in connection with our development work; the loss of key personnel; failure to comply with laws and regulations; our limited geographic diversification; fluctuations in quarterly operating results; our level of indebtedness; our ability to obtain financing if our credit ratings are downgraded; our ability to successfully integrate acquired companies and achieve anticipated benefits from these acquisitions; our compliance with government regulations; the effect of legislative and other governmental actions, orders, policies or initiatives that impact housing, labor availability, construction, mortgage availability, our access to capital, the cost of capital or the economy in general, or other initiatives that seek to restrain growth of new housing construction or similar measures; legislation relating to energy and climate change; the replication of our energy-efficient technologies by our competitors; our exposure to information technology failures and security breaches; negative publicity that affects our reputation; legislation related to tariffs; and other factors identified in documents filed by the Company with the Securities and Exchange Commission, including those set forth in this Form 10-Q and our Form 10-K for the year ended December 31, 2017 under the caption "Risk Factors," which can be found on our website.
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 disclaim and 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, except as required by law.


23



Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Overview and Outlook
The first nine months of 2018 have benefited from strong underlying economic and housing market fundamentals, evidenced by low unemployment levels, wage growth and a shortage in the supply of homes, particularly at entry-level price points. More recently, the pace of rising interest rates coupled with higher home sale prices has resulted in what markets are interpreting as a temporary pause in the homebuilding sector as potential buyers adjust to higher monthly mortgage payments and potentially adjust their buying expectations to a smaller, less expensive offering. With plentiful mortgage availability and improving economic metrics for most segments of the population and the meaningful re-entry of millennials into the home buying sector, we believe demand will continue for new homes but buyers will be primarily motivated by affordability. Homebuilders with attractive, lower price-point product in desirable locations should be poised to capture this pent-up demand as move-down and millennial buyers look to move into nicely appointed but affordable homes. While we believe the longer term economic data supports a continuation of the positive homebuilding cycle, the next several quarters may be choppy as the market absorbs the impact of increasing interest rates.
At Meritage, we continue to focus on our pivot to the first-time and first move-up buyer and our key strategic initiatives such as home closing gross margin improvement, selling, general and administrative cost control and community count stability. We believe the successful execution of these initiatives will position us to improve profitability, with our focus on the first-time and first move-up buyer. We have made considerable progress on these goals as one-third of our current communities are targeted to first-time buyers and those buyers represented more than 40% of our orders in the third quarter of 2018. We expect that growth to continue as we are opening an increased number of communities that target the first-time buyer. Our entry-level product is also attracting move-down buyers with select floor plans and price points that appeal to an age-targeted audience.
Summary Company Results
Our third quarter 2018 results delivered on several of our key strategic initiatives, with growth in our entry-level business and strong earnings performance. Total home closing revenue was $877.7 million for the three months ended September 30, 2018, an increase of $72.7 million over the corresponding prior year period, due to 193 additional homes closed. The increase in home closing revenue and consistent year-over-year home closing gross margin provided $12.9 million in additional home closing gross profit which, combined with a $1.1 million decrease in interest expense and a lower income tax provision, contributed to $54.1 million in net income for the three months ended September 30, 2018, a 27.2% improvement over the $42.6 million in the corresponding 2017 period. Third quarter 2018 earnings reflect a lower provision for income taxes due to a lower effective tax rate of 24.2% versus 32.9% in 2017 as a result of the Tax Act signed into law in December 2017, which resulted in a lower corporate tax rate. Similar to the third quarter performance, year-to-date results reflect $215.2 million in additional home closing revenue and $48.6 million higher home closing gross profit versus the nine months ended September 30, 2017. Higher gross profit combined with a $4.0 million increase in Other income, net and lower year-over-year interest expense led to net income of $151.8 million for the nine months ended September 30, 2018 compared to $107.7 million for the 2017 period.
On a consolidated basis, we experienced year over year growth in closings, both in units and value, for the three and nine months ended September 30, 2018 over the prior year. For the three months ended September 30, 2018, orders and order value declined by 2.5% and 6.5%, respectively, while those metrics in the nine month period increased by 4.4% and 2.3%, respectively, over the corresponding prior year period. We ended the third quarter of 2018 with 3,285 homes in backlog valued at $1.4 billion, declines of 1.4% and 3.0%, respectively, over September 30, 2017. The decline in year-over-year backlog is the result of the lower third quarter orders, while our average sales price on homes in backlog was down slightly stemming from our pivot to a higher concentration of entry-level product. The percentage of actively selling communities that target the first-time buyer grew to 33.3% in the third quarter of 2018, as compared to 26.0% in the prior year third quarter.
Company Positioning
We believe that the investments in our new communities, particularly those designed for the first-time homebuyer, and industry-leading innovation in energy-efficient product offerings and automation create a differentiated strategy that has aided us in our growth in the highly competitive new home market.
Our focus includes the following strategic initiatives:
Expanding the number of LiVE.NOW® communities that target the growing first-time homebuyer;

24



Improving the overall customer experience, most recently through a simplification of the customer purchase and selection processes;
Enhancing our website and sales offices through investments in technology. As of September 30, 2018 all of our LiVE.NOW communities feature interactive tools offering homebuyers the ability to search for available homes with their desired home features and based on their preferred availability or move-in dates;
Improving our home closing gross profit by growing revenue while managing costs, allowing us to better leverage our overhead; and
Actively and strategically acquire and develop land in key markets in order to maintain and grow our lot supply and active community count.
In order to maintain focus on growing our business, we also remain committed to the following:
Increasing orders and order pace through the use of our consumer and market research to ensure that we build homes that offer our buyers their desired features and amenities;
Expanding market share in our smaller markets;
Continuing to innovate and promote our energy efficiency program and our M.Connected® Automation Suite to create differentiation for the Meritage brand;
Managing construction efficiencies and cost increases through national and regional vendor relationships with a focus on quality construction and warranty management;
Generating additional working capital and maintaining adequate liquidity, most recently through a $200 million add-on to our existing $200.0 million of 6.00% Senior Notes due 2025 and through the expansion and extension of our Credit Facility;
Maximize returns to our shareholders, most recently through our share repurchase program; and
Promoting a positive environment for our employees in order to develop and motivate them and to minimize turnover and to maximize recruitment efforts.
Critical Accounting Policies
The accounting policies we deem most critical to us and that involve the most difficult, subjective or complex judgments include revenue recognition, valuation of real estate, goodwill, deferred tax assets and warranty reserves as well as the calculation of compensation cost relating to share-based payments. Other than the adoption of ASU 2014-09, as described in Note 1 in the accompanying unaudited consolidated financial statements, there have been no significant changes to our critical accounting policies during the nine months ended September 30, 2018 compared to those disclosed in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, included in our 2017 Annual Report on Form 10-K.

25



Home Closing Revenue, Home Orders and Order Backlog
The composition of our closings, home orders and backlog is constantly changing and is based on a changing mix of communities with various price points between periods as new projects open and existing projects wind down. Further, individual homes within a community can range significantly in price due to differing square footage, option selections, lot sizes and quality and location of lots (e.g. cul-de-sac, view lots, greenbelt lots). These variations result in a lack of meaningful comparability between our home orders, closings and backlog due to the changing mix between periods. The tables on the following pages present operating and financial data that we consider most critical to managing our operations (dollars in thousands):
 
 
Three Months Ended September 30,
 
Quarter over Quarter
 
 
2018
 
2017
 
Change $
 
Change %
Home Closing Revenue
 
 
 
 
 
 
 
 
Total
 
 
 
 
 
 
 
 
Dollars
 
$
877,734

 
$
805,008

 
$
72,726

 
9.0
 %
Homes closed
 
2,162

 
1,969

 
193

 
9.8
 %
Average sales price
 
$
406.0

 
$
408.8

 
$
(2.9
)
 
(0.7
)%
West Region
 
 
 
 
 
 
 
 
Arizona
 
 
 
 
 
 
 
 
Dollars
 
$
134,977

 
$
141,249

 
$
(6,272
)
 
(4.4
)%
Homes closed
 
411

 
424

 
(13
)
 
(3.1
)%
Average sales price
 
$
328.4

 
$
333.1

 
$
(4.7
)
 
(1.4
)%
California
 
 
 
 
 
 
 
 
Dollars
 
$
143,386

 
$
154,731

 
$
(11,345
)
 
(7.3
)%
Homes closed
 
206

 
261

 
(55
)
 
(21.1
)%
Average sales price
 
$
696.0

 
$
592.8

 
$
103.2

 
17.4
 %
Colorado
 
 
 
 
 
 
 
 
Dollars
 
$
87,716

 
$
77,728

 
$
9,988

 
12.8
 %
Homes closed
 
160

 
135

 
25

 
18.5
 %
Average sales price
 
$
548.2

 
$
575.8

 
$
(27.5
)
 
(4.8
)%
West Region Totals
 
 
 
 
 
 
 
 
Dollars
 
$
366,079

 
$
373,708

 
$
(7,629
)
 
(2.0
)%
Homes closed
 
777

 
820

 
(43
)
 
(5.2
)%
Average sales price
 
$
471.1

 
$
455.7

 
$
15.4

 
3.4
 %
Central Region - Texas
 
 
 
 
 
 
 
 
Central Region Totals
 
 
 
 
 
 
 
 
Dollars
 
$
256,308

 
$
236,759

 
$
19,549

 
8.3
 %
Homes closed
 
721

 
647

 
74

 
11.4
 %
Average sales price
 
$
355.5

 
$
365.9

 
$
(10.4
)
 
(2.9
)%
East Region
 
 
 
 
 
 
 
 
Florida
 
 
 
 
 
 
 
 
Dollars
 
$
105,902

 
$
77,652

 
$
28,250

 
36.4
 %
Homes closed
 
249

 
185

 
64

 
34.6
 %
Average sales price
 
$
425.3

 
$
419.7

 
$
5.6

 
1.3
 %
Georgia
 
 
 
 
 
 
 
 
Dollars
 
$
47,429

 
$
29,019

 
$
18,410

 
63.4
 %
Homes closed
 
139

 
95

 
44

 
46.3
 %
Average sales price
 
$
341.2

 
$
305.5

 
$
35.8

 
11.7
 %
North Carolina
 
 
 
 
 
 
 
 
Dollars
 
$
63,381

 
$
48,129

 
$
15,252

 
31.7
 %
Homes closed
 
165

 
107

 
58

 
54.2
 %
Average sales price
 
$
384.1

 
$
449.8

 
$
(65.7
)
 
(14.6
)%
South Carolina
 
 
 
 
 
 
 
 
Dollars
 
$
23,605

 
$
25,164

 
$
(1,559
)
 
(6.2
)%
Homes closed
 
69

 
74

 
(5
)
 
(6.8
)%
Average sales price
 
$
342.1

 
$
340.1

 
$
2.0

 
0.6
 %
Tennessee
 
 
 
 
 
 
 
 
Dollars
 
$
15,030

 
$
14,577

 
$
453

 
3.1
 %
Homes closed
 
42

 
41

 
1

 
2.4
 %
Average sales price
 
$
357.9

 
$
355.5

 
$
2.3

 
0.7
 %
East Region Totals
 
 
 
 
 
 
 
 
Dollars
 
$
255,347

 
$
194,541

 
$
60,806

 
31.3
 %
Homes closed
 
664

 
502

 
162

 
32.3
 %
Average sales price
 
$
384.6

 
$
387.5

 
$
(3.0
)
 
(0.8
)%

26



 
 
Nine Months Ended September 30,
 
Quarter over Quarter
 
 
2018
 
2017
 
Chg $
 
Chg %
Home Closing Revenue
 
 
 
 
 
 
 
 
Total
 
 
 
 
 
 
 
 
Dollars
 
$
2,478,649