In Meritage Homes' fiscal yearend conference call Jan. 29, CEO Steve Hilton and CFO Larry Seay pointed to all the positions the company has taken to cut back in order to face the worst downturn either has encountered.

One shift that is having a positive impact on the company is the adjustment of product to better compete with existing-home sales and foreclosures. Hilton said that 53 new models have been introduced in different markets, all of which are spurring buyer demand. The models are moving away from the company's previous consumer base of move-up buyers to align with the needs of first-time buyers: less square footage at a lower cost, yet still maintaining options and upgrades.

"We have significantly reduced our costs to build, by redesigning existing home plans, introducing new plans, and renegotiating construction contracts in order to make our homes more affordable and attract buyers in lower price ranges," Hilton said. "We've been able to reduce the base cost of our homes in many communities by 30% or more, combining a lower cost per square foot with more efficient square footages, while allowing our customers to choose additional features to suit their own style and budget."

Hilton used Orlando as a prime example where the company redesigned product in mid-2008, bringing square footage down and cutting costs by a third. The average price was dropped by approximately 22% to roughly $200,000. In that market alone, 57 homes were sold in the fourth quarter of 2008, which is more than previous quarters, Hilton said.

Along with cutting back on product size, Meritage has also cut back on employee count--with 42% fewer employees than in 2007--and reduced active communities by 14% during the fourth quarter.

Hilton also said the company has canceled options and sold lots in "certain marginal projects," accounting for approximately $67 million of total impairments in the fourth quarter--allowing the company to realize $106 million of corresponding tax losses.

Meritage reported a net loss of $79 million for the quarter, largely due to pre-tax real estate-related and joint venture impairments of $109 million, plus a $1 million impairment of intangible assets, partially offset by a $30 million net tax benefit. By comparison, the net loss of $129 million reported for 4Q2007 included $130 million of pre-tax real estate-related and joint venture charges, plus an additional $58 million pre-tax charge to impair goodwill and intangible assets.

Net orders declined 57% from 2007 to 2008, highlighted by a 56% cancellation rate in the fourth quarter. The total dollar value of sales for the quarter was off 59% year-over-year, reflecting a further decline of 14% in the company's average sales price. Colorado was the sole division to record an increase in sales over the previous year's final quarter, yet Texas remained Meritage's strongest region--despite the fact that its net sales fell during the quarter, according to Hilton. He estimated the builder would turn a profit in two out of four communities in the market, even after impairments.

"One positive sign was that gross sales hit their quarterly low point in November and have inched up a bit since then and into January," Hilton said regarding the overall outlook.

"By executing our asset-light option strategy as it was designed, we have managed a lower lot supply and relatively stronger balance sheet than many other home builders," he added.

The company has also built a cash position of $206 million at the end of 2008, and expects to collect approximately $112 million in tax refunds during the first few months of 2009.

The company is at the end of the two-year tax carryback limit, with 2006 being its last profitable year. Hilton said that if the proposed five-year carryback is adopted by the federal government--a likely possibility, he said--the company could reverse much of the $127 million deferred tax valuation allowance it had as of the end of the year. "The reversal would increase our book assets at the time a change is adopted, by the amount of deferred tax assets we could realize in 2009 and 2010," he said.

"Despite lower sales and current market conditions, we expect to generate modest positive cash flow before tax refunds for the full year 2009, before any potential limited land acquisitions," Hilton added. "We have reduced our lot supply for the last 10 consecutive quarters. At some point, we intend to begin acquiring lots again at what we expect will be greatly reduced prices. However, we are keenly aware of the risks in this environment, and therefore plan to redeploy capital only where we believe we can achieve returns that justify the risks."