Meritage Homes Corporation — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022; comparison is with Q1 2021 unless otherwise noted. Meritage builds single-family homes across the West, Central and East regions and operates title, insurance and mortgage-related financial services. Amounts below are in U.S. dollars; financial statement amounts are in millions unless stated otherwise.
Financial and operating results
| Metric | Q1 2022 | Q1 2021 | Change / context |
|---|---|---|---|
| Home-closing revenue | $1,245.5 | $1,080.0 | Up 15.3%; closings declined 1.1% to 2,858, while average selling price rose 16.6% to $435,800. |
| Total closing revenue, including land | $1,286.9 | $1,083.8 | Land-closing revenue was $41.5 versus $3.8. |
| Home-closing gross profit / margin | $377.6 / 30.3% | $266.7 / 24.7% | Margin improved 560 basis points; management attributed the increase mainly to pricing gains outpacing cost inflation. |
| Total closing gross profit | $388.4 | $267.2 | Includes land-closing gross profit of $10.8 versus $0.5. |
| Financial services profit | $3.3 | $3.8 | Lower, primarily due to mix of financial-services closings. |
| Income before taxes | $285.9 | $166.0 | Up 72.2%. |
| Net earnings | $217.3 | $131.8 | Up 64.8%. |
| Diluted EPS | $5.79 | $3.44 | Weighted-average diluted shares declined to 37.5 million from 38.3 million. |
| Effective tax rate | 24.0% | 20.6% | Higher rate reflected expiration of the federal energy-efficient homes credit after 2021. |
| Operating cash flow | $12.2 | $(13.9) | Despite positive earnings, inventory investment and other asset increases absorbed cash. |
Balance sheet, debt and liquidity
- Cash and cash equivalents were $520.4 at March 31, 2022, down from $618.3 at year-end 2021. Total assets were $5,058.2; real estate inventory was $4,028.0.
- Total debt was $1,165.3, comprising $1,142.8 of senior notes, net, and $22.6 of other borrowings. Senior notes mature in 2025, 2027 and 2029; the filing states there are no debt maturities before 2025.
- No borrowings were outstanding under the $780 million revolving credit facility. After $61.6 million of letters of credit, $718.4 million remained available. The company reported compliance with its credit-facility covenants.
- Debt-to-capital was 26.9% and net debt-to-capital was 16.9%, compared with 27.6% and 15.1%, respectively, at December 31, 2021. The company reported $520.4 million in cash against total debt of $1,165.3 million.
- Operating cash flow included a $283.9 million increase in real estate and a $52.1 million increase in other receivables, prepaids and other assets, partly offset by a $115.9 million increase in accounts payable and accrued liabilities. Financing cash use included $99.3 million of share repurchases.
Material changes and business trends
- Home orders reached a company record of 3,874, up 12.0%; order value rose 31.0% to $1,767.7 million. Order average selling price increased 17.0% to $456,300.
- Orders pace fell 15.5% to 4.9 homes per community per month. Management said it metered orders to align starts with production capacity amid supply-chain and labor constraints.
- Backlog at quarter-end was 6,695 homes valued at $3,038.9 million, up 27.8% in units and 45.9% in value year over year. Cancellation rates were 10%, versus 11%.
- Active communities increased to 268 from 203 a year earlier. The company opened 32 communities during the quarter, purchased approximately 4,400 lots for $149.4 million, spent $222.1 million on land development and started 4,020 homes.
- Share repurchases totaled $99.3 million, or approximately 1.04 million shares, in Q1. $54.1 million remained under the $300 million authorization at March 31, 2022. Meritage has never declared cash dividends.
Outlook, commentary, risks and unusual items
- Management described housing demand as favorable, supported by limited housing supply and demand from entry-level and first move-up buyers. It said selling-price increases had so far offset higher commodity, labor and other production costs. The filing provides no specific numerical earnings or revenue guidance.
- Management expects near-term funding needs for home construction, land acquisition and development, operating costs and potential share repurchases to be met primarily with cash on hand and operating cash flow; it stated that cash and available credit provide sufficient liquidity. It also noted it may seek additional capital, with no assurance financing would be available on acceptable terms.
- In March 2022, the company purchased fixed-rate interest locks for eligible floating-rate loans on backlog homes scheduled to close in the second half of 2022. The related increase in other assets contributed to operating cash use.
- Key risks include rising mortgage rates and reduced mortgage availability, affordability pressure, supply-chain disruption, labor shortages, cost inflation, construction delays, order cancellations, land and inventory impairment, and warranty or construction-defect claims. Management specifically cautioned that rapid rate increases could affect buyers’ financing and cancellations.
- Surety bonds outstanding were $677.0 million, with estimated work remaining of $379.6 million; letters of credit totaled $61.6 million. Management considered significant draws unlikely. Land purchase and option arrangements covered 51,908 lots with a stated purchase price of $1,882.7 million; most contracts do not require purchase, and exposure is generally limited to non-refundable deposits and capitalized costs.
- The company reported $26.7 million of warranty reserves, including case-specific reserves for alleged stucco defects in certain homes built predominantly from 2006 to 2017. Management believed reserves were sufficient but noted estimates may change as information develops. It did not identify pending legal or warranty matters expected to materially adversely affect the company beyond amounts sufficiently reserved.
- Other notable comparisons include the increase in land-sale profit and the higher tax rate following expiration of the energy-efficient homes credit. No recent accounting pronouncement was expected to materially affect the financial statements.
Important facts for investors to verify
- Whether pricing power continues to offset rising construction, labor and land costs, and whether the 30.3% home-closing gross margin is sustainable.
- Whether higher mortgage rates affect orders, affordability, backlog cancellations and the timing of backlog conversions into closings.
- Whether production constraints ease sufficiently to convert the $3.0 billion backlog into revenue and cash, and how inventory growth affects operating cash flow.
- The level and use of liquidity, including cash, revolving-credit availability, debt maturities and the pace of share repurchases.
- Potential changes in warranty and construction-defect estimates, particularly the stucco matter, and any material developments in surety, letter-of-credit or land-contract exposures.