Meritage Homes Corporation — FY2021 Form 10-K
Reporting period: Fiscal year ended December 31, 2021. This is an annual report; it does not provide a standalone Q4 income statement. Meritage designs and builds single-family entry-level and first move-up homes across nine states, with West, Central and East homebuilding regions and a financial services segment.
Financial and operating results
| Metric | FY2021 | FY2020 |
|---|---|---|
| Home closing revenue | $5.095 billion | $4.464 billion |
| Total closing revenue, including land sales | $5.120 billion | $4.482 billion |
| Home closing gross margin | 27.8% | 22.0% |
| Net earnings | $737.4 million | $423.5 million |
| Diluted earnings per share | $19.29 | $11.00 |
| Cash from operating activities | $(152.1) million | $530.4 million |
- Home closings rose 8.2% to 12,801; average closing price increased 5.5% to approximately $398,000. Home closing revenue rose 14.1%.
- Net earnings increased 74%. Home closing gross profit was $1.418 billion, up from $980.4 million. Financial services profit was $18.0 million, compared with $16.4 million.
- Orders totaled 13,808, up 0.6%, while order value rose 12.0% to $5.797 billion; management said orders were metered to match production capacity. Year-end backlog grew 21.6% by units to 5,679 and 38.8% by value to $2.516 billion.
- At year-end, cash and equivalents were $618.3 million, down from $745.6 million; real estate inventory was $3.734 billion, up 34% from $2.778 billion. Operating cash use largely reflected a $948.1 million increase in real estate inventory as the company invested in homes under construction and land positions.
- Debt carrying value was $1.160 billion, and cash-adjusted net debt was $541.7 million. Debt-to-capital was 27.6% and net debt-to-capital 15.1%, versus 30.3% and 10.5% a year earlier. The company had no revolver borrowings and reported $717.6 million available under its credit facility.
- Land acquisition and development spending was approximately $2.0 billion. Controlled lots totaled 75,049, including 48,554 owned lots; management described this as a 5.9-year supply based on 2021 closings.
Material changes and unusual items
- Gross margin increased 580 basis points, reflecting pricing power and fixed-cost leverage, which more than offset higher lumber and other commodity costs.
- General and administrative expense rose $22.4 million to $181.4 million, but remained 3.6% of home closing revenue. The increase included higher headcount and performance compensation and approximately $5.0 million of one-time items.
- The company issued $450 million of 3.875% senior notes due 2029 and redeemed $300 million of 7.00% notes due 2022. It recognized an $18.2 million early-extinguishment loss. No senior-note maturities were reported before 2025.
- Land impairment charges declined to $2.1 million from $24.9 million in 2020. The company also reported a $1.1 million land closing gross loss in 2021, compared with a $20.8 million loss in 2020.
- The effective tax rate rose to 22.8% from 20.6%. The company recognized an estimated $16.9 million benefit from energy-efficient home tax credits; the relevant credit expired at December 31, 2021, absent new legislation.
Outlook, risks and contingencies
- Management expected elevated housing demand to continue in the near to mid-term, then normalize. It cited low existing-home supply and demographic demand, and targeted 300 actively selling communities by mid-2022. The filing provides no quantified earnings or revenue guidance.
- Management expected supply-chain constraints and labor shortages to persist for at least several more quarters. Longer construction timelines, material and labor inflation, and availability constraints could delay closings, raise costs, increase cancellations or pressure margins.
- Management identified rising mortgage rates and tighter mortgage availability as risks to affordability and demand. Other risks include a housing downturn, weaker orders or pricing, land and entitlement constraints, severe weather, regulatory changes and construction-defect claims.
- Warranty reserves were $26.3 million. The company disclosed ongoing matters involving alleged stucco defects in certain homes built predominantly from 2006 to 2017 and drainage issues in one Florida community; management said reserves, after considering potential recoveries, were sufficient. Routine legal matters were described as not expected to have a material adverse impact, subject to uncertainty.
- The company reported compliance with credit-facility covenants. Its auditor gave an unqualified opinion on the financial statements and internal controls; real estate valuation was identified as a critical audit matter because it involves significant estimates and projections.
Important facts for investors to verify
- Whether backlog converts to closings as expected, including the effects of cancellations, construction cycle times and order metering.
- Whether pricing and margin gains can be sustained as interest rates, labor availability, materials costs and housing demand change.
- How inventory growth and continued land investment affect operating cash flow, liquidity and net leverage.
- Whether the $26.3 million warranty reserve adequately covers the stucco and Florida drainage matters, and any subsequent claim developments.
- Whether community growth and the 2022 target are achieved without weakening land underwriting, returns or balance-sheet flexibility.