Meritage Homes Corporation — Q3 2023 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2023. Meritage designs and builds entry-level and first move-up single-family homes across three U.S. regions and operates title, insurance and mortgage-related financial services. Financial statements are unaudited; amounts below are in millions except per-share data and operating statistics.
Financial and operating results
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Total closing revenue | $1,613.1 | $1,578.0 | $4,459.8 | $4,277.3 |
| Home closing revenue | $1,610.3 | $1,569.0 | $4,415.3 | $4,223.4 |
| Home closing gross profit / margin | $429.6 / 26.7% | $450.6 / 28.7% | $1,089.0 / 24.7% | $1,273.0 / 30.1% |
| Earnings before income taxes | $285.7 | $329.5 | $690.6 | $947.1 |
| Net earnings | $221.8 | $262.5 | $539.9 | $729.8 |
| Diluted earnings per share | $5.98 | $7.10 | $14.55 | $19.65 |
| Cash from operating activities | — | $460.1 | $(169.8) |
Q3 home closings were 3,638, up 4.3%; average closing price was $442,600, down 1.6%. Nine-month closings totaled 10,025, up 4.8%, with average price down 0.2% to $440,400. Financial services profit was $5.7 million in Q3 versus $4.8 million, but $6.1 million year to date versus $12.3 million, including $7.9 million of Q2 charges for unused prepaid mortgage rate locks.
Material changes and drivers
- Revenue increased, primarily from higher closing volume, while profit and margins declined. Management attributed lower home gross margins chiefly to buyer financing incentives and higher land-development costs; shorter construction cycle times and relatively steady direct costs partly offset them.
- Q3 home orders rose 50.4% to 3,474; the cancellation rate improved to 11% from 30%. Nine-month orders increased 3.5%, while order value declined 1.6%, reflecting lower average order prices and incentives.
- Backlog at quarter-end fell 40.5% to 3,608 homes, valued at $1.56 billion, down 44.9%. Management cited a 96.4% Q3 backlog conversion rate and faster cycle times.
- Commissions and other sales costs rose to 6.2% of home closing revenue from 5.0% in Q3; G&A rose to 3.9% from 3.1%, reflecting higher commissions, compensation and other costs.
- Other income was $13.3 million in Q3 versus a small net expense a year earlier, mainly because of higher interest earned on cash. Q3 tax rate was 22.4% versus 20.3%; the nine-month rate was 21.8% versus 22.9%, partly reflecting energy-efficiency tax credits.
Cash, debt and liquidity
- Cash and cash equivalents were $1,048.8 million at September 30, 2023, versus $861.6 million at year-end 2022. Operating cash flow was $460.1 million for the first nine months, compared with cash used of $169.8 million in 2022.
- Total debt, including senior notes and other borrowings, was approximately $1,005.4 million; senior notes, net, were $994.4 million. Debt-to-capital was 18.5%, and net debt-to-capital was negative 1.0% (net cash position), compared with 22.6% and 6.8% at year-end 2022.
- The company redeemed $150 million principal of its 6.00% notes due 2025 in September and recorded a $0.9 million extinguishment charge. No Credit Facility borrowings were outstanding; $794.4 million remained available after letters of credit. The amended $835 million facility matures June 2028. The company reported compliance with its covenants.
- Financing cash uses included $150.0 million of note repayment, $55.0 million of share repurchases and $29.7 million of dividends paid during the nine-month period. The quarterly dividend was $0.27 per share.
Outlook, risks and contingencies
Management said Q3 demand remained steady despite elevated mortgage rates and inflation, with buyers seeking affordability support. It expects home costs to trend toward historical levels as inflation stabilizes, while noting that higher land-development costs are expected to pressure margins in the near to medium term. The company emphasized its all-spec strategy, affordability focus and shorter construction cycle times. It provided no specific financial guidance in the supplied filing text.
Key risks include mortgage-rate increases and buyer affordability, construction and land costs, labor or supply constraints, cancellations, slower sales absorption, land availability and potential inventory impairments, and warranty or construction-defect claims. Management reported $39.1 million of warranty reserves, including case-specific reserves for stucco and HVAC matters, and believes reserves are sufficient; actual costs may differ. It stated that routine legal matters were not expected to have a material adverse effect and that no material changes to previously disclosed risk factors occurred. The company had 44,464 lots under purchase or option arrangements with an indicated purchase price of $1.62 billion; most contracts do not require purchase, and the company’s stated maximum exposure is generally non-refundable deposits and related costs. It reported $93.5 million of deposits on real estate under option or contract.
Important facts for investors to verify
- Whether demand, order pace and cancellation rates remain resilient if mortgage rates stay elevated or rise further.
- Whether incentives and land-development costs continue to compress gross margins, particularly in the West and Central regions.
- How quickly the substantially reduced backlog converts to closings and whether new orders replenish it.
- Cash deployment for land, construction, debt repayment, dividends and repurchases, including the terms and risk of land-option commitments.
- Whether warranty reserves and recoveries from contractors or insurers adequately cover the cited defect matters.