Meritage Homes Corporation — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023. Meritage builds entry-level and first move-up homes across the West, Central and East regions, and provides mortgage, title, escrow and insurance services. It operated in 278 communities across 10 states.
Financial and operating results
- Revenue: Homebuilding closing revenue was $1.279 billion, down 0.6% from $1.287 billion a year earlier. Home closing revenue rose 1.3% to $1.262 billion on 2,897 closings, up 1.4%; average closing price was essentially flat at $435,600. Land closing revenue fell to $17.4 million from $41.5 million.
- Profit and margins: Net earnings were $131.3 million, down 39.6% from $217.3 million; diluted EPS was $3.54 versus $5.79. Home closing gross profit was $282.5 million, with a 22.4% margin versus $377.6 million and 30.3%. Pretax income was $165.3 million versus $285.9 million. The effective tax rate declined to 20.6% from 24.0%, primarily reflecting energy-efficient home tax credits.
- Costs and other income: Commissions and other sales costs increased to $82.8 million from $65.5 million; G&A rose to $47.5 million from $40.0 million. Other income was $8.8 million versus an expense of $0.3 million, primarily due to higher interest income on cash. No interest expense was recognized in Q1 2023 because interest was capitalized.
- Orders and backlog: Orders declined 10.0% to 3,487 homes; order value fell 14.8% to $1.507 billion, including a 5.3% decline in average order price. Orders pace was 4.2 homes per community per month, above management’s 3–4 target. Backlog fell 41.4% year over year to 3,922 homes valued at $1.764 billion. The cancellation rate was 15%, up from 10% a year earlier but down from 39% in Q4 2022.
- Cash flow and liquidity: Operating cash flow was $124.5 million versus $12.2 million. Investing cash outflow was $8.7 million and financing cash outflow was $20.1 million, including $9.9 million of dividends and $10.0 million of repurchases. Cash and equivalents were $957.2 million at quarter-end, up from $861.6 million at year-end.
- Debt and capital: Debt was $1.151 billion, consisting mainly of senior notes; there were no revolver borrowings. Debt-to-capital was 22.1% and net debt-to-capital 4.5%. The $780 million unsecured revolver had $730.5 million available after letters of credit, and the company was in compliance with its covenants. No debt maturities are due before 2025.
- Balance sheet: Total assets were $5.871 billion and stockholders’ equity was $4.067 billion at March 31, 2023. Real estate inventory was $4.355 billion.
Material changes and management commentary
- Closings reached a record Q1 level, supported by move-in-ready inventory, but lower orders and backlog reflect softer demand and a high backlog conversion rate.
- Gross margin contracted as the company used price reductions, mortgage rate locks and buy-downs, and other incentives to address affordability; elevated construction costs also weighed on results. The West region’s home closing margin fell to 17.8% from 31.0%; Central and East margins were 24.9% and 24.5%, respectively.
- Management said demand was stronger than anticipated and stabilized entering the spring selling season as buyers adjusted to interest rates. Labor and supply constraints continued to elevate costs and cycle times, although the construction cycle was about one week shorter than a year earlier.
- Management plans to return community count to 300 by year-end 2023. It expects housing undersupply and favorable demographics to support long-term demand, while stating that lower, normalized market volume could eventually reduce costs and cycle times. The filing provides no formal earnings or revenue guidance.
- The company initiated a quarterly dividend of $0.27 per share; the first payment was made March 31, 2023. It repurchased $10.0 million of shares during the quarter, with $234.1 million remaining under its authorization.
Risks, contingencies and unusual items
- Key risks include mortgage-rate increases, buyer affordability and cancellations, inflation, labor and material constraints, lot availability, competition, weather and natural disasters, and potential inventory impairments.
- Land purchase and option agreements covered 34,050 lots with a stated purchase price of $1.364 billion and $65.8 million of deposits. Most agreements do not require the company to purchase the lots; generally, exposure is limited to non-refundable deposits and related costs.
- Outstanding surety bonds were $949.1 million, with estimated remaining work of $646.6 million; letters of credit totaled $49.5 million. Management considered significant draws unlikely.
- The company reported $37.1 million in warranty reserves, including case-specific reserves for alleged stucco defects and HVAC condensation issues. Management believes reserves are sufficient, but estimates may change as information develops. It reported no pending legal or warranty matter expected to materially adversely affect results that was not sufficiently reserved.
- Management reported effective disclosure controls and no material changes in internal control over financial reporting. The filing reported no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Whether orders, cancellations and backlog stabilize, and how backlog conversion affects future closings.
- Whether pricing incentives and construction costs continue to pressure gross margins, particularly in the West.
- Whether management achieves its year-end community-count target and sustains adequate lot supply and liquidity.
- How warranty claims, land commitments, surety obligations and interest-rate exposure evolve.
- Whether operating cash flow remains strong as inventory investment and seasonal working-capital needs change.