Meritage Homes Corporation — FY2020 Form 10-K
Reporting period: Fiscal year ended December 31, 2020. This is an annual report, not a standalone fourth-quarter filing. Meritage designs and builds single-family homes, primarily for first-time and first move-up buyers, across nine states. It also provides title, insurance and mortgage-related services.
Financial and operating performance
| Metric | FY2020 | FY2019 |
|---|---|---|
| Total closing revenue | $4.482 billion | $3.650 billion |
| Home closing revenue | $4.464 billion, up 23.9% | $3.605 billion |
| Home closings | 11,834, up 27.7% | 9,267 |
| Average closing sales price | $377,300, down 3.0% | $389,000 |
| Home closing gross profit / margin | $980.4 million / 22.0% | $680.7 million / 18.9% |
| Earnings before income taxes | $533.6 million | $302.9 million |
| Net earnings | $423.5 million | $249.7 million |
| Diluted EPS | $11.00 | $6.42 |
| Cash from operating activities | $530.4 million | $346.8 million |
Orders rose 42.7% to 13,724 homes; year-end backlog increased 67.9% to 4,672 homes, valued at $1.813 billion. Financial-services profit declined to $16.4 million from $20.6 million, principally due to a change in how mortgage-joint-venture customer incentives were recorded. Q4 2020 closing revenue was $1.410 billion and net earnings were $152.5 million, versus $1.137 billion and $103.6 million, respectively, in Q4 2019.
At year-end, cash and cash equivalents were $745.6 million, compared with $319.5 million a year earlier. Debt was approximately $1.020 billion; debt-to-capital was 30.3% and net debt-to-capital 10.5%, compared with 34.0% and 26.2% in 2019. There were no credit-facility borrowings outstanding; $682.6 million remained available. The company generated $530.4 million in operating cash flow, used $86.0 million in financing activities, and invested $18.2 million in investing activities.
Material changes and management commentary
- Management attributed strong demand to historically low mortgage rates, limited existing-home supply and increased interest in healthier homes, despite a brief COVID-19-related interruption in March and April.
- Home-closing gross margin improved 310 basis points, supported by pricing, higher volume, construction efficiencies and cost controls; this was achieved despite lumber-cost pressure. Average selling prices fell as the mix shifted toward lower-priced homes.
- Impairment charges rose to $24.9 million from $7.3 million, primarily related to land assets slated for sale because they no longer fit the company’s strategy.
- Land and lot investment was approximately $1.3 billion. Controlled lots increased to 55,502 from 41,399, representing a 4.7-year supply based on 2020 closings. Management targeted 300 active selling communities by mid-2022; there were 195 at year-end, versus 244 in 2019.
- The company repurchased 1.1 million shares for $69.6 million in 2020. It reported approximately $114.4 million remaining under its repurchase authorization at year-end. It does not expect to pay cash dividends in the foreseeable future.
- The revolving credit facility was amended to extend its maturity to December 2025. A new CEO, Phillippe Lord, took office January 1, 2021; Steven J. Hilton became Executive Chairman.
Outlook, risks and contingencies
Management expects to deliver substantially all year-end backlog during 2021 and believes demand for affordable homes will remain supportive in the short to medium term. It plans to continue acquiring and developing land and expanding community count. The filing provides strategic targets and expectations, but no specific financial guidance for 2021.
- Key risks include higher mortgage rates or tighter financing availability, weakening home prices or demand, slower sales absorption, land or lot constraints, and cost or availability pressures for lumber, other materials and subcontract labor.
- COVID-19 or related restrictions could disrupt operations, construction, supply chains or buyer demand. Management said the pandemic had not adversely affected full-year results to date, but future effects remained uncertain.
- Warranty and construction-defect exposure includes alleged widespread stucco issues in certain Florida communities and water-drainage issues in one Florida community. The company reported $23.7 million in warranty reserves and believes them sufficient, while noting estimates may change.
- Routine legal and regulatory proceedings are ongoing; management said it did not believe any unreserved matter would materially affect the company. Surety bonds outstanding were $478.8 million, with estimated remaining work of $216.7 million; letters of credit were $97.4 million. Management considered significant draws unlikely.
- The company disclosed a first-quarter 2020 malware attack that temporarily limited some employee access; core operations continued, systems were restored, and the incident did not materially affect results or involve data exfiltration.
- Real-estate valuation is a significant estimation area and was identified as the auditor’s critical audit matter. Actual land values and impairment charges may differ from management’s estimates.
Important facts for investors to verify
- Whether order growth and the enlarged backlog convert into closings at expected prices and margins, particularly as the home mix shifts toward entry-level products.
- Whether lumber, labor and supply-chain cost pressures or higher interest rates weaken affordability or gross-margin improvement.
- Progress toward the 300-community target, and the quality, cost and development timing of the expanded lot pipeline.
- Whether Florida warranty reserves adequately cover the stucco and drainage matters, and whether further impairments or legal costs arise.
- Cash deployment among land investment, share repurchases and debt obligations; confirm credit-facility availability and compliance with covenants.