Meritage Homes Corporation — Q2 2022 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2022. Meritage is a U.S. single-family homebuilder operating across the West, Central and East regions, with a financial services segment. It had 303 active communities across ten states at quarter-end.
Financial and operating results
- Q2 revenue: Home-closing revenue was $1.409 billion, up 11.4% year over year; total homebuilding closing revenue, including land sales, was $1.412 billion. The company closed 3,221 homes, down 1.6%, while average selling price rose 13.2% to $437,400.
- Q2 earnings: Net earnings were $250.1 million versus $167.4 million; diluted EPS was $6.77 versus $4.36. Earnings before tax increased 54% to $331.7 million.
- Margins: Home-closing gross margin rose 430 basis points to 31.6%; gross profit increased to $444.7 million from $345.3 million. Management attributed the gain mainly to selling-price increases outpacing higher construction costs, with benefits from lower entry-level land costs and interest amortization.
- First-half results: Home-closing revenue was $2.654 billion, up 13.2%; 6,079 homes closed, down 1.4%, with average selling price up 14.8%. Net earnings were $467.3 million versus $299.2 million, diluted EPS was $12.55 versus $7.80, and gross margin improved to 31.0% from 26.1%.
- Orders and backlog: Q2 net orders reached a company record for a second quarter at 3,767 homes, up 6.4%; order value rose 20.7% to $1.810 billion. The monthly order pace declined 20% to 4.4, and cancellations increased to 13% from 8%. Backlog at June 30 was 7,241 homes valued at $3.439 billion, up 31.4% in units and 48.4% in value year over year.
- Cash flow and liquidity: First-half operating cash flow was negative $206.8 million versus negative $143.5 million, principally reflecting a $729.5 million increase in real estate inventory and other working-capital uses. Cash and equivalents were $272.1 million, down from $618.3 million at year-end. The $780 million revolver had no borrowings and $716.9 million available after letters of credit.
- Debt and capital: Senior notes, net, were $1.143 billion; other borrowings were $15.6 million. Debt-to-capital was 25.3%, and net debt-to-capital was 20.6%, compared with 27.6% and 15.1% at year-end. The company reported covenant compliance and no debt maturities until 2025.
Changes versus the prior comparable period
- Strong pricing lifted revenue and gross margin despite slightly fewer Q2 closings. Production delays from supply-chain and labor constraints affected closing volume and cycle times.
- Demand showed signs of cooling late in Q2: order pace slowed and cancellations increased, particularly in the West and Central regions. The East region continued to show stronger order growth.
- Cash declined as real estate investment and share repurchases exceeded cash generation. First-half repurchases were $109.3 million; the company had $244.1 million remaining under its authorization at June 30.
- The 2022 effective tax rate rose to 24.6% for Q2 and 24.3% for the first half, from 22.4% and 21.6%, respectively, largely because the energy-efficient homes tax credit expired. The prior-year comparable periods included an $18.2 million debt-extinguishment loss; there was no such charge in 2022.
Outlook, risks and contingencies
- Management expected demand to slow as higher mortgage rates, inflation-related household costs and buyer uncertainty affected affordability. It cited low housing supply and favorable demographics as supportive factors, but did not provide quantified earnings or revenue guidance.
- Management said it had so far offset higher material and labor costs with selling-price increases, but cautioned it may not be able to continue doing so. It highlighted ongoing supply-chain constraints, labor shortages, longer construction times and potential pricing or incentive changes.
- The all-spec strategy for entry-level homes is intended to shorten customer wait times and may help buyers lock rates. The company had purchased rate locks for some eligible floating-rate backlog loans; availability, terms and customer use are not assured.
- Warranty reserves were $31.4 million, including case-specific reserves for alleged stucco defects in homes built predominantly from 2006 to 2017. Management believed reserves and potential recoveries were sufficient, while noting estimates could change. It reported no pending legal or warranty matter expected to materially adversely affect results beyond amounts reserved.
- Surety bonds outstanding were $696.0 million and letters of credit totaled $63.1 million; management considered significant draws unlikely. Land purchase and option contracts not recorded on the balance sheet covered approximately $1.859 billion of projected purchases; generally, the company’s exposure is limited to nonrefundable deposits and capitalized pre-acquisition costs.
- The company has never declared cash dividends and said it expects to retain cash for liquidity and business growth. Disclosure controls were considered effective, with no material change in internal control over financial reporting reported for the quarter.
Important facts for investors to verify
- Whether higher mortgage rates continue to reduce order pace, increase cancellations or require greater sales incentives.
- Whether selling-price growth continues to offset labor, material and land-development cost increases, and how margins respond as demand softens.
- Whether construction delays resolve and backlog converts to closings and cash at the expected pace.
- How inventory growth, share repurchases and cash generation affect liquidity and net leverage; also verify revolver availability and covenant headroom.
- Updates to the stucco-related warranty matter, warranty reserves, and any changes in expected recoveries or legal exposure.