Meritage Homes Corporation — Q3 2021 Form 10-Q
Business and period: Unaudited results for the quarter and nine months ended September 30, 2021, compared with the same 2020 periods. Meritage builds single-family homes across the West, Central and East regions and provides mortgage, title and insurance services. It had 236 active communities at quarter-end.
Financial performance
- Q3 revenue: Homebuilding closing revenue was $1.260 billion, up 10.7% from $1.138 billion; financial services profit was $4.2 million versus $4.3 million.
- Q3 profit and margins: Net earnings were $200.8 million ($5.25 diluted EPS), versus $109.1 million ($2.84). Home closing gross margin reached 29.7%, up from 21.5%; gross profit rose to $371.7 million from $243.6 million. The company described this as its highest quarterly home closing margin.
- Nine-month results: Closing revenue was $3.621 billion, up 17.9%; net earnings were $500.0 million ($13.06 diluted EPS), versus $270.9 million ($7.04). Home closing gross margin was 27.4%, compared with 21.0%.
- Orders and backlog: Q3 net home orders fell 10.6% to 3,441, while average order price rose 12.0%. The cancellation rate improved to 10% from 13%. Backlog at September 30 was 5,838 homes valued at $2.555 billion, up 11.4% in units and 27.5% in value year over year.
- Cash flow and liquidity: Operating cash flow was negative $248.7 million for the first nine months, versus positive $373.1 million in 2020, primarily as real estate inventory increased $810.7 million. Cash was $562.3 million, down from $745.6 million at year-end 2020. No credit-facility borrowings were outstanding; $705 million remained available after letters of credit.
- Debt and capital: Debt was $1.161 billion, including $1.142 billion of net senior notes; net debt was $598.9 million. Debt-to-capital was 29.1% and net debt-to-capital 17.5%. The company issued $450 million of 3.875% notes due 2029 and redeemed $300 million of 7.00% notes due 2022, recording an $18.2 million early-extinguishment loss for the nine-month period.
Changes, outlook and risks
- Results improved substantially year over year, with stronger closings, pricing and gross margins. Management attributed margin gains to strong buyer demand and fixed-cost leverage, which more than offset higher lumber and other commodity costs.
- Management cited low interest rates, limited existing-home supply and buyer demand as supportive near- to mid-term factors, while expecting conditions to normalize over time. It gave no specific numerical earnings or revenue guidance in the provided filing text.
- Supply-chain constraints, labor and material availability, and permitting and land-supply delays extended construction cycles and affected closing timing. Management expected supply constraints to continue into 2022 and said it was metering homes available for sale to align orders with production capacity.
- The company plans to increase land and development spending over the next several years and expects to redeploy cash generated from closings toward strategic lots and community growth. It said current cash and credit availability were sufficient for its plans, while noting additional capital might be sought.
- Key risks include mortgage-rate increases that could weaken demand, inflation and supply delays that could raise costs or erode margins, construction-defect and warranty claims, land acquisition and development exposure, and broader pandemic-related disruption. Warranty reserves totaled $26.6 million, including reserves for alleged stucco defects and water drainage issues; management stated it believed reserves were sufficient. Surety bonds totaled $597.4 million, with $331.2 million of estimated work remaining; management considered significant draws unlikely.
Investor verification points
- Track whether supply constraints, longer build cycles and cost inflation affect backlog conversion, cancellations, closing volume and gross margins.
- Assess whether order trends and backlog support community-count growth, particularly given Q3 order volume declined despite higher prices.
- Monitor cash use, inventory and planned land spending; operating cash flow was negative even as earnings increased.
- Review debt maturities, refinancing costs, revolver availability and the effect of any further share repurchases; $177.4 million remained under the repurchase authorization at quarter-end.
- Follow developments in the specific warranty matters, other legal proceedings, and potential obligations associated with land contracts, surety bonds and letters of credit.