Meritage Homes Corporation (NYSE: MTH) — Q2 2021 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2021. Unaudited results; comparisons are with the corresponding 2020 periods. Meritage builds single-family homes across the West, Central and East regions and operates a financial services segment.
Financial and operating highlights
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Home closing revenue | $1,264.6 million | $1,031.6 million | $2,344.6 million | $1,922.0 million |
| Total closing revenue, including land | $1,277.6 million | $1,033.1 million | $2,361.4 million | $1,934.1 million |
| Home closings | 3,273 | 2,770 | 6,163 | 5,086 |
| Home closing gross margin | 27.3% | 21.4% | 26.1% | 20.8% |
| Net earnings | $167.4 million | $90.7 million | $299.2 million | $161.8 million |
| Diluted earnings per share | $4.36 | $2.38 | $7.80 | $4.20 |
Q2 home closing revenue rose 22.6%, and closings increased 18.2%; the average closing price rose 3.8% to approximately $386,400. Management attributed margin expansion to strong demand and pricing, higher volume and overhead leverage, which more than offset rising material costs, particularly lumber. Financial services profit was $4.6 million for the quarter, up from $3.8 million.
For the six months, operating cash flow was negative $143.5 million, versus positive $237.4 million in 2020. The principal use was a $469.7 million increase in real estate inventory, reflecting land acquisition, development and construction activity. Investing cash flow was negative $10.7 million; financing cash flow was positive $92.9 million. Cash declined by $61.2 million from year-end to $684.4 million.
At June 30, 2021, total assets were $4.32 billion and stockholders’ equity was $2.63 billion. Debt, including senior notes and other borrowings, totaled $1.16 billion; debt-to-capital was 30.6% and net debt-to-capital was 15.4%. The company had no revolver borrowings and reported $705.9 million available under its $780 million revolving credit facility, after letters of credit. It reported compliance with facility covenants.
Demand, backlog and material changes
- Q2 net home orders were 3,542, down 1.5% year over year, while order value rose 16.2% to $1.50 billion; the average order price rose 18.0%. The cancellation rate fell to 8% from 15%.
- At quarter-end, backlog was 5,509 homes valued at $2.32 billion, up 25.3% in units and 40.6% in value year over year. Active communities numbered 226, versus 237 a year earlier and 203 at March 31, 2021.
- Six-month home orders increased 4.5% to 7,000; order value rose 15.3% to $2.85 billion. The six-month cancellation rate was 9%, compared with 14% in 2020.
- All three homebuilding regions reported higher Q2 home closing gross margins: West 26.0%, Central 29.6% and East 26.5%. Regional results and demand trends varied.
Outlook, risks and unusual items
Management described housing demand as strong, supported by low mortgage rates, limited existing-home supply and buyer demand for additional space. It expects elevated demand over the next several years but said market conditions may normalize in the near term and vary by market. No specific full-year revenue or earnings guidance is provided in the filing.
Supply-chain disruption and material availability constrained production; construction cycles were about four weeks longer than typical in Q2, affecting orders and closings. The company cautioned that delays and cost inflation could increase costs, prompt cancellations or erode margins if price increases cannot be passed on. Other highlighted risks include mortgage-rate increases, labor and lot availability, weather and natural disasters, inventory impairments, warranty or construction-defect claims, and COVID-19-related disruption.
In April, Meritage issued $450 million of 3.875% senior notes due 2029 and redeemed $300 million of 7.00% notes due 2022. The refinancing produced an $18.2 million early-extinguishment loss in Q2 and reduced reported interest expense. The company repurchased $27.5 million of shares in the first half; $86.8 million remained available under its repurchase authorization. It has not declared cash dividends.
Warranty reserves totaled $25.1 million, including reserves for alleged stucco defects in certain Florida homes and drainage issues in one Florida community. Management said it believed reserves were adequate, while noting estimates may change as information develops. It reported no pending legal or warranty matter expected to have a material adverse impact that was not sufficiently reserved.
Important facts for investors to verify
- Whether supply-chain, labor and material-cost pressures persist, and whether longer build times affect closings, cancellations or margins.
- Whether order pace, pricing, community growth and backlog convert into deliveries and cash generation as expected.
- Land spending and inventory growth: real estate reached $3.25 billion, while first-half operating cash flow was negative.
- Debt maturities, refinancing economics, available revolver capacity and covenant headroom.
- Potential changes in Florida warranty claims and related reserves, and the adequacy of insurance or third-party recoveries.