Meritage Homes Corporation — Q2 2020 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2020. Meritage builds single-family homes across the West, Central and East regions and operates title and insurance businesses. Figures below are in U.S. dollars; financial statement amounts are generally in millions unless noted.
Financial performance and liquidity
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Home closing revenue | $1,031.6 | $863.1 | $1,922.0 | $1,561.7 |
| Total closing gross profit | $219.2 | $157.4 | $398.0 | $274.2 |
| Net earnings | $90.7 | $50.8 | $161.8 | $76.2 |
| Diluted EPS | $2.38 | $1.31 | $4.20 | $1.97 |
| Operating cash flow | Not stated for quarter | Not stated for quarter | $237.4 | $113.3 |
- Q2 home closings were 2,770 homes, up 22.9%; average sales price fell 2.8% to $372,400. Six-month closings were 5,086, up 26.6%, while average price declined 2.8% to $377,900.
- Home closing gross margin rose to 21.4% in Q2 from 18.4%, and to 20.8% for the first half from 17.6%. Net earnings increased substantially in both comparison periods.
- At June 30, cash and equivalents were $484.6 million, versus $319.5 million at year-end 2019. Total assets were $3.54 billion and stockholders’ equity was $2.08 billion.
- Debt comprised $996.5 million of senior notes and $20.9 million of other borrowings. Net debt was $532.8 million; debt-to-capital was 32.8% and net debt-to-capital 20.4%, compared with 34.0% and 26.2% at year-end.
- The $780 million revolving credit facility had no borrowings outstanding at quarter-end; $709.5 million remained available after letters of credit. The company repaid a $500 million draw during Q2 and reported compliance with facility covenants.
- Six-month investing cash use was $9.1 million and financing cash use was $63.2 million, mainly reflecting $60.8 million in share repurchases. One million shares were repurchased in the first half; $23.2 million remained under the authorization.
Changes versus the prior comparable period
- Q2 orders increased 31.5% to 3,597 homes; six-month orders increased 27.2% to 6,699. Backlog at June 30 was 4,395 homes valued at $1.65 billion, up 19.4% in units and 11.6% in value year over year.
- Q2 cancellations were 15%, versus 12% a year earlier; the rate peaked at 20% in April and declined to 13% in June. The six-month rate was 14%, versus 12%.
- Higher closings and improved margins drove profit growth. Management attributed margin gains to simplified, lower-cost home designs, shorter construction cycles, higher volume and overhead leverage, plus temporary cost concessions. Q2 margin also included a 30-basis-point negative effect from $3.3 million of terminated land-contract costs.
- Financial services profit declined to $3.8 million in Q2 from $6.0 million and to $6.6 million for six months from $10.7 million. Management said a change in mortgage-joint-venture customer-incentive accounting shifted related amounts into home closing revenue beginning in Q4 2019.
Outlook, commentary and risks
- Management reported a strong demand rebound beginning in late April, supported by low mortgage rates and buyer interest in single-family homes, including homes suited to work-from-home needs. Digital tours, online sales tools and virtual or drive-through closings helped maintain operations.
- The company reported no quantified earnings, revenue or margin guidance. It said it believed cash and credit-facility liquidity were sufficient to pursue growth and manage COVID-19 uncertainty, while noting it might seek additional debt or equity capital.
- COVID-19 remained a major uncertainty. Potential effects identified include weaker orders, closings or prices; tighter mortgage availability; supply-chain and labor disruption; increased operating costs; renewed government restrictions; and real estate inventory impairments.
- Other key exposures include land availability and cost, construction inflation, interest-rate sensitivity, cancellation risk, geographic concentration, warranty and construction-defect claims, and the possibility of losing non-refundable land deposits. Management said pending legal and warranty matters were adequately reserved; the warranty reserve was $21.6 million, including specific Florida stucco and drainage matters.
- Management reported $3.3 million of terminated land-contract costs in Q2, no material real estate or goodwill impairment identified in the provided filing text, and no material change in previously disclosed risk factors apart from the added pandemic risk.
Important facts for investors to verify
- Whether the Q2 order surge and lower cancellation rates persisted, and how backlog converted into closings after June 30.
- Whether reported gross-margin gains, including temporary COVID-related cost concessions and fixed-cost leverage, were sustainable.
- How average selling prices and product mix evolved as the company emphasized entry-level and first move-up buyers.
- COVID-19 effects on buyer demand, mortgage availability, construction labor and materials, community openings and land-development schedules.
- The status and potential cost of the Florida warranty matters, and any changes in the related reserves or insurance recoveries.
- Use of remaining share-repurchase authorization, credit-facility availability and compliance with debt covenants as conditions change.