Meritage Homes Corporation — FY2022 Form 10-K
Reporting period: Fiscal year ended December 31, 2022. This is an annual report, not a standalone fourth-quarter results report. Meritage designs and builds entry-level and first move-up single-family homes across the West, Central and East regions, with ancillary title, insurance and mortgage services. Its 271 active communities spanned ten states.
Financial and operating performance
| Metric | FY2022 | FY2021 |
|---|---|---|
| Home-closing revenue | $6.207 billion | $5.095 billion |
| Total closing revenue, including land | $6.269 billion | $5.120 billion |
| Home closings | 14,106 | 12,801 |
| Average closing price | $440,100 | $398,000 |
| Home-closing gross margin | 28.6% | 27.8% |
| Net earnings | $992.2 million | $737.4 million |
| Diluted earnings per share | $26.74 | $19.29 |
| Cash provided by/(used in) operations | $405.3 million | $(152.1) million |
- Revenue rose 21.8% and net earnings increased 34.5%; diluted EPS increased 38.6%. Higher closings and average prices drove growth, while gross-margin expansion reflected pricing and land-cost leverage, partly offset by higher materials, labor and buyer incentives.
- Commissions and other sales costs were $323.3 million (5.2% of home-closing revenue, versus 5.6%); general and administrative expense was $193.0 million (3.1%, versus 3.6%). Financial-services profit was $18.3 million, broadly unchanged year over year.
- Orders declined 14.8% to 11,759, while order value fell 9.3% to $5.256 billion. The cancellation rate rose to 21.0% from 10.2%. Year-end backlog fell 41.3% to 3,332 homes, valued at $1.525 billion.
- Cash and cash equivalents were $861.6 million, compared with $618.3 million a year earlier. Real estate inventory increased 16.7% to $4.358 billion. Debt-to-capital was 22.6% and net debt-to-capital was 6.8%, down from 27.6% and 15.1%, respectively.
- Debt consisted primarily of $1.150 billion of senior-note principal, with $7.1 million of other borrowings. There were no year-end borrowings on the $780 million revolving facility; $725.6 million remained available after letters of credit. Senior notes mature in 2025, 2027 and 2029; the company reported no debt maturities before 2025.
- Operating cash flow improved from a 2021 outflow, but was reduced by a $624.5 million increase in real estate and a $103.0 million increase in receivables, prepaids and other assets. Financing activities used $129.8 million, including $109.3 million of share repurchases. The company has not historically paid cash dividends.
Changes, outlook and risks
- Market shift: The year began with strong demand, then weakened as mortgage rates rose, affordability deteriorated and buyers became more hesitant. Order pace declined to 3.6 homes per community per month from 5.1. The West and Central regions saw particularly sharp order declines; the East had a modest decline in unit orders but higher order value.
- Management’s approach: Meritage emphasized affordable, simplified products and a spec-home strategy, sought to grow market share and preserve liquidity, and limited new land acquisitions mainly to exceptional opportunities and newer markets. It ended the year with 63,182 lots under control, a reported 4.5-year supply based on 2022 closings, and had terminated deals covering about 10,100 lots. Management said it expected to deliver substantially all year-end backlog during 2023, including replacement sales for cancellations.
- Near-term uncertainty: Management expected cancellations to remain above normal at least into early 2023 and noted that home prices could continue declining. Supply-chain constraints and labor shortages had lengthened construction cycles; management expected costs and cycle times to improve over time as industry volumes normalize, but provided no numerical earnings or revenue guidance.
- Land and warranty exposures: The company recorded $0.2 million of impairment charges in 2022. Warranty reserves were $35.6 million, after a $10.9 million increase for specific cases. Disclosed issues include alleged stucco defects in certain homes and HVAC condensation issues in Florida; management considered reserves sufficient after potential insurance and contractor recoveries, but estimates may change.
- Other risks and unusual items: Key risks include mortgage-rate and financing availability, cancellations, home-price declines, construction and land costs, subcontractor availability, inventory impairment, geographic concentration, regulation and severe weather. Hurricane Ian caused limited Florida construction and closing delays. The 2021 $18.2 million loss on early debt extinguishment did not recur in 2022. A $18.9 million estimated energy-efficient-home tax benefit was recorded in 2022 following the Inflation Reduction Act’s extension of the relevant credit.
- Audit and controls: Deloitte issued unqualified opinions on the financial statements and internal controls. Real-estate valuation was identified as a critical audit matter because impairment testing depends on significant forecasts and assumptions.
Important facts for investors to verify
- Whether orders, cancellations, backlog and sales incentives stabilize or deteriorate further, especially in the West and Central regions.
- Whether reported gross margins hold as pricing adjusts and construction, labor and incentive costs change.
- Whether elevated inventory and land commitments convert to closings and cash without material impairments; review the 36,339 lots under contract or option, including uncommitted arrangements.
- Whether the $35.6 million warranty reserve adequately covers the disclosed stucco and HVAC matters and other claims.
- Liquidity and covenant headroom, cash generation, and the timing and funding of the $400 million of senior notes due in 2025.
- The sustainability of earnings and tax benefits, including the energy-efficient-home credit, and the effect of subsequent market conditions not quantified in this filing.