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Meritage Homes(MTH) - 2024 Q2 - Quarterly Report

PART I. FINANCIAL INFORMATION Item 1. Financial Statements Unaudited consolidated financial statements present asset growth, increased net earnings, and details on financing and segment performance Unaudited Consolidated Financial Statements Consolidated Balance Sheet Highlights (in thousands) | Metric | June 30, 2024 | December 31, 2023 | | :--- | :--- | :--- | | Total Assets | $6,923,980 | $6,353,134 | | Real estate | $5,175,084 | $4,721,291 | | Cash and cash equivalents | $992,921 | $921,227 | | Total Liabilities | $2,041,446 | $1,741,234 | | Senior and convertible senior notes, net | $1,303,600 | $994,689 | | Total Stockholders' Equity | $4,882,534 | $4,611,900 | Consolidated Income Statement Highlights (in thousands, except per share) | Metric | Q2 2024 | Q2 2023 | Six Months 2024 | Six Months 2023 | | :--- | :--- | :--- | :--- | :--- | | Total closing revenue | $1,693,738 | $1,567,400 | $3,162,139 | $2,846,708 | | Net earnings | $231,555 | $186,836 | $417,571 | $318,137 | | Diluted EPS | $6.31 | $5.02 | $11.37 | $8.56 | Consolidated Cash Flow Highlights (in thousands) | Metric | Six Months Ended June 30, 2024 | Six Months Ended June 30, 2023 | | :--- | :--- | :--- | | Net cash (used in)/provided by operating activities | $(36,017) | $355,885 | | Net cash used in investing activities | $(19,639) | $(22,140) | | Net cash provided by/(used in) financing activities | $127,350 | $(32,063) | | Net increase in cash | $71,694 | $301,682 | Notes to Unaudited Consolidated Financial Statements - The company operates in three homebuilding regions (West, Central, East) and a financial services segment, focusing on entry-level and first move-up single-family homes10130 - In May 2024, the company issued $575.0 million of 1.750% Convertible Senior Notes due 2028 and used a portion of the proceeds to redeem all $250.0 million of its 6.00% Senior Notes due 202528117 - Concurrent with the convertible note offering, the company spent $61.8 million on capped call transactions to reduce potential dilution from the conversion of the notes2956 - Quarterly cash dividends paid on common stock increased to $0.75 per share in Q2 2024, up from $0.27 per share in Q2 2023, with total dividends paid in the first six months of 2024 at $1.50 per share76 Total Assets by Segment (in thousands) | Segment | June 30, 2024 | December 31, 2023 | | :--- | :--- | :--- | | West | $1,861,740 | $1,861,803 | | Central | $1,614,511 | $1,543,666 | | East | $2,317,470 | $1,920,099 | | Financial Services | $2,074 | $1,889 | | Corporate and Unallocated | $1,128,185 | $1,025,677 | | Total | $6,923,980 | $6,353,134 | Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses strong Q2 2024 home demand, record revenue, improved gross margins, and robust liquidity, emphasizing spec-building Overview and Outlook - Demand for entry-level homes remains strong, driven by life events for Millennials, Baby Boomers, and Gen Z, coupled with a persistent shortage of existing housing supply203 - The company's spec building strategy is a key competitive advantage, providing quick move-in inventory that appeals to customers and competes with the limited resale market203 - The company is focused on strategic initiatives including improving the home buying experience, achieving top 5 market positions, managing construction efficiencies, and balancing shareholder returns with growth216217238 Results of Operations Q2 2024 vs. Q2 2023 Performance | Metric | Q2 2024 | Q2 2023 | % Change | | :--- | :--- | :--- | :--- | | Home Closing Revenue (Millions) | $1,693.7 | $1,543.0 | +9.8% | | Homes Closed (Units) | 4,118 | 3,490 | +18.0% | | Avg. Sales Price (Thousands) | $411.3 | $442.1 | -7.0% | | Home Orders (Units) | 3,799 | 3,340 | +13.7% | | Cancellation Rate (%) | 10 | 12 | -2 p.p. | - Home closing gross margin improved by 150 basis points to 25.9% in Q2 2024, up from 24.4% in Q2 2023, driven by lower direct costs, leverage from higher revenue, and shorter construction cycle times179214 - The order backlog decreased to 2,714 homes ($1.1 billion) from 3,772 homes ($1.7 billion) year-over-year, due to a significantly higher backlog conversion rate (135.8% in Q2 2024 vs. 89.0% in Q2 2023) as more spec homes are sold later in the construction cycle193236 - Financial services profit was $4.8 million in Q2 2024, a significant improvement from a loss of $2.6 million in Q2 2023, with the prior year period including $7.9 million in charges for unused interest rate forward commitments compared to only $2.0 million of similar charges in Q2 2024166 Liquidity and Capital Resources - The company maintains a strong liquidity position with $992.9 million in cash and cash equivalents and $795.3 million available under its Credit Facility as of June 30, 202489115 Capitalization Ratios | Ratio | June 30, 2024 | December 31, 2023 | | :--- | :--- | :--- | | Debt-to-capital | 21.2% | 17.9% | | Net debt-to-capital | 6.2% | 1.9% | - Net cash used in operating activities was $36.0 million for the first six months of 2024, compared to $355.9 million provided by operations in the same period of 2023, primarily due to a $450.6 million increase in real estate investment101266 - Financing activities in the first half of 2024 included proceeds from issuing $575.0 million in convertible notes, offset by the redemption of $250.0 million in senior notes, $61.8 million for capped calls, $55.9 million in share repurchases, and $54.5 million in dividend payments247 Item 3. Quantitative and Qualitative Disclosures About Market Risk The company's primary market risk is interest rate exposure, largely mitigated by fixed-rate debt and no outstanding variable-rate borrowings - The company's primary market risk is interest rate risk, however, its $1.3 billion in aggregate principal of senior and convertible senior notes have fixed interest rates, which minimizes financial statement risk from rate changes274 - The company's revolving credit facility is subject to variable interest rates based on SOFR or Prime, but there were no outstanding borrowings under the facility as of June 30, 2024115274 Item 4. Controls and Procedures Management concluded that disclosure controls and procedures were effective as of June 30, 2024, with no material changes to internal controls - Management, including the CEO and CFO, evaluated the company's disclosure controls and procedures and concluded they were effective as of June 30, 2024275 - No changes in the company's internal control over financial reporting occurred during the quarter that have materially affected, or are reasonably likely to materially affect, these controls222 PART II. OTHER INFORMATION Item 1. Legal Proceedings The company is involved in routine legal proceedings, primarily construction defect claims, with management expecting no material adverse financial impact - The company is involved in various routine legal proceedings incidental to its business, such as construction defect claims, with most exposure expected to be covered by subcontractor warranties, indemnities, and insurance201 - Management believes that as of June 30, 2024, there are no pending legal or warranty matters that would have a material adverse impact, and that reserves are sufficient201229 Item 1A. Risk Factors This section highlights material risks, including the capital-intensive homebuilding industry, significant indebtedness, and counterparty risk from capped call transactions - The company's indebtedness of approximately $1.3 billion is a key risk, as it could require a substantial portion of cash flow for debt service, reducing funds available for operations and growth278 - A new risk is the counterparty credit risk associated with the capped call transactions, where a default by one of the financial institution counterparties could expose the company to greater stock dilution upon conversion of its convertible notes264279 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The company reports the private placement of $575.0 million in convertible senior notes and updates on its stock repurchase program, with no Q2 repurchases - In May 2024, the company issued $575.0 million of 1.75% Convertible Senior Notes due 2028 in a private placement to qualified institutional buyers, relying on an exemption from registration under the Securities Act257 - As of June 30, 2024, $129.1 million remained available under the company's stock repurchase program, with no shares repurchased during the three months ended June 30, 2024258 Item 5. Other Information No director or officer adopted or terminated Rule 10b5-1 or non-Rule 10b5-1 trading arrangements during the quarter - During the quarter ended June 30, 2024, no director or officer adopted or terminated a Rule 10b5-1 trading arrangement or a non-Rule 10b5-1 trading arrangement291 Item 6. Exhibits This section lists all exhibits filed with the Form 10-Q, including debt agreements, capped call confirmations, and officer certifications - The report includes a list of filed exhibits, such as corporate governance documents, debt agreements (including the Indenture for the 2028 Convertible Notes), and officer certifications required under Sarbanes-Oxley265284