Meritage Homes(MTH) - 2025 Q2 - Quarterly Report

PART I. FINANCIAL INFORMATION Financial Statements The unaudited consolidated financial statements show increased assets and liabilities, but a decline in net earnings and diluted EPS, with cash flow from operations being a net use Unaudited Consolidated Balance Sheets Total assets increased to $7.76 billion by June 30, 2025, driven by cash and real estate, while liabilities also grew due to senior notes Consolidated Balance Sheet Highlights (in thousands) | Account | June 30, 2025 | December 31, 2024 | | :--- | :--- | :--- | | Assets | | | | Cash and cash equivalents | $930,463 | $651,555 | | Real estate | $5,963,674 | $5,728,775 | | Total assets | $7,756,369 | $7,162,654 | | Liabilities | | | | Senior and convertible senior notes, net | $1,801,609 | $1,306,535 | | Total liabilities | $2,487,195 | $2,021,081 | | Total stockholders' equity | $5,269,174 | $5,141,573 | Unaudited Consolidated Income Statements Both quarterly and year-to-date total closing revenue and net earnings declined significantly compared to the prior year Income Statement Summary (in thousands, except per share data) | Metric | Three Months Ended June 30, 2025 | Three Months Ended June 30, 2024 | Six Months Ended June 30, 2025 | Six Months Ended June 30, 2024 | | :--- | :--- | :--- | :--- | :--- | | Total closing revenue | $1,623,986 | $1,693,738 | $2,981,511 | $3,162,139 | | Total closing gross profit | $340,609 | $439,506 | $639,424 | $817,471 | | Net earnings | $146,879 | $231,555 | $269,685 | $417,571 | | Diluted EPS | $2.04 | $3.15 | $3.73 | $5.68 | Unaudited Consolidated Statements of Cash Flows Operating activities used cash, while financing activities provided significant cash, primarily from new senior note issuance, leading to a net increase in cash Cash Flow Summary for Six Months Ended June 30 (in thousands) | Activity | 2025 | 2024 | | :--- | :--- | :--- | | Net cash used in operating activities | $(28,875) | $(36,017) | | Net cash used in investing activities | $(21,610) | $(19,639) | | Net cash provided by financing activities | $329,393 | $127,350 | | Net increase in cash | $278,908 | $71,694 | | Cash and cash equivalents, end of period | $930,463 | $992,921 | Notes to Unaudited Consolidated Financial Statements Key notes include a stock split, segment realignment, new senior note issuance, share repurchases, dividend payments, and an increased effective tax rate - A two-for-one stock split was effective on January 2, 2025, with all share and per-share amounts retroactively adjusted[20] - Effective January 1, 2025, the Tennessee homebuilding operating segment was reclassified from the East to the Central reporting segment[21][96] - In March 2025, the company issued $500.0 million of 5.650% senior notes due 2035[64] - The effective tax rate increased to 23.6% from 21.4% due to fewer homes qualifying for energy-efficient tax credits[87] - Subsequent to quarter end, the company extended its credit facility's maturity date to July 9, 2030[111] Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses navigating challenging market conditions with a focus on affordable homes and incentives, leading to increased closings but reduced revenue and compressed gross margins Overview and Outlook The company navigated challenging Q2 2025 market conditions by focusing on affordable, move-in ready homes and incentives, despite elevated land costs - The company faced a tough macroeconomic backdrop in Q2 2025, including elevated mortgage rates and diminished consumer confidence[116] - The company's strategy involves offering affordable, move-in ready homes with a 60-day closing commitment and using financing incentives[116] - Elevated land costs negatively impacted margins, partially offset by normalized construction cycle times and material costs[117] Operating Results Analysis Q2 2025 saw a decline in home closing revenue and gross margin despite increased closings, driven by lower average sales prices and higher incentives Q2 2025 vs Q2 2024 Operating Metrics | Metric | Q2 2025 | Q2 2024 | % Change | | :--- | :--- | :--- | :--- | | Homes Closed | 4,170 | 4,118 | 1.3% | | Home Closing Revenue | $1,615.7M | $1,693.7M | (4.6)% | | Home Orders | 3,914 | 3,799 | 3.0% | | Home Closing Gross Margin | 21.1% | 25.9% | (480 bps) | | Cancellation Rate | 10% | 10% | 0% | - The backlog decreased 35.6% to 1,748 homes due to a significantly higher backlog conversion rate of 208%[122][131] - The decline in home closing gross margin was attributed to increased financing incentives, higher lot costs, and $4.2 million in terminated land contract charges[147] - Commissions and other sales costs increased to 6.7% of home closing revenue due to higher broker rates and spec home maintenance costs[149][151] Liquidity and Capital Resources The company maintained a strong liquidity position with $1.7 billion in available capacity, despite an increased debt-to-capital ratio, and remained in compliance with all debt covenants - At June 30, 2025, the company had approximately $1.7 billion of total available liquidity, including $930.5 million in cash[159] Capital Structure Ratios | Ratio | June 30, 2025 | December 31, 2024 | | :--- | :--- | :--- | | Debt-to-capital | 25.8% | 20.6% | | Net debt-to-capital (Non-GAAP) | 14.6% | 11.7% | - The company was in compliance with all financial covenants, maintaining a leverage ratio of 12.7% against a requirement of less than 60%[174][175] - During the first six months of 2025, the company paid dividends totaling $0.86 per share[173] Quantitative and Qualitative Disclosures About Market Risk The company's primary market risk is interest rate exposure, with fixed-rate notes mitigating financial statement risk, but variable-rate credit facility borrowings posing a risk - The company's primary market risk exposure is from interest rates[178] - All outstanding senior and convertible senior notes, totaling $1.8 billion, bear fixed rates, mitigating financial statement risk from interest rate changes[178] - The company's Credit Facility has variable borrowing rates, creating exposure to interest rate changes on outstanding balances[178] Controls and Procedures Management concluded that disclosure controls and procedures were effective as of June 30, 2025, with no material changes to internal control over financial reporting during the quarter - Management concluded that the company's disclosure controls and procedures were effective at a reasonable assurance level as of June 30, 2025[179] - There were no material changes in internal control over financial reporting during the quarter[181] PART II. OTHER INFORMATION Legal Proceedings The company is involved in routine legal proceedings, with management believing potential losses are not material and existing reserves are sufficient - The company is involved in routine legal proceedings, with most exposure expected to be covered by subcontractor obligations and insurance[109] - Management believes no pending legal or warranty matters will have a material adverse impact beyond existing reserves as of June 30, 2025[109] Risk Factors No material changes to the risk factors previously disclosed in the Annual Report on Form 10-K for the year ended December 31, 2024 - There have been no material changes in the company's risk factors as previously disclosed in its Annual Report on Form 10-K[184] Unregistered Sales of Equity Securities and Use of Proceeds The company repurchased 674,124 shares for $45.4 million during Q2 2025, with $219.1 million remaining available under the repurchase program Q2 2025 Share Repurchases | Period | Total Shares Purchased | Average Price Paid per Share | | :--- | :--- | :--- | | April 2025 | 145,965 | $67.88 | | May 2025 | 528,159 | $66.44 | | June 2025 | — | $— | | Total Q2 | 674,124 | N/A | - As of June 30, 2025, $219.1 million was available for future repurchases under the authorized program[186] Other Information Executive officers adopted Rule 10b5-1 trading arrangements in Q2 2025 to cover taxes on equity award vesting in February 2026 - During Q2 2025, several executive officers, including the CEO and CFO, adopted Rule 10b5-1 trading arrangements[188] - The arrangements aim to sell shares to cover taxes due on equity awards vesting in February 2026[188]