Meritage Homes(US:MTH)2023-02-15 21:29Financial Performance - Home closing revenue for 2022 reached $6.2 billion, a 21.8% increase year-over-year, driven by a 10.2% rise in closing volume and a 10.6% increase in average sales price [27][30]. - Net earnings increased by 34.5% to $992.2 million, with diluted EPS rising by 38.6% compared to the previous year [27][30]. - The gross margin on home closings improved to 28.6%, up 80 basis points from 27.8% in 2021, marking the highest full-year margin in company history [30]. - Earnings before income taxes increased by 35.0% to $1.3 billion in 2022, up from $954.8 million in 2021 [154]. - Home closing gross profit increased by $354.6 million to $1.8 billion in 2022, with a gross margin improvement to 28.6% [181]. - Financial services profit for 2022 was $18.3 million, a slight increase of $0.3 million compared to 2021, despite higher home closing volumes [186]. Sales and Orders - The company experienced a 14.8% reduction in order volume in the second half of 2022, leading to a 9.3% decrease in home order value compared to 2021 [30][29]. - The company experienced significant cancellations in the last half of 2022, attributed to economic uncertainty and rising interest rates, with expectations for cancellations to trend above normal in early 2023 [90]. - Homes in backlog decreased by 41.3% year-over-year, totaling 3,332 units valued at $1.5 billion as of December 31, 2022, down from 5,679 units valued at $2.5 billion in 2021 [153]. - The company experienced a 14.8% decline in order volume, with 11,759 orders in 2022 compared to 13,808 in 2021, attributed to decreased demand and a higher cancellation rate of 21.0% [153]. - Cancellation rates increased to 21.0% in 2022, compared to 10.2% in 2021, indicating a significant rise in cancellations [173]. Inventory and Land Acquisition - As of December 31, 2022, the company had cash and cash equivalents of $861.6 million, up from $618.3 million at the end of 2021, while inventory grew by 16.7% to $4.4 billion [31]. - In 2022, the company invested approximately $1.5 billion in land acquisition and development, securing about 2,000 net new lots, a significant decrease from 34,000 in 2021 [32]. - As of December 31, 2022, the company had 63,182 lots under control, down from 75,049 in 2021, maintaining a 4.5-year supply of lots based on 2022 closings [32]. - At the end of 2022, the company had 46,317 owned lots and 16,865 lots under committed purchase or option contracts, with a total purchase price of approximately $738.5 million [39]. Debt and Liquidity - The debt-to-capital ratio was 22.6% and the net debt-to-capital ratio was 6.8% at the end of 2022, compared to 27.6% and 15.1% respectively at the end of 2021 [31]. - As of December 31, 2022, the company had approximately $1.2 billion in indebtedness and $861.6 million in cash and cash equivalents [102]. - The company has $725.6 million available to be drawn under its credit facility, which may be necessary for working capital needs [102]. - The company's credit ratings were BB+, Ba1, and BB+ from Standard and Poor's, Moody's, and Fitch Ratings, respectively, as of December 31, 2022 [104]. Operational Challenges - The company experienced building material cost pressures and supply chain constraints throughout 2022, impacting construction timelines [45]. - Supply chain and labor constraints in 2021 and 2022 led to lengthened construction cycle times, with expectations for these conditions to persist at least through early 2023 [91]. - The company faced higher material and labor costs in recent months, negatively impacting profitability, although it has historically passed cost increases onto customers [87]. - The company experienced delays in construction schedules due to a limited pool of subcontract labor, impacting construction cycle times in 2021 and 2022 [112]. Market Conditions - In 2022, long-term interest rates increased significantly from historically low averages, impacting home sales and cash flow, with potential material effects on the business [84]. - Home prices declined in the latter half of 2022 due to rising interest rates, with expectations for this trend to continue into 2023 and potentially beyond, adversely affecting homebuilding volumes and cash flows [92]. - The company is subject to competitive pressures from national, regional, and local developers, with competition expected to intensify in the housing industry [97]. - The company’s operational success is dependent on the availability of lots and land that meet its investment criteria, which is influenced by external factors [107]. Strategic Initiatives - The company’s strategy includes a focus on affordable, quick move-in homes, with a goal of achieving a 100% speculative home building strategy for entry-level products [20][21]. - The company’s marketing strategy includes digital offerings such as virtual tours and a chatbot for customer support, enhancing the home buying experience [51]. - The company aims for a 100% spec home building strategy for entry-level products, with spec inventory per active community increasing to 18.0 units or 4,891 units as of December 31, 2022, compared to 12.3 units or 3,180 units a year prior [54]. - The company believes favorable homebuyer demographics support long-term demand for homes, despite current downward pressure on the housing market [151]. Environmental and Regulatory Factors - Meritage Homes has adopted an Environmental Responsibility Policy and issued its inaugural Task Force on Climate-Related Financial Disclosures report in 2022 [23]. - The company has received multiple awards for its commitment to energy efficiency, including the 2022 EPA's ENERGY STAR Partner of the Year for Sustained Excellence [24]. - California's updated building codes require all homes constructed with permits obtained in 2020 and beyond to have solar panels, which may increase future operating and compliance costs [123]. - The company anticipates that new building code requirements imposing stricter energy efficiency standards could significantly increase construction costs [124]. - The SEC's proposed climate-related disclosure rules could impose significant compliance costs if adopted, impacting the company's financial performance [125].