Meritage Homes(MTH) - 2021 Q3 - Quarterly Report

PART I Financial Statements Unaudited consolidated financial statements reflect substantial asset and liability growth, with Q3 2021 net earnings and diluted EPS significantly increasing year-over-year Consolidated Balance Sheet Highlights (in thousands) | Account | September 30, 2021 | December 31, 2020 | | :--- | :--- | :--- | | Cash and cash equivalents | $562,291 | $745,621 | | Real estate | $3,593,007 | $2,778,039 | | Total assets | $4,565,449 | $3,864,398 | | Senior notes, net | $1,142,210 | $996,991 | | Total liabilities | $1,740,179 | $1,516,530 | | Total stockholders' equity | $2,825,270 | $2,347,868 | Consolidated Income Statement Highlights (in thousands, except per share) | Metric | Three Months Ended Sep 30, 2021 | Three Months Ended Sep 30, 2020 | Nine Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2020 | | :--- | :--- | :--- | :--- | :--- | | Home closing revenue | $1,251,435 | $1,133,221 | $3,596,060 | $3,055,229 | | Total closing gross profit | $372,440 | $244,077 | $984,611 | $642,068 | | Net earnings | $200,752 | $109,118 | $499,984 | $270,948 | | Diluted EPS | $5.25 | $2.84 | $13.06 | $7.04 | Consolidated Cash Flow Highlights (Nine Months Ended Sep 30, in thousands) | Cash Flow Activity | 2021 | 2020 | | :--- | :--- | :--- | | Net cash (used in)/provided by operating activities | $(248,706) | $373,082 | | Net cash used in investing activities | $(17,507) | $(13,247) | | Net cash provided by/(used in) financing activities | $82,883 | $(69,322) | | Net (decrease)/increase in cash | $(183,330) | $290,513 | - In April 2021, the company issued $450.0 million of 3.875% Senior Notes due 2029 and used the proceeds to redeem all $300.0 million of its 7.00% Senior Notes due 2022, incurring an $18.2 million loss on early debt extinguishment[52] Segment Operating Income (Nine Months Ended Sep 30, in thousands) | Segment | 2021 | 2020 | | :--- | :--- | :--- | | West | $238,356 | $140,059 | | Central | $232,537 | $119,208 | | East | $207,509 | $97,343 | | Total homebuilding segment operating income | $678,402 | $356,610 | Management's Discussion and Analysis of Financial Condition and Results of Operations Management reports a solid Q3 2021 housing market, achieving record closing volume and gross margin, driven by strong demand and pricing power despite supply chain constraints Overview and Outlook The company capitalized on a solid Q3 2021 housing market, achieving record closing volume and gross margin while strategically managing supply chain constraints and community growth - The company achieved its highest third-quarter closing volume and the highest quarterly home closing gross margin in its history during Q3 2021[83] - Active communities grew to 236 as of September 30, 2021, an increase from 226 at the end of Q2 2021 and 204 at the end of Q3 2020[84] - The company intentionally metered the number of homes available for sale to align with production constraints, which are expected to continue into 2022[84] Home Closing Revenue, Home Orders and Order Backlog Q3 2021 saw home closing revenue increase 10.4% to $1.25 billion, while order volume declined, but order value remained flat due to higher average sales prices and an improved cancellation rate Q3 2021 vs Q3 2020 Operating Metrics | Metric | Q3 2021 | Q3 2020 | % Change | | :--- | :--- | :--- | :--- | | Homes Closed | 3,112 | 3,004 | 3.6% | | Home Closing Revenue ($M) | $1,251.4M | $1,133.2M | 10.4% | | Homes Ordered | 3,441 | 3,851 | (10.6)% | | Home Order Value ($M) | $1,489.0M | $1,488.5M | 0.0% | Order Backlog (as of Sep 30) | Metric | 2021 | 2020 | % Change | | :--- | :--- | :--- | :--- | | Homes in Backlog | 5,838 | 5,242 | 11.4% | | Backlog Value ($M) | $2,555.4M | $2,005.0M | 27.5% | | Average Sales Price ($K) | $437.7K | $382.5K | 14.4% | - The order cancellation rate improved, dropping to 10% for Q3 2021 compared to 13% for the prior year period, indicating strong demand[86][98] Operating Results and Other Operating Information The company achieved a record home closing gross margin of 29.7% in Q3 2021, driven by strong pricing power and fixed cost leverage, with all regions showing significant margin expansion Home Closing Gross Margin by Region (Q3 2021 vs Q3 2020) | Region | Q3 2021 Margin (%) | Q3 2020 Margin (%) | Basis Point Change | | :--- | :--- | :--- | :--- | | Companywide | 29.7% | 21.5% | +820 bps | | West | 28.3% | 20.4% | +790 bps | | Central | 32.1% | 23.8% | +830 bps | | East | 29.0% | 20.5% | +850 bps | - The significant improvement in gross margins across all periods in 2021 is attributed to pricing power from strong buyer demand and leveraging fixed costs on higher revenue, which more than offset increased lumber and commodity costs[112] - Financial services profit was $4.2 million for Q3 2021, a slight decrease from $4.3 million in Q3 2020, mainly due to increased employee headcount, while year-to-date profit increased by $1.7 million to $12.6 million[116] Selling, General and Administrative Expenses and Other Expenses Q3 2021 saw commissions and sales costs decrease as a percentage of revenue, while G&A expenses rose in absolute terms but remained flat as a percentage of revenue, and the effective tax rate increased Key Expenses as a Percentage of Home Closing Revenue | Expense Category | Q3 2021 (%) | Q3 2020 (%) | 9M 2021 (%) | 9M 2020 (%) | | :--- | :--- | :--- | :--- | :--- | | Commissions & other sales costs | 5.5% | 6.5% | 5.9% | 6.7% | | General & administrative expenses | 3.8% | 3.6% | 3.6% | 3.6% | - G&A expenses increased by $6.5 million in Q3 2021 compared to Q3 2020, primarily due to increased payroll and performance-based bonus compensation from higher employee headcount[118] - The effective tax rate for Q3 2021 was 23.3%, up from 19.5% in Q3 2020, attributed to higher profits in states with higher tax rates and a reduced benefit from federal energy efficiency tax credits on greater overall earnings[122] Liquidity and Capital Resources The company's capital allocation in the first nine months of 2021 focused on real estate investment, resulting in net cash used in operating activities, while maintaining a strong cash position and improving its debt-to-capital ratio - During the first nine months of 2021, the company purchased approximately 24,800 lots for $824.6 million and spent $623.0 million on land development[128] - In the nine months ended September 30, 2021, the company repurchased and retired 395,461 shares of its common stock for an aggregate price of $37.0 million[130][131] Leverage Ratios | Ratio | September 30, 2021 (%) | December 31, 2020 (%) | | :--- | :--- | :--- | | Debt-to-capital | 29.1% | 30.3% | | Net debt-to-capital | 17.5% | 10.5% | Quantitative and Qualitative Disclosures About Market Risk The company's primary market risk is interest rate sensitivity, as higher mortgage rates could adversely impact housing demand, revenues, and margins, though fixed-rate debt mitigates some exposure - The company's operations are interest rate sensitive, as higher mortgage rates can negatively affect homebuyers' ability to secure financing, which could adversely impact revenues and margins[138] - The company's fixed-rate debt consists primarily of $1.2 billion in senior notes, mitigating short-term impact from rate changes, however, the Credit Facility has variable rates based on LIBOR or Prime[137] Controls and Procedures Management concluded that the company's disclosure controls and procedures were effective as of September 30, 2021, with no changes to internal control over financial reporting during the quarter - Management concluded that as of September 30, 2021, the company's disclosure controls and procedures were effective at a reasonable assurance level[139] - There were no changes in internal control over financial reporting during the quarter that materially affected, or are reasonably likely to materially affect, these controls[140] PART II. OTHER INFORMATION Legal Proceedings The company is involved in routine legal proceedings, primarily construction defect claims, which are generally covered by insurance or subcontractor obligations, with no material adverse impact expected - The company is involved in routine legal proceedings, mainly construction defect claims, which are generally covered by subcontractor warranties, indemnities, or insurance[78] - Specific reserves have been established for alleged stucco defects in homes built between 2006-2017 and water drainage issues in a Florida community, and the company believes these reserves are sufficient[79][34] Risk Factors The company emphasizes the risk of supply shortages and increased building material costs, which can delay construction, impact home closings, and potentially erode margins - A key risk factor is the potential for supply shortages and increased costs of building materials, which could disrupt operations[144] - In 2021, supply chain constraints for various construction materials have already delayed construction cycle times, impacting the timing of expected home closings and potentially increasing costs[144] Unregistered Sales of Equity Securities and Use of Proceeds The company retains cash for business development, having never declared cash dividends, and authorized an additional $100.0 million for its stock repurchase program, with $177.4 million remaining available - The company has never declared cash dividends and currently plans to retain cash to finance business growth[145] - On August 12, 2021, the Board of Directors authorized an additional $100.0 million for the stock repurchase program, and as of September 30, 2021, $177.4 million was available for repurchases[146] Issuer Purchases of Equity Securities (Q3 2021) | Period | Total Number of Shares Purchased | Average price paid per share ($) | | :--- | :--- | :--- | | July 2021 | — | $ — | | August 2021 | — | $ — | | September 2021 | 95,461 | $99.23 | | Total | 95,461 | | Exhibits This section lists all exhibits filed with the Form 10-Q, encompassing corporate governance documents, employment agreements, and financial statements, including Inline XBRL