Meritage Homes(MTH) - 2021 Q4 - Annual Report

Part I Business Meritage Homes is a leading single-family homebuilder focused on affordable, energy-efficient homes for entry-level and first move-up buyers across nine states, achieving record financial performance in 2021 The Company and Strategy Meritage Homes designs and builds energy-efficient, quick move-in homes for entry-level and first move-up buyers across nine states, supported by a financial services segment - The company operates in three regions (West, Central, East) across nine states[12] - The operational strategy focuses on affordable, quick move-in homes for entry-level and first move-up markets, using a 100% speculative building approach for entry-level products[20] - All new homes meet or exceed ENERGY STAR standards and include advanced features like MERV-13 air filters and the M.Connected Home™ Automation Suite[21] Recent Industry and Company Developments In 2021, the company achieved record financial performance, including a 580 basis point improvement in gross margin and 75% diluted EPS growth, driven by strong housing demand and its focus on affordable homes FY 2021 Financial Performance Highlights | Metric | 2021 Value | Change vs 2020 | | :--- | :--- | :--- | | Home Closing Revenue Growth | 14% | - | | Home Closing Volume Growth | 8% | - | | ASP on Closings Growth | 6% | - | | Home Closing Gross Margin | 27.8% | +580 bps | | Net Earnings Growth | 74% | - | | Diluted EPS Growth | 75% | - | Balance Sheet Position (as of Dec 31, 2021) | Metric | Dec 31, 2021 | Dec 31, 2020 | | :--- | :--- | :--- | | Cash and Cash Equivalents | $618.3 million | $745.6 million | | Inventory | $3.7 billion | - | | Debt-to-Capital Ratio | 27.6% | 30.3% | | Net Debt-to-Capital Ratio | 15.1% | 10.5% | - First-time and first move-up buyers accounted for approximately 97% of 2021 closings[27] Land Acquisition and Development The company aggressively invested approximately $2.0 billion in land acquisition and development in 2021, securing nearly 34,000 new lots, primarily for entry-level communities, to maintain a four-to-five year supply Land Position and Investment (FY 2021) | Metric | 2021 | 2020 | | :--- | :--- | :--- | | Investment in Land Acquisition & Development | ~$2.0 billion | - | | Net New Lots Secured | ~34,000 | ~27,200 | | Total Lots Under Control (Year-End) | 75,049 | 55,502 | | Year Supply of Lots (based on 2021 closings) | 5.9 years | - | - Approximately 90% of lots acquired in 2021 are designated for entry-level communities[31] - At year-end 2021, the company controlled 26,495 lots under option or purchase contracts with a total purchase price of approximately $1.0 billion, secured by $82.7 million in cash deposits[38] Operations and Sales The company navigated 2021 building material cost pressures and supply chain constraints, expanded digital marketing, and saw its sales backlog increase significantly by 39% in value - The company experienced building material cost pressures and supply chain constraints in 2021, with expectations for continuation[44] - Marketing and sales expanded digital offerings, including online scheduling, virtual tours, and digital contract signing[46][51] Sales Backlog (as of Dec 31, 2021) | Metric | Dec 31, 2021 | Dec 31, 2020 | Change | | :--- | :--- | :--- | :--- | | Backlog Units | 5,679 | 4,672 | +22% | | Backlog Value | $2.5 billion | $1.8 billion | +39% | Human Capital As of December 31, 2021, Meritage Homes had 1,773 full-time employees, demonstrating a commitment to DE&I with 40% female and 25% minority representation, and implemented COVID-19 safety measures Employee Statistics (as of Dec 31, 2021) | Category | Number/Percentage | | :--- | :--- | | Total Full-Time Employees | 1,773 | | Management & Administration | 346 | | Sales & Marketing | 494 | | Construction & Warranty | 878 | | Female Employees | 40% | | Minority Employees | 25% | - In 2021, the company adopted a Human Rights Policy and donated $300,000 to organizations supporting racial equity and inclusion[72] Risk Factors The company faces significant risks including rising interest rates, supply chain shortages, land availability, IT failures, and regulatory changes, which could impact its operations and financial performance - Housing demand is adversely affected by increases in interest rates and lack of mortgage availability, with predictions for further increases in 2022 and beyond[84] - Supply chain constraints for construction materials, which lengthened cycle times in 2021, are expected to persist in 2022 and potentially beyond[88] - A shift in market demand away from entry-level and first move-up homes could negatively impact operations[106] - Information technology failures and data security breaches pose significant operational risks, though a Q1 2020 malware attack was remediated without material adverse effect[111][112] Unresolved Staff Comments The company reports no unresolved staff comments from the Securities and Exchange Commission - No unresolved staff comments were reported[133] Properties The company leases its 72,000 square foot corporate office in Scottsdale, Arizona, and an additional 325,000 square feet for operating divisions - The corporate office is a leased space of approximately 72,000 square feet in Scottsdale, Arizona[134] - Approximately 325,000 square feet of office space is leased for operating divisions and other corporate offices[134] Legal Proceedings The company is involved in routine legal proceedings, mainly warranty and construction defect claims, which are expected to be covered by subcontractor obligations and insurance, with no material adverse impact anticipated - The company is involved in routine legal proceedings, primarily warranty and construction defect claims, generally covered by subcontractor indemnities and insurance[136] - Pending legal and warranty matters are not expected to have a material adverse impact beyond existing reserves[137] Mine Safety Disclosures This item is not applicable to the company's operations - Not applicable[138] Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Meritage Homes' common stock trades on the NYSE (MTH), with no cash dividends planned, while the company repurchased $61.0 million in shares during 2021 under an ongoing program - The company's common stock is listed on the NYSE under the symbol "MTH"[141] - The company does not intend to declare cash dividends in the foreseeable future, retaining earnings for operations and growth[146] Share Repurchase Activity (FY 2021) | Metric | Value | | :--- | :--- | | Shares Repurchased | 639,346 | | Aggregate Purchase Price | $61.0 million | | Amount Available for Repurchase (as of Dec 31, 2021) | $153.4 million | Management's Discussion and Analysis of Financial Condition and Results of Operations In 2021, the company achieved record home closing revenue of $5.1 billion and net earnings of $737.4 million, driven by strong market conditions and strategic focus, despite negative operating cash flow due to inventory investment Summary Company Results In 2021, the company achieved record home closing revenue of $5.1 billion and net income of $737.4 million, with gross margin expanding to 27.8%, while year-end backlog value grew 38.8% FY 2021 vs. FY 2020 Key Results | Metric | 2021 | 2020 | | :--- | :--- | :--- | | Home Closing Revenue | $5.1 billion | $4.5 billion | | Home Closing Gross Margin | 27.8% | 22.0% | | Pre-tax Net Earnings | $954.8 million | $533.6 million | | Net Income | $737.4 million | $423.5 million | | Homes Closed | 12,801 | 11,834 | | Backlog Value (Year-End) | $2.5 billion | $1.8 billion | - Orders were intentionally metered to align with production constraints, resulting in relatively flat year-over-year order volume[152] Home Closing Revenue, Home Orders and Order Backlog - Segment Analysis In 2021, total home closing revenue increased 14.1% to $5.1 billion, with the East Region showing strongest growth, and year-end backlog value rising 38.8% to $2.5 billion Home Closing Revenue by Region (FY 2021 vs 2020) | Region | 2021 Revenue ($M) | 2020 Revenue ($M) | % Change | | :--- | :--- | :--- | :--- | | West | $1,914.4 | $1,795.2 | +6.6% | | Central | $1,500.7 | $1,273.7 | +17.8% | | East | $1,679.8 | $1,395.5 | +20.4% | | Total | $5,094.9 | $4,464.4 | +14.1% | Home Orders by Region (FY 2021 vs 2020) | Region | 2021 Orders (Units) | 2020 Orders (Units) | % Change | | :--- | :--- | :--- | :--- | | West | 4,276 | 4,781 | -10.6% | | Central | 4,413 | 4,476 | -1.4% | | East | 5,119 | 4,467 | +14.6% | | Total | 13,808 | 13,724 | +0.6% | Order Backlog (as of Dec 31) | Metric | 2021 | 2020 | % Change | | :--- | :--- | :--- | :--- | | Backlog Value | $2,516.2 M | $1,812.5 M | +38.8% | | Homes in Backlog | 5,679 | 4,672 | +21.6% | Other Operating Information Home closing gross margin improved to 27.8% in 2021, driven by pricing power, while sales costs decreased as a percentage of revenue and the effective tax rate increased Home Closing Gross Profit Margin by Region (FY 2021 vs 2020) | Region | 2021 Margin | 2020 Margin | Basis Point Change | | :--- | :--- | :--- | :--- | | West | 27.1% | 21.2% | +590 bps | | Central | 29.9% | 23.9% | +600 bps | | East | 26.8% | 21.2% | +560 bps | | Total | 27.8% | 22.0% | +580 bps | - Commissions and other sales costs decreased to 5.6% of home closing revenue in 2021 from 6.4% in 2020, driven by lower broker commissions and digital sales solutions[187][188] - The effective tax rate increased to 22.8% in 2021 from 20.6% in 2020, primarily due to higher profits in states with higher tax rates[193] Liquidity and Capital Resources In 2021, net cash used in operations was $152.1 million, primarily due to a $948.1 million investment in real estate inventory, while the company maintained a strong balance sheet with a 27.6% debt-to-capital ratio Cash Flow Summary (FY 2021 vs 2020) | Cash Flow Activity ($M) | 2021 | 2020 | | :--- | :--- | :--- | | Net Cash (Used in)/Provided by Operating Activities | ($152.1) | $530.4 | | Net Cash Used in Investing Activities | ($26.8) | ($18.2) | | Net Cash Provided by/(Used in) Financing Activities | $51.6 | ($86.0) | - Negative operating cash flow in 2021 was primarily due to a $948.1 million increase in real estate inventory for homes under construction and new land acquisitions[205] Leverage Ratios (as of Dec 31) | Ratio | 2021 | 2020 | | :--- | :--- | :--- | | Debt-to-Capital | 27.6% | 30.3% | | Net Debt-to-Capital | 15.1% | 10.5% | Quantitative and Qualitative Disclosures About Market Risk The company's primary market risk is interest rate sensitivity, as rising mortgage rates can adversely affect housing demand and its variable-rate borrowing costs, though most debt is fixed-rate - The company's operations are sensitive to interest rates, as higher mortgage rates can negatively impact homebuyer affordability and demand[217] - The company's fixed-rate debt comprises $1.2 billion in senior notes, with no maturities until 2025[215][216] - There were no outstanding borrowings under the variable-rate Credit Facility at year-end 2021 or 2020[215] Financial Statements and Supplementary Data This section presents the company's audited consolidated financial statements for FY2021, with an unqualified auditor's opinion, highlighting real estate valuation as a critical audit matter Report of Independent Registered Public Accounting Firm Deloitte & Touche LLP issued an unqualified opinion on the company's consolidated financial statements and internal control over financial reporting, identifying real estate valuation as a critical audit matter - The auditor issued an unqualified opinion, affirming the fair presentation of the company's financial position[221] - The valuation of real estate was identified as a Critical Audit Matter due to significant management judgments and estimates in assessing recoverability[225][226][227] Consolidated Financial Statements The consolidated financial statements show total assets increased to $4.81 billion, total closing revenue rose to $5.12 billion, and net earnings grew 74% to $737.4 million in 2021 Consolidated Balance Sheet Highlights (in thousands) | Account | Dec 31, 2021 | Dec 31, 2020 | | :--- | :--- | :--- | | Cash and cash equivalents | $618,335 thousand | $745,621 thousand | | Real estate | $3,734,408 thousand | $2,778,039 thousand | | Total assets | $4,807,533 thousand | $3,864,398 thousand | | Senior notes, net | $1,142,486 thousand | $996,991 thousand | | Total liabilities | $1,763,144 thousand | $1,516,530 thousand | | Total stockholders' equity | $3,044,389 thousand | $2,347,868 thousand | Consolidated Income Statement Highlights (in thousands) | Account | 2021 | 2020 | | :--- | :--- | :--- | | Total closing revenue | $5,120,110 thousand | $4,482,120 thousand | | Total closing gross profit | $1,417,294 thousand | $959,614 thousand | | Earnings before income taxes | $954,834 thousand | $533,566 thousand | | Net earnings | $737,444 thousand | $423,475 thousand | | Diluted EPS | $19.29 | $11.00 | Notes to Consolidated Financial Statements The notes detail accounting policies, including $2.1 million in real estate impairment charges, the issuance of $450 million in new senior notes, and segment performance, with the Central region showing the highest operating income margin - Real estate impairment charges were $2.1 million in 2021, down from $24.9 million in 2020, primarily due to selling non-strategic assets[272] - In April 2021, the company issued $450.0 million of 3.875% Senior Notes due 2029 and redeemed $300.0 million of 7.00% Senior Notes due 2022, incurring an $18.2 million loss on early extinguishment[302] Homebuilding Segment Operating Income (in thousands) | Region | 2021 | 2020 | | :--- | :--- | :--- | | West | $379,093 thousand | $213,918 thousand | | Central | $319,435 thousand | $185,202 thousand | | East | $302,487 thousand | $157,971 thousand | | Total | $1,001,015 thousand | $557,091 thousand | Controls and Procedures Management concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2021, a conclusion affirmed by the independent auditor - Management concluded that the company's disclosure controls and procedures were effective as of December 31, 2021[339] - Management concluded that internal control over financial reporting was effective as of December 31, 2021, a conclusion audited and affirmed by Deloitte & Touche LLP[342][345] Part III Directors, Executive Officers, Corporate Governance, Compensation, and Security Ownership Information for Items 10 through 14, covering directors, executive officers, corporate governance, compensation, and security ownership, is incorporated by reference from the 2022 Proxy Statement - Information for Items 10-14 is incorporated by reference from the registrant's Proxy Statement for the 2022 Annual Meeting of Stockholders[353][354][355][356][357] Part IV Exhibits and Financial Statement Schedules This section lists the financial statements, schedules, and exhibits filed as part of the Form 10-K, with consolidated financial statements in Item 8 and a comprehensive list of exhibits provided - The consolidated financial statements are included under Part II, Item 8 of the report[360] - A list of exhibits filed with the report includes governance documents, debt agreements, employment agreements, and certifications[362][363][364]