What changed in this filing

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Item 8. Financial Statements and Supplementary Data

2023-02-15 compared with 2022-02-16 · 110 added, 130 removed, 750 unchanged (24% of the section changed)

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Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of Meritage Homes Corporation and subsidiaries (the "Company") as of December 31, 2021 and 2020, the related consolidated income statements, stockholders' equity and cash flows, for each of the three years in the period ended December 31, 2021, and the related notes (collectively referred to as the "financial statements").

We have audited the accompanying consolidated balance sheets of Meritage Homes Corporation and subsidiaries (the "Company") as of December 31, 2022 and 2021, the related consolidated income statements, statements of stockholders' equity and statements of cash flows, for each of the three years in the period ended December 31, 2022, and the related notes (collectively referred to as the "financial statements").

In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2022 and 2021, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2022, in conformity with accounting principles generally accepted in the United States of America.

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We tested the effectiveness of the Company’s internal controls related to the Company’s evaluation of the recoverability of real estate assets.

We also evaluated the significant assumptions used in the Company’s evaluation of the recoverability of real estate assets, by comparing the assumptions to actual recent home sales and closings in that community and external analyst and industry reports for the respective geography.

We also evaluated the significant assumptions used in the Company’s evaluation of the recoverability of real estate assets, by comparing the assumptions to actual recent home sales and closings in that community and the Company's other nearby communities, as well as external analyst and industry reports for the respective geography.

For certain communities that did not have actual recent home closings, we compared to historical home sales and closings in nearby communities taking into consideration factors such as location, size, and type of community.

In addition, we met with management to understand how recent trends in home sales and closings have been considered in the Company’s evaluation of the recoverability of real estate assets.

In addition, we met with management to understand how recent trends in home sales, closings and market conditions have been considered in the Company’s evaluation of the recoverability of real estate assets.

/s/ DELOITTE & TOUCHE LLP

Phoenix, Arizona

Tempe, Arizona

February 15, 2023

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Home closing gross profit 1,773,018 1,418,377 980,408

Land closing gross loss ( 1,083 ) ( 20,794 ) ( 1,045 )

Land closing gross profit/(loss) 11,583 ( 1,083 ) ( 20,794 )

Total closing gross profit 1,784,601 1,417,294 959,614

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Net earnings $ 992,192 $ 737,444 $ 423,475

Adjustments to reconcile net earnings to net cash (used in)/provided by operating activities:

Adjustments to reconcile net earnings to net cash provided by/(used in) operating activities:

Depreciation and amortization 24,748 26,245 31,052

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Changes in assets and liabilities:

(Increase)/decrease in real estate ( 948,055 ) ( 40,089 ) 3,621

(Increase)/decrease in deposits on real estate under option or contract ( 31,946 ) ( 9,477 ) 453

Increase in real estate ( 624,522 ) ( 948,055 ) ( 40,089 )

Decrease/(increase) in deposits on real estate under option or contract 10,463 ( 31,946 ) ( 9,477 )

(Increase)/decrease in receivables, prepaids and other assets ( 102,950 ) ( 65,114 ) 2,130

Increase in accounts payable and accrued liabilities 76,985 76,158 88,942

Increase/(decrease) in home sale deposits 17,536 828 ( 4,390 )

Net cash (used in)/provided by operating activities ( 152,092 ) 530,360 346,820

(Decrease)/increase in home sale deposits ( 4,649 ) 17,536 828

Net cash provided by/(used in) operating activities 405,270 ( 152,092 ) 530,360

Cash flows from investing activities:

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Repurchase of shares ( 109,303 ) ( 60,992 ) ( 69,592 )

Net cash provided by/(used in) financing activities 51,627 ( 85,971 ) ( 325,331 )

Net (decrease)/increase in cash and cash equivalents ( 127,286 ) 426,155 8,000

Net cash (used in)/provided by financing activities ( 129,758 ) 51,627 ( 85,971 )

Net increase/(decrease) in cash and cash equivalents 243,226 ( 127,286 ) 426,155

Cash and cash equivalents, beginning of year 618,335 745,621 319,466

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Organization.

Meritage Homes Corporation ("Meritage Homes") is a leading designer and builder of single-family homes.

Meritage Homes Corporation ("Meritage Homes") is a leading designer and builder of single-family attached and detached homes.

We primarily build in historically high-growth regions of the United States and offer a variety of entry-level and first move-up homes.

We have homebuilding operations in three regions:

West, Central and East, which are comprised of nine states:

Arizona, California, Colorado, Texas, Florida, Georgia, North Carolina, South Carolina and Tennessee.

West, Central and East, which are comprised of ten states:

Arizona, California, Colorado, Texas, Florida, Georgia, North Carolina, South Carolina, Tennessee, and Utah.

These three regions are our principal homebuilding reporting segments.

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Our financial services operations also provides mortgage services to our homebuyers through an unconsolidated joint venture.

We commenced our homebuilding operations in 1985 through our predecessor company known as Monterey Homes.

We commenced our homebuilding operations in 1985 through our predecessor company, Monterey Homes.

Meritage Homes Corporation was incorporated in the state of Maryland in 1988 under the name of Homeplex Mortgage Investments Corporation and merged with Monterey Homes in 1996, at which time our name was changed to Monterey Homes Corporation and later ultimately to Meritage Homes Corporation.

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When a home closes, we may have incurred costs for goods and services that have not yet been paid.

We accrue a liability to capture such obligations in connection with the home closing which is charged directly to cost of sales.

We accrue a liability to capture such obligations in connection with the home closing which is charged directly to Cost of home closings.

We capitalize qualifying interest to inventory during the development and construction periods.

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Land held for development primarily represents land and land development costs related to land where development activity is not currently underway but is expected to begin in the future.

For these parcels, we have chosen not to currently develop certain land holdings as they typically represent a portion or phases of a larger land parcel that we plan to build out over several years.

For these parcels, we have chosen not to currently develop certain land holdings as they typically represent a portion or phases of a larger land parcel that

we plan to build out over several years.

We do not capitalize interest for these inactive assets, and all ongoing costs of land ownership (i.e.

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In determining these costs, we compile project budgets that are based on a variety of assumptions, including future construction schedules and costs to be incurred.

Actual results can differ from budgeted amounts for various reasons, including construction delays, labor or material shortages, slower absorptions, increases in costs that have not yet been committed, changes in governmental requirements, or other unanticipated issues encountered during construction and development and other factors beyond our control.

Actual results can differ from budgeted amounts for various reasons, including construction delays, labor or material shortages, absorptions that differ from our expectations, increases in costs that have not yet been committed, changes in governmental requirements, or other unanticipated issues, including weather, encountered during construction and development and other factors beyond our control.

To address uncertainty in these budgets, we assess, update and revise project budgets on a regular basis, utilizing the most current information available to estimate home construction and land development costs.

Typically, a community's life cycle ranges from three to five years , commencing with the acquisition of the land, continuing through the land development phase, if applicable, and concluding with the sale, construction and closing of the homes.

Actual community lives will vary based on the size of the community, the orders absorption rates and whether the land purchased was raw, partially-developed or in finished status.

Actual community lives will vary based on the size of the community, the sales orders absorption rates and whether the land purchased was raw, partially-developed or in finished status.

Master-planned communities encompassing several phases and super-block land parcels may have significantly longer lives and projects involving smaller finished lot purchases may be significantly shorter.

All of our land inventory and related real estate assets are periodically reviewed for recoverability when certain criteria are met, but at least annually, as our inventory is considered “long-lived” in accordance with GAAP.

If the undiscounted cash flows expected to be generated by an asset are lower than its carrying amount, impairment charges are recorded to write down the asset to its estimated fair value.

Community-level reviews are performed quarterly to determine if indicators of potential impairment exist.

If indicators of potential impairment exist and the undiscounted cash flows expected to be generated by an asset are lower than its carrying amount, impairment charges are recorded to write down the asset to its estimated fair value.

The impairment of a community is allocated to each remaining lot in the community on a straight-line basis and is recognized in Cost of home closings in the period in which the impairment is determined.

Our determination of fair value is based on projections and estimates.

Changes in these expectations may lead to a change in the outcome of our impairment analysis, and actual results may also differ from our assumptions.

We conduct an analysis if indicators of a decline in value of our land and real estate assets exists.

If an asset is deemed to be impaired, the impairment recognized is measured as the amount by which the assets' carrying amount exceeds their fair value.

The impairment of a community is allocated to each lot on a straight-line basis.

See Note 2 for additional information related to real estate and impairments.

Deposits paid related to land option and purchase contracts are recorded and classified as Deposits on real estate under option or contract until the related land is purchased.

Deposits are reclassified as a component of real estate inventory at the time the deposit is used to offset the acquisition price of the land based on the terms of the underlying agreements.

To the extent they are non-refundable, deposits are charged to expense if the land acquisition is terminated or no longer considered probable.

Since our acquisition contracts typically do not require specific performance, we do not consider such contracts to be contractual obligations to purchase the land and our total exposure under such contracts is limited to the loss of any nonrefundable deposits and any ancillary capitalized costs.

Deposits are reclassified as a component of Real estate at the time the deposit is used to offset the acquisition price of the land based on the terms of the underlying agreements.

To the extent they are non-refundable, deposits are expensed to Cost of home closings if the land acquisition is terminated or no longer considered probable.

Since our acquisition contracts typically do not require specific performance, we do not consider such contracts to be contractual obligations to purchase the land and our total exposure under such contracts is limited to the loss of any non-refundable deposits and any ancillary capitalized costs.

Our Deposits on real estate under option or contract were $ 76.7 million and $ 90.7 million as of December 31, 2022 and December 31, 2021, respectively.

In accordance with ASC 350, Intangibles, Goodwill and Other ("ASC 350"), we analyze goodwill on an annual basis (or whenever indication of impairment exists) through a qualitative assessment to determine whether it is necessary to perform a goodwill impairment test.

ASC 350 states that an entity may assess qualitative factors to determine whether it is necessary to perform a goodwill impairment test.

ASC 350 states that an entity may first assess qualitative factors to determine whether it is necessary to perform a goodwill impairment test.

Such qualitative factors include:

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Deferred Costs.

At December 31, 2021 and 2020, deferred costs representing debt issuance costs related to our Credit Facility of approximately $ 3.6 million and $ 4.7 million, net of accumulated amortization, are included on our consolidated balance sheets within Prepaids, other assets and goodwill.

At December 31, 2022 and 2021, deferred costs representing debt issuance costs related to our revolving credit facility of approximately $ 3.8 million and $ 3.6 million, net of accumulated amortization, are recorded on our consolidated balance sheets within Prepaids, other assets and goodwill.

The costs are primarily amortized to interest expense using the straight line method which approximates the effective interest method.

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We use the equity method of accounting for investments in unconsolidated entities over which we exercise significant influence but do not have a controlling interest.

Under the equity method, our share of the unconsolidated entities’ earnings or loss is included in Other income net, or Earnings from financial services unconsolidated entities and other, net, in our income statements.

Under the equity method, our share of the unconsolidated entities’ pre-tax earnings or loss is included in Other (expense)/income net, or Earnings from financial services unconsolidated entities and other, net, in our consolidated income statements.

We use the cost method of accounting for investments in unconsolidated entities over which we do not have significant influence, if any.

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• Revenue from land sales is recognized when a significant down payment is received, title passes and collectability of the receivable is reasonably assured, and we have no continuing involvement with the property, which is generally upon the close of escrow.

• Revenue from financial services is recognized when closings have occurred and all financial services have been rendered, which generally upon the close of escrow.

• Revenue from financial services is recognized when closings have occurred and all financial services have been rendered, which is generally upon the close of escrow.

Home sale contract assets consist of cash from home closings that are in transit from title companies, which are considered cash in transit and are classified as cash on our accompanying consolidated balance sheets.

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Substantially all of our home sales are scheduled to close and be recorded as revenue within one year from the date of receiving a customer deposit.

Revenue expected to be recognized in any future year related to remaining performance obligations (if any) and contract liabilities expected to be recognized as revenue, excluding revenue pertaining to contracts that have an original expected duration of one year or less, is not material.

Revenue from financial services includes estimated future insurance policy renewal commissions as our performance obligations are satisfied upon issuance of the initial policy with a third-party broker.

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Cost of home closings includes direct home construction costs, closing costs, land acquisition and development costs, development period interest and common costs, and impairments, if any.

Direct construction costs are accumulated during the period of construction and charged to cost of closings under specific identification methods, as are closing costs.

Direct construction costs are accumulated during the period of construction and charged to Cost of home closings under specific identification methods, as are closing costs.

Land development, acquisition and common costs are allocated to each lot based on the number of lots remaining to close.

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We account for stock-based compensation in accordance with ASC 718-10, Compensation—Stock Compensation ("ASC 718").

This guidance requires us to estimate forfeitures in calculating the expense related to stock-based compensation.

As allowed by ASC 718, we have elected to estimate forfeitures in calculating the expense related to stock-based compensation.

Awards with either a graded or cliff vesting are expensed on a straight-line basis over the life of the award.

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Off-Balance Sheet Arrangements - Joint Ventures .

We may participate in land development joint ventures as a means of accessing larger parcels of land and lot positions, expanding our market opportunities, managing our risk profile and leveraging our capital base, although our participation in such ventures is currently very limited.

We may participate in land development joint ventures as a means of accessing larger parcels of land, expanding our market opportunities, managing our risk profile, optimizing deal structure for the impacted parties and leveraging our capital, although our participation in such ventures is currently limited.

See Note 5 for additional discussion of our investments in unconsolidated entities.

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The purchase price generally approximates the market price at the date the contract is executed (with possible future escalators) and may have staggered purchase schedules.

See Note 3 for additional information on off-balance sheet arrangements.

See Note 3 for additional information on these off-balance sheet arrangements.

Surety Bonds and Letters of Credit.

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Warranty Reserves.

We provide home purchasers with limited warranties against certain building defects and have certain obligations related to those post-construction warranties for closed homes.

We provide home purchasers with limited warranties against certain building defects and we have certain obligations related to those post-construction warranties for closed homes.

The specific terms and conditions of these limited warranties vary by state, but overall the nature of the warranties include a complete workmanship and materials warranty for the first year after the close of the home, a major mechanical warranty for two years after the close of the home and a structural warranty that typically extends up to 10 years after the close of the home.

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We regularly review our warranty reserves and adjust them, as necessary, to reflect changes in trends as information becomes available.

Based on such reviews of warranty costs incurred, we did not adjust the warranty reserve balance in the twelve months ended December 31, 2021 and 2020.

Included in the warranty reserve balances at December 31, 2021 and December 31, 2020 reflected in the table below are case-specific reserves for warranty matters, as discussed in Note 16.

Based on such reviews of warranty costs incurred, we recorded an adjustment to our reserve balance of $ 10.9 million in the twelve months ended December 31, 2022, primarily related to specific case reserves, as discussed in Note 16.

No adjustment was recorded to the warranty reserve balance during the twelve months ended December 31, 2021.

A summary of changes in our warranty reserves follows (in thousands):

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Balance, end of year $ 35,575 $ 26,264

(1) Net of recoveries in 2022 for costs incurred over several prior years on a foundation design and performance matter that affected a single community in Texas.

Warranty reserves are included in Accrued liabilities on the accompanying consolidated balance sheets, and additions and adjustments to the reserves are included in Cost of home closings within the accompanying consolidated income statements.

These reserves are intended to cover costs associated with our contractual and statutory warranty obligations, which include, among other items, claims involving defective workmanship and materials.

We believe that our total reserves, coupled with our contractual relationships and rights with our trades and the insurance we maintain, are sufficient to cover our general warranty obligations.

However, as unanticipated changes in legal, weather, environmental or other conditions could have an impact on our actual warranty costs, future costs could differ significantly from our estimates.

We believe that our total reserves, coupled with our contractual relationships and rights with our trades and the insurance we and our trades maintain, are sufficient to cover our general warranty obligations.

However, unanticipated changes in legal, weather, environmental or other conditions could have an impact on our actual warranty costs, and future costs could differ significantly from our estimates.

Recent Accounting Pronouncements.

In December 2019, the Financial Accounting Standards Board issued Accounting Standards Update ("ASU") No.

2019-12, Income Taxes (Topic 740):

Simplifying the Accounting for Income Taxes ("ASU 2019-12"), which simplifies the accounting for income taxes by eliminating certain exceptions within ASC Topic 740, Income Taxes , and clarifying other areas of existing guidance.

ASU 2019-12 was effective for us on January 1, 2021, and the adoption did not have a material impact on our financial statements or financial statement disclosures.

There are no recent accounting pronouncements that are expected to have a material impact on our financial statements or financial statement disclosures .

NOTE 2 — REAL ESTATE AND CAPITALIZED INTEREST

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(2) Includes raw land, land held for development and land held for sale, less impairments, if any.

Land held for development primarily represents land and land development costs related to land where development activity is not currently underway but is expected to begin in the future.

For these parcels, we have chosen not to currently develop certain land holdings as they typically represent a portion or phases of a larger land parcel that we plan to build out over several years.

We do not capitalize interest for inactive assets, and all ongoing costs of land ownership (i.e.

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Our determination of fair value is based on projections and estimates.

We also evaluate alternative product offerings in communities where impairment indicators are present and other strategies for the land exist, such as selling or holding the land for sale.

We recorded impairment charges of approximately $ 2.1 million, $ 24.9 million and $ 7.3 million for the years ended December 31, 2021, 2020, and 2019 respectively, primarily as a result of upcoming dispositions of certain assets that no longer fit our strategy of entry-level and first move-up communities.

In communities where impairment indicators are present, we may also evaluate alternative product offerings or other strategies for the land, such as pausing development, selling, or holding the land for sale.

We recorded impairment charges of approximately $ 0.2 million, $ 2.1 million and $ 24.9 million for the years ended December 31, 2022, 2021 and 2020, respectively, primarily as a result of dispositions of certain assets that no longer fit our strategy of entry-level and first move-up communities.

Subject to sufficient qualifying assets, we capitalize our development period interest costs incurred to applicable qualifying assets in connection with our real estate development and construction activities.

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We evaluate all option and purchase agreements and amendments for land to determine whether they are a VIE.

ASC 810, Consolidation , requires that for each VIE, we assess whether we are the primary beneficiary and, if we are, we consolidate the VIE in our financial statements and reflect such assets and liabilities as Real estate not owned and Liabilities related to real estate not owned, respectively.

ASC 810, Consolidation , requires that for each VIE, we assess whether we are the primary beneficiary.

Although we do not have legal title to the underlying land, if we are the primary beneficiary we are required to consolidate the VIE in our financial statements and reflect its assets and liabilities as Real estate not owned and Liabilities related to real estate not owned, respectively.

The liabilities related to consolidated VIEs are generally excluded from our debt covenant calculations.

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Total purchase and option contracts not recorded on balance sheet (3) 36,339 $ 1,413,821 $ 76,729 (4)

(1) Real estate not owned represents a single parcel of land intended for multi-family housing that, once purchased, the Company intends to sell.

(1) Deposits are non-refundable except if certain contractual conditions are not performed by the selling party.

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Generally, our options to purchase lots remain effective so long as we purchase a pre-established minimum number of lots each month or quarter, as determined by the respective agreement.

Although the pre-established number is typically structured to approximate our expected rate of home construction starts, during a weakened homebuilding market, we may purchase lots at an absorption level that exceeds our sales and home starts pace needed to meet the pre-established minimum number of lots or restructure our original contract to terms that more accurately reflect our revised orders pace expectations.

Although the pre-established number is typically structured to approximate our expected rate of home construction starts, during a weakened homebuilding market, we may purchase lots at an absorption level that exceeds our expected orders and home starts pace to meet the pre-established minimum number of lots or restructure our original contract to terms that more accurately reflect our revised orders pace expectations.

During a strong homebuilding market, we may accelerate our pre-established minimum purchases if allowed by the contract.

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In determining our incremental borrowing rate, we consider the lease period, market interest rates, current interest rates on our senior notes and the effects of collateralization.

Our lease population at December 31, 2021 is comprised of operating leases where we are the lessee and these leases are primarily real estate for office space for our corporate office, division offices and design centers, in addition to leases of certain equipment.

As allowed by ASC 842, we adopted an accounting policy election to not record leases with lease terms of twelve months or less on the consolidated balance sheets.

Our lease population at December 31, 2022 is comprised of operating leases where we are the lessee and these leases are primarily for office space for our corporate and division offices, in addition to leases of certain equipment.

As allowed by ASC 842, we do not record leases with lease terms of twelve months or less on the consolidated balance sheets.

Lease cost included in our consolidated income statements in General and administrative expenses and Commissions and other sales costs is in the table below (in thousands).

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NOTE 5 - INVESTMENTS IN UNCONSOLIDATED ENTITIES

We may enter into joint ventures as a means of accessing larger parcels of land, expanding our market opportunities, managing our risk profile, optimizing deal structure for the impacted parties and leveraging our capital base.

While purchasing land through a joint venture can be beneficial, currently we do not view joint ventures as critical to the success of our homebuilding operations.

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Based on the structure of these joint ventures, they may or may not be consolidated into our results.

As of December 31, 2021, we had two active equity-method land ventures and one mortgage joint venture, which is engaged in mortgage activities and primarily provides services to our homebuyers.

As of December 31, 2022, we had two active equity-method land joint ventures and one mortgage joint venture, which is engaged in mortgage activities and primarily provides services to our homebuyers.

Summarized condensed combined financial information related to unconsolidated joint ventures that are accounted for using the equity method was as follows (in thousands):

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This balance may differ from the balance reported in our consolidated financial statements due to the following reconciling items:

(i) timing differences for revenue and distributions recognition, (ii) step-up basis and corresponding amortization, (iii) capitalization of interest on qualified assets, (iv) income deferrals as discussed in Note (2) below and (v) the cessation of allocation of losses from joint ventures in which we have previously written down our investment balance to zero and where we have no commitment to fund additional losses.

As discussed in Note 2 to these consolidated financial statements, the balances above do not include $ 208,000 , $ 217,000 and $ 279,000 of capitalized interest that is a component of our investment balances at December 31, 2021, 2020 and 2019, respectively.

(2) Our share of pre-tax earnings is recorded in Earnings from financial services unconsolidated entities and other, net or Other income, net, as applicable, on our consolidated income statements and excludes joint venture profit related to lots we purchased from the joint ventures.

(i) timing differences for revenue and distributions recognition, (ii) step-up basis and corresponding

amortization, (iii) capitalization of interest on qualified assets, (iv) income deferrals as discussed in Note (2) below and (v) the cessation of allocation of losses from joint ventures in which we have previously written down our investment balance to zero and where we have no commitment to fund additional losses.

(2) Our share of pre-tax earnings/(loss) from our mortgage joint venture is recorded in Earnings from financial services unconsolidated entities and other, net on the accompanying consolidated income statements.

Our share of pre-tax earnings/(loss) from all other joint ventures is recorded in Other (expense)/income, net, on the accompanying consolidated income statements and excludes joint venture profit related to lots we purchased from the joint ventures, if any.

Such profit is deferred until homes are delivered by us and title passes to a homebuyer.

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At December 31,

Other borrowings, real estate note payable (1) $ 17,552 $ 23,094

Other borrowings, secured real estate note payable (1) $ 7,057 $ 17,552

$ 780.0 million unsecured revolving credit facility

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(1) Reflects balance of non-recourse notes payable in connection with land purchases.

The Company entered into an amended and restated unsecured revolving credit facility ("Credit Facility") in 2014 that has been amended from time to time.

In December 2021, the Credit Facility was amended to extend the maturity date to December

22, 2026 and replace LIBOR as the benchmark interest rate with the Secured Overnight Financing Rate ("SOFR") as described below.

The Company entered into an amended and restated unsecured revolving credit facility agreement ("Credit Facility") in 2014 that has been amended from time to time.

In December 2021, the Credit Facility was amended to extend the maturity date to December 22, 2026 and replace LIBOR as the benchmark interest rate with the Secured Overnight Financing Rate ("SOFR") as described below.

The Credit Facility's aggregate commitment is $ 780.0 million with an accordion feature permitting the size of the facility to increase to a maximum of $ 880.0 million, subject to certain conditions, including the availability of additional bank commitments.

Borrowings under the Credit Facility bear interest at the Company's option, at either (1) term SOFR (based on 1, 3, or 6 month interest periods, as selected by the Company) plus a 10 basis point adjustment plus an applicable margin (ranging from 125 basis points to 175 basis points (the "applicable margin")) based on the Company's leverage ratio as determined in accordance with a pricing grid, (2) the higher of (i) the prime lending rate, (ii) an overnight bank rate plus 50 basis points and (3) term SOFR (based on a 1 month interest period) plus a 10 basis point adjustment plus 1 %, in each case plus a margin ranging from 25 basis points to 75 basis points based on the Company's leverage in accordance with a pricing grid, or (iii) daily simple SOFR plus a 10 basis point adjustment plus the applicable margin.

At December 31, 2021, the interest rate on outstanding borrowings under the Credit Facility would have been 1.40 % per annum.

Borrowings under the Credit Facility bear interest at the Company's option, at either (1) term SOFR (based on 1, 3, or 6 month interest periods, as selected by the Company) plus a 10 basis point adjustment plus an applicable margin (ranging from 125 basis points to 175 basis points (the "applicable margin")) based on the Company's leverage ratio as determined in accordance with a pricing grid, (2) the higher of (i) the prime lending rate ("Prime"), (ii) an overnight bank rate plus 50 basis points and (iii) term SOFR (based on a 1 month interest period) plus a 10 basis point adjustment plus 1 %, in each case plus a margin ranging from 25 basis points to 75 basis points based on the Company's leverage in accordance with a pricing grid, or (3) daily simple SOFR plus a 10 basis point adjustment plus the applicable margin.

At December 31, 2022, the interest rate on outstanding borrowings under the Credit Facility would have been 5.71 % per annum, calculated in accordance with option (1) discussed previously and using the 1 month term SOFR.

We are obligated to pay a fee on the undrawn portion of the Credit Facility at a rate equal to the applicable margin then in effect.

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We had no outstanding borrowings under the Credit Facility as of December 31, 2022 and December 31, 2021.

During the twelve months ended December 31, 2021, we had no gross borrowings or repayments.

During the twelve months ended December 31, 2020 and 2019, we had $ 500.0 million and $ 90.0 million of gross borrowings and repayments, respectively.

During the twelve months ended December 31, 2022, we had $ 40.0 million gross borrowings and repayments.

During the twelve months ended December 31, 2021 we had no borrowings and repayments, and during the twelve months ended December 31, 2020 we had $ 500.0 million of gross borrowings and repayments.

As of December 31, 2022 we had outstanding letters of credit issued under the Credit Facility totaling $ 54.4 million, leaving $ 725.6 million available under the Credit Facility to be drawn.

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6.00 % senior notes due 2025.

At December 31, 2022 and 2021 there was approximately $ 1,977 and $ 2,795 in net unamortized premium, respectively.

401,977 402,795

5.125 % senior notes due 2027

At December 31, 2021 and December 31, 2020 there was approximately $ 2,795 and $ 3,614 in net unamortized premium, respectively.

300,000 300,000

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450,000 450,000

3.875 % senior notes due 2029

Net debt issuance costs ( 8,387 ) ( 10,309 )

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Such guarantees are full and unconditional, and joint and several.

In the event of a sale or other disposition of all of the assets of any Guarantor, by way of merger, consolidation or otherwise, or a sale or other disposition of all of the equity interests of any Guarantor then held by Meritage and its subsidiaries, then that Guarantor will be released and relieved of any obligations under its note guarantee.

In the event of a sale or other disposition of all of the assets of any Guarantor, by way of merger, consolidation or otherwise, or a sale or other disposition of all of the equity interests of any Guarantor then held by Meritage and its subsidiaries, then that Guarantor may be released and relieved of any obligations under its note guarantee.

There are no significant restrictions on our ability or the ability of any Guarantor to obtain funds from their respective subsidiaries, as applicable, by dividend or loan.

We do not provide separate financial statements of the Guarantor Subsidiaries because Meritage (the parent company) has no independent assets or operations and the guarantees are full and unconditional and joint and several.

Subsidiaries of Meritage Homes Corporation that are nonguarantor subsidiaries, if any, are, individually and in the aggregate, minor.

During 2010, we completed an offering of $ 200.0 million aggregate principal amount of 7.15 % senior notes due 2020 (the "2020 Notes").

During 2013, we completed a $ 100.0 million add-on offering to the existing 7.50 % senior notes due 2020.

In the fourth quarter of 2019, we redeemed the 2020 Notes, incurring $ 5.6 million in charges reflected as Loss on early extinguishment of debt in the accompanying income statements.

Subsidiaries of Meritage Homes Corporation that are non-guarantor subsidiaries are, individually and in the aggregate, minor.

In April 2012, we completed an offering of $ 300.0 million aggregate principal amount of 7.00 % Senior Notes due 2022 (the "2022 Notes").

In April 2021, we completed an offering of $ 450.0 million aggregate principal amount of 3.875 % Senior Notes due 2029 (the "2029 Notes").

We used a portion of the net proceeds from this offering to redeem all $ 300.0 million aggregate principal outstanding of the 2022 Notes, incurring $ 18.2 million in early debt extinguishment during the year ended December 31, 2021, reflected as Loss on early extinguishment of debt in the accompanying consolidated income statements.

In June 2015, we completed an offering of $ 200.0 million aggregate principal amount of 6.00 % Senior Notes due 2025 (the "2025 Notes").

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The 2027 notes were issued at par.

Using the proceeds from the 2027 Notes offering, we retired all $ 126.5 million of our convertible senior notes through a repurchase of $ 51.9 million in privately negotiated transactions and a redemption of the remaining $ 74.6 million through a combination of holder redemptions and an exercise of our call option at a redemption price equal to 100 % of the principal amount of the notes redeemed, plus accrued and unpaid interest.

In April 2021, we completed an offering of $ 450.0 million aggregate principal amount of 3.875 % Senior Notes due 2029.

Scheduled principal maturities of our senior and notes as of December 31, 2021 follow (in thousands):

Using the proceeds from the 2027 Notes offering, we retired all $ 126.5 million of our then outstanding convertible senior notes through a repurchase of $ 51.9 million in privately negotiated transactions and a redemption of the remaining $ 74.6 million through a combination of holder redemptions and an exercise of our call option at a redemption price equal to 100 % of the principal amount of the notes redeemed, plus accrued and unpaid interest.

Scheduled principal maturities of our senior notes as of December 31, 2022 follow (in thousands):

Year Ended December 31,

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NOTE 8 — FAIR VALUE DISCLOSURES

ASC 820-10, Fair Value Measurement, defines fair value, establishes a framework for measuring fair value and addresses required disclosures about fair value measurements.

ASC 820-10, Fair Value Measurement ("ASC 820") , defines fair value, establishes a framework for measuring fair value and addresses required disclosures about fair value measurements.

This standard establishes a three-level hierarchy for fair value measurements based upon the significant inputs used to determine fair value.

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$ 450,000 $ 380,610 $ 450,000 $ 472,500

3.875 % senior notes

$ 450,000 $ 472,500 $ — $ —

Due to the short-term nature of other financial assets and liabilities including our Loans payable and other borrowings, we consider the carrying amounts of our other short-term financial instruments to approximate fair value.

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Refer to Notes 1 and 2 for information regarding the valuation of these assets.

Our Real estate assets measured at fair value are as follows (in thousands):

Year Ended December 31,

Initial basis of long-lived real estate assets $ 7,369 $ 71,769

Impairments $ 2,115 $ 24,852

Adjusted basis of long-lived real estate assets $ 5,254 $ 46,917

At December 31, 2021 and 2020, we remeasured these assets at fair value because of a decision to sell certain assets that are no longer aligned with our strategy to focus on first-time and first move-up homebuyers.

The non-recurring fair values included in the table above represent only those assets whose carrying values were adjusted to fair value as of the respective balance sheet dates.

NOTE 9 — EARNINGS PER SHARE

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In prior years, we have entered new markets through the acquisition of the homebuilding assets and operations of local/regional homebuilders in Georgia, South Carolina and Tennessee.

As a result of these transaction, we recorded approximately $ 33.0 million of goodwill.

As a result of these transactions, we recorded approximately $ 33.0 million of goodwill.

Goodwill represents the excess purchase price of our acquisitions over the fair value of the net assets acquired.

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We believe that such awards provide a means of performance-based compensation to attract and retain qualified employees and better align the interests of our employees with those of our stockholders.

Non-vested stock awards are usually granted with a five-year ratable vesting period for employees, a three-year cliff vesting for both non-vested stock and performance-based awards granted to senior executive officers and either a three-year cliff vesting or one-year vesting for non-employee directors, dependent on their start date.

Non-vested stock awards are usually granted with a five-year ratable vesting period for employees, a three-year cliff vesting for both restricted stock and performance-based awards granted to senior executive officers and either a three-year cliff vesting or one-year vesting for non-employee directors, dependent on their start date.

Summary of Nonvested (Restricted) Shares and Units Activity:

We grant time-based and performance-based restricted shares or units.

Performance-based restricted shares are only granted to executive officers.

All performance shares only vest upon the attainment of certain financial and operational criteria as established and approved by our Board of Directors.

Performance-based restricted shares and units are only granted to executive officers.

All performance share awards only vest upon the attainment of certain financial and operational criteria as established and approved by our Board of Directors.

The number of shares that may be issued to the award recipients may be greater or lesser than the target award amount depending on actual performance achieved as compared to the performance targets set forth in the awards.

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Outstanding at December 31, 2022 659,102 $ 80.52 144,667 $ 71.33

(1) Performance-based shares granted for the year ended December 31, 2019 includes 21,039 shares that were issued as a result of the performance achievement exceeding the performance targets related to grants to our executive officers for the year ended December 31, 2016.

These shares vested in March 2019.

(2) Forfeitures on time-based nonvested shares are a result of terminations of employment, while forfeitures on performance-based nonvested shares are the result of failing to attain certain goals as outlined in our executive officers' compensation agreements.

(3) Performance-based shares granted for the year ended December 31, 2020 includes 24,054 shares that were issued as a result of the performance achievement exceeding the performance targets related to grants to our executive officers for the year ended December 31, 2017.

(1) Performance-based shares granted and earned/released for the year ended December 31, 2020 includes 24,054 shares that were issued as a result of the performance achievement exceeding the performance targets related to grants to our executive officers for the year ended December 31, 2017.

These shares vested in February 2020.

(4) Performance-based shares granted for the year ended December 31, 2021 includes 37,425 shares that were issued as a result of the performance achievement exceeding the performance targets related to grants to our executive officers for the year ended December 31, 2018.

(3) Performance-based shares granted and earned/released for the year ended December 31, 2021 includes 37,425 shares that were issued as a result of the performance achievement exceeding the performance targets related to grants to our executive officers for the year ended December 31, 2018.

These shares vested in March 2021.

Performance-based shares granted for the year ended December 31, 2021 also includes 1,670 shares and 696 shares that were issued to our General Counsel, who retired on December 15, 2021, as a result of the performance achievement exceeding the performance targets related to grants to our executive officers for the years ended December 31, 2019 and 2018, respectively.

Performance-based shares granted for the year ended December 31, 2021 also includes 1,670 shares and 696 shares that were issued to our former General Counsel, who retired on December 15, 2021, as a result of the performance achievement exceeding the performance targets related to grants to our executive officers for the years ended December 31, 2019 and 2018, respectively.

These shares vested in December 2021 in accordance with his employment agreement.

(4) Performance-based shares granted and earned/released for the year ended December 31, 2022 includes 37,146 shares that were issued as a result of the performance achievement exceeding the performance targets related to grants to our executive officers for the year ended December 31, 2019.

These shares vested in March 2022.

Compensation cost related to time-based restricted stock awards is measured as of the closing price on the date of grant and is expensed, less forfeitures, on a straight-line basis over the vesting period of the award.

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ASC 718 requires that compensation expense for stock awards with market conditions be expensed based on a derived grant date fair value and expensed over the service period.

We engage a third party to perform a valuation analysis on the awards containing market conditions and our associated expense with those awards is based on the derived fair value from that analysis and is being expensed straight line over the service period of the awards.

Below is a summary of compensation

expense and stock award activity (in thousands):

We engage a third party to perform a valuation analysis on the awards containing market conditions and our associated expense with those awards is based on the derived fair value from that analysis and is expensed straight-line over the service period of the awards.

Below is a summary of stock-based

compensation expense and stock award activity (in thousands):

Years Ended December 31,

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NOTE 12 — INCOME TAXES

Components of income tax expense are as follows (in thousands):

Components of the income tax provision are as follows (in thousands):

Years Ended December 31,

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The effective tax rate was 23.0 %, 22.8 %, and 20.6 % for 2022, 2021 and 2020, respectively.

The rates in all three years reflect a benefit from the extension of the Internal Revenue Code ("IRC") §45L new energy efficient homes credits, and additional energy tax credits obtained by qualifying more homes in open prior tax years.

The rate in 2019 also includes the

additional benefit of energy tax credit for the 2018 tax year that was realized in the 2019 tax year due to the retroactive application of the 2019 Act.

The rate in all three years reflect a benefit from Internal Revenue Code ("IRC") §45L energy efficient homes credits.

Deferred tax assets and liabilities are netted on our balance sheet by tax jurisdiction.

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At December 31, 2022 and December 31, 2021, we have no unrecognized tax benefits.

We believe that our current income tax filing positions and deductions will be sustained on audit and do not anticipate any adjustments that will result in a material change.

Our policy is to accrue interest and penalties on unrecognized tax benefits and include them in federal income tax expense.

We believe our current income tax filing positions and deductions will be sustained on audit and do not anticipate any adjustments that will result in a material change.

Our policy is to accrue interest and penalties on unrecognized tax benefits and include them in the provision for income taxes.

We determine our deferred tax assets and liabilities in accordance with ASC 740, Income Taxes ("ASC 740" ) .

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We have no valuation allowance on our deferred tax assets and no NOL carryovers at December 31, 2022.

In December of 2019, Congress passed the Taxpayer Certainty and Disaster Tax Relief Act of 2019 as a part of the Further Consolidated Appropriations Act, 2020 (the "2020 Act") which the President signed into law on December 20, 2019.

The 2020 Act further extended the availability of the IRC §45L new energy efficient homes credit (the "energy tax credit") through the end of 2020.

The Taxpayer Certainty and Disaster Relief Act of 2020, signed into law by the President on December 27, 2020 extended the energy tax credit through the end of 2021.

The Taxpayer Certainty and Disaster Relief Act of 2020 extended IRC §45L energy efficient homes credit (the "energy tax credit") through the end of 2021.

On August 16, 2022, the Inflation Reduction Act of 2022 ("the IRA") retroactively extended the energy tax credit to homes delivered from January 1, 2022 through December 31, 2032.

Under ASC 740, the effects of the new legislation are recognized in the period that includes the date of enactment, regardless of the retroactive benefit.

In accordance with this guidance, we recorded a tax benefit of $ 16.9 million during the year ended December 31, 2021 based on our estimate for qualifying new energy efficient homes that we closed in 2021.

The estimated tax effected benefit is reflected in our effective

tax rate reconciliation as the benefit from federal tax credits.

The energy tax credit expired at December 31, 2021, and a benefit for the year-ended December 31, 2022 can only occur with new legislation extending the credit.

In accordance with this guidance, we recorded a tax benefit of $ 18.9 million during the year ended December 31, 2022, based on our estimate for qualifying new energy efficient homes that we closed in the year.

The estimated tax effected benefit is reflected in our effective tax rate reconciliation as the benefit from federal tax credits.

The IRA also modifies the energy standards required to qualify for the tax credit and increases the per-home credit amount starting in 2023, creates a 15% corporate alternative minimum tax on certain profits and creates a 1% excise tax on

stock repurchases.

These provisions will be effective for us on January 1, 2023, and we do not expect them to have a material impact on our consolidated financial statements.

Our future deferred tax asset realization depends on sufficient taxable income in the carryforward periods under existing tax laws.

Federal NOL carryforwards may be used to offset future taxable income for 20 years.

State NOL carryforwards may be used to offset future taxable income for a period of time ranging from 5 to 20 years, depending on the state jurisdiction.

Federal NOL carryforwards may be used to offset future taxable income indefinitely.

State NOL carryforwards may be used to offset future taxable income for a period ranging from 5 to 20 years, depending on the state jurisdiction.

At December 31, 2022, we had no remaining un-utilized federal NOL carryforward, federal tax credits, or state NOL carryforwards.

At December 31, 2021, we have a current tax payable of $ 23.7 million, which consists of current federal and state income tax accruals net of current energy tax credits and estimated tax payments, and is recorded in Accrued liabilities in the accompanying balance sheet.

At December 31, 2021, we have no current tax receivables.

At December 31, 2022, we have no current income taxes receivable and current income taxes payable of $ 12.1 million, which consists of current federal and state tax accruals, net of current energy tax credits and estimated tax payments.

This amount is recorded in Accrued liabilities on the accompanying consolidated balance sheets at December 31, 2022.

We conduct business and are subject to tax in the U.S.

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Non-cash operating activities:

Real estate not owned increase $ 8,011 $ — $ —

Real estate not owned (decrease)/increase $ ( 8,011 ) $ 8,011 $ —

Real estate acquired through notes payable $ 9,960 $ 8,047 $ 16,597

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homebuilding and financial services.

As defined in ASC 280-10, Segment Reporting , we have nine homebuilding operating segments.

As defined in ASC 280-10, Segment Reporting , we have ten homebuilding operating segments.

The homebuilding segments are engaged in the business of acquiring and developing land, constructing homes, marketing and selling those homes and providing warranty and customer services.

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Our current reportable homebuilding segments are as follows:

Arizona, California and Colorado

Arizona, California, Colorado and Utah

Florida, Georgia, North Carolina, South Carolina and Tennessee

Management’s evaluation of segment performance is based on segment operating income, which we define as home and land closing revenues less cost of home and land closings, commissions and other sales costs, land development and other land sales costs and other costs incurred by or allocated to each segment, including impairments.

Management’s evaluation of segment performance is based on segment operating income, which we define as home and land closing revenue less cost of home and land closings, including land development and other land sales costs, commissions and other sales costs, and other general and administrative costs incurred by or allocated to each segment, including impairments.

Each reportable segment follows the same accounting policies described in Note 1, “Business and Summary of Significant Accounting Policies.” Operating results for each segment may not be indicative of the results for such segment had it been an independent, stand-alone entity for the periods presented.

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(2) Balance consists primarily of cash and cash equivalents, development reimbursements from local municipalities and prepaid expenses and other assets.

(3) Balance consists primarily of cash and cash equivalents, real estate not owned, goodwill, prepaid expenses and other assets and property and equipment.

(3) Balance consists primarily of cash and cash equivalents, goodwill, prepaid expenses and other assets and property and equipment.

(4) Balance consists primarily of cash and cash equivalents, deferred tax assets and prepaid expenses and other assets.

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Total assets $ 1,665,148 $ 1,290,197 $ 1,243,271 $ 610 $ 608,307 $ 4,807,533

(1) Balance consists primarily of cash and cash equivalents and property and equipment.

(1) Balance consists primarily of cash and cash equivalents, development reimbursements from local municipalities and property and equipment.

(2) Balance consists primarily of cash and cash equivalents, development reimbursements from local municipalities and prepaid expenses and other assets.

(3) Balance consists primarily of cash and cash equivalents, goodwill, prepaid expenses and other assets and property and equipment.

(3) Balance consists primarily of cash and cash equivalents, real estate not owned, goodwill, prepaid expenses and other assets and property and equipment.

(4) Balance consists primarily of cash and cash equivalents, deferred tax assets and prepaid expenses and other assets.

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We believe there are no pending legal or warranty matters as of December 31, 2022 that could have a material adverse impact upon our consolidated financial condition, results of operations or cash flows that have not been sufficiently reserved.

As discussed in Note 1 under the heading “Warranty Reserves”, we have case specific reserves within our $ 26.3 million of total warranty reserves related to alleged stucco defects in certain homes we constructed predominantly between 2006 and 2017 and for water drainage issues in a single community in Florida that we developed in 2016.

Our review and handling of these two matters is ongoing and our estimate of and reserves for resolving these matters is based on internal data, our judgment and various assumptions and estimates.

As discussed in Note 1 under the heading “Warranty Reserves”, we have case specific reserves within our $ 35.6 million of total warranty reserves related to alleged stucco defects in certain homes we constructed predominantly between 2006 and 2017 and HVAC condensation issues for homes constructed and delivered in 2021 and the first half of 2022.

Our review and handling of these matters is ongoing and our estimate of and reserves for resolving them is based on internal data, our judgment and various assumptions and estimates.

Due to the degree of judgment and the potential for variability in our underlying assumptions and data, as we obtain additional information, we may revise our estimate and thus our related reserves.

As of December 31, 2021, after considering potential recoveries from the consultants and contractors involved and their insurers and the potential recovery under our general liability insurance policies, we believe our reserves are sufficient to cover the above mentioned matters.

As of December 31, 2022, after considering potential recoveries from the consultants and contractors involved and their insurers and the potential recovery under our general liability insurance policies, we believe our reserves are sufficient to cover the above mentioned matter.

See Note 1 for information related to our warranty obligations.

Lease Agreements

See Note 4 for information related to our leases.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 8. Financial Statements and Supplementary Data