MTH Meritage Homes Corp

Meritage Homes Corporation (NYSE:MTH), a leading U.S. homebuilder, reported its third quarter results for the period ended September 30, 2017.

 

Summary Operating Results (unaudited)
(Dollars in thousands, except per share amounts)
		Three Months Ended September 30,											Nine Months Ended September 30,
		2017				2016				% Chg			2017				2016				% Chg
Homes closed (units)		1,969				1,800				9	%		5,456				5,238				4	%
Home closing revenue		$	805,008			$	735,870			9	%		$	2,263,405			$	2,127,332			6	%
Average sales price - closings		$	409			$	409			—	%		$	415			$	406			2	%
Home orders (units)		1,874				1,737				8	%		6,162				5,797				6	%
Home order value		$	765,027			$	715,562			7	%		$	2,536,448			$	2,365,508			7	%
Average sales price - orders		$	408			$	412			(1	)%		$	412			$	408			1	%
Ending backlog (units)													3,333				3,251				3	%
Ending backlog value													$	1,408,801			$	1,375,857			2	%
Average sales price - backlog													$	423			$	423			—	%
Earnings before income taxes		$	63,455			$	53,802			18	%		$	163,429			$	141,723			15	%
Net earnings		$	42,550			$	36,887			15	%		$	107,702			$	97,734			10	%
Diluted EPS		$	1.02			$	0.88			16	%		$	2.55			$	2.33			9	%

 

MANAGEMENT COMMENTS

“We are pleased with our results for the third quarter of 2017, despite the disruptions caused by the hurricanes that hit Houston and Florida," said Steven J. Hilton, chairman and chief executive officer of Meritage Homes. "We grew our third quarter orders, home closings and revenue year-over-year, increased sales productivity in our East region, and made good progress on our strategic initiatives to expand earnings by improving our gross margins and managing overhead expenses for additional leverage. Our home closing margin improved to 18.1% and our overhead leverage improved by 80 basis points, helping to drive an 18% increase in pre-tax earnings and a 16% improvement in diluted earnings per share compared to last year's third quarter."

Mr. Hilton continued, “Considering the results we’ve achieved in the first nine months of the year and adjusting for delays due to weather events, we are modestly reducing our closings and revenue guidance while maintaining our 2017 earnings expectations due to our strong third quarter performance. We expect to deliver approximately 7,600-7,800 homes and closing revenue of $3.15-3.25 billion for the year. On that level of closings and revenue, we are maintaining our expectations for approximately $235-245 million in pre-tax earnings with full year 2017 gross margin in line with 2016.”

He concluded, "Demand continues to be healthy across all of our markets, especially for our entry-level and LiVE.NOW. homes. More than ever, buyers appreciate that they can get Meritage's quality, energy efficiency and advanced technology in affordably-priced homes. As we continue to execute our strategy to serve the growing population of first-time buyers, we foresee additional growth opportunities for Meritage."

THIRD QUARTER RESULTS

• Net earnings of $42.6 million ($1.02 per diluted share) for the third quarter of 2017, compared to prior year net earnings of $36.9 million ($0.88 per diluted share), primarily reflect higher home closing revenue and gross margins, combined with cost controls and improved overhead leverage. Earnings before income taxes increased 18% year-over-year.
• The third quarter effective tax rate was 33% in 2017, compared to 31% in 2016. The lower rate in 2016 reflected the impact of energy tax credits captured on energy-efficient homes closed in 2016 and prior periods, which Congress has not extended for 2017, resulting in a higher projected effective tax rate this year.
• Home closing revenue increased 9% over the prior year on higher closing volume. Despite increases in market prices of homes over 2016, average closing prices remained constant with the third quarter of 2016, as a higher percentage of home closings were lower-priced entry-level homes, consistent with the Company’s strategic focus. Both the West and Central regions delivered 19% year-over-year increases in home closing revenue, reflecting strong growth in Arizona and Texas. A 12% decline in East region home closing revenue reflected 14% fewer closings due to fewer orders during the first half of 2017 than 2016, as well as delays due to Hurricane Irma.
• Home closing gross margins increased to 18.1% for the third quarter of 2017, compared to 17.8% in the third quarter of 2016 and 17.7% in the second quarter of 2017. The margin improvement reflects higher margins in Texas and the West Region as well as improved leverage of construction overhead expenses overall.
• Selling, general and administrative expenses totaled 10.9% of home closing revenue, an 80 bps improvement from 11.7% in the third quarter of 2016, reflecting successful cost controls and greater overhead leverage.
• Total orders for the third quarter increased 8% year-over-year due to strong demand in Texas and improved sales execution in the East region. Orders increased 22% over the third quarter of 2016 in Texas, primarily due to a 26% increase in average active communities over the prior year. Total orders increased 13% in the East, primarily due to a 12% increase in absorptions (orders per average active community) during the quarter. Three of the five states in the region produced 20% or greater order growth over the third quarter of 2016, reflecting positive acceptance of new products in new communities, as well as better sales execution. A 7% decrease in average active communities in the West region resulted in a 6% decline in third-quarter orders for the region.
• Total active community count was 250 at September 30, 2017, compared to 237 communities open at September 30, 2016, which translated to a 6% year-over-year increase in average active communities for the third quarter.
• Average sales prices on closings and orders were consistent with the prior year, as general home price appreciation in many markets offset the growing percentage of entry-level homes relative to move-up.

YEAR TO DATE RESULTS

• Net earnings increased to $107.7 million for the first three quarters of 2017, compared to $97.7 million for the first three quarters of 2016, with a 15% increase in pretax earnings.
• Earnings growth year-to-date was primarily driven by a 6% increase in home closing revenue, resulting from a 4% increase in home closings and a 2% increase in average closing prices over 2016.
• Higher home closing revenue led to a $21.8 million increase in home closing gross profit to $393.8 million in the first three quarters of 2017, compared to $372.1 million in the first three quarters of 2016, as home closing gross margins were relatively consistent in both years.
• Total commissions and selling expenses improved by 30 basis points to 7.0% of year-to-date 2017 home closing revenue from 7.3% in 2016. In addition, total general and administrative expenses also declined 30 basis points to 4.0% of home closing revenue in the first three quarters of 2017, compared to 4.3% in 2016, resulting in a total improvement of 60 basis points in year-to-date selling, general and administrative expenses.
• The effective tax rate for the first three quarters of 2017 was 34%, compared to 31% for the first three quarters of 2016, due to the expiration of energy tax credits that reduced the rate in 2016, but were unavailable in 2017.

BALANCE SHEET

• Cash and cash equivalents at September 30, 2017, totaled $115.2 million, compared to $131.7 million at December 31, 2016, primarily reflecting the use of cash to fund the purchase and development of lots, as well as additional homes under construction, to meet Meritage's growth targets. Proceeds from the issuance of $300 million in new senior notes in June 2017 were used to repay borrowings under the Company’s revolving credit facility and to retire all $126.5 million of the Company's 1.875% convertible senior notes.
• A total of $285.6 million was invested in land and development during the third quarter of 2017 to meet current demand and position the company for future growth. Total spending on land and development year-to-date was $771.1 million in 2017, compared to $667.2 million through the third quarter of 2016.
• Meritage ended the third quarter of 2017 with approximately 33,300 total lots owned or under control, compared to approximately 28,800 total lots at September 30, 2016, as the Company secured more than 2,400 new lots during the quarter. Approximately half of those additions were in Texas to meet continued strong demand, and approximately 70% of the newly controlled lots added during the quarter were for entry-level communities.
• Debt-to-capital and net debt-to-capital ratios at September 30, 2017, were 45.9% and 43.6%, compared to 44.2% and 41.2%, respectively, at December 31, 2016, reflect the increased investment of cash into homes and land under development, while remaining well within management’s target range for this key ratio.

CONFERENCE CALL

Management will host a conference call at 11:00 a.m. Eastern Time (8:00 a.m. in Arizona) today to discuss the Company's results. The call will be webcast with an accompanying slideshow available on the "Investor Relations" page of the Company's website at http://investors.meritagehomes.com. Telephone participants may avoid any delays by pre-registering for the call using the following link to receive a special dial-in number and PIN.

Conference Call registration link: http://dpregister.com/10112737. 

Telephone participants who are unable to pre-register may dial in on 866-226-4948 on the day of the call. International dial-in number is 1-412-902-4125 or 1-855-669-9657 for Canada.

A replay of the call will be available beginning at approximately 1:00 p.m. ET on October 27 and extending through November 15, 2017, on the website noted above or by dialing 877-344-7529, 1-412-317-0088 for international or 1-855-669-9658 for Canada, and referencing conference number 10112737.

 

	Meritage Homes Corporation and Subsidiaries
	Consolidated Income Statements
	(In thousands, except per share data)
	(Unaudited)
		Three Months Ended September 30,								Nine Months Ended September 30,
		2017				2016				2017				2016
Homebuilding:
	Home closing revenue	$	805,008			$	735,870			$	2,263,405			$	2,127,332
	Land closing revenue	589				16,987				16,942				21,187
	Total closing revenue	805,597				752,857				2,280,347				2,148,519
	Cost of home closings	(659,350		)		(604,891		)		(1,869,569		)		(1,755,260		)
	Cost of land closings	(1,646		)		(16,092		)		(15,504		)		(19,485		)
	Total cost of closings	(660,996		)		(620,983		)		(1,885,073		)		(1,774,745		)
	Home closing gross profit	145,658				130,979				393,836				372,072
	Land closing gross (loss)/profit	(1,057		)		895				1,438				1,702
	Total closing gross profit	144,601				131,874				395,274				373,774
Financial Services:
	Revenue	3,549				3,139				10,142				9,115
	Expense	(1,524		)		(1,398		)		(4,454		)		(4,152		)
	Earnings from financial services unconsolidated entities and other, net	3,489				4,215				9,673				10,802
	Financial services profit	5,514				5,956				15,361				15,765
Commissions and other sales costs		(55,845		)		(52,478		)		(158,866		)		(155,034		)
General and administrative expenses		(31,636		)		(33,258		)		(90,849		)		(91,774		)
(Loss)/earnings from other unconsolidated entities, net		(91		)		440				852				856
Interest expense		(1,116		)		(167		)		(3,561		)		(5,127		)
Other income, net		2,028				1,435				5,218				3,263
Earnings before income taxes		63,455				53,802				163,429				141,723
Provision for income taxes		(20,905		)		(16,915		)		(55,727		)		(43,989		)
Net earnings		$	42,550			$	36,887			$	107,702			$	97,734
Earnings per share:
	Basic
	Earnings per share	$	1.06			$	0.92			$	2.67			$	2.45
	Weighted average shares outstanding	40,323				40,022				40,273				39,958
	Diluted
	Earnings per share	$	1.02			$	0.88			$	2.55			$	2.33
	Weighted average shares outstanding	42,011				42,608				42,585				42,541

 

Meritage Homes Corporation and Subsidiaries
Consolidated Balance Sheets
(In thousands)
(Unaudited)
		September 30, 2017				December 31, 2016
Assets:
Cash and cash equivalents		$	115,167			$	131,702
Other receivables		78,933				70,355
Real estate (1)		2,762,269				2,422,063
Real estate not owned		39,793				—
Deposits on real estate under option or contract		67,547				85,556
Investments in unconsolidated entities		16,378				17,097
Property and equipment, net		32,080				33,202
Deferred tax asset		56,870				53,320
Prepaids, other assets and goodwill		83,121				75,396
Total assets		$	3,252,158			$	2,888,691
Liabilities:
Accounts payable		$	140,492			$	140,682
Accrued liabilities		193,102				170,852
Home sale deposits		39,446				28,348
Liabilities related to real estate not owned		35,768				—
Loans payable and other borrowings		38,082				32,195
Senior and convertible senior notes, net		1,266,160				1,095,119
Total liabilities		1,713,050				1,467,196
Stockholders' Equity:
Preferred stock		—				—
Common stock		403				400
Additional paid-in capital		582,414				572,506
Retained earnings		956,291				848,589
Total stockholders’ equity		1,539,108				1,421,495
Total liabilities and stockholders’ equity		$	3,252,158			$	2,888,691
(1) Real estate – Allocated costs:
Homes under contract under construction		$	677,456			$	508,927
Unsold homes, completed and under construction		484,701				431,725
Model homes		140,326				147,406
Finished home sites and home sites under development		1,459,786				1,334,005
Total real estate		$	2,762,269			$	2,422,063

Supplemental Information and Non-GAAP Financial Disclosures (Dollars in thousands – unaudited):
	Three Months Ended September 30,								Nine Months Ended September 30,
	2017				2016				2017				2016
Depreciation and amortization	$	4,199			$	3,870			$	12,071			$	11,470
Summary of Capitalized Interest:
Capitalized interest, beginning of period	$	72,327			$	64,682			$	68,196			$	61,202
Interest incurred	21,024				17,372				58,199				52,644
Interest expensed	(1,116		)		(167		)		(3,561		)		(5,127		)
Interest amortized to cost of home and land closings	(15,462		)		(14,256		)		(46,061		)		(41,088		)
Capitalized interest, end of period	$	76,773			$	67,631			$	76,773			$	67,631
	September 30, 2017				December 31, 2016
Notes payable and other borrowings	$	1,304,242			$	1,127,314
Stockholders' equity	1,539,108				1,421,495
Total capital	2,843,350				2,548,809
Debt-to-capital	45.9		%		44.2		%
Notes payable and other borrowings	$	1,304,242			$	1,127,314
Less: cash and cash equivalents	$	(115,167	)		$	(131,702	)
Net debt	1,189,075				995,612
Stockholders’ equity	1,539,108				1,421,495
Total net capital	$	2,728,183			$	2,417,107
Net debt-to-capital	43.6		%		41.2		%

 

Meritage Homes Corporation and Subsidiaries
Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
		Nine Months Ended September 30,
		2017				2016
Cash flows from operating activities:
Net earnings		$	107,702			$	97,734
Adjustments to reconcile net earnings to net cash used in operating activities:
Depreciation and amortization		12,071				11,470
Stock-based compensation		9,898				11,042
Excess income tax provision from stock-based awards		—				540
Equity in earnings from unconsolidated entities		(10,525		)		(11,658		)
Distribution of earnings from unconsolidated entities		10,410				11,439
Other		1,265				4,942
Changes in assets and liabilities:
Increase in real estate		(336,069		)		(318,490		)
Decrease/(increase) in deposits on real estate under option or contract		13,633				(3,160		)
Increase in other receivables, prepaids and other assets		(15,207		)		(14,201		)
Increase in accounts payable and accrued liabilities		21,298				61,206
Increase in home sale deposits		11,098				791
Net cash used in operating activities		(174,426		)		(148,345		)
Cash flows from investing activities:
Investments in unconsolidated entities		(404		)		(242		)
Distributions of capital from unconsolidated entities		1,250				—
Purchases of property and equipment		(12,038		)		(12,256		)
Proceeds from sales of property and equipment		251				144
Maturities/sales of investments and securities		1,297				645
Payments to purchase investments and securities		(1,297		)		(645		)
Net cash used in investing activities		(10,941		)		(12,354		)
Cash flows from financing activities:
Proceeds from Credit Facility, net		10,000				25,000
Repayment of loans payable and other borrowings		(10,491		)		(18,286		)
Repurchase of convertible senior notes		(126,691		)		—
Proceeds from issuance of senior notes		300,000				—
Payment of debt issuance costs		(3,986		)		—
Excess income tax provision from stock-based awards		—				(540		)
Proceeds from stock option exercises		—				232
Net cash provided by financing activities		168,832				6,406
Net decrease in cash and cash equivalents		(16,535		)		(154,293		)
Beginning cash and cash equivalents		131,702				262,208
Ending cash and cash equivalents		$	115,167			$	107,915

 

Meritage Homes Corporation and Subsidiaries
Operating Data
(Dollars in thousands)
(Unaudited)
		Three Months Ended September 30,
		2017							2016
		Homes			Value				Homes			Value
Homes Closed:
Arizona		424			$	141,249			253			$	89,092
California		261			154,731				251			142,056
Colorado		135			77,728				167			84,114
West Region		820			373,708				671			315,262
Texas		647			236,759				542			199,499
Central Region		647			236,759				542			199,499
Florida		185			77,652				206			85,647
Georgia		95			29,019				83			27,477
North Carolina		107			48,129				177			71,641
South Carolina		74			25,164				76			22,658
Tennessee		41			14,577				45			13,686
East Region		502			194,541				587			221,109
Total		1,969			$	805,008			1,800			$	735,870
Homes Ordered:
Arizona		348			$	116,757			345			$	116,815
California		200			124,339				216			125,920
Colorado		92			55,459				121			66,213
West Region		640			296,555				682			308,948
Texas		593			213,241				488			178,934
Central Region		593			213,241				488			178,934
Florida		269			120,243				208			95,946
Georgia		102			33,039				85			28,841
North Carolina		147			59,976				149			61,537
South Carolina		86			28,449				71			22,434
Tennessee		37			13,524				54			18,922
East Region		641			255,231				567			227,680
Total		1,874			$	765,027			1,737			$	715,562

		Nine Months Ended September 30,
		2017							2016
		Homes			Value				Homes			Value
Homes Closed:
Arizona		1,139			$	382,814			749			$	258,139
California		702			427,095				738			418,834
Colorado		417			233,377				474			231,913
West Region		2,258			1,043,286				1,961			908,886
Texas		1,752			637,147				1,563			566,377
Central Region		1,752			637,147				1,563			566,377
Florida		518			225,674				619			252,311
Georgia		223			74,860				229			76,874
North Carolina		370			164,596				474			198,525
South Carolina		217			75,085				231			71,577
Tennessee		118			42,757				161			52,782
East Region		1,446			582,972				1,714			652,069
Total		5,456			$	2,263,405			5,238			$	2,127,332
Homes Ordered:
Arizona		1,148			$	380,459			935			$	322,807
California		802			480,694				775			442,863
Colorado		368			214,532				459			237,237
West Region		2,318			1,075,685				2,169			1,002,907
Texas		2,000			719,656				1,629			597,947
Central Region		2,000			719,656				1,629			597,947
Florida		791			342,754				702			295,453
Georgia		270			88,306				305			102,392
North Carolina		440			187,683				497			205,562
South Carolina		224			76,827				296			95,123
Tennessee		119			45,537				199			66,124
East Region		1,844			741,107				1,999			764,654
Total		6,162			$	2,536,448			5,797			$	2,365,508
Order Backlog:
Arizona		453			$	158,988			503			$	182,574
California		331			207,237				326			208,175
Colorado		224			135,239				317			167,475
West Region		1,008			501,464				1,146			558,224
Texas		1,179			437,243				1,008			381,764
Central Region		1,179			437,243				1,008			381,764
Florida		526			233,534				370			161,148
Georgia		138			46,809				171			58,944
North Carolina		263			110,339				283			118,515
South Carolina		123			42,378				153			53,657
Tennessee		96			37,034				120			43,605
East Region		1,146			470,094				1,097			435,869
Total		3,333			$	1,408,801			3,251			$	1,375,857

 

Meritage Homes Corporation and Subsidiaries
Operating Data
(Unaudited)
		Three Months Ended September 30,
		2017						2016
		Ending			Average			Ending			Average
Active Communities:
Arizona		40			39.5			40			41.5
California		24			25.0			29			27.0
Colorado		9			9.5			10			11.0
West Region		73			74.0			79			79.5
Texas		93			92.5			74			73.5
Central Region		93			92.5			74			73.5
Florida		29			29.5			26			26.0
Georgia		17			18.0			17			17.0
North Carolina		18			19.0			19			20.5
South Carolina		14			14.0			15			15.5
Tennessee		6			6.5			7			7.0
East Region		84			87.0			84			86.0
Total		250			253.5			237			239.0

		Nine Months Ended September 30,
		2017						2016
		Ending			Average			Ending			Average
Active Communities:
Arizona		40			41.0			40			40.5
California		24			26.0			29			26.5
Colorado		9			9.5			10			13.0
West Region		73			76.5			79			80.0
Texas		93			86.5			74			73.0
Central Region		93			86.5			74			73.0
Florida		29			28.0			26			28.5
Georgia		17			17.0			17			17.0
North Carolina		18			17.5			19			22.5
South Carolina		14			14.5			15			16.5
Tennessee		6			6.5			7			8.0
East Region		84			83.5			84			92.5
Total		250			246.5			237			245.5

About Meritage Homes Corporation

Meritage Homes is the eighth-largest public homebuilder in the United States, based on homes closed in 2016. Meritage Homes builds and sells single-family homes for first- time, move-up, luxury and active adult buyers across the Western, Southern and Southeastern United States. Meritage Homes builds in markets including Sacramento, San Francisco Bay area, southern coastal and Inland Empire markets in California; Houston, Dallas-Ft. Worth, Austin and San Antonio, Texas; Phoenix/Scottsdale, Green Valley and Tucson, Arizona; Denver, Colorado; Orlando, Tampa and South Florida; Raleigh and Charlotte, North Carolina; Greenville-Spartanburg and York County, South Carolina; Nashville, Tennessee; and Atlanta, Georgia.

Meritage Homes has designed and built over 100,000 homes in its 32-year history and has a reputation for its distinctive style, quality construction, and positive customer experience. Meritage Homes is the industry leader in energy-efficient homebuilding and has received the U.S. Environmental Protection Agency's ENERGY STAR Partner of the Year for Sustained Excellence Award every year since 2013 for innovation and industry leadership in energy efficient homebuilding.

For more information, visit www.meritagehomes.com. 

The information included in this press release contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements include management's projected home closings, home closing revenue, gross margins and pre-tax earnings for the full year 2017, as well as expected future growth and earnings expansion opportunities.

Such statements are based on the current beliefs and expectations of Company management, and current market conditions, which are subject to significant uncertainties and fluctuations. Actual results may differ from those set forth in the forward-looking statements. The Company makes no commitment, and disclaims any duty, to update or revise any forward-looking statements to reflect future events or changes in these expectations. Meritage's business is subject to a number of risks and uncertainties. As a result of those risks and uncertainties, the Company's stock and note prices may fluctuate dramatically. These risks and uncertainties include, but are not limited to, the following: potential adverse impacts on our Houston and Florida sales, closings, revenue and costs due to Hurricanes Harvey and Irma; the availability and cost of finished lots and undeveloped land; changes in interest rates and the availability and pricing of residential mortgages; the success of strategic initiatives; shortages in the availability and cost of labor; changes in tax laws that adversely impact us or our homebuyers; the ability of our potential buyers to sell their existing homes; cancellation rates; inflation in the cost of materials used to develop communities and construct homes; the adverse effect of slow absorption rates; impairments of our real estate inventory; a change to the feasibility of projects under option or contract that could result in the write-down or write-off of earnest or option deposits; our potential exposure to and impacts from natural disasters or severe weather conditions; competition; construction defect and home warranty claims; failures in health and safety performance; our success in prevailing on contested tax positions; our ability to obtain performance bonds in connection with our development work; the loss of key personnel; enactment of new laws or regulations or our failure to comply with laws and regulations; our limited geographic diversification; fluctuations in quarterly operating results; our level of indebtedness; our ability to obtain financing; our ability to successfully integrate acquired companies and achieve anticipated benefits from these acquisitions; our compliance with government regulations; the effect of legislative and other governmental actions, orders, policies or initiatives that impact housing, labor availability, construction, mortgage availability, our access to capital, the cost of capital or the economy in general, or other initiatives that seek to restrain growth of new housing construction or similar measures; legislation relating to energy and climate change; the replication of our energy-efficient technologies by our competitors; our exposure to information technology failures and security breaches; and other factors identified in documents filed by the Company with the Securities and Exchange Commission, including those set forth in our Form 10-K for the year ended December 31, 2016 and our subsequent Forms 10-Q, under the caption "Risk Factors," which can be found on our website.

Contacts: Brent Anderson, VP Investor Relations  (972) 580-6360 (office)investors@meritagehomes.com