Meritage Homes reports third quarter 2019 results including a 24% increase in orders, 19.8% home closing gross margin and 35% increase in diluted EPS

Tuesday, 22. October 2019 22:30

SCOTTSDALE, Ariz., Oct. 22, 2019 (GLOBE NEWSWIRE) -- Meritage Homes Corporation (NYSE: MTH), a leading U.S. homebuilder, reported third quarter results for the period ended September 30, 2019.

Summary Operating Results (unaudited)
(Dollars in thousands, except per share amounts)

  Three Months Ended September 30, Nine Months Ended September 30,
  2019 2018 % Chg 2019 2018 % Chg
Homes closed (units) 2,419  2,162  12% 6,437  6,026  7%
Home closing revenue $939,185  $877,734  7% $2,500,888  $2,478,649  1%
Average sales price - closings $388  $406  (4)% $389  $411  (6)%
Home orders (units) 2,258  1,828  24% 7,523  6,436  17%
Home order value $858,395  $715,089  20% $2,879,369  $2,595,881  11%
Average sales price - orders $380  $391  (3)% $383  $403  (5)%
Ending backlog (units)       3,519  3,285  7%
Ending backlog value       $1,397,033  $1,367,006  2%
Average sales price - backlog       $397  $416  (5)%
Earnings before income taxes $92,366  $71,409  29% $192,410  $191,478  %
Net earnings $69,809  $54,135  29% $146,049  $151,847  (4)%
Diluted EPS $1.79  $1.33  35% $3.76  $3.69  2%

MANAGEMENT COMMENTS

“Our results for the third quarter demonstrated continued strong demand for our homes, as well as the impact of operating efficiencies that are enabling us to improve our margins while selling homes at affordable prices," said Steven J. Hilton, chairman and chief executive officer of Meritage Homes. “Our total orders for new homes increased 24% year-over-year in the third quarter, as a result of higher absorptions on slightly lower community count.

“We’re clearly in the sweet spot of the market with our LiVE.NOW.® homes for value-conscious buyers,” he explained. “Those homes are selling at a significantly higher pace than move-up homes and made up 54% of our third quarter orders, compared to 43% a year ago.

“In addition to our success with LiVE.NOW. in the entry-level market, our first move-up business is also doing well. We have nearly completed the roll-out of our new Studio M design centers, which have been very well received by our move-up buyers," he continued. “The new studios are benefiting both our margins and overhead leverage by providing additional revenue at a reduced cost due to streamlining and simplifying our operations. The combination of revenue growth and improved operating margin drove a 29% increase in our net earnings for the third quarter.”

Mr. Hilton concluded, “We are confident in our strategy and execution, and are encouraged by healthy employment levels in the U.S., growing household incomes and low interest rates, which are allowing more people to own their own homes. Based on our results in the first three quarters of 2019, we are projecting 8,900-9,100 total home closings for the year, generating approximately $3.5 billion of total home closing revenue with home closing gross margin in the mid to high-18's percent range for the year, which should translate to approximately $5.50-5.70 in diluted earnings per share.”

THIRD QUARTER RESULTS

  • Total orders for the third quarter of 2019 increased 24% year-over-year, driven by a 27% year-over-year increase in absorptions, primarily due to higher demand for Meritage’s entry-level priced LiVE.NOW. product.  Absorptions were up 29% in the West, 26% in the Central and 23% in the East region, demonstrating broad strength across all regions. As a result of the Company's strategic product shift, average sales price (ASP) on orders was 3% lower year-over-year.

  • Net earnings was $69.8 million ($1.79 per diluted share) for the third quarter of 2019, compared to $54.1 million ($1.33 per diluted share) for the third quarter of 2018. The 35% increase in diluted EPS reflected the combination of increases in home closing revenue, gross margins and greater overhead leverage, in addition to a 4% reduction in diluted shares after share repurchases in the fourth quarter of 2018 and first quarter of 2019. Third quarter 2019 pre-tax earnings increased 180 bps to 9.8% compared to 8.0% in 2018.

  • The 7% increase in home closing revenue for the quarter reflected a 12% increase in home closing volume, which was partially offset by a 4% reduction in ASP due to the shift in product mix, compared to the third quarter of 2018. The East region led with home closing revenue up 15% year-over-year, followed by a 9% increase in the Central region, while closing revenue in the West was flat.

  • Home closing gross margin improved 170 bps to 19.8% from 18.1% a year ago, contributing to a 17% increase in total home closing gross profit over the prior year's third quarter. Third quarter 2018 gross margin was reduced by 30 bps due to a $2.6 million impairment from exiting a move-up community that was no longer aligned with the company's strategy.

  • Selling, general and administrative expenses (SG&A) totaled 10.7% of third quarter 2019 home closing revenue, compared to 11.0% in the third quarter of 2018.

  • Interest expense increased $1.0 million year-over-year, as less interest was capitalizable to assets under development due to shortened construction cycles and higher inventory turnover.

YEAR TO DATE RESULTS

  • Net earnings for the first nine months of 2019 was $146.0 million, compared to $151.8 million in 2018. Increases in home closing revenue and gross margin year-to-date in 2019 were offset by higher interest expense and lower other income than the prior year, which benefited from a favorable legal settlement, as well as a lower effective tax rate in 2018.

  • Home closings for the first nine months of the year were up 7% over 2018, while average prices on closings were down 6% from the previous year due to the product mix shift toward more affordable homes, resulting in a 1% increase in total home closing revenue.

  • Home closing gross margin increased to 18.5% for the first three-quarters of 2019 over 17.8% in the same period last year, driving a 4% increase in total home closing gross profit for the first nine months of 2019.

  • SG&A expenses as a percentage of home closing revenue year-to-date were 11.3% in 2019, compared to 11.1% in 2018, reflecting higher brokerage commissions, severance expenses and equity compensation expense accelerated into the first quarter of 2019 as a result of changes in tax rules.

  • Interest expense increased $8.1 million year-over-year, primarily due to less interest capitalized to assets under development from faster construction cycle times.

  • Other income (net) decreased by $4.1 million in 2019 primarily due to a $4.8 million favorable legal settlement in the first quarter of 2018 related to a previous joint venture in Nevada.

  • The effective tax rate for the first nine months of 2019 was 24%, compared to 21% for the first nine months of 2018, due to $6.3 million of energy tax credits recorded in the first quarter of 2018 for homes closed in 2017 that qualified for the credits. 

BALANCE SHEET

  • Cash and cash equivalents at September 30, 2019 totaled $454.8 million, compared to $311.5 million at December 31, 2018, reflecting positive cash flow from operations. Real estate assets grew $111.3 million year-to-date to approximately $2.9 billion at September 30, 2019 to support further growth.

  • Meritage ended the third quarter of 2019 with 37,300 total lots owned or under control, compared to approximately 34,400 total lots at September 30, 2018. Approximately 81% of the lots added year-to-date 2019 were in LiVE.NOW. communities for entry-level homes.

  • Debt-to-capital ratios decreased to 41.1% at September 30, 2019 from 43.2% at December 31, 2018, with further improvement year-to-date in the net debt-to-capital ratio of 31.3% from 36.7% at year-end 2018.

CONFERENCE CALL

Management will host a conference call to discuss the results at 7:30 a.m. Arizona Time (10:30 a.m. Eastern Time) on Wednesday, October 23. The call will be webcast with an accompanying slideshow available on the "Investor Relations" page of the Company's web site at http://investors.meritagehomes.com. Telephone participants can avoid 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/10134822.

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

A replay of the call will be available beginning at approximately 12:00 p.m. ET on October 23 and extending through November 6, 2019, on the website noted above or by dialing 1-877-344-7529 US toll free, 1-412-317-0088 for international or 1-855-669-9658 toll free for Canada, and referencing conference number 10134822.


Meritage Homes Corporation and Subsidiaries
Consolidated Income Statements
(In thousands, except per share data)
(Unaudited)

  Three Months Ended September 30,
  2019 2018 Change $ Change %
Homebuilding:       
 Home closing revenue$939,185  $877,734  $61,451  7%
 Land closing revenue1,695  6,847  (5,152) (75)%
 Total closing revenue940,880  884,581  56,299  6%
 Cost of home closings(753,068) (719,142) 33,926  5%
 Cost of land closings(1,721) (6,922) (5,201) (75)%
 Total cost of closings(754,789) (726,064) 28,725  4%
 Home closing gross profit186,117  158,592  27,525  17%
 Land closing gross loss(26) (75) 49  65%
 Total closing gross profit186,091  158,517  27,574  17%
Financial Services:       
 Revenue4,317  3,832  485  13%
 Expense(1,725) (1,659) 66  4%
 Earnings from financial services unconsolidated entities and other, net2,990  4,148  (1,158) (28)%
 Financial services profit5,582  6,321  (739) (12)%
Commissions and other sales costs(63,450) (60,282) 3,168  5%
General and administrative expenses(37,191) (35,906) 1,285  4%
Interest expense(1,068) (53) 1,015  n/m 
Other income, net2,402  2,812  (410) (15)%
Earnings before income taxes92,366  71,409  20,957  29%
Provision for income taxes(22,557) (17,274) 5,283  31%
Net earnings$69,809  $54,135  $15,674  29%
        
Earnings per common share:       
 Basic    Change $ or shares Change %
 Earnings per common share$1.82  $1.34  $0.48  36%
 Weighted average shares outstanding38,296  40,283  (1,987) (5)%
 Diluted       
 Earnings per common share$1.79  $1.33  $0.46  35%
 Weighted average shares outstanding39,079  40,855  (1,776) (4)%


Meritage Homes Corporation and Subsidiaries
Consolidated Income Statements
(In thousands, except per share data)
(Unaudited)

  Nine Months Ended September 30,
  2019 2018 Change $ Change %
Homebuilding:       
 Home closing revenue$2,500,888  $2,478,649  $22,239  1%
 Land closing revenue12,747  25,991  (13,244) (51)%
 Total closing revenue2,513,635  2,504,640  8,995  %
 Cost of home closings(2,039,191) (2,036,212) 2,979  %
 Cost of land closings(14,149) (27,963) (13,814) (49)%
 Total cost of closings(2,053,340) (2,064,175) (10,835) (1)%
 Home closing gross profit461,697  442,437  19,260  4%
 Land closing gross loss(1,402) (1,972) 570  29%
 Total closing gross profit460,295  440,465  19,830  5%
Financial Services:       
 Revenue11,705  10,750  955  9%
 Expense(4,949) (4,836) 113  2%
 Earnings from financial services unconsolidated entities and other, net9,559  10,278  (719) (7)%
 Financial services profit16,315  16,192  123  1%
Commissions and other sales costs(176,130) (173,857) 2,273  1%
General and administrative expenses(105,536) (101,004) 4,532  4%
Interest expense(8,350) (233) 8,117  n/m
Other income, net5,816  9,915  (4,099) (41)%
Earnings before income taxes192,410  191,478  932  %
Provision for income taxes(46,361) (39,631) 6,730  17%
Net earnings$146,049  $151,847  $(5,798) (4)%
        
Earnings per common share:       
 Basic    Change $ or shares Change %
 Earnings per common share$3.83  $3.75  $0.08  2%
 Weighted average shares outstanding38,119  40,472  (2,353) (6)%
 Diluted       
 Earnings per common share$3.76  $3.69  $0.07  2%
 Weighted average shares outstanding38,841  41,100  (2,259) (5)%


Meritage Homes Corporation and Subsidiaries
 Consolidated Balance Sheets
(In thousands)
(Unaudited)

  September 30, 2019 December 31, 2018
Assets:    
Cash and cash equivalents $454,812  $311,466 
Other receivables 85,962  77,285 
Real estate (1) 2,853,933  2,742,621 
Deposits on real estate under option or contract 45,643  51,410 
Investments in unconsolidated entities 7,908  17,480 
Property and equipment, net 53,111  54,596 
Deferred tax asset 25,656  26,465 
Prepaids, other assets and goodwill 108,010  84,156 
Total assets $3,635,035  $3,365,479 
Liabilities:    
Accounts payable $180,069  $128,169 
Accrued liabilities 240,102  177,862 
Home sale deposits 31,444  28,636 
Loans payable and other borrowings 13,992  14,773 
Senior notes, net 1,295,862  1,295,284 
Total liabilities 1,761,469  1,644,724 
Stockholders' Equity:    
Preferred stock    
Common stock 383  381 
Additional paid-in capital 508,541  501,781 
Retained earnings 1,364,642  1,218,593 
Total stockholders’ equity 1,873,566  1,720,755 
Total liabilities and stockholders’ equity $3,635,035  $3,365,479 
     
(1) Real estate – Allocated costs:    
Homes under contract under construction $712,288  $480,143 
Unsold homes, completed and under construction 661,393  644,717 
Model homes 126,925  146,327 
Finished home sites and home sites under development 1,353,327  1,471,434 
Total real estate $2,853,933  $2,742,621 


Supplemental Information and Non-GAAP Financial Disclosures (Dollars in thousands – unaudited):

 Three Months Ended September 30, Nine Months Ended September 30,
 2019 2018 2019 2018
Depreciation and amortization$7,172  $6,850  $19,553  $19,458 
        
Summary of Capitalized Interest:       
Capitalized interest, beginning of period$88,307  $84,443  $88,454  $78,564 
Interest incurred21,319  21,545  64,227  63,788 
Interest expensed(1,068) (53) (8,350) (233)
Interest amortized to cost of home and land closings(20,363) (17,871) (56,136) (54,055)
Capitalized interest, end of period$88,195  $88,064  $88,195  $88,064 
        
 September 30, 2019 December 31, 2018    
Notes payable and other borrowings$1,309,854  $1,310,057     
Stockholders' equity1,873,566  1,720,755     
Total capital$3,183,420  $3,030,812     
Debt-to-capital41.1% 43.2%    
        
Notes payable and other borrowings$1,309,854  $1,310,057     
Less: cash and cash equivalents(454,812) (311,466)    
Net debt$855,042  $998,591     
Stockholders’ equity1,873,566  1,720,755     
Total net capital$2,728,608  $2,719,346     
Net debt-to-capital31.3% 36.7%    


Meritage Homes Corporation and Subsidiaries

Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)

  Nine Months Ended September 30,
  2019 2018
Cash flows from operating activities:    
Net earnings $146,049  $151,847 
Adjustments to reconcile net earnings to net cash provided by operating activities:    
Depreciation and amortization 19,553  19,458 
Stock-based compensation 15,719  13,737 
Equity in earnings from unconsolidated entities (8,934) (11,160)
Distribution of earnings from unconsolidated entities 11,261  11,898 
Other 3,902  2,197 
Changes in assets and liabilities:    
(Increase) in real estate (110,295) (161,816)
Decrease in deposits on real estate under option or contract 5,773  10,080 
(Increase)/decrease in other receivables, prepaids and other assets (3,108) 1,686 
Increase in accounts payable and accrued liabilities 84,632  35,625 
Increase in home sale deposits 2,808  100 
Net cash provided by operating activities 167,360  73,652 
Cash flows from investing activities:    
Investments in unconsolidated entities (1,112) (551)
Distributions of capital from unconsolidated entities 7,250  597 
Purchases of property and equipment (18,376) (23,754)
Proceeds from sales of property and equipment 267  107 
Maturities/sales of investments and securities 675  1,065 
Payments to purchase investments and securities (675) (1,065)
Net cash used in investing activities (11,971) (23,601)
Cash flows from financing activities:    
Repayment of loans payable and other borrowings (3,086) (13,484)
Repayment of senior notes   (175,000)
Proceeds from issuance of senior notes   206,000 
Payment of debt issuance costs   (3,198)
Repurchase of shares (8,957) (29,353)
Net cash used in financing activities (12,043) (15,035)
Net increase in cash and cash equivalents 143,346  35,016 
Beginning cash and cash equivalents 311,466  170,746 
Ending cash and cash equivalents $454,812  $205,762 


Meritage Homes Corporation and Subsidiaries
Operating Data
(Dollars in thousands)
(Unaudited)

         
  Three Months Ended September 30,
  2019 2018
  Homes Value Homes Value
Homes Closed:        
Arizona 440  $144,920  411  $134,977 
California 200  135,555  206  143,386 
Colorado 169  85,674  160  87,716 
West Region 809  366,149  777  366,079 
Texas 810  278,744  721  256,308 
Central Region 810  278,744  721  256,308 
Florida 302  118,804  249  105,902 
Georgia 139  46,984  139  47,429 
North Carolina 206  77,696  165  63,381 
South Carolina 75  23,768  69  23,605 
Tennessee 78  27,040  42  15,030 
East Region 800  294,292  664  255,347 
Total 2,419  $939,185  2,162  $877,734 
Homes Ordered:        
Arizona 482  $159,778  347  $112,185 
California 198  124,201  104  67,810 
Colorado 156  74,498  157  84,078 
West Region 836  358,477  608  264,073 
Texas 649  217,648  635  228,627 
Central Region 649  217,648  635  228,627 
Florida 293  111,471  231  94,089 
Georgia 138  47,527  89  32,459 
North Carolina 188  69,017  139  52,434 
South Carolina 55  17,520  65  21,448 
Tennessee 99  36,735  61  21,959 
East Region 773  282,270  585  222,389 
Total 2,258  $858,395  1,828  $715,089 


Meritage Homes Corporation and Subsidiaries
Operating Data
(Dollars in thousands)
(Unaudited)

         
  Nine Months Ended September 30,
  2019 2018
  Homes Value Homes Value
Homes Closed:        
Arizona 1,126  $368,762  1,052  $344,245 
California 464  304,846  643  444,796 
Colorado 507  264,479  416  231,523 
West Region 2,097  938,087  2,111  1,020,564 
Texas 2,176  760,189  2,004  707,397 
Central Region 2,176  760,189  2,004  707,397 
Florida 809  321,364  761  329,156 
Georgia 380  132,440  316  107,237 
North Carolina 558  204,866  488  191,129 
South Carolina 202  66,513  211  72,611 
Tennessee 215  77,429  135  50,555 
East Region 2,164  802,612  1,911  750,688 
Total 6,437  $2,500,888  6,026  $2,478,649 
         
Homes Ordered:        
Arizona 1,521  $493,391  1,222  $401,063 
California 572  368,194  513  359,907 
Colorado 580  290,060  498  270,991 
West Region 2,673  1,151,645  2,233  1,031,961 
Texas 2,346  799,293  2,210  785,686 
Central Region 2,346  799,293  2,210  785,686 
Florida 925  369,503  814  343,293 
Georgia 431  149,731  346  125,293 
North Carolina 658  241,573  439  168,623 
South Carolina 205  65,540  233  80,774 
Tennessee 285  102,084  161  60,251 
East Region 2,504  928,431  1,993  778,234 
Total 7,523  $2,879,369  6,436  $2,595,881 
         
Order Backlog:        
Arizona 738  $258,341  496  $176,843 
California 199  129,880  188  138,274 
Colorado 258  129,167  281  154,451 
West Region 1,195  517,388  965  469,568 
Texas 1,151  413,229  1,226  461,628 
Central Region 1,151  413,229  1,226  461,628 
Florida 488  213,427  499  211,063 
Georgia 174  63,730  181  68,605 
North Carolina 277  104,162  194  74,405 
South Carolina 92  31,474  121  43,678 
Tennessee 142  53,623  99  38,059 
East Region 1,173  466,416  1,094  435,810 
Total 3,519  $1,397,033  3,285  $1,367,006 


Meritage Homes Corporation and Subsidiaries
Operating Data
(Unaudited)

         
  Three Months Ended September 30,
  2019 2018
  Ending Average Ending Average
Active Communities:        
Arizona 37  38.5  44  42.0 
California 24  22.0  14  14.5 
Colorado 20  20.5  20  19.5 
West Region 81  81.0  78  76.0 
Texas 74  73.5  92  91.0 
Central Region 74  73.5  92  91.0 
Florida 36  36.0  30  30.0 
Georgia 18  19.5  22  21.0 
North Carolina 22  22.5  20  20.0 
South Carolina 10  9.5  12  11.5 
Tennessee 9  10.0  10  9.0 
East Region 95  97.5  94  91.5 
Total 250  252.0  264  258.5 


         
  Nine Months Ended September 30,
  2019 2018
  Ending Average Ending Average
Active Communities:        
Arizona 37  38.5  44  41.0 
California 24  20.5  14  17.0 
Colorado 20  20.0  20  15.5 
West Region 81  79.0  78  73.5 
Texas 74  84.5  92  92.0 
Central Region 74  84.5  92  92.0 
Florida 36  33.5  30  29.0 
Georgia 18  20.0  22  20.5 
North Carolina 22  23.5  20  18.5 
South Carolina 10  11.0  12  12.5 
Tennessee 9  9.5  10  8.0 
East Region 95  97.5  94  88.5 
Total 250  261.0  264  254.0 

About Meritage Homes Corporation

Meritage Homes is the seventh-largest public homebuilder in the United States, based on homes closed in 2018. Meritage offers a variety of homes that are designed with a focus on first-time and first move-up buyers in Arizona, California, Colorado, Texas, Florida, Georgia, North Carolina, South Carolina and Tennessee.

The Company has designed and built over 120,000 homes in its 34-year history, and has a reputation for its distinctive style, quality construction, and positive customer experience. Meritage 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, home closing gross margin and diluted earnings per share for the full year 2019.

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, except as required by law. 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: changes in interest rates and the availability and pricing of residential mortgages; legislation related to tariffs; the availability and cost of finished lots and undeveloped land; shortages in the availability and cost of labor; the success of strategic initiatives; the ability of our potential buyers to sell their existing homes; 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; cancellation rates; competition; changes in tax laws that adversely impact us or our homebuyers; 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; home warranty and construction defect claims; failures in health and safety performance; our success in prevailing on contested tax positions; our ability to obtain performance and surety bonds in connection with our development work; the loss of key personnel; 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 if our credit ratings are downgraded; 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; negative publicity that affects our reputation 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, 2018 and our Form 10-Q for the quarter ended June 30, 2019 under the caption "Risk Factors," which can be found on our website at www.investors.meritagehomes.com

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

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