SOURCE: Meritage Homes Corporation

Meritage Homes Corporation

July 28, 2016 07:30 ET

Meritage Homes Reports a 35% Increase in Home Closing Revenue and a 37% Increase in Net Earnings, Resulting in Diluted EPS of $0.95 for the Second Quarter 2016

SCOTTSDALE, AZ--(Marketwired - July 28, 2016) - Meritage Homes Corporation (NYSE: MTH), a leading U.S. homebuilder, announced today second quarter results for the period ended June 30, 2016.

  
Summary Operating Results (unaudited) 
(Dollars in thousands, except per share amounts) 
  
   Three Months Ended June 30,   Six Months Ended June 30,  
   2016  2015  % Chg   2016  2015  % Chg  
Homes closed (units)   1,950   1,556  25 %  3,438   2,891  19 %
Home closing revenue  $795,845  $591,027  35 % $1,391,462  $1,108,300  26 %
Average sales price - closings  $408  $380  7 % $405  $383  6 %
Home orders (units)   2,073   1,986  4 %  4,060   3,965  2 %
Home order value  $845,346  $775,815  9 % $1,649,946  $1,558,627  6 %
Average sales price - orders  $408  $391  4 % $406  $393  3 %
Ending backlog (units)               3,314   3,188  4 %
Ending backlog value              $1,396,165  $1,296,779  8 %
Average sales price - backlog              $421  $407  4 %
Net earnings  $39,878  $29,133  37 % $60,847  $45,533  34 %
Diluted EPS  $0.95  $0.70  36 % $1.45  $1.10  32 %
                   

MANAGEMENT COMMENTS

Steven J. Hilton, chairman and chief executive officer of Meritage Homes, said: "We continue to benefit from our focused strategy, as evidenced by our solid performance in the second quarter and the first half of 2016. We delivered strong top-line growth for the quarter, reflecting a significant increase in our backlog conversion rate. In addition, we successfully managed our overhead costs, which combined with our 35% increase in home closing revenue to generate positive year-over-year earnings growth.

"We continue to make efficiency improvements to create a sustainable platform for increased operating leverage as we grow. We reduced our selling, general and administrative expenses for the second quarter by 150 basis points. This, along with a 60 basis point reduction in interest expense, more than offset a 200 basis point decline in our gross margin. As a result, we delivered a 43% increase in pre-tax earnings compared to last year's second quarter.

"Importantly, many economic and housing drivers remain positive, including continued job growth, historically low interest rates and a 30-year low supply of homes available for sale. These trends are reflected in the 2,073 new homes we sold during the quarter, the most since the first quarter of 2007. We anticipate these positive conditions will translate to Millennial buyers entering the market in growing numbers, and are working to position Meritage to capture the expected increase in demand from those buyers.

"Based on our outlook and the results for the first half of the year, we are reiterating our projections for 2016 full year orders, closings, revenue and diluted earnings per share, while adjusting our expectations for the timing of improvements in gross margin due to limited pricing power to offset rising costs. We are also providing our third quarter projections, including approximately 1,600-1,800 orders, which should result in 7,350-7,550 orders for the year. We also project 1,750-1,850 homes closings in the third quarter for home closing revenue of $740-760 million, and 7,300-7,600 closings for revenue of $2.9-3.1 billion for the year. We expect home closing gross margins of approximately 17.5-18.0% for the third quarter and for the year. With those projections, we expect to deliver diluted EPS of $0.80-0.85 for the third quarter and $3.55-3.85 for the year."

SECOND QUARTER RESULTS

  • Net earnings of $39.9 million ($0.95 per diluted share) for the second quarter of 2016, compared to prior year net earnings of $29.1 million ($0.70 per diluted share), primarily reflects higher home closing revenues and greater overhead operating leverage.
  • Home closing revenue increased 35% due to a 25% increase in home closings combined with a 7% increase in average price over the prior year period. The West region (California, Colorado and Arizona) led with a 51% increase in home closing revenue over the second quarter of 2015, followed by 30% growth in the East region (Florida, Georgia, the Carolinas and Tennessee) and a 19% growth in the Central region (Texas).
  • Home closing gross profit increased 21% to $137.7 million for the second quarter of 2016, including $2.0 million of real estate impairments, compared to $114.2 million in the second quarter of 2015, which included $1.8 million of impairments. Second quarter home closing gross margin was 17.3% in 2016 (17.6% before impairments), compared to 19.3% in 2015 (19.6% before impairments), primarily reflecting higher land and labor costs, in addition to fewer closings of homes in high-margin communities.
  • Commissions and other sales costs totaled 7.1% of home closing revenue in the second quarter of 2016, compared to 7.6% in the second quarter of 2015, reflecting the impact of recent company initiatives.
  • General and administrative expenses for the second quarter of 2016 also benefited from improved operating leverage on higher revenue, decreasing 100 basis points to 3.6% of total closing revenue in 2016 from 4.6% in 2015.
  • Interest expense declined to $1.7 million or 0.2% of second quarter 2016 revenue from $4.6 million or 0.8% of total second quarter 2015 revenue, due to additional interest capitalized to an increased level of real-estate assets under development.
  • Second quarter effective tax rate increased to 32% in 2016 from 30% in the second quarter of 2015, and consistent with management's projected 32% for the full year 2016. Meritage benefits from a lower effective tax rate than statutory rates due to energy tax credits captured on its energy-efficient homes (currently approved through the remainder of 2016) and manufacturing credits.
  • Second quarter 2016 orders for new homes increased 4% over the prior year and total order value increased 9% year over year. The total value of homes ordered increased 19% in the East and 15% in the West region, partially offset by a 9% decline in Texas.
  • Total active community count was 241 at June 30, 2016, essentially flat year over year. Average orders per community increased marginally to 8.6 for the second quarter of 2016 from 8.5 in 2015.

YEAR TO DATE RESULTS

  • Net earnings were $60.8 million for the first half of 2016, compared to $45.5 million for the first half of 2015, primarily driven by a 26% increase in home closing revenue.
  • Home closings for the first half of the year increased 19% over 2015, combined with a 6% increase in average prices.
  • Home closing gross profit increased 15% to $241.1 million in the first half of 2016 compared to $209.7 million in the first half of 2015.
  • Gross margin was 17.3% in the first half of 2016 compared to 18.9% in 2015, reflecting continued cost and pricing headwinds.
  • Total commissions and selling expenses declined 40 basis points to 7.4% of year-to-date 2016 home closing revenue from 7.8% in 2015, while general and administrative expenses declined 90 basis points to 4.2% of total closing revenue in the first half of 2016, compared to 5.1% in 2015.

BALANCE SHEET

  • Cash and cash equivalents at June 30, 2016, totaled $128.2 million, compared to $262.2 million at December 31, 2015, primarily reflecting investments in real estate to replace lots and position the company for future growth.
  • Real estate assets increased by $203.0 million in the first half of the year, ending at $2.30 billion at June 30, 2016, compared to $2.10 billion at December 31, 2015.
  • Meritage ended the second quarter of 2016 with approximately 28,900 total lots under control, compared to approximately 29,100 total lots at June 30, 2015 and 27,800 at year-end 2015.
  • Net debt-to-capital ratio at June 30, 2016 was 42.6%, compared to 40.4% at December 31, 2015, due to the intended use of cash to replenish the pipeline for land and development, and a growing inventory of homes under construction during the second quarter of 2016.

CONFERENCE CALL

Management will host a conference call today to discuss the Company's results at 10:30 a.m. Eastern Time (7:30 a.m. Arizona Time). 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 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/10088999.

Telephone participants who are unable to pre-register may dial in to 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 until August 11, 2016, beginning at approximately 12:30 p.m. ET on July 28, 2016 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 10088999.

  
  
Meritage Homes Corporation and Subsidiaries 
Consolidated Income Statements 
(Unaudited) 
(In thousands, except per share data) 
  
   Three Months Ended
June 30,
  Six Months Ended
June 30,
 
   2016   2015   2016   2015  
Homebuilding:                     
 Home closing revenue  $795,845   $591,027   $1,391,462   $1,108,300  
 Land closing revenue   2,051    6,774    4,200    8,213  
  Total closing revenue   797,896    597,801    1,395,662    1,116,513  
 Cost of home closings   (658,099 )  (476,790 )  (1,150,369 )  (898,576 )
 Cost of land closings   (1,693 )  (6,262 )  (3,393 )  (7,547 )
  Total cost of closings   (659,792 )  (483,052 )  (1,153,762 )  (906,123 )
 Home closing gross profit   137,746    114,237    241,093    209,724  
 Land closing gross profit   358    512    807    666  
  Total closing gross profit   138,104    114,749    241,900    210,390  
Financial Services:                     
 Revenue   3,476    2,741    5,976    5,276  
 Expense   (1,508 )  (1,362 )  (2,754 )  (2,661 )
 Earnings from financial services unconsolidated entities and other, net   3,795    2,757    6,587    5,301  
  Financial services profit   5,763    4,136    9,809    7,916  
Commissions and other sales costs   (56,379 )  (45,167 )  (102,556 )  (86,779 )
General and administrative expenses   (28,898 )  (27,650 )  (58,516 )  (57,300 )
Earnings/(loss) from other unconsolidated entities, net   573    (169 )  416    (292 )
Interest expense   (1,672 )  (4,621 )  (4,960 )  (7,775 )
Other income, net   1,545    136    1,828    551  
Earnings before income taxes   59,036    41,414    87,921    66,711  
Provision for income taxes   (19,158 )  (12,281 )  (27,074 )  (21,178 )
Net earnings  $39,878   $29,133   $60,847   $45,533  
                      
Earnings per share:                     
 Basic                     
   Earnings per share  $1.00   $0.73   $1.52   $1.15  
   Weighted average shares outstanding   40,012    39,648    39,926    39,520  
 Diluted                     
   Earnings per share  $0.95   $0.70   $1.45   $1.10  
   Weighted average shares outstanding   42,533    42,145    42,477    42,079  
                 
 
Meritage Homes Corporation and Subsidiaries
Consolidated Balance Sheets
(In thousands)
(unaudited)
 
   June 30,
2016
 December 31,
2015
Assets:        
 Cash and cash equivalents   128,171   262,208
 Other receivables   68,837   57,296
 Real estate (1)   2,301,305   2,098,302
 Deposits on real estate under option or contract   91,444   87,839
 Investments in unconsolidated entities   11,188   11,370
 Property and equipment, net   34,009   33,970
 Deferred tax asset   58,840   59,147
 Prepaids, other assets and goodwill   67,361   69,645
  Total assets  $2,761,155  $2,679,777
Liabilities:        
 Accounts payable   126,028   106,440
 Accrued liabilities   154,643   161,163
 Home sale deposits   39,646   36,197
 Loans payable and other borrowings   19,889   23,867
 Senior and convertible senior notes, net   1,094,146   1,093,173
   Total liabilities   1,434,352   1,420,840
Stockholders' Equity:        
 Preferred stock   -   -
 Common stock   400   397
 Additional paid-in capital   566,508   559,492
 Retained earnings   759,895   699,048
   Total stockholders' equity   1,326,803   1,258,937
  Total liabilities and stockholders' equity  $2,761,155  $2,679,777
(1)Real estate - Allocated costs:        
 Homes under contract under construction  $607,390  $456,138
 Unsold homes, completed and under construction   274,824   307,425
 Model homes   146,707   138,546
 Finished home sites and home sites under development   1,272,384   1,196,193
   Total real estate  $2,301,305  $2,098,302
       
  
Supplemental Information and Non-GAAP Financial Disclosures (Dollars in thousands - unaudited): 
  
   Three Months Ended June 30,   Six Months Ended June 30,  
   2016   2015   2016   2015  
Depreciation and amortization  $4,198   $3,518   $7,600   $6,729  
                      
Summary of Capitalized Interest:                     
Capitalized interest, beginning of period  $64,126   $56,843   $61,202   $54,060  
Interest incurred   17,713    16,526    35,272    31,808  
Interest expensed   (1,672 )  (4,621 )  (4,960 )  (7,775 )
Interest amortized to cost of home and land closings   (15,485 )  (9,878 )  (26,832 )  (19,223 )
Capitalized interest, end of period  $64,682   $58,870   $64,682   $58,870  
                      
   June 30,
2016
  December 31,
2015
         
Notes payable and other borrowings   1,114,035    1,117,040            
Stockholders' equity   1,326,803    1,258,937            
Total capital   2,440,838    2,375,977            
Debt-to-capital   45.6 %  47.0 %          
Notes payable and other borrowings   1,114,035    1,117,040            
 Less: cash and cash equivalents  $(128,171 ) $(262,208 )          
Net debt   985,864    854,832            
Stockholders' equity   1,326,803    1,258,937            
Total net capital  $2,312,667   $2,113,769            
Net debt-to-capital   42.6 %  40.4 %          
                 
  
Meritage Homes Corporation and Subsidiaries 
Consolidated Statements of Cash Flows 
(In thousands) (unaudited) 
  
   Six Months Ended June 30,  
   2016   2015  
Cash flows from operating activities:           
 Net earnings  $60,847   $45,533  
 Adjustments to reconcile net earnings to net cash used in operating activities:           
  Depreciation and amortization   7,600    6,729  
  Stock-based compensation   7,313    8,465  
  Excess income tax provision/(benefit) from stock-based awards   526    (2,012 )
  Equity in earnings from unconsolidated entities   (7,003 )  (5,009 )
  Distribution of earnings from unconsolidated entities   7,343    5,769  
  Other   3,262    424  
 Changes in assets and liabilities:           
  Increase in real estate   (193,981 )  (144,450 )
  (Increase)/decrease in deposits on real estate under option or contract   (3,551 )  3,604  
  Increase in other receivables, prepaids and other assets   (9,368 )  (10,346 )
  Increase in accounts payable and accrued liabilities   12,944    4,996  
  Increase in home sale deposits   3,449    9,349  
  Net cash used in operating activities   (110,619 )  (76,948 )
Cash flows from investing activities:           
 Investments in unconsolidated entities   (159 )  (282 )
 Purchases of property and equipment   (7,570 )  (7,829 )
 Proceeds from sales of property and equipment   87    62  
 Maturities/sales of investments and securities   645    -  
 Payments to purchase investments and securities   (645 )  -  
  Net cash used in investing activities   (7,642 )  (8,049 )
Cash flows from financing activities:           
 Repayment of loans payable and other borrowings   (15,482 )  (3,211 )
 Proceeds from issuance of senior notes   -    200,000  
 Debt issuance costs   -    (2,955 )
 Excess income tax (provision)/benefit from stock-based awards   (526 )  2,012  
 Proceeds from stock option exercises   232    2,839  
  Net cash (used in)/provided by financing activities   (15,776 )  198,685  
Net (decrease)/increase in cash and cash equivalents   (134,037 )  113,688  
Beginning cash and cash equivalents   262,208    103,333  
Ending cash and cash equivalents  $128,171   $217,021  
         
 
Meritage Homes Corporation and Subsidiaries
Operating Data
(Dollars in thousands) (unaudited)
             
   Three Months Ended June 30,
   2016  2015
   Homes  Value  Homes  Value
Homes Closed:              
 Arizona  279  $94,048  229  $71,878
 California  280   156,058  176   95,763
 Colorado  169   82,472  113   52,133
 West Region  728   332,578  518   219,774
 Texas  556   206,907  509   174,397
 Central Region  556   206,907  509   174,397
 Florida  257   103,342  210   91,491
 Georgia  81   27,383  42   13,057
 North Carolina  179   76,507  135   50,214
 South Carolina  88   27,748  91   27,258
 Tennessee  61   21,380  51   14,836
 East Region  666   256,360  529   196,856
 Total  1,950  $795,845  1,556  $591,027
Homes Ordered:              
 Arizona  331  $115,812  320  $102,714
 California  289   165,931  237   131,814
 Colorado  169   84,398  181   84,421
 West Region  789   366,141  738   318,949
 Texas  550   202,948  635   224,195
 Central Region  550   202,948  635   224,195
 Florida  267   106,913  218   92,663
 Georgia  115   38,356  53   16,690
 North Carolina  159   66,944  181   72,667
 South Carolina  118   38,468  99   29,473
 Tennessee  75   25,576  62   21,178
 East Region  734   276,257  613   232,671
 Total  2,073  $845,346  1,986  $775,815
           
             
   Six Months Ended June 30,
   2016  2015
   Homes  Value  Homes  Value
Homes Closed:              
 Arizona  496  $169,047  415  $134,479
 California  487   276,778  329   182,186
 Colorado  307   147,799  241   109,987
 West Region  1,290   593,624  985   426,652
 Texas  1,021   366,878  949   326,984
 Central Region  1,021   366,878  949   326,984
 Florida  413   166,664  387   164,322
 Georgia  146   49,397  94   28,515
 North Carolina  297   126,884  224   85,189
 South Carolina  155   48,919  167   51,818
 Tennessee  116   39,096  85   24,820
 East Region  1,127   430,960  957   354,664
 Total  3,438  $1,391,462  2,891  $1,108,300
Homes Ordered:              
 Arizona  590  $205,992  608  $193,305
 California  559   316,943  547   309,911
 Colorado  338   171,024  370   169,828
 West Region  1,487   693,959  1,525   673,044
 Texas  1,141   419,013  1,192   409,327
 Central Region  1,141   419,013  1,192   409,327
 Florida  494   199,507  466   201,520
 Georgia  220   73,551  130   40,908
 North Carolina  348   144,025  329   134,292
 South Carolina  225   72,689  195   59,001
 Tennessee  145   47,202  128   40,535
 East Region  1,432   536,974  1,248   476,256
 Total  4,060  $1,649,946  3,965  $1,558,627
               
Order Backlog:              
 Arizona  411  $154,851  385  $125,044
 California  361   224,311  430   251,688
 Colorado  363   185,376  397   181,474
 West Region  1,135   564,538  1,212   558,206
 Texas  1,062   402,329  1,101   391,384
 Central Region  1,062   402,329  1,101   391,384
 Florida  368   150,849  316   139,768
 Georgia  169   57,580  89   28,977
 North Carolina  311   128,619  290   117,271
 South Carolina  158   53,881  98   33,303
 Tennessee  111   38,369  82   27,870
 East Region  1,117   429,298  875   347,189
 Total  3,314  $1,396,165  3,188  $1,296,779
            
 
Meritage Homes Corporation and Subsidiaries
Operating Data
(unaudited)
             
   Three Months Ended June 30,
   2016  2015
   Ending  Average  Ending  Average
Active Communities:            
 Arizona  43  42.5  43  43.5
 California  25  24.5  20  20.5
 Colorado  12  13.0  16  16.0
 West Region  80  80.0  79  80.0
 Texas  73  71.5  66  63.5
 Central Region  73  71.5  66  63.5
 Florida  26  26.0  30  28.0
 Georgia  17  17.5  16  14.5
 North Carolina  22  23.0  25  24.0
 South Carolina  16  16.0  20  20.0
 Tennessee  7  8.0  4  4.5
 East Region  88  90.5  95  91.0
 Total  241  242.0  240  234.5
         
             
   Six Months Ended June 30,
   2016  2015
   Ending  Average  Ending  Average
Active Communities:            
 Arizona  43  42.0  43  42.0
 California  25  24.5  20  22.0
 Colorado  12  14.0  16  16.5
 West Region  80  80.5  79  80.5
 Texas  73  72.5  66  62.5
 Central Region  73  72.5  66  62.5
 Florida  26  28.5  30  29.5
 Georgia  17  17.0  16  14.5
 North Carolina  22  24.0  25  23.0
 South Carolina  16  17.0  20  20.0
 Tennessee  7  8.0  4  4.5
 East Region  88  94.5  95  91.5
 Total  241  247.5  240  234.5
         

About Meritage Homes Corporation

Meritage Homes is the seventh-largest public homebuilder in the United States, based on homes closed in 2015. 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's East Bay, the Central Valley and Orange County, California; Houston, Dallas-Ft. Worth, Austin and San Antonio, Texas; Phoenix/Scottsdale, Green Valley and Tucson, Arizona; Denver and Fort Collins, Colorado; Orlando and Tampa, Florida; Raleigh and Charlotte, North Carolina; Greenville-Spartanburg and York County, South Carolina; Nashville, Tennessee; and Atlanta, Georgia.

Meritage Homes has designed and built more than 95,000 homes in its 30-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 in 2013, 2014, 2015 and 2016 for innovation and industry leadership in energy efficient homebuilding. For more information, visit meritagehomes.com.

This press release and the accompanying comments during our analyst call contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements include management's expectations with respect to future revenue and earnings growth, projected orders, home closings and home closing revenue, home closing gross margins, tax rates and diluted earnings per share for the third quarter and full year 2016.

Such statements are based upon the current beliefs and expectations of Company management, and current market conditions, which are subject to significant risks and uncertainties. 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: the availability and cost of finished lots and undeveloped land; interest rates and changes in the availability and pricing of residential mortgages; fluctuations in the availability and cost of labor; changes in tax laws that adversely impact us or our homebuyers; reversal of the current economic recovery; 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 slower order 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 option deposits; our potential exposure to 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; 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 due to a downgrade of our credit ratings; our ability to successfully integrate acquired companies and achieve anticipated benefits from these acquisitions; our compliance with government regulations and the effect of legislative 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, 2015 and subsequent quarterly reports on Forms 10-Q under the caption "Risk Factors," which can be found on our website.

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