SOURCE: Meritage Homes Corp.

April 23, 2014 08:15 ET

Meritage Homes Reports Results for the First Quarter of 2014

First Quarter EPS of $0.62 Increased 94% Compared to 2013; Home Closing Revenue Grew 23% and Home Closing Gross Margin Increased to 22.8%

SCOTTSDALE, AZ--(Marketwired - Apr 23, 2014) - Meritage Homes Corporation (NYSE: MTH), a leading U.S. homebuilder, today announced first quarter results for the period ended March 31, 2014.

 
Summary Operating Results (unaudited)
(Dollars in thousands, except per share amounts)
 
 
    Three Months Ended March 31,
    2014   2013   %Chg
Homes closed (units)     1,109     1,052   5 %
Home closing revenue   $ 405,779   $ 330,710   23 %
Average sales price - closings   $ 366   $ 314   16 %
Home orders (units)     1,525     1,547   (1 )%
Home order value   $ 555,040   $ 520,403   7 %
Average sales price - orders   $ 364   $ 336   8 %
Ending backlog (units)     2,269     1,967   15 %
Ending backlog value   $ 835,933   $ 668,959   25 %
Average sales price - backlog   $ 368   $ 340   8 %
Net earnings   $ 25,377   $ 12,041   111 %
Diluted EPS   $ 0.62   $ 0.32   94 %
                   

MANAGEMENT COMMENTS

"We achieved another quarter of strong revenue and earnings growth, generating the second highest quarterly pre-tax earnings we've reported in almost eight years," said Steven J. Hilton, chairman and chief executive officer of Meritage Homes. "We grew home closing revenue by 23% and leveraged that with an improved gross margin to produce a 44% increase in gross profit on home closings, which led to a 111% increase in net earnings over the first quarter of 2013.

"Both our total order value and backlog value grew year over year, and total orders were nearly as high as last year's first quarter, which was up 35% over 2012, making for a difficult comparison," said Mr. Hilton. "Our Texas and southeastern markets grew enough to offset the decline in total order value from our western markets, showing the benefit of our strategic diversification. Orders in Texas were up 26% over 2013's first quarter, and our East region produced 22% year-over-year growth as our new markets in the Carolinas and Florida contributed significantly to our total results.

"The high-pitched pace of sales in our western region has slowed in recent quarters after experiencing very robust demand and significant increases in home prices since 2012," he explained. "Demand in Arizona has softened over the last several months and home prices there have moderated. On the other hand, demand in California and Colorado remains strong, though not as intense as a year ago. We continue to focus on maximizing profitability at a more normalized sales pace."

He concluded, "We remain committed to our forecast of approximately 210-220 active communities by year-end 2014. Based on the trends in sales pace and prices that we've experienced so far this year, we are projecting that our 2014 home closing gross margin may be relatively flat compared to 2013, due to less pricing power and higher land costs. With that in mind, we believe we will still achieve significant earnings growth in 2014, and that future years' earnings growth will be driven mainly by community count growth and operating leverage as we expand and grow our top line while managing our costs."

FIRST QUARTER RESULTS

  • Net earnings increased by $13.3 million for the first quarter to $25.4 million or $0.62 per diluted share, from $12.0 million or $0.32 per diluted share in the first quarter of 2013, driven by higher home closing revenue and gross margins, assisted by additional operating leverage.
  • Home closing revenue increased 23% over the prior year, resulting from a 5% increase in home closings and a 16% increase in the average price of homes closed during the quarter. Closing revenue grew across all three regions and five of the six states where Meritage operated continuously in both years. Meritage's East region grew home closing revenue by 70% year over year, with 59% increases in Florida and the Carolinas. The Central region followed with a 30% increase in Texas. Total home closing revenue increased 4% in the West region, with Arizona up 26% and Colorado up 24%, while California was off 12% from the first quarter of 2013, when it led the company with 172% growth in home closing revenue over the first quarter of 2012.
  • Home closing gross margin increased 330 basis points (bps) to 22.8% in the first quarter of 2014 compared to 19.5% in the first quarter of 2013, as home prices increased more than did the costs of land and construction.
  • Commissions and other sales costs in the first quarter decreased slightly as a percentage of home closing revenue to 7.6% in 2014 compared to 7.8% in 2013.
  • General and administrative expenses for the first quarter decreased as a percentage of total closing revenue to 5.3% in 2014, compared to 5.9% in 2013.
  • Interest expense declined to 0.7% of first quarter closing revenue in 2014 compared to 1.5% in 2013, with a larger portion of interest capitalized to lots and homes under development.
  • Pre-tax margin increased 480 bps to 9.7% in the first quarter of 2014 from 4.9% in 2013.
  • Total order value grew 7% to $555.0 million, the second highest quarter for Meritage since the first quarter of 2007, driven primarily by Texas, which generated a $61.1 million year-over-year increase in total order value, 47% higher than 2013. For the company as a whole, an 8% increase in the average selling price of homes ordered more than offset the 1% decline in order volume from the first quarter of 2013.
  • Total orders for 1,525 homes represented the third highest quarterly orders for Meritage in the last six years. Only the first two quarters of 2013 were higher, when average orders per community were at their highest level since the second quarter of 2006.
  • After more than two years of exceptionally strong growth through the first half of 2013, first quarter 2014 orders were down 25% in California and 12% in Colorado compared to 2013. California still led the company with 12.2 orders per average active community during the first quarter of 2014, and Colorado reported an average of 9.2 per average active community, well above the company average. Arizona's sales pace and order volume declined 32% and 28%, respectively, from the first quarter of 2013.
  • The East region, consisting of Florida, Tennessee and the Carolinas, increased total orders by 22% by expanding average active community count by 43%, partially offset by a 15% decline in average orders per community. Most of the growth came from Meritage's newest markets in the Carolinas and Tennessee.
  • Ending community count at March 31, 2014 was 189 active communities, compared to 168 at March 31, 2013.
  • Order cancellation rate remained low at 13% in the first quarter of 2014 compared to 11% in 2013.
  • Ending backlog value was 25% higher at March 31, 2014 than it was a year earlier, with units in backlog up 15% and average price was 8% higher than it was at March 31, 2013.

BALANCE SHEET

  • The company ended the first quarter of 2014 with $338.7 million in cash and cash equivalents, investments and securities, with no restricted cash, compared to $363.8 million at December 31, 2013, and $452.9 million on March 31, 2013, which included $38.9 million in restricted cash.
  • In January 2014, Meritage issued approximately 2.53 million shares of common stock for net proceeds of approximately $110 million, to use for working capital, potential expansion into new markets and/or expansion of existing markets, including the possible acquisition of other homebuilders or assets and general corporate purposes.
  • Net debt-to-capital ratio at quarter-end was 36.6% compared to 39.1% at December 31, 2013 and 37.6% at March 31, 2013.
  • Real estate assets increased to $1.54 billion at March 31, 2014, compared to $1.41 billion at December 31 and $1.15 billion at March 31, 2013.
  • Total lot supply at the end of the quarter was approximately 25,800, compared to approximately 21,000 a year earlier. Based on trailing twelve months closings, the March 31, 2014 balance represents a 4.9 year supply of lots.

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. Pacific 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/10043762.

Telephone participants who are unable to pre-register may dial in to 888-317-6016 on the day of the call. International dial-in number is 1-412-317-6016.

A replay of the call will be available for fifteen days, beginning at 12:30 p.m. ET on April 24, 2014 on the website noted above, or by dialing 877-344-7529, and referencing conference number 10043762. For more information, visit meritagehomes.com.

   
   
Meritage Homes Corporation and Subsidiaries  
Consolidated Income Statements  
(Unaudited)  
(In thousands, except per share data)  
   
  Three Months Ended March 31,  
  2014     2013  
Homebuilding:              
  Home closing revenue $ 405,779     $ 330,710  
  Land closing revenue   2,566       5,725  
    Total closing revenue   408,345       336,435  
  Cost of home closings   (313,180 )     (266,350 )
  Cost of land closings   (3,593 )     (5,550 )
    Total cost of closings   (316,773 )     (271,900 )
  Home closing gross profit   92,599       64,360  
  Land closing gross (loss)/profit   (1,027 )     175  
    Total closing gross profit   91,572       64,535  
Financial Services:              
  Revenue   1,899       842  
  Expense   (1,075 )     (573 )
  Earnings from financial services unconsolidated entities and other, net   2,201       2,787  
    Financial services profit   3,025       3,056  
Commissions and other sales costs   (30,934 )     (25,879 )
General and administrative expenses   (21,671 )     (19,724 )
Loss from other unconsolidated entities, net   (169 )     (155 )
Interest expense   (2,713 )     (5,128 )
Other income, net   648       470  
Loss on early extinguishment of debt   --       (700 )
Earnings before income taxes   39,758       16,475  
Provision for income taxes   (14,381 )     (4,434 )
Net earnings $ 25,377     $ 12,041  
               
Earnings per share:              
  Basic              
      Earnings per share $ 0.66     $ 0.34  
      Weighted average shares outstanding   38,687       35,798  
  Diluted              
      Earnings per share $ 0.62     $ 0.32  
      Weighted average shares outstanding   41,308       38,440  
 
 
 
Meritage Homes Corporation and Subsidiaries
Consolidated Balance Sheets
(In thousands)
(unaudited)
 
  March 31, 2014   December 31, 2013
Assets:          
  Cash and cash equivalents $ 260,956   $ 274,136
  Investments and securities   77,698     89,687
  Other receivables   54,165     38,983
  Real estate (1)   1,538,218     1,405,299
  Real estate not owned   48     289
  Deposits on real estate under option or contract   54,666     51,595
  Investments in unconsolidated entities   9,756     11,638
  Property and equipment, net   26,726     22,099
  Deferred tax asset   69,235     70,404
  Prepaids, other assets and goodwill   37,885     39,231
    Total assets $ 2,129,353   $ 2,003,361
Liabilities:          
  Accounts payable $ 76,192   $ 68,018
  Accrued liabilities   141,771     166,611
  Home sale deposits   23,835     21,996
  Liabilities related to real estate not owned   48     289
  Senior, convertible senior notes and other borrowings   904,913     905,055
    Total liabilities   1,146,759     1,161,969
Stockholders' Equity:          
  Preferred stock   --     --
  Common stock   391     362
  Additional paid-in capital   528,757     412,961
  Retained earnings   453,446     428,069
    Total stockholders' equity   982,594     841,392
  Total liabilities and stockholders' equity $ 2,129,353   $ 2,003,361
(1)Real estate - Allocated costs:          
  Homes under contract under construction $ 313,527   $ 262,633
  Unsold homes, completed and under construction   165,813     147,889
  Model homes   84,973     81,541
  Finished home sites and home sites under development   874,760     813,135
  Land held for development   50,811     52,100
  Land held for sale   24,548     19,112
  Communities in mothball status   23,786     28,889
    Total real estate $ 1,538,218   $ 1,405,299
   
   
   
Supplemental Information and Non-GAAP Financial Disclosures (In thousands - unaudited):  
   
  Three Months Ended March 31,  
  2014     2013  
Depreciation and amortization $ 2,512     $ 2,158  
               
Summary of Capitalized Interest:              
Capitalized interest, beginning of period $ 32,992     $ 21,600  
Interest incurred   14,256       12,726  
Interest expensed   (2,713 )     (5,128 )
Interest amortized to cost of home and land closings   (5,834 )     (5,000 )
Capitalized interest, end of period $ 38,701     $ 24,198  
               
  March 31, 2014     December 31, 2013  
Notes payable and other borrowings $ 904,913     $ 905,055  
Stockholders' equity   982,594       841,392  
Total capital   1,887,507       1,746,447  
Debt-to-capital   47.9 %     51.8 %
               
Notes payable and other borrowings $ 904,913     $ 905,055  
  Less: cash and cash equivalents and investments and securities   (338,654 )     (363,823 )
Net debt   566,259       541,232  
Stockholders' equity   982,594       841,392  
Total net capital $ 1,548,853     $ 1,382,624  
Net debt-to-capital   36.6 %     39.1 %
   
   
   
Meritage Homes Corporation and Subsidiaries  
Consolidated Statements of Cash Flows  
(In thousands) (unaudited)  
   
  Three Months Ended March 31,  
  2014     2013  
Cash flows from operating activities:              
  Net earnings $ 25,377     $ 12,041  
  Adjustments to reconcile net earnings to net cash used in operating activities:              
    Depreciation and amortization   2,513       2,158  
    Stock-based compensation   2,411       1,844  
    Loss on early extinguishment of debt   --       700  
    Equity in earnings from unconsolidated entities   (2,032 )     (2,632 )
    Deferred tax asset valuation benefit   --       (464 )
    Distribution of earnings from unconsolidated entities   3,955       3,722  
    Other   1,843       3,632  
  Changes in assets and liabilities:              
    Increase in real estate   (134,807 )     (38,876 )
    (Increase)/decrease in deposits on real estate under option or contract   (3,071 )     3,030  
    Increase in receivables and prepaid expenses and other assets   (13,998 )     (5,312 )
    (Decrease)/increase in accounts payable and accrued liabilities   (15,697 )     14,671  
    Increase in home sale deposits   1,839       5,367  
    Net cash used in operating activities   (131,667 )     (119 )
Cash flows from investing activities:              
  Purchases of property and equipment   (6,995 )     (2,704 )
  Maturities of investments and securities   47,533       43,999  
  Payments to purchase investments and securities   (35,514 )     (46,826 )
  Other   49       79  
    Net cash provided by/(used in) investing activities   5,073       (5,452 )
Cash flows from financing activities:              
  Repayments of senior and senior subordinated notes   --       (17,264 )
  Proceeds from issuance of senior notes   --       175,000  
  Proceeds from sale of common stock, net   110,432       --  
  Other   2,982       2,399  
    Net cash provided by financing activities   113,414       160,135  
Net (decrease)/increase in cash and cash equivalents   (13,180 )     154,564  
Beginning cash and cash equivalents   274,136       170,457  
Ending cash and cash equivalents (2) $ 260,956     $ 325,021  
 
(2) Ending cash and cash equivalents as excludes investments and securities totaling $77.7 million as of March 31, 2014 and excludes investments and securities and restricted cash of $127.8 million as of March 31, 2013.
 
 
 
Meritage Homes Corporation and Subsidiaries
Operating Data
(Dollars in thousands)
(unaudited)
 
  Three Months Ended
  March 31, 2014   March 31, 2013
  Homes   Value   Homes   Value
Homes Closed:                  
  Arizona 211   $ 71,782   192   $ 57,149
  California 165     79,927   228     90,642
  Colorado 89     39,922   94     32,204
  Nevada --     --   16     3,569
  West Region 465     191,631   530     183,564
  Texas 403     118,199   354     90,705
  Central Region 403     118,199   354     90,705
  Carolinas 55     22,579   40     14,215
  Florida 163     67,098   128     42,226
  Tennessee 23     6,272   --     --
  East Region 241     95,949   168     56,441
  Total 1,109   $ 405,779   1,052   $ 330,710
Homes Ordered:                  
  Arizona 228   $ 75,647   318   $ 97,708
  California 237     120,052   314     133,631
  Colorado 124     54,758   141     56,795
  Nevada --     --   23     5,506
  West Region 589     250,457   796     293,640
  Texas 634     192,231   503     131,130
  Central Region 634     192,231   503     131,130
  Carolinas 81     34,019   69     26,886
  Florida 173     64,616   179     68,747
  Tennessee 48     13,717   --     --
  East Region 302     112,352   248     95,633
  Total 1,525   $ 555,040   1,547   $ 520,403
Order Backlog:                  
  Arizona 295   $ 101,104   375   $ 121,375
  California 297     147,588   401     167,577
  Colorado 237     107,220   189     74,680
  Nevada --     --   21     5,042
  West Region 829     355,912   986     368,674
  Texas 1,023     319,687   649     172,742
  Central Region 1,023     319,687   649     172,742
  Carolinas 134     54,658   78     30,012
  Florida 218     86,790   254     97,531
  Tennessee 65     18,886   --     --
  East Region 417     160,334   332     127,543
  Total 2,269   $ 835,933   1,967   $ 668,959
               
 
 
Meritage Homes Corporation and Subsidiaries
Operating Data
(unaudited)
 
  Three Months Ended
  March 31, 2014   March 31, 2013
  Beg.   End   Beg.   End
Active Communities:              
  Arizona 40   41   38   40
  California 22   17   17   15
  Colorado 14   13   12   11
  Nevada --   --   1   --
  West Region 76   71   68   66
  Texas 70   77   65   69
  Central Region 70   77   65   69
  Carolinas 17   18   7   11
  Florida 20   17   18   22
  Tennessee 5   6   --   --
  East Region 42   41   25   33
  Total 188   189   158   168
                 

About Meritage Homes Corporation

Meritage Homes is the ninth-largest public homebuilder in the United States, based on homes closed in 2013. Meritage builds and sells single-family homes for first-time, move-up, luxury and active adult buyers across the Western, Southern and Southeastern United States. As of March 31, 2014, the company had 189 actively selling communities 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, Colorado; Orlando and Tampa, Florida; Raleigh and Charlotte, North Carolina; York County, South Carolina and Nashville, Tennessee.

Meritage has designed and built more than 80,000 homes in its 28-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 in 2013 and 2014, for innovation and industry leadership in energy efficient homebuilding. Meritage was the first national homebuilder to be 100 percent ENERGY STAR qualified in every home it builds, and far exceeds ENERGY STAR standards today.

For more information, visit meritagehomes.com.

This press release contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements include management's expectations for positive housing market conditions, its projected community count, flat margins for 2014, and revenue and earnings growth for 2014 and beyond.

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. The risks and uncertainties include but are not limited to the following: the availability of finished lots and undeveloped land;interest rates and changes in the availability and pricing of residential mortgages; the availability and cost of labor; adverse changes in tax laws that benefit our homebuyers; the ability of our potential buyers to sell their existing homes; cancellation rates and home prices in our markets; weakness in the homebuilding market resulting from an unexpected setback in the current economic recovery; inflation in the cost of materials used to construct homes; the adverse effect of slower order absorption rates; potential write-downs or write-offs of assets, including pre-acquisition costs and deposits; a change feasibility of projects under option or contract that could result in the write-off of option deposits; our potential exposure to natural disasters; competition; the adverse impacts of cancellations resulting from small deposits relating to our sales contracts; construction defect and home warranty claims; our success in prevailing on contested tax positions; our ability to obtain performance bonds in connection with our development work; the liquidity of our joint ventures and the ability of our joint venture partners to meet their obligations to us and the joint venture; the loss of key personnel; changes in or our failure to comply with laws and regulations; our lack of geographic diversification; fluctuations in quarterly operating results; our financial leverage and level of indebtedness and our ability to take certain actions because of restrictions contained in the indentures for our senior notes and our ability to raise additional capital when and if needed; our credit ratings; successful integration of future acquisitions; our compliance with government regulations and the effect of legislative or other initiatives that seek to restrain growth or new housing construction or similar measures; acts of war; the replication of our "Green" 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, 2013 under the caption "Risk Factors," which can be found on our website.

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