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Meritage Homes reports third quarter 2016 diluted EPS of $0.88 on a 22% increase in net earnings, with 11% growth in home closing revenue and home orders

SCOTTSDALE, Ariz., Oct. 27, 2016 (GLOBE NEWSWIRE) -- Meritage Homes Corporation (NYSE:MTH), a leading U.S. homebuilder, announced today third quarter results for the period ended September 30, 2016.

Summary Operating Results (unaudited)
(Dollars in thousands, except per share amounts)
Three Months Ended September 30, Nine Months Ended September 30,
2016 2015 % Chg 2016 2015 % Chg
Homes closed (units) 1,800 1,712 5% 5,238 4,603 14%
Home closing revenue $735,870 $661,884 11% $2,127,332 $1,770,184 20%
Average sales price - closings $409 $387 6% $406 $385 6%
Home orders (units) 1,737 1,567 11% 5,797 5,532 5%
Home order value $715,562 $629,977 14% $2,365,508 $2,188,604 8%
Average sales price - orders $412 $402 2% $408 $396 3%
Ending backlog (units) 3,251 3,043 7%
Ending backlog value $1,375,857 $1,264,872 9%
Average sales price - backlog $423 $416 2%
Net earnings $36,887 $30,308 22% $97,734 $75,841 29%
Diluted EPS $0.88 $0.73 21% $2.33 $1.83 27%

MANAGEMENT COMMENTS

“We delivered another quarter of strong earnings growth as we continued to execute on our strategic plan,” said Steven J. Hilton, chairman and chief executive officer of Meritage Homes. “Earnings growth was driven primarily by increased home closing revenue on higher closing volumes. We delivered 1,800 homes during the quarter and celebrated the closing of our 100,000th home in October. We have expanded and diversified strategically over the past 31 years, and continue to have significant opportunities for growth.

“I am very pleased with the initial success we’re having in our ‘entry-level plus’ communities, including the first of our new LiVE.NOW.™ homes, which we unveiled earlier this month,” said Mr. Hilton. “We are offering homes that are a cut above traditional entry-level homes and include Meritage’s signature energy efficiency, designed to appeal to more discerning first-time buyers. Many of those are Millennials, who represent millions of additional household formations over the next decade or more, and additional growth potential for Meritage. Our enhanced product offering provides a broader range of affordably-priced homes to address pent-up demand, which we expect will produce top-line growth and operational efficiencies over time to drive additional earnings.”

He added, “We are benefitting from the numerous operational changes we made last year in our latest expansion markets and are experiencing higher absorptions in Georgia, North Carolina and Tennessee, which should lead to better returns and improved operating leverage for our company. As a result of those changes and stronger demand, we achieved a 14% increase in our orders per average community over last year’s third quarter, which drove our 11% order growth during the quarter," continued Mr. Hilton. “We believe the economic drivers of the housing market, including job growth, increased household formations and low interest rates, point to continued growth for well-positioned homebuilders.

“Based on our results for the first three quarters of the year and our positive outlook for the market, we have refined our projections for 2016 full year orders, closings, revenue and diluted earnings per share: We expect 7,300-7,500 orders and 7,300-7,500 home closings for full year home closing revenue of $2.9-3.1 billion in 2016. With a projected home closing gross margin of approximately 17.5% for the year, we expect to deliver full year diluted EPS of $3.40-3.60 for 2016.”

THIRD QUARTER RESULTS

  • Net earnings for the third quarter of 2016 were $36.9 million or $0.88 per diluted share, 22% higher than the $30.3 million or $0.73 per diluted share reported for the third quarter of 2015, primarily reflecting higher home closing revenue offsetting lower home closing gross margins in the 2016 quarter.
  • Home closing revenue increased 11% over the third quarter of 2015, combining a 5% increase in home closings with a 6% increase in the average price of homes closed during the quarter. The rise in average closing price was driven primarily by increased closings and higher average prices in the West region. Central region home closing revenue grew 9% on a 5% increase in closings over the prior year. Closings grew 10% in the East region, partially offset by a 3% decline in average closing price, for a 6% increase in home closing revenue.
  • Home closing gross margin of 17.8% in the third quarter of 2016 declined from 19.0% in the third quarter of 2015, though it improved sequentially from 17.3% in the second quarter of 2016. Margins have been compressed in 2016 primarily due to limited pricing power to offset increased land and construction costs.
  • Selling, general and administrative expenses were 11.4% of third quarter 2016 total closing revenue, compared to 11.5% in the prior year.
  • Interest expense decreased by $4.0 million to $0.2 million in the third quarter of 2016, as more interest incurred was capitalized to assets under development.
  • Other income/(expense) increased by a net $5.4 million in the third quarter of 2016 compared to 2015, reflecting a $4.1 million adverse legal ruling in 2015, while the 2016 quarter included additional income from municipalities related to reimbursable property development expenditures.
  • The effective tax rate was 31.4% in the third quarter of 2016, compared to 35.1% in the third quarter of 2015, reflecting the benefit from federal energy tax credits on Meritage’s highly energy efficient homes. The benefit was recognized in the third quarter of 2016 compared to the fourth quarter of 2015, following the legislative extension of energy tax credits.
  • Total order value grew 14% to $715.6 million in the third quarter of 2016, compared to $630.0 million in the third quarter of the prior year. Total orders increased 11% due to a 14% increase in orders per average community, despite a lower community count in the third quarter of 2016 than in 2015. Orders per average community were 7.3 in the third quarter of 2016 compared to 6.4 in the prior year. Average sales prices also rose 2% over 2015’s third quarter.
  • Ending community count at September 30, 2016 was 237, compared to 250 at September 30, 2015, with a 2% decline in average active communities for the third quarter of 2016 compared to 2015.
  • September 30th ending backlog value was 9% higher in 2016 than in 2015, combining 7% more units in backlog with a 2% increase in the average price of orders in backlog.

YEAR TO DATE RESULTS

  • Net earnings were $97.7 million or $2.33 per fully diluted share for the first nine months of 2016, compared to $75.8 million or $1.83 per diluted share for the first nine months of 2015, a 29% increase in net earnings and 27% increase in fully diluted EPS. The increased earnings were primarily the result of a 20% increase in 2016 year-to-date home closing revenue and greater overhead leverage, partially offset by lower home closing gross margins.
  • Home closings for the first three quarters of the year increased 14% over 2015, and average closing prices increased 6% for the same period.
  • Year-to-date home closing gross margin in 2016 was 17.5%, compared to 18.9% for 2015, reflecting limited pricing power relative to increased land and construction costs, as well as immature markets within the East region.
  • Total commissions and selling expenses declined to 7.3% of year-to-date 2016 home closing revenue from 7.6% in 2015. General and administrative expenses declined to 4.3% of total closing revenue in 2016 compared to 4.8% in 2015.
  • Interest expense for the first nine months of the year decreased to $5.1 million in 2016 compared to $12.0 million in 2015, as more interest was capitalized to assets under development.

BALANCE SHEET

  • The company ended the third quarter of 2016 with $107.9 million in cash and cash equivalents, compared to $262.2 million at December 31, 2015. The decrease in cash was primarily due to investments in real estate inventory as a result of organic growth. The company had $25 million drawn on its revolving credit facility at quarter-end, which was repaid in early October.
  • Real estate assets increased to $2.43 billion at September 30, 2016, compared to $2.10 billion at December 31, 2015, as the balance of homes under contract under construction increased $176 million, accounting for most of the increase.
  • Net debt-to-capital ratio at September 30 was 43.0%, consistent with June 30, 2016 at 42.6%, and up from 40.4% at December 31, 2015 due to the use of cash to replenish the company’s land pipeline, as well as a growing inventory of homes under construction during 2016.
  • Total lot supply at the end of the quarter was approximately 28,800, compared to approximately 29,000 at September 30, 2015 and 27,800 at year-end 2015. Based on trailing twelve months closings, total lots at September 30, 2016 represented approximately a 4.0 year supply of lots.

CONFERENCE CALL

Management will host a conference call today to discuss the Company's results at 12:30 p.m. Eastern Time (9:30 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/10092994.

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 in Canada.

A replay of the call will be available through November 10, 2016, beginning at 2:30 p.m. ET on October 27, 2016 on the website noted above, or by dialing 877-344-7529, and referencing conference number 10092994. For more information, visit www.meritagehomes.com.

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,
2016 2015 2016 2015
Homebuilding:
Home closing revenue$735,870 $661,884 $2,127,332 $1,770,184
Land closing revenue16,987 8,072 21,187 16,285
Total closing revenue752,857 669,956 2,148,519 1,786,469
Cost of home closings(604,891) (536,267) (1,755,260) (1,434,843)
Cost of land closings(16,092) (7,445) (19,485) (14,992)
Total cost of closings(620,983) (543,712) (1,774,745) (1,449,835)
Home closing gross profit130,979 125,617 372,072 335,341
Land closing gross profit895 627 1,702 1,293
Total closing gross profit131,874 126,244 373,774 336,634
Financial Services:
Revenue3,139 3,000 9,115 8,276
Expense(1,398) (1,253) (4,152) (3,914)
Earnings from financial services unconsolidated entities and other, net4,215 3,854 10,802 9,155
Financial services profit5,956 5,601 15,765 13,517
Commissions and other sales costs(52,478) (48,097) (155,034) (134,876)
General and administrative expenses(33,258) (28,774) (91,774) (86,074)
Earnings/(loss) from other unconsolidated entities, net440 (123) 856 (415)
Interest expense(167) (4,187) (5,127) (11,962)
Other income/(expense), net1,435 (3,996) 3,263 (3,445)
Earnings before income taxes53,802 46,668 141,723 113,379
Provision for income taxes(16,915) (16,360) (43,989) (37,538)
Net earnings$36,887 $30,308 $97,734 $75,841
Earnings per share:
Basic
Earnings per share$0.92 $0.76 $2.45 $1.92
Weighted average shares outstanding40,022 39,663 39,958 39,568
Diluted
Earnings per share$0.88 $0.73 $2.33 $1.83
Weighted average shares outstanding42,608 42,192 42,541 42,134


Meritage Homes Corporation and Subsidiaries
Consolidated Balance Sheets
(In thousands)
(Unaudited)
September 30, 2016 December 31, 2015
Assets:
Cash and cash equivalents $107,915 $262,208
Other receivables 76,371 57,296
Real estate (1) 2,429,014 2,098,302
Deposits on real estate under option or contract 91,053 87,839
Investments in unconsolidated entities 11,831 11,370
Property and equipment, net 33,983 33,970
Deferred tax asset 57,552 59,147
Prepaids, other assets and goodwill 65,436 69,645
Total assets $2,873,155 $2,679,777
Liabilities:
Accounts payable $148,260 $106,440
Accrued liabilities 180,687 161,163
Home sale deposits 36,988 36,197
Loans payable and other borrowings 45,183 23,867
Senior and convertible senior notes, net 1,094,632 1,093,173
Total liabilities 1,505,750 1,420,840
Stockholders' Equity:
Preferred stock
Common stock 400 397
Additional paid-in capital 570,223 559,492
Retained earnings 796,782 699,048
Total stockholders’ equity 1,367,405 1,258,937
Total liabilities and stockholders’ equity $2,873,155 $2,679,777
(1) Real estate – Allocated costs:
Homes under contract under construction $632,454 $456,138
Unsold homes, completed and under construction 377,490 307,425
Model homes 150,662 138,546
Finished home sites and home sites under development 1,268,408 1,196,193
Total real estate $2,429,014 $2,098,302


Supplemental Information and Non-GAAP Financial Disclosures (Dollars in thousands – unaudited):
Three Months Ended
September 30,
Nine Months Ended
September 30,
2016 2015 2016 2015
Depreciation and amortization$3,870 $3,565 $11,470 $10,294
Summary of Capitalized Interest:
Capitalized interest, beginning of period$64,682 $58,870 $61,202 $54,060
Interest incurred17,372 17,857 52,644 49,665
Interest expensed(167) (4,187) (5,127) (11,962)
Interest amortized to cost of home and land closings(14,256) (11,144) (41,088) (30,367)
Capitalized interest, end of period$67,631 $61,396 $67,631 $61,396
September
30, 2016
December
31, 2015
Notes payable and other borrowings$1,139,815 $1,117,040
Stockholders' equity1,367,405 1,258,937
Total capital2,507,220 2,375,977
Debt-to-capital45.5% 47.0%
Notes payable and other borrowings$1,139,815 1,117,040
Less: cash and cash equivalents$(107,915) $(262,208)
Net debt1,031,900 854,832
Stockholders’ equity1,367,405 1,258,937
Total net capital$2,399,305 $2,113,769
Net debt-to-capital43.0% 40.4%


Meritage Homes Corporation and Subsidiaries
Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
Nine Months Ended September 30,
2016 2015
Cash flows from operating activities:
Net earnings $97,734 $75,841
Adjustments to reconcile net earnings to net cash used in operating activities:
Depreciation and amortization 11,470 10,294
Stock-based compensation 11,042 12,418
Excess income tax provision/(benefit) from stock-based awards 540 (2,040)
Equity in earnings from unconsolidated entities (11,658) (8,740)
Distribution of earnings from unconsolidated entities 11,439 9,446
Other 4,942 1,246
Changes in assets and liabilities:
Increase in real estate (318,490) (198,520)
(Increase)/decrease in deposits on real estate under option or contract (3,160) 2,719
Increase in other receivables, prepaids and other assets (14,201) (6,067)
Increase in accounts payable and accrued liabilities 61,206 39,949
Increase in home sale deposits 791 10,208
Net cash used in operating activities (148,345) (53,246)
Cash flows from investing activities:
Investments in unconsolidated entities (242) (300)
Purchases of property and equipment (12,256) (12,334)
Proceeds from sales of property and equipment 144 92
Maturities/sales of investments and securities 645
Payments to purchase investments and securities (645)
Net cash used in investing activities (12,354) (12,542)
Cash flows from financing activities:
Proceeds from Credit Facility, net 25,000
Repayment of loans payable and other borrowings (18,286) (4,044)
Proceeds from issuance of senior notes 200,000
Debt issuance costs (3,013)
Excess income tax (provision)/benefit from stock-based awards (540) 2,040
Proceeds from stock option exercises 232 2,881
Net cash provided by financing activities 6,406 197,864
Net (decrease)/increase in cash and cash equivalents (154,293) 132,076
Beginning cash and cash equivalents 262,208 103,333
Ending cash and cash equivalents $107,915 $235,409



Meritage Homes Corporation and Subsidiaries
Operating Data
(Dollars in thousands)
(Unaudited)
Three Months Ended September 30,
2016 2015
Homes Value Homes Value
Homes Closed:
Arizona 253 $89,092 302 $92,888
California 251 142,056 236 120,387
Colorado 167 84,114 123 56,927
West Region 671 315,262 661 270,202
Texas 542 199,499 517 183,455
Central Region 542 199,499 517 183,455
Florida 206 85,647 202 90,285
Georgia 83 27,477 62 20,663
North Carolina 177 71,641 165 63,532
South Carolina 76 22,658 80 25,812
Tennessee 45 13,686 25 7,935
East Region 587 221,109 534 208,227
Total 1,800 $735,870 1,712 $661,884
Homes Ordered:
Arizona 345 $116,815 272 $96,867
California 216 125,920 203 110,076
Colorado 121 66,213 84 43,782
West Region 682 308,948 559 250,725
Texas 488 178,934 452 165,206
Central Region 488 178,934 452 165,206
Florida 208 95,946 227 94,114
Georgia 85 28,841 67 23,143
North Carolina 149 61,537 138 57,168
South Carolina 71 22,434 88 26,766
Tennessee 54 18,922 36 12,855
East Region 567 227,680 556 214,046
Total 1,737 $715,562 1,567 $629,977


Nine Months Ended September 30,
2016 2015
Homes Value Homes Value
Homes Closed:
Arizona 749 $258,139 717 $227,367
California 738 418,834 565 302,573
Colorado 474 231,913 364 166,914
West Region 1,961 908,886 1,646 696,854
Texas 1,563 566,377 1,466 510,439
Central Region 1,563 566,377 1,466 510,439
Florida 619 252,311 589 254,607
Georgia 229 76,874 156 49,178
North Carolina 474 198,525 389 148,721
South Carolina 231 71,577 247 77,630
Tennessee 161 52,782 110 32,755
East Region 1,714 652,069 1,491 562,891
Total 5,238 $2,127,332 4,603 $1,770,184
Homes Ordered:
Arizona 935 $322,807 880 $290,172
California 775 442,863 750 419,987
Colorado 459 237,237 454 213,610
West Region 2,169 1,002,907 2,084 923,769
Texas 1,629 597,947 1,644 574,533
Central Region 1,629 597,947 1,644 574,533
Florida 702 295,453 693 295,634
Georgia 305 102,392 197 64,051
North Carolina 497 205,562 467 191,460
South Carolina 296 95,123 283 85,767
Tennessee 199 66,124 164 53,390
East Region 1,999 764,654 1,804 690,302
Total 5,797 $2,365,508 5,532 $2,188,604
Order Backlog:
Arizona 503 $182,574 355 $129,023
California 326 208,175 397 241,377
Colorado 317 167,475 358 168,329
West Region 1,146 558,224 1,110 538,729
Texas 1,008 381,764 1,036 373,135
Central Region 1,008 381,764 1,036 373,135
Florida 370 161,148 341 143,597
Georgia 171 58,944 94 31,457
North Carolina 283 118,515 263 110,907
South Carolina 153 53,657 106 34,257
Tennessee 120 43,605 93 32,790
East Region 1,097 435,869 897 353,008
Total 3,251 $1,375,857 3,043 $1,264,872



Meritage Homes Corporation and Subsidiaries
Operating Data
(Unaudited)
Three Months Ended September 30,
2016 2015
Ending Average Ending Average
Active Communities:
Arizona 40 41.5 41 42.0
California 29 27.0 26 23.0
Colorado 10 11.0 15 15.5
West Region 79 79.5 82 80.5
Texas 74 73.5 70 68.0
Central Region 74 73.5 70 68.0
Florida 26 26.0 31 30.5
Georgia 17 17.0 17 16.5
North Carolina 19 20.5 25 25.0
South Carolina 15 15.5 17 18.5
Tennessee 7 7.0 8 6.0
East Region 84 86.0 98 96.5
Total 237 239.0 250 245.0


Nine Months Ended September 30,
2016 2015
Ending Average Ending Average
Active Communities:
Arizona 40 40.5 41 41.0
California 29 26.5 26 25.0
Colorado 10 13.0 15 16.0
West Region 79 80.0 82 82.0
Texas 74 73.0 70 64.5
Central Region 74 73.0 70 64.5
Florida 26 28.5 31 30.0
Georgia 17 17.0 17 15.0
North Carolina 19 22.5 25 23.0
South Carolina 15 16.5 17 18.5
Tennessee 7 8.0 8 6.5
East Region 84 92.5 98 93.0
Total 237 245.5 250 239.5

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 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 and Fort Collins, 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 31-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 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 growth, projected orders, home closings and home closing revenue, home closing gross margins and diluted earnings per share for the 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; 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 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.

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

Source:Meritage Homes Corporation