Meritage Homes reports 20% order growth and 10% increase in pre-tax earnings for the fourth quarter, contributing to a 14% increase in 2017 full year pre-tax earnings

SCOTTSDALE, Ariz., Feb. 01, 2018 (GLOBE NEWSWIRE) -- Meritage Homes Corporation (NYSE:MTH), a leading U.S. homebuilder, today announced fourth quarter and full year results for the periods ended December 31, 2017.

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

Three Months Ended December 31, Twelve Months Ended December 31,
2017 2016 %Chg 2017 2016 %Chg
Homes closed (units) 2,253 2,117 6% 7,709 7,355 5%
Home closing revenue $923,370 $876,094 5% $3,186,775 $3,003,426 6%
Average sales price - closings $410 $414 (1)% $413 $408 1%
Home orders (units) 1,795 1,493 20% 7,957 7,290 9%
Home order value $760,340 $635,995 20% $3,296,788 $3,001,503 10%
Average sales price - orders $424 $426 (1)% $414 $412 1%
Ending backlog (units) 2,875 2,627 9%
Ending backlog value $1,245,771 $1,135,758 10%
Average sales price - backlog $433 $432 %
Earnings before income taxes $84,090 $76,337 10% $247,519 $218,060 14%
Net earnings $35,553 $51,807 (31)% $143,255 $149,541 (4)%
Diluted EPS $0.87 $1.22 (29)% $3.41 $3.55 (4)%

MANAGEMENT COMMENTS

“Strong fourth quarter results helped deliver our seventh consecutive year of annual order growth and our highest pretax earnings in over a decade," said Steven J. Hilton, chairman and chief executive officer of Meritage Homes.

"Fourth quarter 2017 orders were up 20% year-over-year, as we continued to experience robust demand for homes designed to meet the needs of entry-level buyers. They made up nearly 33% of our total 2017 orders, compared to approximately 24% in 2016. Notably, our East region led with a 47% increase in total home orders over the fourth quarter of 2016, demonstrating buyers' acceptance of the plans in our new regional product library and improved execution by our teams in those markets. Our strategic focus on expanding our entry-level business and strengthening our performance in the East region should continue to drive strong results going forward," he continued.

"We generated a 10% increase in pre-tax earnings for the fourth quarter on a 5% increase in home closing revenue, combined with higher home closing gross margins and overhead leverage. Our full year pre-tax earnings increased 14% over 2016, demonstrating the effects of our successful implementation of several strategic initiatives during the year," explained Mr. Hilton. "Based on the lower corporate tax rate that will be effective in 2018, we took a $19.7 million charge in the fourth quarter to reflect a revaluation of our deferred tax asset. Without that charge, our net earnings for the quarter would have been approximately $55.2 million or $1.34 per diluted share."

He continued, “Housing-related economic indicators remain positive, pointing to further growth in new home sales for the next several years. For 2018, we expect a normal seasonal decline in our revenue, margins and overhead leverage for the first quarter, followed by positive trends throughout the remainder of the year. We expect to deliver approximately 8,350-8,750 home closings in 2018 for total home closing revenue of approximately $3.4-3.6 billion, which should drive an 6-13% increase in pre-tax earnings. At this time, we are also projecting a home closing gross margin for the year of approximately 17.5-18%, with an opportunity for additional overhead leverage and the added benefit of a lower effective tax rate of approximately 25%, which should drive strong earnings growth in 2018.”

FOURTH QUARTER RESULTS

  • Pre-tax earnings increased 10% over the prior year to $84.1 million for the fourth quarter of 2017, from $76.3 million in the fourth quarter of 2016. The earnings growth primarily reflects higher home closing revenue and gross margins, supplemented by cost controls and overhead leverage.

  • Fourth quarter 2017 effective tax rate was 57.7%, compared to 32.1% in 2016. The higher rate in 2017 includes a $19.7 million charge in the fourth quarter of 2017 associated with a revaluation of the Company's deferred tax asset, reflecting the impact of a lower corporate tax rate enacted by the Tax Cuts and Jobs Act in December 2017 and effective beginning in 2018, as well as the expiration of energy tax credits which benefited the Company's effective tax rate in 2016.

  • As a result of these changes in tax regulations, fourth quarter net earnings were $35.6 million ($0.87 per diluted share) in 2017, compared to $51.8 million ($1.22 per diluted share) in 2016.

  • Home closing revenue increased 5% over the prior year on 6% higher closing volume. Despite general increases in market prices of homes over 2016, average closing prices for the Company were 1% lower in the fourth quarter of 2017, as a higher percentage of home closings were lower-priced entry-level homes, consistent with the Company’s strategic focus. Texas, Arizona and Florida, which have the greatest concentration of entry-level communities, drove nearly all the increases in closings and revenue.

  • Home closing gross margin increased to 18.2% for the fourth quarter of 2017, compared to 17.9% in the fourth quarter of 2016 and 18.1% in the third quarter of 2017, due to better margins in new communities as well as management of direct costs in an inflationary environment.

  • Selling, general and administrative expenses totaled 10.4% of home closing revenue compared to 10.5% in the fourth quarter of 2016, reflecting continued cost controls and slightly greater overhead leverage on higher home closing revenue.

  • Total orders for the fourth quarter increased 20% year-over-year due to strong demand, evidenced by an 18% increase in absorptions and a 3% increase in average active communities over the fourth quarter of 2016. Orders increased 47% in the East region, 19% in Texas and 5% in the West region. Average active community count in the West was 11% lower year-over-year, while total active community count for the Company was relatively flat at 244 on December 31, 2017, compared to 243 at December 31, 2016.

YEAR TO DATE RESULTS

  • Pre-tax earnings increased 14% for the year to $247.5 million in 2017, from $218.1 million in 2016, primarily reflecting higher home closing revenue and improved overhead leverage.

  • Net earnings of $143.3 million ($3.41 per diluted share) for the year 2017 compared to $149.5 million ($3.55 per diluted share) in 2016, reflecting the impact of higher tax expense in 2017 and the deferred tax asset revaluation.

  • The 6% year-over-year increase in 2017 home closing revenue resulted from a 5% increase in home closings and a 1% increase in average closing prices over 2016.

  • Higher home closing revenue led to a $33.3 million increase in home closing gross profit to $562.1 million in 2017, compared to $528.8 million in 2016. Home closing gross margin remained at 17.6% for the full year, as anticipated, with cost inflation offsetting the appreciation in average sales prices of homes closed in 2017.

  • Total commissions and selling expenses improved by approximately 20 basis points to 7.0% of 2017 home closing revenue from 7.2% in 2016. In addition, total general and administrative expenses also declined approximately 20 basis points to 3.9% of home closing revenue in 2017, compared to 4.1% in 2016.

BALANCE SHEET

  • Cash and cash equivalents at December 31, 2017, totaled $170.7 million, compared to $131.7 million at December 31, 2016, primarily reflecting net proceeds from a June 2017 debt issuance, partially offset by the use of cash to fund the purchase and development of lots, as well as additional homes under construction. Proceeds from the issuance of $300 million in new senior notes in June 2017 were primarily used to repay borrowings under the Company’s revolving credit facility and to retire all $126.5 million of the Company's 1.875% convertible senior notes.

  • A total of $250.3 million was invested in land and development during the fourth quarter of 2017 to meet current demand and position the company for future growth. Total spending on land and development for the full year 2017 was $1.0 billion, compared to $900.7 million in 2016.

  • Meritage ended 2017 with approximately 34,300 total lots owned or under control, compared to approximately 29,800 total lots at December 31, 2016. During the fourth quarter of 2017, the Company secured approximately 3,200 new lots to meet continued strong demand. Approximately 70% of the newly controlled lots added during the quarter were for entry-level communities.

  • Debt-to-capital and net debt-to-capital ratios of 44.9% and 41.4%, respectively at December 31, 2017, were maintained within management's target ranges, consistent with 44.2% and 41.2%, respectively at December 31, 2016, even as the Company's total investment in homes and land under development grew commensurate with its current and future growth expectations.

CONFERENCE CALL

Management will host a conference call at 10:00 a.m. Eastern Time (8:00 a.m. in Arizona) today to discuss the Company's results. The call will be webcast with an accompanying slideshow available on the "Investor Relations" page of the Company's website at http://investors.meritagehomes.com. Telephone participants may avoid any delays by pre-registering for the call using the following link to receive a special dial-in number and PIN.

Conference Call registration link: http://dpregister.com/10115673.

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

A replay of the call will be available beginning at approximately 12:00 p.m. ET today and extending through February 15, 2018, 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 10115673.


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

Three Months Ended
December 31,
Twelve Months Ended
December 31,
2017 2016 2017 2016
Homebuilding:
Home closing revenue $923,370 $876,094 $3,186,775 $3,003,426
Land closing revenue 23,055 4,614 39,997 25,801
Total closing revenue 946,425 880,708 3,226,772 3,029,227
Cost of home closings (755,067) (719,324) (2,624,636) (2,474,584)
Cost of land closings (20,133) (3,946) (35,637) (23,431)
Total cost of closings (775,200) (723,270) (2,660,273) (2,498,015)
Home closing gross profit 168,303 156,770 562,139 528,842
Land closing gross profit 2,922 668 4,360 2,370
Total closing gross profit 171,225 157,438 566,499 531,212
Financial Services:
Revenue 4,061 3,392 14,203 12,507
Expense (1,552) (1,435) (6,006) (5,587)
Earnings from financial services unconsolidated entities and other, net 4,185 4,180 13,858 14,982
Financial services profit 6,694 6,137 22,055 21,902
Commissions and other sales costs (62,781) (60,058) (221,647) (215,092)
General and administrative expenses (33,192) (32,029) (124,041) (123,803)
Earnings from other unconsolidated entities, net 1,249 3,204 2,101 4,060
Interest expense (292) (45) (3,853) (5,172)
Other income, net 1,187 1,690 6,405 4,953
Earnings before income taxes 84,090 76,337 247,519 218,060
Provision for income taxes (48,537) (24,530) (104,264) (68,519)
Net earnings $35,553 $51,807 $143,255 $149,541
Earnings per share:
Basic
Earnings per share $0.88 $1.29 $3.56 $3.74
Weighted average shares outstanding 40,328 40,028 40,287 39,976
Diluted
Earnings per share $0.87 $1.22 $3.41 $3.55
Weighted average shares outstanding 41,073 42,667 42,228 42,585


Meritage Homes Corporation and Subsidiaries

Consolidated Balance Sheets
(In thousands)
(unaudited)

December 31, 2017 December 31, 2016
Assets:
Cash and cash equivalents $170,746 $131,702
Other receivables 79,317 70,355
Real estate (1) 2,731,380 2,422,063
Real estate not owned 38,864
Deposits on real estate under option or contract 59,945 85,556
Investments in unconsolidated entities 17,068 17,097
Property and equipment, net 33,631 33,202
Deferred tax asset 35,162 53,320
Prepaids, other assets and goodwill 85,145 75,396
Total assets $3,251,258 $2,888,691
Liabilities:
Accounts payable $140,516 $140,682
Accrued liabilities 181,076 170,852
Home sale deposits 34,059 28,348
Liabilities related to real estate not owned 34,978
Loans payable and other borrowings 17,354 32,195
Senior and convertible senior notes 1,266,450 1,095,119
Total liabilities 1,674,433 1,467,196
Stockholders' Equity:
Preferred stock
Common stock 403 400
Additional paid-in capital 584,578 572,506
Retained earnings 991,844 848,589
Total stockholders’ equity 1,576,825 1,421,495
Total liabilities and stockholders’ equity $3,251,258 $2,888,691
(1) Real estate – Allocated costs:
Homes under contract under construction $566,474 $508,927
Unsold homes, completed and under construction 516,577 431,725
Model homes 142,026 147,406
Finished home sites and home sites under development 1,506,303 1,334,005
Total real estate $2,731,380 $2,422,063

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

Three Months Ended
December 31,
Twelve Months Ended
December 31,
2017 2016 2017 2016
Depreciation and amortization$4,633 $4,508 $16,704 $15,978
Summary of Capitalized Interest:
Capitalized interest, beginning of period$76,773 $67,631 $68,196 $61,202
Interest incurred20,846 17,704 79,045 70,348
Interest expensed(292) (45) (3,853) (5,172)
Interest amortized to cost of home and land closings(18,763) (17,094) (64,824) (58,182)
Capitalized interest, end of period$78,564 $68,196 $78,564 $68,196
December 31,
2017
December 31,
2016
Notes payable and other borrowings$1,283,804 $1,127,314
Stockholders' equity1,576,825 1,421,495
Total capital2,860,629 2,548,809
Debt-to-capital44.9% 44.2%
Notes payable and other borrowings$1,283,804 $1,127,314
Less: cash and cash equivalents(170,746) (131,702)
Net debt1,113,058 995,612
Stockholders’ equity1,576,825 1,421,495
Total net capital$2,689,883 $2,417,107
Net debt-to-capital41.4% 41.2%


Meritage Homes Corporation and Subsidiaries

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

Twelve Months Ended December 31,
2017 2016
Cash flows from operating activities:
Net earnings $143,255 $149,541
Adjustments to reconcile net earnings to net cash used in operating activities:
Depreciation and amortization 16,704 15,978
Stock-based compensation 12,056 13,741
Excess income tax provision from stock-based awards 956
Equity in earnings from unconsolidated entities (15,959) (19,042)
Deferred tax asset revaluation 19,687
Distribution of earnings from unconsolidated entities 15,337 16,959
Other 5,849 9,539
Changes in assets and liabilities:
Increase in real estate (301,477) (311,426)
Decrease in deposits on real estate under option or contract 21,355 2,337
Increase in receivables, prepaids and other assets (17,775) (17,513)
Increase in accounts payable and accrued liabilities 8,125 43,377
Increase/(decrease) in home sale deposits 5,711 (7,849)
Net cash used in operating activities (87,132) (103,402)
Cash flows from investing activities:
Investments in unconsolidated entities (670) (7,244)
Distributions of capital from unconsolidated entities 1,338 3,600
Purchases of property and equipment (18,096) (16,662)
Proceeds from sales of property and equipment 356 200
Maturities/sales of investments and securities 1,402 746
Payments to purchase investments and securities (1,402) (746)
Net cash used in investing activities (17,072) (20,106)
Cash flows from financing activities:
(Repayments of)/proceeds from Credit Facility, net $(15,000) $15,000
Repayment of loans payable and other borrowings (10,970) (21,274)
Repurchase/redemption of convertible senior notes (126,691)
Proceeds from issuance of senior notes 300,000
Payment of debt issuance costs (4,091)
Excess income tax provision from stock-based awards (956)
Proceeds from stock option exercises 232
Net cash provided by/(used in) financing activities 143,248 (6,998)
Net increase/(decrease) in cash and cash equivalents 39,044 (130,506)
Beginning cash and cash equivalents 131,702 262,208
Ending cash and cash equivalents $170,746 $131,702


Meritage Homes Corporation and Subsidiaries

Operating Data
(Dollars in thousands)
(unaudited)

Three Months Ended
December 31, 2017 December 31, 2016
Homes Value Homes Value
Homes Closed:
Arizona 396 $132,596 373 $126,628
California 261 153,921 282 171,506
Colorado 154 89,941 160 78,278
West Region 811 376,458 815 376,412
Texas 741 267,139 567 212,587
Central Region 741 267,139 567 212,587
Florida 296 127,880 276 116,253
Georgia 89 29,830 108 37,263
North Carolina 163 68,432 198 80,222
South Carolina 90 29,857 97 32,274
Tennessee 63 23,774 56 21,083
East Region 701 279,773 735 287,095
Total 2,253 $923,370 2,117 $876,094
Homes Ordered:
Arizona 269 $93,143 314 $105,397
California 248 169,593 187 116,969
Colorado 129 69,550 116 64,887
West Region 646 332,286 617 287,253
Texas 582 211,413 490 185,557
Central Region 582 211,413 490 185,557
Florida 216 90,611 159 71,559
Georgia 102 33,407 28 11,682
North Carolina 143 54,672 108 48,959
South Carolina 66 22,911 60 19,253
Tennessee 40 15,040 31 11,732
East Region 567 216,641 386 163,185
Total 1,795 $760,340 1,493 $635,995

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

Twelve Months Ended
December 31, 2017 December 31, 2016
Homes Value Homes Value
Homes Closed:
Arizona 1,535 $515,410 1,122 $384,767
California 963 581,016 1,020 590,340
Colorado 571 323,318 634 310,191
West Region 3,069 1,419,744 2,776 1,285,298
Texas 2,493 904,286 2,130 778,964
Central Region 2,493 904,286 2,130 778,964
Florida 814 353,554 895 368,564
Georgia 312 104,690 337 114,137
North Carolina 533 233,028 672 278,747
South Carolina 307 104,942 328 103,851
Tennessee 181 66,531 217 73,865
East Region 2,147 862,745 2,449 939,164
Total 7,709 $3,186,775 7,355 $3,003,426
Homes Ordered:
Arizona 1,417 $473,602 1,249 $428,204
California 1,050 650,287 962 559,832
Colorado 497 284,082 575 302,124
West Region 2,964 1,407,971 2,786 1,290,160
Texas 2,582 931,069 2,119 783,504
Central Region 2,582 931,069 2,119 783,504
Florida 1,007 433,365 861 367,012
Georgia 372 121,713 333 114,074
North Carolina 583 242,355 605 254,521
South Carolina 290 99,738 356 114,376
Tennessee 159 60,577 230 77,856
East Region 2,411 957,748 2,385 927,839
Total 7,957 $3,296,788 7,290 $3,001,503
Order Backlog:
Arizona 326 $119,535 444 $161,343
California 318 222,909 231 153,638
Colorado 199 114,848 273 154,084
West Region 843 457,292 948 469,065
Texas 1,020 381,517 931 354,734
Central Region 1,020 381,517 931 354,734
Florida 446 196,265 253 116,454
Georgia 151 50,386 91 33,363
North Carolina 243 96,579 193 87,252
South Carolina 99 35,432 116 40,636
Tennessee 73 28,300 95 34,254
East Region 1,012 406,962 748 311,959
Total 2,875 $1,245,771 2,627 $1,135,758


Meritage Homes Corporation and Subsidiaries

Operating Data
(unaudited)

Three Months Ended
December 31, 2017 December 31, 2016
Ending Average Ending Average
Active Communities:
Arizona 38 39.0 42 41.0
California 20 22.0 28 28.5
Colorado 11 10.0 10 10.0
West Region 69 71.0 80 79.5
Texas 92 92.5 80 77.0
Central Region 92 92.5 80 77.0
Florida 28 28.5 27 26.5
Georgia 19 18.0 17 17.0
North Carolina 17 17.5 17 18.0
South Carolina 13 13.5 15 15.0
Tennessee 6 6.0 7 7.0
East Region 83 83.5 83 83.5
Total 244 247.0 243 240.0


Twelve Months Ended
December 31, 2017 December 31, 2016
Ending Average Ending Average
Active Communities:
Arizona 38 40.0 42 41.5
California 20 24.0 28 26.0
Colorado 11 10.5 10 13.0
West Region 69 74.5 80 80.5
Texas 92 86.0 80 76.0
Central Region 92 86.0 80 76.0
Florida 28 27.5 27 29.0
Georgia 19 18.0 17 17.0
North Carolina 17 17.0 17 21.5
South Carolina 13 14.0 15 16.5
Tennessee 6 6.5 7 8.0
East Region 83 83.0 83 92.0
Total 244 243.5 243 248.5

About Meritage Homes Corporation

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

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

For more information, visit investors.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 belief about expected performance in the Company's East region, first quarter trends in revenue, margin and overhead leverage, as well as its expected 2018 home closings, home closing revenue, pre-tax earnings, gross margins and effective tax rate.

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

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

Source:Meritage Homes Corporation