Meritage Homes reports Q2 net earnings of US$28.1M, up from US$8M a year earlier, primary driven by higher home closing revenue and gross margins, overhead expense leverage; home closing revenue up 55% US$436M

SCOTTSDALE, Arizona , July 24, 2013 (press release) – 21% Growth in Orders, 55% Increase in Home Closing Revenue, 21.5% Home Closing Gross Margin and Diluted EPS of $0.74

Meritage Homes Corporation (NYSE: MTH), a leading U.S. homebuilder, today announced second quarter results for the period ended June 30, 2013.

Summary Operating Results (unaudited)  
(Dollars in thousands, except per share amounts)  
   
   
    Three Months Ended June 30,     Six Months Ended June 30,  
    2013   2012   %Chg     2013   2012   %Chg  
Homes closed (units)     1,321     1,042   27 %     2,373     1,801   32 %
Home closing revenue   $ 436,040   $ 281,340   55 %   $ 766,750   $ 485,362   58 %
Average sales price - closings   $ 330   $ 270   22 %   $ 323   $ 269   20 %
Home orders (units)     1,637     1,353   21 %     3,184     2,497   28 %
Home order value   $ 573,392   $ 385,829   49 %   $ 1,093,795   $ 694,158   58 %
Average sales price - orders   $ 350   $ 285   23 %   $ 344   $ 278   24 %
Ending backlog (units)                       2,283     1,611   42 %
Ending backlog value                     $ 806,311   $ 457,650   76 %
Average sales price - backlog                     $ 353   $ 284   24 %
Net earnings   $ 28,143   $ 8,005   252 %   $ 40,184   $ 3,251   1,136 %
Diluted EPS   $ 0.74   $ 0.24   208 %   $ 1.06   $ 0.10   960 %

MANAGEMENT COMMENTS

"The second quarter of 2013 was another quarter of strong growth, with continued significant improvements across our operating metrics," said Steven J. Hilton, chairman and chief executive officer of Meritage Homes. "This was our ninth consecutive quarter of positive year-over-year growth in orders and our seventh consecutive quarter of growth in closing revenue year over year.

"More importantly, our earnings continued to grow at a much higher rate than our revenue. Our gross margin on home closings increased to 21.5%, and our additional operating leverage drove year-over-year net earnings growth of 252% on a 55% increase in home closing revenue.

"Despite the recent rise in interest rates and home prices, affordability remains excellent and demand for new homes continues to be strong in our markets, as evidenced by our pace of orders increasing over last quarter's pace and well above the second quarter of 2012," Mr. Hilton explained.

"In a competitive land market, I am also pleased with our ability to acquire new lot positions for additional growth. We increased our total lot supply by more than 1,500 lots during the quarter, putting more than 3,500 new lots under control, which was the second highest number of lots we have acquired over the last six quarters. We continue to seek new opportunities to expand our footprint while also allocating capital to grow within our existing markets."

STRONG GROWTH

  • Total order value in the second quarter increased 49% year over year due to a 23% increase in average price and a 21% increase in total orders. Total order value and backlog grew in every state except Nevada, where the company has now ceased operations. The average sales price of approximately $350,000 on orders was the highest for Meritage in more than eight years, reflecting the combination of a greater portion of orders in higher-priced communities in addition to home price appreciation.
  • Ending backlog value increased 76% over the second quarter of 2012, combining a 24% increase in average sales price with 42% growth in units. Colorado, the Carolinas and Florida led with growth in backlog value of 164%, 127% and 99%, respectively, over the prior year. Meritage's expansion into Charlotte early last year accounted for some of the growth in the Carolinas.
  • Orders per average community increased to 9.8 for the second quarter of 2013 from 9.0 in the second quarter of 2012 and 9.5 in the first quarter of 2013.
  • Meritage ended the quarter with 165 active communities, up from 151 at June 30, 2012.
  • Order cancellation rate fell to 11% in the second quarter of 2013, compared to 13% in the prior year.

OPERATING LEVERAGE

  • Net earnings for the second quarter increased 252% year over year to $28.1 million or $0.74 per diluted share in 2013, compared to $8.0 million or $0.24 per diluted share in 2012, primarily due to higher home closing revenue and gross margins, coupled with overhead expense leverage.
  • Home closing revenue increased 55% year over year due to a 22% increase in average price on top of a 27% increase in total homes closed in the second quarter. Every state grew over the prior year in closings, revenue and average prices.
  • Home closing gross margin increased to 21.5% in the second quarter of 2013, a year-over-year improvement of 300 bps compared to 18.5% in the second quarter of 2012, and a sequential improvement of 200 bps compared to 19.5% in the first quarter of 2013. The significant margin growth reflects both home price appreciation and the effects of improved management of direct costs.
  • Commissions and other sales costs in the second quarter improved 100 bps due to operating leverage, decreasing as a percentage of home closing revenue to 7.2% in 2013 from 8.2% in 2012.
  • General and administrative expenses also improved 90 bps due to operating leverage, declining to 5.0% of second quarter revenue in 2013, from 5.9% in 2012. The majority of the $5.9 million increase over last year was the result of additional hiring and compensation expense.
  • Interest expense improved 120 bps, declining to 1.0% of second quarter revenue in 2013 compared to 2.2% in 2012, as more interest was capitalized to additional land under development and homes under construction.
  • Second quarter pre-tax margin increased 750 bps to 8.5% in 2013 from 1.0% in 2012, or $38.5 million in 2013 pre-tax income compared to $2.8 million in 2012.

YEAR-TO-DATE RESULTS

  • Net earnings of $40.2 million for the first half of 2013 included a $3.8 million loss on early extinguishment of debt and a tax provision of $14.8 million, compared to net earnings of $3.3 million for the first half of 2012, which included a $5.8 million loss on early extinguishment of debt and a $5.0 million tax benefit.
  • Home closings and closing revenue for the first half of the year increased 32% and 58%, respectively, for 2013 over 2012, reflecting the combination of a greater portion of sales in higher-priced communities in addition to home price appreciation.
  • Year-to-date home closing gross margin improved by 270 basis points to 20.6% for 2013, compared to 17.9% for 2012, as a result of home price appreciation and improved management of direct costs.
  • Total selling, general and administrative expenses decreased 250 basis points as a percentage of revenue to 12.6% in the first half of 2013 compared to 15.1% in 2012, reflecting operating leverage.
  • Net orders for the first half of the year increased 28% in 2013 over 2012, and combined with a 24% increase in average sales prices, resulting in total order value increasing 58% year over year.

BALANCE SHEET STRENGTH

  • Meritage replenished its land pipeline by spending approximately $156 million on land acquisition and development in the second quarter of 2013, and added approximately 3,500 new lots under contract during the quarter.
  • Total lot supply at the end of the quarter was approximately 22,600, compared to approximately 17,600 a year earlier. Based on trailing twelve months closings, the June 30, 2013 balance represents a 4.7 year supply of lots.
  • The company ended the second quarter of 2013 with $353 million in cash and cash equivalents, restricted cash and securities, an increase of $148 million over the June 30, 2012 total of $205 million. Net debt to total capital ratio decreased to 37.2% at June 30, 2013, from 44.1% at June 30, 2012 and 38.1% at December 31, 2012, despite a $75.4 million increase in debt this year.

SUMMARY

"Most housing metrics have been moving in a positive direction over the last year, albeit from historically depressed levels. As the U.S. economy improves and creates jobs, demand for new homes should remain strong, especially in light of the shortage of used homes listed for sale," said Mr. Hilton. "Nearly every major housing market is experiencing price appreciation, which is good for both existing homeowners and homebuilders, and is helping to drive our revenue growth well in excess of our growth in orders and closings. Buyers may conclude that they missed the absolute bottom of the market in terms of prices and interest rates, but they also recognize that both are still a bargain in terms of the amount of house you can buy at a given income level.

"Assuming continued growth in the market due to those factors, and based on our better than expected second quarter performance and subsequently revised projections, we are projecting home closing revenue of approximately $1.7-1.8 billion for 2013, resulting in projected earnings per diluted share in the range of $2.65-$2.85 for the year."

CONFERENCE CALL

Management will host a conference call today to discuss the Company's second quarter 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 Pre-registration link: http://services.choruscall.com/DiamondPassRegistration/register?confirmationNumber=10030804&linkSecurityString=259fe32118.

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

A replay of the call will be available for fifteen days, beginning at 12:30 p.m. ET on July 24, 2013 on the website noted above, or by dialing 877-344-7529, and referencing conference number 10030804. For more information, visit meritagehomes.com.

Meritage Homes Corporation and Subsidiaries  
Operating Results  
(Unaudited)  
(In thousands, except per share data)  
   
   
    Three Months Ended June 30,     Six Months Ended June 30,  
    2013     2012     2013     2012  
Homebuilding:                                
  Home closing revenue   $ 436,040     $ 281,340     $ 766,750     $ 485,362  
  Land closing revenue     13,910       755       19,635       1,083  
    Total closing revenue     449,950       282,095       786,385       486,445  
  Cost of home closings     (342,435 )     (229,394 )     (608,785 )     (398,303 )
  Cost of land closings     (12,463 )     (1,135 )     (18,013 )     (1,340 )
    Total cost of closings     (354,898 )     (230,529 )     (626,798 )     (399,643 )
  Home closing gross profit     93,605       51,946       157,965       87,059  
  Land closing gross profit/(loss)     1,447       (380 )     1,622       (257 )
    Total closing gross profit     95,052       51,566       159,587       86,802  
Financial Services:                                
  Revenue     1,434       -       2,276       -  
  Expense     (755 )     (142 )     (1,328 )     (167 )
  Earnings from financial services unconsolidated entities and other, net     3,486       2,319       6,273       3,925  
    Financial services profit     4,165       2,177       7,221       3,758  
Commissions and other sales costs     (31,180 )     (23,118 )     (57,059 )     (42,095 )
General and administrative expenses     (22,451 )     (16,516 )     (42,175 )     (31,237 )
Loss from other unconsolidated entities, net     (120 )     (91 )     (275 )     (274 )
Interest expense     (4,523 )     (6,338 )     (9,651 )     (13,709 )
Other income, net     685       934       1,155       795  
Loss on early extinguishment of debt     (3,096 )     (5,772 )     (3,796 )     (5,772 )
Earnings/(loss) before income taxes     38,532       2,842       55,007       (1,732 )
(Provision for)/benefit from income taxes     (10,389 )     5,163       (14,823 )     4,983  
Net earnings   $ 28,143     $ 8,005     $ 40,184     $ 3,251  
                                 
Earnings per share:                                
  Basic                                
      Earnings per share   $ 0.78     $ 0.24     $ 1.12     $ 0.10  
      Weighted average shares outstanding     36,151       32,755       35,976       32,694  
  Diluted                                
      Earnings per share   $ 0.74     $ 0.24     $ 1.06     $ 0.10  
      Weighted average shares outstanding     38,758       33,104       38,662       33,086  
                                       
 
Meritage Homes Corporation and Subsidiaries
Consolidated Balance Sheets
(In thousands)
(unaudited)
 
 
    June 30, 2013   December 31, 2012
Assets:            
  Cash and cash equivalents   $ 218,019   $ 170,457
  Investments and securities     91,988     86,074
  Restricted cash     43,265     38,938
  Other receivables     30,246     20,290
  Real estate (1)     1,227,229     1,113,187
  Deposits on real estate under option or contract     21,712     14,351
  Investments in unconsolidated entities     10,698     12,085
  Property and equipment, net     17,013     15,718
  Deferred tax asset     77,279     77,974
  Prepaid expenses and other assets     30,028     26,488
    Total assets   $ 1,767,477   $ 1,575,562
Liabilities:            
  Accounts payable   $ 68,662   $ 49,801
  Accrued liabilities     124,353     96,377
  Home sale deposits     25,566     12,377
  Senior, senior subordinated, convertible senior notes and other borrowings     798,215     722,797
      Total liabilities     1,016,796     881,352
Stockholders' Equity:            
  Preferred stock, par value $0.01.     -     -
  Common stock, par value $0.01.     362     356
  Additional paid-in capital     406,530     390,249
  Retained earnings     343,789     303,605
      Total stockholders' equity     750,681     694,210
    Total liabilities and stockholders' equity   $ 1,767,477   $ 1,575,562
(1) Real estate -Allocated costs:            
  Homes under contract under construction   $ 304,159   $ 192,948
  Unsold homes, completed and under construction     96,076     107,466
  Model homes     70,596     62,411
  Finished home sites and home sites under development     644,315     634,106
  Land held for development     57,650     56,118
  Land held for sale     15,104     21,650
  Communities in mothball status     39,329     38,488
      Total real estate   $ 1,227,229   $ 1,113,187
                   
Supplemental Information and Non-GAAP Financial Disclosures (In thousands - unaudited):
             
             
    Three Months Ended June 30,     Six Months Ended June 30,  
    2013     2012     2013     2012  
Depreciation and amortization   $ 2,500     $ 1,921     $ 4,658     $ 3,614  
                                 
Summary of Capitalized Interest:                                
Capitalized interest, beginning of period   $ 24,198     $ 15,908     $ 21,600     $ 14,810  
Interest incurred     12,642       11,318       25,368       22,165  
Interest expensed     (4,523 )     (6,338 )     (9,651 )     (13,709 )
Interest amortized to cost of home, land closings and impairments     (6,023 )     (3,052 )     (11,023 )     (5,430 )
Capitalized interest, end of period   $ 26,294     $ 17,836     $ 26,294     $ 17,836  
                                 
    June 30, 2013     December 31, 2012                  
Notes payable and other borrowings   $ 798,215     $ 722,797                  
  Less: cash and cash equivalents, restricted cash, and investments and securities     (353,272 )     (295,469 )                
Net debt     444,943       427,328                  
Stockholders' equity     750,681       694,210                  
Total capital   $ 1,195,624     $ 1,121,538                  
Net debt-to-capital     37.2 %     38.1 %                
                                 
   
Meritage Homes Corporation and Subsidiaries  
Consolidated Statements of Cash Flows  
(In thousands) (unaudited)  
    Six Months Ended June 30,  
    2013     2012  
Cash flows from operating activities:                
  Net earnings   $ 40,184     $ 3,251  
  Adjustments to reconcile net earnings to net cash used in operating activities:                
    Depreciation and amortization     4,658       3,614  
    Stock-based compensation     3,941       3,273  
    Loss on early extinguishment of debt     3,796       5,772  
    Excess income tax benefit from stock-based awards     (1,687 )     -  
    Equity in earnings from unconsolidated entities     (5,998 )     (3,651 )
    Deferred tax asset valuation benefit     (3,057 )     (7,705 )
    Distribution of earnings from unconsolidated entities     7,236       2,995  
    Other     4,022       1,202  
  Changes in assets and liabilities:                
    Increase in real estate     (113,992 )     (140,662 )
    (Increase)/decrease in deposits on real estate under option or contract     (7,361 )     424  
    (Increase)/decrease in receivables and prepaid expenses and other assets     (13,167 )     1,758  
    Increase in accounts payable and accrued liabilities     48,715       20,934  
    Increase in home sale deposits     13,189       3,888  
    Net cash used in operating activities     (19,521 )     (104,907 )
Cash flows from investing activities:                
  Investments in unconsolidated entities     (116 )     (405 )
  Distributions of capital from unconsolidated entities     74       -  
  Purchases of property and equipment     (5,787 )     (4,383 )
  Proceeds of sales from property and equipment     32       364  
  Maturities of investments and securities     71,024       120,201  
  Payments to purchase investments and securities     (76,938 )     (76,502 )
  Increase in restricted cash     (4,327 )     (6,962 )
    Net cash (used in)/provided by investing activities     (16,038 )     32,313  
Cash flows from financing activities:                
  Repayments of senior and senior subordinated notes     (102,822 )     (315,080 )
  Proceeds from issuance of senior notes     175,000       300,000  
  Debt issuance costs     (1,403 )     (5,334 )
  Excess income tax benefit from stock-based awards     1,687       -  
  Non-controlling interest acquisition     (257 )     -  
  Proceeds from stock option exercises     10,916       1,222  
    Net cash (used in)/provided by financing activities     83,121       (19,192 )
Net increase/(decrease) in cash and cash equivalents     47,562       (91,786 )
Beginning cash and cash equivalents     170,457       173,612  
Ending cash and cash equivalents (2)   $ 218,019     $ 81,826  
                 
(2) Ending cash and cash equivalents as of June 30, 2013 and December 31, 2012 excludes investments and securities and restricted cash totaling $135 million and $125 million, respectively.
 
 
Meritage Homes Corporation and Subsidiaries
Operating Data
(Dollars in thousands)
(unaudited)
 
    Three Months Ended
    June 30, 2013   June 30, 2012
    Homes   Value   Homes   Value
Homes Closed:                    
  Arizona   251   $ 79,736   208   $ 54,772
  California   297     124,818   148     50,521
  Colorado   100     37,001   80     26,877
  Nevada   21     5,086   11     2,093
  West Region   669     246,641   447     134,263
  Texas   449     116,970   439     101,744
  Central Region   449     116,970   439     101,744
  Carolinas   51     19,273   26     9,507
  Florida   152     53,156   130     35,826
  East Region   203     72,429   156     45,333
  Total   1,321   $ 436,040   1,042   $ 281,340
Homes Ordered:                    
  Arizona   334   $ 105,683   260   $ 70,331
  California   251     113,561   279     100,432
  Colorado   121     53,278   87     28,774
  Nevada   1     289   31     5,615
  West Region   707     272,811   657     205,152
  Texas   641     183,509   482     117,028
  Central Region   641     183,509   482     117,028
  Carolinas   77     31,604   40     14,053
  Florida   212     85,468   174     49,596
  East Region   289     117,072   214     63,649
  Total   1,637   $ 573,392   1,353   $ 385,829
                       
     
    Six Months Ended
    June 30, 2013   June 30, 2012
    Homes   Value   Homes   Value
Homes Closed:                    
  Arizona   443   $ 136,885   350   $ 93,671
  California   525     215,460   245     83,827
  Colorado   194     69,205   144     48,177
  Nevada   37     8,655   17     3,289
  West Region   1,199     430,205   756     228,964
  Texas   803     207,675   756     173,395
  Central Region   803     207,675   756     173,395
  Carolinas   91     33,488   44     16,054
  Florida   280     95,382   245     66,949
  East Region   371     128,870   289     83,003
  Total   2,373   $ 766,750   1,801   $ 485,362
Homes Ordered:                    
  Arizona   652   $ 203,391   509   $ 129,943
  California   565     247,192   466     163,079
  Colorado   262     110,073   178     59,087
  Nevada   24     5,795   39     7,071
  West Region   1,503     566,451   1,192     359,180
  Texas   1,144     314,639   945     225,891
  Central Region   1,144     314,639   945     225,891
  Carolinas   146     58,490   73     26,132
  Florida   391     154,215   287     82,955
  East Region   537     212,705   360     109,087
  Total   3,184   $ 1,093,795   2,497   $ 694,158
Order Backlog:                    
  Arizona   458   $ 147,322   317   $ 81,504
  California   355     156,320   303     106,900
  Colorado   210     90,957   104     34,403
  Nevada   1     245   27     4,858
  West Region   1,024     394,844   751     227,665
  Texas   841     239,281   585     145,990
  Central Region   841     239,281   585     145,990
  Carolinas   104     42,343   53     18,694
  Florida   314     129,843   222     65,301
  East Region   418     172,186   275     83,995
  Total   2,283   $ 806,311   1,611   $ 457,650
                     
 
Meritage Homes Corporation and Subsidiaries
Operating Data
(unaudited)
 
    Three Months Ended
    June 30, 2013   June 30, 2012
    Beg.   End   Beg.   End
Active Communities:                
  Arizona   40   36   32   32
  California   15   13   21   20
  Colorado   11   12   8   8
  Nevada   -   -   2   2
  West Region   66   61   63   62
  Texas   69   71   67   68
  Central Region   69   71   67   68
  Carolinas   11   13   4   5
  Florida   22   20   16   16
  East Region   33   33   20   21
  Total   168   165   150   151
                   
                 
    Six Months Ended
    June 30, 2013   June 30, 2012
    Beg.   End   Beg.   End
Active Communities:                
  Arizona   38   36   37   32
  California   17   13   20   20
  Colorado   12   12   10   8
  Nevada   1   -   2   2
  West Region   68   61   69   62
  Texas   65   71   67   68
  Central Region   65   71   67   68
  Carolinas   7   13   3   5
  Florida   18   20   18   16
  East Region   25   33   21   21
  Total   158   165   157   151

About Meritage Homes Corporation

Meritage Homes is the ninth-largest public homebuilder in the United States, based on 4,238 homes closed in 2012. 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 June 30, 2013, the company had 165 actively selling communities in markets including Sacramento, San Francisco's East Bay, the Central Valley and Southern California; Houston, Dallas-Ft. Worth, Austin and San Antonio, Texas; Phoenix/Scottsdale and Tucson, Arizona; Nevada; Denver, Colorado; Orlando and Tampa, Florida; Raleigh and Charlotte, North Carolina.

Meritage has designed and built more than 75,000 homes in its 27-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 in 2013, Meritage received the U.S. Environmental Protection Agency's ENERGY STAR Partner of the Year for Sustained Excellence Award, for its 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 plans to expand the Company's footprint and allocate capital to existing markets, and management's projected home closing revenue and earnings per diluted share for 2013.

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: weakness in the homebuilding market resulting from an unexpected setback in the current economic recovery; 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 materials and 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; 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; 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 preserve our deferred tax assets and use them within the statutory time limits; delays and risks associated with land development; 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; our ability to take certain actions because of restrictions contained in the indentures for our senior and senior subordinated notes and our ability to raise additional capital when and if needed; our credit ratings; successful integration of future acquisitions; government regulations and 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, 2012 under the caption "Risk Factors," which can be found on our website.

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