Meritage Homes Corporation (MTH)

Meritage Homes reports record third quarter 2020 orders 71% higher than prior year; 56% increase in net earnings with 21% revenue growth and 21.5% gross margin

SCOTTSDALE, Ariz., Oct. 21, 2020 (GLOBE NEWSWIRE) -- Meritage Homes Corporation (NYSE: MTH), a leading U.S. homebuilder, reported third quarter results for the period ended September 30, 2020. Summary Operating Results (unaudited) (Dollars in thousands, except per share amounts)  Three Months Ended September 30, Nine Months Ended September 30,   2020 2019 % Chg 2020 2019 % Chg Homes closed (units) 3,004  2,419  24 % 8,090  6,437  26 % Home closing revenue $1,133,221  $939,185  21 % $3,055,229  $2,500,888  22 % Average sales price - closings $377  $388  (3)% $378  $389  (3)% Home orders (units) 3,851  2,258  71 % 10,550  7,523  40 % Home order value $1,488,480  $858,395  73 % $3,958,870  $2,879,369  37 % Average sales price - orders $387  $380  2 % $375  $383  (2)% Ending backlog (units)       5,242  3,519  49 % Ending backlog value       $2,004,981  $1,397,033  44 % Average sales price - backlog       $382  $397  (4)% Earnings before income taxes $135,506  $92,366  47 % $338,201  $192,410  76 % Net earnings $109,118  $69,809  56 % $270,948  $146,049  86 % Diluted EPS $2.84  $1.79  59 % $7.04  $3.76  87 % MANAGEMENT COMMENTS "Our third quarter of 2020 results continued to outperform and reflect the current strength in the homebuilding market. Meritage had many remarkable achievements this past quarter: We delivered our highest quarterly sales orders, our strongest absorptions since 2005, record quarterly home closing revenue, and our best quarterly gross margin since 2014 - while also achieving our lowest net debt to capital in our company's history,” said Steven J. Hilton, chairman and chief executive officer of Meritage Homes. “These strong results are the combination of existing favorable market factors including historically-low mortgage interest rates and increased demand for healthier, safer homes, and Meritage's strategy of focusing on affordable entry-level and first move-up homes that allowed us to capitalize on that demand.“Our sales orders of 3,851 homes this quarter were 71% more than the third quarter of 2019 and surpassed our previous quarterly record set in the second quarter of 2020. Over just the first nine months of this year, we sold a total of 10,550 homes - well over the full year 2019 sales volume. We also closed 24% more homes than we did in the same quarter of the prior year. Home closing revenue increased 21% year-over-year to $1.1 billion for the third quarter of 2020, which combined with a 21.5% home closing gross margin to drive a 56% increase in our net earnings compared to the third quarter of 2019."He continued, "To meet the surge in demand we are experiencing, we are investing significantly for additional growth. We spent nearly $300 million on land acquisition and development and put a record near 9,000 new lots under control this quarter, bringing the total lot supply to nearly 48,000 lots, as we increase our market share in our existing geographies and push toward our 300 community count goal by early to mid 2022."Mr. Hilton concluded, "Based on our performance through the first three quarters of 2020 and confidence in our ability to deliver our backlog, we are projecting 11,200-11,500 total home closings for approximately $4.2-4.4 billion total home closing revenue and home closing gross margin of 21.0-21.5% for the full year 2020. We expect that to translate into approximately $10.25-10.50 diluted earnings per share, a year-over-year increase of more than 60%."THIRD QUARTER RESULTS * The record total sales orders for the third quarter of 2020 reflected an increase of 71% year-over-year, driven by a 94% increase in absorption pace over the prior year’s third quarter with high demand for Meritage's entry-level LiVE.NOW® product. Entry-level represented almost 70% of third quarter 2020 orders, compared to 54% in the same quarter in 2019. Absorptions doubled in Texas to six per month, compared to three per month in the third quarter last year, even with a 14% decline in average active communities. Absorptions were up 88% in the West region and 87% in the East region year-over-year, with significant increases across all states led by California's 137% increase. * A 21% year-over-year increase in home closing revenue to a record $1.1 billion for the quarter ended September 30, 2020 reflected a 24% increase in home closing volume partially offset by a 3% reduction in average sales price ("ASP"), which was primarily due to the shift in product mix toward entry-level as compared to 2019. * Home closing gross margin improved 170 bps to 21.5% from 19.8% a year ago. The additional closing volume and efficiencies gained from streamlined operations more than offset record high lumber prices and contributed to a 31% increase in total home closing gross profit over the prior year's third quarter. * Selling, general and administrative expenses ("SG&A") were 10.1% of third quarter 2020 home closing revenue, a 70 bps improvement over 10.8% in the third quarter of 2019 due to greater leverage of fixed expenses on higher home closing revenue, as well as cost savings from technology enhancements, particularly as related to the Company's sales and marketing efforts. * The third quarter effective income tax rate decreased to 19.5% in 2020 compared to 24.4% in 2019 primarily due to eligible energy tax credits on qualifying energy-efficient homes closed in 2020 that were not available in 2019, under the Taxpayer Certainty and Disaster Tax Relief Act enacted in December 2019. * Third quarter 2020 pre-tax margin increased 210 bps to 11.9%, compared to 9.8% in the third quarter of 2019. Net earnings were $109.1 million ($2.84 per diluted share) for the third quarter of 2020, a 56% increase over $69.8 million ($1.79 per diluted share) reported for the third quarter of 2019. Strong earnings growth reflected the increases in home closing revenue, gross margins and improved overhead leverage, which combined with the reduction in diluted shares after the repurchase of one million shares in the first quarter of 2020, led to a 59% year-over-year improvement in earnings per diluted share.YEAR TO DATE RESULTS * Total orders for the first nine months of 2020 increased 40% year-over-year, driven by a 58% increase in absorptions on an 11% lower average community count, compared to the first nine months of 2019. * Home closings of 8,090 for the first nine months of 2020 increased 26% year-over-year with a 3% reduction in ASP on closings due to the product mix shift toward Meritage's entry-level product, resulting in a 22% year-over-year increase in home closing revenue to $3.1 billion. * Home closing gross margin increased 250 bps to 21.0% for the first nine months of 2020, compared to 18.5% in the same period of 2019, reflecting a 39% increase in total home closing gross profit for the first nine months of 2020. * SG&A expenses as a percentage of home closing revenue improved to 10.3% in the first nine months of 2020, compared to 11.2% in the first nine months of 2019, reflecting greater leverage of overhead expenses on higher home closing revenue, as well as technology and cost savings initiatives implemented at the start of the COVID-19 pandemic. * Interest expense decreased $6.2 million year-over-year, primarily due to lower debt balances reflecting the early redemption in December 2019 of $300 million senior notes that were due in early 2020. * The effective tax rate for the first nine months of 2020 was 19.9%, compared to 24.1% for the same period in 2019, primarily due to approximately $10 million in year-to-date 2020 estimated energy tax credits. * The pre-tax margin for the first nine months of 2020 increased 340 bps to 11.0%, compared to 7.6% for the first nine months of 2019. Year-to-date 2020 net earnings were $270.9 million ($7.04 per diluted share), an 86% increase over $146.0 million ($3.76 per diluted share) for year-to-date 2019, reflecting increases in home closing revenue and gross margin, combined with lower SG&A expenses and a lower effective tax rate in 2020, which combined with the reduction in diluted shares after the repurchase of one million shares in the first quarter of 2020, led to an 87% year-over-year improvement in earnings per diluted share.BALANCE SHEET * Cash and cash equivalents at September 30, 2020 totaled $610.0 million, compared to $319.5 million at December 31, 2019, reflecting positive cash flow from operations of $373.1 million. Real estate assets at September 30, 2020 held relatively steady to December 31, 2019 as an increase in sold inventory resulted in a decrease in spec inventory. * Nearly 16,000 new lots were put under control in the first nine months of 2020, with over 55% coming from the third quarter of 2020 alone. The Company has been actively securing new lots following a short-lived dip in March and April due to COVID-19-related shutdowns. A total of nearly 48,000 lots were owned or controlled as of September 30, 2020, compared to approximately 37,000 total lots at September 30, 2019. * Debt-to-capital and net debt-to-capital ratios were 31.7% and 15.7%, respectively, at September 30, 2020, down from 34.0% and 26.2%, respectively, at December 31, 2019. CONFERENCE CALL Management will host a conference call to discuss the results at 8:00 a.m. Arizona Time (11:00 a.m. Eastern Time) on Thursday, October 22. The call will be webcast live with an accompanying slideshow, both of which will be available on the "Investor Relations" page of the Company's web site at https://investors.meritagehomes.com. For those unable to participate via the webcast, telephone participants can dial in to 1-800-437-2398 US toll free on the day of the call. The international dial-in number is 1-929-477-0577.A replay of the call will be available beginning at approximately 10:00 a.m. Arizona Time (1:00 p.m. Eastern Time) on October 22 and extending through November 5, 2020, on the website noted above or by dialing 1-800-437-2398 US toll free, 1-929-477-0577 for international and referencing conference number 1805364. Meritage Homes Corporation and Subsidiaries Consolidated Income Statements (In thousands, except per share data) (Unaudited) Three Months Ended September 30,  2020 2019 Change $ Change % Homebuilding:        Home closing revenue$1,133,221  $939,185  $194,036  21 % Land closing revenue4,870  1,695  3,175  187 % Total closing revenue1,138,091  940,880  197,211  21 % Cost of home closings(889,654) (753,068) 136,586  18 % Cost of land closings(4,360) (1,721) 2,639  153 % Total cost of closings(894,014) (754,789) 139,225  18 % Home closing gross profit243,567  186,117  57,450  31 % Land closing gross profit/(loss)510  (26) 536  N/M Total closing gross profit244,077  186,091  57,986  31 % Financial Services:        Revenue4,939  4,317  622  14 % Expense(2,026) (1,725) 301  17 % Earnings from financial services unconsolidated entities and other, net1,402  2,990  (1,588) (53)% Financial services profit4,315  5,582  (1,267) (23)% Commissions and other sales costs(73,282) (63,450) 9,832  15 % General and administrative expenses(40,737) (37,191) 3,546  10 % Interest expense(55) (1,068) (1,013) (95)% Other income, net1,188  2,402  (1,214) (51)% Earnings before income taxes135,506  92,366  43,140  47 % Provision for income taxes(26,388) (22,557) 3,831  17 % Net earnings$109,118  $69,809  $39,309  56 %          Earnings per common share:        Basic    Change $ or shares Change % Earnings per common share$2.90  $1.82  $1.08  59 % Weighted average shares outstanding37,607  38,296  (689) (2)% Diluted        Earnings per common share$2.84  $1.79  $1.05  59 % Weighted average shares outstanding38,405  39,079  (674) (2)%  Nine Months Ended September 30,  2020 2019 Change $ Change % Homebuilding:        Home closing revenue$3,055,229  $2,500,888  $554,341  22 % Land closing revenue16,954  12,747  4,207  33 % Total closing revenue3,072,183  2,513,635  558,548  22 % Cost of home closings(2,412,606) (2,039,191) 373,415  18 % Cost of land closings(17,509) (14,149) 3,360  24 % Total cost of closings(2,430,115) (2,053,340) 376,775  18 % Home closing gross profit642,623  461,697  180,926  39 % Land closing gross loss(555) (1,402) 847  60 % Total closing gross profit642,068  460,295  181,773  39 % Financial Services:        Revenue13,329  11,705  1,624  14 % Expense(5,519) (4,949) 570  12 % Earnings from financial services unconsolidated entities and other, net3,132  9,559  (6,427) (67)% Financial services profit10,942  16,315  (5,373) (33)% Commissions and other sales costs(204,863) (176,130) 28,733  16 % General and administrative expenses(111,083) (105,536) 5,547  5 % Interest expense(2,176) (8,350) (6,174) (74)% Other income, net3,313  5,816  (2,503) (43)% Earnings before income taxes338,201  192,410  145,791  76 % Provision for income taxes(67,253) (46,361) 20,892  45 % Net earnings$270,948  $146,049  $124,899  86 %          Earnings per common share:        Basic    Change $ or shares Change % Earnings per common share$7.17  $3.83  $3.34  87 % Weighted average shares outstanding37,763  38,119  (356) (1)% Diluted        Earnings per common share$7.04  $3.76  $3.28  87 % Weighted average shares outstanding38,491  38,841  (350) (1)% Meritage Homes Corporation and Subsidiaries  Consolidated Balance Sheets (In thousands) (Unaudited)  September 30, 2020 December 31, 2019 Assets:     Cash and cash equivalents $609,979  $319,466  Other receivables 96,702  88,492  Real estate (1) 2,741,016  2,744,361  Deposits on real estate under option or contract 62,967  50,901  Investments in unconsolidated entities 3,819  4,443  Property and equipment, net 42,730  50,606  Deferred tax asset 28,425  25,917  Prepaids, other assets and goodwill 101,680  114,063  Total assets $3,687,318  $3,398,249  Liabilities:     Accounts payable $167,788  $155,024  Accrued liabilities 274,371  226,008  Home sale deposits 25,509  24,246  Loans payable and other borrowings 23,031  22,876  Senior notes, net 996,770  996,105  Total liabilities 1,487,469  1,424,259  Stockholders' Equity:     Preferred stock —  —  Common stock 377  382  Additional paid-in capital 460,268  505,352  Retained earnings 1,739,204  1,468,256  Total stockholders’ equity 2,199,849  1,973,990  Total liabilities and stockholders’ equity $3,687,318  $3,398,249  (1) Real estate – Allocated costs:     Homes under contract under construction $967,222  $564,762  Unsold homes, completed and under construction 395,151  686,948  Model homes 86,933  121,340  Finished home sites and home sites under development 1,291,710  1,371,311  Total real estate $2,741,016  $2,744,361  Supplemental Information and Non-GAAP Financial Disclosures (Dollars in thousands – unaudited): Three Months Ended September 30, Nine Months Ended September 30,  2020 2019 2020 2019 Depreciation and amortization$7,945  $7,172  $22,496  $19,553           Summary of Capitalized Interest:        Capitalized interest, beginning of period$72,882  $88,307  $82,014  $88,454  Interest incurred16,103  21,319  50,188  64,227  Interest expensed(55) (1,068) (2,176) (8,350) Interest amortized to cost of home and land closings(21,380) (20,363) (62,476) (56,136) Capitalized interest, end of period$67,550  $88,195  $67,550  $88,195            September 30, 2020 December 31, 2019     Notes payable and other borrowings$1,019,801  $1,018,981      Stockholders' equity2,199,849  1,973,990      Total capital$3,219,650  $2,992,971      Debt-to-capital31.7 % 34.0 %              Notes payable and other borrowings$1,019,801  $1,018,981      Less: cash and cash equivalents(609,979) (319,466)     Net debt$409,822  $699,515      Stockholders’ equity2,199,849  1,973,990      Total net capital$2,609,671  $2,673,505      Net debt-to-capital15.7 % 26.2 %     Meritage Homes Corporation and Subsidiaries Consolidated Statements of Cash Flows  (In thousands) (Unaudited)  Nine Months Ended September 30,   2020 2019 Cash flows from operating activities:     Net earnings $270,948  $146,049  Adjustments to reconcile net earnings to net cash provided by operating activities:     Depreciation and amortization 22,496  19,553  Stock-based compensation 15,724  15,719  Equity in earnings from unconsolidated entities (2,821) (8,934) Distribution of earnings from unconsolidated entities 2,449  11,261  Other 1,881  3,902  Changes in assets and liabilities:     Decrease/(increase) in real estate 9,080  (110,295) (Increase)/decrease in deposits on real estate under option or contract (12,910) 5,773  Decrease/(increase) in other receivables, prepaids and other assets 4,933  (3,108) Increase in accounts payable and accrued liabilities 60,039  84,632  Increase in home sale deposits 1,263  2,808  Net cash provided by operating activities 373,082  167,360  Cash flows from investing activities:     Investments in unconsolidated entities (4) (1,112) Distributions of capital from unconsolidated entities 1,000  7,250  Purchases of property and equipment (14,771) (18,376) Proceeds from sales of property and equipment 528  267  Maturities/sales of investments and securities 632  675  Payments to purchase investments and securities (632) (675) Net cash used in investing activities (13,247) (11,971) Cash flows from financing activities:     Repayment of loans payable and other borrowings (8,509) (3,086) Repurchase of shares (60,813) (8,957) Net cash used in financing activities (69,322) (12,043) Net increase in cash and cash equivalents 290,513  143,346  Beginning cash and cash equivalents 319,466  311,466  Ending cash and cash equivalents  $609,979  $454,812  Meritage Homes Corporation and Subsidiaries Operating Data (Dollars in thousands)  (Unaudited)  Three Months Ended September 30,   2020 2019   Homes Value Homes Value Homes Closed:         Arizona 429  $143,630  440  $144,920  California 332  202,460  200  135,555  Colorado 183  88,199  169  85,674  West Region 944  434,289  809  366,149  Texas 1,059  349,907  810  278,744  Central Region 1,059  349,907  810  278,744  Florida 339  124,836  302  118,804  Georgia 178  62,921  139  46,984  North Carolina 295  98,322  206  77,696  South Carolina 78  25,502  75  23,768  Tennessee 111  37,444  78  27,040  East Region 1,001  349,025  800  294,292  Total 3,004  $1,133,221  2,419  $939,185  Homes Ordered:         Arizona 709  $240,151  482  $159,778  California 510  319,680  198  124,201  Colorado 188  88,972  156  74,498  West Region 1,407  648,803  836  358,477  Texas 1,183  395,453  649  217,648  Central Region 1,183  395,453  649  217,648  Florida 491  179,607  293  111,471  Georgia 172  62,541  138  47,527  North Carolina 386  132,988  188  69,017  South Carolina 90  28,140  55  17,520  Tennessee 122  40,948  99  36,735  East Region 1,261  444,224  773  282,270  Total 3,851  $1,488,480  2,258  $858,395    Nine Months Ended September 30,   2020 2019   Homes Value Homes Value Homes Closed:         Arizona 1,315  $437,233  1,126  $368,762  California 787  487,605  464  304,846  Colorado 553  268,970  507  264,479  West Region 2,655  1,193,808  2,097  938,087  Texas 2,747  901,791  2,176  760,189  Central Region 2,747  901,791  2,176  760,189  Florida 942  357,233  809  321,364  Georgia 459  163,617  380  132,440  North Carolina 805  276,477  558  204,866  South Carolina 229  73,113  202  66,513  Tennessee 253  89,190  215  77,429  East Region 2,688  959,630  2,164  802,612  Total 8,090  $3,055,229  6,437  $2,500,888            Homes Ordered:         Arizona 2,016  $654,579  1,521  $493,391  California 1,250  769,251  572  368,194  Colorado 540  258,268  580  290,060  West Region 3,806  1,682,098  2,673  1,151,645  Texas 3,457  1,130,943  2,346  799,293  Central Region 3,457  1,130,943  2,346  799,293  Florida 1,198  435,411  925  369,503  Georgia 518  182,958  431  149,731  North Carolina 999  340,626  658  241,573  South Carolina 272  85,316  205  65,540  Tennessee 300  101,518  285  102,084  East Region 3,287  1,145,829  2,504  928,431  Total 10,550  $3,958,870  7,523  $2,879,369            Order Backlog:         Arizona 1,212  $404,044  738  $258,341  California 608  373,949  199  129,880  Colorado 183  87,047  258  129,167  West Region 2,003  865,040  1,195  517,388  Texas 1,758  602,709  1,151  413,229  Central Region 1,758  602,709  1,151  413,229  Florida 627  242,419  488  213,427  Georgia 192  69,204  174  63,730  North Carolina 413  143,741  277  104,162  South Carolina 114  36,723  92  31,474  Tennessee 135  45,145  142  53,623  East Region 1,481  537,232  1,173  466,416  Total 5,242  $2,004,981  3,519  $1,397,033  Meritage Homes Corporation and Subsidiaries Operating Data (Unaudited)  Three Months Ended September 30,   2020 2019   Ending Average Ending Average Active Communities:         Arizona 35  36.5  37  38.5  California 20  24.0  24  22.0  Colorado 11  12.0  20  20.5  West Region 66  72.5  81  81.0  Texas 58  63.0  74  73.5  Central Region 58  63.0  74  73.5  Florida 34  35.0  36  36.0  Georgia 11  14.0  18  19.5  North Carolina 20  20.5  22  22.5  South Carolina 6  5.5  10  9.5  Tennessee 9  10.0  9  10.0  East Region 80  85.0  95  97.5  Total 204  220.5  250  252.0    Nine Months Ended September 30,   2020 2019   Ending Average Ending Average Active Communities:         Arizona 35  34.3  37  38.5  California 20  25.3  24  20.5  Colorado 11  13.8  20  20.0  West Region 66  73.4  81  79.0  Texas 58  70.3  74  84.5  Central Region 58  70.3  74  84.5  Florida 34  34.4  36  33.5  Georgia 11  15.3  18  20.0  North Carolina 20  21.6  22  23.5  South Carolina 6  6.8  10  11.0  Tennessee 9  10.3  9  9.5  East Region 80  88.4  95  97.5  Total 204  232.1  250  261.0  About Meritage Homes Corporation Meritage Homes is the seventh-largest public homebuilder in the United States, based on homes closed in 2019. Meritage offers a variety of homes that are designed with a focus on first-time and first move-up buyers in Arizona, California, Colorado, Texas, Florida, Georgia, North Carolina, South Carolina and Tennessee.The Company has designed and built over 135,000 homes in its 35-year history, and has a reputation for its distinctive style, quality construction, and award-winning customer experience. Meritage is the industry leader in energy-efficient homebuilding and a seven-year recipient of the U.S. Environmental Protection Agency’s ENERGY STAR® Partner of the Year for Sustained Excellence Award since 2013 for innovation and industry leadership in energy efficient homebuilding. For more information, visit www.meritagehomes.com.The information included in this press release contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements include statements regarding health of the housing market and the potential adverse impacts of the COVID-19 pandemic, and projected full year 2020 home closings, home closing revenue, gross margins and diluted earnings per share.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, except as required by law. 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: disruptions to our business by COVID-19, fear of a similar event, and measures implemented by federal, state and local governments or health authorities to address it; the availability and cost of finished lots and undeveloped land; shortages in the availability and cost of labor; the ability of our potential buyers to sell their existing homes; changes in interest rates and the availability and pricing of residential mortgages; our exposure to information technology failures and security breaches; legislation related to tariffs; inflation in the cost of materials used to develop communities and construct homes; the adverse effect of slow absorption rates; impairments of our real estate inventory; cancellation rates; competition; changes in tax laws that adversely impact us or our homebuyers; 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; home warranty and construction defect claims; failures in health and safety performance; our ability to obtain performance and surety bonds in connection with our development work; the loss of key personnel; 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 if our credit ratings are downgraded; 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; negative publicity that affects our reputation 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, 2019 and our Form 10-Q for the quarter ended June 30, 2020 under the caption "Risk Factors," which can be found on our website at www.investors.meritagehomes.com.Contacts: Emily Tadano, VP Investor Relations   (480) 515-8979 (office)   investors@meritagehomes.com