Meritage Homes Reports First Quarter 2007 Results and Comments On Outlook For Full Year
FIRST QUARTER SUMMARY RESULTS (CHANGE 2007 VS. 2006): * Closed 1,796 homes (-29%) with an ASP of $321K (-4%) for $576 million home closing revenue (-32%) * Net earnings of $15 million (-81%), or $0.57 diluted EPS (-80%) * Gross margin of 15.6%, including $17 million pre-tax charge ($0.40 per share after tax) for land-related write-offs and impairments * Net orders for 2,073 homes (-20%) totaling $641 million (-23%) * Cancellation rate improved to 27% of gross orders in the quarter from 48% in the fourth quarter 2006 * Order backlog at quarter-end of 3,962 homes (-39%) valued at $1.3 billion (-42%) * Net debt-to-capital ratio of 43% * Total lot supply reduced 23% from September 30, 2005 peak to 41,936 lots, with 20% owned and 80% optioned
SCOTTSDALE, Ariz., April 25, 2007 (PRIME NEWSWIRE) -- Meritage Homes Corporation (NYSE:MTH) today announced first quarter results for the period ended March 31, 2007.
Summary Operating Results (Unaudited)
(Dollars in thousands, except per share amounts)
As of and for the Three Months Ended
March 31,
2007 2006 %Chg
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Homes closed (units) 1,796 2,528 -29%
Home closing revenue $576,115 $846,374 -32%
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Sales orders (units) 2,073 2,590 -20%
Sales order value $640,616 $832,618 -23%
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Ending backlog (units) 3,962 6,456 -39%
Ending backlog value $1,264,562 $2,167,844 -42%
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Net Earnings $15,116 $79,736 -81%
Diluted EPS $0.57 $2.86 -80%
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Revenue and earnings reflect slower overall housing demand and difficult comparisons to record 2006 results
Meritage reported total revenue, net earnings and diluted EPS of $577 million, $15 million and $0.57 per diluted share, respectively, for the first quarter of 2007, compared to all-time first quarter record 2006 amounts of $847 million, $80 million and $2.86 per diluted share, respectively.
"Our first quarter 2007 results reflect the broad slowdown in the U.S. housing market and a difficult comparison to the prior year, when we achieved record first quarter revenue and earnings, resulting from unprecedented housing demand in 2005. Although home closing revenue returned to levels achieved two years ago, our margins were much lower due to competitive pricing pressures and additional land-related write-offs," said Steven J. Hilton, chairman and CEO of Meritage.
Total home closing revenue for the first quarter 2007 was $576 million from 1,796 home closings at an average price of approximately $321,000. First quarter 2006 home closing revenue was $846 million, up from $551 million the previous year, on 2,528 home closings at an average price of approximately $335,000.
Gross margin on first quarter home closing revenue was 15.6% in 2007, compared with a near-record 25.3% in the first quarter of 2006. First quarter 2007 gross margin was reduced by $17 million in pre-tax charges ($0.40 per share after tax) related to lot option deposit write-offs and inventory impairments, with no such charges in the first quarter 2006. Excluding these charges in 2007, gross margin would have been 18.6% and the Company would have reported diluted EPS of $0.97 per share.
Sales improve with lower cancellations
Net sales orders for 2,073 homes totaled $641 million in the first quarter 2007, a substantial improvement from the fourth quarter 2006, although lower than the near-record first quarter 2006 sales by 20% and 23%, respectively. Net sales were helped by a decline in order cancellations during the first quarter 2007. The cancellation rate improved to 27% of first quarter gross orders (21% of beginning backlog) from 48% of fourth quarter 2006 gross orders (22% of beginning backlog) and in line with 28% of gross orders reported in last year's first quarter.
With 217 active communities at quarter-end, up from 185 a year ago, the absorption rate as measured by sales per average community was 10 in the first quarter 2007 compared to 14 in the first quarter 2006.
Total dollar value of backlog at the end of the first quarter was reduced 42% year-over-year, a combination of 39% fewer homes and a 5% lower average price (ASP.) The lower ASP reflects price reductions, incentives and changes in sales mix, with a higher percentage of lower-priced homes sold in recent quarters.
"Considering the difficult comparison to the first quarter last year, we were pleased with our sales results this quarter, and encouraged by the overall decline in cancellations," said Mr. Hilton. "We define a normal market as an absorption rate of about one sale per community per week, with stable prices and normal incentives. While we're not there yet, we believe our first quarter results indicate a move in the right direction."
Meritage maintains strong balance sheet
Responding to the downturn in demand and sales, the Company further reduced its inventories of unsold homes by 11% during the quarter, to a total of 1,213 spec homes, from the year-end 2006 balance of 1,365 spec homes.
While maintaining approximately a four- to five-year target supply of lots, total lot supply under control was reduced to 41,936 at first quarter-end, with 20% owned and 80% controlled under option contracts. Meritage has reduced its total controlled lot supply by 23% from the peak of 54,675 at September 30, 2005. The total was reduced by approximately 495 lots in the first quarter 2007 due to the write-off of optioned lots.
"We continue to believe that our use of options to control land has provided tangible benefits -- by leveraging capital to allow us to grow faster when markets are strong, and by reducing our capital at risk, thereby limiting our land-related write-offs as markets weaken," said Mr. Hilton. "This strategy has benefited our shareholders, and we expect it will continue to do so."
Meritage reported a net debt-to-capital ratio of 43% at March 31, 2007, better than most other 'BB' rated homebuilders and near the low end of the Company's target of 40-50%. Meritage Homes Corporation received a rating upgrade to 'BB' from Standard and Poor's Rating Services during the quarter.
Total funds available under Meritage's existing bank credit facility increased 18% from year-end 2006 to $528 million at March 31, 2007, after considering the facility's borrowing base availability and most restrictive covenants. In February of this year, the Company issued $150 million of 7.73% senior subordinated notes maturing in 2017 in a private placement, and used the proceeds to pay down borrowings under its credit facility, increasing Meritage's liquidity.
Operating and reporting segments
Closings and orders slowed in the Central segment, Meritage's largest, comprised of Arizona, Texas and Colorado. Total closing revenue was down 7%, as 15% lower volume was partially offset by a 10% increase in ASP. First quarter 2007 total order value was 41% lower in Arizona, 12% lower in Texas, and 9% higher in Colorado, compared to the first quarter 2006.
Meritage's West segment, comprised of California and Nevada, experienced a 63% decline in total closing revenue during the first quarter 2007, while the total value of net orders was off just 9%. ASP's for the West segment were down 6% on homes closed and 11% on new orders, reflecting continued pricing constraints. Meritage's California markets were some of the first to realize a slowdown, contributing to more favorable year-over-year comparisons, as the total value of home sales improved 2% year-over-year in the first quarter.
Florida markets comprise the East segment for Meritage, and continued to report the largest declines in terms of order volume and ASPs, driven by very weak demand in southwest Florida. Total closing revenue was 46% lower, while total order value was 62% lower in the first quarter 2007 compared to the first quarter 2006.
Summary and future outlook
"The markets for homebuilders have changed dramatically in the last year," said Mr. Hilton. "Change creates opportunity, and we see this period of change as one of opportunity for Meritage. We have a sound strategy for growth and profitability, a strong organization and leadership team with a proven record of success, and a solid franchise in some of the best homebuilding markets in the country. We are using the slowdown in demand as an opportunity to improve each.
"As we've stated previously, we expect 2007 will be a difficult year, but we are encouraged by some early signs of stabilization," offered Mr. Hilton. "We've seen our overall cancellation rate decline, sales pace begin to improve and incentives begin to stabilize in certain markets, resulting in modest impairments during the first quarter this year relative to last year's fourth quarter and some of our peers' recent write-offs. We have taken steps to improve sales, reduce our cost structure and strengthen our balance sheet, and our successes are evident in the results we've reported. While conditions are still challenging -- with softer demand and weaker pricing compared to a year ago -- we are confident in our ability to manage through these difficult conditions."
Mr. Hilton continued, "Based on current conditions and our projections, we are expecting to close 7,700-8,500 homes in 2007 for a total of $2.4-2.7 billion revenue. Assuming relatively stable conditions and an associated modest exposure to inventory impairments or option write-offs during the remainder of the year, we expect to earn between $2.00-2.50 per diluted share for the full year 2007.
"We will face difficult comparisons in the second quarter as we did in the first, but we believe that order comparisons will ease as we go through 2007. We anticipate that margins will continue to be under pressure due to competition in 2007, and would expect some modest improvement in demand during 2008, but are not relying on a rebound in 2007 to achieve our projections."
Concluding, Mr. Hilton said, "We expect Meritage will remain profitable for the full year 2007, and will emerge from this cycle a stronger competitor, well positioned to deliver superior growth and earnings in future years for our shareholders."
Awards and recognition
Meritage was pleased to move up to 580th on the FORTUNE 1000 list in its most recently published report, up from 615th in 2006. Among homebuilders ranked on this list, Meritage is the 13th largest in terms of total 2006 revenue.
Conference call and webcast
The Company will host a conference call on Thursday, April 26, 2007 at 11:00 a.m. Eastern Time to discuss the results of the quarter. The call will be webcast and accompanying materials will be accessible on the "Investor Relations" page of the Company's website at http://www.meritagehomes.com. The dial-in number is 800-901-5248 with a passcode of "Meritage," and participants are encouraged to dial in five minutes before the call begins. A replay of the call will be available after 2:00 p.m. EDT April 26, 2007, through midnight May 25, 2007, on the website noted above, or by dialing 888-286-8010, and referencing passcode 54286061. The webcast replay will also be available on the "Investor Relations" page of the Company's website, and through CCBN for two weeks at www.fulldisclosure.com.
Meritage Homes Corporation and Subsidiaries
Operating Results
(Unaudited)
(In thousands, except per share data)
Three Months Ended
March 31,
2007 2006
---- ----
Operating results
Home closing revenue $ 576,115 $ 846,374
Land closing revenue 1,335 897
--------- ---------
Total closing revenue 577,450 847,271
Home closing gross profit 90,151 214,063
Land closing gross profit/(loss) 189 (22)
--------- ---------
Total closing gross profit 90,340 214,041
Commissions and other sales costs (47,338) (48,027)
General and administrative expenses (26,663) (42,722)
Other income, net 6,279 7,499
--------- ---------
Earnings before provision for
income taxes 22,618 130,791
Provision for income taxes (7,502) (51,055)
--------- ---------
Net earnings $ 15,116 $ 79,736
========= =========
Earnings per share
Basic:
Earnings per share $ 0.58 $ 2.96
Weighted average shares
outstanding 26,165 26,974
Diluted:
Earnings per share $ 0.57 $ 2.86
Weighted average shares
outstanding 26,543 27,876
Non-GAAP Reconciliations:
Total closing gross profit $ 90,340 $ 214,041
Add: Land-related write-offs/
impairments 17,037 --
--------- ---------
Adjusted closing gross profit 107,377 214,041
========= =========
Earnings before provision for
income taxes 22,618 130,791
Add: Land-related write-offs/
impairments 17,037 --
--------- ---------
Adjusted earnings before
provision for income taxes 39,655 130,791
Adjusted provision for income
taxes (13,933) (51,055)
--------- ---------
Adjusted net earnings $ 25,722 $ 79,736
========= =========
Adjusted basic earnings
per share $ 0.98 $ 2.96
Adjusted diluted earnings
per share $ 0.97 $ 2.86
Meritage Homes Corporation and Subsidiaries
Non-GAAP Financial Disclosures
(Unaudited)
(Dollars in thousands)
As of and for the Four
Three Months Ended Quarters Ended
March 31, March 31,
2007 2006 2007 2006
---- ---- ---- ----
EBITDA reconciliation:(1)
Net earnings $ 15,116 $ 79,736 $ 160,734 $ 311,205
Provision for
income taxes 7,502 51,055 95,102 197,090
Interest amortized
to cost of sales 7,972 10,761 40,197 41,629
Depreciation and
amortization 4,269 4,873 23,125 18,326
-------- -------- ---------- ----------
$ 34,859 $146,425 $ 319,158 $ 568,250
======== ======== ========== ==========
Interest coverage ratio:(2)
EBITDA $ 319,158 $ 568,250
Interest incurred 54,373 $ 44,480
Interest coverage
ratio 5.9x 12.8x
Debt to EBITDA ratio:(3)
Notes payable and other
borrowings $ 810,364 $ 648,413
EBITDA $ 319,158 $ 568,250
Debt to EBITDA ratio 2.5x 1.1x
After-tax stockholder returns:(4)
Net earnings $ 160,734 $ 311,205
Average assets $2,154,122 $1,785,990
Average equity $ 970,01 $ 762,744
After-tax return on
assets 7.5% 17.4%
After-tax return on
equity 16.6% 40.8%
Net debt-to-capital:(5)
Notes payable and
other borrowings $ 810,364 $ 648,413
Less: cash and cash
Equivalents 38,919 41,662
------------ -----------
Net debt 771,445 606,751
Stockholders' equity 1,023,061 891,540
------------ -----------
Capital $1,794,50 $1,498,291
Net debt-to-capital 43.0% 40.5%
(1) EBITDA is a non-GAAP financial measure and represents net
earnings before interest expense amortized to cost of sales, income
taxes, depreciation and amortization. A non-GAAP financial measure is
a numerical measure of a company's historical or future financial
performance, financial position or cash flows that excludes amounts,
or is subject to adjustments that have the effect of excluding
amounts, that are included in the most directly comparable measure
calculated and presented in accordance with GAAP in the statement of
earnings, balance sheet, or statement of cash flows (or equivalent
statements) of the Company; or includes amounts, or is subject to
adjustments that have the effect of including amounts, that are
excluded from the most directly comparable measure so calculated and
presented. In this regard, GAAP refers to generally accepted
accounting principles in the United States. We have provided a
reconciliation of this non-GAAP financial measure to the most
directly comparable GAAP financial measure. EBITDA is presented here
because it is used by management to analyze and compare Meritage with
other homebuilding companies on the basis of operating performance
and we believe it is a financial measure widely used by investors and
analysts in the homebuilding industry. EBITDA as presented may not be
comparable to similarly titled measures reported by other companies
because not all companies calculate EBITDA in an identical manner
and, therefore, it is not necessarily an accurate means of comparison
between companies. EBITDA is not intended to represent cash flows for
the period or funds available for management's discretionary use nor
has it been presented as an alternative to operating income or as an
indicator of operating performance and it should not be considered in
isolation or as a substitute for measures of performance prepared in
accordance with GAAP.
(2) Interest coverage ratio is calculated as the trailing four
quarters' EBITDA divided by the trailing four quarters' interest
incurred.
(3) Debt to EBITDA ratio is calculated as notes payable and
other borrowings divided by the trailing four quarters' EBITDA.
(4) Return on assets is defined as net earnings for the trailing four
quarters divided by the average of the trailing five quarters' ending
total assets. Return on equity is defined as net earnings for the
trailing four quarters divided by the average of the trailing five
quarters' ending stockholders' equity for the same period.
(5) Net debt-to-capital is calculated as notes payable and other
borrowings less cash and cash equivalents, divided by the sum of
notes payable and other borrowings, less cash and cash equivalents,
plus stockholders' equity.
Meritage Homes Corporation and Subsidiaries
Balance Sheet Data
(In thousands)
March 31, 2007 December 31, 2006
-------------- -----------------
(unaudited)
Total assets $2,184,129 $2,170,525
Real estate 1,576,038 1,535,871
Cash and cash equivalents 38,919 56,710
Total liabilities 1,161,068 1,163,693
Notes payable and other borrowings 810,364 733,276
Stockholders' equity 1,023,061 1,006,832
Meritage Homes Corporation and Subsidiaries
Operating Data (Unaudited)
(Dollars in Thousands)
For the Three Months Ended March 31,
2007 2006
---------------------- -----------------------
Homes Value Homes Value
Homes Closed:
California 194 $ 102,135 423 $ 246,883
Nevada 45 15,277 189 74,156
---------- ---------- ---------- ----------
West Region 239 117,412 612 321,039
Arizona 498 182,289 736 225,859
Texas 912 222,888 952 219,084
Colorado 33 13,663 16 6,090
---------- ---------- ---------- ----------
Central Region 1,443 418,840 1,704 451,033
Florida 114 39,863 212 74,302
---------- ---------- ---------- ----------
East Region 114 39,863 212 74,302
---------- ---------- ---------- ----------
Total 1,796 $ 576,115 2,528 $ 846,374
========== ========== ========== ==========
Homes Ordered:
California 291 $ 139,984 237 $ 137,356
Nevada 84 30,866 129 49,408
---------- ---------- ---------- ----------
West Region 375 170,850 366 186,764
Arizona 478 152,342 733 259,810
Texas 1,096 278,544 1,312 315,147
Colorado 48 18,520 42 16,994
---------- ---------- ---------- ----------
Central Region 1,622 449,406 2,087 591,951
Florida 76 20,360 137 53,903
---------- ---------- ---------- ----------
East Region 76 20,360 137 53,903
---------- ---------- ---------- ----------
Total 2,073 $ 640,616 2,590 $ 832,618
========== ========== ========== ==========
Order Backlog:
California 323 $ 167,665 528 $ 311,437
Nevada 96 37,314 289 101,652
---------- ---------- ---------- ----------
West Region 419 204,979 817 413,089
Arizona 885 317,359 2,424 872,653
Texas 2,393 637,819 2,533 605,528
Colorado 60 23,640 58 22,726
---------- ---------- ---------- ----------
Central Region 3,338 978,818 5,015 1,500,907
Florida 205 80,765 624 253,848
---------- ---------- ---------- ----------
East Region 205 80,765 624 253,848
---------- ---------- ---------- ----------
Total 3,962 $1,264,562 6,456 $2,167,844
========== ========== ========== ==========
Meritage Homes Corporation and Subsidiaries
Operating Data (Unaudited)
First Qtr 2007 First Qtr 2006
-------------- --------------
Active
Communities: Beg. End Beg. End
---- --- ---- ---
California 26 25 20 23
Nevada 5 9 6 6
----- ----- ----- -----
West Region 31 34 26 29
Arizona 42 39 35 36
Texas 121 124 108 100
Colorado 6 7 3 5
----- ----- ----- -----
Central Region 169 170 146 141
Florida 13 13 12 15
----- ----- ----- -----
East Region 13 13 12 15
----- ----- ----- -----
Total 213 217 184 185
===== ===== ===== =====
About Meritage Homes Corporation
Meritage Homes Corporation (NYSE:MTH) is a leader in the homebuilding industry. The Company is ranked by Builder magazine as the 13th largest homebuilder in the U.S. and was recently selected for the fourth consecutive year to Forbes' "Platinum 400 - Best-Managed Big Companies in America." Meritage is in the S&P SmallCap 600 Index, ranks 580 on the 2007 Fortune 1000 list and has appeared on Fortune's "Fastest Growing Companies in America" list in five of the last seven years. Meritage operates in many of the dominant homebuilding markets of the southern and western United States, including six of the top 10 single-family housing markets in the country, and has reported 19 consecutive years of record revenue through 2006. For more information about the Company, visit www.meritagehomes.com. Meritage is a member of the Public Home Builders Council of America (www.phbca.org).
The Meritage Homes Corporation logo is available at http://www.primezone.com/newsroom/prs/?pkgid=2624
This press release contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements include those regarding our expectations about trends in the housing or homebuilding markets, or for Meritage in particular, including trends related to: sales/orders, cancellations, prices/incentives, land values and sales/absorption rates, as well as the timing of changes or continuation of trends in related metrics; our expected home closings, revenue, margins and net earnings/EPS for 2007; the level of option write-offs and impairment charges we may incur in 2007; our future lot or land supply and the benefits of our lot option strategy; and our future opportunities and operations of Meritage Homes. Such statements are based upon preliminary financial and operating data, 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 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, including: fluctuations in demand, competition, sales orders, cancellation rates and home prices in our markets; potential write-downs or write-offs of assets or deposits; interest rates and changes in the availability and pricing of residential mortgages; housing affordability; our success in locating and negotiating potential acquisitions; successful integration of acquired operations with existing operations; our investments in land and development joint ventures; our dependence on key personnel and the availability of satisfactory subcontractors; materials and labor costs; our ability to take certain actions because of restrictions contained in the indentures for our senior and senior subordinated notes, and the agreement for our unsecured credit facility; our lack of geographic diversification; the cost and availability of insurance, including the unavailability of insurance for the presence of mold; our potential exposure to natural disasters; the impact of construction defect and home warranty claims; demand for and acceptance of our homes; changes in the availability and pricing of real estate in the markets in which we operate; our ability to acquire additional land or options to acquire additional land on acceptable terms, particularly in our start-up markets; our exposure to obligations under performance and surety bonds, performance guarantees and letters of credit; general economic slow downs; consumer confidence, which can be impacted by economic and other factors such as terrorism, war, or threats thereof and changes in energy prices or stock markets; inflation in the cost of materials used to construct our homes; our level of indebtedness and our ability to raise additional capital when and if needed; legislative or other initiatives that seek to restrain growth or new housing construction or similar measures and other factors identified in documents filed by us with the Securities and Exchange Commission, including those set forth in our Form 10-K for the year ended December 31, 2006, under the caption "Risk Factors." As a result of these and other factors, the Company's stock and note prices may fluctuate dramatically.
CONTACT: Meritage Homes Corporation
Investor Relations:
Brent Anderson, Director Investor Relations
(972) 543-8207
Corporate Communications:
Jane Hays, Vice President Corporate Development
(972) 543-8123
Released April 25, 2007