Meritage Homes Reports Second Quarter and First Half 2007 Results
SECOND QUARTER SUMMARY RESULTS (CHANGE 2007 VS. 2006):
-- Net orders for 1,734 homes (-18%) with an average selling price
(ASP) of $289K (-12%) totaling $501 million (-28%)
-- Closed 1,858 homes (-32%) with an ASP of $306K (-8%) for $568
million home closing revenue (-37%) as demand and prices weakened
-- Net loss of $57 million or $(2.16) per share, after real estate
and goodwill-related impairments reduced net earnings by $70
million after tax
YEAR TO DATE RESULTS (CHANGE 2007 VS. 2006):
-- Closed 3,654 homes (-30%) with an ASP of $313K (-6%) for $1.1
billion home closing revenue (-35%)
-- Net loss of $41 million or ($1.58) per share after real estate
and goodwill-related impairments reduced net earnings by $81
million after tax
-- Order backlog of 3,838 homes (-34%) valued at $1.2 billion (-39%)
-- Net debt-to-capital ratio at June 30 was 47% in 2007, compared to
42% in 2006
-- Total lot supply reduced 7% from March 31, 2007 - and 29% from
its September 2005 peak - to 38,925 lots, with 25% owned and 75%
optioned
SCOTTSDALE, Ariz., July 26, 2007 (PRIME NEWSWIRE) -- Meritage Homes Corporation (NYSE:MTH) today announced second quarter and year-to-date results for the periods ended June 30, 2007.
Summary Operating Results (Unaudited)
(Dollars in thousands, except per share amounts)
---------------------------------------------------------------------
Three Months Ended June 30, Six Months Ended June 30,
2007 2006 %Chg 2007 2006 %Chg
---------------------------------------------------------------------
Homes closed
(units) 1,858 2,722 -32% 3,654 5,250 -30%
Home closing
revenue $ 567,748 $ 902,851 -37% $1,143,863 $1,749,225 -35%
---------------------------------------------------------------------
Sales orders
(units) 1,734 2,116 -18% 3,807 4,706 -19%
Sales order
value $ 501,466 $ 694,360 -28% $1,142,082 $1,526,978 -25%
---------------------------------------------------------------------
Ending
backlog
(units) 3,838 5,849 -34%
Ending
backlog
value $1,198,280 $1,959,353 -39%
---------------------------------------------------------------------
Net
earnings*
(including
write-offs) ($56,576) $ 77,055 -173% ($41,460) $ 156,791 -126%
Adjusted net
earnings*
(excluding
write-offs) $ 13,495 $ 81,560 -83% $ 39,671 $ 161,296 -75%
Diluted EPS
(including
write-offs) ($2.16) $ 2.82 -177% ($1.58) $ 5.68 -128%
---------------------------------------------------------------------
* See non-GAAP reconciliation between net earnings and adjusted net
earnings on "Operating Results" table, page 5.
SECOND QUARTER RESULTS REFLECT DETERIORATION IN MARKET CONDITIONS
Meritage reported a net loss for the second quarter 2007 of $57 million, or ($2.16) per share, compared to net earnings of $77 million, or $2.82 per diluted share in the second quarter 2006. The results included pre-tax real estate-related and joint venture impairments of $80 million and goodwill-related impairments of $28 million in the second quarter 2007. The 2007 real estate-related charges stemmed from reduced market valuations of properties in California ($45 million), Florida ($15 million), Nevada ($12 million) and Arizona ($8 million). Due to persistent and severe weakness in southwest Florida, all goodwill and other intangible assets relating to a February 2005 acquisition in Ft. Myers/Naples were impaired and written off. These charges, after tax effects, combined to reduce net earnings from homebuilding operations by $70 million. Excluding these charges, adjusted net earnings for the second quarter 2007 were $13 million, compared to $82 million in 2006.
Second quarter home closing revenue was $568 million in 2007, compared to $903 million in 2006. This 37% revenue decline reflects an 8% reduction in ASP on 32% fewer home closings. The largest year-over-year declines in closing revenue were experienced in Nevada (-69%), Arizona (-58%) and California (-52%), while quarterly revenue from Texas home closings increased 8% in 2007 over 2006.
Gross margin was 1.7%, or 15.6% before real estate-related impairments in the second quarter 2007, compared to 24.1% and 24.9%, respectively, one year earlier. These adjusted gross margins exclude second quarter real estate-related impairments of $79 million in 2007 and $7 million in 2006.
"Weakened demand and increased price incentives have resulted in lower margins on homes sold and more write-offs on remaining inventories," said Steven J. Hilton, chairman and CEO of Meritage. "Based on lower market values, we adjusted our inventory valuations and abandoned certain lot purchase options where previously-negotiated prices won't allow us to generate a reasonable return at today's lower home selling prices."
Softer demand coupled with higher cancellation rates reduced net orders to 1,734 homes with a total value of $501 million in 2007, compared to 2,116 orders valued at $694 million in 2006. This 18% decline in net home orders, combined with a 12% lower ASP, resulted in a 28% year-over-year reduction in order value, with the largest declines in Arizona (-37%) and California (-35%). The second quarter 2007 cancellation rate rose to approximately 37% of gross orders, compared to 32% in the second quarter 2006.
YEAR-TO-DATE RESULTS REFLECT SLOWER SECOND QUARTER
Meritage reported a net loss of $41 million, or ($1.58) per share, for the first six months of 2007, compared to net earnings of $157 million, or $5.68 per diluted share for the first six months of 2006. The 2007 results included pre-tax real estate-related and joint venture impairments of $97 million and goodwill-related impairments of $28 million, which combined to reduce net earnings from homebuilding operations by $81 million after tax.
Year-to-date home closing revenue for 2007 was $1.1 billion, generated from 3,654 homes closed at an ASP of approximately $313,000. First half 2006 home closing revenue was $1.7 billion, generated from 5,250 homes closed at an ASP of approximately $333,000. The largest declines were in Nevada (-74%) and California (-56%), while Florida and Arizona closing revenues also decreased 42% and 41%, respectively. Texas closing revenue increased 5% year-to-date 2007 compared to 2006.
Net orders for the first six months declined 19%, with an 8% lower ASP, resulting in total order value 25% less than the same period a year ago. Average sales per community ran slightly less than 3 per month, compared to 4 per month last year. Slower absorption rates resulted in a 9% increase in communities open for sale as of June 30, 2007 compared to the same date in 2006, as communities have not sold out as quickly as originally projected, and a few communities in the development pipeline have opened and started selling.
CAREFUL BALANCE SHEET MANAGEMENT CONTINUES
Order backlog stood at 3,838 homes valued at $1.2 billion on June 30, 2007, compared to 5,849 homes valued at $2.0 billion on June 30, 2006. A 7% year-over-year decline in the ASP of homes in backlog, combined with the 34% lower volume, reduced backlog value by 39% from a year ago. Arizona and Florida represented the largest declines in backlog from the previous year at -60% and -71%, respectively, with Texas backlog 9% lower than a year ago.
"Based on weaker demand today and our expectation of difficult selling conditions persisting for at least the remainder of the year, we reduced our lot supply by 7% this quarter -- and by 29% from its September 2005 peak -- abandoning options to purchase another 2,000 lots, which would have cost about $110 million," said Mr. Hilton. "Since the first quarter 2006, we have terminated options to purchase more than 9,000 lots representing about 20% of our total lots under option, which will avoid over $690 million of purchases. Our total lot supply today stands at 38,925 -- roughly a four-and-a-half-year supply of lots based on trailing twelve months' deliveries -- with only one year's supply owned. We have $175 million of deposits controlling $1.7 billion of land, which represents 75% of our total supply, and we will continually evaluate market conditions going forward before deciding whether or not to exercise these options."
Inventories of unsold homes increased slightly during the quarter, ending at 1,387 spec homes, compared to 1,365 specs at the beginning of the year. Total real estate inventories at June 30, 2007 were $1.6 billion, compared to $1.5 billion at year-end 2006, due to the slight increase in specs from cancellations, and closings slowing faster than lot purchases.
Meritage's net debt-to-capital ratio was 47% as of June 30, 2007, compared to 42% at June 30, 2006, reflecting increases in inventory levels, but still within the Company's target range of 40-50%. Total funds available under Meritage's existing bank credit facility stood at $516 million at June 30, 2007, after considering the facility's borrowing base availability and most restrictive covenants.
SUMMARY AND FUTURE OUTLOOK
"Market conditions have become more challenging in the last few months, as interest rates have increased, mortgage credit has tightened, and buyers continue to wait for signs that we're near the bottom, especially in markets where affordability was a relevant concern," commented Mr. Hilton. "Many believe we're approaching the bottom in terms of housing demand and buyer confidence, and we at Meritage are working to help buyers get more comfortable with their purchase decision. We've increased our sales training and marketing, and improved our customer satisfaction ratings, while reducing costs and future commitments in under-performing markets.
"We expect the remainder of 2007 will be difficult, but take confidence in our sound strategy, strong organization, proven record of success, and solid franchise that includes some of the historically best homebuilding markets in the country. We are emphasizing value, quality and customer satisfaction, and are determined to maintain a strong balance sheet that will allow us to emerge a stronger competitor when the market improves."
CONFERENCE CALL AND WEBCAST
The Company will host a conference call to discuss these results on July 27, 2007, at 8:00 a.m. Pacific Time (11:00 a.m. Eastern Time.) The call will be webcast by Thomson/CCBN and distributed through the Thomson StreetEvents Network, with an accompanying slideshow on the "Investor Relations" page of the Company's web site at http://www.meritagehomes.com. For telephone participants, the dial-in number is 866-831-6247 with a passcode of "Meritage". 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 July 27, 2007, through midnight August 6, 2007 on the websites noted above, or by dialing 888-286-8010, and referencing passcode 43585367.
Meritage Homes Corporation and Subsidiaries
Operating Results
(Unaudited)
(In thousands, except per share data)
Three Months Ended Six Months Ended
June 30, June 30,
2007 2006 2007 2006
---- ---- ---- ----
Operating results
Home closing
revenue $ 567,748 $ 902,851 $1,143,863 $1,749,225
Land closing
revenue 919 11,809 2,254 12,706
---------- ---------- ---------- ----------
Total closing
revenue 568,667 914,660 1,146,117 1,761,931
Home closing gross
profit 9,588 219,467 99,739 433,530
Land closing gross
profit 171 1,151 360 1,129
---------- ---------- ---------- ----------
Total closing
gross profit 9,759 220,618 100,099 434,659
Commissions and
other sales costs (48,067) (52,849) (95,405) (100,876)
General and
administrative
expenses (a) (56,366) (51,344) (83,029) (94,066)
Other income, net
(b) 5,470 8,725 11,749 16,224
---------- ---------- ---------- ----------
Earnings/(loss)
before provision
for income taxes (89,204) 125,150 (66,586) 255,941
(Provision)/
benefit for
income taxes 32,628 (48,095) 25,126 (99,150)
---------- ---------- ---------- ----------
Net earnings/
(loss) ($ 56,576) $ 77,055 ($ 41,460) $ 156,791
========== ========== =========== ==========
Earnings per share
Basic:
Earnings/(loss)
per share ($ 2.16) $ 2.90 ($ 1.58) $ 5.85
Weighted average
shares
outstanding 26,232 26,609 26,199 26,792
Assuming dilution:
Earnings/(loss)
per share ($ 2.16) $ 2.82 ($ 1.58) $ 5.68
Weighted average
shares
outstanding 26,232 27,362 26,199 27,619
Non-GAAP
Reconciliations:
Total closing
gross profit $ 9,759 $ 220,618 $ 100,099 $ 434,659
Add: Real estate-
related
impairments
Terminated lot
options 20,162 2,835 36,119 2,835
Impaired projects 58,700 4,460 59,780 4,460
---------- ---------- ---------- ----------
Adjusted closing
gross profit $ 88,621 $ 227,913 $ 195,998 $ 441,954
========== ========== ========== ==========
Earnings/(loss)
before provision
for income taxes ($ 89,204) $ 125,150 ($ 66,586) $ 255,941
Add:
Real estate-related
impairments
Terminated lot
options 20,162 2,835 36,119 2,835
Impaired projects 58,700 4,460 59,780 4,460
Joint venture
(JV) impairments 1,120 -- 1,120 --
Goodwill-related
impairments 27,952 -- 27,952 --
---------- ---------- ---------- ----------
Adjusted earnings
before provision
of income taxes 18,730 132,445 58,385 263,236
Adjusted provision
for income taxes (5,235) (50,885) (18,714) (101,940)
---------- ---------- ---------- ----------
Adjusted net
earnings $ 13,495 $ 81,560 $ 39,671 $ 161,296
========== ========== ========== ==========
(a) General and administrative expenses include the following:
Severance-
related
expenses $ 987 $ 11,711 $ 2,061 $ 11,711
Goodwill-
related
impairments 27,952 -- 27,952 --
---------- ---------- ---------- ----------
Total $ 28,939 $ 11,711 $ 30,013 $ 11,711
========== ========== ========== ==========
(b) Other income includes joint venture impairments of $1.1 million
in the three and six months ended June 30, 2007.
Meritage Homes Corporation and Subsidiaries
Non-GAAP Financial Disclosures
(Unaudited)
(Dollars in thousands)
As of and for
the Four
Three Months Ended Six Months Ended Quarters Ended
June 30, June 30, June 30,
2007 2006 2007 2006 2007 2006
---- ---- ---- ---- ---- ----
EBITDA
reconciliation: (a)
Net earnings/
(loss) ($56,576) $ 77,055 ($41,460) $156,791 $ 27,103 $329,021
(Provision)/
benefit for
income
taxes (32,628) 48,095 (25,126) 99,150 14,379 209,628
Interest
amortized
to cost
of sales 10,166 9,518 18,138 20,279 40,845 41,564
Depreciation
and
amortiza-
tion 4,775 5,304 9,044 10,177 22,596 19,360
-----------------------------------------------------------
EBITDA ($74,263) $139,972 ($39,404) $286,397 $104,923 $599,573
Add back:
Real estate-
related
impair-
ments 79,982 7,295 97,019 7,295 167,992 7,295
Goodwill-
related
impair-
ments 27,952 -- 27,952 -- 27,952 --
-----------------------------------------------------------
Adjusted
EBITDA $ 33,671 $147,267 $ 85,567 $293,692 $300,867 $606,868
===========================================================
Interest coverage ratio: (b)
Adjusted EBITDA $300,867 $606,868
Interest incurred 58,524 $47,370
Interest coverage ratio 5.1 12.8
Debt to Adjusted EBITDA ratio: (c)
Notes payable and other borrowings $903,330 $721,566
Adjusted EBITDA $300,867 $606,868
Debt to Adjusted EBITDA ratio 3.0 1.2
After-tax stockholder returns: (d)
Net earnings $27,103 $329,021
Average assets $2,191,276 $1,927,074
Average equity $985,490 $825,373
After-tax return on assets 1.2% 17.1%
After-tax return on equity 2.8% 39.9%
Net debt-to-capital: (5)
Notes payable and other borrowings $903,330 $721,566
Less: cash and cash equivalents 51,678 47,465
---------------------
Net debt 851,652 674,101
Stockholders' equity 968,937 933,738
---------------------
Capital 1,820,589 1,607,839
Net debt-to-capital 46.8% 41.9%
(a) EBITDA and adjusted EBITDA are non-GAAP financial measures,
representing net earnings before interest expense amortized to
cost of sales, income taxes, depreciation and amortization, with
write-offs and impairment charges also excluded from adjusted
EBITDA. 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 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. Adjusted EBITDA is
presented because it more closely resembles the comparable
covenant calculations under our revolving credit facility and
senior and senior subordinated note indentures.
(b) Interest coverage ratio is calculated as the trailing four
quarters' EBITDA or adjusted EBITDA divided by the trailing four
quarters' interest incurred.
(c) Debt to adjusted EBITDA ratio is calculated as notes payable and
other borrowings divided by the trailing four quarters' EBITDA
or adjusted EBITDA.
(d) 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.
(e) 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)
June 30, December 31,
2007 2006
----------- ----------
(unaudited)
Total assets $2,229,595 $2,170,525
Real estate 1,649,286 1,535,871
Cash and cash equivalents 51,678 56,710
Total liabilities 1,260,658 1,163,693
Notes payable and other borrowings 903,330 733,276
Stockholders' equity 968,937 1,006,832
Meritage Homes Corporation and Subsidiaries
Operating Data (Unaudited)
(Dollars in Thousands)
For the Three Months Ended June 30,
2007 2006
---------------- ----------------
Homes Value Homes Value
----- ----- ----- -----
Homes Closed:
California 208 $ 99,256 361 $208,111
Nevada 58 21,649 172 69,106
-------- -------- -------- --------
West Region 266 120,905 533 277,217
Arizona 358 120,735 888 290,124
Texas 1,074 273,200 1,075 252,386
Colorado 28 9,810 37 13,638
-------- -------- -------- --------
Central Region 1,460 403,745 2,000 556,148
Florida 132 43,098 189 69,486
-------- -------- -------- --------
East Region 132 43,098 189 69,486
-------- -------- -------- --------
Total 1,858 $567,748 2,722 $902,851
======== ======== ======== ========
Homes Ordered:
California 243 $104,407 291 $161,857
Nevada 70 24,769 82 33,241
-------- -------- -------- --------
West Region 313 129,176 373 195,098
Arizona 369 104,824 457 165,475
Texas 908 222,270 1,170 293,439
Colorado 56 20,449 22 7,652
-------- -------- -------- --------
Central Region 1,333 347,543 1,649 466,566
Florida 88 24,747 94 32,696
-------- -------- -------- --------
East Region 88 24,747 94 32,696
-------- -------- -------- --------
Total 1,734 $501,466 2,116 $694,360
======== ======== ======== ========
Meritage Homes Corporation and Subsidiaries
Operating Data (Unaudited)
(Dollars in Thousands)
As of and For the Six Months Ended June 30,
2007 2006
------------------- --------------------
Homes Value Homes Value
Homes Closed:
California 402 $201,391 784 $454,994
Nevada 103 36,926 361 143,262
----- ---------- ----- ----------
West Region 505 238,317 1,145 598,256
Arizona 856 303,024 1,624 515,983
Texas 1,986 496,088 2,027 471,470
Colorado 61 23,473 53 19,728
----- ---------- ----- ----------
Central Region 2,903 822,585 3,704 1,007,181
Florida 246 82,961 401 143,788
----- ---------- ----- ----------
East Region 246 82,961 401 143,788
----- ---------- ----- ----------
Total 3,654 $1,143,863 5,250 $1,749,225
===== ========== ===== ==========
Homes Ordered:
California 534 $244,391 528 $299,213
Nevada 154 55,635 211 82,649
----- ---------- ----- ----------
West Region 688 300,026 739 381,862
Arizona 847 257,166 1,190 425,285
Texas 2,004 500,814 2,482 608,586
Colorado 104 38,969 64 24,646
----- ---------- ----- ----------
Central Region 2,955 796,949 3,736 1,058,517
Florida 164 45,107 231 86,599
----- ---------- ----- ----------
East Region 164 45,107 231 86,599
----- ---------- ----- ----------
Total 3,807 $1,142,082 4,706 $1,526,978
===== ========== ===== ==========
Order Backlog:
California 358 $172,816 457 $265,183
Nevada 108 40,434 199 65,787
----- ---------- ----- ----------
West Region 466 213,250 656 330,970
Arizona 896 301,448 1,993 748,004
Texas 2,227 586,889 2,628 646,581
Colorado 88 34,279 43 16,740
----- ---------- ----- ----------
Central Region 3,211 922,616 4,664 1,411,325
Florida 161 62,414 529 217,058
----- ---------- ----- ----------
East Region 161 62,414 529 217,058
----- ---------- ----- ----------
Total 3,838 $1,198,280 5,849 $1,959,353
===== ========== ===== ==========
Meritage Homes Corporation and Subsidiaries
Operating Data (Unaudited)
First Half 2007 First Half 2006
--------------- ---------------
Active Beg. End Beg. End
---- --- ---- ---
Communities:
California 26 29 20 26
Nevada 5 11 6 6
------- ------- ------- -------
West Region 31 40 26 32
Arizona 42 39 35 40
Texas 121 123 108 113
Colorado 6 7 3 5
------- ------- ------- -------
Central Region 169 170 146 158
Florida 13 13 12 14
------- ------- ------- -------
East Region 13 13 12 14
------- ------- ------- -------
Total 213 222 184 204
======= ======= ======= =======
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 12th largest homebuilder in the U.S. and was selected in 2006 for the fourth consecutive year to Forbes' "Platinum 400 - Best-Managed Big Companies in America." Meritage is included in the S&P SmallCap 600 Index, and ranks #580 on the 2007 FORTUNE 1000 list. Meritage operates in many of the historically dominant homebuilding markets of the southern and western United States, including six of the top 10 single-family housing markets in the country, and reported its 19th consecutive year 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 housing demand, buyer confidence and management's expectation that 2007 will continue to be a difficult year. 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; 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, and Form 10-Q for the quarter ended March 31, 2007, 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-Corp. Develop.
(972) 543-8123
Released July 26, 2007