Meritage Homes reports third quarter 2018 diluted EPS of $1.33; with a 13% increase in pre-tax earnings on 9% growth in home closing revenue; Continued expansion into entry-level market represents one-third of communities and 43% of third quarter orders

SCOTTSDALE, Ariz., Oct. 24, 2018 (GLOBE NEWSWIRE) -- Meritage Homes Corporation (NYSE: MTH), a leading U.S. homebuilder, reported its third quarter results for the period ended September 30, 2018.

MANAGEMENT COMMENTS

“We delivered another quarter of strong earnings performance with a 13% increase in pre-tax earnings, largely due to the success of our shift into the entry-level market over the past couple of years,” said Steven J. Hilton, chairman and chief executive officer of Meritage Homes. “That performance resulted from a 10% increase in our third quarter home closings -- the second highest number of homes we’ve delivered in more than a decade -- and our ability to hold margins through increased efficiencies that helped offset higher costs.

“The combination of higher home prices and interest rates have clearly impacted recent home buying activity, especially at higher price points, which we anticipated two years ago when we undertook our strategy to build more affordable homes to cater to the expanding entry-level and move-down markets,” explained Mr. Hilton. “We’ve made tremendous progress in shifting toward more affordably-priced homes, which represented one-third of our communities and 43% of our total orders in the third quarter. The fact that these communities are selling at a faster pace than higher-end move-up communities reinforces our confidence and commitment to furthering that strategy.”

He continued, “Underlying economic and housing market fundamentals remain strong. Employment is high, wages are growing, consumer confidence is high and inventories of affordable homes are low. These conditions offer opportunities for Meritage and the entry-level LiVE.NOW.® communities we have in our pipeline.

"We expect continued demand for entry-level homes will exceed that for move-up homes over the long term, though the next couple of quarters may be more challenging, and we have therefore adjusted our expectations for the remainder of 2018 based on the recent softness we’ve seen in the overall market,” said Mr. Hilton. “We are now projecting approximately 8,300-8,500 home closings and total home closing revenue of $3.375-3.475 billion for the full year 2018. We also expect home closing gross margin for the full year to be approximately 18% and are projecting pre-tax earnings of $265-285 million for the year."

Mr. Hilton added, “We announced an authorization by our board last quarter to repurchase up to $100 million of Meritage Homes stock. We have purchased more than $29 million from cash on hand so far and we expect to complete additional repurchases over the coming quarters.”

THIRD QUARTER RESULTS

• Net earnings of $54.1 million ($1.33 per diluted share) for the third quarter of 2018, increased 27% and 30%, respectively, compared to $42.6 million ($1.02 per diluted share) for the third quarter of 2017. Earnings before income taxes were up 13% year-over-year, primarily due to increased home closing revenue.
  
  
• Home closing revenue increased 9% with a 10% increase in closing volume, partially offset by a 1% decrease in average sales price compared to the third quarter of 2017, as demand continued to shift to entry-level homes. The increases in closings and revenue were led by the East region, which delivered a 31% increase in home closing revenue with 32% more home closings at an average sales price 1% lower than the third quarter of 2017. The Central region delivered home closings and revenue growth of 11% and 8%, respectively, with a 3% decrease in average price.  West region home closing revenue was 2% less than last year’s third quarter, as a 5% decline in closing volume was partially offset by a 3% increase in average closing prices for the region.
  
  
• Home closing gross margin for the third quarter of 2018 was 18.1%, or 18.4% excluding a $2.6 million charge to terminate a purchase agreement for land in California that is no longer consistent with the Company’s strategy. That compared to 18.1% in the third quarter of 2017, or 18.3% excluding $1.8 million of charges incurred for asset write-offs.
  
  
• Selling, general and administrative expenses totaled 11.0% of third quarter 2018 home closing revenue, in line with 10.9% in the prior year.
  
  
• Interest expense declined $1.1 million for the third quarter of 2018 compared to 2017. The reduction was due to a greater percentage of interest capitalized to qualified assets under development.
  
  
• Third quarter effective tax rate was approximately 24% in 2018, compared to 33% in 2017, reflecting lower corporate income tax rates enacted for 2018.
  
  
• Total orders for the third quarter of 2018 were 2% below 2017’s third quarter, primarily reflecting a 42% decrease in average active communities in California, which have produced among the highest absorptions over the past year. Though average active community count company-wide for the third quarter was 2% higher in 2018 than 2017, this included several communities near close-out with limited inventory, which contributed to a 4% decline in total orders pace year-over-year.

YEAR TO DATE RESULTS

• Net earnings were $151.8 million for the first nine months of 2018, a 41% increase over $107.7 million for the first nine months of 2017, primarily driven by a 10% increase in home closing revenue, combined with a 40 basis point improvement in home closing gross margin and a lower effective tax rate for the first nine months of 2018 compared to 2017.
  
  
• Home closings for the first nine months of the year increased 10% over 2017, driven by a 32% increase in the East region and 14% increase in the Central region.
  
  
• Home closing gross profit increased 12% to $442.4 million in the first nine months of 2018 compared to $393.8 million in the first nine months of 2017, as year-to-date home closing gross margin improved to 17.8% in 2018 from 17.4% in 2017, or 18.0% compared to 17.6%, excluding $2.7 million and $3.6 million of charges incurred on asset write-offs in both years, respectively. East region home closing gross margins were the primary contributor, as they improved 210 basis points year-over-year for the first nine months of the year, or 120 basis points excluding the asset write-offs in the prior year.
  
  
• Other income for the first nine months of the year increased by $4.0 million in 2018 primarily due to a $4.8 million favorable legal settlement in the first quarter of 2018 related to a previous joint venture in Nevada.
  
  
• The effective tax rate for the first nine months of 2018 was 21%, compared to 34% for the first nine months of 2017, due to the lower statutory corporate tax rate in 2018, as well as $6.3 million of energy tax credits recorded in the first quarter of 2018 for homes closed in 2017 that qualified for the credits. These energy tax credits were extended only for 2017 and are expected to reduce the full year 2018 effective tax rate by at least 200 basis points.

BALANCE SHEET

• Cash and cash equivalents at September 30, 2018, totaled $205.8 million, compared to $170.7 million at December 31, 2017. Real estate assets increased to $2.89 billion at September 30, 2018, compared to $2.73 billion at December 31, 2017. Homes under construction or completed increased by $224.6 million, reflecting a higher level of spec inventory for entry-level communities, while finished home sites and land under development decreased by $63.0 million.
  
  
• The Company repurchased and retired approximately $29.4 million of its outstanding stock during the third quarter of 2018 under the Company's authorized $100 million share repurchase program.
  
  
• Meritage ended the third quarter of 2018 with approximately 34,400 total lots owned or under control, compared to approximately 33,300 total lots at September 30, 2017. Approximately 80% of the lots added during the third quarter were in communities planned for entry-level product.
  
  
• Debt-to-capital ratio was reduced to 43.4% at September 30, 2018 from 44.9% at December 31, 2017, with net debt-to-capital ratio reduced further to 39.2% and 41.4%, respectively.

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 25.

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 registration link: http://dpregister.com/10124467.

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

A replay of the call will be available beginning at approximately 1:00 p.m. ET on October 26 and extending through November 9, 2018, on the website noted above or by dialing 877-344-7529, 1-412-317-0088 for international or 1-855-669-9658 for Canada, and referencing conference number 10124467. 

About Meritage Homes Corporation
Meritage Homes is the seventh-largest public homebuilder in the United States, based on homes closed in 2017. Meritage builds and sells single-family homes for entry-level, move-up, and active adult buyers in markets including California, Texas, Arizona, Colorado, Florida, North Carolina, South Carolina, Tennessee and Georgia.

The Company has designed and built over 110,000 homes in its 32-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 has received the U.S. Environmental Protection Agency's ENERGY STAR Partner of the Year for Sustained Excellence Award every year since 2013 for innovation and industry leadership in energy efficient homebuilding.

For more information, visit 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 management's projected home closings, home closing revenue, home closing gross margin and pre-tax earnings for the full year 2018, as well as management's expectation for entry-level demand and its intention to repurchase additional shares.

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: the availability and cost of finished lots and undeveloped land; shortages in the availability and cost of labor; changes in interest rates and the availability and pricing of residential mortgages; changes in tax laws that adversely impact us or our homebuyers; inflation in the cost of materials used to develop communities and construct homes; the success of strategic initiatives; the ability of our potential buyers to sell their existing homes; cancellation rates; the adverse effect of slow absorption rates; slowing in the growth of entry-level home buyers; competition; impairments of our real estate inventory; a change to the feasibility of projects under option or contract that could result in the write-down or write-off of earnest or option deposits; our potential exposure to and impacts from natural disasters or severe weather conditions; home warranty and construction defect claims; failures in health and safety performance; our success in prevailing on contested tax positions; our ability to obtain performance and surety bonds in connection with our development work; the loss of key personnel; 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 ability to successfully integrate acquired companies and achieve anticipated benefits from these acquisitions; our compliance with government regulations, the effect of legislative and other governmental actions, orders, policies or initiatives that impact housing, labor availability, construction, mortgage availability, our access to capital, the cost of capital or the economy in general, or other initiatives that seek to restrain growth of new housing construction or similar measures; legislation relating to energy and climate change; the replication of our energy-efficient technologies by our competitors; our exposure to information technology failures and security breaches; negative publicity that affects our reputation; legislation related to tariffs 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, 2017 and Form 10-Q for the second quarter ended June 30, 2018 under the caption "Risk Factors," which can be found on our website at www.investors.meritagehomes.com.

Released October 24, 2018