Meritage Homes reports record second quarter 2020 orders 32% higher than prior year; 78% increase in net earnings driven by 20% revenue growth and strong margin improvement

SCOTTSDALE, Ariz., July 22, 2020 (GLOBE NEWSWIRE) -- Meritage Homes Corporation (NYSE: MTH), a leading U.S. homebuilder, reported second quarter results for the period ended June 30, 2020.

Summary Operating Results (unaudited)
(Dollars in thousands, except per share amounts)

MANAGEMENT COMMENTS

“The spring selling season demonstrated remarkable resilience in May and June after a slow start in April due to the global pandemic, resulting in our two highest selling months ever and an all-time company record of nearly 3,600 orders for the quarter,” said Steven J. Hilton, chairman and chief executive officer of Meritage Homes. “Our absorptions were up 42% over last year's second quarter, averaging approximately five homes per month in roughly 240 communities nationwide.

“Demand for new homes is being driven by historically low mortgage interest rates, a shortage of used homes for sale, and an increased need for homes that can accommodate entire families working from home more than ever before. Many of those families are choosing safe suburban communities rather than crowded urban centers and many often prefer to purchase a home virtually rather than physically,” he explained. “That is exactly what Meritage offers. 100% of our communities are open for both in-person and virtual sales, and our virtual selling capabilities have been very beneficial. More than half of our communities are designed for the entry-level market with a wide selection of affordable homes ready for quick move-in, while our streamlined design selection process in Studio M  allows first move-up customers to move quickly into a new home.”

Mr. Hilton continued, “The entire Meritage organization is executing at a high level to drive powerful earnings growth. Our second quarter net earnings increased 78% through the combination of a 20% increase in home closing revenue, our highest gross margin in six years of 21.4% and our fourth consecutive quarter of improving overhead leverage -- to just 10.3% of home closing revenue.

“As a result, we ended the quarter with the strongest balance sheet we’ve ever had, including almost a half billion dollars in cash and the lowest net debt-to-capital ratio in our history, which gives us the flexibility to continue to grow and expand market share while also providing a healthy cushion in the event that conditions weaken,” he added. “We responded to the resurgence in demand since late-April by re-accelerating new home starts to meet demand and securing new land positions to replace communities as they sell out, with almost 6,000 new lots put under control since April.”

Mr. Hilton concluded, “We are encouraged by the health of the housing market and confident in our strategy, while remaining aware of the risks and uncertainties in the economy until the pandemic is brought under control. We have taken necessary precautions to protect our employees, trade partners and customers. In addition, we have recently committed at least $250,000 to support Feed America for those in need.

“Based on our current forecast, we believe we can generate between $4.0-4.3 billion in home closing revenue for the year, including $1.0-1.1 billion for the third quarter, with home closing gross margins around 21% for the third quarter and full year. We estimate that will translate to approximately $8.75-9.25 of diluted earnings per share for the full year, including approximately $2.15-2.35 for the third quarter.”

SECOND QUARTER RESULTS

• Total orders for the second quarter of 2020 increased 32% year-over-year, driven by a 42% increase in absorption pace over the prior year’s second quarter. Order trends accelerated through the quarter, with April orders 15% lower than the prior year, followed by year-over-year increases of 44% and 66% in May and June, respectively. Strong demand was broad-based, with Arizona and Texas generating the highest absorptions in the second quarter. Order cancellations rose to 15% from 12% for the second quarter of 2020 compared to 2019.
   
• Entry-level represented 57% of total active communities at June 30, 2020 and 70% of total orders for the second quarter of 2020, compared to 41% of total communities and 51% of orders a year earlier.  First move-up made up one-third of communities at June 30 and 26% of second quarter 2020 orders.
   
• Home closing revenue increased 20%, resulting from a 23% increase in home closing volume and a 3% reduction in ASP over the second quarter of 2019 due to Meritage’s strategic shift to the higher-demand entry-level market.
   
• Home closing gross margin increased 300 bps over 2019’s second quarter to 21.4%, reflecting the benefits of Meritage’s strategic streamlining of operations, including efficiencies in purchasing, processes and labor, as well as some temporary cost concessions and leverage from increased closings. Those savings were partially offset by contract termination walk-away charges of $3.3 million in the second quarter of 2020, compared to $0.5 million of related charges in the second quarter of 2019.
   
• Selling, general and administrative (SG&A) expenses were reduced to 10.3% of second quarter 2020 home closing revenue from 11.0% in the second quarter of 2019, attributed to slightly lower selling expenses, greater leverage of fixed expenses on higher home closing revenue and the immediate tightening of overhead expenses in response to the sharp but short-term decline in demand during March and April due to the nationwide spread of the pandemic.
   
• Pre-tax earnings increased 71% year-over-year for the second quarter. Net earnings increased 78% to $90.7 million ($2.38 per diluted share) with a 22% effective tax rate for the second quarter of 2020, compared to $50.8 million ($1.31 per diluted share) and a 25% effective tax rate for the second quarter of 2019. Diluted EPS benefited from the repurchase of one million shares of stock during the first quarter of 2020.

YEAR TO DATE RESULTS

• Total orders for the first half of 2020 increased 27% year-over-year, driven by a 40% increase in absorptions, partially offset by a 9% decrease in average community count compared to the first half of 2019.
   
• Net earnings were $161.8 million ($4.20 per diluted share) for the first half of 2020, a 113% increase over $76.2 million ($1.97 per diluted share) for the first half of 2019, primarily reflecting increases in home closing revenue and gross margin, greater overhead leverage, lower interest expense and a lower effective tax rate in 2020.
   
• Home closings for the first half of the year also increased 27% over the prior year with a 3% lower average price on closings, resulting in a 23% increase in home closing revenue.
   
• Home closing gross profit increased 45% to $399.1 million in the first half of 2020 compared to $275.6 million in the first half of 2019, reflecting a 320 bps increase in home closing gross margin primarily due to streamlined operations and additional leverage of construction overhead expenses on higher home closings and revenue.
   
• SG&A expenses decreased 110 bps year-over-year to 10.5% of home closing revenue, compared to 11.6% in the first half of 2019, due to operating efficiencies and improved leverage of fixed expenses on higher closing volume and revenue, in addition to cost reductions taken immediately following the shelter-in-place orders enacted in late March to prevent the spread of Covid-19.
   
• Interest expense decreased $5.2 million year-over-year, primarily due to a reduction in total interest incurred due to the December 2019 early redemption of $300 million 7.15% senior notes due in 2020, partially offset by interest incurred on the $500 million borrowed under the existing credit facility in March to provide financial flexibility within an environment of heightened uncertainty, which was repaid on May 26, 2020.
   
• The effective tax rate for the first half of 2020 was 20%, compared to 24% for the first half of 2019. The 2020 effective tax rate benefited from credits earned for energy-efficient homes under the Taxpayer Certainty and Disaster Tax Relief Act enacted in December 2019.

BALANCE SHEET

• Cash and cash equivalents at June 30, 2020 totaled $484.6 million, compared to $319.5 million at December 31, 2019, reflecting positive cash flow from operations of $237.4 million and partially offset by the repayment of the full $500 million borrowed against the Company’s $780 million Revolving Credit Facility in the first quarter of 2020.
   
• Meritage terminated contracts to purchase approximately 1,500 lots in the second quarter, in response to the sharp but short-lived drop in demand from late March through early April. The Company has subsequently put nearly 6,000 new lots under control as demand for its homes rebounded and strengthened through the second quarter, ending with approximately 42,900 total lots owned or under control as of June 30, 2020, compared to approximately 34,700 total lots at June 30, 2019.
   
• Debt-to-capital and net debt-to-capital ratios were 32.8% and 20.4%, respectively, at June 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 7:30 a.m. Arizona Time (10:30 a.m. Eastern Time) on Thursday, July 23. The call will be webcast with an accompanying slideshow, both available on the "Investor Relations" page of the Company's web site at http://investors.meritagehomes.com.

For those unable to participate via the webcast, telephone participants can avoid 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://services.incommconferencing.com/DiamondPassRegistration/register?confirmationNumber=13706029&linkSecurityString=cb02a52e8. The Participant Access Code is 0774497.

Telephone participants who are unable to pre-register can dial in to 1-877-407-6951 US toll free on the day of the call. International dial-in number is 1-412-902-0046.

A replay of the call will be available beginning at approximately 12:00 p.m. ET on July 23 and extending through August 6, 2020, on the website noted above or by dialing 1-877-660-6853 US toll free, 1-201-612-7415 for international and referencing conference number 13706029.

Meritage Homes Corporation and Subsidiaries
Consolidated Income Statements
(In thousands, except per share data)
(Unaudited)

Meritage Homes Corporation and Subsidiaries
 Consolidated Balance Sheets
(In thousands)
(Unaudited)

Supplemental Information and Non-GAAP Financial Disclosures (Dollars in thousands – unaudited):

Meritage Homes Corporation and Subsidiaries
Consolidated Statements of Cash Flows 
(In thousands)
(Unaudited)

Meritage Homes Corporation and Subsidiaries
Operating Data
(Dollars in thousands) 
(Unaudited)

Meritage Homes Corporation and Subsidiaries
Operating Data
(Unaudited)

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 130,000 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 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 the statements regarding health of the housing market and the potential adverse impacts of the COVID-19 pandemic, and projected third quarter and full year 2020 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 success of our strategic initiatives to focus on the first- and second-move-up buyer; 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 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; 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 March 31, 2020 under the caption "Risk Factors," which can be found on our website at www.investors.meritagehomes.com.

Released July 22, 2020