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Meritage Homes Reports Strong Order Growth Of 46% And Revenue Growth Of 48% For The Fourth Quarter 2012

Stocks in this article: MTH

"Our strong order growth throughout 2012 drove Meritage's total orders for the year to their highest point since 2007, and translated into the highest annual pre-tax income we've generated since 2006," said Mr. Hilton. "Net income of $95 million for the fourth quarter of 2012 was driven by increased home closings and revenue, greater leverage of overhead expenses, lower interest expense and a $71.5 million net tax benefit. We earned $0.63 per diluted share for the quarter even before taking into account the net tax benefit from the reversal of most of our valuation allowance against our deferred tax assets. We expect to use the deferred tax asset to offset future income taxes."

Mr. Hilton continued, "While 2012 was the second year of growth in U.S. new home sales since they bottomed in 2010, and the highest number of new homes were started since 2007, the absolute level of starts is still far below the historical average, indicating abundant opportunity for continued growth.

"Based on our expectations for additional growth, we invested approximately $480 million in land and development during the year, including the purchase of approximately 9,000 lots. We ended the year with about 20,800 total lots under control, up from about 16,700 lots at the end of 2011. Additionally, we have significantly higher backlog, total assets and stockholders' equity than we had at the end of 2011, with sufficient liquidity to grow as the housing market continues to recover."

Fourth quarter 2012 operating results compared to 2011

  • Net income increased $106.9 million over 2011 to $95.1 million ($2.49 per diluted share) in the fourth quarter of 2012, compared to an $11.8 million loss ($0.36 per diluted share) in the prior year. 2012 results included $0.4 million of impairments and a net tax benefit of $71.5 million due to the reversal of most of the remaining deferred tax asset valuation allowance. Prior year results included $13.0 million of real estate-related impairments, primarily due to the wind down of operations in Las Vegas, and a $0.8 million loss from the sale of Meritage's only two golf courses.
  • Home closing revenue increased 48% due to a 39% increase in home closings and a 7% increase in average price over the prior year period. California, Texas and Florida accounted for the largest portion of the increase in total closing revenue. California more than doubled its fourth quarter closing revenue with a 117% increase over 2011.
  • Home orders increased 46%, and when combined with an 18% increase in average selling price that was primarily mix-driven, resulted in a 72% increase in total order value over the fourth quarter of 2011. The fourth quarter of 2012 was Meritage's seventh consecutive quarter of year-over-year growth in home orders, and the total of 1,094 homes ordered was higher than any fourth quarter since 2006. Average sales price for the fourth quarter increased to $323,000 from $275,000 in 2011.
  • Orders per average community during the fourth quarter increased 43% over the prior year to 7.0 from 4.9 in 2011, and reached their highest fourth quarter level since 2005. California achieved the highest orders per community for the quarter at 13.9; Colorado averaged 9.8; and Florida, 8.2.
  • Cancellation rate decreased to 13% in the fourth quarter of 2012, compared to 19% in the fourth quarter of 2011, reflecting a high quality backlog and greater confidence among buyers, supported by increasing prices and expectations of further home value appreciation.
  • Ending backlog of orders was up 61% over the prior year, and the total value of orders in backlog was up 93%, aided by a 20% increase in the average sales price per home.
  • Home closing gross profit increased 74% over the prior year, and home closing gross margin increased to 18.9% in the fourth quarter of 2012 compared to 16.0% in the fourth quarter of 2011. Margins increased primarily due to lower impairments and sales price increases, although sales price increases were largely offset by increases in various cost components. Excluding impairments from cost of sales, adjusted gross margins in the fourth quarter were 19.0% in 2012 and 18.8% in 2011, and slightly higher sequentially than 18.7% in the third quarter of 2012.
  • Commissions and selling expenses decreased by 120 basis points from the prior year, to 7.4% of home closing revenue in the fourth quarter of 2012, compared to 8.6% of home closing revenue in the fourth quarter of 2011, as higher closing revenue resulted in greater leverage of the fixed components within selling costs.
  • General and administrative expenses for the fourth quarter of 2012 decreased by 230 basis points to 4.9% of total revenue in 2012, compared to 7.2% of total revenue in 2011.
  • Interest expense decreased to $5.5 million or 1.5% of revenue in the fourth quarter of 2012, compared to $7.4 million or 3.0% of revenue in the fourth quarter of 2011. A greater portion of interest incurred was capitalized to assets under development, and interest expense leverage improved with increased revenue.

Full year 2012 operating results compared to 2011

  • Net income of $105.2 million for the full year of 2012 included a $5.8 million loss on early extinguishment of debt and $2.0 million of impairments, in addition to an $8.7 million charge related to litigation accruals and a $76.3 million net tax benefit primarily due to the reversal of most of the deferred tax asset valuation allowance. By comparison, the $21.1 million loss for the full year of 2011 included $16.2 million of asset impairments, primarily due to $9.2 million of charges related to the wind down of the company's operations in Las Vegas, and a tax provision of $0.7 million.
  • Home closings and closing revenue increased 30% and 38%, respectively, for 2012 as compared to 2011.
  • 2012 home closing gross margins improved by 130 basis points to 18.4%, primarily due to lower impairment charges, compared to 17.1% for 2011. Adjusted home closing gross margins excluding impairments were 18.5% in 2012 and 18.2% in 2011.
  • Net orders for the year increased 41% in 2012 over 2011, and combined with an 11% increase in average sales prices, resulted in total order value increasing 56% year over year.

Balance sheet

  • Cash and cash equivalents, restricted cash and securities at December 31, 2012, totaled $295.5 million, compared to $333.2 million at December 31, 2011, as Meritage invested in additional inventory, as well as land and development, to support future growth in orders.
  • During the fourth quarter of 2012, management determined that most of the deferred tax asset previously reserved was more likely than not to be used within the statutory time limits, and that $79.9 million of the company's deferred tax valuation allowance should accordingly be reversed. $8.4 million of the $79.9 million was used for federal and state taxes in the fourth quarter of 2012, resulting in a net tax benefit of $71.5 million for the quarter. At year-end, deferred tax assets totaled $78.0 million net of $8.7 million of valuation allowances.
  • Real estate assets increased by $297.8 million for the year 2012, ending at $1.1 billion at December 31, 2012, compared to $815.4 million at December 31, 2011, funded by cash on hand and approximately $209 million of additional capital raised during the year.
  • Meritage ended the quarter with approximately 20,800 total lots under control, of which 84% were owned, compared to approximately 16,700 at December 31, 2011, a net increase of approximately 4,100 lots during the year.
  • Net debt-to-capital ratio at December 31, 2012 was 38.1%, compared to 35.8% at December 31, 2011.

Conference call

Management will host a conference call today to discuss the Company's results at 10:30 a.m. Eastern Time (7:30 a.m. Pacific Time). The call will be webcast by Business-to-Investor, Inc. (B2i), with an accompanying slideshow on the "Investor Relations" page of the Company's web site at http://investors.meritagehomes.com. For telephone participants, the dial-in number is 877-317-6789 and the conference number is 10023382. Participants are encouraged to dial in five minutes before the call begins. A replay of the call will be available for fifteen days, beginning at 12:00 p.m. ET on January 31, 2013 on the website noted above, or by dialing 877-344-7529, and referencing conference number 10023382. For more information, visit meritagehomes.com.

Meritage Homes Corporation and Subsidiaries
Operating Results
(Unaudited)
(In thousands, except per share data)
         
         
  Three Months Ended December 31, Twelve Months Ended December 31,
  2012 2011 2012 2011
Operating results        
Home closing revenue  $ 364,118  $ 245,730  $ 1,184,360  $ 860,884
Land closing revenue 468 260 9,314 360
Total closing revenue 364,586 245,990 1,193,674 861,244
Home closing gross profit 68,763 39,411 217,976 147,448
Land closing gross profit/(loss) 210 (6,222) 223 (6,340)
Total closing gross profit 68,973 33,189 218,199 141,108
Commissions and other sales costs (26,883) (21,036) (94,833) (74,912)
General and administrative expenses (17,739) (17,602) (68,185) (64,184)
Interest expense (5,526) (7,363) (24,244) (30,399)
Loss on extinguishment of debt (5,772)
Other income, net (1) 4,775 1,208 3,689 8,011
Income/(loss) before income taxes 23,600 (11,604) 28,854 (20,376)
Benefit from/(provision for) income taxes 71,528 (170) 76,309 (730)
Net income/(loss)  $ 95,128 $ (11,774)  $ 105,163 $ (21,106)
Income/(loss) per share        
Basic:        
Income/(loss) per share  $ 2.67 $ (0.36)   $ 3.09  $ (0.65) 
Weighted average shares outstanding 35,595 32,452 34,057 32,382
Diluted:        
Income/(loss) per share  $ 2.49 $ (0.36)  $ 3.00 $ (0.65)
Weighted average shares outstanding 38,308 32,452 35,172 32,382
Non-GAAP Reconciliations:        
Home closing gross profit  $ 68,763  $ 39,411  $ 217,976  $ 147,448
Add: Real estate-related impairments 436 6,696 1,340 8,870
Adjusted home closing gross profit  $ 69,199  $ 46,107  $ 219,316  $ 156,318
Income/(loss) before income taxes  $ 23,600 $ (11,604)  $ 28,854 $ (20,376)
Add Real estate-related impairments:        
Terminated lot options and land sales 8,994 1,015 9,221
Impaired projects 436 4,029 994 6,103
Fixed asset impairment 848 848
Increase in litigation reserve (1) 8,720
Loss on early extinguishment of debt 5,772
Adjusted income/(loss) before income taxes  $ 24,036  $ 2,267  $ 45,355 $ (4,204)
         
(1) Other income, net for the full year 2012 includes an $8.7 million charge to increase litigation reserves.
 
Meritage Homes Corporation and Subsidiaries
Condensed Consolidated Balance Sheets
(In thousands)
(unaudited)
     
     
  December 31, 2012 December 31, 2011
Assets:    
Cash and cash equivalents  $ 170,457  $ 173,612
Investments and securities 86,074 147,429
Restricted cash 38,938 12,146
Other receivables 20,290 14,932
 Real estate (2) 1,113,187 815,425
Deposits on real estate under option or contract 14,351 15,208
Investments in unconsolidated entities 12,085 11,088
Deferred tax assets, net 77,974
Other assets 42,206 31,538
Total assets  $ 1,575,562  $ 1,221,378
Liabilities and Equity:    
Accounts payable, accrued liabilities, home sale deposits and other liabilities  $ 158,555  $ 126,057
Senior notes 496,472 480,534
Convertible senior notes 126,500
Senior subordinated notes 99,825 125,875
Total liabilities 881,352 732,466
Total stockholders' equity 694,210 488,912
Total liabilities and equity  $ 1,575,562  $ 1,221,378
(2) Real estate – Allocated costs:    
Homes under contract under construction  $ 192,948  $ 101,445
Unsold homes, completed and under construction 107,466 97,246
Model homes 62,411 49,892
Finished home sites and home sites under development 634,106 441,242
Land held for development 56,118 55,143
Land held for sale 21,650 29,908
Communities in mothball status 38,488 40,549
Total allocated costs  $ 1,113,187  $ 815,425
 
Supplemental Information and Non-GAAP Financial Disclosures (In thousands – unaudited):
         
         
  Three Months Ended December 31, Twelve Months Ended December 31,
  2012 2011 2012 2011
Depreciation and amortization  $ 2,283  $ 1,911  $ 8,196  $ 7,178
         
Summary of Capitalized Interest:        
Capitalized interest, beginning of period  $ 20,185  $ 14,115  $ 14,810  $ 11,679
Interest incurred 12,316 10,848 46,135 43,393
Interest expensed (5,526) (7,363) (24,244) (30,399)
Interest amortized to cost of home, land closings and impairments (5,375) (2,790) (15,101) (9,863)
Capitalized interest, end of period  $ 21,600  $ 14,810  $ 21,600  $ 14,810
         
      2012 2011
Notes payable and other borrowings      $ 722,797  $ 606,409
Less: cash and cash equivalents, restricted cash, and investments and securities     (295,469) (333,187)
Net debt     427,328 273,222
Stockholders' equity     694,210 488,912
Total capital      $ 1,121,538  $ 762,134
Net debt-to-capital     38.1% 35.8%
 
Meritage Homes Corporation and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(In thousands)
(unaudited)
         
         
  Three Months Ended December 31, Twelve Months Ended December 31,
  2012 2011 2012 2011
Operating results        
Net income/(loss)  $ 95,128 $ (11,774)  $ 105,163 $ (21,106)
Loss on early extinguishment of debt 5,772
Real-estate related impairments 436 13,023 2,009 15,324
Deferred tax valuation benefit (70,265) (77,974)
Equity in earnings from JVs and distributions of JV earnings—net (77) (30) (585) 648
Increase in real estate and deposits, net (110,044) (31,851) (298,361) (95,697)
Other operating activities (3,413) 7,709 43,489 26,695
Net cash used in operating activities (88,235) (22,923) (220,487) (74,136)
Net cash (used in)/provided by investing activities (46,900) 38,649 23,844 141,182
Proceeds from issuance of new debt 426,500
Debt issuance costs 188 (9,312)
Repayments of senior notes (315,080)
Net proceeds from issuance of common stock 87,113
Proceeds from stock option exercises and other 355 782 4,267 2,613
Net cash provided by financing activities 543 782 193,488 2,613
Net (decrease)/increase in cash (134,592) 16,508 (3,155) 69,659
Beginning cash and cash equivalents 305,049 157,104 173,612 103,953
Ending cash and cash equivalents (3)  $ 170,457  $ 173,612  $ 170,457  $ 173,612
         
(3) Ending cash and cash equivalents as of December 31, 2012 and December 31, 2011 excludes investments and securities and restricted cash totaling $125 million and $160 million, respectively.
 
Meritage Homes Corporation and Subsidiaries
Operating Data
(Dollars in thousands)
(unaudited)
         
         
  Three Months Ended
  December 31, 2012 December 31, 2011
  Homes Value Homes Value
Homes Closed:        
Arizona 232  $ 67,910 176  $ 50,028
California 243 91,813 127 42,389
Colorado 65 20,991 83 27,338
Nevada 22 4,042 10 2,233
West Region 562 184,756 396 121,988
Texas 465 113,206 391 92,742
Central Region 465 113,206 391 92,742
Carolinas 33 11,375
Florida 180 54,781 107 31,000
East Region 213 66,156 107 31,000
Total 1,240  $ 364,118 894  $ 245,730
Homes Ordered:        
Arizona 178  $ 56,426 128  $ 34,918
California 251 103,275 99 33,813
Colorado 98 35,391 55 18,279
Nevada 9 2,018 1 228
West Region 536 197,110 283 87,238
Texas 389 97,458 341 80,279
Central Region 389 97,458 341 80,279
Carolinas 33 11,772 24 8,616
Florida 136 47,522 101 29,928
East Region 169 59,294 125 38,544
Total 1,094  $ 353,862 749  $ 206,061
 
Meritage Homes Corporation and Subsidiaries
Operating Data
(Dollars in thousands)
(unaudited)
         
         
  Twelve Months Ended
  December 31, 2012 December 31, 2011
  Homes Value Homes Value
Homes Closed:        
Arizona 825  $ 221,100 594  $ 150,258
California 732 264,388 355 120,319
Colorado 292 96,807 258 83,095
Nevada 61 11,444 59 12,593
West Region 1,910 593,739 1,266 366,265
Texas 1,655 390,642 1,660 395,278
Central Region 1,655 390,642 1,660 395,278
Carolinas 117 41,888
Florida 556 158,091 342 99,341
East Region 673 199,979 342 99,341
Total 4,238  $ 1,184,360 3,268  $ 860,884
Homes Ordered:        
Arizona 916  $ 256,684 627  $ 163,510
California 965 361,328 392 132,672
Colorado 364 123,403 276 89,624
Nevada 70 13,473 52 11,300
West Region 2,315 754,888 1,347 397,106
Texas 1,759 429,465 1,593 377,165
Central Region 1,759 429,465 1,593 377,165
Carolinas 142 50,613 24 8,616
Florida 579 179,806 441 125,035
East Region 721 230,419 465 133,651
Total 4,795  $ 1,414,772 3,405  $ 907,922
Order Backlog:        
Arizona 249  $ 80,816 158  $ 45,232
California 315 124,588 82 27,648
Colorado 142 50,089 70 23,493
Nevada 14 3,105 5 1,076
West Region 720 258,598 315 97,449
Texas 500 132,317 396 93,494
Central Region 500 132,317 396 93,494
Carolinas 49 17,341 24 8,616
Florida 203 71,010 180 49,295
East Region 252 88,351 204 57,911
Total 1,472  $ 479,266 915  $ 248,854
 
Meritage Homes Corporation and Subsidiaries
Operating Data
(unaudited)
         
         
  Three Months Ended
  December 31, 2012 December 31, 2011
  Beg. End Beg. End
Active Communities:        
Arizona 34 38 37 37
California 19 17 22 20
Colorado 8 12 9 10
Nevada 2 1 3 2
West Region 63 68 71 69
Texas 68 65 65 67
Central Region 68 65 65 67
Carolinas 7 7 3
Florida 15 18 13 18
East Region 22 25 13 21
Total 153 158 149 157
         
         
  Twelve Months Ended
  December 31, 2012 December 31, 2011
  Beg. End Beg. End
Active Communities:        
Arizona 37 38 32 37
California 20 17 14 20
Colorado 10 12 9 10
Nevada 2 1 4 2
West Region 69 68 59 69
Texas 67 65 82 67
Central Region 67 65 82 67
Carolinas 3 7 3
Florida 18 18 10 18
East Region 21 25 10 21
Total 157 158 151 157

About Meritage Homes Corporation

Meritage Homes is the ninth-largest public homebuilder in the United States based on homes closed in 2011. Meritage builds a variety of homes across the Southern and Western states to appeal to a wide range of buyers, including first-time, move-up, luxury and active adults. As of December 31, 2012, the company had 158 actively selling communities in 15 metropolitan areas, including Northern California, East Bay/Central Valley and Southern California, Houston, Dallas/Ft. Worth, Austin, San Antonio, Phoenix/Scottsdale, Tucson, Las Vegas, Denver, Orlando, Tampa and Raleigh-Durham. In 2012, Meritage also announced its entry into the Charlotte market.

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