Meritage Homes Corporation, Scottsdale (NYSE:MTH) on Thursday reported net earnings of $35.6 million ($0.87 per diluted share) for the fourth quarter ended Dec. 31, 2017, compared to $51.8 million ($1.22 per diluted share) in the 2016 quarter.
The gain was narrowed by a $19.7 million charge in the fourth quarter of 2017 associated with a revaluation of the company’s deferred tax asset, reflecting the impact of a lower corporate tax rate enacted by the Tax Cuts and Jobs Act in December 2017 and effective beginning in 2018, as well as the expiration of energy tax credits which benefited the Company’s effective tax rate in 2016.
Pre-tax earnings increased 10% over the prior year to $84.1 million for the fourth quarter of 2017, from $76.3 million in the fourth quarter of 2016. The earnings growth primarily reflects higher home closing revenue and gross margins, supplemented by cost controls and overhead leverage.
Home closing revenue increased 5% over the prior year on 6% higher closing volume. Despite general increases in market prices of homes over 2016, average closing prices for the Company were 1% lower in the fourth quarter of 2017, as a higher percentage of home closings were lower-priced entry-level homes, consistent with the company’s strategic focus. Texas, Arizona and Florida, which have the greatest concentration of entry-level communities, drove nearly all the increases in closings and revenue.
Home closing gross margin increased to 18.2% for the fourth quarter of 2017, compared to 17.9% in the fourth quarter of 2016 and 18.1% in the third quarter of 2017, due to better margins in new communities as well as management of direct costs in an inflationary environment.
Selling, general and administrative expenses totaled 10.4% of home closing revenue compared to 10.5% in the fourth quarter of 2016, reflecting continued cost controls and slightly greater overhead leverage on higher home closing revenue.
Total orders for the fourth quarter increased 20% year-over-year due to strong demand, evidenced by an 18% increase in absorptions and a 3% increase in average active communities over the fourth quarter of 2016. Orders increased 47% in the East region, 19% in Texas and 5% in the West region. Average active community count in the West was 11% lower year-over-year, while total active community count for the Company was relatively flat at 244 on December 31, 2017, compared to 243 at December 31, 2016.
Cash and cash equivalents at December 31, 2017, totaled $170.7 million, compared to $131.7 million at December 31, 2016, primarily reflecting net proceeds from a June 2017 debt issuance, partially offset by the use of cash to fund the purchase and development of lots, as well as additional homes under construction. Proceeds from the issuance of $300 million in new senior notes in June 2017 were primarily used to repay borrowings under the company’s revolving credit facility and to retire all $126.5 million of the Company’s 1.875% convertible senior notes.
A total of $250.3 million was invested in land and development during the fourth quarter of 2017 to meet current demand and position the company for future growth. Total spending on land and development for the full year 2017 was $1.0 billion, compared to $900.7 million in 2016.
Meritage ended 2017 with approximately 34,300 total lots owned or under control, compared to approximately 29,800 total lots at December 31, 2016. During the fourth quarter of 2017, the Company secured approximately 3,200 new lots to meet continued strong demand. Approximately 70% of the newly controlled lots added during the quarter were for entry-level communities.
Debt-to-capital and net debt-to-capital ratios of 44.9% and 41.4%, respectively at December 31, 2017, were maintained within management’s target ranges, consistent with 44.2% and 41.2%, respectively at December 31, 2016, even as the Company’s total investment in homes and land under development grew commensurate with its current and future growth expectations.
“Housing-related economic indicators remain positive, pointing to further growth in new home sales for the next several years,” said said Steven J. Hilton, chairman and CEO. “For 2018, we expect a normal seasonal decline in our revenue, margins and overhead leverage for the first quarter, followed by positive trends throughout the remainder of the year. We expect to deliver approximately 8,350-8,750 home closings in 2018 for total home closing revenue of approximately $3.4-3.6 billion, which should drive an 6-13% increase in pre-tax earnings. At this time, we are also projecting a home closing gross margin for the year of approximately 17.5-18%, with an opportunity for additional overhead leverage and the added benefit of a lower effective tax rate of approximately 25%, which should drive strong earnings growth in 2018.”
