FOURTH QUARTER HIGHLIGHTS (PERCENT CHANGE 2008 VS. 2007):
-- Increased cash by $87M during the fourth quarter, to $206M at
December 31, 2008
-- Adjusted pre-tax income slightly positive before impairments,
compared to prior year $7M loss
-- Net loss of $79M includes $110M pre-tax impairments, partially
offset by $30M of net tax benefits after deferred tax valuation
allowance
-- Reduced fourth quarter general and administrative expenses by 47%
-- Reduced community count to 178 at year-end from 207 at
September 30, 2008
FULL YEAR HIGHLIGHTS (PERCENT CHANGE 2008 VS. 2007):
-- Generated $200M cash flow from operations, paid off all bank debt,
raised $83M in equity offering
-- Recognized tax losses resulting in anticipated $112M tax refund in
early 2009
-- Reduced spec inventory by 31% to 768 or 4.3 homes per community
-- Reduced lot supply by 39% to 15,802, approximately 2.8 years
inventory (on ttm closings)
-- Reduced full year general & administrative expenses by 36%, in
line with decreases in home closing and total revenue
-- Reduced net debt-to-capital ratio at December 31 to 45% in 2008,
from 49% in 2007
-- Introduced more affordable homes with lower construction costs to
improve profitability
SCOTTSDALE, Ariz., Jan. 28, 2009 (GLOBE NEWSWIRE) -- Meritage Homes Corporation (NYSE:MTH) today announced fourth quarter and full year results for the periods ended December 31, 2008.
Summary Operating Results (Unaudited)
(Dollars in millions, except per share amounts)
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Three Months Ended Year Ended
December 31, December 31,
2008 2007 %Chg 2008 2007 %Chg
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Homes closed (units) 1,488 2,139 -30% 5,627 7,687 -27%
Home closing revenue $387 $616 -37% $1,505 $2,334 -36%
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Sales orders (units) 500 1,048 -52% 4,620 6,290 -27%
Sales order value $112 $272 -59% $1,173 $1,804 -35%
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Ending backlog (units) 1,281 2,288 -44%
Ending backlog value $338 $670 -50%
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Net loss (including
impairments) $(79) $(129) 39% $(292) $(289) -1%
Adjusted pre-tax (loss)/
income* (excluding
impairments) 1 (7) n/a (11) 75 n/a
Diluted EPS (including
impairments) $(2.58) $(4.91) 47% $(9.95) $(11.01) 10%
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* see "Operating Results" for non-GAAP reconciliation between net
loss and adjusted pre-tax income/(loss)
INCREASE IN CASH AND CASH FLOW FROM HOME CLOSINGS
Meritage increased its cash balance by $87 million during the fourth quarter 2008, to end the year with $206 million in cash, no borrowings outstanding under its credit facility and $270 million available to borrow under the facility. By comparison, the Company reported $28 million in cash, $82 million borrowed and $375 million available under its credit facility one year earlier at December 31, 2007.
The Company generated $94 million positive cash flow from operations during its fourth quarter, bringing the 2008 total to approximately $200 million.
"As anticipated, we generated a significant amount of additional cash, increasing our cash position by more than 70% during the last three months of 2008. And we expect to collect approximately $112 million of tax refunds in the first part of 2009 for tax losses we realized this year," said Steven J. Hilton, chairman and CEO of Meritage. "We further strengthened our balance sheet during 2008 to better weather this recession."
COST REDUCTIONS IN CONSTRUCTION AND OVERHEAD HELP OFFSET REVENUE DECLINE
Fourth quarter 2008 home closing revenue declined 37% from the prior year, due to 30% lower closings coupled with a 10% year-over-year decline in average sale prices -- from $287,800 in the fourth quarter of 2007 to $259,800 in the fourth quarter of 2008.
Fourth quarter gross margin including impairments was a negative 12.1% in 2008, compared to a negative 3.9% in the prior year. Gross margins excluding real estate-related impairments of $109 million improved to 13.9% in the fourth quarter 2008, from 12.7% in the previous quarter and 11.6% in the fourth quarter 2007. The margin improvement was due to construction cost savings and the effect of previous impairments, which lowered the cost basis of homes closed.
"We have significantly reduced our costs to build, by re-designing existing home plans, introducing new plans and re-negotiating construction contracts in order to make our homes more affordable and attract buyers in lower price ranges," said Mr. Hilton. "We've been able to reduce the base cost of our homes in many communities by 30% or more, combining a lower cost per square foot with more efficient square footages, while allowing our customers to choose additional features to suit their own style and budget. More than half of our active communities outside of Texas were redesigned in the latter months of 2008, and we anticipate redesigning many of our remaining communities in 2009, to make our homes more competitive with existing home inventories."
As sales and closings declined, Meritage also reduced overhead costs, keeping them in line with lower revenue. Fourth quarter general and administrative expenses were 47% lower than the prior year, on 35% lower total revenue. As a result, these expenses declined to 3.9% of total revenue in the fourth quarter 2008, compared to 4.8% in the fourth quarter 2007.
FURTHER IMPAIRMENTS RESULT IN LOSSES
Meritage reported a net loss of $79 million for the fourth quarter of 2008, largely due to pre-tax real estate-related and joint venture impairments of $109 million, plus $1 million impairment of intangible assets, partially offset by a $30 million net tax benefit. By comparison, the net loss of $129 million reported for the fourth quarter of 2007 included $130 million of pre-tax real estate-related and joint venture charges, plus an additional $58 million pre-tax charge to impair goodwill and intangible assets. Excluding those and other primarily non-cash charges in 2007, Meritage operated slightly above break-even for the fourth quarter 2008, compared to a $7 million pre-tax loss for the fourth quarter of 2007.
"Economic conditions in the fourth quarter of 2008 were the worst we've experienced to date," said Mr. Hilton. "We reduced our number of active communities by 14% during the quarter, which we expect to result in future overhead savings, and ended the quarter with 178 actively selling communities, down from 207 at the beginning of the period."
Impairments on land sold or held for sale accounted for $23 million of the total fourth quarter 2008 real estate-related charges recognized during the quarter. Four property sales generated $12 million of those impairments, but together with prior impairments accounted for $47 million of the tax losses realized during the quarter. Additional impairments in the quarter included $49 million of option terminations, $32 million related to continuing projects and $5 million related to joint venture impairments. Geographically, $44 million of the total was attributable to California, mainly from two large option terminations and one bulk land sale. In addition, option terminations and lot sales in Texas made up most of the $36 million of that region's total real estate-related charges in the fourth quarter of 2008.
"Due to further weakening in our markets, we made strategic decisions to cancel options and sell lots in certain marginal projects," Mr. Hilton explained. "Those actions accounted for approximately $67 million of the total impairments in the fourth quarter, which allowed us to realize approximately $106 million of corresponding tax losses. As a result, our total expected 2009 tax refunds increased from our prior quarter estimate, and we now expect to receive a $112 million early refund in 2009. Considering the difficult economic conditions, we believe that taking swift action today regarding lot sales and cancellations of options will limit our future losses, while strengthening our balance sheet."
ECONOMIC CRISIS REDUCED SALES AND INCREASED CANCELLATIONS
Fourth quarter net orders declined 52% from 2007 to 2008 after a 56% cancellation rate in the quarter, sequentially higher than the 40% cancellation rate in the third quarter of 2008, and above the 47% rate experienced in the fourth quarter of 2007. The total dollar value of sales for the quarter was off 59% year over year, reflecting a further decline of 14% in average selling price. Texas experienced a 61% decline in net orders over the same period in 2007, due to a large number of late-stage cancellations on nearly-completed homes in December, believed to have been caused by buyer anxiety over the financial crisis. Colorado was the sole division to record an increase in sales over the previous year's final quarter.
"The reverberations from the financial crisis that began in September 2008 impacted all of our markets, and we experienced a substantial decrease in traffic and sales during the fourth quarter, which is also traditionally a slower selling time due to seasonality," said Mr. Hilton. "One positive sign was that gross sales hit their quarterly low point in November, and have inched up a bit since then and into January."
Mr. Hilton added, "Texas remains our strongest region due to its relatively strong population and employment growth, as well as housing affordability. Based on our experience in other markets during this downturn, we were swift in taking aggressive actions in Texas as our net sales there fell during the quarter. We closed certain communities, sold some assets and consolidated operations in the region. We'll continue to be cautious until we are more comfortable with the activity in our Texas region."
FULL YEAR RESULTS
Lower home closings, prices and revenue marked another year of weaker market conditions for homebuilders. Full year 2008 home closing revenue declined 36% from the prior year as a result of 27% lower closings and a 12% decline in average sale prices.
Meritage reported a full year net loss of $292 million in 2008, including primarily non-cash real estate-related and joint venture charges of $263 million (pre-tax), and $16 million of tax expense, which is comprised of a $119 million deferred tax valuation expense, partially offset by $103 million of tax benefits recorded in 2008. By comparison, the full year net loss of $289 million in 2007 included $398 million of pre-tax real estate-related and joint venture charges, and $130 million of pre-tax charges to impair goodwill.
The Company controlled overhead costs relative to declining revenue, reducing general and administrative expenses by $38 million or 36% from the previous year, to 4.5% of revenue in 2008, in line with 2007. Excluding a $10 million benefit in the second quarter 2008 related to a successful legal settlement, full year general and administrative expenses were $78 million, or 5.1% of full year revenue.
Cancellations increased as the economy weakened, adding to the Company's inventory of unsold "accidental spec" homes. Yet, Meritage successfully reduced its spec inventory to 768 as of December 31, 2008, from 809 the previous quarter, and 31% lower than December 31, 2007.
Meritage controlled 15,802 lots at December 31, 2008, which was 71% lower than its peak three years earlier, and down from 20,738 at September 30, 2008. Consistent with management's strategy to reduce risks associated with owning long land positions in depreciating markets, the Company owns 8,750 lots representing a 1.6-year supply (based on trailing twelve months' closings,) which is one of the lowest in the homebuilding industry.
The Company was in compliance with all covenants under its amended credit facility as of December 31, 2008. Its net debt-to-capital ratio was 45% at December 31, 2008, down from 49% at December 31, 2007. The combined effect of Meritage's increase in cash, reduction of debt and its $83 million equity offering more than offset its 2008 decrease in stockholders' equity resulting from net losses during the year.
SUMMARY AND FUTURE OUTLOOK
Mr. Hilton concluded, "2008 marks the end of our third year in this housing recession, which has eliminated many of our competitors and weakened all of our peers. By executing our asset-light option strategy as it was designed, we have managed a lower lot supply and relatively stronger balance sheet than many other homebuilders. We have also built a substantial cash position that should provide greater flexibility for the future. In addition to the $206 million cash we had at the end of 2008, we expect to collect approximately $112 million in tax refunds during the first few months of 2009.
"Current tax law allows for losses to be carried back two years to offset prior years' income, and we're at the end of that limit, since 2006 was our last profitable year. If a five-year carryback is adopted as has been proposed, we could reverse much of the $127 million deferred tax valuation allowance we had as of the end of the year. The reversal would increase our book assets at the time a change is adopted, by the amount of deferred tax assets we could realize in 2009 and 2010.
"We fully expect 2009 will be another challenging year, and are not hanging our hopes on 'rescue packages' that are out of our control. Having defended our balance sheet well to date, we are focused on minimizing our losses and engineering our return to profitability. We have consolidated operations, reduced overhead and limited purchases in order to preserve cash.
