Meritage Homes Corporation (NYSE: MTH) reported Q2 EPS of $1.31, $0.20 better than the analyst estimate of $1.11. Revenue for the quarter came in at $877.5 million versus the consensus estimate of $824.93 million.

SECOND QUARTER RESULTS

• Net earnings of $53.8 million ($1.31 per diluted share) for the second quarter of 2018, increased 29% and 34%, respectively, compared to $41.6 million ($0.98 per diluted share) for the second quarter of 2017. Earnings before income taxes were up 13% year-over-year, primarily due to increases in home closing revenue and home closing gross margin.
• Home closing revenue increased 9% with a 12% increase in closing volume, partially offset by a 3% decrease in average sales price compared to the second quarter of 2017, as demand has shifted more toward entry-level homes. The increases in closings and revenue were led by the East region (Florida, Georgia, North and South Carolina, and Tennessee), which delivered a 30% increase in home closing revenue with 35% more home closings at an average sales price 4% lower than the second quarter of 2017. The Central region (Texas) delivered home closings and revenue growth of 21% and 15%, respectively, with a 5% decrease in average price. West region home closing revenue (California, Colorado and Arizona) was 5% less than last year’s second quarter, as a 9% decline in closing volume reflected 8% fewer communities open on average during the second quarter in 2018 than 2017, but was partially offset by a 4% increase in average price due to additional closings from higher-priced communities in California.
• Home closing gross margin increased 60 bps to 18.3% for the second quarter of 2018, compared to 17.7% in the second quarter of 2017, primarily due to improved margins in the East region.
• Selling, general and administrative expenses were 10.9% of second quarter 2018 home closing revenue, compared to 2017’s second quarter SG&A of 10.6% of home closing revenue. Approximately 15 bps of the year-over-year increase was due to the recognition of compensation expense in the second quarter of 2018 for certain performance-based equity awards. No comparable expense was incurred in 2017.
• Interest expense declined $1.6 million for the second quarter of 2018 compared to 2017. The reduction was due to a greater percentage of interest capitalized to qualified assets under development, despite a $2.1 million increase in total interest incurred from the issuances of new senior notes in June 2017 and March 2018. The net proceeds of those higher-rate issuances were primarily used to retire maturing notes and repay outstanding borrowings under the Company’s revolving credit facility.
• Second quarter effective tax rate was approximately 24% in 2018, compared to 34% in 2017, reflecting lower corporate income tax rates enacted for 2018.
• Total orders for the second quarter of 2018 increased 5% year-over-year, driven by a 6% increase in orders pace (orders per average active community), partially offset by a 1% year-over-year decline in average active community count. Order growth in the East and Central regions offset a decline in the West region, with a significant 14% year-over-year increase in average orders pace for the East region.

MANAGEMENT COMMENTS

“We continued to experience generally healthy demand in our markets, especially for our entry-level LiVE.NOW.® homes, and our second quarter performance reflects the results of our strategy to address that demand, as well as the successful execution of our strategic initiatives to improve profitability,” said Steven J. Hilton, chairman and chief executive officer of Meritage Homes. “Our overall orders pace was 6% higher in the second quarter than it was in 2017 and is up 8% in the first half of the year. It’s evident that our LiVE.NOW. homes are driving the increases in orders pace, as they made up 44% of our orders this quarter compared to just 35% in last year’s second quarter.

“Our home closing gross margin for the quarter was 60 bps higher than last year’s second quarter, and we are particularly pleased with the improvements in our East region,” Mr. Hilton added. “This was our fifth consecutive quarter of year-over-year gains in home closing gross margin, despite significant increases in materials and labor costs over the last year.”

He continued, “We delivered a 13% increase in pre-tax earnings and our diluted earnings per share for the quarter was up 34% over last year, as the reduction in corporate tax rates for 2018 and our 2017 retirement of convertible notes are also positively impacting our diluted EPS this year.

"We expect continued healthy demand for entry-level homes and are maintaining our projections for full year 2018 home closings and total home closing revenue to grow to approximately 8,450-8,850 and $3.5-3.65 billion, respectively. Considering the improvement in our second quarter home closing gross margin, we are adjusting our expectation for the full year to 18-18.5%, tempered by potential further increases in materials costs due to recently proposed tariffs. Based on our strong second quarter earnings and improved overhead leverage for the year, we are increasing our projection for pre-tax earnings to $295-315 million for the year."

Mr. Hilton added, “We expect to use part of our free cash flow over the next several quarters to repurchase up to $100 million of Meritage Homes stock under a new share repurchase program authorized by our board, replacing our prior program adopted in 2006. We may begin repurchasing shares as early as this quarter, depending on market and other conditions.”

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