Meritage Homes Corporation late today (April 25) reported an 81% drop in fiscal first-quarter net earnings to $15.1 million ($0.57 per diluted share) from $79.7 million last year.
Revenue was off 32% to $576.1 million from $846.4 million during last year's first quarter. Sales orders were down 20% to 2,073, and the value of those orders was off 23% to $640.6 million. There was a drop of 29% in homes closed to 1,796 and a 32% fall in home closing revenue to $576.1 million.The average closing price for the company's homes fell 4.4%, from $335,000 this time last year to $321,000 during first quarter 2007.
"Our first quarter 2007 results reflect the broad slowdown in the U.S.housing market and a difficult comparison to the prior year, when we achieved record first quarter revenue and earnings, resulting from unprecedented housing demand in 2005," said Steven J. Hilton, chairman and CEO of Meritage. "Although home closing revenue returned to levels achieved two years ago, our margins were much lower due to competitive pricing pressures and additional land-related write-offs."
Gross margin on first quarter home closing revenue was 15.6% in 2007, compared with a near-record 25.3% in the first quarter of 2006. First quarter 2007 gross margin was reduced by $17 million in pre-tax charges ($0.40 per share after tax) related to lot option deposit write-offs and inventory impairments, with no such charges in the first quarter 2006.
The company's cancellation rate improved to 27% of first quarter gross orders (21% of beginning backlog) from 48% of fourth quarter 2006 gross orders (22% of beginning backlog) and in line with 28% of gross orders reported in last year's first quarter. With 217 active communities at quarter-end, up from 185 a year ago, the absorption rate as measured by sales per average community was 10 in the first quarter 2007 compared to 14 in the first quarter 2006.
Total dollar value of backlog at the end of the first quarter was reduced 42% year-over-year, a combination of 39% fewer homes and a 5% lower average price (ASP.) The lower ASP reflects price reductions, incentives and changes in sales mix, with a higher percentage of lower-priced homes sold in recent quarters.
"Considering the difficult comparison to the first quarter last year, we were pleased with our sales results this quarter, and encouraged by the overall decline in cancellations," said Hilton. "We define a normal market as an absorption rate of about one sale per community per week, with stable prices and normal incentives. While we're not there yet, we believe our first quarter results indicate a move in the right direction."
The Company also said it reduced its inventories of unsold homes by 11% during the quarter, to a total of 1,213 spec homes, from the year-end 2006 balance of 1,365 spec homes. Total lot supply under control was reduced to 41,936 at first quarter-end, with 20% owned and 80% controlled under option contracts. Meritage has reduced its total controlled lot supply by 23% from the peak of 54,675 at September 30, 2005. The total was reduced by approximately 495 lots in the first quarter 2007 due to the write-off of optioned lots.
Regionally, closings and orders slowed in the Central segment, Meritage's largest, comprised of Arizona, Texas and Colorado. Total closing revenue was down 7%, as 15% lower volume was partially offset by a 10% increase in average selling price. First quarter 2007 total order value was 41% lower in Arizona, 12% lower in Texas, and 9% higher in Colorado, compared to the first quarter 2006. Meritage's West segment, comprised of California and Nevada, experienced a 63% decline in total closing revenue during the first quarter 2007, while the total value of net orders was off just 9%. ASP's for the West segment were down 6% on homes closed and 11% on new orders, reflecting continued pricing constraints. Meritage's California markets were some of the first to realize a slowdown, contributing to more favorable year-over-year comparisons, as the total value of home sales improved 2% year-over-year in the first quarter.
Florida markets comprise the East segment for Meritage, and continued to report the largest declines in terms of order volume and average selling prices, driven by very weak demand in southwest Florida. Total closing revenue was 46% lower, while total order value was 62% lower in the first quarter 2007 compared to the first quarter 2006.
"As we've stated previously, we expect 2007 will be a difficult year, but we are encouraged by some early signs of stabilization," said Hilton. "We've seen our overall cancellation rate decline, sales pace begin to improve and incentives begin to stabilize in certain markets, resulting in modest impairments during the first quarter this year relative to last year's fourth quarter and some of our peers' recent write-offs...Based on current conditions and our projections, we are expecting to close 7,700-8,500 homes in 2007 for a total of $2.4-2.7 billion revenue. Assuming relatively stable conditions and an associated modest exposure to inventory impairments or option write-offs during the remainder of the year, we expect to earn between $2.00-2.50 per diluted share for the full year 2007."