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Feb. 18, 2020, 11:50 a.m. EST

10-K: MERITAGE HOMES CORP

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(EDGAR Online via COMTEX) -- Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Industry Conditions Housing market conditions were generally healthy in 2019, as strong underlying economic and housing market fundamentals drove demand along with historically low interest rates and a limited supply of entry-level homes, where homebuying activity was most prevalent. Homebuilders with attractive, lower price-point product in desirable locations captured this demand for affordable homes, as buyers in this environment are primarily motivated by affordability. We believe the longer-term economic data supports a continuation of the current homebuilding cycle, although individual market results will vary, responding to each respective market's economic factors. At Meritage, we continue to focus on our pivot to the first-time and first move-up buyer through our commitment to simplification and our key strategic initiatives of home closing gross margin improvement, selling, general and administrative cost control and long-term community count growth. We have made considerable progress as 87% of our current communities are targeted to first-time or first move-up buyers and those buyer segments represented approximately 90% of our orders in 2019. We expect to continue to open an increasing number of communities that target the first-time and first move-up buyers. We believe this strategy will allow us to achieve higher gross margins and better opportunities to leverage our overhead costs. Summary Company Results Total home closing revenue increased by 3.7% to $3.6 billion for the year ended December 31, 2019 from $3.5 billion in 2018. Home closing gross margin for the year ended December 31, 2019 improved by 70 basis points to 18.9% while gross margin for the year ended December 31, 2018 was 18.2%. The improved margin in 2019 reflects efficiencies in our construction process and effective cost controls. Improved revenue from higher closing volume resulted in pre-tax net earnings of $302.9 million in 2019 as compared to $283.3 million in 2018. Our effective tax rate in 2019 was 17.6% as compared to a 19.7% effective tax rate in 2018. Net income for the year ended December 31, 2019 was $249.7 million compared to $227.3 million in 2018. We ended 2019 with 9,267 closings, an 8.6% increase over 8,531 closings in 2018. Orders improved by 18.9% in 2019 with 9,616 orders for the year compared to 8,089 in 2018. Increases in both closings and order value were muted compared to the volume increases, resulting from lower average sales prices reflecting our continuing transition to entry-level product. At December 31, 2019, our backlog of $1.1 billion on 2,782 units increased by 8.1% in value, compared to $1.0 billion on 2,433 units at December 31, 2018. Similar to closings and orders, average sales price for homes in backlog decreased compared to prior year at $394,700 from $417,600 at December 31, 2018. Our cancellation rate on sales orders as a percentage of gross sales in 2019 decreased to 14.2% as compared to 15.7% for the year ended December 31, 2018. Company Positioning We believe that the investments in our new communities, particularly those designed for the first-time and first move-up homebuyer, our unique selling process, and industry-leading innovation in energy-efficient product offerings and automation create a differentiated strategy that has aided us in our growth in the highly competitive new home market.

Our focus includes the following strategic initiatives:

Improving our home closing gross profit by growing closing volume while streamlining our operations, allowing us to better leverage our overhead; In order to maintain focus on growing our business, we also remain committed to the following:

Revenue from financial services is recognized when closings have occurred and all financial services have been rendered, which generally occurs as each home is closed. Revenues associated with our insurance company operations represent insurance brokerage commissions from home and other insurance policies placed with third party carriers. Our performance obligations for policy renewal commissions are considered satisfied upon issuance of the initial policy.

Real Estate

Warranty Reserves

accurately predict our actual warranty costs. Furthermore, there can be no assurances that future economic, financial or legislative developments might not lead to a significant change in the reserve. Valuation of Deferred Tax Assets







                                        Years Ended December 31,                             Year Over Year
                                         2019              2018             Chg $             Chg %
        Home Closing Revenue
        Total
        Dollars                     $ 3,604,629       $ 3,474,712       $  129,917                 3.7  %
        Homes closed                      9,267             8,531              736                 8.6  %
        Average sales price         $     389.0       $     407.3       $    (18.3)               (4.5) %
        West Region
        Arizona
        Dollars                     $   556,432       $   485,867       $   70,565                14.5  %
        Homes closed                      1,707             1,505              202                13.4  %
        Average sales price         $     326.0       $     322.8       $      3.1                 1.0  %
        California
        Dollars                     $   486,153       $   588,975       $ (102,822)              (17.5) %
        Homes closed                        749               849             (100)              (11.8) %
        Average sales price         $     649.1       $     693.7       $    (44.7)               (6.4) %
        Colorado
        Dollars                     $   367,468       $   342,984       $   24,484                 7.1  %
        Homes closed                        711               628               83                13.2  %
        Average sales price         $     516.8       $     546.2       $    (29.3)               (5.4) %
        West Region Totals
        Dollars                     $ 1,410,053       $ 1,417,826       $   (7,773)               (0.5) %
        Homes closed                      3,167             2,982              185                 6.2  %
        Average sales price         $     445.2       $     475.5       $    (30.2)               (6.4) %
        Central Region - Texas
        Central Region Totals
        Dollars                     $ 1,033,755       $ 1,006,221       $   27,534                 2.7  %
        Homes closed                      2,976             2,840              136                 4.8  %
        Average sales price         $     347.4       $     354.3       $     (6.9)               (1.9) %
        East Region
        Florida
        Dollars                     $   468,591       $   455,292       $   13,299                 2.9  %
        Homes closed                      1,181             1,078              103                 9.6  %
        Average sales price         $     396.8       $     422.3       $    (25.6)               (6.1) %
        Georgia
        Dollars                     $   183,492       $   161,969       $   21,523                13.3  %
        Homes closed                        527               468               59                12.6  %
        Average sales price         $     348.2       $     346.1       $      2.1                 0.6  %
        North Carolina
        Dollars                     $   303,635       $   254,207       $   49,428                19.4  %
        Homes closed                        823               654              169                25.8  %
        Average sales price         $     368.9       $     388.7       $    (19.8)               (5.1) %
        South Carolina
        Dollars                     $    88,371       $   104,622       $  (16,251)              (15.5) %
        Homes closed                        272               309              (37)              (12.0) %
        Average sales price         $     324.9       $     338.6       $    (13.7)               (4.0) %
        Tennessee
        Dollars                     $   116,732       $    74,575       $   42,157                56.5  %
        Homes closed                        321               200              121                60.5  %
        Average sales price         $     363.7       $     372.9       $     (9.2)               (2.5) %
        East Region Totals
        Dollars                     $ 1,160,821       $ 1,050,665       $  110,156                10.5  %
        Homes closed                      3,124             2,709              415                15.3  %
        Average sales price         $     371.6       $     387.8       $    (16.3)               (4.2) %
        








                                        Years Ended December 31,                            Year Over Year
                                         2019              2018            Chg $             Chg %
        Home Orders (1)
        Total
        Dollars                     $ 3,683,502       $ 3,240,091       $ 443,411                13.7  %
        Homes ordered                     9,616             8,089           1,527                18.9  %
        Average sales price         $     383.1       $     400.6       $   (17.5)               (4.4) %
        West Region
        Arizona
        Dollars                     $   608,795       $   499,353       $ 109,442                21.9  %
        Homes ordered                     1,875             1,522             353                23.2  %
        Average sales price         $     324.7       $     328.1       $    (3.4)               (1.0) %
        California
        Dollars                     $   511,767       $   432,134       $  79,633                18.4  %
        Homes ordered                       803               622             181                29.1  %
        Average sales price         $     637.3       $     694.7       $   (57.4)               (8.3) %
        Colorado
        Dollars                     $   361,336       $   331,389       $  29,947                 9.0  %
        Homes ordered                       722               614             108                17.6  %
        Average sales price         $     500.5       $     539.7       $   (39.3)               (7.3) %
        West Region Totals
        Dollars                     $ 1,481,898       $ 1,262,876       $ 219,022                17.3  %
        Homes ordered                     3,400             2,758             642                23.3  %
        Average sales price         $     435.9       $     457.9       $   (22.0)               (4.8) %
        Central Region - Texas
        Central Region Totals
        Dollars                     $ 1,031,937       $   995,473       $  36,464                 3.7  %
        Homes ordered                     3,043             2,801             242                 8.6  %
        Average sales price         $     339.1       $     355.4       $   (16.3)               (4.6) %
        East Region
        Florida
        Dollars                     $   466,528       $   422,925       $  43,603                10.3  %
        Homes ordered                     1,180             1,004             176                17.5  %
        Average sales price         $     395.4       $     421.2       $   (25.9)               (6.1) %
        Georgia
        Dollars                     $   186,735       $   157,706       $  29,029                18.4  %
        Homes ordered                       537               440              97                22.0  %
        Average sales price         $     347.7       $     358.4       $   (10.7)               (3.0) %
        North Carolina
        Dollars                     $   315,572       $   224,552       $  91,020                40.5  %
        Homes ordered                       865               588             277                47.1  %
        Average sales price         $     364.8       $     381.9       $   (17.1)               (4.5) %
        South Carolina
        Dollars                     $    80,325       $   101,426       $ (21,101)              (20.8) %
        Homes ordered                       254               299             (45)              (15.1) %
        Average sales price         $     316.2       $     339.2       $   (23.0)               (6.8) %
        Tennessee
        Dollars                     $   120,507       $    75,133       $  45,374                60.4  %
        Homes ordered                       337               199             138                69.3  %
        Average sales price         $     357.6       $     377.6       $   (20.0)               (5.3) %
        East Region Totals
        Dollars                     $ 1,169,667       $   981,742       $ 187,925                19.1  %
        Homes ordered                     3,173             2,530             643                25.4  %
        Average sales price         $     368.6       $     388.0       $   (19.4)               (5.0) %
        


(1)Home orders for any period represent the aggregate sales price of all homes ordered, net of cancellations. We do not include orders contingent upon the sale of a customer's existing home as a sales contract until the contingency is removed.







                                                   Years Ended December 31,
                                                 2019                                     2018
                                         Ending              Average      Ending      Average
        Active Communities
        Total                                     244        258.0         272        258.0
        West Region
        Arizona                                    31         35.5          40         39.0
        California                                 24         20.5          17         18.5
        Colorado                                   18         19.0          20         15.5
        West Region Totals                         73         75.0          77         73.0
        Central Region - Texas
        Central Region Totals                      77         86.0          95         93.5
        East Region
        Florida                                    33         32.0          31         29.5
        Georgia                                    18         20.0          22         20.5
        North Carolina                             25         25.0          25         21.0
        South Carolina                              9         10.5          12         12.5
        . . .
        


Feb 18, 2020

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