M/I Homes, Inc. (MHO) — Q3 2020 Form 10-Q
Business context and reporting period
M/I Homes builds single-family homes across markets in the Midwest, South and Texas, and provides mortgage and title services. This unaudited report covers the quarter and nine months ended September 30, 2020, compared with the same 2019 periods. Management notes that COVID-19 makes interim results less indicative of full-year performance.
Financial and operating results
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $847.9 million | $653.3 million | $2,139.7 million | $1,758.1 million |
| Income before taxes | $95.1 million | $50.1 million | $208.2 million | $114.7 million |
| Net income | $73.5 million | $37.8 million | $159.8 million | $85.8 million |
| Diluted EPS | $2.51 | $1.32 | $5.50 | $3.04 |
| Operating cash flow | — | $197.2 million | $1.0 million |
Q3 revenue rose 30%, pretax income 90% and net income 94% year over year. Nine-month revenue increased 22%, pretax income 81% and net income 86%. Q3 housing gross margin was 20.3%, up from 19.1%; the company reported total gross margin of 22.9% for the quarter. Nine-month housing gross margin was 19.6%, versus 18.1%. Lower selling, general and administrative expense as a share of revenue and reduced interest expense also supported results.
Q3 home deliveries increased 29% to 2,137; net new contracts increased 71% to 2,949. At quarter-end, backlog reached 4,503 homes, valued at $1.8 billion, up 54% and 60%, respectively. The cancellation rate declined to 9.5% from 12.6%. Financial services revenue more than doubled to $28.9 million in Q3, with segment pretax income of $19.2 million.
At September 30, cash, cash equivalents and restricted cash totaled $202.5 million, including $202.3 million of unrestricted cash. Total assets were $2.42 billion and shareholders’ equity was $1.17 billion. There were no borrowings under the $500 million homebuilding revolver; after $66.6 million of letters of credit, $433.4 million remained available. Financial-services borrowings were $136.1 million. Senior notes had $250 million principal due 2025 and $400 million due 2028; the 2021 notes were redeemed in January. Homebuilding debt to capital was 36%, compared with 38% at year-end 2019. Management said available cash and credit were expected to fund anticipated needs for at least 12 months.
Material changes versus the prior comparable period
- Following a sharp sales slowdown in late March and April, demand recovered from May; management cited low mortgage rates, limited existing-home supply and consumer interest in suburban single-family homes.
- Home deliveries, contracts and backlog all reached records. The average selling price of delivered homes declined 1% in Q3 and 3% year to date, largely reflecting product and market mix.
- Financial-services results benefited from more loan originations and higher loan-sale margins. M/I Financial financed approximately 85% of Q3 deliveries, versus 85% a year earlier.
- Operating cash flow increased to $197.2 million from $1.0 million, aided by earnings, customer deposits and payables, partly offset by inventory investment.
- In January, the company issued $400 million of 4.95% notes due 2028 and used part of the proceeds to redeem $300 million of 6.75% notes due 2021 and repay revolver borrowings. Interest expense fell to $1.2 million in Q3 from $4.6 million.
Outlook, risks and unusual items
Management expected demand to remain supported by low rates and housing supply and demographic trends, but warned that the pandemic could weaken economic conditions and sales. It provided no 2020 land-spending or community-count estimates because of uncertainty. Priorities included managing land investment and inventory, bringing new communities online, maintaining liquidity, expanding more affordable Smart Series homes and controlling costs. Management reported construction-material cost increases in Q2 and Q3, partly offset by pricing and cost management.
Key risks include renewed COVID-19 restrictions or economic deterioration; tighter mortgage underwriting and reduced availability; labor, subcontractor and material constraints; rising costs; and the possibility that rapid sales exhaust available communities before replacements open. The company had 207 active communities, down from 221 a year earlier, and had opened 51 and closed 69 communities during the first nine months.
Contingencies include Florida stucco-related homeowner claims. The related warranty reserve was $3.7 million at quarter-end; management cautioned estimates may change and did not recognize additional recoveries. Other commitments included $801.4 million of land and lot options, $267.7 million of completion bonds and standby letters of credit, and $61.6 million of land-option deposits and prepaid acquisition costs identified as maximum exposure apart from consolidated inventory not owned. Other litigation reserves were $0.9 million.
Unusual items included a $2.5 million Q3 tax benefit from retroactively reinstated energy-efficient home credits ($3.7 million for the nine-month period), a $0.5 million year-to-date impairment of mortgage servicing rights related to COVID-19 disruption, and $0.95 million of loss on early extinguishment of debt. The company reported no inventory or joint-venture impairment charges. Its Detroit operations had been temporarily shut down from March 23 through May 7; the September goodwill review found no impairment.
Important facts for investors to verify
- Whether record contracts and backlog convert to deliveries and earnings, and whether active-community levels can be replenished.
- Whether pricing and construction-cost controls sustain margins amid material-cost inflation and changing product mix.
- Whether COVID-19, employment conditions or tighter mortgage standards affect cancellations, closings, buyers’ financing or liquidity.
- The adequacy of the stucco reserve and any future changes in repair costs, legal exposure or recoveries.
- Land-option commitments, completion guarantees and credit-facility availability, including compliance with debt covenants.