M/I Homes, Inc. (NYSE: MHO) — Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2019. The interim financial statements are unaudited. M/I Homes builds and sells single-family homes across U.S. markets and provides mortgage and title services, primarily to its homebuyers.
Financial performance
| Metric | Q2 2019 | Q2 2018 | First half 2019 | First half 2018 |
|---|---|---|---|---|
| Revenue | $623.7 million | $558.1 million | $1,104.8 million | $996.0 million |
| Income before taxes | $41.2 million | $33.5 million | $64.7 million | $57.4 million |
| Net income | $30.2 million | $27.9 million | $48.0 million | $46.0 million |
| Diluted EPS | $1.08 | $0.96 | $1.71 | $1.56 |
| Operating cash flow | Not presented quarterly | Not presented quarterly | $10.6 million | $(20.9) million |
- Revenue rose 12% in Q2 and 11% in the first half. Homes delivered increased 9% and 8%, respectively; average delivered home prices were $389,000 and $391,000.
- Q2 income before taxes increased 23%. Management attributed the improvement to more deliveries, higher average prices, better overhead leverage and lower acquisition-related charges, partly offset by lower homebuilding gross margin percentage.
- Housing gross margin percentage was 17.6% in Q2 versus 17.8% a year earlier, and 17.5% in the first half versus 17.7%. Management cited product mix and higher lot costs; its commentary also identifies rising labor costs as a pressure.
- Financial-services revenue increased 20% to $14.3 million in Q2, helped by loan volume and improved loan-sale margins. First-half revenue declined 3% to $26.1 million, reflecting weaker loan margins earlier in the year.
- Reported first-half net income increased, but adjusted net income, a company-defined non-GAAP measure, decreased to $48.4 million from $50.1 million. Q2 adjusted net income was $30.3 million versus $30.1 million.
Balance sheet, debt and liquidity
- At June 30, 2019, total assets were $2.09 billion, inventory was $1.76 billion, shareholders’ equity was $904.2 million and cash, cash equivalents and restricted cash totaled $20.4 million, including $19.4 million of unrestricted cash.
- Reported borrowings included $174.3 million for homebuilding, $104.0 million for financial services, $5.1 million of other notes and approximately $545.3 million carrying value of senior notes. The senior notes have $300 million principal due in 2021 and $250 million due in 2025.
- Homebuilding debt to capital was 45%, up from 44% at year-end 2018. Net remaining availability under the $500 million homebuilding revolver was $266.8 million after borrowings and letters of credit. Financial-services facilities had $14.7 million available.
- First-half operating cash flow was positive, compared with cash used in the prior-year period. Inventory investment of $89.9 million remained a significant use of operating cash. Investing activities used $16.7 million; financing activities provided $5.0 million.
- Management said cash, operating receipts and available credit were expected to fund anticipated needs for at least the next 12 months. It expected continued revolver use and estimated peak 2019 homebuilding revolver borrowings would not exceed $300 million.
Changes, outlook and risks
- Management reported record Q2 and first-half levels of new contracts, deliveries, revenue and net income. At June 30, backlog was 2,845 homes valued at $1.125 billion, down from 2,966 homes and $1.174 billion a year earlier. The total cancellation rate increased to 14.1% in Q2 from 13.7%.
- Management expected generally favorable housing conditions to continue in the remainder of 2019, while noting that rising land and labor costs could pressure affordability and margins. It provided no specific earnings or revenue forecast.
- Management estimated 2019 spending on land purchases and development of $550 million to $600 million, including $283 million spent in the first half. It planned to continue expanding communities and offering more affordable Smart Series homes, while adjusting land spending to market conditions.
- The company decided to wind down Washington, D.C. operations, substantially by year-end 2019. It also recast its reportable segments; the change did not affect consolidated results.
- Stucco-related homeowner claims in Florida remain a contingency. The warranty reserve included $5.3 million for identified and estimated future repairs; 165 homes were in various stages of repair at quarter-end. No additional stucco charge or recovery was recorded in Q2, and the company said future cost estimates could change materially.
- Other exposures include $574.1 million of land and lot options or contingent purchase agreements, and $233.5 million of completion bonds and standby letters of credit. The company reported compliance with its credit-facility and senior-note covenants.
- Other notable items: adoption of the lease standard added $19.4 million of right-of-use assets and lease liabilities at quarter-end; a new corporate-headquarters lease expected to start in 2020 represents approximately $25 million of future operating leases not yet commenced. The Q2 effective tax rate was 26.6%, versus 16.8%, largely because the prior-year quarter included a $3.0 million nonrecurring tax benefit.
Important facts for investors to verify
- Whether home deliveries and new contracts sustain growth while backlog remains below the prior-year level and cancellations have increased.
- Whether homebuilding margins withstand higher labor and lot costs, and whether the expected land investment generates adequate returns.
- Revolver utilization, available liquidity, the 2021 senior-note maturity and refinancing plans, and the expected extension of the financial-services repurchase facility expiring October 2019.
- The ultimate cost and recoveries, if any, relating to Florida stucco claims and other legal matters.
- Progress and costs of the Washington, D.C. wind-down, and the effect of changing mortgage margins and interest rates on financial-services results.