M/I Homes, Inc. (NYSE: MHO) — FY2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019; the filing also reports fourth-quarter results. M/I Homes builds single-family homes and townhomes across Northern and Southern regions and provides mortgage and title services. Homebuilding generated about 98% of consolidated revenue. The company operated in 15 markets and ended the year with 225 active communities.
Financial and operating results
| Metric | FY2019 | FY2018 | Change |
|---|---|---|---|
| Revenue | $2.500 billion | $2.286 billion | +9% |
| Gross margin | $489.4 million | $443.8 million | +10% |
| Income before taxes | $166.0 million | $141.3 million | +18% |
| Net income | $127.6 million | $107.7 million | +19% |
| Diluted EPS | $4.48 | $3.70 | +21% |
| Operating cash flow | $65.6 million | $(2.6) million | Turned positive |
- Housing gross margin was 17.9%, versus 17.6% in 2018; adjusted housing gross margin was 18.1% in both years. SG&A was 12.1% of revenue, down from 12.3%.
- Homebuilding revenue was $2.420 billion; land-sale revenue was $24.6 million; financial-services revenue was $55.3 million. Financial-services revenue rose 6%, while its pretax income declined to $23.7 million from $24.2 million.
- New contracts rose 16% to a record 6,773; deliveries increased 9% to a record 6,296. Year-end backlog grew 22% to 2,671 homes valued at $1.058 billion. Cancellation rate improved to 13.0% from 14.6%.
- Average delivered home price was $384,000, flat year over year. Average backlog price fell 3% to $396,000, reflecting a greater share of more affordable Smart Series homes.
- Year-end assets were $2.106 billion, including $1.770 billion of inventory; shareholders’ equity was $1.003 billion. Cash, cash equivalents and restricted cash totaled $6.1 million, of which $5.9 million was unrestricted.
- Homebuilding debt-to-capital declined to 38% from 44%. Homebuilding debt was $617.9 million, excluding financial-services borrowing; financial-services notes payable were $136.9 million. The company had $364.9 million available under its $500 million revolving credit facility at year-end and reported compliance with its covenants.
Fourth quarter: Revenue was $742.2 million versus $722.5 million in Q4 2018; net income available to common shareholders was $41.8 million versus $32.4 million. Diluted EPS was $1.44 versus $1.15.
Changes, outlook and management commentary
- Management attributed annual growth chiefly to more deliveries, additional communities and improved overhead leverage. Higher lot and construction costs partially offset gains; management said cost inflation had pressured margins.
- Management expected generally favorable housing conditions to continue into 2020, citing low mortgage rates, employment and wage growth, consumer confidence and limited home inventory, while cautioning that positive trends were not assured.
- 2020 plans emphasized growth in existing markets, more affordable Smart Series homes, customer service and product quality, and maintaining a strong balance sheet. Management estimated average community count would rise about 5% from 2019.
- Planned 2020 spending on land purchases and development was approximately $650–$700 million, subject to market conditions and transaction requirements. Year-end lots under control represented about 5.3 years of supply at 2019 delivery levels.
- In January 2020, after the reporting date, the company issued $400 million of 4.95% senior notes due 2028. It used part of the proceeds to redeem all $300 million of 6.75% notes due 2021 and repay some revolving-credit borrowings.
Risks, contingencies and notable items
- Key risks include housing-market downturns, mortgage-rate or financing changes, competition, land availability and valuation, and labor or material shortages. Increased construction costs that cannot be passed through may reduce margins; inventory valuations depend on management forecasts and assumptions.
- Stucco-related homeowner claims in Tampa and Orlando remain unresolved. No new stucco charge was recorded in 2019; the year-end reserve was $4.5 million, and the company said further repair costs could exceed its estimate. Repairs were completed on 139 homes during 2019, with 136 in various stages of repair at year-end.
- Inventory impairment charges were $5.0 million in 2019, compared with $5.8 million in 2018. Pinnacle Homes acquisition-related charges were $0.6 million in 2019 versus $5.1 million in 2018, plus $1.7 million of acquisition and integration costs in 2018.
- The mortgage warehouse and repurchase facilities were scheduled to expire in June and October 2020, respectively; renewal or replacement was important to mortgage operations. The filing said the company expected to extend the warehouse agreement but could not assure renewal.
- The company disclosed $235.4 million of performance bonds and standby letters of credit, and approximately $685 million of land and lot purchases under option or contingent contracts. Other risks include warranty and legal claims, severe weather, regulation, cyber incidents and debt-covenant restrictions.
- The company wound down its Washington, D.C. operations during 2019. It also sold its former Columbus headquarters on December 31, 2019 and planned to move to a leased office in 2020.
Important facts for investors to verify
- Track whether 2020 sales, backlog conversion and community growth support the company’s outlook, particularly given the lower average backlog price and greater affordable-home mix.
- Compare realized pricing with land, labor and material cost increases to assess whether housing margins can be sustained.
- Review subsequent stucco repair experience, claim outcomes, reserve adequacy and any insurance or subcontractor recoveries.
- Confirm renewal or replacement of the 2020 mortgage facilities and monitor liquidity, borrowing levels and covenant headroom after the notes refinancing and planned land spending.
- Assess inventory quality and impairment assumptions, including the projected gradual market improvement used in valuations.
The filing’s financial statements received an unqualified audit opinion; management and the auditor reported effective internal control over financial reporting as of December 31, 2019.