M/I Homes, Inc. (NYSE: MHO) — 2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017. This is an annual report, not a standalone fourth-quarter filing. Financial statements were audited, and the auditor issued an unqualified opinion.
Business context
M/I Homes builds and sells single-family homes and townhomes across 15 markets in nine states. Homebuilding generated 97% of 2017 revenue; its financial services segment provides mortgage and title services. At year-end, the company operated in 188 communities.
Financial and operating results
| Metric | 2017 | 2016 |
|---|---|---|
| Revenue | $1.962 billion | $1.691 billion |
| Gross margin | $393.3 million | $329.2 million |
| Income before taxes | $120.3 million | $91.8 million |
| Net income | $72.1 million | $56.6 million |
| Net income to common shareholders | $66.2 million | $51.7 million |
| Diluted EPS | $2.26 | $1.84 |
| Cash from operating activities | $(52.5) million | $34.2 million |
| Cash, cash equivalents and restricted cash | $151.7 million | $34.4 million |
- Revenue rose 16%; homes delivered increased 14% to a record 5,089, and average delivered home price rose 3% to $369,000.
- GAAP housing gross margin was 18.1%, up from 17.6%. Excluding stucco-repair and impairment charges, adjusted housing gross margin was 19.0% in both years. These are company-defined non-GAAP measures.
- Financial services revenue increased 18% to $49.7 million; loan originations rose to 3,632 from 3,286.
- Operating cash flow turned negative as inventory investment increased $168.6 million. Inventory was $1.415 billion at year-end, up from $1.216 billion.
- Total assets were $1.865 billion and shareholders’ equity was $747.3 million. Homebuilding debt-to-capital was 46%, versus 43% in 2016.
Material changes and financing
- Year-end backlog increased 12% to 2,014 homes, with aggregate sales value up 15% to $791.3 million.
- The company issued $250 million of 5.625% senior notes due 2025 and used part of the proceeds to repay homebuilding credit-facility borrowings. It had no homebuilding credit-facility borrowings at year-end and $426.0 million of remaining availability.
- All $57.5 million of 3.25% convertible notes due 2017 converted into approximately 2.4 million common shares. The company also redeemed its remaining preferred shares for approximately $50.4 million.
- The 3.0% convertible notes due March 1, 2018 had $86.3 million principal outstanding at year-end. The company expected to repay any notes remaining at maturity with cash and/or credit-facility borrowings.
- The $125 million mortgage warehouse agreement, with $128.1 million outstanding at year-end, expires June 22, 2018. Management expected an extension but gave no assurance it would be obtained.
Outlook, risks and unusual items
- Management expected modest housing-market improvement in 2018 and planned to grow existing markets, expand communities and maintain a strong balance sheet. It estimated 2018 land purchases and development spending of $550–$600 million and expected average community count to increase 10% from 2017. These are expectations, not guarantees.
- Management cited employment, household formation, consumer confidence and mortgage availability as supportive factors, while noting that rising interest rates could reduce affordability and demand. It expected the 2017 Tax Act to support its business, although effects remained uncertain.
- Cash used in operations and planned land investment may require revolving-credit borrowings in 2018. Management believed available cash and credit sources would cover anticipated needs for at least 12 months.
- Florida stucco claims remained a material estimate and contingency: the company recorded an $8.5 million 2017 charge, had $9.1 million reserved at year-end, and said its review was ongoing. It could not estimate probable recoveries from insurers or contractors.
- Inventory impairment charges were $7.7 million in 2017. Other key risks include construction labor and material costs, land valuation and availability, mortgage-market access, regulatory requirements, severe weather, and warranty or legal claims. Hurricanes Harvey and Irma disrupted Texas and Florida operations; the company estimated about $0.8 million in community and model-home repair costs.
- The Tax Act reduced the federal corporate tax rate from 35% to 21%; remeasurement of deferred tax assets produced a provisional, non-cash tax expense of approximately $6.5 million. The accounting was not yet final.
Investor verification priorities
- Review the cash-flow and inventory build, including whether land investment converts into deliveries, cash generation and returns as planned.
- Verify refinancing or repayment of the $86.3 million convertible notes due March 2018 and renewal or replacement of the mortgage warehouse facility due June 2018.
- Track stucco repair progress, claims and reserve adequacy against the $9.1 million year-end accrual.
- Compare 2018 land spending and community-growth plans with demand, margins, leverage and available liquidity.
- Assess the impact of interest rates, construction-cost inflation, tax-law changes and regional weather events on affordability, pricing and gross margins.