M/I Homes, Inc. — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016; comparative period is Q1 2015. M/I Homes builds single-family homes and provides mortgage and title services. Results are unaudited. Unless noted, amounts are in millions.
Financial and operating results
| Metric | Q1 2016 | Q1 2015 |
|---|---|---|
| Revenue | $324.4 | $263.2 |
| Income before taxes | $14.7 | $15.7 |
| Net income | $9.2 | $9.6 |
| Net income to common shareholders | $8.0 | $8.3 |
| Diluted EPS | $0.30 | $0.31 |
| Operating cash flow | $1.1 | $(29.3) |
- Revenue rose 23%. Homes delivered increased 22% to 876, and average delivered home price rose 9% to $353,000. New contracts grew 19% to 1,314; backlog increased 22% to 1,969 homes, with a value of $730.0 million.
- Despite higher revenue, pretax income declined. Management attributed much of the comparison to $4.5 million less land-sale profit. Excluding land-sale profits, pretax income increased 34% to $14.0 million.
- Housing gross margin, excluding the $2.2 million stucco-repair charge, was 18.0%, down from 18.7%. Management cited community mix and higher construction and lot costs. SG&A was 13.7% of revenue, improving from 14.1%.
- Financial-services revenue rose 24% to $10.1 million; loan originations increased 6% to 604 and average loan amount rose 10% to $293,000. About 82% of delivered homes were financed through M/I Financial, unchanged year over year.
Balance sheet, debt and liquidity
- At March 31, cash and cash equivalents were $31.8 million, restricted cash $2.6 million, inventory $1,153.5 million, total assets $1,436.7 million and shareholders’ equity $604.6 million.
- Debt principal was approximately $654.3 million, comprising homebuilding bank borrowings of $114.5 million, financial-services borrowings of $87.2 million, other notes of $8.8 million, convertible notes of $57.5 million due 2017 and $86.3 million due 2018, and $300.0 million of senior notes due 2021. Net debt to net capital was 51%, versus 50% at year-end.
- The $400 million homebuilding revolver had $114.5 million drawn and $39.6 million of letters of credit outstanding, leaving $245.9 million available. The company reported compliance with its covenants.
- Financial-services warehouse and repurchase facilities had $87.2 million outstanding and $0.7 million available at quarter-end. The warehouse agreement expires June 24, 2016; management expected to extend it but gave no assurance lenders would agree.
- Operating cash flow improved to $1.1 million from cash use of $29.3 million. Investing used $12.9 million, including $10.7 million for property and equipment; financing provided $33.4 million. Cash increased $21.6 million during the quarter.
Changes, outlook and material risks
- Management described generally favorable housing conditions, citing employment, low interest rates, consumer confidence and mortgage availability. It expected modest U.S. housing-demand improvement in 2016, while cautioning that positive trends may not continue.
- Management estimated 2016 land-purchase and development spending of $425–$475 million, subject to market conditions and business activity. The company spent $84.2 million on land purchases and development in Q1 and ended the quarter with 181 active communities, versus 153 a year earlier. It announced entry into Sarasota, Florida in April.
- Land-sale revenue fell to $5.1 million from $22.1 million, reflecting fewer strategic sales. Homebuilding margins also face pressure from land, labor and construction costs; management said its ability to continue passing higher costs through to buyers is uncertain.
- Florida stucco claims increased. The company recorded an additional $2.2 million warranty accrual; the remaining reserve for identified homes requiring more than minor repairs was $1.8 million, covering approximately 138 homes. The ultimate number of affected homes, repair costs and potential recoveries from subcontractors or insurers remain uncertain.
- Other legal proceedings are described as ordinary-course matters, but management noted resolution costs could exceed recorded estimates. Outstanding completion bonds and standby letters of credit totaled $129.9 million. Land options and contingent purchase agreements represented approximately $525.5 million of potential purchases, subject to conditions.
- A $9.9 million airplane purchase contributed to the quarter’s higher capital spending. The company also reported higher weighted-average borrowings ($608.8 million versus $502.8 million), while the average borrowing rate declined to 5.89% from 6.51%.
- Management believed available cash, operating cash flows and credit availability would fund anticipated needs for at least 12 months. It expected to continue using the revolver and estimated peak 2016 revolver borrowings below $200 million. Results are seasonal, and interim performance is not necessarily indicative of full-year results.
Key facts for investors to verify
- Whether warranty reserves adequately reflect the evolving Florida stucco claims and any additional repair or litigation exposure.
- Renewal of the financial-services warehouse facility before its June 2016 expiration, and continued availability under the homebuilding revolver.
- Whether home-price growth can offset rising land, construction and labor costs without further margin deterioration.
- Execution of the planned $425–$475 million land-spending program, and the cash and financing needed to support it.
- Backlog conversion, cancellations and community absorption: the overall cancellation rate was 11.0%, compared with 13.4% a year earlier.
- Debt maturities, covenant headroom and contingent exposures, including land options, bonds, letters of credit and mortgage-loan guarantees.