M/I Homes, Inc. — Form 10-Q Summary
Business context and reporting period
M/I Homes is a U.S. homebuilder operating across the Midwest, Southern and Mid-Atlantic regions, with mortgage and title services supporting home sales. This unaudited filing covers the three and nine months ended September 30, 2015; comparisons are to the corresponding 2014 periods.
Financial and operating performance
| Metric | Q3 2015 | Q3 2014 | 9M 2015 | 9M 2014 |
|---|---|---|---|---|
| Revenue | $363.5M | $330.8M | $949.5M | $847.2M |
| Income before tax | $26.5M | $22.2M | $64.1M | $50.0M |
| Net income | $15.6M | $13.6M | $38.5M | $39.8M |
| Net income to common shareholders | $14.4M | $12.4M | $34.8M | $36.1M |
| Diluted EPS | $0.51 | $0.44 | $1.25 | $1.30 |
| Gross margin | $78.0M (about 21.5%) | $68.5M (about 20.7%) | $205.3M (about 21.6%) | $179.0M (about 21.1%) |
- Quarter revenue rose about 10%; nine-month revenue rose about 12%. Homes delivered were 994 in Q3 and 2,630 year to date. Average delivered home price increased 9% in Q3 and 10% year to date.
- Net new contracts increased to 988 in Q3 from 892; nine-month contracts were 3,196 versus 2,890. Ending backlog increased to 1,788 homes from 1,554 a year earlier, with backlog sales value of $656.9M versus $518.1M.
- Management attributed stronger gross margin chiefly to higher home prices and favorable product and community mix; higher lot, labor and material costs partly offset gains. Financial-services revenue rose 22% in Q3 and 20% year to date.
- Operating cash flow was negative $95.2M for the first nine months, compared with negative $106.7M in 2014, primarily reflecting inventory investment. Investing cash flow was negative $6.0M; financing provided $110.8M, largely from increased credit-facility borrowings. Cash and restricted cash totaled $28.1M at quarter-end, including $25.1M unrestricted cash.
- Total debt was approximately $611.2M at September 30, versus approximately $497.1M at December 31, 2014. Net debt to net capital was 50%, up from 47%. Homebuilding revolver borrowings were $156.1M, with $209.2M remaining availability; financial-services borrowings were $73.2M, with reported available amount of $0.75M.
- Total assets were $1.406B, including $1.133B of inventory; shareholders’ equity was $583.3M. The $400M homebuilding credit facility was expanded from $300M during Q3. The company reported compliance with its debt covenants.
Material changes versus prior period
- Q3 diluted EPS improved to $0.51 from $0.44. Nine-month diluted EPS declined to $1.25 from $1.30 despite higher pre-tax income, mainly because 2014 included a $9.3M, or $0.31 per diluted share, benefit from reversing a state deferred-tax valuation allowance. Excluding that benefit, management said nine-month common income and diluted EPS improved 29.7% and 26.3%, respectively.
- Q3 operating income increased to $30.1M from $24.8M, while nine-month operating income rose to $75.7M from $59.5M. Interest expense increased to $11.9M for nine months from $9.5M, reflecting higher average borrowings, partly offset by a lower average borrowing rate.
- Inventory increased by $214.8M from year-end 2014. No inventory or joint-venture impairment charges were recorded in the 2015 periods; 2014 included $1.4M of nine-month impairment charges.
- The effective tax rate was 39.9% for the first nine months of 2015 versus 20.4% in 2014, with the prior-year rate affected by the valuation-allowance reversal and tax attributes.
Outlook, risks and contingencies
- Management expected low interest rates and improving confidence, employment and mortgage availability to support modestly higher housing demand through the remainder of 2015 and into 2016; it cautioned that positive trends may not continue.
- Management estimated 2015 land purchases and development spending of $425M–$450M, including $322.9M spent in the first nine months. It expected continued use of the homebuilding credit facility and estimated peak 2015 facility borrowings of about $175M.
- The company said cash, operating receipts and available borrowing capacity should cover anticipated needs for at least 12 months. M/I Financial’s $15M mortgage repurchase facility was due to expire November 3, 2015; management expected to seek a one-year extension but gave no assurance it would be obtained.
- Key exposures include housing-demand and mortgage-rate changes, rising land, labor and material costs, inventory valuation assumptions, and the ability to pass cost increases to buyers. The company also had $495.2M of land and developed-lot options and contingent purchase agreements, and $150.8M of completion bonds and standby letters of credit.
- Ordinary-course legal claims were described as not expected to have a material overall effect, but outcomes remain uncertain and could differ from recorded estimates. Mortgage-loan repurchase and indemnification guarantees and warranty reserves also depend on estimates and future claims.
Important facts for investors to verify
- Whether home-price and backlog growth translate into closings and sustained margins, particularly as construction and land costs rise.
- Inventory growth, operating cash use and planned land spending against actual home deliveries and cash generation.
- Higher leverage, revolver usage, covenant headroom and refinancing or extension of M/I Financial’s mortgage repurchase facility.
- The extent to which 2014’s tax benefit explains the year-over-year nine-month EPS comparison, and the sustainability of reported earnings excluding that item.
- Potential exposure from land commitments, completion guarantees, warranty claims and legal matters.