Business context and reporting period
M/I Homes, Inc. (NYSE: MHO) filed this Form 10-K for the fiscal year ended December 31, 2013. The company builds and sells homes across Midwest, Southern and Mid-Atlantic markets, with mortgage and title services supporting home sales. Homebuilding generated 97% of consolidated revenue. The filing also reports fourth-quarter 2013 results.
Financial and operating performance
| Metric | FY 2013 | FY 2012 |
|---|---|---|
| Revenue | $1,036.8 million | $761.9 million |
| Gross margin | $206.5 million | $147.9 million |
| Operating income | $58.7 million | $28.8 million |
| Income before taxes | $41.3 million | $12.8 million |
| Net income | $151.4 million | $13.3 million |
| Net income to common shareholders | $145.6 million; diluted EPS $5.24 | $13.3 million; diluted EPS $0.67 |
| Cash used in operating activities | $74.0 million | $47.0 million |
| Cash and cash equivalents at year-end | $128.7 million | $145.5 million |
| Inventory at year-end | $690.9 million | $556.8 million |
- Net income included a $112.8 million non-cash tax benefit from reversing most of the deferred-tax-asset valuation allowance. Management attributed $38.6 million, or $1.32 per diluted share, to core profitability.
- FY 2013 home deliveries rose 26% to 3,472; average delivered home price increased 8% to $286,000. Net new contracts increased 25% to 3,787.
- Year-end backlog rose 33% to 1,280 homes, with aggregate sales value up 44% to $408.0 million. Total cancellation rate improved to 16.1% from 17.1%.
- Fourth-quarter revenue was $336.3 million and net income was $13.0 million; diluted EPS was $0.48.
- Reported consolidated gross margin was approximately 19.9% of revenue. SG&A was $147.8 million, or 14.3% of revenue, versus 15.6% in 2012.
Liquidity, debt and capital
- At December 31, 2013, cash, cash equivalents and restricted cash totaled $142.6 million, including $128.7 million unrestricted cash. The company had $187.6 million available under its $200 million unsecured revolving credit facility and no revolver borrowings.
- The company reported a 39% net-debt-to-net-capital ratio. It reported approximately $379.6 million of indebtedness excluding financial-services bank borrowings; the financial-services borrowing balance was $80.0 million. Debt included $230.0 million principal of 8.625% senior notes due 2018, $57.5 million of 3.25% convertible notes due 2017 and $86.3 million of 3.0% convertible notes due 2018.
- Financing actions included issuing $86.3 million of convertible notes and 2.461 million common shares in March 2013, for combined net proceeds of $137.3 million; the company also redeemed half of its Series A preferred shares for $50.4 million.
- Land purchases and development used $323.6 million in 2013. Operating cash outflow increased to $74.0 million, primarily reflecting a $156.7 million inventory increase.
- Purchase and option agreements covered approximately 9,732 lots with an aggregate stated purchase price of $353.1 million; purchases were generally contingent on specified conditions. Outstanding completion bonds and standby letters of credit totaled $91.3 million.
Changes, outlook and risks
- All three homebuilding regions improved operating results in 2013. Growth reflected more deliveries, higher average selling prices, improved community mix and expanded markets. The Southern region had the strongest revenue growth, up 71%.
- Management said the housing recovery’s pace moderated in the second half of 2013 as mortgage rates and home prices rose and federal stimulus tapered. It expected continued improvement in 2014, but cautioned that new-contract and price growth could be slower than in 2013.
- For 2014, management estimated land purchases and development spending of $400–$500 million, expected community count growth of 5%–10%, and anticipated peak revolver borrowings of about $75 million. It expected leverage and profitability to improve, but gave no assurance that margins or financial-services performance would continue improving.
- The mortgage warehouse agreement, with $100 million maximum availability, was scheduled to expire March 28, 2014. Management expected to extend it but gave no assurance of renewal. A separate $15 million mortgage repurchase facility was scheduled to expire November 5, 2014.
- Key risks include housing-market and mortgage-rate volatility, mortgage-credit availability and regulation, land and inventory valuation, labor and material shortages, construction costs, regional concentration, and warranty, litigation and natural-disaster exposure. Management reported routine legal matters and recorded related reserves; outcomes remain uncertain.
- The auditor issued an unqualified opinion on the financial statements and internal controls. The company reported effective disclosure controls and internal control over financial reporting.
Important facts for investors to verify
- Separate recurring homebuilding earnings from the $112.8 million valuation-allowance reversal when assessing 2013 profitability.
- Confirm renewal or replacement of the mortgage warehouse agreement and the company’s ability to maintain mortgage origination operations.
- Track whether planned 2014 land investment, inventory growth and community expansion convert into deliveries and operating cash flow; 2013 operating cash flow was negative.
- Monitor backlog conversion, cancellations, selling prices, incentives and construction costs, especially after the second-half 2013 slowdown.
- Review debt maturities, covenant headroom, contingent land commitments and potential inventory impairments as market conditions change.