M/I Homes, Inc. (NYSE: M) — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2011. Unaudited consolidated financial statements; amounts below are USD unless otherwise stated.
Business context and reporting period
M/I Homes builds and sells single-family homes across Midwest, Southern, and Mid-Atlantic markets, alongside mortgage and title services. In April 2011, it acquired assets of San Antonio builder TriStone Homes, expanding its Texas operations.
Financial performance and position
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Revenue | $141.6m | $135.6m | $389.6m | $451.4m |
| Net loss | $(4.7)m | $(2.1)m | $(30.9)m | $(15.2)m |
| Loss per diluted share | $(0.25) | $(0.11) | $(1.65) | $(0.82) |
| Interest expense | $3.4m | $2.0m | $10.9m | $6.2m |
Q3 gross margin was $23.7m, or approximately 16.7% of revenue; management’s adjusted operating gross margin was 17.9%, compared with 18.1% a year earlier. For the nine months, adjusted operating gross margin was 17.1%, versus 17.0%. These adjusted measures are non-GAAP.
At September 30, total assets were $661.7m, inventory $491.4m, and shareholders’ equity $275.9m. Unrestricted cash was $46.8m and restricted cash was $46.2m. Total debt was approximately $276.4m, comprising senior notes, financial-services bank borrowings, and other notes; community development district obligations were another $6.3m. Net debt to net capital was 40%, up from 34% at year-end 2010.
Operating cash flow was negative $24.6m for the nine months, compared with negative $43.0m in 2010. Investing cash flow was negative $10.7m and financing cash flow positive $0.9m; cash declined $34.4m to $46.8m. Land and development spending was $90.1m during the period.
Material changes versus comparable periods
- Q3 revenue increased 4%, as deliveries rose 13% to 582 homes, partly offset by a 7% decline in average selling price to $238,000. Nine-month revenue fell 14%, reflecting 10% fewer deliveries and a 5% lower average selling price.
- Q3 net loss widened by $2.6m; nine-month net loss roughly doubled. Management cited lower year-to-date revenue, higher impairment charges, increased interest expense, and the absence of a $2.4m defective-drywall settlement received in Q3 2010.
- New Q3 contracts rose 20% to 587; backlog increased 16% year over year to 838 homes, with a stated aggregate sales value of $222.7m. The cancellation rate was 19.1%, down from 21.8% in Q3 2010.
- Nine-month inventory impairment charges were $18.0m, versus $11.2m a year earlier; including abandoned land transaction write-offs, total impairment and write-off charges were $18.5m versus $11.6m.
Outlook, liquidity, risks, and unusual items
- Management described housing demand as uncertain, citing cautious consumers and tighter lending standards. It said market recovery timing and pace were difficult to predict. No formal earnings guidance was provided.
- Management estimated 2011 land purchases and development spending of $125m–$150m and said it believed available liquidity could fund expected working capital, planned spending, and debt service for at least 12 months, including repayment of the $41.4m of 6.875% notes due April 2012.
- The homebuilding credit facility had $32.9m of net remaining borrowing availability. The company was compliant with its covenants, but failed the specified interest-coverage and adjusted-cash-flow thresholds for the June and September quarters and therefore had to maintain a $25m cash pledge. Restricted cash also collateralized letters of credit.
- Senior-note indentures’ restricted-payment baskets were negative; common and preferred dividends and share repurchases were prohibited. No preferred dividends were paid in the first nine months.
- A $139.5m valuation allowance had been recorded against deferred tax assets, including an additional $11.6m for the nine-month period. Management cited cumulative losses and said it did not expect further 2011 tax benefits apart from a limited carryback.
- Defective imported drywall: 93 Florida homes had been identified; 80 repairs were complete and nine were in progress. The repair accrual was $1.4m. Related litigation remained unresolved; the company recorded no litigation accrual beyond repair costs because loss probability and range could not be estimated.
- Other risks include further inventory impairments, changes in local housing conditions, interest-rate and financing risks, mortgage-loan repurchase or indemnity claims, and potential refinancing or liquidity constraints. Management’s community valuations rely on uncertain assumptions, including prices, sales pace, and construction costs.
Most important facts for investors to verify
- Whether the company can repay or refinance the $41.4m notes due April 2012 and maintain liquidity as restricted cash and facility conditions evolve.
- Whether backlog converts to closings at expected prices, and whether contract growth persists across regions.
- Future inventory impairments and the assumptions underlying management’s community-level valuations.
- Progress in Texas markets and the acquired TriStone business, including related costs and profitability.
- Potential exposure from drywall litigation, mortgage-loan guarantees, and other contingencies.
- Whether sustained taxable income can support realization of deferred tax assets and any future reduction in the valuation allowance.