MHO

Business Context and Reporting Period

Company: M/I Homes, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2010
Business Overview: M/I Homes is a leading builder of single-family homes operating in the Midwest, Florida, and Mid-Atlantic regions, with recent entry into the Houston market. The company also operates a financial services segment providing mortgage and title services.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue: For the nine months ended September 30, 2010, revenue increased 24% to $451.4 million compared to $365.0 million in the prior year period, driven by a 15% increase in homes delivered and an 8% increase in average sales price. However, for the third quarter specifically, revenue decreased 11% due to the expiration of the federal homebuyer tax credit.
• Profitability: The net loss for the nine months ended September 30, 2010, improved significantly to $15.2 million from a loss of $69.1 million in the same period in 2009. This improvement was primarily due to a substantial reduction in inventory impairment charges ($11.2 million in 2010 vs. $32.5 million in 2009) and improved gross margins.
• Impairment Charges: Total impairment and write-off charges decreased to $11.6 million for the nine months ended September 30, 2010, compared to $34.0 million in the prior year period.
• Backlog: Homes in backlog decreased 32% to 722 units (valued at $188.3 million) as of September 30, 2010, down from 1,060 units at the end of 2009, largely attributed to the decline in new contracts following the tax credit expiration.

Guidance, Outlook, Risks, and Unusual Items

• Outlook: Management anticipates a gradual improvement in market conditions over the long term but notes that the timing and degree of recovery remain uncertain. The company plans to continue strategic land acquisitions in well-positioned markets to replenish inventory.
• Unusual Items:
  • Defective Drywall: The company identified approximately 90 homes in Florida with defective imported drywall. As of September 30, 2010, $2.3 million remained accrued for repairs. The company received a $2.4 million settlement in the third quarter of 2010 related to these claims.
  • Tax Refund: The company received a $25.9 million federal tax refund in the first quarter of 2010 related to net operating loss carrybacks.
• Risks and Contingencies:
  • Dividend Restrictions: Due to a negative "restricted payments basket" of $(171.6) million under the Senior Notes indenture, the company is currently restricted from paying dividends on common and preferred shares or repurchasing shares.
  • Debt Covenants: The company is in compliance with all covenants under its Credit Facility and Senior Notes. However, the Credit Facility commitment may be reduced or terminated if the Senior Notes are not refinanced by specific dates in 2011.
  • Valuation Allowance: Due to cumulative losses, the company recorded a valuation allowance of $122.8 million against deferred tax assets, indicating it is more likely than not that these assets will not be realized.

Investor Verification Checklist

• Verify the status of the tender offer for the $200 million Senior Notes due April 2012, announced October 14, 2010.
• Monitor the resolution of the defective drywall litigation and potential additional costs beyond the current $2.3 million accrual.
• Assess the impact of the "restricted payments basket" deficit on the company's ability to return capital to shareholders or refinance debt.
• Review the company's land acquisition strategy and inventory absorption rates in light of the 32% decline in backlog.
• Confirm the company's ability to meet the refinancing deadlines for the Senior Notes to avoid reductions in the Credit Facility commitment.