Business Context and Reporting Period
Company: M/I Homes, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 2010
Business Overview: M/I Homes is a leading builder of single-family homes operating in the Midwest, Florida, and Mid-Atlantic regions, alongside financial services operations (mortgage and title). The company markets homes under the trade names M/I Homes and Showcase Homes.
Key Financial Metrics
| Metric (in thousands) | Q1 2010 | Q1 2009 |
|---|---|---|
| Revenue | $119,389 | $96,149 |
| Net Loss | $(8,335) | $(28,129) |
| Loss Per Share (Diluted) | $(0.45) | $(2.01) |
| Operating Cash Flow | $(4,635) | $53,639 |
| Total Assets | $660,991 | $663,828 |
| Total Liabilities | $341,765 | $337,065 |
| Shareholders' Equity | $319,226 | $326,763 |
| Cash and Restricted Cash | $133,716 | $132,232 |
| Senior Notes Outstanding | $200,000 | $200,000 |
Margins: GAAP Gross Margin was $16.9 million (14.2%). Adjusted operating gross margin (excluding impairments and drywall charges) was 17.3%, up from 12.7% in Q1 2009.
Material Changes vs. Prior Period
- Revenue Growth: Revenue increased 24% ($23.3 million) driven by a 22% increase in homes delivered (479 vs. 394) and a 3% increase in average sales price ($242,000 vs. $235,000).
- Loss Reduction: Net loss improved significantly, decreasing 70% to $8.3 million from $28.1 million. Loss before taxes decreased by $19.3 million.
- Impairment Charges: Charges for inventory impairment and abandoned land write-offs dropped to $3.2 million from $11.0 million in the prior year.
- Cash Flow Shift: Operating cash flow turned negative ($4.6 million used) compared to $53.6 million generated in Q1 2009. This was primarily due to a $30.9 million investment in land and a decrease in tax refunds received ($25.9 million vs. $36.4 million).
- Backlog: Backlog units increased 12% to 936 homes, with aggregate sales value rising 28% to $246.6 million.
Outlook, Risks, and Unusual Items
- Management Commentary: Management notes signs of market recovery and improved conditions. They anticipate a gradual improvement in market conditions over the long term but warn that the expiration of the federal homebuyer tax credit in June 2010 could have a negative impact.
- Unusual Items:
- Imported Drywall: The company accrued an additional $0.6 million (total $12.8 million) for repairs related to defective imported drywall in approximately 90 homes in Florida.
- Valuation Allowance: Due to a four-year cumulative pre-tax loss position, the company recorded a $3.0 million valuation allowance against deferred tax assets, bringing the total allowance to $120.1 million.
- Risks and Contingencies:
- Dividend Restrictions: The company is restricted from paying dividends on common and preferred shares and repurchasing shares due to a negative "restricted payments basket" of $(164.3) million under its Senior Notes indenture.
- Debt Covenants: The company is in compliance with all covenants. The Credit Facility expires in October 2010; a new $100 million facility is expected to close in Q2 2010.
- Litigation: Ongoing litigation regarding defective drywall (MDL Omnibus Actions) and employee overtime classification. No accrual has been made for the drywall litigation as the probability of loss cannot be determined.
Investor Verification Checklist
- Dividend Status: Verify the continued restriction on dividends and share repurchases due to the Senior Notes indenture deficit.
- Debt Refinancing: Monitor the closing of the new $100 million credit facility scheduled for Q2 2010 to replace the facility expiring in October 2010.
- Drywall Exposure: Track the resolution of the imported drywall litigation and the adequacy of the $12.8 million accrual for repairs.
- Land Investment Strategy: Assess the impact of the increased land investment ($25.3 million in Q1) on future cash flows and inventory levels.
- Tax Credit Expiration: Evaluate the potential impact of the June 2010 expiration of the federal homebuyer tax credit on sales volume and backlog conversion.