Business Context and Reporting Period
Company: M/I Homes, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 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 (M/I Financial) providing mortgage and title services.
Key Financial Metrics
| Metric | Three Months Ended June 30, 2010 | Six Months Ended June 30, 2010 |
|---|---|---|
| Revenue | $196.4 million | $315.8 million |
| Net Loss | $(4.8) million | $(13.1) million |
| Loss Per Share (Basic & Diluted) | $(0.26) | $(0.71) |
| Operating Cash Flow | Not provided for quarter | $(18.0) million (Used) |
| Total Assets | $665.2 million | $665.2 million |
| Total Liabilities | $349.9 million | $349.9 million |
| Shareholders' Equity | $315.2 million | $315.2 million |
| Cash and Restricted Cash | $128.7 million | $128.7 million |
| Senior Notes Outstanding | $200.0 million | $200.0 million |
Material Changes vs. Prior Period
- Revenue Growth: Revenue increased 69% ($80.3 million) for the quarter and 49% ($103.5 million) for the six months compared to the same periods in 2009. This was driven by a 61% increase in homes delivered (790 vs. 492) and a higher average sales price ($245,000 vs. $230,000).
- Loss Reduction: Net loss improved significantly, decreasing 76% for the quarter and 73% for the six months compared to 2009. The pre-tax loss narrowed from $19.9 million to $4.7 million (quarter) and from $47.8 million to $13.4 million (six months).
- Impairment Charges: Total impairment and write-off charges decreased to $6.5 million for the quarter and $9.7 million for the six months, compared to $7.9 million and $18.9 million in 2009, respectively.
- Backlog Decline: Homes in backlog decreased 32% to 748 units (valued at $200.0 million) from 1,106 units at June 30, 2009, largely due to the expiration of the federal homebuyer tax credit pulling closings forward.
- Inventory: Total inventory increased to $433.2 million from $420.3 million at year-end 2009, reflecting increased land purchases ($58.1 million in the first half of 2010).
Guidance, Outlook, and Risks
- Market Outlook: Management anticipates a gradual improvement in market conditions over the long term but notes that the expiration of the homebuyer tax credit caused a significant drop in new contracts in May and June 2010. New contracts for the quarter declined 21%.
- Strategic Shift: The company is shifting from a purely defensive strategy to a slightly more offensive one, increasing land purchases and targeting modest growth in 2011.
- Liquidity and Debt:
- On June 9, 2010, the company entered a new $140 million secured revolving credit facility maturing in 2013. Net borrowing availability was $32.5 million as of June 30, 2010.
- The company holds $200 million in Senior Notes due April 2012. Due to a negative "restricted payments basket" of $(169.5) million, the company is currently restricted from paying dividends or repurchasing shares.
- Risks and Contingencies:
- Defective Drywall: Approximately 90 homes in Florida have confirmed defective imported drywall. The company has accrued $3.6 million for repairs and is involved in multidistrict litigation (MDL) regarding this issue.
- Inventory Impairment: Continued market deterioration could lead to additional impairment charges on inventory and investments in unconsolidated LLCs.
- Interest Rate Risk: The company uses derivatives (forward sales of mortgage-backed securities) to hedge interest rate risk on loan commitments.
Investor Verification Checklist
- Backlog Sustainability: Verify the impact of the homebuyer tax credit expiration on future revenue visibility given the 32% drop in backlog units.
- Dividend Restrictions: Confirm the timeline for restoring the "restricted payments basket" to resume dividend payments on common and preferred shares.
- Drywall Liability: Monitor the status of the MDL litigation and the adequacy of the $3.6 million accrual for defective drywall repairs.
- Land Acquisition Strategy: Assess the risk associated with the increased land spending ($58.1 million in H1 2010) if market absorption rates do not improve as projected.
- Debt Refinancing: Track the company's ability to refinance the $200 million Senior Notes maturing in April 2012, as failure to do so could trigger reductions in the revolving credit facility.