Business Context and Reporting Period
Company: M/I Homes, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 2009
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 origination and title services). The company operates in a challenging economic environment characterized by reduced demand, oversupply, and declining home prices.
Key Financial Metrics
| Metric (in thousands) | Q1 2009 | Q1 2008 |
|---|---|---|
| Total Revenue | $96,149 | $156,085 |
| Net Loss | $(28,129) | $(19,770) |
| Loss Per Share (Basic & Diluted) | $(2.01) | $(1.58) |
| Operating Cash Flow | $53,639 | $98,752 |
| Total Assets | $641,476 | $693,288 |
| Total Liabilities | $335,831 | $360,227 |
| Shareholders' Equity | $305,645 | $333,061 |
| Cash and Restricted Cash | $65,349 | $32,518 |
| Senior Notes Outstanding | $200,000 | $200,000 |
Margins: Pre-impairment gross margins declined to 8.6% in Q1 2009 from 15.7% in Q1 2008.
Material Changes vs. Prior Period
- Revenue Decline: Total revenue decreased 38% ($59.9 million) year-over-year. Housing revenue dropped 29% due to a 12% decrease in homes delivered (394 vs. 450) and a 19% decrease in average sales price ($235,000 vs. $291,000). Financial services revenue fell 45% due to lower loan origination volumes.
- Increased Losses: Net loss increased to $28.1 million from $19.8 million. Excluding impairment charges, the pre-tax loss widened from $4.4 million to $17.0 million, driven by lower revenue and compressed margins.
- Impairment Charges: The company recorded $11.0 million in charges related to inventory impairment, investment in unconsolidated LLCs, and abandoned land write-offs, a significant decrease from $22.3 million in Q1 2008.
- Backlog and Contracts: Despite market weakness, new contracts increased 20% to 667 units. Backlog increased to 839 units (up from 816), though the aggregate sales value of backlog declined 21% to $193 million due to price reductions.
- Cost Reductions: General and administrative expenses decreased 32% and selling expenses decreased 34%, primarily due to workforce reductions and lower variable costs.
Guidance, Outlook, and Risks
Management Commentary: Management notes "slight improvement" in some markets, citing a 20% increase in new contracts and a record sales month in March. However, they expect reduced demand and oversupply to persist through the remainder of 2009. The company believes its strong balance sheet positions it to capitalize on opportunities as smaller competitors exit the market.
Liquidity and Capital Resources:
- Total cash and restricted cash stands at $65.3 million.
- Borrowing availability under the amended Credit Facility is $35.5 million.
- The company is restricted from paying dividends or repurchasing shares due to a negative "consolidated restricted payments basket" of $(174.9) million under its Senior Notes indenture.
Risks and Contingencies:
- Inventory Impairment: Continued market deterioration could necessitate additional impairment charges.
- Legal Proceedings: The company accrued $4.0 million for repairs related to imported drywall in Florida homes. It is also defending against a class action regarding employee overtime classification.
- Financing: The lender for the financial services warehouse line is withdrawing from the business; the company has secured a new $30 million line to replace it upon expiration in May 2009.
- Tax Valuation Allowance: Due to a five-year cumulative pre-tax loss, the company has recorded a $120.6 million valuation allowance against deferred tax assets, indicating it is "more likely than not" that these assets will not be realized.
Investor Verification Checklist
- Dividend Restrictions: Verify the status of the "consolidated restricted payments basket" to confirm if dividend payments or share repurchases remain prohibited.
- Inventory Valuation: Review the assumptions used for the $11.0 million impairment charge and assess the risk of further write-downs given the 19% drop in average sales price.
- Debt Covenants: Confirm continued compliance with the Credit Facility covenants, specifically the Minimum Net Worth ($301.5 million actual vs. $100 million required) and Leverage Ratio (0.80x actual vs. 2.00x limit).
- Financing Continuity: Monitor the transition of the mortgage warehouse lending facility from the exiting lender to the new $30 million agreement.
- Legal Accruals: Track the $4.0 million drywall accrual and potential exposure from the ongoing class action lawsuit regarding employee classification.