MHO

Business Context and Reporting Period

Company: M/I Homes, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 2008
Business Overview: M/I Homes is a single-family homebuilder operating in the Midwest, Florida, and Mid-Atlantic regions, alongside a financial services segment (M/I Financial) providing mortgage and title services. The company operates in a significant industry downturn characterized by declining demand, high inventory, and increased cancellations.

Key Financial Metrics

Note: Debt figures include Notes Payable Banks ($53.2M) and Senior Notes ($199.0M net of discount) as of March 31, 2008.

Material Changes vs. Prior Period

• Revenue Decline: Total revenue decreased 28% ($60.5 million) year-over-year. Housing revenue dropped 36% due to a 34% decrease in homes delivered (450 vs. 686) and a 3% decrease in average sales price ($291k vs. $301k).
• Significant Impairment Charges: The company recorded $22.3 million in charges related to inventory impairment, investment write-offs in unconsolidated LLCs, and abandoned land transaction costs. This compares to $2.2 million in similar charges in Q1 2007.
• Profitability Reversal: The company swung from a net income of $2.2 million in Q1 2007 to a net loss of $19.8 million in Q1 2008. Excluding impairment charges, the pre-tax loss was $4.5 million, compared to pre-tax income of $5.5 million in the prior year.
• Backlog Reduction: Total backlog units fell 51% to 816 homes (valued at $243 million) from 1,678 homes (valued at $543 million) in Q1 2007.
• Debt Reduction: The company utilized a $49 million tax refund and operating cash flow to repay $102.2 million in bank borrowings, significantly reducing total debt.

Guidance, Outlook, and Risks

Management Commentary: Management anticipates challenging market conditions to continue throughout 2008. The company is pursuing a defensive strategy to reduce land purchases and inventory levels to match forecasted sales. While a gradual improvement in market conditions is projected over the long term, the company warns that further deterioration could necessitate additional impairment charges.

Key Risks and Contingencies:

• Covenant Compliance: The company must maintain a minimum tangible net worth of $400 million (adjusted for deferred tax allowances). As of March 31, 2008, the company exceeded this by approximately $155.6 million. Further impairments could jeopardize compliance.
• Financing Expiration: The M/I Financial credit facility expires May 30, 2008. The company is negotiating a replacement secured facility; failure to secure this could impede financial services operations.
• Joint Venture Default: One unconsolidated LLC is in default on its loan agreement. While the loan is non-recourse, failure to renegotiate could result in a write-off of the company's investment (approx. $5.3 million).
• Deferred Tax Assets: The company has not established a valuation allowance for its deferred tax assets, relying on future taxable income and carrybacks. Continued losses could require a substantial valuation allowance, increasing tax expense.

Investor Verification Checklist

• Inventory Valuation: Verify the assumptions used for the $22.3 million impairment charge and assess the risk of further write-downs given the 51% drop in backlog.
• Liquidity Position: Confirm the status of the new secured credit facility for M/I Financial before the May 30, 2008 expiration of the current facility.
• Covenant Headroom: Monitor the tangible net worth covenant compliance, specifically the impact of potential future impairments on the $155.6 million buffer.
• Joint Venture Exposure: Track the resolution of the defaulted unconsolidated LLC loan to determine if the full investment write-off will occur.
• Tax Asset Realization: Evaluate the likelihood of realizing the $57.5 million in net deferred tax assets given the current loss position and market conditions.