Business Context and Reporting Period
Company: M/I Homes, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 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 severe housing downturn characterized by declining demand, falling prices, and credit market turmoil.
Key Financial Metrics
| Metric (in thousands) | Three Months Ended Sep 30, 2008 | Nine Months Ended Sep 30, 2008 | Nine Months Ended Sep 30, 2007 |
|---|---|---|---|
| Total Revenue | $160,385 | $457,472 | $676,000 |
| Net Loss | $(58,655) | $(170,088) | $(59,666) |
| Net Loss to Common Shareholders | $(58,655) | $(174,963) | $(64,541) |
| Loss Per Share (Diluted) | $(4.18) | $(12.48) | $(4.62) |
| Cash and Cash Equivalents | $4,343 | $4,343 | $1,506 (Dec 31, 2007) |
| Total Assets | $781,492 | $781,492 | $1,117,645 (Dec 31, 2007) |
| Total Liabilities | $373,648 | $373,648 | $536,300 (Dec 31, 2007) |
| Shareholders' Equity | $407,844 | $407,844 | $581,345 (Dec 31, 2007) |
| Inventory | $617,933 | $617,933 | $797,329 (Dec 31, 2007) |
| Senior Notes Outstanding | $199,104 | $199,104 | $198,912 (Dec 31, 2007) |
Operating Cash Flow (Nine Months): $126.173 million (2008) vs. $73.722 million (2007).
Impairment Charges (Nine Months): $105.7 million related to inventory, unconsolidated LLCs, and land write-offs.
Material Changes vs. Prior Period
- Revenue Decline: Revenue for the nine months ended September 30, 2008, decreased 32% ($218.5 million) compared to the prior year. This was driven by a 33% drop in homes delivered (1,471 vs. 2,189) and a 6% decrease in average sales price ($278,000 vs. $295,000).
- Increased Losses: Net loss for the nine months increased significantly to $170.1 million from $59.7 million in the prior year. Loss from continuing operations before taxes was $138.6 million, compared to $81.6 million in 2007.
- Impairment Charges: The company recorded $105.7 million in impairment charges for the nine months ended September 30, 2008, compared to $85.7 million in the same period in 2007. These charges impacted all three homebuilding regions, with Florida seeing the largest impact ($52.9 million).
- Debt Reduction: The company utilized a $49 million tax refund and operating cash flow to repay $119.7 million in bank borrowings. As of September 30, 2008, there were no outstanding borrowings under the homebuilding Credit Facility, compared to $115 million at year-end 2007.
- Backlog Reduction: Total backlog dropped 44% in units (781 homes) and 53% in value ($212 million) compared to September 30, 2007 (1,403 homes; $450 million).
Guidance, Outlook, and Risks
Management Commentary: Management describes the economic environment as "unprecedented" with severe turmoil in credit and financial markets. The company has adopted a defensive strategy focused on cash flow generation, right-sizing overhead, and carefully managing inventory. They anticipate minimal investment in new land parcels in the near term and expect market conditions to persist well into 2009.
Dividend Restrictions: Due to a negative "consolidated restricted payments basket" of $(71.4) million under the indenture governing senior notes, the company is currently restricted from paying dividends on common and preferred shares or repurchasing shares.
Key Risks and Contingencies:
- Inventory Impairment: Continued deterioration in market conditions could necessitate additional significant impairment charges on inventory and unconsolidated LLC investments.
- Liquidity and Covenants: While the company is currently in compliance with its Credit Facility covenants, the "Minimum Tangible Net Worth" covenant is the most restrictive. The company has a cushion of approximately $69.5 million but notes that further market deterioration could impact compliance.
- Tax Valuation Allowance: The company recorded a $79.6 million valuation allowance against deferred tax assets for the nine months ended September 30, 2008, due to cumulative losses making the realization of these assets "more likely than not" uncertain.
- Legal Proceedings: The company is a defendant in various routine legal actions, including a class action suit regarding overtime compensation for construction superintendents.
Investor Verification Checklist
- Debt Covenant Compliance: Verify the company's ability to maintain the "Minimum Tangible Net Worth" covenant of $335 million (actual: $404.5 million) given the volatility in asset valuations.
- Inventory Valuation: Assess the adequacy of the $617.9 million inventory balance against current market prices, considering the $105.7 million in impairment charges already taken.
- Dividend Status: Confirm the status of the "restricted payments basket" and the likelihood of resuming dividend payments on the 9.75% Series A Preferred Shares.
- Backlog Quality: Review the cancellation rate (31.6% for Q3 2008) and the average sales price of homes in backlog ($272,000) to gauge future revenue visibility.
- Unconsolidated LLC Exposure: Evaluate the $23.0 million investment in unconsolidated LLCs and the associated guarantees/indemnifications, particularly given the write-off of a $2.5 million investment in one LLC during Q3 2008.