MHO

Business Context and Reporting Period

Company: M/I Homes, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2005
Business Overview: M/I Homes is a leading single-family homebuilder operating in Ohio, Indiana, Florida, North Carolina, and the Washington, D.C. suburbs. The company operates two primary segments: Homebuilding (land development and home construction) and Financial Services (mortgage origination and title services).

Key Financial Metrics

Note: Debt figure includes $232M homebuilding notes, $11.6M financial services notes, and $198.3M senior notes (net of discount).

Material Changes vs. Prior Period

• Revenue: Total revenue for the six months ended June 30, 2005, decreased slightly (less than 1%) to $507.4 million compared to $509.9 million in 2004. This stability occurred despite a 17% decline in homes delivered, offset by a 13% increase in average sales price ($287,000 vs. $254,000) and increased land sales revenue.
• Profitability: Net income for the six months declined 23% to $34.4 million from $44.4 million in the prior year. Income before taxes dropped 23% to $56.4 million.
• Segment Performance:
  • Homebuilding: Revenue decreased 4% year-over-year. Gross margin remained stable at 23.3%.
  • Financial Services: Revenue declined 28% to $13.4 million due to a 27% decrease in loans originated and lower margins on adjustable-rate mortgages.
• Backlog: Backlog increased to 3,310 homes (valued at $1.1 billion) as of June 30, 2005, a 6% increase in units and 19% increase in value compared to June 30, 2004.
• Capital Structure: The company issued $50 million in additional senior notes in June 2005, bringing the total to $200 million. Proceeds were used to reduce revolving bank borrowings by $65.4 million.

Guidance, Outlook, and Risks

• Outlook: Management anticipates homes delivered will increase in the second half of 2005, projecting a full-year total of approximately 4,600 homes (up from 4,303 in 2004). New contracts are expected to increase by approximately 15% for the full year.
• Land Acquisition: The company plans to purchase approximately $380 million of land in 2005, with 85% of purchases targeted in markets outside the Midwest to support future growth.
• Financial Services Pressure: Management expects continued downward pressure on mortgage capture rates and margins due to lower refinance volume and increased demand for adjustable-rate mortgages.
• Risks:
  • Market Conditions: Sensitivity to interest rates, consumer confidence, and economic conditions in specific markets (31% of operating income derived from Columbus).
  • Supply Chain: Potential delays due to material and labor shortages, particularly in Florida markets.
  • Regulatory: Delays in regulatory processes and weather-related construction delays.
• Accounting Changes: The company will adopt SFAS 123(R) regarding share-based payment on January 1, 2006, which will require recognizing stock option expense in the income statement.

Investor Verification Checklist

• Backlog Conversion: Verify the ability to convert the $1.1 billion backlog into revenue in the second half of the year, given the 18.9% cancellation rate.
• Land Inventory Valuation: Assess the $985 million inventory balance, specifically the $616 million in land and land development costs, against current market absorption rates.
• Debt Covenants: Confirm compliance with the $600 million credit facility covenants, noting the borrowing base availability of $150.9 million.
• Financial Services Margins: Monitor the impact of declining mortgage capture rates (82% in Q2 2005 vs. 85% in Q2 2004) on the financial services segment's contribution to earnings.
• Ohio Tax Transition: Evaluate the long-term impact of Ohio's transition from income tax to gross receipts tax on future effective tax rates and operating expenses.