Business Context and Reporting Period
Company: M/I Schottenstein Homes, Inc. (M/I)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 1999
Business Overview: M/I is a homebuilder and financial services provider operating in the Midwest, Florida, and the Mid-Atlantic/Southwest regions. The company engages in the construction of single-family homes, land development, and mortgage banking services.
Key Financial Metrics
| Metric (in thousands) | Three Months Ended Sep 30, 1999 | Nine Months Ended Sep 30, 1999 | Balance Sheet (Sep 30, 1999) |
|---|---|---|---|
| Total Revenue | $235,106 | $597,443 | - |
| Net Income | $12,143 | $30,383 | - |
| Diluted EPS | $1.37 | $3.42 | - |
| Operating Cash Flow | - | ($42,519) Used | - |
| Cash & Equivalents | - | - | $5,223 |
| Total Debt (Notes & Mortgages) | - | - | $209,830 |
| Homebuilding Gross Margin | 19.7% | 19.5% | - |
| Backlog (Units) | 2,420 | 2,420 | - |
| Backlog Value | $540.0 million | $540.0 million | - |
Material Changes vs. Prior Period
- Revenue Growth: Total revenue increased 12.6% for the three months and 19.1% for the nine months ended September 30, 1999, compared to 1998. This was driven by a 16.9% increase in housing revenue (due to higher volume and average sales prices) partially offset by a 53.3% decrease in land revenue.
- Profitability: Net income rose 47.9% for the quarter and 57.1% for the nine-month period. Income before taxes increased 45.9% (quarter) and 54.6% (nine months).
- Margin Expansion: Homebuilding gross margin improved to 19.7% for the quarter and 19.5% for the nine months, up from 18.1% and 18.3% in the prior year periods, respectively.
- Debt Levels: Notes payable for homebuilding operations increased significantly from $70.0 million (Dec 31, 1998) to $132.0 million (Sep 30, 1999) to fund increased inventory and land development.
- Backlog: Backlog units increased 12.0% to 2,420 homes, with a total sales value of $540.0 million, reflecting record new contracts in the first nine months of 1999.
Guidance, Outlook, and Risks
- Management Commentary: Management attributes revenue growth to favorable market conditions, increased closings in high-price markets (Phoenix, Washington D.C.), and a focus on premier locations. However, new contracts in the third quarter declined 11.6% due to rising interest rates and higher sales prices.
- Outlook: The company expects to finalize a new bank loan agreement by November 30, 1999, which will increase credit availability. Future performance depends on economic conditions, interest rates, and land development timing.
- Interest Rate Risk: The company notes that rising interest rates (two prime rate increases in Q3 1999) have decreased sales and marketing gains. The business is sensitive to mortgage rates affecting buyer qualification.
- Contingencies: The company holds options and contingent purchase contracts for land with an aggregate price of approximately $182.9 million.
- Year 2000 Compliance: The company believes its systems are substantially compliant but notes risks associated with third-party vendors and suppliers failing to comply.
Investor Verification Checklist
- Debt Covenants: Verify the terms of the new bank loan agreement expected by November 30, 1999, and ensure compliance with EBITDA and working capital covenants.
- Land Inventory: Assess the $224.4 million in single-family lots and land development costs against current sales trends and the $182.9 million in contingent land contracts.
- Interest Rate Sensitivity: Monitor the impact of rising interest rates on the $132.0 million variable-rate bank borrowings and the volume of new home contracts.
- Backlog Cancellation Rate: Review the 11.0% cancellation rate of backlog from December 1998 to ensure it remains within historical norms (12.8% in prior year).
- Financial Services Volatility: Evaluate the stability of the financial services segment, which saw a 46.4% drop in marketing gains for the quarter due to rate fluctuations.