Business Context and Reporting Period
Company: M/I Schottenstein Homes, Inc. (M/I)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 1998
Business Overview: M/I is a homebuilder and financial services provider operating primarily in the Midwest, Florida, and the Mid-Atlantic regions. The company engages in the construction of single-family homes, land development, and mortgage banking services through its subsidiary, M/I Financial.
Key Financial Metrics
| Metric (in thousands) | Six Months Ended June 30, 1998 | Six Months Ended June 30, 1997 |
|---|---|---|
| Revenue | $292,836 | $251,843 |
| Net Income | $11,126 | $7,687 |
| Diluted EPS | $1.38 | $0.90 |
| Operating Cash Flow | $(35,511) | $(19,977) |
| Ending Cash Balance | $11,811 | $9,928 |
| Total Debt (Notes Payable + Mortgages) | $178,452 | $113,950 |
| Homebuilding Gross Margin | 18.9% | 18.2% |
Liquidity: As of June 30, 1998, the company held $11.8 million in cash and had $112.3 million of unused borrowing availability under its credit facilities. Total borrowing capacity stands at $234.5 million.
Material Changes vs. Prior Period
- Revenue Growth: Total revenue increased 16.0% year-over-year for the six-month period, driven by a 17.1% increase in housing revenue. This was partially offset by a 14.1% decrease in land revenue.
- Profitability: Net income rose 44.8% to $11.1 million. Income before taxes increased 45.0% to $18.7 million.
- Volume and Pricing: Homes delivered increased 11.4% (1,485 units vs. 1,333 units). The average sales price of homes delivered increased 5.1%.
- Backlog: Backlog units increased 33.6% to 2,243 homes, with a total sales value of $466.0 million (up 46.1% from the prior year).
- Debt Levels: Notes payable for homebuilding operations increased by $27.0 million to $105.0 million, reflecting increased investment in land development and houses under construction.
Guidance, Outlook, and Risks
Management Commentary: Management attributes growth to favorable market conditions, low interest rates, and a strategic focus on acquiring land in premier locations. The company successfully increased its borrowing capacity to $204.5 million and extended the maturity of its primary credit facility to September 2002.
Capital Actions: In May 1998, the company sold 1.2 million shares of treasury stock for approximately $24.6 million, proceeds of which were used to repay indebtedness. The company also initiated its first-ever cash dividend in April 1998 ($0.05 per share).
Risks and Contingencies:
- Interest Rate Sensitivity: The business is highly sensitive to interest rate fluctuations, which affect both consumer mortgage affordability and the company's variable-rate borrowing costs.
- Land Development: Significant capital is tied up in land development. The company faces risks regarding the ability to sell developed lots and potential cost overruns.
- Market Concentration: Approximately 45% of housing revenue for the six months ended June 30, 1998, was derived from the Columbus, Ohio market.
- Regulatory and Environmental: Operations are subject to zoning, environmental regulations, and potential building moratoriums due to infrastructure limitations.
Investor Verification Checklist
- Backlog Cancellation Rate: Verify the 11.7% cancellation rate for backlog units as of June 30, 1998, compared to historical rates (14.1% for prior year backlog).
- Land Inventory Valuation: Review the $161.6 million in single-family lots and land development costs to assess exposure to market downturns.
- Debt Covenants: Confirm compliance with the new bank loan agreement covenants, specifically the EBITDA to interest incurred ratio and minimum net worth requirements.
- Margin Sustainability: Monitor the 18.9% homebuilding gross margin against potential increases in labor and material costs.
- Year 2000 Compliance: Assess the materiality of costs associated with modifying management information systems for Year 2000 compliance.