M/I Homes, Inc. (NYSE: MHO) — Q3 2023 Form 10-Q
Reporting period: Quarter ended September 30, 2023. M/I Homes builds single-family homes across Northern and Southern U.S. markets and operates mortgage and title services. Financial statements are unaudited.
Financial and operating results
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Revenue | $1,046.4 million | $1,012.9 million | $3,060.9 million | $2,914.4 million |
| Income before taxes | $178.0 million | $166.6 million | $469.3 million | $471.0 million |
| Net income | $139.0 million | $131.6 million | $360.1 million | $360.3 million |
| Diluted EPS | $4.82 | $4.67 | $12.58 | $12.59 |
| Operating cash flow | Not separately reported for quarter | Not separately reported for quarter | $497.2 million | $(14.1) million |
- Q3 revenue rose 3%, pretax income 7%, and net income 6% year over year. Nine-month revenue rose 5%, while pretax income and net income were approximately flat.
- Q3 housing gross margin was 25.4%, flat year over year. For the first nine months, it was 23.5%, down from 24.8%, primarily reflecting delivery mix and higher construction and lot costs.
- Cash, cash equivalents and restricted cash were $736.3 million at quarter-end, including $736.1 million unrestricted. Inventory was $2.74 billion, down from $2.83 billion at December 31, 2022.
- Debt principal outstanding totaled $900.6 million, including $700 million of senior notes and $200.6 million of financial-services borrowings. The company had no homebuilding revolver borrowings; $572.6 million remained available after letters of credit. Homebuilding debt to capital was 22%, versus 25% at year-end 2022.
- Home deliveries increased 3% in Q3 to 2,096; nine-month deliveries rose 2% to 6,093. Net new contracts increased 50% in Q3 to 2,021, while quarter-end backlog fell 24% year over year to 3,433 homes.
Material changes versus comparable periods
- Q3 performance differed by region: Northern revenue declined 16% and operating income declined to $43.8 million; Southern revenue rose 17% and operating income increased to $135.6 million.
- For the first nine months, Northern operating income fell to $129.8 million from $173.9 million, while Southern operating income increased to $343.2 million from $323.6 million.
- Financial-services revenue rose 17% in both Q3 and the nine-month period, supported by higher loan volumes, average loan amounts and margins.
- Operating cash flow improved from cash use in the prior-year period, largely reflecting lower inventory investment and timing of land purchases. Cash balances also benefited from home closings and a higher beginning cash balance.
Outlook, commentary and risks
- Management reported stronger demand in Q2 and Q3 than in the corresponding 2022 periods, but said the fourth quarter could be challenging. It provided no specific earnings or revenue guidance.
- Management plans to emphasize land and inventory management, build-cycle improvements, new community openings, overhead control, liquidity and customer service. It expected community count to grow approximately 11% by year-end 2023; earlier commentary also described an approximately 15% increase from year-end 2022.
- At quarter-end, the company controlled approximately 44,800 lots, about a five-year supply based on trailing deliveries. It had 204 active communities, versus 178 a year earlier, and expected to continue opening communities.
- Management cited mortgage rates above 8% by late October 2023, affordability and buyer sentiment, inflation, labor and material costs, and uncertainty in the broader economy as risks. It said it would adjust land spending and incentives as conditions change.
- After quarter-end, M/I Financial amended its mortgage warehousing agreement and replaced an expired mortgage repurchase facility with a new facility of up to $300 million, subject to scheduled availability changes; combined maximum availability was $380 million as of the report date.
- Commitments included approximately $1.04 billion of land and developed-lot options and $417.6 million of completion bonds and letters of credit. The company reported ordinary-course legal matters and $1.4 million reserved for legal expenses; management did not expect their resolution to materially affect financial position, results or cash flows, but noted uncertainty.
- The company repurchased $40.3 million of shares in the first nine months, with $52.9 million remaining under its authorization. Management said it expected to continue repurchases during the remainder of 2023, subject to market conditions and other factors.
Important facts for investors to verify
- Whether elevated mortgage rates and affordability pressure weaken contracts, deliveries, backlog or pricing, especially given the year-over-year backlog decline.
- Whether housing gross margins stabilize or continue to be affected by regional and product mix, construction costs, land costs and incentives.
- Whether operating cash generation remains strong as land development, construction and community-opening activity change.
- Current availability, borrowing levels and terms under M/I Financial’s amended and replacement credit facilities, including their 2024 maturities and variable-rate exposure.
- Potential cash or earnings effects from land options, completion obligations, warranties, mortgage-loan guarantees and legal matters.