M/I Homes, Inc. — Q1 2022 Form 10-Q
Business context and period: Homebuilder and mortgage/title services provider; unaudited quarter ended March 31, 2022, compared with Q1 2021. Amounts below are in U.S. dollars unless noted.
Financial performance
| Metric | Q1 2022 | Q1 2021 | Change |
|---|---|---|---|
| Revenue | $860.8 million | $828.8 million | +4% |
| Income before taxes | $122.3 million | $110.3 million | +11% |
| Net income | $91.8 million | $84.9 million | +8% |
| Diluted EPS | $3.16 | $2.85 | +11% |
| Total gross margin | 24.8% | 24.4% | +40 bps |
| Housing gross margin | 22.6% | 21.6% | +100 bps |
| Operating cash flow | $69.3 million | $75.2 million | Down |
Homebuilding revenue benefited from a 16% increase in average selling price, partly offset by 10% fewer deliveries (1,823 versus 2,019). Housing revenue was $833.2 million; financial-services revenue fell 19% to $24.1 million. Selling, general and administrative expense was $90.2 million, or 10.5% of revenue, versus 11.0% a year earlier. Net interest expense decreased to $0.7 million, partly because more interest was capitalized in inventory. The effective tax rate rose to 24.9% from 23.0%.
Balance sheet, cash flow and capital
- Cash, cash equivalents and restricted cash were $218.6 million at March 31, including $217.7 million unrestricted, versus $236.4 million at year-end.
- Inventory increased to $2.58 billion from $2.45 billion. Operating cash flow included a $129.3 million inventory investment.
- Total liabilities were $1.60 billion and shareholders’ equity was $1.70 billion. Senior notes totaled $700 million principal: $400 million due 2028 at 4.95% and $300 million due 2030 at 3.95%.
- No borrowings were outstanding under the $550 million homebuilding revolver; $475.9 million remained available after letters of credit. Financial-services borrowings were $203.7 million, with $1.9 million of reported facility availability.
- The company repurchased 310,000 shares for $15.4 million during the quarter; $133.1 million remained authorized under the $200 million repurchase program. Homebuilding debt to capital was 29%, versus 30% at year-end.
- Cash used in investing activities was $6.6 million; cash used in financing activities was $80.5 million, primarily reflecting repayments of financial-services borrowings and share repurchases.
Operating changes and outlook
Management reported record first-quarter revenue, pretax income and net income, and an all-time-high backlog of 5,526 homes valued at $2.8 billion, up 17% in value year over year. New contracts declined 19% to 2,514; management cited fewer selling communities, limits on sales to align with production and lot availability, and comparison with exceptionally strong Q1 2021 sales. Average monthly absorption declined to 4.8 homes per community from 5.3. Average selling price of delivered homes rose 16% to $457,000.
Management said demand remained strong but construction delays, labor and material shortages, transportation constraints and extended product lead times increased build-cycle times and delayed closings. It expected these challenges and cost inflation to persist. Rising mortgage rates could weaken affordability and demand. The company raised prices in many communities and emphasized cost control, liquidity, land-spending discipline and expansion of its more affordable Smart Series homes. It expected to open a record number of communities in 2022 and grow to more than 200 by year-end, approximately 15% growth; it did not provide a 2022 land-spending estimate.
Management stated that current cash, operating receipts and available credit should meet anticipated needs for at least 12 months. It expected to extend the mortgage warehouse facility, which expires May 27, 2022, but gave no assurance that lenders would agree. It anticipated low likelihood of drawing on the homebuilding revolver during the rest of 2022, while noting actual borrowing could vary.
Risks, contingencies and unusual items
- Inflation, rising mortgage and borrowing rates, construction-cost increases, supply-chain disruption, labor shortages, permitting delays and slower community openings could pressure margins, sales and deliveries.
- Land options and contingent purchase agreements covered 21,552 lots with an aggregate purchase price of approximately $961.5 million. Outstanding completion bonds and standby letters of credit totaled approximately $386.1 million.
- Florida stucco-related claims involved homes primarily built before 2014; the remaining related reserve was $2.4 million. Other legal proceedings had a $1.0 million reserve. Management said other proceedings were not expected to have a material overall effect, but outcomes remain uncertain.
- Mortgage loan-sale guarantees covered approximately $304 million of loans; the company recorded a $0.5 million liability for described guarantees. Actual warranty, litigation and guarantee costs could differ from estimates.
- No inventory or joint-venture impairment charges were recorded in the quarter. Management cautioned that valuation assumptions and market conditions could change.
Investor verification priorities
- Track backlog conversion, cancellations, selling prices and delivery volumes as mortgage rates rise and construction cycle times remain extended.
- Verify the mortgage warehouse facility extension and monitor financial-services borrowing capacity and maturities.
- Assess whether inventory growth, land commitments and community-opening plans remain aligned with demand and cash generation.
- Monitor margin resilience against labor, material and land-cost inflation, as well as the lower financial-services revenue and earnings.
- Review developments in stucco claims, warranty reserves, land-option commitments and contingent bonds or letters of credit.