M/I Homes, Inc. — Q3 2018 Form 10-Q
Reporting period: Three and nine months ended September 30, 2018. M/I Homes builds and sells single-family homes across Midwest, Southern and Mid-Atlantic markets, and provides mortgage and title services. Results are unaudited.
Financial and operating performance
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue | $567.8 million | $476.4 million | $1,563.8 million | $1,340.3 million |
| Income before taxes | $39.5 million | $34.7 million | $96.9 million | $86.2 million |
| Net income | $29.3 million | $22.3 million | $75.3 million | $56.2 million |
| Diluted EPS | $1.01 | $0.64 | $2.56 | $1.73 |
| Housing gross margin | 18.7% | 19.5% | 18.1% | 18.5% |
- Q3 revenue increased 19%; homes delivered rose 13% to 1,422 and average delivered home price rose 7% to $390,000. Nine-month revenue increased 17%, with deliveries up 13% to 3,953 and average price up 4% to $384,000.
- Net new contracts increased 6% in Q3 to 1,302 and 15% for the nine months to 4,672. September 30 backlog rose 20% to 2,846 homes, valued at $1.14 billion, up 25%.
- Housing margin pressure reflected higher lot and construction costs and product/community mix. Adjusted housing gross margin was 18.8% for Q3 and 18.4% for the nine months, excluding specified acquisition and prior-year stucco charges.
- Cash used in operating activities was $73.9 million for the nine months, versus $66.0 million used in 2017. Investing activities used $121.5 million, including the $101.0 million Pinnacle acquisition; financing activities provided $80.1 million. Cash, cash equivalents and restricted cash ended at $36.4 million, including $35.5 million unrestricted cash.
- At September 30, total liabilities were $1.22 billion and shareholders’ equity was $835.2 million. Debt included $222.7 million of homebuilding revolver borrowings, $104.0 million of financial-services borrowings, $297.6 million carrying value of 2021 notes and $246.4 million carrying value of 2025 notes. The 2018 convertible notes matured during the period.
- Homebuilding credit facility availability was $228.5 million after borrowings and letters of credit. The company said available cash and credit were expected to meet anticipated needs for at least 12 months; it expected continued revolver use and estimated peak 2018 borrowings would not exceed $275 million.
Material changes and management outlook
- The March 2018 acquisition of Pinnacle Homes for approximately $101.0 million expanded the company into Detroit. It recorded provisional goodwill of $16.4 million and acquisition-related purchase-accounting and integration charges of $6.2 million through September.
- The company reported record Q3 and nine-month revenue, deliveries and new contracts, and record Q3 pretax income. Management described overall demand as healthy but noted a modest Q3 slowdown from the first half, citing higher mortgage rates and prices affecting affordability.
- Management viewed low unemployment, wage growth and limited housing supply as supportive of steady demand into 2019, while cautioning that favorable trends may not continue. It estimated 2018 land purchases and development spending of $575–$600 million, including $408.8 million through September, and said spending would be adjusted to market conditions and sales pace.
- Effective tax rates fell to 25.8% for Q3 and 22.3% for the nine months, from 35.6% and 34.8%, respectively, primarily reflecting the lower federal corporate tax rate. The nine-month period included a $3.0 million tax benefit related primarily to reinstated energy-efficient-home credits.
Risks, contingencies and unusual items
- Florida stucco-related homeowner claims remain under review. The company had a $5.6 million reserve at September 30 and had recorded no additional stucco charge in 2018; it stated future repair estimates could change materially and recoveries from insurers or contractors could not be reliably estimated.
- Outstanding completion bonds and standby letters of credit totaled approximately $205.9 million. Land options and contingent purchase agreements covered land and lots with an aggregate purchase price of approximately $699.9 million.
- Higher mortgage rates, construction and labor costs, and affordability pressures could weaken demand or margins. Inventory and joint-venture valuations rely on estimates and could result in future impairment charges.
- The company repurchased 437,490 common shares for $11.1 million under a newly authorized $50 million program; $38.9 million remained available. Credit agreements and senior-note indentures constrain certain additional debt, dividends and share repurchases. The company reported covenant compliance.
- Management reported effective disclosure controls and no material changes in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether Q3’s moderation in sales pace persists, particularly given rising rates and affordability concerns.
- Whether homebuilding margins stabilize as land, labor and construction costs evolve, and how much acquisition-related purchase accounting will continue to affect results.
- Cash needs and revolver usage against the planned land-spending range and the company’s estimated peak 2018 borrowing level.
- Whether the $5.6 million stucco reserve proves adequate and whether any recoveries or additional claims arise.
- Final purchase-price allocation and subsequent impairment testing for Pinnacle goodwill, and the effects of the tax-law adjustments and lease-accounting adoption.