M/I Homes, Inc. — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017. M/I Homes builds single-family homes across Midwest, Southern and Mid-Atlantic markets and provides mortgage and title services. Dollar amounts below are in millions unless noted.
Financial and operating performance
- Revenue: $407.0, up 25% year over year. Homebuilding revenue from deliveries was $387.5; land-sale revenue was $5.2; financial-services revenue was $14.3.
- Profit: Operating income was $31.7 versus $19.7; pretax income was $26.3 versus $14.7; net income was $16.9 versus $9.2. Net income attributable to common shareholders was $15.7, or $0.55 diluted EPS, compared with $8.0, or $0.30.
- Margins and expenses: Total gross margin was $86.7 (21.3% of revenue). Housing gross margin was 18.6%, up from 17.3%; excluding the prior-year stucco charge, the comparable margin rose from 18.0%. SG&A was 13.5% of revenue versus 13.7%.
- Cash flow: Operating activities used $23.3, compared with $1.4 provided a year earlier, principally reflecting a $54.8 inventory increase and reductions in accounts payable and accrued liabilities. Investing activities provided $3.2, including $7.4 proceeds from selling mortgage servicing rights. Financing activities provided $24.5. Cash, cash equivalents and restricted cash ended at $38.9, including $37.9 unrestricted cash.
- Balance sheet and liquidity: Total assets were $1,572.3 and shareholders’ equity was $671.7. Inventory was $1,286.6. Homebuilding debt-to-capital was 45%, up from 43% at year-end. The $400 revolving credit facility had $110.9 drawn and $255.8 of remaining availability; management reported covenant compliance.
- Debt: Reported debt included $300.0 principal of 6.75% senior notes due 2021, $57.5 principal of 3.25% convertible notes due September 2017, and $86.3 principal of 3.0% convertible notes due March 2018. M/I Financial had $106.9 outstanding on mortgage credit facilities. The filing states that it expects to repay or refinance the 2017 notes if they are not converted.
Changes versus Q1 2016
- New contracts increased 11% to 1,454; deliveries increased 18% to 1,038; average delivered home price rose 6% to $373,000.
- Quarter-end backlog grew 13% to 2,220 homes, with aggregate value up 14% to $834.4.
- Pretax income increased 79%; compared with prior-year pretax income excluding the $2.2 stucco-related charge, management reported growth of 56%.
- Financial-services revenue rose 42% to $14.3, with 725 loans originated versus 604. The total cancellation rate increased to 14.0% from 11.0%.
- Operating cash flow moved from positive $1.4 to negative $23.3. Inventory increased from $1,215.9 at year-end to $1,286.6 at quarter-end.
Outlook, commentary and risks
- Management expects modest increases in permits and new-home sales in many markets for the remainder of 2017, citing employment, wage growth, low interest rates and consumer confidence. It did not provide specific earnings or revenue guidance.
- Management estimated 2017 spending of approximately $500–$550 on land purchases and development, including $121.4 spent in Q1. It opened 24 communities and closed 18, ending the quarter with 184 active communities.
- Management said cash, expected receipts and available borrowing capacity should fund anticipated needs for at least the next 12 months, while noting that favorable operating trends may not continue. The mortgage warehouse facility was due to expire June 23, 2017; an extension was expected but not assured.
- Stucco claims: The company had an $8.8 reserve for known and estimated future Florida stucco repairs and said further estimate changes could be material. It recorded no stucco charge in Q1 2017, versus $2.2 in Q1 2016, and had not recognized potential insurance or subcontractor recoveries.
- Other exposures: Land and lot options represented approximately $622.8 of potential purchases; outstanding completion bonds and standby letters of credit totaled $146.5. Homebuilding results are exposed to interest rates, housing demand, land, labor and materials costs, and home-price changes. The filing also identifies possible deferred-tax-asset reductions if U.S. corporate tax rates change.
- Revenue from homebuilding was expected to remain substantially unchanged under the forthcoming revenue-recognition standard, but the timing of some third-party land sales could vary depending on contract terms.
Key facts for investors to verify
- Whether delivery growth, backlog conversion and home prices continue, particularly given the higher cancellation rate and regional variation in new contracts.
- Progress on the $8.8 stucco reserve, additional homes requiring repair, and any recoveries from insurers or subcontractors.
- Repayment, conversion or refinancing of the $57.5 notes due September 2017 and the $86.3 notes due March 2018; also confirm extension of the mortgage warehouse facility.
- Whether planned land spending of $500–$550 and inventory growth can be funded without materially increasing leverage or constraining liquidity.