M/I Homes, Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2017. M/I Homes builds single-family homes across Midwest, Southern and Mid-Atlantic markets and provides mortgage and title services, primarily to its homebuyers. Financial amounts below are in U.S. dollars.
Financial performance
- Third quarter: Revenue was $476.4 million, up 8% year over year; income before taxes was $34.7 million versus $18.4 million; net income attributable to common shareholders was $18.9 million versus $9.7 million; diluted EPS was $0.64 versus $0.35. The 2016 quarter included a $14.5 million stucco-related warranty charge; excluding that charge, pretax income increased about 5%.
- Nine months: Revenue was $1.340 billion, up 15%; pretax income was $86.2 million versus $58.1 million; common-shareholder net income was $50.3 million versus $32.4 million; diluted EPS was $1.73 versus $1.17. Excluding stucco charges in both periods, pretax income increased 22%.
- Margins and costs: Housing gross margin was 19.5% in the quarter versus 16.0% reported in the prior-year quarter; adjusted for the prior-year stucco charge, both quarters were 19.5%. Nine-month housing gross margin was 18.5% versus 17.3%; adjusted margins were 19.2% versus 19.0%. Nine-month selling, general and administrative expense rose to $177.9 million from $153.7 million, slightly increasing as a share of revenue to 13.3% from 13.2%.
- Operating indicators: Third-quarter new contracts rose 13% to 1,225, deliveries rose 9% to 1,256, and September backlog increased 7% to 2,378 homes. Backlog sales value rose 11% to $911.7 million. The overall cancellation rate was 15.1% for the quarter, little changed from 15.2%.
- Cash flow and liquidity: Operating activities used $66.0 million in the first nine months, versus $26.5 million provided a year earlier, chiefly reflecting a $212.7 million inventory increase. Investing activities used $5.1 million; financing activities provided $140.3 million. Period-end cash, cash equivalents and restricted cash totaled $103.6 million, including $103.0 million unrestricted. Management said available cash and credit were expected to meet anticipated needs for at least 12 months.
- Debt and capital: The company issued $250 million of 5.625% senior notes due 2025 and used part of the proceeds to repay its homebuilding revolver; no revolver borrowings remained at quarter-end, with $434.2 million of net availability. Carrying-value debt across listed debt instruments was approximately $723.8 million, including $91.3 million of financial-services borrowings. Homebuilding debt to capital was 47%, versus 43% at year-end 2016. The $57.5 million 2017 convertible notes were converted into about 2.4 million common shares. The remaining $86.3 million convertible notes mature March 1, 2018.
Material changes and management outlook
- Management reported record new contracts, deliveries and revenue for the quarter and nine-month period. Homes delivered increased 9% in the quarter and 14% year to date; average delivered-home selling prices were broadly steady in the quarter and up 2% year to date.
- Management cited generally steady to modestly improving housing demand, supported by employment and household formation, low interest rates, mortgage availability and limited housing supply. It emphasized growth in existing markets, new communities, land investment, balance-sheet strength, customer service and product quality.
- The company estimated 2017 spending on land purchases and development of $525 million to $550 million; $387.2 million had been spent through September. It opened 48 communities and closed 47 in the first nine months, ending with 179 active communities.
- No specific full-year revenue or earnings guidance was provided. Management cautioned that hurricane recovery could affect fourth-quarter and later results through lower orders, construction delays, higher materials and labor costs, warranty claims and softer buyer traffic. Hurricanes had delayed about 20 deliveries and caused approximately $0.7 million of community and model-home repair costs in the quarter.
Risks, contingencies and unusual items
- Stucco claims: Florida stucco-related repair costs led to an $8.5 million charge in the first nine months of 2017; the comparable 2016 period included $19.4 million. The remaining reserve was $11.3 million. The review is ongoing, and additional costs could be material; potential recoveries from insurers or subcontractors were not recorded because they could not be estimated as probable.
- Other exposures: The company had $167.7 million of completion bonds and standby letters of credit, and land options or contingent purchase agreements with an aggregate purchase price of about $672.9 million. It also disclosed mortgage-loan repurchase and indemnification guarantees, legal proceedings, and warranty and self-insurance estimates subject to uncertainty.
- Refinancing and interest-rate risk: The $35 million mortgage repurchase facility matured October 30, 2017; M/I Financial expected to seek a one-year extension but gave no assurance it could obtain one. Borrowings under financial-services facilities carried variable rates. Management also noted that higher rates, land, materials and labor costs could pressure housing demand, financing costs and margins.
- Preferred-share redemption: After quarter-end, on October 16, 2017, the company redeemed its remaining Series A preferred shares for $50.4 million cash. The quarter included a $2.3 million non-cash charge related to the planned redemption.
Key facts for investors to verify
- Whether demand, backlog conversion and community openings—particularly in the weaker Mid-Atlantic region—support continued growth.
- How hurricane recovery affects orders, construction schedules, costs and deliveries in Florida and Texas.
- Whether the $11.3 million stucco reserve proves sufficient and whether any recoveries from insurers or subcontractors become probable.
- Liquidity after the $50.4 million preferred-share redemption, and the extension or replacement of the mortgage repurchase facility.
- Repayment or conversion plans for the $86.3 million convertible notes due March 2018, and compliance with debt covenants as leverage and investment spending evolve.
- Whether inventory growth and planned land spending generate adequate sales, cash flow and returns; operating cash flow was negative through September despite higher earnings.