M/I Homes, Inc. — Q2 2015 Form 10-Q
Business context and period. Homebuilder and mortgage/title services provider operating across Midwest, Southern and Mid-Atlantic markets. This unaudited filing covers the quarter and six months ended June 30, 2015; comparative figures are for 2014. Dollar amounts below are in millions unless stated otherwise.
Financial and operating performance
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Revenue | $322.9 | $281.6 | $586.0 | $516.4 |
| Income before taxes | $21.9 | $15.3 | $37.6 | $27.8 |
| Net income | $13.4 | $13.6 | $22.9 | $26.2 |
| Net income to common shareholders | $12.1 | $12.3 | $20.5 | $23.7 |
| Diluted EPS | $0.43 | $0.44 | $0.74 | $0.85 |
| Gross margin | $70.3; 21.8% | $59.6; 21.2% | $127.2; 21.7% | $110.5; 21.4% |
- Q2 revenue increased 15% year over year. Home revenue was $312.1 million, land-sale revenue $1.8 million and financial-services revenue $8.9 million. Homes delivered rose to 919 from 894; average delivered home price increased to $340,000 from $306,000.
- Q2 operating income was $25.6 million versus $18.1 million. First-half operating income was $45.6 million versus $34.6 million. Q2 operating-margin improvement reflected higher gross profit and better SG&A leverage.
- First-half operating cash flow was a use of $46.2 million, compared with a use of $66.7 million in 2014. Investing cash use was $4.0 million; financing provided $56.5 million, primarily through increased homebuilding facility borrowings. Cash and equivalents ended at $21.8 million, up from $15.5 million at year-end.
- Inventory increased to $1,040.9 million from $918.6 million at December 31, 2014. Total assets were $1,315.0 million and shareholders’ equity $567.2 million at June 30.
- Total debt was approximately $555.9 million, based on reported carrying amounts; net debt to net capital was 48%, versus 47% at year-end. The $300 million unsecured homebuilding revolver had $105.6 million drawn and $167.1 million of remaining availability after letters of credit. Financial-services facilities had $69.7 million outstanding and reported availability of $0.7 million.
Material changes versus prior period
- Revenue, gross profit, pre-tax income and homebuilding operating metrics improved. Backlog rose to 1,794 homes valued at $656.9 million, compared with 1,647 homes and $546.2 million a year earlier. Net new contracts increased to 1,100 from 1,016 in Q2.
- Common net income and EPS were slightly lower in the reported comparisons, chiefly because the 2014 periods benefited from reversals of state deferred-tax valuation allowances: $4.0 million in Q2 and $9.3 million in the first half. Excluding those benefits, management said common earnings and diluted EPS improved 45% and 39% in Q2, and 41.7% and 37.0% in the first half, respectively.
- First-half homebuilding credit-facility borrowing increased; weighted-average borrowings rose to $518.6 million from $403.9 million. Interest expense rose to $8.2 million from $6.9 million, partly offset by a lower weighted-average borrowing rate.
- No inventory or joint-venture impairment charges were recorded in 2015; 2014 included $0.8 million of impairment charges.
Outlook, risks and contingencies
- Management expected modestly stronger housing demand through the rest of 2015 and national new-home sales above 2014 levels, while cautioning that favorable trends might not continue. No specific revenue or earnings guidance was provided.
- Estimated 2015 land purchases and development spending: $400–$450 million; $177.0 million had been spent in the first half. Management expected operating cash use in Q3 and positive operating cash flow in Q4 based on seasonal delivery patterns, and estimated peak homebuilding revolver borrowings of about $200 million.
- Management believed available cash, operating receipts and credit facilities would fund anticipated needs for at least twelve months. The company was in compliance with its credit-facility and note covenants at June 30. Risks include housing demand and mortgage availability, interest rates, labor and materials cost inflation, land values, execution of community growth, and the ability to pass higher costs on to buyers.
- Commitments included $495.6 million of land and lot option/purchase agreements and $131.9 million of completion bonds and standby letters of credit. Legal claims were described as ordinary-course matters; management did not expect a material overall impact, but outcomes and costs remain uncertain.
- The mortgage warehouse agreement was amended in June to extend its expiration to June 24, 2016 and reduce its spread to LIBOR plus 250 basis points, subject to a 3.0% floor. The separate $15 million mortgage repurchase facility expires November 3, 2015.
Most important facts for investors to verify
- Whether home-price and backlog growth convert into deliveries and sustained margins, particularly as labor and construction costs rise.
- Cash consumption, inventory growth and planned $400–$450 million land spending, alongside expected revolver use and remaining borrowing capacity.
- The effect of the 2014 deferred-tax valuation-allowance benefits when comparing reported earnings and the sustainability of the 2015 tax rate.
- Near-term financial-services facility expirations, debt maturities and covenant headroom, as well as potential cash needs from land commitments, guarantees and legal matters.