M/I Homes, Inc. — First Quarter 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015. M/I Homes builds single-family homes across Midwest, Southern and Mid-Atlantic markets and provides mortgage and title services. Figures below are in U.S. dollars; financial statement amounts are in millions unless noted.
Financial and operating results
| Metric | Q1 2015 | Q1 2014 |
|---|---|---|
| Revenue | $263.2 | $234.8 |
| Income before taxes | $15.7 | $12.5 |
| Net income | $9.6 | $12.6 |
| Net income to common shareholders | $8.3 | $11.4 |
| Diluted earnings per common share | $0.31 | $0.41 |
| Cash used in operating activities | $29.3 | $2.1 |
Revenue included $233.0 million from home deliveries, $22.1 million from third-party land sales and $8.1 million from financial services. Homebuilding gross margin was 21.7%, unchanged year over year. Selling, general and administrative expense was $37.0 million, or 14.1% of revenue, versus 14.6% a year earlier. Income before taxes rose 26%; reported net income and EPS declined partly because Q1 2014 included a $5.3 million tax benefit from a deferred-tax valuation allowance reversal. Excluding that benefit, management said common net income and diluted EPS improved 37% and 35%, respectively.
The company delivered 717 homes, down 3%, while average delivered home price increased 9% to $325,000. Net new contracts rose 13% to 1,108; quarter-end backlog increased 6% to 1,613 homes, with backlog value up 16% to $576.8 million. The cancellation rate improved to 13.4% from 16.0%.
Balance sheet, debt and liquidity
At March 31, 2015, cash and cash equivalents were $30.0 million and restricted cash was $6.1 million. Inventory was $959.1 million, up from $918.6 million at year-end 2014. Total assets were $1.251 billion; shareholders’ equity was $553.6 million.
Total reported debt was approximately $542.9 million, compared with $497.1 million at December 31, 2014, primarily reflecting increased homebuilding credit-facility borrowing. Net debt to net capital was 48%, versus 47% at year-end. Homebuilding revolver borrowings were $90.0 million, with $180.9 million of net remaining availability after outstanding letters of credit. Financial-services facilities had $71.7 million outstanding and $0.5 million available under the reported borrowing-base calculation. The company reported compliance with applicable credit and note covenants.
Operating cash use reflected inventory investment, working-capital changes and mortgage originations net of loan-sale proceeds. Financing activities provided $44.5 million, mainly from increased homebuilding facility borrowing. Management said cash, operating proceeds and available credit were expected to meet anticipated needs for at least the next 12 months.
Changes, outlook and risks
Management cited generally favorable housing demand, supported by low interest rates, improved consumer confidence and employment, and mortgage availability. Revenue increased 12% year over year, helped by higher home prices and land sales. Land-sale revenue increased $15.8 million; home deliveries were lower. Segment results varied: Southern revenue and operating income strengthened, while Mid-Atlantic home operating income and gross margin weakened amid higher costs and mix effects. Interest expense increased to $4.5 million from $4.2 million, while the weighted-average borrowing rate declined to 6.51% from 7.39%.
Management expects modestly higher housing demand in 2015 than in 2014 and expects national new-home sales to exceed 2014 levels; it provided no specific earnings guidance. It estimated 2015 land purchases and development spending of $400–$450 million, including $88.9 million spent in Q1, and anticipated continued use of the revolving credit facility, with peak borrowings estimated at approximately $150 million. The company opened 14 communities, closed 11 and ended the quarter with 153 active communities.
Key risks include rising labor, material and land costs, interest-rate or housing-demand changes, and the possibility that higher costs cannot be passed through to buyers. The mortgage warehouse agreement was extended only through June 26, 2015; management expected a further extension but gave no assurance it could obtain one. Land options and contingent purchase agreements totaled approximately $416.5 million. Completion bonds and standby letters of credit totaled $125.7 million. Routine legal matters were not expected by management to materially affect the company, but outcomes remain uncertain. No inventory or joint-venture impairment charges were recorded in the quarter.
Important facts for investors to verify
- Whether contract growth and backlog convert into deliveries and cash generation, particularly given lower Q1 deliveries and seasonal variability.
- Progress on the expected extension of the mortgage warehouse facility before its June 26, 2015 expiration.
- Actual 2015 land and development spending versus the $400–$450 million estimate, and its effect on borrowing and inventory.
- Whether home pricing can continue to offset higher construction and land costs, especially in weaker-performing markets.
- Potential effects of legal claims, loan repurchase or indemnification guarantees, land commitments and other contingent obligations.