M/I Homes, Inc. — Q2 2013 Form 10-Q
Business context and period. M/I Homes builds single-family homes in Midwest, Southern and Mid-Atlantic markets and provides mortgage and title services. This unaudited filing covers the three and six months ended June 30, 2013; comparisons are with the corresponding 2012 periods. Dollar amounts below are in millions unless stated otherwise.
Financial performance and liquidity
| Metric | Q2 2013 | Q2 2012 | First half 2013 | First half 2012 |
|---|---|---|---|---|
| Revenue | $234.6 | $171.0 | $425.3 | $302.1 |
| Income before taxes | $7.4 | $3.3 | $12.3 | $(1.1) |
| Net income | $7.3 | $3.2 | $11.9 | $0.02 |
| Net income to common shareholders | $6.0 | $3.2 | $8.4 | $0.02 |
| Diluted EPS | $0.25 | $0.17 | $0.36 | — |
- Q2 revenue increased 37%; first-half revenue increased 41%. Homes delivered rose 26% in Q2 and 25% in the first half. Average delivered home prices rose 8% and 11%, respectively.
- Homebuilding gross margin percentage was 17.1% in Q2 versus 17.5% a year earlier, and 17.0% for the first half versus 16.4%. Higher prices and deliveries supported gross profit, while construction-cost increases and impairments weighed on margins.
- Q2 total selling, general and administrative expense was $34.4 million, or 14.7% of revenue, compared with $26.7 million, or 15.6%, in Q2 2012. First-half expense was $63.5 million, or 14.9%, versus $50.1 million, or 16.6%.
- Operating cash flow was negative $25.2 million in the first half, compared with negative $23.5 million in 2012; investing cash flow was negative $23.2 million. Financing provided $69.1 million, and cash and cash equivalents increased $20.8 million to $166.3 million.
- At June 30, cash, cash equivalents and restricted cash totaled $178.7 million, including $166.3 million unrestricted. Net debt to net capital was 42%, versus 39% at year-end 2012. Inventory was $615.0 million, up from $556.8 million.
- Balance-sheet debt carrying amounts totaled approximately $431.5 million, including $227.9 million of senior notes, $143.8 million of convertible notes, $50.4 million of financial-services bank borrowings and $9.4 million of other notes. The filing separately cites approximately $381.0 million of indebtedness excluding financial-services warehouse and repurchase facilities and letters of credit.
- The company reported $230.0 million principal of 8.625% senior notes due 2018, $57.5 million of 3.25% convertible notes due 2017, and $86.3 million of 3.0% convertible notes due 2018.
Material changes versus prior period
- Backlog grew 43% in units and 53% in aggregate sales value year over year to 1,675 homes and approximately $490.8 million. Net new contracts rose 31% in Q2 and 34% in the first half.
- All three homebuilding regions increased revenue. First-half segment operating income rose to $6.6 million in Midwest, $6.9 million in Southern and $10.5 million in Mid-Atlantic. Financial-services revenue rose 47% in Q2 and 70% in the first half.
- Inventory impairments were $1.2 million in Q2 and $2.1 million in the first half, compared with $0.5 million and $0.6 million, respectively. First-half 2013 common earnings also reflected a $2.2 million non-cash charge relating to preferred-share redemption.
- In March, M/I Homes issued $86.3 million of convertible notes and 2.461 million common shares, receiving net equity proceeds of $54.6 million. In April, it redeemed 2,000 Series A preferred shares for $50.4 million and paid $1.2 million in preferred dividends.
Outlook, risks and contingencies
- Management said it expected the housing recovery to continue, citing limited housing supply, improving traffic and demand, and favorable affordability. It noted that mortgage rates had risen and that further increases could hurt affordability, new contracts and pricing; contract pace moderated slightly late in Q2, with seasonality versus rate effects unclear.
- Management estimated 2013 land acquisition and development spending of $300 million to $350 million; $136.5 million had been spent in the first half. The company entered the Dallas/Fort Worth market in July.
- On July 18, 2013, after quarter-end, the company replaced its secured revolving facility with a $200 million unsecured revolving credit facility maturing in 2016, with a possible increase to $225 million. No borrowings had been made under the new facility as of the report date. It carries financial and other covenants.
- Key sensitivities include home prices, sales pace, construction and labor costs, mortgage rates, inventory valuations and estimates used in impairment testing. The company recorded $2.1 million of first-half impairment charges and states future impairments remain uncertain.
- Commitments include $321.0 million of land and developed-lot options or contingent purchases, subject to conditions; $75.7 million of completion bonds and standby letters of credit; and $28.6 million invested in unconsolidated LLCs, plus a $2.5 million note receivable. Further LLC investment is expected.
- Routine legal matters were described as not expected to materially affect the company, though outcomes are uncertain. Mortgage-loan repurchase and indemnification guarantees are also disclosed; the recorded liability was $3.1 million at June 30.
- Management said it believed cash, available borrowing options and expected receipts would fund anticipated needs for at least 12 months. The company was in compliance with applicable debt covenants at quarter-end; its full valuation allowance against deferred tax assets remained in place.
Investor facts to verify
- Whether the strong growth in contracts and backlog converts into closings, revenue and cash generation, particularly if mortgage rates rise.
- Whether higher home prices and improved overhead leverage can offset construction-cost inflation and sustain margins.
- Land spending plans, inventory growth, and the assumptions and potential exposure behind impairment testing and land options.
- Debt service, covenant headroom, and the terms and availability of the new revolving facility and financial-services warehouse lines.
- The impact of share issuance and convertible-note potential dilution, preferred-share redemption, and the remaining restrictions on dividends and repurchases.