M/I Homes, Inc. (NYSE: MHO) — Q2 2023 Form 10-Q
Reporting period: Three and six months ended June 30, 2023. M/I Homes builds single-family homes across Northern and Southern U.S. markets and operates mortgage and title services. Financial figures below are in U.S. dollars; amounts are rounded to millions unless noted.
Financial performance and key metrics
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Revenue | $1,014.0 | $1,040.7 | $2,014.5 | $1,901.5 |
| Income before taxes | $155.4 | $182.2 | $291.3 | $304.4 |
| Net income | $118.0 | $136.8 | $221.1 | $228.7 |
| Diluted EPS | $4.12 | $4.79 | $7.77 | $7.93 |
| Operating cash flow | Not stated for quarter | Not stated for quarter | $417.7 | $78.5 |
- Q2 revenue declined 3%; first-half revenue rose 6%. Q2 housing revenue was $980.2 million, land-sale revenue $8.5 million, and financial-services revenue $25.3 million.
- Housing gross margin was 23.7% in Q2, down 230 basis points year over year, and 22.6% for the first half, down 180 basis points. Management attributed pressure mainly to higher construction costs and sales and financing incentives.
- Homes delivered fell 7% to 1,990 in Q2, but rose 1% to 3,997 in the first half. Average selling price increased 3% to $493,000 in Q2 and 4% to $489,000 in the first half.
- New contracts increased 21% to 2,197 in Q2 and 1% to 4,368 in the first half. Quarter-end backlog was 3,508 homes valued at $1.78 billion, down from 5,213 homes and $2.71 billion a year earlier.
- Cash, cash equivalents and restricted cash were $668.3 million at June 30, including $667.4 million unrestricted. Total assets were $3.86 billion and shareholders’ equity was $2.30 billion.
- Aggregate debt principal was $886.4 million, including $186.4 million of financial-services borrowings and $700 million of senior notes. There were no borrowings on the $650 million homebuilding revolver; $568.8 million remained available after letters of credit. Homebuilding debt to capital was 23%, versus 25% at year-end 2022.
- First-half investing cash use was $2.8 million and financing cash use was $58.1 million. Operating cash flow benefited from lower inventory investment and mortgage-loan sale proceeds net of originations.
Material changes versus comparable periods
- Q2 pretax income fell 15% and net income fell 14%; first-half pretax income fell 4% and net income fell 3%.
- Q2 housing gross margin declined as construction costs and buyer incentives increased. Higher home prices and deliveries partly offset margin pressure in the first half.
- Northern-region Q2 revenue declined 19%, principally due to fewer deliveries; Southern-region revenue increased 10%. Financial-services revenue rose 30% in Q2 and 16% in the first half, supported by higher loan margins and average loan amounts.
- Interest income, net, was $4.7 million in Q2 and $6.1 million in the first half, compared with net interest expense in the respective 2022 periods, primarily reflecting higher average cash balances.
- Cash increased from $311.5 million at December 31, 2022. Inventory declined to $2.69 billion from $2.83 billion.
Outlook, commentary and risks
- Management reported improving buyer demand and stronger-than-expected Q2 revenue and deliveries, citing limited resale and new-home supply, incentives and buyers adjusting to higher mortgage rates. It expects long-term housing fundamentals to benefit from undersupply and favorable demographics.
- No numerical earnings, revenue or margin guidance was provided. Management expects to grow active communities by approximately 15% by year-end 2023, while noting that openings may be delayed to match demand. It is not providing 2023 land-spending estimates.
- Priorities include managing land spend and inventory, improving build cycle times, opening communities, controlling overhead and maintaining liquidity. The company controlled approximately 41,300 lots at quarter-end, described as about a five-year supply.
- Management cautioned that higher mortgage rates, inflation, affordability concerns, recession risks, construction and labor costs, supply-chain issues, and permitting delays could materially affect results. It said recent easing of supply disruptions and cost stabilization helped gross margin improve sequentially from Q1.
- The $90 million mortgage repurchase facility expires October 23, 2023, and may not be extended. The mortgage warehousing agreement was amended in May 2023 and now expires May 24, 2024.
- Contingencies include approximately $391 million of completion bonds and letters of credit, $848.3 million of land options and contingent purchase agreements, mortgage-loan guarantees, warranty obligations and ongoing legal proceedings. Management said current legal proceedings are not expected to materially affect results, but outcomes remain uncertain.
- No inventory or joint-venture impairment charges were recorded in the periods presented. Management reported compliance with debt covenants, effective disclosure controls, and no material change to previously disclosed risk factors.
Important facts for investors to verify
- Whether stronger contract activity converts into deliveries and backlog replenishment, particularly as backlog remains substantially below the prior-year level.
- Whether incentives and construction or lot costs continue to pressure housing gross margins, and whether sequential margin improvement persists.
- Liquidity and debt trends, including use of the homebuilding revolver and renewal or replacement of the mortgage repurchase facility before its October 2023 expiration.
- Execution of planned community openings and land development amid permitting delays, and any changes to the approximately five-year lot supply.
- Exposure and possible outcomes related to land commitments, completion bonds, mortgage guarantees, warranty reserves and legal proceedings.