M/I Homes, Inc. (NYSE: MHO) — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022. Unaudited results; comparisons are with the corresponding 2021 periods. Dollar amounts below are in millions unless stated otherwise.
Business context and financial performance
M/I Homes builds single-family homes across Northern and Southern U.S. markets and operates mortgage and title services primarily for its homebuyers. Q3 results reflected homes contracted during the stronger demand environment of 2021 and early 2022, while demand weakened sharply during 2022’s second and third quarters.
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Revenue | $1,012.9 | $904.3 | $2,914.4 | $2,694.1 |
| Income before income taxes | $166.6 | $116.2 | $471.0 | $367.8 |
| Net income | $131.6 | $91.0 | $360.3 | $283.5 |
| Diluted earnings per share | $4.67 | $3.03 | $12.59 | $9.46 |
| Total gross margin | $271.9 | $221.8 | $769.3 | $665.3 |
| Housing gross margin percentage | 25.4% | 22.7% | 24.8% | 22.4% |
Q3 revenue rose 12%, pre-tax income 43%, and net income 45% year over year; nine-month revenue rose 8%, pre-tax income 28%, and net income 27%. Homebuilding housing revenue growth was principally price-driven: average delivered home prices increased 13% in Q3 and 15% year to date. Q3 deliveries declined 1%; nine-month deliveries declined 5%. Financial-services revenue fell 3% in Q3 and 20% year to date as loan volume and sale margins weakened. The 2021 comparisons included a $9.1 million debt-extinguishment charge.
Cash flow, balance sheet and debt
- Nine-month operating cash flow was negative $14.1 million, versus negative $34.3 million in 2021. Inventory growth used $533.0 million of cash.
- Investing cash flow was negative $19.1 million; financing cash flow was negative $135.4 million. Cash, cash equivalents and restricted cash fell to $67.8 million from $236.4 million at year-end 2021; unrestricted cash was $67.0 million.
- Total assets were $3.588 billion and shareholders’ equity was $1.938 billion at September 30, 2022. Inventory was $3.017 billion, up from $2.452 billion at year-end 2021.
- Aggregate notes payable principal was $889.4 million, including $700 million of senior notes due 2028 and 2030 and $189.4 million of financial-services borrowings. The homebuilding revolver had no borrowings and $453.4 million available after letters of credit. Combined financial-services facilities had $2.3 million of available capacity at quarter-end.
- Homebuilding debt to capital was 26%, compared with 30% at year-end 2021. The company reported compliance with its credit-facility and senior-note covenants.
- The company repurchased 1.2 million shares for $55.3 million in the first nine months. It reported $93.1 million remaining under the program in Note 12, while the Part II quarterly repurchase table shows $83.4 million available at September 30; verify this difference.
Demand, outlook, risks and unusual items
- Q3 net new contracts fell 31% year over year to 1,349; monthly absorption declined to 2.6 homes per community from 3.7. Backlog fell to 4,536 homes from 5,407 a year earlier, while the cancellation rate rose to 17.0% from 7.8%.
- Management cited sharply higher mortgage rates, inflation, affordability pressures and recession concerns as drivers of weaker demand. Mortgage rates approached 7% by quarter-end, according to management. Hurricane Ian and construction and supply-chain delays also affected deliveries.
- Management expected another strong 2022, but described 2023 as very challenging and cautioned that 2022 results should not be viewed as indicative of future performance. No land-spending estimates were provided. Priorities include controlling land investment and overhead, maintaining liquidity, expanding affordable Smart Series offerings, and using incentives such as mortgage-rate buy-downs.
- Management expected to open a record number of communities in 2022 and grow year-end community count by approximately 10%, while noting openings could be delayed to match demand. The company had 46,100 lots under control, representing about 5.5 years of supply based on recent deliveries.
- Inflation in land, materials and labor may pressure margins if costs cannot be passed through. Other identified exposures include mortgage-financing availability and rates, supply-chain and development delays, warranty and construction-defect claims, and legal proceedings.
- The company reported a $2.1 million reserve for Florida stucco-related repairs and outstanding completion bonds and letters of credit of approximately $446.4 million. Land options and contingent purchase agreements covered properties with aggregate purchase prices of approximately $982.4 million.
- The Inflation Reduction Act generated an $8.4 million year-to-date tax benefit related to energy-efficient home credits. The mortgage repurchase facility was amended after quarter-end, extending its term to October 2023 and replacing LIBOR with SOFR.
Key facts for investors to verify
- Reconcile the share-repurchase availability figures: $93.1 million in Note 12 versus $83.4 million in the quarterly repurchase table.
- Track new contracts, cancellation rates, absorption, backlog and incentives as indicators of demand and future revenue.
- Assess whether elevated inventory, land commitments and development spending remain supportable if sales and deliveries weaken.
- Monitor liquidity and financing capacity, particularly the limited reported availability on financial-services facilities and the mortgage-repurchase facility’s post-quarter amendment.
- Review future housing margins, warranty and stucco claims, and the effects of interest rates, inflation, Hurricane Ian and construction delays.