M/I Homes, Inc. (NYSE: MHO) — 2021 Form 10-K
Business and reporting period. M/I Homes builds single-family homes and townhomes in 16 markets across 11 states, with Northern and Southern homebuilding segments and a mortgage and title services segment. This is the annual report for the fiscal year ended December 31, 2021, not a standalone fourth-quarter report. Homebuilding generated approximately 97% of revenue.
Financial and operating results
| Metric | 2021 | 2020 | Change |
|---|---|---|---|
| Revenue | $3.746 billion | $3.046 billion | +23% |
| Income before taxes | $509.1 million | $310.0 million | +64% |
| Net income | $396.9 million | $239.9 million | +65% |
| Diluted earnings per share | $13.28 | $8.23 | Up from prior year |
| Housing gross margin percentage | 22.1% | 20.0% | +210 basis points |
| Cash from operating activities | $(16.8) million | $168.3 million | Declined |
Housing revenue was $3.630 billion, from 8,638 homes delivered (+12%) at an average price of $420,000 (+10%). Total gross margin was $908.9 million, or 24.3% of revenue; selling, general and administrative expense was 10.4% of revenue, compared with 11.7% in 2020. The effective tax rate was 22.1%.
Northern revenue was $1.596 billion and operating income $212.0 million; Southern revenue was $2.048 billion and operating income $312.7 million. Financial services revenue was $102.0 million and income before taxes $58.4 million. The company originated 6,525 loans, and approximately 84% of homes delivered were financed through M/I Financial.
At year-end, backlog was 4,835 homes worth $2.37 billion, up 10% in homes and 29% in value. Average backlog price was $490,000. Net new contracts were 9,084, versus 9,427 in 2020; cancellations fell to 7.8% from 11.2%.
Liquidity, debt and capital allocation
Cash, cash equivalents and restricted cash totaled $236.4 million, including $236.0 million unrestricted. Operating cash use was driven principally by a $508.2 million increase in inventory and mortgage originations exceeding loan-sale proceeds by $43.9 million. Investing activities used $51.7 million; financing activities provided $44.1 million. Inventory increased to $2.452 billion from $1.917 billion.
Homebuilding debt to capital was 30%, down from 34%. The company reported approximately $695.8 million of debt, net of issuance costs, excluding mortgage-finance facilities; it also had $266.2 million outstanding under those facilities. The $550 million revolving credit facility had no borrowings and $465.0 million available after letters of credit. The company reported compliance with debt covenants at year-end.
In August 2021, M/I Homes issued $300 million of 3.95% notes due 2030 and redeemed $250 million of 5.625% notes due 2025, recording a $9.1 million early-extinguishment loss. It repurchased $51.5 million of shares during 2021. In February 2022, the board increased the buyback authorization, leaving up to $148.5 million available.
Outlook, risks and unusual items
- Management expected demand to remain supported by limited housing supply, employment and demographics, but identified inflation, rising mortgage rates, labor and material shortages, supply-chain disruption and municipal approval delays as risks.
- The company expected to open a record number of communities in 2022 and grow year-end community count by approximately 15% to more than 200. It did not provide a 2022 land-spending estimate. Management expected any 2022 peak borrowing under the revolving facility to be no more than $150 million.
- The two M/I Financial mortgage facilities were due to expire in May and October 2022; management expected to extend the May facility but gave no assurance of renewal.
- Florida stucco claims remain a contingency. The year-end reserve included $2.7 million for identified and estimated future repairs; management cautioned actual costs could exceed its estimate. No new stucco charges or recoveries were recorded in 2021.
- Other notable items included a $1.9 million gain on sale of an airplane/non-operating asset and a $12.7 million benefit from energy tax credits. There were no inventory impairment charges in 2021, compared with $8.4 million in 2020.
- The auditor gave an unqualified opinion on the financial statements and internal controls. Inventory valuation was identified as a critical audit matter because it involves significant management judgment.
Most important facts for investors to verify
- Whether strong backlog and pricing convert to deliveries while labor, materials and community-opening constraints persist.
- Whether margin gains can be sustained as construction costs and mortgage rates rise.
- How inventory investment affects cash generation; 2021 operating cash flow was negative despite record earnings.
- Renewal or replacement of the mortgage warehouse facilities due in 2022, and the level and terms of any borrowing.
- Adequacy of the Florida stucco reserve and any developments in related litigation.
- Share repurchases under the enlarged authorization, including liquidity and debt-covenant implications.