M/I Homes, Inc. (NYSE: MHO) — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020. Financial statements are unaudited. Comparisons are with Q1 2019 unless noted.
Business context
M/I Homes builds single-family homes across Northern and Southern U.S. markets and provides mortgage and title services, primarily to its homebuyers. Management reported record first-quarter deliveries, revenue, pretax income, net income, new contracts and backlog, while noting that COVID-19 began disrupting operations in the latter half of March.
Financial and operating performance
- Revenue: $577.6 million, up 20%. Housing revenue was $559.4 million; land sales were $4.7 million; financial services revenue was $13.5 million.
- Profit: Operating income was $46.0 million, versus $30.4 million. Pretax income rose 76% to $41.4 million; net income rose 79% to $31.7 million. Diluted EPS was $1.09, versus $0.63.
- Margins and costs: Housing gross margin was 18.4%, up from 17.3%, primarily reflecting delivery and product mix. Selling, general and administrative expense was $70.7 million, or 12.2% of revenue, versus 12.9%. Interest expense declined to $4.7 million from $6.8 million.
- Homebuilding activity: Deliveries increased 26% to 1,495; net new contracts increased 27% to 2,089. Quarter-end backlog was 3,265 homes, with $1.30 billion in sales value, up 23% and 22%, respectively. Average delivered home price declined 5% to $374,000, primarily due to mix. The cancellation rate was 11.3%, compared with 12.0%.
- Cash flow and liquidity: Operating cash flow used $24.2 million, compared with $22.6 million used in Q1 2019. Investing activities used $6.5 million; financing activities provided $45.9 million. Cash, cash equivalents and restricted cash ended at $21.2 million, including $20.7 million of unrestricted cash.
- Debt: Homebuilding debt to capital was 39%, versus 38% at year-end 2019. The company issued $400 million of 4.95% notes due 2028 and redeemed $300 million of 6.75% notes due 2021. At quarter-end, $6.9 million was drawn on the $500 million homebuilding credit facility, with $427.3 million available after borrowings and letters of credit. Financial-services facilities had $145.1 million outstanding and $3.1 million of availability.
- Balance sheet: Total assets were $2.20 billion and total liabilities were $1.16 billion at March 31, 2020. Inventory was $1.82 billion, up from $1.77 billion at December 31, 2019.
Material changes and unusual items
- Record first-quarter results reflected higher deliveries and improved homebuilding gross margin. Both regions reported higher revenue and operating income.
- Financial-services revenue increased 14%, and loan originations increased 42% to 1,131. The segment recorded a $1.0 million mortgage-servicing-rights impairment attributable to COVID-19 disruption in the mortgage industry.
- The debt refinancing reduced the coupon rate on the refinanced principal; the company also recorded a $0.95 million loss on early extinguishment of debt.
- No inventory or joint-venture impairment charges were recorded in the quarter. Management performed a goodwill impairment assessment for Detroit after a temporary COVID-related shutdown and recorded no impairment.
- The effective tax rate was 23.2%, versus 24.5%, including tax benefits related to reinstated energy-efficient-home credits and equity compensation.
Outlook, risks and contingencies
- Management said COVID-19 had significantly slowed weekly sales and increased cancellations from the latter half of March into April, while delaying construction and home deliveries in some markets. Most operating states treated housing construction and mortgage services as essential; Michigan did not.
- The company expected COVID-19 to negatively affect Q2 and later results, but said the magnitude and duration were too uncertain to estimate. Management withdrew prior 2020 guidance for land acquisition and development expenditures and average community count.
- Management described priorities as managing land spending and inventory, maintaining liquidity, expanding more affordable Smart Series homes, and emphasizing customer service and product quality. It cited low mortgage rates and low housing inventory as potential partial offsets, while warning of tighter mortgage underwriting and reduced availability for some borrowers.
- Management believed available cash, operating receipts and credit availability would meet anticipated needs for at least 12 months, while cautioning that prolonged disruption could pressure cash flow, sales, margins, covenant compliance and access to financing.
- Land options and contingent purchase agreements covered approximately $720.9 million of land and developed lots. Outstanding completion bonds and letters of credit totaled approximately $237.8 million. These are commitments, not amounts necessarily payable in full.
- Florida stucco claims remain a contingency. The warranty reserve included $4.4 million for identified and estimated future stucco repairs; management said the estimate could change as additional information becomes available. Other legal proceedings were described as incidental, but their resolution remains uncertain.
- The $125 million mortgage warehousing agreement expires June 19, 2020; management expected to seek an extension but gave no assurance it could obtain one. The $65 million mortgage repurchase facility expires October 26, 2020; the homebuilding credit facility expires July 18, 2021.
Important facts for investors to verify
- Subsequent-quarter sales pace, cancellations, deliveries and backlog conversion as COVID-19 restrictions and economic conditions evolve.
- Liquidity, operating cash flow, credit-facility availability and covenant headroom if sales weaken or construction and closings are delayed.
- Renewal terms and continued availability of the mortgage warehousing and repurchase facilities, and mortgage-market conditions affecting the financial-services business.
- Changes in land spending, inventory exposure and commitments under the $720.9 million of land options and purchase agreements.
- Developments in Florida stucco claims, repair costs and any potential recoveries, as well as future warranty or inventory impairment charges.