M/I Homes, Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; financial statements are unaudited. M/I Homes builds and sells single-family homes across Midwest, Southern and Mid-Atlantic markets and provides mortgage and title services.
Financial and operating highlights
Amounts below are in millions, except per-share and operating data.
| Metric | Q1 2019 | Q1 2018 / comparison |
|---|---|---|
| Revenue | $481.1 | $437.9; up 10% |
| Income before income taxes | $23.5 | $23.9; down 2% |
| Net income | $17.7 | $18.1 |
| Diluted EPS | $0.63 | $0.60 |
| Housing gross margin | 17.3% | 17.6% |
| Homes delivered | 1,186 | 1,122; up 6% |
| New contracts, net | 1,644 | 1,739; down 5% |
| Ending backlog | 2,652 homes; $1.07 billion | 2,744 homes; $1.09 billion |
| Average delivered home price | $393,000 | $373,000 |
- Housing revenue was $466.3 million, land-sale revenue $3.0 million and financial-services revenue $11.8 million. Homebuilding growth reflected more deliveries and higher average selling prices. Financial-services revenue fell 22%, with lower loan-sale margins and no repeat of the prior-year mortgage-servicing-rights sale.
- Total gross margin was $92.6 million, up from $89.2 million. Housing gross margin percentage declined amid higher construction costs and changes in delivered-home mix. Adjusted housing gross margin percentage, a company-defined non-GAAP measure, was 17.4% versus 17.8%.
- Operating cash flow was negative $22.6 million; investing cash flow was negative $6.5 million; financing cash flow was positive $49.5 million. Cash, cash equivalents and restricted cash ended at $41.9 million, including $40.8 million unrestricted cash. Operating cash use mainly reflected inventory investment and lower accrued compensation.
- Inventory was $1.73 billion, up from $1.67 billion at year-end. Shareholders’ equity was $871.5 million. Homebuilding debt to capital was 47%, versus 44% at December 31, 2018.
- At quarter-end, bank borrowings were $218.8 million for homebuilding and $104.0 million for financial services; senior-note principal was $300 million due 2021 and $250 million due 2025. The homebuilding revolver had $221.9 million remaining availability after borrowings and letters of credit. The company reported compliance with its debt covenants.
Material changes and management commentary
- Despite record first-quarter deliveries, average delivered price and revenue, pretax income declined slightly. Management cited softer early-quarter demand, increased buyer incentives, lower housing margins and weaker financial-services contributions. Mortgage rates moderated as the quarter progressed, and management said underlying employment, wage and housing-supply conditions remained favorable.
- Company-wide sales absorption was 2.6 homes per community per month, down from 3.0. Active communities reached a record 214. Cancellation rate was 12.0%, compared with 11.8%.
- Midwest revenue rose 26%; Southern revenue rose 10%; Mid-Atlantic revenue fell 18%, mainly due to fewer deliveries and delayed replacement-community openings. The company decided to wind down Washington, D.C. operations, expected to be substantially complete within one year; management did not expect a material business or financial impact.
- Q1 pretax income included $0.4 million of Pinnacle Homes purchase-accounting charges. The prior-year quarter included $0.9 million of such charges and $1.7 million of acquisition and integration costs. Excluding these items, adjusted pretax income was $23.9 million versus $26.5 million; adjusted net income was $18.0 million versus $20.0 million. These are non-GAAP measures.
Outlook, risks and contingencies
- Management estimated 2019 land purchases and development spending of $550–$600 million, including $134.8 million spent in Q1. It expected to continue using the homebuilding revolver and estimated peak borrowings would not exceed $300 million. The company stated that available cash and credit sources should cover anticipated needs for at least 12 months, while noting spending and land transactions may change with market conditions.
- The mortgage warehouse facility, with $72.3 million outstanding, was due to expire June 21, 2019. Management expected to extend it but gave no assurance. The mortgage repurchase facility, with $31.8 million outstanding, was due to expire October 28, 2019.
- Risks include changes in mortgage rates and homebuyer demand, construction and land costs, the ability to raise prices, community-opening delays, and inventory valuation assumptions. Management warned that softer demand and higher costs could pressure margins.
- Stucco-related homeowner claims in Florida remained a contingency. The warranty reserve included $5.7 million for estimated stucco repairs; management said the review was ongoing and additional costs could be material. No additional stucco charge or recovery was recorded in Q1. The company also had $224.2 million of completion bonds and standby letters of credit, and land options and contingent purchase agreements with an aggregate purchase price of about $597.8 million.
- The company adopted the new lease standard on January 1, 2019, recognizing $20.9 million of operating lease assets and liabilities at adoption; quarter-end balances were $20.6 million. The adoption did not affect retained earnings.
Important facts for investors to verify
- Whether new contracts, absorption and backlog stabilize or improve, especially in the Southern and Mid-Atlantic regions.
- Whether housing gross margins withstand construction-cost pressure and incentives, and whether financial-services loan-sale margins recover.
- Progress and costs of the Washington, D.C. wind-down and Florida stucco repairs, claims and potential recoveries.
- 2019 land-spending execution, revolver usage and availability, and extension or refinancing of the mortgage warehouse and repurchase facilities.
- Whether the assumptions behind inventory and joint-venture valuations remain supportable; no inventory or joint-venture impairment was recorded in Q1.