M/I Homes, Inc. — Q2 2016 Form 10-Q
Business context and reporting period
Quarter ended June 30, 2016; unaudited results. M/I Homes builds single-family homes across Midwest, Southern and Mid-Atlantic markets and operates mortgage and title services. The company entered Sarasota, Florida, on July 1, 2016.
Financial and operating performance
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Revenue | $401.2m | $322.9m | $725.6m | $586.0m |
| Income before taxes | $25.0m | $21.9m | $39.7m | $37.6m |
| Net income | $15.9m | $13.4m | $25.1m | $22.9m |
| Net income to common shareholders | $14.7m | $12.1m | $22.7m | $20.5m |
| Diluted EPS | $0.52 | $0.43 | $0.81 | $0.74 |
| Operating cash flow | — | $40.5m | $(46.2)m |
- Q2 revenue grew 24%; homes delivered rose 13% to 1,042 and average delivered price increased 6% to $362,000. First-half deliveries rose 17% to 1,918 and average price increased 8% to $358,000.
- Q2 housing gross margin was 18.6%, down from 19.6%; excluding $2.8m in stucco repair charges, it was 19.4%. First-half housing gross margin was 18.0%, versus 19.2%; excluding $4.9m of stucco charges, it was 18.7%.
- Q2 SG&A was 13.1% of revenue, down from 13.8%; first-half SG&A was 13.4%, down from 13.9%. Q2 and first-half net income to common shareholders include $1.2m and $2.4m of preferred dividends, respectively.
- Net cash increased $17.5m in the first half to $27.7m unrestricted cash; restricted cash was $2.3m. Total assets were $1.45bn and shareholders’ equity $620.5m at June 30.
- Debt carrying value was approximately $608m; principal outstanding was approximately $615m. Net debt to net capital was 49%, compared with 50% at year-end 2015. The $400m homebuilding revolver had $70m drawn and $294.3m remaining availability, after letters of credit.
Material changes versus comparable periods
- Q2 pretax income increased 14%; first-half pretax income increased 6%. Management’s non-GAAP adjusted pretax income, excluding land-sale profits and stucco charges, rose 22% in Q2 to $26.4m and 32% in the first half to $42.5m.
- First-half operating cash flow swung to $40.5m provided from $46.2m used a year earlier, mainly reflecting a smaller inventory build and mortgage-loan sale proceeds net of originations.
- Backlog at June 30 increased 27% to 2,281 homes, with aggregate value up 28% to $842.4m. Net new contracts rose 23% in Q2 and 21% in the first half.
- Debt and interest expense were higher: first-half interest expense rose to $9.6m from $8.2m, while the weighted-average borrowing rate declined to 5.79% from 6.38%. Inventory increased to $1.17bn from $1.11bn at December 2015.
Outlook, risks and unusual items
- Management expected modest improvement in housing demand during the rest of 2016, citing employment, wage growth, low rates and tight inventory. It estimated 2016 land acquisition and development spending of $425m–$475m; $170.9m had been spent in the first half. Management expected continued revolver use and estimated peak homebuilding revolver borrowings below $200m.
- Management said available cash, operating receipts and credit facilities should cover anticipated needs for at least 12 months, while noting that land, construction and operating outlays may exceed operating cash generation in some periods. No specific full-year revenue or earnings guidance was provided.
- Florida stucco claims are the principal disclosed contingency. The company recorded $4.9m of first-half charges and had a $2.9m reserve for identified homes awaiting repairs at June 30. It believed additional homes would require repairs but could not reasonably estimate the number, cost or ultimate liability; future reserve revisions could be material. No recovery from insurers or contractors was recorded.
- Other exposures include $533.1m of land and lot options, $130.2m of completion bonds and standby letters of credit, and mortgage-loan repurchase/indemnity guarantees. Houston demand was affected by energy-sector volatility. Homebuilding is seasonal, and the company noted risks from interest rates, construction and lot costs, and changes in housing demand.
- The company purchased an airplane for $9.9m in the first half. It recorded no inventory or joint-venture impairment charges. Management reported compliance with debt covenants and effective disclosure controls.
Important facts for investors to verify
- How subsequent stucco claims, repair costs and any insurance or subcontractor recoveries affect reserves and earnings.
- Whether backlog converts to closings at expected prices and margins, particularly in the Southern region and Houston.
- Whether construction and land-cost inflation continues to pressure housing gross margins.
- Actual land spending, revolver borrowing and liquidity relative to management’s 2016 estimates and covenant requirements.
- Debt maturities and refinancing or conversion outcomes for the 2017 and 2018 convertible notes, and the company’s ability to maintain preferred dividends within debt restrictions.