M/I Homes, Inc. (MHO) — Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2012. The company builds single-family homes across Midwest, Southern and Mid-Atlantic markets and provides mortgage and title services. Unless otherwise noted, financial amounts are in millions of dollars.
Financial performance and key metrics
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Revenue | $171.0 | $137.4 | $302.1 | $248.0 |
| Net income (loss) | $3.2 | $(9.1) | $0.018 | $(26.2) |
| Diluted EPS | $0.17 | $(0.49) | approximately $0.00 | $(1.40) |
| Income (loss) before taxes | $3.3 | $(9.0) | $(1.1) | $(26.0) |
| Operating cash flow | Not separately presented for the quarter | $(23.5) | $(8.5) |
- Q2 gross margin was $33.4 million, approximately 19.5% of revenue, versus $18.0 million, approximately 13.1%, a year earlier. Management’s adjusted operating gross margin, a non-GAAP measure excluding impairment charges, was 19.8% versus 17.0%. For the first half, adjusted margin was 19.1% versus 16.7%.
- Q2 deliveries increased 6% to 625 homes and average selling price rose 14% to $259,000. New contracts increased 30% to 826; ending backlog rose 40% to 1,168 homes, with backlog value up 50% to $320.4 million. First-half deliveries increased 10% and new contracts increased 23%.
- Inventory was $522.0 million at June 30, up from $466.8 million at year-end. Cash and cash equivalents were $44.3 million, with another $12.6 million restricted; total assets were $670.8 million and shareholders’ equity was $275.1 million.
- Debt included $230.0 million principal amount of 8.625% senior notes due 2018 (carrying amount $227.5 million), $46.3 million drawn under the mortgage warehouse agreement, and $10.8 million of other notes. No borrowings were outstanding on the homebuilding revolver. Net debt to net capital was 45%, compared with 42% at year-end.
- Homebuilding revolver availability was $68.7 million before $16.7 million of letters of credit, leaving $52.0 million net availability. The warehouse facility had $0.3 million available. The company reported compliance with applicable debt covenants.
Changes versus the prior comparable period
- Q2 returned to profitability from a year-earlier loss; first-half results improved to near break-even from a substantial loss. Higher deliveries and selling prices, stronger margins and reduced impairment charges contributed.
- Impairment and abandoned-land write-off charges were $0.7 million in Q2 versus $5.5 million, and $0.8 million for the first half versus $16.6 million a year earlier.
- Operating cash use increased to $23.5 million from $8.5 million, principally reflecting a $47.6 million inventory increase. Investing cash flow was positive $23.2 million, largely due to release of restricted cash; financing activities used $15.2 million, including repayment of the 2012 notes.
- In April, the company acquired assets of a privately held Houston homebuilder and recorded a $1.2 million bargain purchase gain. It opened 12 communities and closed 10 during Q2; management reported higher margins in newer communities than legacy communities.
Outlook, risks and unusual items
- Management described housing conditions as stabilizing and gradually improving, citing affordability, low mortgage rates, job growth and stronger sales activity. It cautioned that recovery may be uneven and that lending standards, credit availability, employment and broader economic uncertainty remain challenges. No specific full-year revenue or earnings guidance was provided.
- Management estimated 2012 spending on land purchases and development of approximately $160–$210 million, subject to market conditions and transaction timing. It expected possible Q3 homebuilding revolver borrowings, with peak borrowing not expected to exceed $50 million.
- The company reported sufficient liquidity for anticipated needs over at least the next 12 months, while noting that future financing may not be available on acceptable terms. Inventory valuation depends on uncertain community-level sales, pricing, absorption and cost assumptions; adverse changes could trigger further impairments.
- A $140.7 million valuation allowance was recorded against deferred tax assets. Management cited a four-year cumulative pre-tax loss position as significant negative evidence regarding their realization.
- The senior-note indenture’s restricted-payments basket was negative $11.6 million, preventing common and preferred dividends and share repurchases. No preferred dividends were paid in the first half.
- For defective drywall claims, the company had identified 93 Florida homes; 88 repairs were complete and two were underway. A $0.8 million repair accrual remained. A proposed global class settlement had preliminary approval, with a fairness hearing scheduled for November 2012; no separate litigation loss accrual was recorded because loss probability and range could not be estimated.
- Mortgage-loan investor put-back inquiries led to additional reserves in financial services. The company also had $61.0 million of completion bonds and standby letters of credit, and land options or contingent purchase agreements with approximately $165.3 million of aggregate purchase price.
Most important facts for investors to verify
- Whether backlog growth converts into closings and sustained profitable margins, particularly as market recovery varies by region.
- Cash use, inventory growth and the planned $160–$210 million land and development investment, alongside available revolver and warehouse liquidity.
- Debt covenant headroom, refinancing needs and the negative restricted-payments basket that blocks dividends and repurchases.
- Realizability of deferred tax assets and sensitivity of inventory values to sales pace, pricing and construction costs.
- Resolution and potential cost of defective-drywall litigation, mortgage-loan put-back claims and other guarantees or contingencies.