M/I Homes, Inc. — Q3 2012 Form 10-Q
Business and period. M/I Homes is a U.S. homebuilder with Midwest, Southern and Mid-Atlantic homebuilding operations, plus mortgage and title services. This unaudited report covers the quarter and nine months ended September 30, 2012; comparisons are with the same 2011 periods. Dollar amounts below are in millions unless stated otherwise.
Financial and operating performance
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Revenue | $208.9 | $141.6 | $511.0 | $389.6 |
| Income (loss) before taxes | $8.5 | ($4.8) | $7.4 | ($30.8) |
| Net income (loss) | $8.3 | ($4.7) | $8.3 | ($30.9) |
| Diluted earnings (loss) per share | $0.42 | ($0.25) | $0.43 | ($1.65) |
| Interest expense | $4.0 | $3.4 | $12.1 | $10.9 |
| Operating cash flow | Not presented by quarter | ($16.3) | ($24.6) |
- Q3 revenue rose 48%; delivered homes increased 28% to 746 and average selling price rose 12% to $266,000. Nine-month revenue rose 31%; deliveries increased 17% to 1,878 and average selling price rose 10% to $259,000.
- Gross margin was $43.1 million in Q3 and $100.2 million for the nine months. Management reported adjusted operating gross margin improvements of 190 basis points and 230 basis points, respectively; its adjusted figures exclude impairments/write-offs and the $3.0 million drywall settlement.
- Net income for the nine-month period included a $0.955 million income tax benefit. The company reported a $137.1 million valuation allowance against deferred tax assets and cautioned that cumulative losses weigh against their future realization.
- At September 30, cash and cash equivalents were $159.8 million, with $9.0 million restricted. Inventory was $543.9 million, up from $466.8 million at year-end 2011; total assets were $817.3 million and shareholders’ equity was $326.5 million.
- Debt included $230.0 million principal of 8.625% senior notes due 2018, $57.5 million of 3.25% convertible subordinated notes due 2017, and $54.8 million outstanding on the mortgage warehouse facility. The balance sheet reports $227.6 million for senior notes and $10.8 million of other notes payable. Net debt to net capital was 36%, versus 42% at year-end 2011.
- Backlog rose 41% to 1,179 homes, with aggregate sales value up 50% to $334.3 million. Net new contracts increased 29% in Q3. The total cancellation rate was 18.0%, compared with 19.1% a year earlier.
Changes, outlook and notable items
- Management described housing conditions as stabilizing and improving across most markets, citing affordability, low mortgage rates and reduced housing inventory. It reported higher margins in newer communities than legacy communities and opened 12 communities while closing eight legacy communities during Q3.
- No formal earnings or revenue guidance is provided. Management estimated 2012 land purchases and development spending of approximately $180 million to $210 million, subject to market conditions and transaction timing, and said liquidity should cover anticipated needs and debt service for at least the next 12 months.
- September financing raised approximately $99.6 million in combined net proceeds from issuing $57.5 million of convertible notes and 2.53 million common shares. The company also issued $30 million additional senior notes in May and repaid $41.4 million of 2012 senior notes at maturity.
- Q3 results included a $3.0 million settlement related to defective imported drywall, recorded as a reduction of land and housing costs, and a $1.2 million bargain-purchase gain from the April Houston acquisition. Q3 impairment charges were $1.3 million; nine-month impairments and option/pre-acquisition write-offs totaled $2.1 million, versus $18.5 million a year earlier.
- Operating cash use continued as the company invested in land, development and home construction; inventory growth used $71.2 million of cash in the first nine months. Management cited housing-market weakness, mortgage availability, interest rates, competition, construction costs, land valuation and financing access as material risks.
- The company was in compliance with debt covenants at quarter-end. It had $54.8 million of net remaining availability under the homebuilding credit facility; the mortgage warehouse agreement, with $54.8 million outstanding, was scheduled to expire March 30, 2013. Management identified renewal or replacement as important to financial-services operations.
- Defective-drywall claims remained a contingency. Of 93 identified Florida homes, 88 had been repaired, two were being repaired and three owners had not authorized repairs. The repair accrual was $0.7 million; the company planned to participate in a proposed global settlement, but no separate litigation loss accrual was recorded because loss probability and range could not be estimated.
Investor verification priorities
- Check whether the increase in deliveries, contracts, backlog and selling prices persisted, and whether backlog converted to closings without higher cancellations.
- Assess recurring profitability apart from the drywall settlement, bargain-purchase gain, land-sale profits and lower impairment charges; compare GAAP results with management’s non-GAAP adjustments.
- Monitor cash use and inventory growth alongside planned land spending, liquidity availability and the March 2013 mortgage warehouse renewal.
- Review debt maturities, interest costs, covenant headroom and potential dilution from convertible notes, including the initial $23.80 conversion price.
- Track realization of deferred tax assets and the outcome of the drywall settlement and any remaining or future claims.