M/I Homes, Inc. (NYSE: MHO) — FY 2011 Form 10-K
Reporting period: Fiscal year ended December 31, 2011. This is an annual filing; fourth-quarter figures are included where available. Amounts are in U.S. dollars.
Business context and reporting period
M/I Homes builds and sells single-family homes, townhomes and condominiums, primarily in 11 markets across the Midwest, Mid-Atlantic and Southern regions. Homebuilding generated 97% of 2011 revenue; financial services provides mortgage and title services. The company delivered 2,278 homes and expanded into San Antonio through an April 2011 acquisition.
Financial and operating results
| Metric | FY 2011 | FY 2010 |
|---|---|---|
| Revenue | $566.4 million | $616.4 million |
| Gross margin | $77.3 million (13.6%) | $92.4 million (15.0%) |
| Operating loss | $18.9 million | $9.6 million |
| Loss before income taxes | $33.9 million | $27.4 million |
| Net loss / loss per share | $33.9 million / $1.81 | $26.3 million / $1.42 |
| Cash used in operating activities | $34.0 million | $37.3 million |
| Unrestricted cash at year-end | $59.8 million | $81.2 million |
| Total debt at year-end | Approximately $297.4 million | Approximately $276.7 million |
- Adjusted operating gross margin, a non-GAAP measure, improved to 17.5% from 16.7%. Adjusted pre-tax loss worsened to $10.9 million from $7.7 million.
- Home deliveries fell 6% to 2,278; average delivered selling price fell 2% to $242,000. Net new contracts rose 3% to 2,381, and cancellations eased to 19% from 20%.
- Year-end backlog grew to 676 homes valued at $180.7 million, from 532 homes and $135.2 million a year earlier.
- Inventory was $466.8 million, up from $450.9 million. The company recorded $22.0 million of inventory and unconsolidated-investment impairments and $1.0 million of abandoned land transaction write-offs.
- Cash used in investing activities was $9.3 million; financing activities provided $21.9 million. Land purchases and development spending totaled $117.2 million.
- Financial services revenue was $14.5 million; segment income before taxes was $5.7 million. Mortgage capture rate was 84%.
Material changes versus the prior comparable period
- Revenue declined 8%, primarily due to fewer deliveries and lower average selling prices. The Midwest region’s revenue dropped 23%; Southern revenue rose 37%, aided by Texas expansion; Mid-Atlantic revenue fell 8%.
- Net loss increased by $7.6 million. Contributing factors included lower revenue, $9.8 million more impairment charges, $5.6 million higher interest expense and no comparable 2010 drywall settlement. Lower SG&A and the absence of a 2010 debt-extinguishment loss partly offset the increase.
- Interest expense rose to $15.0 million from $9.4 million, reflecting higher average borrowings and a higher weighted average borrowing rate (9.43% versus 8.75%).
- Operating cash use improved by $3.3 million, but the company continued to invest in inventory and remained cash-flow negative.
- Unrestricted cash fell by $21.4 million. Total cash, cash equivalents and restricted cash was $101.1 million, of which $41.3 million was restricted.
Outlook, risks, contingencies and unusual items
- Management expected housing demand to remain weak and uneven in 2012, with no overall improvement anticipated and no predictable timing for a sustained recovery. It planned cautious land investment and continued emphasis on liquidity, cost control and newer communities.
- Management reported backlog units and value entering 2012 were 27% and 34% higher, respectively, than a year earlier, but cautioned that positive sales and margin trends might not continue.
- The company expected 2012 land purchases and development spending to exceed 2011’s $117.2 million, subject to market conditions and delivery pace.
- The $41.4 million balance of 6.875% Senior Notes was due April 2012; management planned repayment using cash and, if needed, the homebuilding credit facility. A January 2012 amendment extended that facility’s maturity to December 2014 and revised certain availability and covenant provisions. At year-end, $51.6 million of borrowing availability remained after letters of credit.
- M/I Financial’s $60 million mortgage warehouse facility was due to expire March 31, 2012. Management expected renewal but gave no assurance. Mortgage-loan fundings had lengthened to about six weeks after major loan buyers exited the market.
- The company was compliant with its homebuilding credit facility covenants at year-end, but interest coverage and adjusted cash flow ratios were below stated thresholds; it maintained $25 million of pledged cash under the then-applicable terms. Net debt to net capital was 42%, versus 34% in 2010.
- Debt indentures prohibited common and preferred dividends and share repurchases while restricted-payment baskets remained negative. No common or preferred dividends were paid in 2011.
- A $140.8 million valuation allowance fully offset deferred tax assets. Management said it did not expect additional tax benefits in 2012 apart from a $0.6 million carryback.
- Defective drywall was confirmed in 93 Florida homes; 80 repairs were complete and nine were underway. The remaining repair accrual was $1.2 million. Related litigation remained pending, and the company could not estimate the potential loss, if any.
- The independent auditor issued an unqualified opinion on the financial statements and internal control over financial reporting; management also concluded controls were effective.
Important facts for investors to verify
- Whether operating cash use, losses and inventory impairments continue, and whether the assumed gradual market recovery in inventory valuations proves reasonable.
- Repayment of the 2012 Senior Notes and renewal or replacement of M/I Financial’s warehouse facility, including resulting liquidity and covenant headroom.
- Backlog conversion, cancellation rates, selling incentives and margins by region, especially whether newer communities sustain their reported margin advantage.
- Potential additional homebuilding impairments, warranty costs and defective-drywall litigation exposure beyond recorded accruals.
- Availability and use of net operating loss carryforwards, which may be limited by future taxable income or an ownership change.