Business Context and Reporting Period
Company: M/I Homes, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 2011
Business Overview: M/I Homes is a homebuilder operating in the Midwest, Southern, and Mid-Atlantic regions, along with financial services operations (mortgage and title). The company operates in a challenging housing market characterized by oversupply, high unemployment, and the expiration of the federal homebuyer tax credit.
Key Financial Metrics
| Metric (in thousands) | Q1 2011 | Q1 2010 |
|---|---|---|
| Revenue | $110,570 | $119,389 |
| Net Loss | $(17,039) | $(8,335) |
| Loss Per Share (Basic & Diluted) | $(0.92) | $(0.45) |
| Operating Cash Flow | $2,627 | $(4,635) |
| Total Assets | $645,742 | $661,894 |
| Total Liabilities | $356,960 | $358,403 |
| Shareholders' Equity | $288,782 | $303,491 |
| Cash and Restricted Cash | $127,029 | $123,131 |
| Senior Notes Outstanding | $238,711 | $238,610 |
Margins: Adjusted operating gross margin was 16.3% for Q1 2011, down from 17.3% in Q1 2010. GAAP gross margin was $7.1 million (6.4%) compared to $17.0 million (14.2%) in the prior year, heavily impacted by impairment charges.
Material Changes vs. Prior Period
- Revenue Decline: Total revenue decreased 7% ($8.8 million) primarily due to an 8% decrease in homes delivered (439 vs. 479). Financial services revenue also dropped 14% due to fewer loan originations.
- Increased Losses: Net loss more than doubled to $17.0 million from $8.3 million. This was driven by lower revenue, higher interest costs (due to 2018 Senior Notes issuance), and significantly higher impairment charges.
- Impairment Charges: The company recorded $10.9 million in impairment charges related to inventory and investments in Unconsolidated LLCs, compared to $3.2 million in Q1 2010. This was largely due to price reductions and increased incentives in legacy communities to improve sales pace.
- Backlog and Contracts: New contracts decreased 15% to 654 units. Backlog decreased 20% to 747 units, reflecting the post-tax credit market slowdown.
- Interest Expense: Interest expense increased 88% to $4.0 million from $2.1 million, attributed to the issuance of $200 million in 8.625% Senior Notes in late 2010.
Guidance, Outlook, and Risks
Management Commentary: Management continues to focus on maintaining a strong balance sheet, improving affordability, and strategically investing in new communities. New communities opened in Q1 2011 are expected to contribute higher gross margins than legacy communities. The company acquired TriStone Homes in San Antonio, Texas, in April 2011 to enhance geographic diversification.
Liquidity and Capital Resources:
- The company generated $2.6 million in operating cash flow, a significant improvement over the $4.6 million used in Q1 2010.
- Unrestricted cash was $80.4 million, with an additional $46.7 million in restricted cash.
- Available borrowing capacity under the homebuilding Credit Facility was $23.1 million.
- The company is currently restricted from paying dividends on common or preferred shares due to a deficit in the "restricted payments basket" under the 2012 Senior Notes indenture.
Risks and Contingencies:
- Defective Drywall Litigation: Approximately 90 homes in Florida have confirmed defective imported drywall. The company has accrued $13.0 million for repairs, with a remaining accrual of $1.5 million. The company is seeking reimbursement from manufacturers and insurers.
- Market Conditions: Persistent oversupply, high unemployment, and tight credit availability continue to negatively impact the homebuilding industry.
- Inventory Impairment: Future impairments remain a risk if market conditions do not improve or if management must further reduce prices to maintain absorption rates.
Key Facts for Investor Verification
- Dividend Restrictions: Verify the status of the "restricted payments basket" under the 2012 Senior Notes, as the company is currently prohibited from paying dividends or repurchasing shares until this basket becomes positive.
- Impairment Volatility: Monitor the magnitude of future inventory impairment charges, which are highly sensitive to management's assumptions regarding sales prices and absorption rates in legacy communities.
- Debt Covenants: Review compliance with the Credit Facility covenants, specifically the Adjusted Cash Flow Ratio, which was negative (-0.66 to 1) in Q1 2011, potentially requiring the company to pledge $25 million of cash as security.
- Land Spending: Confirm the company's ability to execute its planned land spending of $140-$160 million for the remainder of 2011 given current market absorption rates.
- Legal Exposure: Track the resolution of the defective drywall litigation and the success of reimbursement claims against third-party manufacturers.