MHO

Business Context and Reporting Period

Company: M/I Homes, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2009
Business Overview: M/I Homes is a single-family homebuilder operating in the Midwest, Florida, and Mid-Atlantic regions, alongside a financial services segment (M/I Financial) providing mortgage and title services. The company operates in a challenging economic environment characterized by rising unemployment, tight credit standards, and declining home prices.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Decline: Total revenue decreased 5% ($7.6 million) in Q3 2009 compared to Q3 2008, and 20% ($92.4 million) for the nine-month period. This was driven by an 18% drop in average sales price (from $273k to $224k in Q3) and a significant reduction in third-party land sales revenue.
• Volume Increase: Despite price declines, homes delivered increased 20% in Q3 (665 vs. 555) and 5% for the nine-month period (1,551 vs. 1,471).
• Loss Reduction: Net loss improved significantly, decreasing 64% in Q3 (from $58.7 million to $21.1 million) and 59% for the nine-month period (from $170.1 million to $69.1 million). This improvement is largely attributed to reduced impairment charges and lower operating expenses.
• Impairment Charges: Total impairment and write-off charges dropped to $15.0 million in Q3 2009 from $43.5 million in Q3 2008. For the nine months, charges were $34.0 million compared to $105.7 million in the prior year.
• Backlog Growth: Backlog increased 36% to 1,060 units (valued at $263.2 million) as of September 30, 2009, up from 781 units in the prior year.

Guidance, Outlook, Risks, and Unusual Items

• Outlook: Management is "cautiously optimistic" regarding recent contract increases but notes the industry has a long way to go for full recovery. They anticipate gradual market improvement starting in 2010. The expiration of the $8,000 federal tax credit on December 1, 2009, is noted as a potential negative factor.
• Unusual Items:
  • Imported Drywall: The company identified approximately 80 homes in Florida with defective imported drywall. An accrual of $9.7 million was established for repairs, with $1.7 million charged against it in the first nine months of 2009. Total exposure remains uncertain.
  • Asset Sales: The company sold its corporate airplane in Q1 2009, incurring a $0.9 million loss, compared to a $5.6 million gain on an airplane exchange in Q1 2008.
• Risks and Contingencies:
  • Dividend Restrictions: Due to a negative "consolidated restricted payments basket" of $(163.0) million, the company is restricted from paying dividends on common or preferred shares and repurchasing shares until the basket is restored.
  • Deferred Tax Assets: A valuation allowance of $136.4 million was recorded against deferred tax assets due to a four-year cumulative pre-tax loss position (2005-2009).
  • Legal Proceedings: Ongoing litigation includes a class action regarding overtime pay for superintendents and a class action regarding defective drywall.

Investor Verification Checklist

• Inventory Valuation: Verify the assumptions used in the fair value calculations for the remaining $494 million inventory, given the history of significant impairments.
• Drywall Exposure: Monitor updates on the defective drywall investigation to determine if the $9.7 million accrual is sufficient or if additional homes are identified outside of Florida.
• Liquidity and Covenants: Confirm continued compliance with the Credit Facility covenants, specifically the "Minimum Net Worth" and "Adjusted Cash Flow Ratio," given the company's loss position.
• Dividend Status: Note that no dividends are currently being paid on common or preferred shares due to debt indenture restrictions.
• Backlog Conversion: Assess the risk of contract cancellations (currently 20% in Q3) impacting the $263 million backlog value.