MHO

Business Context and Reporting Period

Company: M/I Homes, Inc. (M/I Homes)
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2010
Business Overview: M/I Homes is a leading builder of single-family homes operating in three regions: Midwest, Mid-Atlantic, and Southern (formerly Florida). The company operates 110 communities across 10 markets in 9 states. Its operations are divided into homebuilding (98% of revenue) and financial services (2% of revenue), which provides mortgage and title services.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Revenue increased 8% to $616.4 million, driven by a 7% increase in average sales price ($247,000 vs. $231,000) and a slight increase in homes delivered (2,434 vs. 2,409).
• Profitability Improvement: Net loss narrowed significantly by 58% to $26.3 million. This was primarily due to a 140 basis point improvement in adjusted gross margin, lower fixed overhead, and a substantial reduction in asset impairment charges ($12.6 million in 2010 vs. $57.1 million in 2009).
• Backlog Decline: Year-end backlog decreased 18% in units and 23% in value, attributed to a 7% decline in new contracts (2,316 vs. 2,493) following the expiration of the federal homebuyer tax credit in April 2010.
• Debt Restructuring: The company completed a tender offer to repurchase $158.6 million of its 2012 Senior Notes and issued $200 million of new 2018 Senior Notes.
• Land Investment: Land purchases increased to $110.7 million in 2010, more than double the $44.3 million spent in 2009, as the company shifted strategy to acquire land in existing markets.

Guidance, Outlook, and Risks

Outlook: Management expects the housing market to remain weak in 2011 with uneven results before a sustained recovery. The company plans to continue focusing on restoring profitability through cost control, product refinement (including the "eco series"), and strategic land acquisition. No specific financial guidance for 2011 was provided.

Key Risks and Contingencies:

• Market Conditions: Persistent oversupply of homes, weak consumer demand, high unemployment, and tight mortgage credit standards continue to pressure the industry.
• Inventory Impairment: The company recorded $12.6 million in impairment charges in 2010. Future market deterioration could necessitate additional write-downs.
• Defective Drywall Litigation: Approximately 90 homes in Florida were identified with defective imported drywall. The company accrued $12.8 million for repairs (with $1.3 million remaining at year-end) and received a $2.4 million settlement in Q3 2010. Ongoing litigation remains a risk.
• Liquidity and Covenants: The company is restricted from paying dividends or repurchasing shares due to a deficit in the "restricted payments basket" under its 2012 Senior Notes indenture. However, it remains in compliance with its Credit Facility covenants.
• Financing: The M/I Financial credit agreement expires in April 2011 and requires renewal.

Investor Verification Checklist

• Backlog Conversion: Verify the ability to convert the reduced backlog of 532 units into revenue in 2011 given the high cancellation rate (20% in 2010).
• Impairment Exposure: Assess the remaining inventory value ($450.9 million) for potential future impairment charges if market absorption slows.
• Debt Maturity: Confirm the renewal status of the M/I Financial credit facility expiring April 2011 and the impact of the new 2018 Senior Notes on interest expense.
• Drywall Resolution: Monitor the status of the defective drywall litigation and any potential for additional accruals beyond the $1.3 million remaining reserve.
• Dividend Restrictions: Note that the company is currently prohibited from paying dividends or repurchasing shares until the restricted payments basket becomes positive or the 2012 Senior Notes are repaid.