Business Context and Reporting Period
Company: M/I Homes, Inc. (M/I Homes)
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2009
Industry: Single-family homebuilding and financial services (mortgage/title).
Operations: The Company operates in three geographic regions: Midwest (Ohio, Indiana, Illinois), Florida (Tampa, Orlando), and Mid-Atlantic (North Carolina, Virginia, Maryland). It exited the West Palm Beach, Florida market in late 2007, reporting those results as discontinued operations.
Key Financial Metrics
| Metric | 2009 | 2008 |
|---|---|---|
| Revenue | $569.9 million | $607.7 million |
| Gross Margin | $19.5 million (3.4%) | ($77.8 million) (Negative) |
| Net Loss (Continuing Ops) | ($62.1 million) | ($245.4 million) |
| Net Loss (Total) | ($62.1 million) | ($245.4 million) |
| Loss Per Share (Diluted) | ($3.71) | ($17.86) |
| Cash and Cash Equivalents | $109.9 million | $32.5 million |
| Total Assets | $663.8 million | $693.3 million |
| Total Debt (Senior Notes + Bank Notes) | $224.1 million | $234.2 million |
| Inventory | $420.3 million | $516.0 million |
| Backlog (Units) | 650 | 566 |
| Backlog (Value) | $177.0 million | $139.0 million |
Operational Highlights:
- Homes Delivered: 2,409 (up 19% from 2,025 in 2008).
- Average Sales Price: $231,000 (down from $274,000 in 2008).
- New Contracts: 2,493 (up 33% from 1,879 in 2008).
- Cancellation Rate: 19% (improved from 27% in 2008).
Material Changes vs. Prior Period
- Revenue Decline: Total revenue decreased 6% to $569.9 million. This was primarily driven by a $32.2 million drop in third-party land sales revenue ($32.9M in 2008 vs. $0.7M in 2009), partially offset by a 19% increase in homes delivered.
- Improved Profitability: Net loss from continuing operations improved significantly by $183.3 million (75% reduction) compared to 2008. This improvement was driven by lower impairment charges ($57.1M in 2009 vs. $158.6M in 2008) and reduced operating expenses.
- Impairment Charges: The Company recorded $55.4 million in inventory impairment and $1.7 million in option deposit write-offs in 2009, compared to $153.3 million and $5.3 million respectively in 2008.
- Drywall Charges: A specific charge of $12.2 million was accrued in 2009 for the repair of homes in Florida containing defective imported drywall.
- Liquidity Improvement: Cash and cash equivalents increased from $32.5 million to $109.9 million, bolstered by a $52.6 million equity offering in Q2 2009 and strong operating cash flow generation ($68.5 million).
Guidance, Outlook, and Risks
Management Outlook:
- Management maintains a "defensive operating strategy" focused on preserving cash and liquidity, anticipating a prolonged transition before a sustainable recovery.
- While signs of moderation in negative trends exist (e.g., increased new contracts and backlog), the outlook remains cautious due to high foreclosure rates and soft macroeconomic indicators.
- 2010 Targets: The Company projects purchasing approximately $75 million of land in 2010 (up from $44.3 million in 2009) to expand market presence. Desired financial targets for new communities include 20% gross margins and a 20% return on investment.
- Tax Refund: The Company expects to receive a $26 million federal tax refund in Q1 2010 due to new net operating loss carry-back legislation.
Key Risks and Contingencies:
- Debt Covenants: The Company is restricted from paying dividends or repurchasing shares due to a negative "restricted payments basket" of ($156.0) million under its Senior Notes indenture. It remains in compliance with its Credit Facility covenants.
- Financing Expiration: The primary Credit Facility expires in October 2010, and the M/I Financial credit agreement expires in May 2010. Refinancing terms may be less favorable.
- Inventory Risk: Continued market weakness could necessitate additional inventory impairment charges.
- Legal Proceedings: Ongoing class action litigation regarding defective drywall and a wage-and-hour lawsuit regarding overtime compensation for superintendents.
Investor Verification Checklist
- Debt Refinancing: Verify the status of refinancing negotiations for the Credit Facility (expiring Oct 2010) and M/I Financial agreement (expiring May 2010).
- Inventory Valuation: Monitor future quarters for additional impairment charges, as the Company noted market conditions remain weak and assumptions could change.
- Drywall Exposure: Track the investigation into defective drywall to determine if the $12.2 million accrual is sufficient or if additional homes are identified.
- Dividend Restrictions: Confirm the timeline for restoring the "restricted payments basket" to resume dividend payments on common and preferred shares.
- Tax Refund Timing: Verify the receipt of the expected $26 million tax refund in Q1 2010 to assess near-term liquidity.