Business Context and Reporting Period
Company: M/I Homes, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2007
Business Overview: M/I Homes is a single-family homebuilder operating in the Midwest, Florida, and Mid-Atlantic regions, alongside financial services operations (mortgage origination and title services). The company operates under the trade names M/I Homes and Showcase Homes.
Key Financial Metrics
| Metric (in thousands) | Three Months Ended Sept 30, 2007 |
Nine Months Ended Sept 30, 2007 |
Nine Months Ended Sept 30, 2006 |
|---|---|---|---|
| Total Revenue | $243,668 | $703,774 | $877,037 |
| Net (Loss) Income | $(21,717) | $(59,666) | $49,844 |
| Net (Loss) Income Available to Common Shareholders | $(24,154) | $(64,541) | $49,844 |
| (Loss) Earnings Per Share (Basic) | $(1.73) | $(4.62) | $3.56 |
| Operating Cash Flow | N/A | $73,722 | $(182,009) |
| Total Assets | $1,354,380 | N/A | N/A |
| Total Liabilities | $702,492 | N/A | N/A |
| Shareholders' Equity | $651,888 | N/A | N/A |
| Cash and Cash Equivalents | $2,485 | N/A | N/A |
Debt and Liquidity:
- Notes Payable (Homebuilding): $255.0 million outstanding under a $500 million credit facility (reduced from $650 million in August 2007).
- Senior Notes: $200.0 million outstanding (6.875% due 2012).
- Preferred Shares: Issued 4,000 shares (9.75% Series A) in March 2007 for net proceeds of $96.3 million.
- Available Liquidity: Approximately $210 million available under the homebuilding credit facility and $10.1 million under the financial services facility as of September 30, 2007.
Material Changes vs. Prior Period
Revenue Decline: Total revenue decreased 20% for the nine months ended September 30, 2007, compared to the same period in 2006. This was driven by an 18% decrease in homes delivered and a decline in average sales prices.
Significant Impairment Charges: The company recorded substantial non-cash charges impacting profitability:
- Inventory and Investment Impairment: $32.6 million for the quarter and $101.7 million for the nine months ended September 30, 2007. This includes write-downs of operating communities, future communities, land held for sale, and investments in unconsolidated LLCs.
- Goodwill and Intangibles: $5.2 million write-off related to the Shamrock Homes acquisition.
Regional Performance:
- Florida: Revenue decreased 42% (quarter) and 33% (nine months). Operating loss of $20.4 million (quarter) driven by a 33% drop in deliveries and $25.2 million in impairment charges.
- Midwest: Revenue decreased 21% (quarter) and 29% (nine months). Operating loss of $1.0 million (quarter).
- Mid-Atlantic: Revenue increased 18% (quarter) and 28% (nine months) due to higher delivery volume, though operating results were negative due to $6.7 million in impairment charges.
Backlog: Backlog units decreased significantly from 2,533 at September 30, 2006, to 1,468 at September 30, 2007. The aggregate sales value of backlog dropped from $923 million to $481 million.
Guidance, Outlook, and Risks
Management Commentary:
- Market Conditions: Management describes the housing market as "challenging" with uncertainty, credit tightening, excess inventory, and weakening demand. Conditions are expected to remain difficult through 2009.
- Strategy: The company is pursuing a "defensive operating strategy," focusing on premier locations, reducing land purchases (planning to purchase ~$26 million in 2007 vs. $164 million in 2006), and reducing inventory levels.
- 2007 Delivery Estimate: Management estimates delivering approximately 3,000 homes in 2007.
Risks and Contingencies:
- Further Impairments: Management warns that if market conditions deteriorate further or differ from assumptions, additional inventory impairment charges may be required.
- Debt Covenants: The company is subject to interest coverage and leverage ratios under its credit facility. Management believes it will meet these covenants through at least the third quarter of 2008 but notes no assurance of compliance.
- Financing Availability: Tighter lending standards and volatility in sub-prime/alternative mortgage markets could adversely affect homebuyer financing.
- Legal Proceedings: Routine litigation exists, but management does not anticipate a material adverse effect.
Investor Verification Checklist
- Inventory Valuation: Verify the assumptions used for the $101.7 million in impairment charges, specifically regarding projected sales prices and absorption rates in Florida and Mid-Atlantic regions.
- Covenant Compliance: Monitor the company's ability to meet the Interest Coverage Ratio (EBITDA to Interest) and Leverage Ratio covenants under the amended credit facility, particularly given the recent losses.
- Backlog Quality: Assess the cancellation rate (38% in Q3 2007) and the risk of further backlog erosion given the 42% drop in Florida revenue.
- Liquidity Position: Confirm the utilization of the $210 million available credit facility and the impact of preferred share dividends ($4.9 million paid YTD) on cash flow.
- Land Acquisition: Review the reduction in land purchases and the status of land option agreements ($132.7 million aggregate purchase price) to ensure alignment with the defensive strategy.