Business Context and Reporting Period
Company: M/I Homes, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2007
Business Overview: M/I Homes is a leading builder of single-family homes 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 | Three Months Ended June 30, 2007 |
Six Months Ended June 30, 2007 |
Three Months Ended June 30, 2006 |
Six Months Ended June 30, 2006 |
|---|---|---|---|---|
| Revenue | $235.6 million | $460.1 million | $311.8 million | $570.8 million |
| Net (Loss) Income | $(40.2) million | $(37.9) million | $18.3 million | $34.7 million |
| Diluted EPS | $(3.05) | $(2.89) | $1.29 | $2.43 |
| Operating Cash Flow | N/A | $62.4 million | N/A | $(137.3) million |
| Total Assets | $1,359.5 million | N/A | N/A | N/A |
| Total Liabilities | $683.9 million | N/A | N/A | N/A |
| Shareholders' Equity | $675.6 million | N/A | N/A | N/A |
| Debt (Notes Payable & Senior Notes) | $479.8 million | N/A | N/A | N/A |
Note: Debt figure includes Notes payable banks ($281.0 million) and Senior notes ($198.8 million). Cash on hand was $2.3 million as of June 30, 2007.
Material Changes vs. Prior Period
- Revenue Decline: Revenue decreased 24% ($76.1 million) for the quarter and 19% ($110.7 million) for the six months compared to the prior year periods. This was driven primarily by a 24% decrease in homes delivered and a 24% decrease in mortgage loan originations.
- Significant Impairment Charges: The company recorded $66.9 million in impairment charges for the quarter and $69.1 million for the six months ended June 30, 2007. These charges related to inventory, investments in unconsolidated LLCs, and abandoned land transactions. Additionally, a $5.2 million charge was recorded for the write-off of goodwill and intangible assets associated with the Shamrock Homes acquisition.
- Profitability Reversal: The company swung from a net income of $18.3 million in Q2 2006 to a net loss of $40.2 million in Q2 2007. Excluding impairment charges, the company would have reported pre-tax income of $6.9 million for the quarter.
- Margin Compression: Gross margin percentage excluding impairments declined from 27.6% in Q2 2006 to 21.5% in Q2 2007 due to price competition and sales incentives.
- Backlog Reduction: Total backlog dropped significantly from 2,889 units at June 30, 2006, to 1,694 units at June 30, 2007, representing a 41% decrease in units.
Guidance, Outlook, and Risks
- Market Outlook: Management anticipates challenging market conditions to continue through 2008, citing credit tightening, excess inventory, and weakening demand. The company estimates delivering approximately 3,000 homes in 2007.
- Strategic Shift: The company is pursuing a defensive operating strategy, focusing on reducing inventory levels and land purchases. Planned land purchases for 2007 are estimated at $28 million, a significant reduction from $164 million in 2006.
- Liquidity and Capital: In March 2007, the company issued $100 million of preferred shares (net proceeds $96.3 million) to repay debt. As of June 30, 2007, the company had $231.6 million available under its homebuilding credit facility and $15.5 million under its financial services facility. $50 million remains available under a universal shelf registration.
- Risk Factors:
- Inventory Risk: Continued deterioration in market conditions could necessitate additional impairment charges.
- Financing Covenants: The company must maintain an interest coverage ratio of 2.0x. Management believes it will meet this in 2007 but is pursuing actions to ensure compliance through 2008.
- Sub-prime Exposure: Approximately 10% of closings in the first half of 2007 were sub-prime and 17% were alternative loans, exposing the company to tighter lending standards.
Investor Verification Checklist
- Impairment Sustainability: Verify if the $69.1 million in impairment charges for the first half of 2007 represents a one-time adjustment or if further write-downs are likely given the projected market softness into 2008.
- Covenant Compliance: Monitor the company's ability to maintain the 2.0x interest coverage ratio required by its credit facility, especially given the recent losses.
- Backlog Quality: Assess the cancellation rate (29% in Q2 2007) and the average sales price of the remaining backlog ($327,000) to gauge future revenue realization.
- Preferred Share Impact: Review the dividend obligations on the newly issued 9.75% Series A Preferred Shares ($2.4 million paid in the first half of 2007) and their impact on cash flow available to common shareholders.
- Land Inventory Reduction: Confirm the execution of the plan to reduce land purchases to $28 million for the full year 2007 to improve liquidity.