Business Context and Reporting Period
Company: M/I Schottenstein Homes, Inc. (M/I Homes)
Filing Type: Form 10-Q (Quarterly Report)
Reporting Period: Quarter and nine months ended September 30, 2000
Business Overview: The Company is engaged in homebuilding and financial services (M/I Financial). Operations are concentrated in the Midwest, Florida, and the Washington, D.C. metropolitan area, with significant exposure to the Columbus, Ohio market (approx. 40% of housing revenue).
Key Financial Metrics
| Metric (in thousands) | 9 Months Ended Sep 30, 2000 | 9 Months Ended Sep 30, 1999 | 3 Months Ended Sep 30, 2000 | 3 Months Ended Sep 30, 1999 |
|---|---|---|---|---|
| Total Revenue | $654,166 | $597,443 | $245,582 | $235,106 |
| Net Income | $31,992 | $30,383 | $12,381 | $12,143 |
| Diluted EPS | $3.94 | $3.41 | $1.56 | $1.36 |
| Operating Cash Flow | $1,114 | $(42,519) | N/A | N/A |
| Cash and Equivalents (End of Period) | $9,684 | $5,223 | $9,684 | $5,223 |
| Total Debt (Notes Payable + Mortgages) | $247,334 | $202,075 | $247,334 | $202,075 |
| Senior Subordinated Notes | $50,000 | $50,000 | $50,000 | $50,000 |
| Homebuilding Gross Margin | 19.2% | 19.5% | 19.1% | 19.7% |
Note: Debt figures include Notes payable banks (homebuilding and financial services) and Mortgage notes payable. Operating cash flow is provided for the nine-month period only.
Material Changes vs. Prior Period
- Revenue Growth: Total revenue increased 9.5% for the nine months ended September 30, 2000, compared to the prior year. This was driven by a 9.3% increase in housing revenue and a 32.6% increase in land revenue.
- Volume and Price: For the nine-month period, the Company delivered 2,861 homes (up 2.7% from 2000) with an average sales price increase of 6.4%. New contracts for the nine months decreased 2.2% year-over-year, attributed to higher sales prices and rising interest rates.
- Profitability: Net income increased 5.3% for the nine-month period. However, homebuilding gross margin declined slightly from 19.5% to 19.2%, primarily due to a decrease in land gross margin (from 22.5% to 16.1%) following high-margin land sales in Maryland in 1999 that did not recur.
- Backlog: Backlog at September 30, 2000, stood at 2,406 homes with a sales value of $551 million, representing a 2.0% increase in value but a 0.6% decrease in units compared to the prior year quarter.
- Debt and Liquidity: Bank borrowings for homebuilding operations increased by $30.6 million to $162.6 million to fund increased land development and construction. The Company entered a new credit agreement in August 2000, increasing total credit availability to $280 million.
Guidance, Outlook, and Risks
- Management Commentary: Management attributes revenue growth to higher average sales prices and increased volume in the Midwest and Florida regions. They note that rising interest rates (four prime rate increases in the last 12 months) have negatively impacted new contract activity.
- Outlook: Future contract activity is expected to depend on economic conditions, land development timing, consumer confidence, and interest rates. The Company continues to invest in land development internally to secure competitive advantages.
- Key Risks:
- Interest Rates: Higher rates reduce buyer affordability and increase the Company's floating-rate borrowing costs.
- Land Development: Significant capital is committed to land development; delays or market downturns could impact returns.
- Market Concentration: Approximately 40% of housing revenue is derived from the Columbus, Ohio market.
- Regulatory and Environmental: Subject to zoning, environmental laws, and potential building moratoriums due to infrastructure limitations.
- Material/Labor Shortages: Recent shortages in brick and framing labor could delay construction, though no material effect is anticipated for fiscal year 2000.
- Contingencies: The Company holds options and contingent purchase contracts for land with an aggregate price of approximately $139 million.
Investor Verification Checklist
- Backlog Conversion: Verify the rate at which the $551 million backlog converts to revenue, given the 12% historical cancellation rate.
- Interest Rate Sensitivity: Assess the impact of further interest rate hikes on both new home sales and the Company's $247 million in variable-rate debt.
- Land Inventory Valuation: Review the $272 million in land and development costs to ensure valuations are appropriate given the competitive market and potential for overbuilding.
- Regional Diversification: Monitor the performance of the Columbus market, which accounts for a significant portion of revenue, against national trends.
- Cash Flow Sustainability: Note that operating cash flow was minimal ($1.1 million) for the nine-month period despite strong net income, driven by a $35.9 million increase in inventories.