Business Context and Reporting Period
Company: M/I Schottenstein Homes, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 1998
Business Overview: The Company is engaged in homebuilding and financial services (M/I Financial). Operations are concentrated in the Midwest, Florida, and the Mid-Atlantic/Southwest regions. The Company develops land and constructs single-family homes, while its financial services segment originates and sells mortgage loans.
Key Financial Metrics
| Metric (in thousands) | 9 Months Ended Sep 30, 1998 | 9 Months Ended Sep 30, 1997 | 3 Months Ended Sep 30, 1998 | 3 Months Ended Sep 30, 1997 |
|---|---|---|---|---|
| Total Revenue | $501,630 | $409,801 | $208,794 | $157,958 |
| Net Income | $19,336 | $12,295 | $8,210 | $4,608 |
| EPS (Diluted) | $2.32 | $1.48 | $0.92 | $0.59 |
| Operating Cash Flow | ($27,692) | ($5,849) | N/A | N/A |
| Cash Balance (End of Period) | $233 | $5,850 | $233 | $5,850 |
| Total Debt (Notes & Mortgages) | $174,000 | $163,950 | $174,000 | $163,950 |
| Unused Borrowing Capacity | $126,100 | N/A | $126,100 | N/A |
Note: Total Debt includes Notes payable banks ($106,225), Mortgage notes payable ($17,772), and Subordinated notes ($50,000). Operating cash flow is negative due to significant inventory build-up.
Material Changes vs. Prior Period
- Revenue Growth: Revenue increased 22.1% for the nine months ended September 30, 1998, driven by a 15.4% increase in homes delivered (2,493 vs. 2,161) and a 5.7% increase in average sales price.
- Profitability: Net income rose 57.3% year-over-year for the nine-month period. Housing gross margin improved to 19.3% from 18.1% in the prior year.
- Backlog Expansion: Backlog increased 29.1% in units to 2,161 homes, with a total sales value of $464.0 million (up 42.3% from the prior year).
- Inventory Build: Inventories increased significantly, with "Houses under construction" rising $62.7 million and "Single-family lots" rising $22.0 million compared to December 31, 1997.
- Financial Services: M/I Financial revenue increased 39.7% for the nine-month period, fueled by a 27.7% increase in loan originations and higher gains from the sale of servicing rights.
Guidance, Outlook, and Risks
- Management Commentary: Management attributes growth to favorable market conditions, low interest rates, and successful land development strategies. The Company is focusing on acquiring lots in premier locations to maintain margins.
- Liquidity: Despite a cash balance of only $233,000, the Company has $126.1 million in unused borrowing availability under its credit facilities. Proceeds from a $24.6 million treasury stock sale in May 1998 were used to repay debt.
- Interest Rate Risk: The Company utilizes interest rate swaps ($75 million total notional) to hedge against rising rates. The weighted average interest rate on debt was 8.5%.
- Year 2000 Compliance: The Company is modifying systems to address Y2K issues, with completion anticipated by mid-1999. Risks include potential failures of supplier systems.
- Market Concentration: Approximately 42% of housing revenue for the nine months ended September 30, 1998, was derived from the Columbus, Ohio market.
- Contingencies: The Company holds options to acquire land with an aggregate purchase price of approximately $181.4 million.
Investor Verification Checklist
- Cash Position: Verify the sustainability of operations given the low cash balance ($233k) relative to the high inventory build-up and negative operating cash flow.
- Debt Covenants: Review the restrictive covenants in the Bank Credit Facility regarding minimum net worth, working capital, and EBITDA ratios.
- Backlog Cancellations: Monitor the 12.8% cancellation rate of backlog from the prior year-end to assess revenue realization risks.
- Land Development Costs: Assess the impact of continued heavy investment in land development on future liquidity and margin stability.
- Y2K Remediation: Confirm the status of Year 2000 compliance for critical suppliers and internal systems.