Business Context and Reporting Period
Company: M/I Schottenstein Homes, Inc. (M/I)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 1997
Business Overview: M/I is a homebuilder and land developer operating primarily in the Midwest, Florida, and the Mid-Atlantic regions (Ohio, Indiana, Florida, North Carolina, Virginia, Maryland, and Arizona). The company also operates a financial services segment (M/I Financial Corp.) providing mortgage banking services.
Key Financial Metrics
| Metric (in thousands) | 3 Months Ended Sep 30, 1997 | 9 Months Ended Sep 30, 1997 | 9 Months Ended Sep 30, 1996 |
|---|---|---|---|
| Total Revenue | $157,958 | $409,801 | $390,147 |
| Net Income | $4,608 | $12,295 | $9,649 |
| Net Income Per Share | $0.59 | $1.48 | $1.10 |
| Operating Cash Flow | N/A | ($5,878) Used | ($7,514) Used |
| Ending Cash Balance | $5,850 | $5,850 | $4,642 |
| Total Debt (Notes Payable + Subordinated) | $159,335 | $159,335 | $125,300 |
| Homebuilding Gross Margin | 18.1% | 18.1% | 17.8% |
Note: Debt figures include $102.0M in bank notes for home-building, $7.3M for financial operations, and $50.0M in subordinated notes.
Material Changes vs. Prior Period
- Revenue Growth: Revenue for the nine months ended September 30, 1997, increased 5.0% ($19.6 million) compared to the prior year. This was driven by a 118.6% increase in land revenue ($7.2 million increase) and a 2.9% increase in housing revenue ($10.8 million increase).
- Profitability: Net income for the nine-month period rose 27.5% to $12.3 million. Income before taxes increased 29.6% to $20.6 million, aided by higher margins in land sales and financial services.
- Operational Volume: Homes delivered decreased 3.1% (2,161 units vs. 2,229 units), but the average sales price increased 6.1%, offsetting the volume decline. New contracts increased 2.1% to 2,498 units.
- Backlog: Total backlog increased to 1,674 units with an aggregate sales value of $326.0 million, representing an 8.3% increase in value and a 2.2% increase in units from the prior year.
- Debt Structure: The company issued $50 million in Senior Subordinated Notes (9.51% fixed rate) in August 1997 to refinance existing debt and fund operations, replacing a previous $25 million note.
Guidance, Outlook, and Risks
- Management Commentary: Management attributes revenue growth to successful land sales in the Washington D.C. market (Virginia and Maryland divisions) and higher average home prices in upscale subdivisions. The company is expanding its Horizon product line in Columbus and entering the Phoenix, Arizona market.
- Liquidity: The company has $96.0 million of unused borrowing availability under its credit facilities. Cash used in operating activities decreased compared to the prior year, primarily due to a large increase in accounts payable.
- Interest Rates: The weighted average interest rate on outstanding debt decreased to 8.5% for the nine months ended September 30, 1997, from 9.7% in the prior year. The company uses hedging methods to manage interest rate exposure on mortgage loans.
- Risks and Contingencies:
- Land Commitments: The company has options and contingent purchase contracts to acquire land with an aggregate price of approximately $156.7 million.
- Market Concentration: Approximately 38% of housing revenue in 1996 was derived from the Columbus, Ohio market.
- Regulatory and Environmental: Subject to zoning, environmental laws, and potential building moratoriums due to infrastructure limitations (water/sewage).
- Shareholder Control: The Schottenstein family owns approximately 53% of outstanding common shares, exerting significant voting control.
Investor Verification Checklist
- Land Sales Sustainability: Verify if the 118.6% increase in land revenue is a recurring trend or a one-time event driven by specific lot sales in the D.C. market.
- Backlog Cancellation Rates: Monitor the 14.1% cancellation rate of backlog from the prior year to assess revenue recognition risks.
- Debt Covenants: Review the restrictive covenants in the new $50M Subordinated Debt Facility and the Bank Credit Facility (EBITDA to interest ratios, net worth requirements).
- Phoenix Market Entry: Assess the financial impact and risks associated with the new expansion into Phoenix, Arizona, including the $700,000 in initial G&A expenses.
- Interest Rate Sensitivity: Evaluate the impact of potential interest rate hikes on both the company's floating-rate debt and homebuyer affordability.