M/I Homes, Inc. (NYSE: MHO) — FY 2020 Form 10-K
Business context and period. The filing covers the fiscal year ended December 31, 2020. M/I Homes builds single-family homes and townhomes across 15 markets in 10 states, with Northern and Southern homebuilding segments and a mortgage and title services segment. Homebuilding represented 97% of 2020 revenue.
Financial and operating performance
| Metric | FY 2020 | FY 2019 | Change |
|---|---|---|---|
| Revenue | $3.046 billion | $2.500 billion | +22% |
| Income before income taxes | $310.0 million | $166.0 million | +87% |
| Net income | $239.9 million | $127.6 million | +88% |
| Diluted EPS | $8.23 | $4.48 | +84% |
| Cash from operating activities | $168.3 million | $65.6 million | Increased |
- Housing revenue was $2.940 billion, up 21%, as deliveries rose 22% to 7,709 homes. Average delivered price was $381,000, down 1% year over year, largely reflecting mix.
- Housing gross margin increased to 20.0% from 17.9%; adjusted housing gross margin, a non-GAAP measure, was 20.3% versus 18.1%. Total gross margin percentage was 22.2%, up 260 basis points.
- New contracts reached a record 9,427, up 39%; year-end backlog rose 64% to 4,389 homes, with sales value up 74% to $1.84 billion. Companywide absorption improved to 3.7 homes per community per month from 2.6.
- Financial services revenue rose 57% to $87.0 million; the segment originated 5,888 loans, up 32%, and reported $50.5 million in pretax income.
- At year-end, cash, cash equivalents and restricted cash were $260.8 million, including $260.7 million unrestricted. Inventory was $1.917 billion, up from $1.770 billion.
- Homebuilding debt to capital was 34%, versus 38% a year earlier. Homebuilding borrowings under the revolving credit facility were zero, with $439.0 million available. Separately, financial-services facilities had $225.6 million outstanding and only $1.7 million of reported availability.
- Operating cash flow was $168.3 million; investing cash flow used $33.9 million and financing activities provided $120.3 million. Inventory growth used $134.9 million of cash, partly offset by higher accounts payable, customer deposits and other liabilities.
Material changes and unusual items
- After COVID-19 disrupted sales, cancellations and construction in late March and April, activity rebounded from May. Management attributed strong demand to low mortgage rates, limited housing supply and consumer shifts toward suburban single-family homes.
- In January 2020, the company issued $400 million of 4.95% senior notes due 2028 and used part of the proceeds to redeem $300 million of 6.75% notes due 2021. The remaining senior notes include $250 million of 5.625% notes due 2025.
- Reported 2020 results included $8.4 million of inventory and joint-venture impairment charges and a $0.9 million net stucco-repair charge. A $7.2 million energy-tax-credit benefit contributed to the 22.6% effective tax rate, down from 23.2%.
- Operating cash increased substantially year over year, while the active community count fell to 202 from 225 as strong sales accelerated community sell-through. The company controlled approximately 39,500 lots, a 5.1-year supply based on 2020 deliveries.
Outlook, risks and contingencies
- Management expects demand support from low rates, housing undersupply and demographic trends, but gave no 2021 estimates for land spending or community count because of COVID-19 and timing uncertainty.
- 2021 priorities include managing land and inventory spending, opening replacement communities, maintaining liquidity, expanding affordable Smart Series homes and emphasizing customer service and quality. Smart Series represented approximately 34% of 2020 sales.
- Management reported higher lumber and other material costs and periodic labor and supply-chain constraints that lengthened production cycles in some markets. It raised prices in many communities and cited cost controls as offsets, but warned that it may not sustain margins if costs rise or pricing power weakens.
- The mortgage warehouse and repurchase facilities expire May 28, 2021 and October 25, 2021, respectively. Management expected to extend the warehouse facility but gave no assurance of renewal.
- Florida stucco claims remain under review. The year-end reserve was $4.7 million; additional repair costs could exceed the estimate. Other legal proceedings were described as ordinary-course matters, with $0.8 million reserved for legal expenses.
- Other principal risks include economic or housing-market deterioration, interest-rate and mortgage-credit changes, land availability and valuation, construction costs and labor availability, regulatory delays, severe weather, cyber incidents, and potential warranty or mortgage-loan repurchase claims. Inventory impairment estimates rely on management projections and assumptions.
- The independent auditor gave an unqualified opinion on the financial statements and internal controls. Inventory valuation was identified as a critical audit matter; no separate audit opinion was expressed on that matter.
Important facts for investors to verify
- Whether the 2021 mortgage warehouse and repurchase facilities were renewed or replaced on acceptable terms.
- Whether the company can replenish communities quickly enough to sustain deliveries as backlog converts and existing communities sell out.
- Whether labor, materials and supply-chain costs affect homebuilding margins, completion times or customer cancellations.
- Whether COVID-19 or housing, employment and mortgage-market changes alter demand, pricing, backlog conversion or liquidity.
- Whether Florida stucco repair obligations or other warranty, legal and mortgage-related claims exceed recorded reserves.
- How much of reported earnings growth reflects durable operating performance versus unusual items, including the energy tax credit and impairment or repair charges.