M/I Homes, Inc. — Q2 2020 Form 10-Q
Business context and period: M/I Homes is a U.S. single-family homebuilder with homebuilding operations across Northern and Southern regions, plus mortgage and title services. This unaudited report covers the three and six months ended June 30, 2020; comparisons are with the corresponding 2019 periods. Management cautions that results may not indicate full-year performance, particularly given COVID-19 disruption.
Financial performance
| Metric | Q2 2020 | Q2 2019 | First half 2020 | First half 2019 |
|---|---|---|---|---|
| Revenue | $714.2 million | $623.7 million | $1,291.8 million | $1,104.8 million |
| Income before taxes | $71.7 million | $41.2 million | $113.1 million | $64.7 million |
| Net income | $54.5 million | $30.2 million | $86.3 million | $48.0 million |
| Diluted EPS | $1.89 | $1.08 | $2.98 | $1.71 |
| Housing gross margin | 19.8% | 17.6% | 19.2% | 17.5% |
| Operating income | $74.2 million | $46.2 million | $120.2 million | $76.6 million |
- Q2 revenue rose 15% and first-half revenue rose 17%. Home deliveries increased 19% in Q2 to 1,835 and 22% in the first half to 3,330.
- Net income increased 80% in both comparison periods. Management attributed stronger results mainly to higher deliveries, improved housing margins and improved financial-services results.
- Average selling price of delivered homes declined 3% in Q2 and 4% in the first half, primarily reflecting home and market mix.
- Financial-services revenue was $19.0 million in Q2 and $32.5 million in the first half, up 33% and 25%, respectively. Loan originations increased to 1,375 in Q2 and 2,506 in the first half.
- Cash provided by operating activities was $82.8 million in the first half, versus $10.6 million in the prior-year period. Investing activities used $20.7 million; financing activities provided $25.8 million.
Financial position and debt
- At June 30, 2020, cash, cash equivalents and restricted cash totaled $94.0 million, including $93.6 million of unrestricted cash. Total assets were $2.33 billion and shareholders’ equity was $1.09 billion.
- Inventory was $1.83 billion, up from $1.77 billion at year-end 2019. Homes under construction included 1,181 homes without a sales contract, valued at $210.2 million.
- Debt included $250 million principal amount of 5.625% senior notes due 2025, $400 million of 4.95% senior notes due 2028, $134.2 million of financial-services borrowings, and $7.0 million of other notes. No borrowings were outstanding on the homebuilding revolver; $69.5 million of letters of credit left $430.5 million available.
- Homebuilding debt to capital was 37%, compared with 38% at December 31, 2019. The company reported compliance with applicable credit-facility and senior-note covenants.
- Operating lease right-of-use assets and liabilities were each $51.2 million, including a $32.8 million increase from commencement of a ten-year renewable lease for the new corporate headquarters.
Material changes and management commentary
- After a substantial decline in new contracts in late March and April due to COVID-19, demand rebounded in May and June. Q2 new contracts rose 31% to a record 2,261; the June 30 backlog increased 30% to a record 3,691 homes, with a sales value of approximately $1.46 billion.
- Management reported record Q2 and first-half deliveries, revenue, pretax income and net income. Q2 absorption improved to 3.4 homes per community per month from 2.7 a year earlier; active communities totaled 220.
- Management expects COVID-19, economic weakness and possible job losses to weigh on demand in Q3 and potentially later periods, partly buffered by low mortgage rates and limited housing inventory. It did not provide 2020 land-spending or community-count estimates because of uncertainty.
- Management’s stated priorities include controlling land and inventory investment, maintaining liquidity, expanding more affordable Smart Series homes, and emphasizing customer service and product quality. It expects that revolver borrowings may be needed at times in the second half of 2020, with a projected peak not expected to exceed $200 million; this is subject to substantial uncertainty.
- In January 2020, the company issued $400 million of 2028 notes and used part of the proceeds to redeem all $300 million of 2021 notes. The June revolver amendment extended most lender commitments to July 2023, increased the minimum tangible-net-worth covenant, raised the LIBOR margin and commitment fee, and added potential accordion capacity subject to lender commitments.
Risks, contingencies and unusual items
- COVID-19 could again disrupt sales, construction, closings, labor and materials availability, mortgage lending or access to capital. Management cited the uncertainty of the pandemic, including rising cases in some markets, and warned that a prolonged downturn could pressure liquidity, covenant compliance and debt service.
- Stucco-related homeowner claims and litigation in Florida remain ongoing. The company reported a $4.0 million reserve for identified and estimated future repairs; it said its estimate could change materially as information develops and has not recorded further expected recoveries.
- Outstanding completion bonds and standby letters of credit totaled approximately $256.0 million. Land options and contingent purchase agreements covered lots with an aggregate purchase price of approximately $715.7 million; purchases are conditional on specified requirements.
- Other legal proceedings are considered incidental by management, but resolution costs could differ from estimates. Legal expense reserves were $1.4 million at June 30, 2020.
- Mortgage servicing rights were affected by COVID-19-related mortgage-market disruption: a net $0.4 million impairment reduced first-half revenue, after a $0.6 million Q2 reversal of part of the Q1 impairment.
- The company recorded no inventory or joint-venture impairment charges in the periods presented. Detroit operations were temporarily shut from March 23 through May 7; the company’s June goodwill review found no impairment.
- The 2018 share repurchase program had $17.2 million remaining; no shares were repurchased in Q2. Debt indentures restrict dividends and repurchases subject to a defined basket and other terms.
Important facts for investors to verify
- Whether the record backlog converts into deliveries and cash flow, and whether cancellations, home prices and margins remain stable as COVID-19 conditions evolve.
- Liquidity and borrowing needs through year-end, including the projected revolver peak, availability under borrowing-base requirements, and continued covenant compliance.
- Mortgage financing availability, lending-standard changes, the financial-services business’s funding facilities and the October 2020 maturity of its mortgage repurchase facility.
- Land commitments, inventory exposure and any future impairment or land-option abandonment charges if demand or pricing weakens.
- Developments in Florida stucco claims, repair estimates, legal proceedings and potential recoveries.