M/I Homes, Inc. (10-Q) — Quarter Ended September 30, 2016
Amounts are in U.S. dollars; financial statement figures are in millions except per-share amounts. Comparisons are with the corresponding 2015 period.
Business context and reporting period
M/I Homes builds single-family homes across Midwest, Southern and Mid-Atlantic markets, and provides mortgage and title services. The filing covers the third quarter and first nine months of 2016. The company entered Sarasota, Florida, on July 1, 2016.
Key financial metrics
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Revenue | $442.5 | $363.5 | $1,168.1 | $949.5 |
| Income before taxes | $18.4 | $26.5 | $58.1 | $64.1 |
| Net income | $10.9 | $15.6 | $36.0 | $38.5 |
| Net income to common shareholders | $9.7 | $14.4 | $32.4 | $34.8 |
| Diluted EPS | $0.35 | $0.51 | $1.17 | $1.25 |
| Operating cash flow | Not presented quarterly | $26.5 | $(95.2) |
- Q3 homebuilding revenue from delivered homes was $419.2 million; financial services revenue was $10.6 million. Total revenue was a quarterly record.
- Q3 housing gross margin was 16.0%, compared with 19.6%; excluding the $14.5 million stucco charge, adjusted housing gross margin was 19.5%. For nine months, reported housing gross margin was 17.3% versus 19.4%, and adjusted was 19.0% versus 19.4%.
- At September 30, cash and cash equivalents were $22.3 million, restricted cash $1.0 million, inventory $1,225.2 million, total assets $1,497.2 million, and shareholders’ equity $631.6 million.
- Debt carrying amounts totaled approximately $622.6 million, including $85.0 million of homebuilding bank debt, $91.5 million of financial-services bank debt, $57.5 million of convertible notes due 2017, $86.3 million due 2018, and $300.0 million of senior notes due 2021.
- Homebuilding debt to capital was 46%, versus 45% at year-end 2015. The $400 million revolving facility had $279.5 million of net availability after borrowings and letters of credit. Financial-services facilities had only about $0.5 million of stated availability at quarter-end.
Material changes versus the prior comparable period
- Revenue rose 22% in Q3 and 23% for the first nine months, supported by more home deliveries and higher average delivery prices. Deliveries increased 15% in Q3 and 17% year to date; average delivered home prices rose 5% and 6%, respectively.
- Net income to common shareholders and diluted EPS declined in both comparison periods. The primary unusual pressure was the stucco-related warranty accrual; Q3 pretax income also reflected $1.1 million of land-sale profit.
- Management’s non-GAAP adjusted pretax income, excluding stucco charges and land-sale profit, was $31.9 million in Q3 versus $25.6 million, and $74.4 million for nine months versus $57.7 million. These measures are not GAAP results.
- Backlog grew 24% to 2,221 homes, with an aggregate sales value up 25% to $821.5 million. Net new contracts increased 10% in Q3 and 18% year to date.
- Operating cash flow improved from a $95.2 million use to $26.5 million provided, while inventory increased $96.5 million year to date. Investing cash use rose to $19.8 million, including an airplane purchase of $9.9 million.
Outlook, risks and unusual items
- Management expected modest improvement in housing demand for the remainder of 2016, citing employment, wage growth, low interest rates and limited new-home supply. It gave no specific revenue or earnings guidance.
- The company estimated 2016 land purchase and development spending of $425–$450 million; $268.8 million had been spent through September. Spending was subject to market conditions and could be adjusted.
- The largest unusual item was the Florida stucco issue: the company accrued $14.5 million in Q3 and $19.4 million year to date. The remaining overall stucco reserve was $15.1 million, including estimated costs for identified homes still needing repairs and homes not yet identified. The review remains ongoing; actual costs could materially exceed estimates. No recovery receivable was recorded because probable recoveries could not be estimated.
- Other risks include construction and lot-cost inflation, interest-rate effects on housing demand and financing costs, land and inventory valuation judgments, warranty and legal claims, and reliance on credit availability. The company reported compliance with its credit facility covenants.
- The financial-services mortgage repurchase facility was due to expire November 1, 2016. Management expected to seek a one-year extension but could not assure it would be obtained. The $57.5 million convertible notes mature in September 2017.
- Management stated that cash, operating receipts and available credit were expected to fund anticipated needs for at least the next 12 months. This is forward-looking and not a guarantee.
Important facts for investors to verify
- Track subsequent stucco claims, repair costs, reserve adequacy and any insurance or subcontractor recoveries.
- Confirm the outcome and terms of the mortgage repurchase facility extension and the company’s ability to address the 2017 convertible-note maturity.
- Monitor housing gross margin, construction and land costs, deliveries, cancellations, backlog conversion and regional performance, particularly in the Southern region.
- Assess actual land spending against the $425–$450 million estimate, inventory growth, cash generation and remaining credit availability.
- Review the assumptions behind management’s adjusted, non-GAAP performance measures alongside GAAP results.