MHO

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended September 30, 2004, for M/I Homes, Inc., a homebuilder and financial services provider operating primarily in Ohio, Indiana, Florida, North Carolina, Virginia, and Maryland. The company operates two reportable segments: Homebuilding (development and sale of single-family homes and land) and Financial Services (mortgage origination and title services).

Key Financial Metrics

Margins (Nine Months Ended Sep 30, 2004): Total Gross Margin was 26.3%; Total Operating Margin was 14.2%.

Material Changes vs. Prior Period

• Revenue Growth: Revenue increased 17.7% for the quarter and 15.0% for the nine-month period compared to 2003. This was driven by an 8.3% increase in homes delivered (quarterly) and an 8.2% increase in average sales price.
• Profitability: Net income rose 16.4% for the quarter and 18.0% for the nine-month period. Income before taxes increased 15.5% (quarterly) and 18.3% (nine-month).
• Segment Performance: Homebuilding revenue increased significantly, while land revenue decreased due to the exit from the Phoenix market and fewer lot sales in Charlotte. Financial services revenue increased 30.4% for the nine months due to higher gains on mortgage sales and increased volume.
• Debt Structure: The company entered a new $500 million revolving credit facility in September 2004, replacing a $315 million facility. Borrowings under this facility totaled $236 million at period end. The company also prepaid $50 million in senior subordinated notes, incurring a $3.0 million net-of-tax charge.
• Inventory: Total inventory increased to $819.6 million from $591.6 million at year-end 2003, reflecting $200 million in land acquisitions during the period.

Guidance, Outlook, and Risks

• Outlook: Management expects fourth-quarter home deliveries to be adversely impacted by regulatory delays in the Florida region resulting from hurricanes in the third quarter. Midwest sales are also expected to be affected by higher mortgage rates and regulatory delays in opening new communities.
• Capital Resources: The company has $250.8 million of unused borrowing availability under its credit facilities and intends to purchase over $90 million of land in the fourth quarter of 2004.
• Key Risks:
  • Interest Rates: Higher rates could reduce affordability and market size.
  • Regulatory Delays: Building moratoriums and zoning restrictions, particularly in Florida and the Midwest, pose risks to delivery schedules.
  • Market Concentration: Approximately 40% of operating income for the nine months ended September 30, 2004, was derived from the Columbus market.
  • Warranty Costs: The company revised its structural warranty estimate upward in the third quarter, increasing costs.
• Unusual Items: A $3.0 million charge was recorded for the prepayment of senior subordinated notes. Reclassifications were made to conform to industry standards, moving amortized capitalized interest from interest expense to land and housing costs.

Investor Verification Checklist

• Verify the impact of Florida hurricane-related regulatory delays on Q4 delivery schedules and backlog conversion rates.
• Confirm the sustainability of the 26.3% gross margin given the mix of land sales and housing deliveries.
• Review the terms of the new $500 million credit facility, specifically covenants regarding net worth and financial ratios.
• Assess the adequacy of the revised warranty accrual ($12.8 million) against historical claim trends.
• Monitor the company's ability to execute its plan to acquire over $90 million in land during Q4 2004.