Business Context and Reporting Period
Company: M/I Schottenstein Homes, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 1997
Business Overview: The Company operates in two primary segments: home-building (residential construction and land development) and financial services (mortgage banking). Operations are concentrated in Ohio, Florida, North Carolina, Virginia, Maryland, and Indiana, with a recent expansion into Phoenix, Arizona.
Key Financial Metrics
| Metric (Dollars in thousands) | Six Months Ended June 30, 1997 | Six Months Ended June 30, 1996 |
|---|---|---|
| Total Revenue | $251,843 | $233,215 |
| Net Income | $7,687 | $5,259 |
| Net Income Per Share | $0.90 | $0.60 |
| Cash Flow from Operations | ($19,203) Used | ($7,716) Used |
| Ending Cash Balance | $11,124 | $11,923 |
| Total Debt (Notes Payable + Subordinated) | $163,580 | $125,300 |
| Home-Building Gross Margin | 18.2% | 17.8% |
Material Changes vs. Prior Period
- Revenue Growth: Total revenue increased 7.7% year-over-year for the six-month period, driven by a 6.5% increase in housing revenue and a 65% increase in land revenue. The average sales price of homes delivered rose 7.2%.
- Profitability: Net income increased 46.2% to $7.7 million. Income before taxes rose 43.6%, aided by higher margins in land sales and financial services, as well as reduced interest expense.
- Interest Expense: Interest expense decreased to $5.1 million from $6.0 million in the prior year, attributed to lower weighted average interest rates and increased capitalization of interest due to higher land development activity.
- Backlog: The backlog of homes decreased 6.5% in units to 1,679 homes (valued at $319 million) due to record deliveries in the first half of 1997, though the average sales price in backlog increased 6.1%.
- Inventory: Inventories increased significantly, with houses under construction rising $29.7 million and land/development costs rising $10.7 million compared to year-end 1996.
Outlook, Risks, and Unusual Items
- Debt Restructuring: The Company signed a letter of intent to issue $50 million in Senior Subordinated Notes at a fixed 9.51% rate, maturing in August 2004. Proceeds will repay existing bank credit facilities and the current $25 million subordinated note. Completion was expected in late August 1997.
- Stock Repurchase: On August 1, 1997, the Company repurchased 702,439 shares from the Schottenstein family for $9.0 million, funded by the bank credit facility.
- Land Development Strategy: The Company is increasing internal land development to secure lots in premier locations, anticipating a 50% increase in land holdings in the Columbus market for 1997.
- Risks:
- Interest Rates: The business is sensitive to interest rate fluctuations, which affect both buyer affordability and the Company's floating-rate debt costs.
- Subcontractor Shortages: Strong sales have led to shortages of qualified subcontractors in certain trades, potentially increasing costs or delaying construction.
- Market Concentration: Approximately 38% of 1996 housing revenue was derived from the Columbus, Ohio market.
Investor Verification Checklist
- Verify the closing of the $50 million Senior Subordinated Notes and the repayment of existing credit facilities as planned.
- Monitor the impact of subcontractor shortages on gross margins and construction timelines in key markets.
- Assess the sustainability of the 18.2% gross margin given competitive promotions and potential cost increases.
- Review the utilization of the $71.3 million in unused borrowing availability against future land acquisition needs.
- Confirm the performance of the new Phoenix, Arizona division, which had no unit activity in the first half of 1997.