M/I Homes, Inc. (NYSE: MHO) — Q1 2023 Form 10-Q
Business context and period. Unaudited results for the three months ended March 31, 2023, compared with Q1 2022. M/I Homes builds single-family homes across Northern and Southern U.S. markets and provides mortgage and title services, primarily to its homebuyers.
Key financial results
| Metric | Q1 2023 | Q1 2022 / comparison |
|---|---|---|
| Revenue | $1.001 billion | $860.8 million; up 16% |
| Income before taxes | $136.0 million | $122.3 million; up 11% |
| Net income | $103.1 million | $91.8 million; up 12% |
| Diluted EPS | $3.64 | $3.16 |
| Homes delivered / average delivered price | 2,007 / $486,000 | 1,823 / $457,000 |
| Housing gross margin percentage | 21.5% | 22.6%; down 110 basis points |
| Operating cash flow | $251.5 million provided | $69.3 million provided |
| Cash, cash equivalents and restricted cash | $542.6 million | $311.5 million at Dec. 31, 2022; $541.2 million of Q1 cash was unrestricted |
Homebuilding revenue growth reflected 10% more deliveries and a 6% higher average selling price; many homes delivered were contracted before demand weakened in the second half of 2022. Higher construction and lot costs pressured housing margins. Selling, general and administrative expense rose to $100.0 million from $90.2 million, but declined to 10.0% of revenue from 10.5%.
Operating cash flow improved substantially, primarily alongside a $175.3 million inventory reduction, versus a $129.3 million inventory increase in Q1 2022. Investing activities used $4.8 million; financing activities used $15.7 million, including net repayments of $22.1 million on financial-services credit facilities. Cash increased by $231.0 million during the quarter.
Debt and liquidity. At March 31, the company had $700 million principal amount of senior notes outstanding: $400 million due 2028 at 4.95% and $300 million due 2030 at 3.95%. Financial-services borrowings were $223.6 million. The filing reports $923.6 million of aggregate principal debt, with $223.6 million payable within 12 months. The $650 million homebuilding revolver had no borrowings; after $73.6 million of letters of credit, $576.4 million remained available. Homebuilding debt-to-capital was 24%, versus 25% at year-end. The company reported compliance with applicable debt covenants.
Material changes and operating trends
- Net new contracts fell 14% to 2,171, and ending backlog declined 40% to 3,301 homes from 5,526 a year earlier. Backlog aggregate sales value was $1.725 billion, versus $2.788 billion.
- The total cancellation rate rose to 12.8% from 7.2%. Northern contracts fell 30%; Southern contracts increased 1%.
- Average monthly sales pace was 3.7 homes per community, down from 4.8. The average community count increased to 198 from 176.
- Inventory declined to $2.657 billion from $2.829 billion at year-end. Homes under construction not subject to a sales contract totaled 1,551, compared with 1,827 at year-end.
- Revenue from financial services increased 5% to $25.3 million. Segment income before taxes was $12.6 million, compared with $13.1 million, reflecting higher interest expense.
- Shareholders’ equity reached $2.183 billion. No shares were repurchased in Q1; $93.1 million remained available under the repurchase authorization.
Outlook, risks and contingencies
Management gave no specific earnings, revenue or land-spending guidance. It expects challenging and uncertain housing conditions through the remainder of 2023, citing mortgage rates near 7%, inflation, affordability and recession concerns, and construction cost and supply constraints. It expects to manage land spending, inventory, build times and overhead carefully, use incentives such as mortgage-rate buy-downs where appropriate, and maintain liquidity. Management anticipates approximately 15% growth in active communities by year-end, subject to demand and possible delays; it ended Q1 with 200 active communities and approximately 40,700 lots under control, described as about a five-year supply.
The company expects its cash, operating receipts and credit availability to fund anticipated needs for at least the next 12 months. Its $200 million mortgage warehousing agreement expires May 26, 2023; management expected to extend it but stated there was no assurance. Combined financial-services credit availability was $290 million, with $223.6 million drawn at quarter-end.
Other exposures include $824.6 million of land and developed-lot options and contingent purchase agreements; approximately $388.8 million of completion bonds and standby letters of credit; and mortgage-loan repurchase and other guarantees. Warranty reserves were $33.2 million. Management said existing legal proceedings were not expected to have a material effect, while noting resolution remains uncertain; $1.2 million was reserved for legal expenses. No inventory or joint-venture impairment charges were recorded in the quarter. Management identified inventory valuation, construction and land costs, demand, interest rates, labor and supply availability, and warranty claims as important uncertainties.
Important facts for investors to verify
- Whether new contracts, cancellations and backlog stabilize, and how backlog converts into deliveries and revenue.
- Whether incentives, construction costs and land costs continue to pressure housing gross margins.
- Whether the mortgage warehousing facility is renewed on acceptable terms before its May 2023 expiration.
- Whether lot commitments, inventory levels and completion-bond obligations remain manageable if demand weakens further.
- Whether warranty, mortgage-loan guarantee and legal exposures remain consistent with recorded reserves and estimates.