M/I Homes, Inc. — Q2 2021 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2021. Unaudited. M/I Homes builds single-family homes across Northern and Southern U.S. markets and operates mortgage and title services.
Financial highlights
| Metric | Q2 2021 | Q2 2020 | First half 2021 | First half 2020 |
|---|---|---|---|---|
| Revenue | $961.0 million | $714.2 million | $1,789.8 million | $1,291.8 million |
| Income before taxes | $141.3 million | $71.7 million | $251.6 million | $113.1 million |
| Net income | $107.6 million | $54.5 million | $192.5 million | $86.3 million |
| Diluted EPS | $3.58 | $1.89 | $6.43 | $2.98 |
| Operating cash flow | Not presented for the quarter | $173.8 million | $82.8 million |
- Q2 revenue rose 35%; pretax income and net income each rose 97%. First-half revenue rose 39%, pretax income 122%, and net income 123% year over year.
- Q2 housing gross margin was 22.8%, up 3.0 percentage points; first-half housing gross margin was 22.3%, up 3.1 points. Total gross margin was 25.1% in Q2, up 3.2 points.
- Q2 deliveries increased 23% to 2,258 homes; first-half deliveries increased 28% to 4,277. Average delivered home price was $411,000 in Q2, up 8% year over year.
- Backlog reached 5,488 homes, up 49%, with a reported sales value of $2.49 billion, up 71%. New contracts were 2,267 in Q2, compared with 2,261 a year earlier; first-half contracts rose 24% to 5,376.
- Cash, cash equivalents and restricted cash totaled $371.8 million at June 30, including $371.3 million unrestricted. Operating cash flow was $173.8 million; investing used $12.8 million and financing used $50.0 million in the first half.
- Total assets were $2.86 billion, liabilities $1.39 billion, and shareholders’ equity $1.47 billion. Inventory was $2.08 billion, versus $1.92 billion at year-end 2020.
- Homebuilding debt-to-capital was 31%, compared with 34% at year-end. There were no borrowings under the $550 million homebuilding revolver; $81.1 million of letters of credit left $468.9 million available. Financial-services borrowings were $167.1 million. Senior note principal totaled $650 million: $250 million due 2025 and $400 million due 2028.
Business changes and management commentary
- Management attributed strong results to housing demand, low mortgage rates, limited existing-home supply, higher home prices and increased deliveries. Financial services also benefited from more originations and higher loan-sale margins.
- Active communities fell to 175 from 220 a year earlier as strong sales accelerated community sell-through. The company opened 37 communities and closed 64 in the first half; it reported approximately 44,000 lots under control.
- The June 2021 amendment increased the homebuilding revolver commitment to $550 million, extended maturity to July 2025, and reduced pricing. Management said it expected any homebuilding revolver borrowings during the remainder of 2021 to peak below $100 million.
- On July 28, 2021, after quarter-end, the board approved a new $100 million share repurchase program, replacing the prior program. No shares were repurchased in the first half.
- No specific 2021 land-spending or community-count estimates were provided. Management identified land spending, community sales pace, new-community readiness, liquidity, affordable Smart Series homes and customer service as priorities.
Outlook, risks and contingencies
- Management expected housing demand to remain supported by low rates, supply constraints and buyer demographics, but cautioned that COVID-19 developments, rising mortgage rates, unemployment, inflation and weaker economic conditions could impair demand.
- Construction material and labor costs increased, and supply-chain disruptions—including availability of skilled labor, lumber, cabinets and appliances—lengthened production cycles in some markets. Management said pricing and cost management had helped preserve or improve margins, but future cost increases or shortages could pressure results.
- Seasonality is significant; deliveries typically increase in the second half, and interim results are not necessarily indicative of full-year results.
- Florida stucco-related claims remain under review. The reserve was $3.7 million at June 30; management believes it is adequate but warned estimates could change materially. The company reported 100 homes in various stages of repair and could not estimate additional recoveries.
- Outstanding completion bonds and standby letters of credit totaled $318.3 million. Land options and contingent purchase agreements had an aggregate purchase price of approximately $993 million. These are commitments, not equivalent to funded debt.
- Mortgage-loan repurchase and other guarantees, warranty exposures and ordinary-course litigation create contingent risks. The company had $1.7 million reserved for legal expenses; it said other proceedings were not expected to materially affect results, while noting inherent uncertainty.
- The mortgage repurchase facility, with $33.6 million outstanding, expires October 25, 2021. Management expected to seek an extension but gave no assurance it would be obtained. The company reported compliance with applicable debt covenants at quarter-end.
Key facts for investors to verify
- Whether strong backlog converts to closings at expected prices and margins, given lower active-community counts and construction-cycle delays.
- How labor, materials, land and development costs affect margins, and whether price increases can continue to offset cost inflation.
- Progress on opening replacement communities and replenishing lots as existing communities sell out.
- The adequacy of the stucco reserve and developments in related claims, repairs and possible recoveries.
- Extension of the mortgage repurchase facility, utilization of financial-services credit lines, and continued compliance with debt covenants.
- Use of the new $100 million repurchase authorization and its effect on liquidity and capital allocation.