M/I Homes, Inc. (M) — Q3 2013 Form 10-Q
Business context and period. M/I Homes builds single-family homes across the Midwest, Southern and Mid-Atlantic regions and provides mortgage and title services. This unaudited report covers the quarter and nine months ended September 30, 2013; comparisons are with the same 2012 periods unless noted.
Financial performance and position
- Revenue: Q3 revenue was $275.2 million, up 32%; nine-month revenue was $700.5 million, up 37%. Q3 homebuilding revenue rose with 26% more deliveries and a 7% increase in average delivered-home price. Nine-month deliveries rose 25%, and average price increased 9%.
- Profit: Q3 net income was $125.3 million ($124.1 million to common shareholders), versus $8.3 million. Nine-month net income was $137.2 million ($132.5 million to common shareholders), versus $8.3 million. The 2013 results include a $111.6 million deferred-tax valuation-allowance reversal; excluding that benefit, management said Q3 core profitability was $13.8 million before tax, or $0.47 per diluted share. Q3 diluted EPS was $4.22; nine-month diluted EPS was $4.79.
- Margins and expenses: Q3 total gross margin increased to $54.9 million from $43.1 million; nine-month gross margin rose to $139.4 million from $100.2 million. Q3 operating income was $18.6 million versus $12.5 million. SG&A declined as a share of revenue to 13.2% from 14.7% in Q3 and to 14.2% from 15.8% for nine months. Higher construction costs and $2.1 million of Q3 impairment charges partly offset operating gains.
- Cash flow and investment: Operating cash use was $40.4 million for nine months, compared with $16.3 million used in 2012. Investing activities used $32.9 million, versus $25.9 million provided in 2012. Land purchases and development spending totaled $224.2 million in the first nine months.
- Liquidity and balance sheet: September 30 cash and cash equivalents were $142.5 million, with another $15.8 million restricted. Inventory was $676.3 million, up from $556.8 million at year-end 2012. Shareholders’ equity was $479.6 million. Debt totaled approximately $435.5 million on the reported carrying amounts; net debt was approximately $277.2 million after cash and restricted cash. The company had no borrowings under its $200 million homebuilding revolver and reported $186.1 million of remaining availability.
- Debt and leverage: Debt included $230.0 million of 8.625% senior notes, $57.5 million of 3.25% convertible notes due 2017, and $86.3 million of 3.0% convertible notes due 2018. Net debt to net capital was 37%, versus 39% at December 31, 2012. The company reported compliance with credit-facility covenants.
Material changes versus 2012
- Backlog increased 36% in homes and 46% in aggregate sales value year over year, to 1,607 homes valued at $488.1 million. New contracts rose 15% in Q3 and 28% for nine months.
- Regional homebuilding operating income improved in all three regions for the nine-month period. The Southern region’s revenue growth was especially strong, reflecting more deliveries, higher average prices and expansion in Texas.
- The company issued $86.3 million of 2018 convertible notes, redeemed $50.4 million of preferred shares and issued 2.461 million common shares for $54.6 million net proceeds.
- A new $200 million unsecured revolving credit facility replaced the prior facility; the company recorded a $1.7 million loss on early debt extinguishment.
Outlook, commentary and risks
- Management described a continuing housing recovery but said improvement moderated in Q3 and could slow further because of higher mortgage rates and weaker consumer confidence. It expected year-over-year growth in new contracts and average selling prices to be less than the pace seen earlier in 2013.
- Management estimated 2013 spending of approximately $300 million to $350 million for land purchases and development. It continued to target profitable growth in existing markets, strategic investment in new markets, a strong balance sheet and customer service and product quality.
- Risks include further increases in land, labor and material costs, which may be harder to offset if home-price appreciation moderates; sensitivity of demand to mortgage rates and economic conditions; and uncertainty in inventory and joint-venture valuations. Management’s impairment assumptions anticipate gradual market improvement, and it reported $4.2 million of impairments for the first nine months.
- Contingencies include $91.8 million of completion bonds and standby letters of credit, $340.1 million of land and lot options or contingent purchase agreements, mortgage-loan repurchase and indemnity guarantees, and ordinary-course litigation. Management did not expect the legal matters to have a material overall effect, but noted outcomes could differ from recorded estimates.
- The M/I Financial mortgage repurchase facility was due to expire November 12, 2013; management expected an extension but gave no assurance it could obtain one. The $111.6 million tax benefit depends on expected future use of deferred tax assets; $14.9 million of valuation allowance remained at quarter-end.
Important facts for investors to verify
- How much reported earnings and EPS reflect the one-time deferred-tax valuation-allowance reversal, and whether future taxable income supports realizing the remaining deferred tax assets.
- Whether backlog converts into deliveries and cash at expected prices and margins, particularly as mortgage rates, sales pace and construction costs change.
- Whether increased inventory and land investment generate adequate returns and whether operating cash use improves as deliveries grow.
- Current borrowing availability, covenant headroom and the extension or replacement of the mortgage repurchase facility.
- Potential exposure from land commitments, letters of credit, loan guarantees, litigation and future inventory or joint-venture impairments.