M/I Homes, Inc. — Q2 2011 Form 10-Q
Business context and reporting period. M/I Homes builds and sells single-family homes across the Midwest, South and Mid-Atlantic, and provides mortgage and title services. This unaudited report covers the quarter and six months ended June 30, 2011; comparisons are with the corresponding 2010 periods.
Financial and operating performance
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Revenue | $137.4 million | $196.4 million | $248.0 million | $315.8 million |
| Net loss | $9.1 million | $4.8 million | $26.2 million | $13.1 million |
| Loss per share, basic and diluted | $0.49 | $0.26 | $1.40 | $0.71 |
| GAAP gross margin dollars | $18.0 million | $25.0 million | $25.1 million | $42.0 million |
| Adjusted operating gross margin | 17.0% | 16.0% | 16.7% | 16.5% |
| Interest expense | $3.5 million | $2.1 million | $7.5 million | $4.2 million |
| Cash used in operating activities | Not stated for quarter | $8.5 million | $18.0 million |
Adjusted operating gross margin is a company-defined non-GAAP measure excluding specified impairment and other charges; it should not be viewed as a substitute for GAAP results.
- Q2 home deliveries fell 25% to 590; average selling price declined to $227,000 from $243,000. First-half deliveries fell 19% to 1,029; average price was $234,000 versus $243,000.
- Net new contracts rose 5% in Q2 to 635 but declined 6% for the first half to 1,289. Cancellation rates were 19.6% and 18.0%, respectively, versus 16.2% and 17.0% a year earlier. Backlog grew 11% year over year to 833 homes, valued at approximately $214.0 million.
- Inventory impairment and unconsolidated LLC impairment charges were $5.4 million in Q2 and $16.3 million in the first half, compared with $6.3 million and $9.4 million in 2010. Including abandoned land transaction write-offs, first-half charges totaled $16.6 million.
- At June 30, assets were $653.3 million, liabilities $373.3 million and shareholders’ equity $280.0 million. Unrestricted cash was $44.9 million; restricted cash was $68.9 million, including $25 million pledged to the revolving credit facility and cash collateral for letters of credit. Total cash including restricted cash was $113.8 million.
- Debt included $41.4 million principal of 6.875% senior notes due April 2012, $200 million principal of 8.625% senior notes due 2018, $32.1 million in financial-services bank borrowings and $5.8 million of other notes. The filing reports a 37% net-debt-to-net-capital ratio, up from 34% at year-end 2010.
- The company had $21.0 million of availability under its homebuilding revolving facility and $162,000 under its mortgage warehouse facility. It reported compliance with facility covenants at quarter-end, but had failed the interest-coverage and adjusted-cash-flow tests during the first half and pledged $25 million cash as the permitted alternative. The $2012 notes maturity remains a significant near-term funding requirement.
Changes, outlook and risks
- Revenue and deliveries contracted substantially, while net losses widened year over year. Management attributed weak comparisons partly to elevated 2010 demand before expiration of the federal homebuyer tax credit, cautious consumers and tighter lending standards.
- Management cited improving adjusted gross margin, an 11% increase in backlog units and a 15% reduction in first-half selling, general and administrative expenses as positive indicators. It also emphasized that a sustained housing recovery remains difficult to predict.
- The company acquired the assets of San Antonio builder TriStone Homes in April 2011. It opened 26 communities and closed 21 older communities in the first half. Management said newer communities generate materially higher gross margins than legacy communities.
- Management estimated 2011 land purchases and development spending of $125 million to $150 million, subject to market conditions. It believed available liquidity could fund anticipated needs and repay the 2012 notes, but noted financing replacement or additional financing is not assured.
- After adding a $10.3 million valuation allowance in the first half, the deferred-tax valuation allowance totaled $138.2 million. The company said it did not expect additional tax benefits in 2011 beyond a limited carryback.
- About 90 Florida homes were identified with defective imported drywall. The remaining repair accrual was $1.3 million. Related litigation continued; the company recorded no additional litigation accrual because it could not determine the likelihood or range of any further loss.
- Other risks include further inventory impairments if local pricing, sales pace or costs worsen; homebuyer financing and interest-rate conditions; land and construction costs; mortgage-loan repurchase and indemnity obligations; and acquisition integration. A $2.4 million drywall settlement had been received in 2010, and the company was pursuing further reimbursement.
Important facts for investors to verify
- Progress toward repayment or refinancing of the $41.4 million 2012 senior notes, and the availability and conditions of revolving-credit borrowing.
- Whether the $25 million cash pledge remains necessary and how much cash is genuinely available for operations after collateral and other restrictions.
- Backlog conversion, cancellations, selling prices and incentives, and whether newer communities’ margins offset ongoing weakness in legacy communities.
- Future inventory and unconsolidated-investment impairments, and the assumptions underlying management’s projected market recovery.
- Potential additional drywall-related costs or litigation exposure, mortgage guarantees, and changes to the deferred-tax valuation allowance.