MHO

Business Context and Reporting Period

Company: M/I Homes, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 2007
Business Overview: M/I Homes is a leading single-family homebuilder operating in the Midwest, Florida, and Mid-Atlantic regions, alongside financial services operations (M/I Financial) providing mortgage and title services.

Key Financial Metrics

Note: Debt figures include Notes payable banks (homebuilding and financial services) and Senior notes net of discount. Cash and cash equivalents (including escrow) totaled $21,276 thousand as of March 31, 2007.

Material Changes vs. Prior Period

• Revenue Decline: Total revenue decreased 13.4% ($34.6 million) year-over-year, driven primarily by a 15% decrease in homes delivered (704 units in 2007 vs. 832 in 2006).
• Profitability Drop: Net income plummeted 86% to $2.2 million. Income before taxes fell 86% to $3.6 million due to reduced housing revenue and increased general and administrative expenses.
• Segment Performance:
  • Midwest: Revenue down 27%; operating loss of $0.4 million compared to $5.3 million profit in 2006.
  • Florida: Revenue down 23%; operating income down 49% to $12.4 million.
  • Mid-Atlantic: Revenue up 54% to $61.0 million due to a 69% increase in homes delivered, though average sales price declined.
• Backlog Reduction: Total backlog dropped 43% to 1,761 homes (valued at $589 million) from 3,112 homes ($1.076 billion) in Q1 2006.
• Capital Structure: Issued $100 million in 9.75% Series A Preferred Shares (net proceeds $96.3 million) to repay $154.7 million of revolving credit facility debt.

Outlook, Risks, and Management Commentary

• Market Conditions: Management cites industry-wide softening, over-supply of inventory, and significant competitor discounting. Demand is weaker, particularly in the Midwest and Florida.
• Guidance: Estimated 2007 home deliveries at approximately 3,000 units. Land purchases for 2007 are projected at $25 million, reflecting a defensive strategy to reduce inventory levels.
• Financial Services Pressure: Mortgage capture rate declined to 73% (from 76% in 2006) due to lower refinance volume and increased competition, expected to continue pressuring margins.
• Impairment Risks: Recorded $1.1 million in inventory impairment charges and $1.1 million in abandoned land write-offs. Management warns that further deterioration in market conditions could necessitate additional valuation adjustments.
• Liquidity: Generated $53.2 million in operating cash flow, a reversal from the $97.4 million used in Q1 2006, largely due to reduced inventory investment and escrow cash collections.
• Risk Factors: Key risks include cyclical industry downturns, interest rate fluctuations, land inventory impairment, and tighter lending standards in the sub-prime and alternative mortgage markets.

Investor Verification Checklist

• Inventory Valuation: Verify the assumptions used for the $1.1 million impairment charge and assess the risk of further write-downs given the 43% backlog decline.
• Debt Covenants: Confirm compliance with the interest coverage covenant (minimum 2x EBITDA to interest) under the $650 million credit facility, especially given the sharp drop in earnings.
• Preferred Share Impact: Review the dividend obligations on the new $100 million Preferred Shares (9.75% yield) and their impact on future net income available to common shareholders.
• Regional Exposure: Analyze the specific market dynamics in Florida and the Midwest, where revenue and operating income declined most significantly.
• Land Option Agreements: Review the $9.9 million exposure in land option deposits and the potential for write-offs if purchase agreements are not exercised.