M/I Homes, Inc. (NYSE: MHO) — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2019; unaudited. M/I Homes builds single-family homes across Northern and Southern U.S. markets and operates mortgage and title services. Comparisons are with the corresponding 2018 periods unless stated otherwise.
Financial and operating performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $653.3 million | $567.8 million | $1,758.1 million | $1,563.8 million |
| Income before taxes | $50.1 million | $39.5 million | $114.7 million | $96.9 million |
| Net income | $37.8 million | $29.3 million | $85.8 million | $75.3 million |
| Diluted EPS | $1.32 | $1.01 | $3.04 | $2.56 |
| Housing gross margin | 19.1% | 18.7% | 18.1% | 18.1% |
- Revenue and earnings: Q3 revenue rose 15%, pretax income 27%, and net income 29%. Nine-month revenue rose 12%, pretax income 18%, and net income 14%.
- Homebuilding activity: Q3 new contracts rose 32% to 1,721 and deliveries rose 16% to 1,651. For nine months, contracts rose 9% to 5,096 and deliveries rose 11% to 4,375. Q3 average delivered-home price was $382,000 versus $390,000; nine-month average was $388,000 versus $384,000.
- Backlog and capacity: At September 30, backlog was 2,915 homes valued at $1.137 billion, compared with 2,846 homes valued at $1.140 billion a year earlier. Active communities reached 221, up from 212.
- Margins and expenses: Q3 housing gross margin improved 40 basis points; nine-month margin was unchanged. Adjusted nine-month housing gross margin was 18.1% versus 18.4%, with management citing product mix and higher lot costs. SG&A declined as a share of revenue to 12.2% in Q3 and 12.3% year to date.
- Cash flow: Operating activities generated $1.0 million in the first nine months, versus $75.1 million used in 2018. Investing activities used $25.7 million, versus $120.3 million, largely reflecting the prior-year Detroit acquisition. Financing activities provided $36.7 million. Cash, cash equivalents and restricted cash were $33.5 million at quarter-end, including $33.0 million of unrestricted cash.
- Balance sheet and debt: Total assets were $2.182 billion and shareholders’ equity was $954.6 million. The balance sheet reported $189.9 million of homebuilding bank borrowings, $108.6 million of financial-services borrowings, and senior notes with $300 million and $250 million principal due in 2021 and 2025, respectively. Homebuilding debt to capital was 44%, unchanged from year-end 2018.
- Liquidity: The $500 million homebuilding revolver had $189.9 million drawn and $65.6 million of letters of credit outstanding, leaving $244.5 million available. Financial-services facilities had $17.7 million of stated availability. The company reported compliance with applicable debt covenants.
Material changes and management commentary
- Management attributed record quarterly and nine-month results to higher deliveries, improved overhead leverage and favorable housing conditions, including low mortgage rates, employment growth and limited resale-home supply.
- Financial-services revenue was $13.5 million in Q3, up 10%, with record quarterly loan originations of 1,243. Nine-month segment operating income declined to $19.9 million from $21.2 million, amid lower loan-sale margins early in the year and higher expenses.
- The company decided to wind down Washington, D.C. operations, expecting substantial completion by year-end 2019. It recorded employee-related costs associated with the wind-down.
- M/I Homes expected 2019 land purchases and development spending of approximately $575–$600 million, including $443.9 million spent in the first nine months. It expected fourth-quarter cash generated from deliveries and operations to exceed cash outlays, while continuing to use its revolver; estimated peak fourth-quarter revolver borrowings were not expected to exceed $275 million.
- No specific full-year revenue, earnings or EPS guidance was provided. Management cautioned that favorable trends may not continue and said it would adjust land spending to market conditions and sales and delivery pace.
Risks, contingencies and unusual items
- Stucco claims: Florida homeowner claims and legal proceedings remain under review. The warranty reserve included $5.0 million for identified and estimated future stucco repairs; management said the estimate could change materially as information develops. No additional stucco charges or recoveries were recorded in the first nine months.
- Land commitments and guarantees: Options and contingent agreements covered land and developed lots with an aggregate purchase price of approximately $570.2 million. Outstanding completion bonds and standby letters of credit totaled approximately $248.8 million. These amounts are commitments, not equivalent to funded debt.
- Other legal matters: The company recorded $0.5 million for anticipated costs of other legal proceedings; actual resolution costs could differ and affect earnings.
- Market and execution risks: Management identified rising land, labor and material costs, affordability, interest-rate movements, mortgage availability, home-price changes and community/product mix as factors that may affect demand and margins.
- Debt and accounting: The $300 million 6.75% senior notes mature in January 2021. Adoption of lease accounting added $19.1 million of operating lease assets and liabilities at September 30, 2019. The company also reported approximately $25 million of leases not yet commenced, primarily related to a new headquarters lease expected to begin in 2020.
- Unusual comparison items: 2018 results included Pinnacle Homes acquisition-related and integration costs; 2019 had smaller acquisition-related charges. The 2018 nine-month tax rate also benefited from a $3.0 million nonrecurring tax credit benefit.
Investor facts to verify
- Whether order growth, backlog conversion and active-community expansion continued after quarter-end, and how backlog pricing and cancellations developed.
- Whether projected 2019 land spending and fourth-quarter revolver borrowing stayed within management’s estimates, and the company’s subsequent liquidity and debt-maturity plans.
- Whether housing gross margins held up amid higher lot, labor and material costs and changes in regional and product mix.
- Whether the $5.0 million stucco reserve and other legal accruals adequately reflect eventual repair and settlement costs.
- Whether the Washington, D.C. wind-down and the planned headquarters lease create additional costs or affect operations.