M/I Homes, Inc. (NYSE: MHO) — FY 2014 Form 10-K
Reporting period: Year ended December 31, 2014. The filing is an annual report; fourth-quarter data are included where relevant. M/I Homes builds and sells homes across 13 markets in eight states, with mortgage and title services supporting home sales.
Business context and operating results
Homebuilding generated 98% of 2014 revenue. The company delivered 3,721 homes, up 7%, at an average price of $313,000, up 9%. Year-end backlog was 1,222 homes valued at $425.2 million; units fell 5% while backlog value rose 4% year over year. New contracts declined 3%, and ending communities fell from 157 to 150. Management cited delayed community openings, reduced affordability in some markets, and uneven demand.
Key financial metrics
| Metric | FY 2014 | FY 2013 |
|---|---|---|
| Revenue | $1,215.2 million | $1,036.8 million |
| Gross margin | $252.7 million; 20.8% of revenue | $206.5 million; 19.9% of revenue |
| Operating income | $82.8 million | $58.7 million |
| Income before taxes | $69.7 million | $41.3 million |
| Net income | $50.8 million | $151.4 million |
| Net income to common shareholders / diluted EPS | $45.9 million / $1.65 | $145.6 million / $5.24 |
| Cash used in operating activities | $132.7 million | $74.0 million |
| Cash and cash equivalents at year-end | $15.5 million | $128.7 million |
| Shareholders’ equity at year-end | $544.3 million | $492.8 million |
Fourth-quarter 2014 revenue was $368.0 million, gross margin $73.8 million, net income to common shareholders $9.8 million and diluted EPS $0.36. In fourth-quarter 2013, the corresponding figures were $336.3 million, $67.0 million, $13.0 million and $0.48.
At year-end, inventory was $918.6 million, up from $690.9 million. Unrestricted cash was $15.5 million; restricted cash was $7.0 million. The company reported $30.0 million drawn on its homebuilding credit facility and $242.8 million available. Financial-services borrowings were $85.4 million. Debt also included $230.0 million principal of 8.625% senior notes due 2018, $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 rose to 47% from 39%.
Changes versus the prior year and unusual items
- Revenue increased 17%, primarily from 249 additional deliveries and higher average selling prices. Gross margin improved by 90 basis points; SG&A declined to 14.0% of revenue from 14.3%.
- Pre-tax income increased to $69.7 million from $41.3 million, but net income fell sharply because 2013 included a $112.8 million income-tax benefit from reversing most of the deferred-tax-asset valuation allowance. The 2014 tax benefit from reversing the remaining state valuation allowance was $9.3 million. Management described 2014 core net income as $41.5 million, or $1.34 per diluted share.
- 2014 included $3.5 million of pre-tax inventory and joint-venture impairment charges, versus $5.8 million in 2013. 2013 also included a $1.7 million debt-extinguishment loss and a $2.2 million preferred-share redemption adjustment.
- Operating cash outflow widened as the company invested more in land and homes under construction. Inventory increased by $209.3 million in the cash-flow reconciliation.
Outlook, risks and contingencies
Management expected modest housing-market improvement in 2015, supported by low interest rates, improving employment and consumer confidence, and anticipated mortgage availability. It planned to open more than 65 communities in 2015, targeting a 15% increase in year-end community count, and forecast $400–$450 million of land purchases and development spending. Management also expected to use the revolving credit facility, with a projected peak balance of approximately $150 million, and estimated a 2015 effective tax rate near 38.5%, barring changes in tax status. These are forward-looking estimates, not guarantees.
- The $110 million mortgage warehousing agreement was due to expire March 27, 2015. Management expected an extension but could not assure renewal.
- Key exposures include housing demand and mortgage-credit conditions, affordability and interest rates, land values and inventory impairment, construction labor and material costs, regulatory or permitting delays, severe weather, warranty and construction-defect claims, and mortgage-loan repurchase or indemnity claims.
- Outstanding completion bonds and standby letters of credit totaled approximately $121.9 million. Contingent land and lot purchase agreements had an aggregate purchase price of approximately $452.7 million; purchases were subject to specified conditions.
- Routine legal claims were described as incidental to the business. Management believed their resolution would not have a material overall effect, while noting outcomes and costs remain uncertain.
- The company reported compliance with its credit-facility covenants at year-end. Its $230 million senior notes carry an 8.625% coupon, and preferred shares carry a 9.75% dividend rate. No common dividends were paid in 2014.
Important facts for investors to verify
- Whether community openings, contracts, backlog units and absorption improve as management expected, particularly in the Mid-Atlantic and newer Texas markets.
- Whether higher home prices and delivery volumes can continue to offset rising construction and land costs without weakening affordability or margins.
- How inventory growth and planned land spending affect operating cash flow, available liquidity, and peak revolver borrowings.
- Renewal or replacement of the mortgage warehousing agreement before its March 2015 expiration, and any effect on mortgage operations or home closings.
- The sustainability of earnings excluding deferred-tax valuation-allowance reversals, and the realization of the $94.4 million net deferred tax asset and tax-loss carryforwards.
- Changes in warranty reserves, impairment charges, legal exposures, mortgage-loan guarantees, and contingent land commitments.