M/I Homes, Inc. — Q1 2012 Form 10-Q
Business context and period. The homebuilder and mortgage/title services provider reported the three months ended March 31, 2012, compared with Q1 2011. Interim results are unaudited and may not indicate full-year performance.
Financial performance and position
| Metric | Q1 2012 | Q1 2011 / prior date |
|---|---|---|
| Revenue | $131.1 million | $110.6 million |
| Net loss | $3.2 million; $0.17 per diluted share | $17.0 million; $0.92 per diluted share |
| Loss before income taxes | $4.4 million | $17.0 million |
| Operating cash flow | Used $7.7 million | Provided $2.6 million |
| Cash and cash equivalents | $67.0 million | $59.8 million at Dec. 31, 2011 |
| Cash, equivalents and restricted cash | $80.7 million | $101.1 million at Dec. 31, 2011 |
| Total liabilities | $386.7 million | $391.1 million at Dec. 31, 2011 |
| Inventory | $490.1 million | $466.8 million at Dec. 31, 2011 |
Revenue rose 19%, with 507 homes delivered versus 439 and average selling price increasing to $249,000 from $243,000. Adjusted operating gross margin was 18.1%, compared with 16.3%; management’s adjusted pre-tax operating loss was $4.2 million versus $5.8 million. These are non-GAAP measures. Interest expense was $4.6 million, up from $4.0 million.
At March 31, debt included $239.1 million of senior notes, $41.6 million under the mortgage warehouse facility, and $5.9 million of other notes payable. The $41.4 million 6.875% senior notes due 2012 were repaid at maturity on April 2, 2012. The company reported a 43% net-debt-to-net-capital ratio, versus 42% at year-end.
Changes and operating trends
- Net loss narrowed substantially year over year, driven by higher deliveries and much lower impairment and land write-off charges: $0.1 million versus $11.1 million.
- New contracts increased 17% to 764; backlog rose 25% to 933 homes, with aggregate backlog value up 33% to $251.4 million. The cancellation rate declined to 14.4% from 16.3%.
- Homebuilding operating income improved to $2.6 million from a $9.5 million loss. Financial services revenue rose 34% to $4.3 million; its income before tax was $2.1 million.
- Operating cash use increased from the prior-year period, principally reflecting a $24.6 million inventory increase and higher land and development spending. Investing cash inflow mainly reflected $27.7 million of restricted cash released following a credit-facility amendment.
Outlook, liquidity, risks and unusual items
- Management described housing conditions as stabilizing and beginning to recover, but expected an uneven, gradual recovery. It cited improving traffic, contracts, deliveries and backlog, while noting foreclosure activity and weak job growth as risks.
- Management estimated 2012 land purchases and development spending of approximately $140 million to $180 million, subject to market conditions and transaction timing. It said available cash, borrowing capacity, closings and other liquidity sources should fund anticipated needs for at least 12 months.
- The amended $140 million secured revolving facility matures December 31, 2014. At quarter-end it had no borrowings and $48.5 million net availability after letters of credit. The company was in compliance with financial covenants, but interest coverage and adjusted cash flow ratios were below specified thresholds; it relied on the permitted $25 million cash pledge and/or borrowing availability requirement.
- The mortgage warehouse facility was increased to $70 million and extended to March 30, 2013; $41.6 million was drawn at quarter-end. The 2018 senior notes carry an 8.625% coupon and $200 million principal.
- A $141.9 million deferred-tax valuation allowance reflected cumulative losses; the company said it did not expect additional tax benefits in 2012 because its carryback had been exhausted. Dividends and share repurchases were restricted by negative indenture baskets.
- Defective-drywall matters remained a contingency. The company had identified 93 affected Florida homes, accrued $0.9 million for remaining repairs, and said it could not estimate a loss range for remaining litigation. It also had $63.9 million of completion bonds and standby letters of credit and $151.4 million of land and lot options/contingent purchase agreements.
- In April 2012, the company acquired assets of Houston builder Triumph Homes. Management also cited seasonality, interest-rate exposure, construction-cost uncertainty and the possibility of further inventory impairment.
Most important facts for investors to verify
- Whether sales, deliveries, backlog and margins continued to improve after the quarter, particularly across individual regions.
- Post-repayment liquidity, borrowing availability, covenant compliance and the effect of planned land spending and the Triumph acquisition.
- Whether operating cash flow improves as inventory investment grows and homes close.
- Potential changes to the deferred-tax valuation allowance, impairment assumptions and related charges.
- Resolution and potential costs of defective-drywall claims, warranty obligations and other contingencies.