Business Context and Reporting Period
Company: M/I Homes, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2004
Business Overview: The Company operates two primary segments: Homebuilding (development and sale of single-family homes and land) and Financial Services (mortgage origination and title services). Operations are concentrated in Ohio, Indiana, Florida, North Carolina, Virginia, and Maryland.
Key Financial Metrics
| Metric (in thousands) | Three Months Ended June 30, 2004 |
Three Months Ended June 30, 2003 |
Six Months Ended June 30, 2004 |
Six Months Ended June 30, 2003 |
|---|---|---|---|---|
| Total Revenue | $281,197 | $240,904 | $509,861 | $449,616 |
| Net Income | $24,881 | $19,525 | $44,418 | $37,399 |
| Diluted EPS | $1.73 | $1.32 | $3.08 | $2.52 |
| Operating Cash Flow | (Not provided for 3 months) | (Not provided for 3 months) | $(71,035) | $(52,338) |
| Total Assets | $914,233 | $746,872 | $914,233 | $746,872 |
| Total Liabilities | $474,196 | $344,463 | $474,196 | $344,463 |
| Shareholders' Equity | $440,037 | $402,409 | $440,037 | $402,409 |
| Backlog (Units) | 3,130 | 3,044 | 3,130 | 3,044 |
| Backlog Value | $887 million | $760 million | $887 million | $760 million |
Margins (Six Months Ended June 30, 2004):
- Gross Margin: 27.2% (vs. 26.1% in 2003)
- Operating Margin: 15.1% (vs. 14.1% in 2003)
- Effective Tax Rate: 39.5%
Material Changes vs. Prior Period
- Revenue Growth: Total revenue increased 16.7% for the quarter and 13.4% for the six-month period compared to 2003. This was driven by a 21.1% increase in housing revenue due to higher home deliveries (1,097 vs. 961) and a 5.8% increase in average sales price ($255,000 vs. $241,000).
- Land Revenue Decline: Land revenue decreased 40.7% for the quarter and 56.5% for the six-month period, primarily due to the exit from the Phoenix market and reduced lot sales in Charlotte.
- Financial Services Surge: Financial services revenue more than doubled in the quarter ($11.1M vs. $5.6M) due to increased gains on mortgage sales, higher loan volumes, and increased ownership in title operations.
- Inventory Build: Single-family lots and land inventory increased significantly from $366.0 million to $485.1 million, reflecting $170.9 million in land purchases during the period.
- Debt Levels: Notes payable for homebuilding operations increased by $94.0 million to $189.0 million to fund land acquisitions. Average borrowings increased 124% in the quarter.
Guidance, Outlook, and Risks
- Liquidity: Management believes available financing is adequate to support operations through mid-2005. The Company has $104.0 million of unused borrowing availability and an accordion feature for an additional $60 million.
- Market Risks: The Company is highly sensitive to interest rate fluctuations. Higher rates could reduce affordability and demand. The Midwest region specifically faces headwinds from higher mortgage rates and regulatory delays.
- Operational Risks: Risks include material and labor shortages, competitive overbuilding, and dependence on a limited number of markets (Columbus, Ohio accounted for ~39% of operating income in the first half of 2004).
- Accounting Changes: The Company reclassified amortization of capitalized interest from interest expense to land and housing costs, and reclassified loan fee expenses, impacting reported margins and interest expense comparisons.
- Contingencies: The Company has $86.2 million in completion bonds and letters of credit. It also holds guarantees on $313.6 million of mortgage loans and has accrued $3.3 million for various guarantees and indemnities.
Investor Verification Checklist
- Land Inventory Valuation: Verify the carrying value of the $485.1 million land inventory against current market conditions, given the significant increase in holdings.
- Backlog Cancellation Rate: Monitor the 22% cancellation rate for the quarter; high cancellation rates could signal financing difficulties for buyers.
- Debt Covenants: Confirm the status of the waiver obtained on March 31, 2004, regarding the Bank Credit Facility, which was effective until September 30, 2004.
- Revenue Recognition Deferrals: Review the $11.4 million of revenue deferred due to low-down payment loans not yet sold to third parties, which impacts near-term revenue recognition.
- Interest Rate Exposure: Assess the impact of rising interest rates on the $205.9 million of variable rate debt and the $185.1 million of interest rate lock commitments.