Business Context and Reporting Period
Company: M/I Schottenstein Homes, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2001
Business Overview: The Company operates in two primary segments: Homebuilding (construction and sale of single-family homes and land) and Financial Services (mortgage banking and related services). Operations are concentrated in markets including Ohio, Indiana, Florida, North Carolina, Virginia, Maryland, and Arizona.
Key Financial Metrics
| Metric (in thousands) | 3 Months Ended June 30, 2001 |
6 Months Ended June 30, 2001 |
6 Months Ended June 30, 2000 |
|---|---|---|---|
| Total Revenue | $222,377 | $400,532 | $408,584 |
| Net Income | $13,261 | $25,505 | $19,611 |
| Diluted EPS | $1.69 | $3.27 | $2.39 |
| Operating Cash Flow | (Not provided for 3 months) | $(21,095) | $(13,355) |
| Total Debt (Notes Payable & Mortgages) | $182,402 | $182,402 | $159,219 |
| Cash and Equivalents | $9,440 | $9,440 | $10,265 |
| Homebuilding Gross Margin | 21.2% | 21.0% | 19.3% |
Note: Total Debt includes Notes payable banks ($146,000), Note payable bank - financial services ($22,850), and Mortgage notes payable ($13,552). Cash includes Cash ($7,590) and Cash held in escrow ($1,850).
Material Changes vs. Prior Period
- Revenue: Total revenue decreased 5.3% for the three months and 2.0% for the six months ended June 30, 2001, compared to the prior year. This was driven by a decline in housing revenue due to fewer homes delivered (down 60 units in Q2, 26 units in YTD) and lower average sales prices.
- Profitability: Despite lower revenue, Income Before Taxes increased 15.7% (Q2) and 15.5% (YTD). This was primarily due to improved homebuilding gross margins (up to 22.1% in Q2 from 19.9% in 2000) and increased financial services income.
- Backlog: The homebuilding backlog increased significantly to 2,944 units (valued at $693 million) at June 30, 2001, a 17.6% increase in units and 20.3% in value compared to the prior year quarter.
- Accounting Change: Net income for the six months ended June 30, 2001, includes a one-time cumulative effect of a change in accounting principle (SFAS No. 133) of $2.7 million (net of tax), related to the fair value recognition of derivative instruments.
Guidance, Outlook, and Risks
- Outlook: Management attributes the increase in new contracts (up 18.2% in Q2 and 21.4% YTD) to lower interest rates. Future contract volume is expected to depend on economic conditions, land development timing, and consumer confidence.
- Liquidity: The Company has $141 million of unused borrowing availability under credit facilities totaling $310 million. Cash flow from operations was negative ($21.1 million used YTD) due to significant inventory build-up ($55.3 million increase) to support future deliveries.
- Risks:
- Interest Rates: The business is highly sensitive to interest rate fluctuations, which affect both customer affordability and the Company's variable-rate borrowing costs.
- Land Position: The Company risks significant capital to maintain land positions; it holds options and contingent contracts to acquire land valued at approximately $166 million.
- Market Concentration: A significant portion of revenue is derived from the Columbus market.
Investor Verification Checklist
- Inventory Turnover: Verify the ability to convert the $500 million+ inventory (lots and houses under construction) into revenue given the negative operating cash flow.
- Backlog Cancellation Rate: Monitor the cancellation rate of the $693 million backlog; historical rates range from 11% to 13%.
- Debt Covenants: Review the terms of the $280 million Bank Credit Facility and the $30 million M/I Financial loan agreement for compliance with borrowing base limitations.
- Derivative Exposure: Assess the impact of fair value changes on loan commitments and forward sales of mortgage-backed securities under SFAS 133.
- Land Options: Evaluate the financial impact of the $166 million in land purchase options and contingent contracts.