Business Context and Reporting Period
Company: M/I Schottenstein Homes, Inc. (M/I)
Filing Type: Form 10-Q (Quarterly Report)
Reporting Period: Quarter and six months ended June 30, 2000
Business Overview: M/I is a homebuilder and financial services provider operating in the Midwest, Florida, and the Mid-Atlantic/Southwest regions. The company engages in the construction of single-family homes, land development, and mortgage banking services.
Key Financial Metrics
| Metric | Six Months Ended June 30, 2000 | Six Months Ended June 30, 1999 |
|---|---|---|
| Total Revenue | $408.6 million | $362.3 million |
| Net Income | $19.6 million | $18.2 million |
| Diluted EPS | $2.39 | $2.04 |
| Operating Cash Flow | $(17.5) million (Used) | $(51.0) million (Used) |
| Homebuilding Gross Margin | 19.3% | 19.5% |
| Total Debt (Notes Payable & Mortgages) | $259.9 million | $202.1 million |
| Cash and Equivalents | $11.9 million | $5.7 million |
| Backlog (Units) | 2,504 | 2,698 |
| Backlog (Value) | $576.0 million | $581.0 million |
Material Changes vs. Prior Period
- Revenue Growth: Total revenue increased 12.8% year-over-year for the six-month period, driven by a 13.2% increase in homebuilding revenue. This was due to a 5.5% increase in homes delivered (1,783 vs. 1,690) and a 6.5% increase in average sales price.
- Profitability: Net income rose 7.5% to $19.6 million. Income before taxes increased 6.2% to $32.0 million.
- Margin Compression: Housing gross margin declined from 20.5% in 1999 to 19.9% in 2000. Management attributed this to increased material costs, higher closing costs due to loan extensions, and deferred gross profit on model homes.
- Backlog Decline: Backlog decreased 7.2% in units and 0.9% in value compared to the prior year, despite higher average sales prices. New contracts dropped 9.8% for the six-month period.
- Debt Expansion: Bank borrowings for homebuilding operations increased by $45.0 million to $177.0 million to fund increased inventory and land development.
- Financial Services: Revenue in this segment decreased 4.3% to $9.5 million, primarily due to lower servicing release premiums from a shift to adjustable-rate mortgages.
Outlook, Risks, and Management Commentary
- Interest Rate Sensitivity: Management notes that six increases in the prime lending rate over the last 12 months have negatively impacted new contracts. Higher rates make mortgage qualification more difficult for buyers.
- Cost Pressures: The company faces shortages in materials (brick, insulation) and labor (framing), which have contributed to margin compression. Management states they have generally been able to pass these costs to buyers.
- Land Strategy: The company is increasing internal land development activities to secure supply, leading to higher inventory levels and borrowing needs.
- Financing Update: M/I has reached an agreement in principle with lenders to increase credit availability, extend loan terms, and add a new lender. Execution is expected in the third quarter.
- Share Repurchases: The company repurchased 519,500 shares of treasury stock during the six-month period at an average price of $14.90.
- Accounting Standards: Management is currently analyzing the impact of SEC Staff Accounting Bulletin No. 101 on revenue recognition.
Investor Verification Checklist
- Backlog Conversion: Verify the ability to convert the current $576 million backlog into revenue given the 7.2% decline in units and rising interest rates.
- Margin Sustainability: Monitor if the 19.9% housing gross margin can be maintained or improved amidst ongoing material and labor shortages.
- Debt Covenants: Review the terms of the new bank loan agreement expected in Q3 to ensure it provides sufficient liquidity for continued land development.
- Regional Exposure: Assess the impact of local economic conditions, particularly in Columbus, Ohio, which accounted for approximately 40% of housing revenue.
- Interest Rate Hedging: Confirm the effectiveness of the $75 million interest rate swap arrangement in mitigating rising borrowing costs.