M/I Homes, Inc. (NYSE: MHO) — Q2 2022 Form 10-Q
Reporting period: Three and six months ended June 30, 2022; comparisons are with the corresponding 2021 periods. M/I Homes builds single-family homes across Northern and Southern U.S. markets and operates mortgage and title services. Amounts below are in U.S. dollars unless stated otherwise.
Financial performance and position
| Metric | Q2 2022 | Q2 2021 | First half 2022 | First half 2021 |
|---|---|---|---|---|
| Revenue | $1,040.7 million | $961.0 million | $1,901.5 million | $1,789.8 million |
| Income before taxes | $182.2 million | $141.3 million | $304.4 million | $251.6 million |
| Net income | $136.8 million | $107.6 million | $228.7 million | $192.5 million |
| Diluted EPS | $4.79 | $3.58 | $7.93 | $6.43 |
| Operating cash flow | — | $78.5 million | $173.8 million |
- Margins: Housing gross margin was 26.0% in Q2 versus 22.8% a year earlier, and 24.4% in the first half versus 22.3%. Management attributed the improvement primarily to higher delivered home prices. Consolidated gross margin was $284.3 million in Q2 and $497.4 million year to date.
- Cash and liquidity: Cash, cash equivalents and restricted cash were $188.8 million at June 30, including $187.5 million unrestricted. The homebuilding revolver had no borrowings, $105.7 million of letters of credit and $444.3 million of remaining availability. The financial-services facilities had $194.6 million outstanding and $2.0 million available under the stated borrowing-base calculation.
- Debt: Aggregate notes payable principal was $894.6 million, including $700 million of senior notes due 2028 and 2030 and $194.6 million of financial-services borrowings. Homebuilding debt to capital was 28%, down from 30% at year-end 2021. The company reported compliance with applicable credit-facility and senior-note covenants.
- Balance sheet: Total assets were $3.49 billion, inventory $2.82 billion, total liabilities $1.68 billion and shareholders’ equity $1.82 billion at June 30, 2022.
Material changes versus the prior comparable period
- Q2 revenue rose 8%, pretax income 29%, and net income 27%; first-half revenue rose 6%, pretax income 21%, and net income 19%. Management described quarterly and first-half revenue and net income as records.
- Home deliveries fell 6% in Q2 to 2,133 and 8% in the first half to 3,956. Higher average selling prices—up 16% in both periods—more than offset lower deliveries for housing revenue.
- Net new contracts declined 20% in Q2 and 19% in the first half. The quarter-end backlog was 5,213 homes valued at $2.71 billion: value increased 9%, while units declined 5% year over year. The cancellation rate increased to 11.2% from 7.0% in Q2 2021.
- Financial-services revenue fell 32% in Q2 and 25% in the first half, reflecting fewer loan originations and lower margins on loans sold. First-half operating cash flow fell to $78.5 million, principally reflecting a $336.5 million inventory increase, despite higher net income.
- Cash declined $47.6 million during the first half. Financing activities used $114.7 million, including $71.6 million of net repayments on financial-services borrowings and $40.2 million of share repurchases. The company repurchased 860,000 shares during the half; $108.2 million remained authorized.
Outlook, risks and contingencies
- Management said demand moderated late in Q2 amid inflation, sharply higher mortgage rates, home-price appreciation and market uncertainty. It cautioned that traffic and contracts may decline in the second half of 2022. The company introduced mortgage buydowns and rate locks and reduced sales restrictions in some communities.
- Management expected to open a record number of communities in 2022 and grow the year-end count by approximately 15% to about 200. It did not provide a 2022 land-spending estimate, citing market conditions and development delays. It stated that the company was positioned for another year of strong results, while noting uncertainty.
- Supply-chain, labor and transportation constraints had extended construction cycles and delayed closings. Management said cycle-time growth had moderated versus Q1 but expected challenges to continue. Inflation and higher financing costs may pressure affordability, demand and margins; the filing also identifies land, labor, materials, competition and regulatory conditions as risks.
- At quarter-end, the company controlled approximately 47,800 lots, described as nearly six years of supply based on recent deliveries, and had about $1.1 billion of land and developed-lot options or contingent purchase agreements. Outstanding completion bonds and standby letters of credit totaled approximately $426 million.
- Warranty reserves included $2.3 million for Florida stucco-related repairs. Related homeowner claims and litigation remain subject to estimation uncertainty; other legal proceedings were described as incidental, with $0.7 million reserved for legal expenses. The company reported no inventory or joint-venture impairment charges in the periods presented.
- The M/I Financial mortgage repurchase facility, with $67.0 million outstanding, was due to expire October 24, 2022. Management expected to extend it but gave no assurance. The filing also reports a $8.7 million Q2 loss on mortgage-related derivative instruments, versus a $1.4 million gain in Q2 2021; derivative fair-value movements can affect reported earnings.
Important facts for investors to verify
- Whether new contracts, cancellations, pricing and backlog conversion hold up as mortgage rates and affordability change.
- Whether higher housing gross margins can be sustained after accounting for construction costs, incentives and any future price adjustments.
- Whether supply-chain and community-opening progress supports delivery growth and the stated goal of approximately 200 communities by year-end.
- Liquidity, land commitments and covenant capacity, including the extension or replacement of the October 2022 mortgage repurchase facility.
- Future warranty and stucco repair costs, legal outcomes, and any inventory or joint-venture impairment indicators.