M/I Homes, Inc. (NYSE: MHO) — FY 2015 Form 10-K
Reporting period: Fiscal year ended December 31, 2015. The filing also reports fourth-quarter results; it is an annual report, not a standalone quarterly filing.
Business context
M/I Homes builds and sells single-family homes and townhomes across the Midwest, Southern and Mid-Atlantic regions, with mortgage and title services supporting home sales. Homebuilding generated 97% of 2015 revenue. The company operated in 14 markets across nine states and ended the year with 175 active communities. It acquired a Minneapolis/St. Paul homebuilder in December 2015.
Financial and operating results
- FY revenue: $1.418 billion, up 17% from $1.215 billion in 2014. Homebuilding revenue included $1.342 billion from home deliveries and $40.3 million from land sales; financial services revenue was $36.0 million.
- Profitability: Gross margin was $300.1 million, or 21.2% of revenue, up 40 basis points. Operating income was $111.8 million versus $82.8 million; pretax income was $86.9 million versus $69.7 million.
- Net income and EPS: Net income was $51.8 million; net income attributable to common shareholders was $46.9 million, or $1.68 diluted EPS, compared with $45.9 million and $1.65 in 2014.
- Fourth quarter: Revenue was $468.9 million versus $368.0 million in Q4 2014. Net income to common shareholders was $12.1 million versus $9.8 million; diluted EPS was $0.43 versus $0.36.
- Demand and backlog: Deliveries increased 4% to 3,883 homes, and net new contracts rose 12% to 4,093. Average delivered price reached $346,000. Year-end backlog increased 25% to 1,531 homes, with an aggregate value of $569.4 million, up 34%.
- Cash flow and liquidity: Operating cash flow was negative $82.2 million, versus negative $132.7 million in 2014; investing cash flow was negative $37.6 million and financing cash flow was positive $114.5 million. Year-end unrestricted cash was $10.2 million, with $2.9 million restricted cash and $316.4 million available under the homebuilding credit facility.
- Debt and leverage: Reported debt carrying amounts totaled approximately $611.8 million, including $123.6 million of financial-services borrowings largely used to fund mortgage loans. The company separately reported approximately $488.2 million of indebtedness excluding financial-services borrowings and specified other items. Net debt to net capital was 50%, up from 47%.
- Assets: Inventory increased to $1.112 billion from $918.6 million; total assets were $1.416 billion and shareholders’ equity was $596.6 million.
Material changes versus 2014
- Revenue growth reflected higher average selling prices, 162 additional home deliveries, more land-sale revenue and higher financial-services revenue. Gross margin improved, and SG&A declined to 13.3% of revenue from 14.0%.
- Common-shareholder earnings rose modestly despite higher pretax income. The 2014 comparison included a $9.3 million tax benefit from reversal of a state deferred-tax valuation allowance; that benefit did not recur in 2015.
- Interest expense increased to $17.5 million from $13.4 million, primarily as average borrowings rose. The company recorded a $7.8 million loss on early debt extinguishment.
- Cash used in operations decreased year over year, but remained negative as the company expanded investment in land, development and homebuilding inventory.
Outlook, risks and unusual items
- Management expected modest U.S. housing-market improvement in 2016, while cautioning that favorable trends were not assured. It forecast average community count growth of 5%–10% and approximately $425 million–$475 million in land purchases and development spending.
- Management expected to continue using the revolving credit facility; estimated peak homebuilding borrowings were below $200 million. It believed available cash, operating receipts and credit facilities would cover anticipated needs for at least 12 months.
- The $110 million mortgage warehousing agreement was due to expire June 24, 2016. Management expected an extension but could not assure renewal. The company was in compliance with its credit-facility covenants at year-end.
- Key exposures include housing-market and interest-rate changes, mortgage availability and regulation, land and inventory valuation, labor and material shortages, construction and warranty claims, severe weather, and Houston-area weakness associated with declining oil prices. The company cited modest labor and construction delays during 2015.
- Unusual items included the $7.8 million debt-extinguishment loss and $3.6 million of inventory and joint-venture impairment charges. The company issued $300 million of 6.75% senior notes due 2021 and used proceeds in part to redeem $230 million of 8.625% senior notes due 2018.
- Routine legal matters were not expected by management to have a material effect, though outcomes could differ from recorded estimates. Deloitte issued unqualified opinions on the financial statements and internal control over financial reporting.
Important facts for investors to verify
- Whether 2016 sales, pricing, backlog conversion and community growth support management’s outlook, particularly in Texas and the newly entered Minnesota market.
- Renewal or replacement of the mortgage warehouse facility before its June 2016 maturity, and the availability and cost of other financing.
- Cash needs for the planned land and development program, operating cash flow, and covenant headroom as borrowings rise.
- Whether higher labor, materials and lot costs can continue to be offset by selling prices without weakening margins or demand.
- Potential dilution from convertible notes due 2017 and 2018, and the impact of debt covenants and preferred dividends on capital allocation.
- Changes in inventory impairment assumptions, warranty and self-insurance reserves, and contingencies related to land commitments, legal claims and mortgage-sale representations.