Business Context and Reporting Period
Company: M/I Homes, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2008
Business Overview: M/I Homes is a single-family homebuilder operating in the Midwest, Florida, and Mid-Atlantic regions, alongside a financial services segment (M/I Financial) providing mortgage and title services. The company is currently navigating a significant downturn in the homebuilding industry, characterized by declining demand, increased inventory, and tighter mortgage financing.
Key Financial Metrics
| Metric | Three Months Ended June 30, 2008 | Six Months Ended June 30, 2008 |
|---|---|---|
| Revenue | $141.0 million | $297.1 million |
| Net Loss | $(91.7) million | $(111.4) million |
| Net Loss to Common Shareholders | $(94.1) million | $(116.3) million |
| Loss Per Share (Basic & Diluted) | $(6.72) | $(8.30) |
| Operating Cash Flow | N/A | $109.5 million |
| Total Assets | $860.6 million | $860.6 million |
| Total Liabilities | $394.5 million | $394.5 million |
| Shareholders' Equity | $466.1 million | $466.1 million |
| Inventory | $698.7 million | $698.7 million |
| Debt (Notes Payable & Senior Notes) | $245.3 million | $245.3 million |
Note: Debt figure includes $10.0M homebuilding notes, $29.6M financial services notes, $16.7M other notes, and $199.0M senior notes.
Material Changes vs. Prior Period
- Revenue Decline: Revenue decreased 38% ($85.4 million) for the quarter and 33% ($145.9 million) for the six months compared to the prior year periods. This was driven by a 37% drop in homes delivered (466 vs. 738) and a decrease in average sales price ($272,000 vs. $295,000).
- Impairment Charges: The company recorded significant non-cash charges related to inventory and investment impairments. For the quarter, charges totaled $39.9 million; for the six months, they totaled $62.2 million. These charges were concentrated in the Florida region ($23.0M for the quarter, $41.6M for six months).
- Valuation Allowance: A non-cash charge of $58.0 million was recorded in the second quarter for a valuation allowance against deferred tax assets, reflecting a shift in the likelihood of realizing these assets due to cumulative losses.
- Cost Reductions: General and administrative expenses decreased 34% for the quarter and 26% for the six months, primarily due to reduced payroll, severance, and amortization expenses.
- Backlog Reduction: Backlog units dropped 46% to 880 homes (valued at $254.1 million) from 1,622 homes ($516 million) in the prior year period.
Guidance, Outlook, and Risks
- Outlook: Management expects difficult market conditions to persist throughout 2008. The company is adopting a defensive strategy, shortening the land pipeline, limiting land development expenditures, and reducing production volumes.
- Liquidity Restrictions: Due to a negative "restricted payments basket" of $(12.7) million under the indenture governing senior notes, the company is currently restricted from paying dividends on common and preferred shares and from repurchasing shares.
- Debt Covenants: The company remains in compliance with its Credit Facility covenants, including minimum tangible net worth and leverage ratios. Borrowing availability under the Credit Facility was $173.0 million as of June 30, 2008.
- Key Risks:
- Market Downturn: Continued decline in demand and oversupply of new homes could further impact sales volume and pricing.
- Financing Availability: Tighter mortgage lending standards and higher interest rates reduce buyer affordability and increase cancellation rates.
- Inventory Impairment: Further deterioration in market conditions could necessitate additional significant impairment charges on land and inventory.
- Joint Ventures: One unconsolidated LLC is in default of its loan agreement, posing a risk to the $3.7 million investment written off and potential future exposure.
Investor Verification Checklist
- Dividend Status: Verify the suspension of common and preferred dividends due to the negative restricted payments basket.
- Inventory Valuation: Review the assumptions used for the $58.0 million deferred tax valuation allowance and the $62.2 million in inventory impairments to assess the risk of future write-downs.
- Debt Compliance: Monitor compliance with the Credit Facility's minimum tangible net worth covenant ($400 million less valuation allowance) and leverage ratio.
- Joint Venture Exposure: Assess the status of the unconsolidated LLC in default and the potential for further write-offs beyond the $3.7 million already recorded.
- Backlog Quality: Analyze the cancellation rate (22% for the quarter) and the average sales price of the remaining backlog ($289,000) to gauge future revenue visibility.