Business Context and Reporting Period
Company: M/I Schottenstein Homes, Inc. (M/I)
Filing Type: Form 10-Q (Quarterly Report)
Reporting Period: Three and six months ended June 30, 1999
Business Overview: M/I is a homebuilder and financial services provider operating in markets including Ohio, Florida, North Carolina, Virginia, Maryland, and Arizona. The company engages in homebuilding, land development, and mortgage banking (M/I Financial).
Key Financial Metrics
| Metric (in thousands) | Six Months Ended June 30, 1999 | Six Months Ended June 30, 1998 |
|---|---|---|
| Total Revenue | $362,337 | $292,836 |
| Net Income | $18,240 | $11,126 |
| Diluted EPS | $2.05 | $1.38 |
| Operating Cash Flow | ($50,956) Used | ($35,511) Used |
| Cash and Equivalents (End of Period) | $11,654 | $11,811 |
| Total Debt (Notes Payable + Mortgage Notes) | $161,441 | $105,293 |
| Senior Subordinated Notes | $50,000 | $50,000 |
| Homebuilding Gross Margin | 19.5% | 18.5% |
Material Changes vs. Prior Period
- Revenue Growth: Total revenue increased 23.7% year-over-year for the six-month period, driven by a 23.9% increase in housing sales revenue and a 40.5% increase in financial services revenue.
- Profitability: Net income rose 63.9% to $18.2 million. Income before taxes increased 61.1% to $30.2 million.
- Volume and Pricing: Homes delivered increased 13.8% (1,690 units vs. 1,485). The average sales price of homes delivered increased 8.9%.
- Backlog: Backlog increased 20.3% in units to 2,698 homes, with a total sales value of $581.0 million (up 24.5% from the prior year).
- Debt Levels: Bank borrowings for homebuilding operations increased significantly by $61.9 million to $131.9 million to fund increased inventory and land development.
- Land Revenue: Land and lot sales revenue decreased 7.9% due to fewer lot sales to outside builders in Charlotte and lower average prices in Washington, D.C.
Guidance, Outlook, and Risks
Management Commentary
Management attributes growth to favorable market conditions, low interest rates, and a focus on premier locations. Gross margins improved due to accurate costing and higher sales prices. The company is actively developing land internally to secure supply, particularly for its Horizon product line.
Liquidity and Capital Resources
The company has $84.8 million of unused borrowing availability under its credit facilities. It is currently in discussions with lenders to increase credit lines and modify covenants, though no assurance is given that terms will be obtained.
Risks and Contingencies
- Interest Rate Sensitivity: The business is highly sensitive to interest rates. Higher rates could reduce buyer qualification and increase the company's borrowing costs on floating-rate debt.
- Land Development Risk: Significant capital is committed to land development before revenue is generated. Delays or cost overruns could impact profitability.
- Market Concentration: Approximately 40% of housing revenue for the six months ended June 30, 1999, was derived from the Columbus, Ohio market.
- Year 2000 Compliance: The company is modifying systems to address Year 2000 issues. While they do not expect a material adverse impact, they cannot assure that suppliers or customers will be compliant, which could disrupt operations.
- Material Shortages: The company has begun experiencing shortages in materials (insulation, drywall, brick) and labor, which could delay construction.
Investor Verification Checklist
- Debt Covenants: Verify the specific financial ratios required by the Bank Credit Facility and the status of ongoing discussions to modify these covenants.
- Land Inventory: Review the $199 million in single-family lots and land development costs to assess the risk of over-investment in specific markets.
- Backlog Cancellation Rate: Monitor the 11.5% cancellation rate of backlog from December 1998 to ensure it remains consistent with historical averages (12.8% final rate for 1997 backlog).
- Year 2000 Status: Confirm the completion timeline for critical system upgrades and the status of supplier compliance inquiries.
- Interest Rate Exposure: Assess the impact of potential rate hikes on the $131.9 million of floating-rate bank borrowings, noting the $75 million hedged via swaps.