M/I Homes, Inc. — Q2 2018 Form 10-Q
Reporting period: Three and six months ended June 30, 2018. M/I Homes builds single-family homes across Midwest, Southern and Mid-Atlantic markets and provides mortgage and title services. In March, it entered Detroit through its $101.0 million acquisition of Pinnacle Homes.
Financial performance
| Metric | Q2 2018 | Q2 2017 | First half 2018 | First half 2017 |
|---|---|---|---|---|
| Revenue | $558.1m | $456.9m | $996.0m | $863.8m |
| Income before taxes | $33.5m | $25.2m | $57.4m | $51.5m |
| Net income | $27.9m | $17.0m | $46.0m | $33.9m |
| Diluted EPS | $0.96 | $0.55 | $1.56 | $1.09 |
| Interest expense | $4.9m | $3.8m | $10.8m | $9.2m |
- Revenue rose 22% in Q2 and 15% in the first half. Home deliveries rose 16% and 13%, respectively; delivered-home average selling prices increased 6% and 3%.
- GAAP housing gross margin was 17.8% in Q2 versus 17.4% a year earlier, and 17.7% for the first half versus 18.0%. Excluding acquisition purchase-accounting charges in 2018 and the prior-year Florida stucco charge, adjusted housing gross margin was 18.3% versus 19.4% for Q2 and 18.1% versus 19.0% for the first half.
- Cash used in operating activities was $19.7m in the first half, versus $39.3m in 2017. Investing activities used $104.1m, principally for the Pinnacle acquisition; financing provided $39.9m. Cash, cash equivalents and restricted cash fell $83.9m to $67.8m, including $66.5m of unrestricted cash.
- Inventory increased to $1.652bn from $1.415bn at year-end. Total assets were $1.971bn and shareholders’ equity $816.0m at June 30.
Debt, liquidity and balance sheet
- Debt carrying amounts totaled approximately $828m, including $181.8m under the homebuilding revolver, $93.2m in financial-services facilities, and $543.6m of senior notes and other borrowings. The $300m 6.75% notes mature in 2021; $250m of 5.625% notes mature in 2025.
- The $500m unsecured revolving facility had $181.8m drawn and $49.6m of letters of credit outstanding, leaving $268.6m available at June 30. Financial-services facilities had $11.8m of reported availability. The company reported compliance with applicable debt covenants.
- The $86.3m convertible notes due 2018 were resolved at maturity: approximately $20.3m converted into 628,515 common shares and approximately $65.9m was repaid in cash.
- Homebuilding debt to capital was 47%, compared with 46% at December 31, 2017. Weighted-average borrowings and rates increased year over year, contributing to higher interest expense.
Material changes and operating trends
- New contracts increased 17% in Q2 and 18% in the first half; backlog at June 30 rose 23% to 2,966 homes, with a record stated sales value of $1.17bn. Active communities increased 12% to 209.
- Growth was strongest in the Southern and Midwest regions. Mid-Atlantic deliveries and revenue declined, partly because replacement community openings were delayed.
- Adjusted pretax income increased 8% in Q2 and 5% in the first half, according to the company’s non-GAAP presentation. Reported comparisons were affected by current-year Pinnacle purchase-accounting charges and acquisition costs, and the $8.5m prior-year stucco charge.
- Financial-services revenue was nearly flat in Q2 and up 3% for the first half; management cited competitive pressure and lower margins on loans sold.
Outlook, risks and unusual items
- Management described housing fundamentals as solid and expected modest improvement in new-home demand during 2018, citing employment, wages and consumer confidence. This is not a quantified earnings forecast; the filing cautions that positive trends may not continue.
- The company estimated 2018 land purchases and development spending of $575m–$625m, including $263.9m spent in the first half and excluding the Pinnacle acquisition. It expected continued revolver use and estimated peak revolver borrowings would not exceed $325m, subject to business and market conditions.
- Management cited higher construction, labor and lot costs, rising interest rates, affordability and potential demand effects as risks to margins and sales. Adjusted housing margin declines reflected cost pressures and product/community mix.
- Florida stucco-related claims remain an uncertainty. The company had a $6.5m reserve at June 30 and recorded no additional stucco charge in the first half of 2018; it could not estimate likely recoveries from insurers or subcontractors and recorded no recovery receivable.
- Outstanding completion bonds and standby letters of credit totaled approximately $198.2m. Land options and contingent purchase agreements covered lots with an aggregate purchase price of about $640.8m; purchases are subject to conditions. Other legal proceedings were described as incidental, though resolution costs could differ from recorded estimates.
- The Pinnacle acquisition resulted in provisional goodwill of $16.4m, subject to purchase-price allocation updates; no impairment indicators were identified at June 30. A $3.0m tax benefit related primarily to retroactively reinstated energy-efficient-home credits contributed to the reported tax provision.
Most important facts for investors to verify
- Whether backlog and new-contract growth convert into deliveries, while monitoring cancellation rates and the weaker Mid-Atlantic trend.
- Whether selling prices can continue to offset higher labor, construction and land costs, and how adjusted housing margins evolve.
- Whether planned land spending and inventory growth remain supported by cash generation and available borrowing capacity.
- Developments in stucco claims, reserve adequacy and potential recoveries, plus final Pinnacle purchase accounting and goodwill assessment.
- Debt, interest expense and covenant headroom as borrowing needs and market interest rates change.