M/I Homes, Inc. (M) — Q2 2017 Form 10-Q
Business context and period. Homebuilder and mortgage/title services provider operating across the Midwest, Southern and Mid-Atlantic regions. This filing covers the quarter and six months ended June 30, 2017; financial statement amounts are unaudited.
Financial and operating performance
- Q2 revenue: $456.9 million, up 14% year over year. Revenue from home deliveries was $443.1 million; financial services contributed $11.9 million.
- Q2 earnings: Net income was $17.0 million; net income to common shareholders was $15.8 million. Diluted EPS was $0.55, versus $0.52 a year earlier. Pretax income increased 1% to $25.2 million.
- Q2 margins and expenses: Housing gross margin was 17.4%, down from 18.6%; excluding stucco charges, the company’s non-GAAP adjusted housing gross margin was 19.4% in both periods. SG&A was 13.2% of revenue versus 13.1%.
- First half: Revenue rose 19% to $863.8 million; net income to common shareholders increased to $31.4 million from $22.7 million, and diluted EPS rose to $1.09 from $0.81. Housing gross margin was 18.0%, unchanged; adjusted margin was 19.0% versus 18.7%.
- Demand and backlog: Q2 new contracts rose 3% to 1,400 and deliveries rose 16% to 1,211 homes. At quarter-end, backlog was 2,409 homes, up 6%, with a sales value of $909.3 million, up 8%. Average delivered home price was $366,000, up 1%.
- Cash flow and liquidity: First-half operating cash flow was negative $39.3 million, compared with positive $40.9 million in 2016, mainly reflecting a $146.2 million inventory increase. Investing provided $1.0 million; financing provided $33.9 million. Cash, cash equivalents and restricted cash were $29.9 million, including $29.1 million unrestricted.
- Debt and capital: Homebuilding revolver borrowings were $138.0 million, with $220.7 million of remaining availability after letters of credit. Financial-services debt was $89.5 million. Homebuilding debt-to-capital was 46%, versus 43% at year-end 2016. The company had $300 million of 6.75% senior notes due 2021, $57.5 million of 3.25% convertible notes due September 2017, and $86.3 million of 3.0% convertible notes due March 2018.
- Balance sheet: Total assets were $1.63 billion, including $1.38 billion of inventory; total liabilities were $938.1 million and shareholders’ equity was $693.3 million.
Changes, outlook and material risks
- Management reported record new contracts, deliveries and revenue in both Q2 and the first half. Higher deliveries, home prices and financial-services results supported growth; the Southern region’s operating income was pressured by stucco costs and higher SG&A, while Mid-Atlantic new contracts and backlog declined.
- Q2 included an $8.5 million stucco-repair charge, compared with $2.8 million in Q2 2016. Management’s non-GAAP adjusted pretax income was $33.7 million, versus $27.7 million. The remaining reserve for identified and estimated future stucco repairs was $14.1 million; the review continues, and possible recoveries from insurers or contractors were not recognized.
- Management expected modest housing-market improvement through the rest of 2017, while cautioning that positive trends may not continue. It estimated 2017 land-purchase and development spending of $500–$550 million; $267.9 million had been spent in the first half. It expected peak 2017 revolver borrowings not to exceed $250 million.
- After quarter-end, the company amended its homebuilding credit facility: commitment increased from $400 million to $475 million, with a potential accordion to $500 million, and maturity extended to July 2021. The company said it expected available liquidity and cash sources to fund anticipated needs for at least 12 months.
- Key exposures include construction and land-cost inflation, interest rates and housing demand; inventory valuation assumptions; stucco claims and warranty estimates; legal contingencies; land-option commitments of about $654.7 million; and $168.6 million of completion bonds and standby letters of credit. The $57.5 million 2017 convertible notes mature soon after quarter-end; management expected conversion but said any unconverted balance would need repayment or refinancing. The 2018 notes also require a refinancing or repayment plan.
Important facts for investors to verify
- Track stucco claims, repair spending, reserve adequacy and any recoveries; the estimate could change materially.
- Assess whether backlog converts to deliveries and revenue, especially given weaker Mid-Atlantic contracts and the overall cancellation rate, which rose to 13.3% for Q2 year over year.
- Verify land investment, inventory growth, operating cash flow and revolver usage against the stated 2017 spending and borrowing expectations.
- Monitor conversion, refinancing or repayment of the 2017 and 2018 convertible notes, and compliance with credit-facility and senior-note covenants.
- Consider that management’s adjusted margin and pretax figures are non-GAAP measures and exclude stucco-related charges; compare them with reported GAAP results.