Business Context and Reporting Period
Company: M/I Schottenstein Homes, Inc. (M/I)
Filing Type: Form 10-Q (Quarterly Report)
Reporting Period: Quarter and nine months ended September 30, 1996
Business Overview: M/I is a homebuilder and financial services provider operating primarily in the Midwest, Florida, and the Mid-Atlantic regions. The company operates two main segments: Home-Building and Financial Services (M/I Financial).
Key Financial Metrics
| Metric (in thousands) | 9 Months Ended Sep 30, 1996 | 9 Months Ended Sep 30, 1995 | 3 Months Ended Sep 30, 1996 | 3 Months Ended Sep 30, 1995 |
|---|---|---|---|---|
| Total Revenue | $390,147 | $357,973 | $156,932 | $137,092 |
| Net Income | $9,649 | $5,834 | $4,390 | $2,575 |
| Diluted EPS | $1.10 | $0.66 | $0.50 | $0.29 |
| Operating Cash Flow | ($7,825) | ($12,411) | N/A | N/A |
| Cash Balance (End of Period) | $4,738 | $10,589 | $4,738 | $10,589 |
| Total Debt (Notes Payable + Subordinated) | $137,888 | $126,713 | $137,888 | $126,713 |
| Home-Building Gross Margin | 17.8% | 16.8% | 17.6% | 16.9% |
Note: Debt figures include Notes payable banks ($99,000 + $14,375) and Subordinated notes ($24,513). Mortgage notes payable are negligible ($104).
Material Changes vs. Prior Period
- Revenue Growth: Revenue increased 8.8% for the nine months ended September 30, 1996, driven by a 10.6% increase in housing revenue. This was partially offset by a 47.2% decrease in land revenue due to fewer lot sales to third parties in the Maryland division.
- Profitability: Net income increased 65.4% year-over-year for the nine-month period. Income before taxes rose 64.1%, attributed to higher home deliveries (2,229 vs. 2,011) and improved gross margins.
- Backlog: Total backlog increased to 1,638 homes with an aggregate sales value of $301.0 million, a 10.7% increase in value and 4.5% increase in units compared to the prior year. The average sales price in backlog rose 5.7% to $184,000.
- Cash Flow: Net cash used by operating activities improved (decreased) to $7.8 million from $12.4 million in the prior year, primarily due to a significant increase in accounts payable and accrued liabilities.
Guidance, Outlook, and Risks
Management Commentary and Outlook
- Debt Restructuring: The company executed a $25 million Subordinated Note Purchase Agreement to refinance existing 14% notes. The new note carries a variable rate (LIBOR + 3.50%) and matures in 2001. A $1.3 million expense (net of tax) is expected upon redemption in December 1996.
- Banking Facilities: The company has reached an agreement in principle to extend its bank loan maturity to September 30, 2001, and increase limits on restrictive covenants. Unused borrowing availability stands at $74.5 million.
- Operational Efficiency: Management is consolidating four Columbus office locations into a new headquarters building to improve efficiency. Construction is expected to complete in Q4 1996.
- Margin Pressures: While margins improved, management warns of potential shortages of qualified subcontractors and competitive promotions that could negatively impact margins in the first half of 1997.
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 floating-rate interest expense.
- Land Commitments: The company holds options and contingent purchase contracts for land with an aggregate price of approximately $180.2 million.
- Market Concentration: Approximately 38% of housing revenue for the nine months ended September 30, 1996, was derived from the Columbus, Ohio market.
- Construction Risks: Potential for cost overruns due to volatile material prices (e.g., lumber) and labor shortages.
Investor Verification Checklist
- Debt Refinancing Execution: Verify the successful closing of the $25 million subordinated note swap in December 1996 and the associated $1.3 million expense impact on Q4 earnings.
- Land Inventory Valuation: Review the $180.2 million in land options and contingent contracts to assess capital commitment risks.
- Subcontractor Availability: Monitor Q4 and Q1 1997 reports for evidence of construction delays or margin compression due to labor shortages.
- Columbus Market Exposure: Assess the stability of the Columbus market, which accounts for a significant portion of revenue, against local economic indicators.
- Backlog Cancellation Rate: Track the cancellation rate of the current backlog (14.4% for 1995 backlog) to gauge future revenue realization.