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MHO > SEC Filings for MHO > Form 10-Q on 29-Oct-2012All Recent SEC Filings

Show all filings for M I HOMES INC

Form 10-Q for M I HOMES INC


29-Oct-2012

Quarterly Report


ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

OVERVIEW

M/I Homes, Inc. (the "Company" or "we") is one of the nation's leading builders of single-family homes, having delivered over 82,000 homes since we commenced homebuilding activities in 1976. The Company's homes are marketed and sold under the M/I Homes, Showcase Homes, TriStone Homes and Triumph Homes trade names. The Company has homebuilding operations in Columbus and Cincinnati, Ohio; Indianapolis, Indiana; Chicago, Illinois; Tampa and Orlando, Florida; Austin, Houston and San Antonio, Texas; Charlotte and Raleigh, North Carolina; and the Virginia and Maryland suburbs of Washington, D.C.

Included in this Management's Discussion and Analysis of Financial Condition and Results of Operations are the following topics relevant to the Company's performance and financial condition:

Information Relating to Forward-Looking Statements;

Our Application of Critical Accounting Estimates and Policies;

Our Results of Operations;

Discussion of Our Liquidity and Capital Resources;

Update of Our Contractual Obligations;

Discussion of Our Utilization of Off-Balance Sheet Arrangements; and

Impact of Interest Rates and Inflation.

FORWARD-LOOKING STATEMENTS

Certain information included in this report or in other materials we have filed or will file with the Securities and Exchange Commission (the "SEC") (as well as information included in oral statements or other written statements made or to be made by us) contains or may contain forward-looking statements, including, but not limited to, statements regarding our future financial performance and financial condition. Words such as "expects," "anticipates," "targets," "goals," "projects," "intends," "plans," "believes," "seeks," "estimates," variations of such words and similar expressions are intended to identify such forward-looking statements. These statements involve a number of risks and uncertainties. Any forward-looking statements that we make herein and in future reports and statements are not guarantees of future performance, and actual results may differ materially from those in such forward-looking statements as a result of various risk factors. Please see "Item 1A. Risk Factors" in Part II of this Quarterly Report on Form 10-Q for the period ended September 30, 2012.

Any forward-looking statement speaks only as of the date made. Except as required by applicable law, we undertake no obligation to publicly update any forward-looking statements or risk factors, whether as a result of new information, future events or otherwise. However, any further disclosures made on related subjects in our subsequent reports on Forms 10-K, 10-Q and 8-K and our other filings with the SEC should be consulted. This discussion is provided as permitted by the Private Securities Litigation Reform Act of 1995, and all of our forward-looking statements are expressly qualified in their entirety by the cautionary statements contained or referenced in this section.

APPLICATION OF CRITICAL ACCOUNTING ESTIMATES AND POLICIES

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America ("GAAP") requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Management bases its estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. On an ongoing basis, management evaluates such estimates and judgments and makes adjustments as deemed necessary. Actual results could differ from these estimates using different estimates and assumptions, or if conditions are significantly different in the future. See Note 1 (Summary of Significant Accounting Policies) to our consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2011 for additional information about our accounting policies.

We believe that there have been no significant changes to our critical accounting policies during the nine months ended September 30, 2012 as compared to those disclosed in Management's Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year ended December 31, 2011 and in our Quarterly Report on Form 10-Q for the three months ended March 31, 2012.


RESULTS OF OPERATIONS

The Company's segment information is presented on the basis that the chief operating decision makers use in evaluating segment performance. The Company's chief operating decision makers evaluate the Company's performance in various ways, including: (1) the results of our eleven individual homebuilding operating segments and the results of our financial services operations; (2) the results of our three homebuilding regions; and (3) our consolidated financial results. We have determined our reportable segments as follows: Midwest homebuilding, Southern homebuilding, Mid-Atlantic homebuilding and financial services operations. The homebuilding operating segments that are included within each reportable segment have similar operations and exhibit similar long-term economic characteristics. Our homebuilding operations include the acquisition and development of land, the sale and construction of single-family attached and detached homes, and the occasional sale of lots to third parties. The homebuilding operating segments that comprise each of our reportable segments are as follows:

Midwest               Southern           Mid-Atlantic
Columbus, Ohio        Tampa, Florida     Washington, D.C.
Cincinnati, Ohio      Orlando, Florida   Charlotte, North Carolina

Indianapolis, Indiana Houston, Texas Raleigh, North Carolina Chicago, Illinois San Antonio, Texas

In April 2012, we expanded our Houston, Texas operations by acquiring the assets of a privately-held homebuilder.

In October 2012, we announced our entry into the Austin, Texas market.

Our financial services operations include the origination and sale of mortgage loans and title services primarily for purchasers of the Company's homes.

Outlook

Throughout the first nine months of 2012, we, as well as others in the homebuilding industry, have seen signs that the overall housing market is stabilizing and beginning to recover from the severe housing downturn that began in mid-2006. We are experiencing broad-based improvement across most of our regions which we believe is being driven by attractive housing affordability levels, moderate changes in buyer perceptions, increased demand for distressed properties, and record-low interest rates for residential consumer mortgage loans, all of which have led to a decline in national housing inventory levels and to stabilization in most of the Company's markets. These factors are evident in both our 2012 third quarter and year to date operating results as well as by our improving gross margins, operating margins and operating leverage statistics when compared to our results from a year ago as more fully described below.

The Company was profitable for both the quarter and the year to date, and achieved its highest net income since 2006 reaching $8.3 million for the quarter and nine months year-to-date. In September 2012, the Company increased its cash with the public issuances of $57.5 million aggregate principal amount of 3.25% Convertible Senior Subordinated Notes due 2017 (the "2017 Convertible Senior Subordinated Notes") and 2.53 million common shares, for aggregate combined net proceeds of $99.6 million.

With these improving conditions in mind, we will continue to focus on the following primary strategic business objectives focused on profitability:

maintaining a strong balance sheet;

emphasizing customer service, product design, and premier locations;

strategically investing in new communities and/or markets; and

having a meaningful presence in our markets.

Summary of Company Results

We have historically experienced, and expect to continue to experience, variability in our quarterly results. Our results of operations for the three and nine months ended September 30, 2012 are not necessarily indicative of the results to be expected for the full year.

As a result of the improving operating conditions and our continued effort to manage our business with a focus on profitability, we experienced improvements in a number of operational metrics and our financial results for the three and nine months ended September 30, 2012.


Operationally, for the quarter ended September 30, 2012, we experienced a 29% increase in our new contracts, a 28% increase in our homes delivered, and a 12% increase in the average sales price of our homes delivered compared to 2011's third quarter. We also experienced a 41% increase in the number of homes in our backlog as well as a 50% increase in the overall sales value of our backlog over prior year's third quarter. For the first nine months of 2012, new contracts increased 25%, homes delivered increased 17%, and the average sales price of our homes delivered increased 10% over the first nine months of 2011. In addition, we continue to invest in new communities and markets that we believe are helping us in attaining improved profitability when and as housing markets improve and in enhancing our ability to establish significant market share and create a platform for future growth in our markets. During the three months ended September 30, 2012, we opened 12 new communities and closed eight legacy communities. We are experiencing higher gross margins in our new communities (20.2%) compared to our legacy communities (14.8%). Of our homes delivered during the third quarter of 2012, 71% were in new communities (defined by us as communities opened after January 1, 2009), compared to 60% during the third quarter of 2011.

From a financial perspective, we improved our financial results in several areas for the three and nine months ended September 30, 2012. Most notably for the quarter ended September 30, 2012, we achieved net income of $8.3 million, or $0.42 per diluted share, compared to a loss of $4.7 million, or a loss of $0.25 per diluted share, for the quarter ended September 30, 2011. We also achieved net income for the nine month period ended September 30, 2012 of $8.3 million compared to a loss of $30.9 million for the same period in 2011.

Below is a further description of the additional improvements in our financial results.

For the quarter ended September 30, 2012, total revenue increased $67.3 million (48%), from $141.6 million in the third quarter of 2011 to $208.9 million in the third quarter of 2012. This increase was attributable to a 28% increase in homes delivered, from 582 in the third quarter of 2011 to 746 in the third quarter of 2012, along with a 12% increase in the average sales price of homes delivered, from $238,000 in the third quarter of 2011 to $266,000 in the third quarter of 2012. We also had $4.1 million of revenue from land sales in the third quarter of 2012 compared to only $0.2 million in the third quarter of 2011. Revenue in our financial services segment increased from $2.9 million for the quarter ended September 30, 2011 to $6.4 million for the same period in 2012. Please see the discussion below for an explanation regarding the increase in revenue.

Income before taxes for the quarter ended September 30, 2012 was $8.5 million compared to loss before taxes of $4.8 million for the third quarter of 2011. The $13.3 million increase in income before taxes was primarily due to the increase in revenue described above, a 190 basis point improvement in our adjusted operating gross margin, a $3.0 million drywall settlement, a $0.8 million increase in land sale profit and a $0.4 million decrease in impairment charges taken during the quarter ended September 30, 2012 compared to the quarter ended September 30, 2011. These improvements were offset, in part, by a $5.6 million increase in selling, general and administrative costs which was driven primarily by a $2.6 million increase in variable selling expenses related to the increase in homes delivered; a $2.0 million increase in payroll related expenses; a $0.7 million increase in design center depreciation expenses, and a $0.3 million increase in expenses related to our sales offices. Excluding the drywall settlement and the impairment charges of $1.3 million, the Company earned adjusted pre-tax income from operations of $6.8 million for the quarter ended September 30, 2012, a $9.8 million increase compared to the adjusted pre-tax loss from operations of $3.0 million for the third quarter of 2011. This improvement was also a result of the factors described with respect to income before taxes above. Please see the table set forth below which reconciles the non-GAAP financial measures of adjusted operating gross margin and adjusted pre-tax income (loss) from operations to their respective most directly comparable GAAP financial measures, gross margin, and income (loss) from operations before taxes.

For the nine months ended September 30, 2012, total revenue increased $121.4 million (31%), from $389.6 million in the first nine months of 2011 to $511.0 million in the first nine months of 2012. This increase was attributable to a 17% increase in homes delivered, from 1,611 in the nine month period ended September 30, 2011 to 1,878 in the nine month period ended September 30, 2012, along with a 10% increase in the average sales price of homes delivered, from $235,000 in the first nine months of 2011 to $259,000 in the first nine months of 2012. Revenue in our financial services segment increased 66% from $9.4 million for the nine months ended September 30, 2011 to $15.6 million for the nine months ended September 30, 2012. Please see the discussion below for an explanation regarding the increase in revenue.

Income before taxes for the nine months ended September 30, 2012 was $7.4 million compared to loss before taxes of $30.8 million for the first nine months of 2011. The $38.2 million increase124% in income before taxes was primarily due to the increase in revenue described above, a 230 basis point improvement in our adjusted operating gross margin, a $3.0 million drywall settlement, a $2.0 million increase in land sale profit and a $16.1 million decrease in impairment charges taken during the first nine months of 2012 compared to the same period in 2011. These improvements were offset, in part, by a $1.2 million increase in interest expense due to the increase in borrowings related to the increase in the number of loans originated by our mortgage company during the first nine months of 2012 as well as a $12.1 million increase in selling, general and administrative costs driven primarily by a $5.3 million increase in variable selling expenses related to the increase in homes delivered; a


$4.0 million increase in payroll related expenses; a $0.9 million increase in expenses related to our sales offices; a $0.5 million increase related to design center related expenses, a $0.5 million increase in land related expenses; a $0.4 million increase in expenses related to our model homes; a $0.3 million increase in miscellaneous other expenses; and a $0.2 million increase in advertising expenses. Excluding the drywall settlement and the impairment charges of $2.1 million, the Company earned adjusted pre-tax income from operations of $6.5 million for the nine months ended September 30, 2012, a $18.9 million increase compared to adjusted pre-tax loss from operations of $12.4 million for the first nine months of 2011. This improvement was also a result of the factors described with respect to income before taxes above. Please see the table set forth below which reconciles the non-GAAP financial measures of adjusted operating gross margin and adjusted pre-tax income from operations to their respective most directly comparable GAAP financial measures, gross margin, and income from operations before income taxes.

Our mortgage company's capture rate increased from 84% for the three months ended September 30, 2011 to 85% for the three months ended September 30, 2012, and decreased from 85% for the nine months ended September 30, 2011 to 84% for the nine months ended September 30, 2012. Capture rate is influenced by financing availability and can fluctuate up or down from period to period.

During the nine months ended September 30, 2012, we reduced our deferred tax assets by $3.7 million, and we recorded a non-cash valuation allowance against the entire amount of deferred tax assets.

The following table reconciles our adjusted operating gross margin and adjusted pre-tax income (loss) from operations (each of which constitutes a non-GAAP financial measure) for the three and nine months ended September 30, 2012 and 2011 to the GAAP financial measures of gross margin and income (loss) from operations before income taxes, respectively:

                                                 Three Months Ended September 30,           Nine Months Ended September 30,
(In thousands)                                       2012                 2011                 2012                 2011
Gross margin                                  $        43,114       $        23,658     $       100,225       $        48,739
Add:
Impairment of inventory and investment in
Unconsolidated LLCs                                     1,309                 1,697               1,876                18,013
Imported drywall settlement                   $        (3,000 )     $             -     $        (3,000 )     $             -
Adjusted operating gross margin               $        41,423       $        25,355     $        99,101       $        66,752

Income (loss) from operations before income
taxes                                         $         8,452       $        (4,835 )   $         7,377       $       (30,830 )
Add:
Impairment of inventory and investment in
Unconsolidated LLCs and abandoned land
transaction costs                                       1,309                 1,837               2,132                18,453
Imported drywall settlement                            (3,000 )                   -              (3,000 )                   -
Adjusted pre-tax income (loss) from
operations                                    $         6,761       $        (2,998 )   $         6,509       $       (12,377 )

Adjusted operating gross margin and adjusted pre-tax income (loss) from operations are non-GAAP financial measures. Management finds these measures to be useful in evaluating the Company's performance because they disclose the financial results generated from homes the Company actually delivered during the period, as the asset impairments and certain other write-offs relate, in part, to inventory that was not delivered during the period. They also assist the Company's management in making strategic decisions regarding the Company's future operations. The Company believes investors will also find these to be important and useful because they disclose profitability measures that can be compared to a prior period without regard to the variability of asset impairments and certain other write-offs. In addition, to the extent that the Company's competitors provide similar information, disclosure of these measures helps readers of the Company's financial statements compare the Company's profits to the profits of its competitors with regard to the homes they deliver in the same period. Because these measures are not calculated in accordance with GAAP, they may not be completely comparable to similarly titled measures of the Company's competitors due to potential differences in methods of calculation and charges being excluded. Due to the significance of the GAAP components excluded, such measures should not be considered in isolation or as an alternative to operating performance measures prescribed by GAAP.


The following table shows, by segment, revenue, operating income (loss) and interest expense for the three and nine months ended September 30, 2012 and 2011, as well as the Company's income (loss) before income taxes for such periods:

                                                 Three Months Ended September 30,           Nine Months Ended September 30,
(In thousands)                                       2012                 2011                 2012                 2011
Revenue:
Midwest homebuilding                          $        79,015       $        58,941     $       198,994       $       168,291
Southern homebuilding                                  50,828                35,281             123,400                84,117
Mid-Atlantic homebuilding                              72,649                44,530             172,977               127,863
Financial services                                      6,383                 2,872              15,623                 9,367
Total revenue                                 $       208,875       $       141,624     $       510,994       $       389,638

Operating income (loss):
Midwest homebuilding (a)                      $         3,940       $         1,364     $         9,012       $        (6,925 )
Southern homebuilding (a)                               6,144                  (203 )             9,837                (6,895 )
Mid-Atlantic homebuilding (a)                           5,787                 1,909               9,496                 4,959
Financial services                                      3,960                   969               8,606                 4,203
Less: Corporate selling, general and
administrative expenses                                (7,380 )              (5,490 )           (17,508 )             (15,288 )
Total operating income (loss)                 $        12,451       $        (1,451 )   $        19,443       $       (19,946 )

Interest expense:
Midwest homebuilding                          $         1,243       $         1,291     $         4,181       $         4,612
Southern homebuilding                                     999                   768               2,543                 1,965
Mid-Atlantic homebuilding                               1,342                 1,122               4,248                 3,663
Financial services                                        415                   203               1,094                   644
Total interest expense                        $         3,999       $         3,384     $        12,066       $        10,884

Income (loss) before income taxes             $         8,452       $        (4,835 )   $         7,377       $       (30,830 )

(a) For the three months ended September 30, 2012 and 2011, the impact of charges relating to the impairment of inventory and investment in Unconsolidated LLCs and the write-off of abandoned land transaction costs was $1.3 million and $1.8 million, respectively. These charges reduced operating income by $1.3 million and $1.2 million in the Midwest region for the three months ended September 30, 2012 and 2011, respectively, and $0.6 million in the Southern region for the three months ended September 30, 2011. Note there were no charges in the Mid-Atlantic region for both the three months ended September 30, 2012 and 2011.

For the nine months ended September 30, 2012 and 2011, the impact of charges relating to the impairment of inventory and investment in Unconsolidated LLCs and the write-off of abandoned land transaction costs was $2.1 million and $18.5 million, respectively. These charges reduced operating income by $1.9 million and $11.6 million in the Midwest region, $0.1 million and $6.6 million in the Southern region and $0.1 million and $0.3 million in the Mid-Atlantic region for the nine months ended September 30, 2012 and 2011, respectively.

The following tables show total assets by segment:

                                                               At September 30, 2012
                                                                                     Corporate,
                                                                                 Financial Services
(In thousands)                      Midwest      Southern       Mid-Atlantic       and Unallocated        Total
Deposits on real estate under
option or contract                $   1,274     $   2,675     $        2,255     $               -     $   6,204
Inventory (a)                       203,947       126,524            207,196                     -       537,667
Investments in Unconsolidated
LLCs                                  5,255         6,001                  -                     -        11,256
Other assets                          5,710         4,434             11,044               240,977       262,165
Total assets                      $ 216,186     $ 139,634     $      220,495     $         240,977     $ 817,292


                                                                At December 31, 2011
                                                                                     Corporate,
                                                                                 Financial Services
(In thousands)                      Midwest      Southern       Mid-Atlantic       and Unallocated        Total
Deposits on real estate under
option or contract                $     252     $   1,516     $          907     $               -     $   2,675
Inventory (a)                       200,760        89,586            173,751                     -       464,097
Investments in Unconsolidated
LLCs                                  5,157         5,200                  -                     -        10,357
Other assets                          3,865         2,858              9,861               170,772       187,356
Total assets                      $ 210,034     $  99,160     $      184,519     $         170,772     $ 664,485

(a) Inventory includes single-family lots, land and land development costs; land held for sale; homes under construction; model homes and furnishings; community development district infrastructure; and consolidated inventory not owned.


Seasonality

Typically, our homebuilding operations experience significant seasonality and quarter-to-quarter variability in homebuilding activity levels. In general, homes delivered increase substantially in the second half of the year compared to the first half of the year. We believe that this seasonality reflects the tendency of homebuyers to shop for a new home in the spring with the goal of closing in the fall or winter, as well as the scheduling of construction to accommodate seasonal weather conditions. Our financial services operations also experience seasonality because loan originations correspond with the delivery of homes in our homebuilding operations.


Reportable Segments

The following table presents, by reportable segment, selected financial
information for the three and nine months ended September 30, 2012 and 2011:
                                                       Three Months Ended
. . .
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