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MHO > SEC Filings for MHO > Form 10-Q on 25-Oct-2013All Recent SEC Filings

Show all filings for M I HOMES INC

Form 10-Q for M I HOMES INC


25-Oct-2013

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 approximately 86,000 homes since we commenced homebuilding activities in 1976. The Company's homes are marketed and sold under the M/I Homes, Showcase Collection and Triumph Homes trade names. The Company has homebuilding operations in Columbus and Cincinnati, Ohio; Indianapolis, Indiana; Chicago, Illinois; Tampa and Orlando, Florida; Austin, Dallas/Fort Worth, 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;

Summary 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," and "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 I of our Annual Report on Form 10-K for the year ended December 31, 2012 and "Item 1A. Risk Factors" of Part II of our Quarterly Reports on Form 10-Q for the quarters ended March 31, 2013 and June 30, 2013.

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, 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 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, 2012 for additional information about our accounting policies.

We believe that there have been no significant changes to our critical accounting policies during the quarter ended September 30, 2013 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, 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 13 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 and land 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
                      Austin, Texas
                      Dallas/Fort Worth, Texas

In July 2013, we announced our entry into the Dallas/Fort Worth, Texas market.

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

Overview

During the nine months ended September 30, 2013, we continued to experience improving results as the recovery in the housing market continued. We believe that the recovery in the housing industry is being driven by the demand for housing created by growing population and re-accelerating household formations, favorable own-versus-rent dynamics, record low inventory levels for both new homes and resales, historically attractive affordability levels, and a slow but steady improvement in job growth. We continue to experience broad based improvements across all of our markets, albeit at a slower pace than the first half of 2013.

We experienced significant improvement in traffic quantity and quality, as well as our number of new contracts, during the nine months ended September 30, 2013, as buyer confidence in the housing market strengthened, and we achieved our highest operating margin in any quarter since 2007 during the third quarter of 2013. We believe that our improved results of operations are due to improving market conditions coupled with a strategic shift in our mix of communities towards better performing locations, our continued focus on shifting our investment to stronger housing markets, and the performance of our mortgage operations.

During the third quarter of 2013, we achieved net income of $125.3 million, of which $13.8 million ($0.47 per diluted share) related to our core profitability while $111.6 million ($3.75 per diluted share) related to the accounting benefit associated with a reversal of a majority of our deferred tax asset valuation allowance as more fully described in Note 11 of our Unaudited Condensed Consolidated Financial Statements.

In response to the continuing recovery in new home sales, we have increased our land positions to meet our strategic growth targets in each market, based on the availability of well-located land opportunities which meet our financial return targets and other requirements. To sustain our improved profitability, we believe that we need to purchase new land at prices that we have underwritten to generate appropriate investment returns and drive greater operating efficiencies. Accordingly, we purchased $156.7 million of new land during the nine months ended September 30, 2013 and spent $67.5 million on land development.

On July 18, 2013, we entered into a new three-year unsecured revolving credit facility (the "Credit Facility") with an aggregate commitment amount of $200 million, as more fully described below in our "Liquidity and Capital Resources" section, which replaced the $140 million secured revolving credit facility (the "Prior Credit Facility") that was scheduled to mature on December 31, 2014. During the three and nine months ended September 30, 2013, we recognized a loss on early extinguishment of debt of $1.7 million which represented the write-off of unamortized debt issuance costs related to the termination of the Prior Credit Facility.


During the three and nine months ended September 30, 2013, we paid cash dividends of $609.375 per preferred share on our 2,000 outstanding Series A Preferred Shares for $1.2 million and $2.4 million , respectively.

Summary of Company Results

Summary of Financial Results

For the quarter ended September 30, 2013, we achieved net income to common shareholders of $124.1 million, or $4.22 per diluted share, which included a $111.6 million accounting benefit from income taxes due to the reversal of a majority of the valuation allowance against our deferred tax assets, offset partially by $2.1 million of pre-tax impairment charges, a $1.7 million charge related to the early termination of our Prior Credit Facility and $1.2 million of dividend payments made to holders of our Series A Preferred Shares. This compares to net income to common shareholders of $8.3 million, or $0.42 per diluted share, for the quarter ended September 30, 2012, which included income of $3.0 million related to a drywall settlement and $1.3 million of pre-tax impairment charges. For the nine months ended September 30, 2013, we achieved net income to common shareholders of $132.5 million, or $4.79 per diluted share, which included a $111.6 million accounting benefit from income taxes due to the reversal of a majority of the valuation allowance against our deferred tax assets, $4.2 million of pre-tax impairment charges, a $2.2 million non-cash equity adjustment resulting from the excess of fair value over carrying value of our Series A Preferred Shares that were called for redemption in the first quarter of 2013 and $2.4 million of dividend payments made to holders of our Series A Preferred Shares. This compares to net income to common shareholders of $8.3 million, or $0.43 per diluted share, for the nine months ended September 30, 2012, which included income of $3.0 million related to a drywall settlement and $1.9 million of pre-tax impairment charges.

For the third quarter of 2013, we recorded $265.9 million in revenue from homes delivered, $2.6 million in revenue from land sales and $6.7 million in revenue from our financial services operations. Revenue from homes delivered increased 34% driven primarily by the 191 additional homes delivered in 2013's third quarter compared to the same period in 2012 and a 7% increase in the average sales price of homes delivered ($18,000 per home delivered). Offsetting the increase in revenue from homes delivered above was a decrease in revenue from land sales of $1.5 million from the third quarter of 2012 due primarily to land sales in our Mid-Atlantic region in prior year. Revenue in our financial services segment increased 5% to $6.7 million in the third quarter of 2013 primarily due to the factors discussed below in our "Year Over Year Comparisons" section. For the nine months ended September 30, 2013, we recorded $665.4 million in revenue from homes delivered, $12.8 million in revenue from land sales and $22.3 million in revenue from our financial services operations. Revenue from homes delivered increased 37% driven primarily by the 474 additional homes delivered in the nine months ended September 30, 2013 compared to the same period in 2012 and a 9% increase in the average sales price of homes delivered ($24,000 per home delivered). Revenue from land sales increased $3.8 million from the nine months ended September 30, 2012. Revenue in our financial services segment increased 43% to $22.3 million in the nine months ended September 30, 2013 primarily due to the factors discussed below in our "Year Over Year Comparisons" section.

Total gross margin increased $11.8 million in the third quarter of 2013 compared to the corresponding period in 2012, which was largely the result of an $11.5 million improvement in our homebuilding operations, with the remainder due to our financial services operations. The improvement in our homebuilding operations for the third quarter of 2013 was primarily due to a $15.3 million increase in homebuilding gross margin when compared to the third quarter of 2012, offset, in part, by an increase of $0.8 million in land impairments taken during the third quarter of 2013. For the nine months ended September 30, 2013, total gross margin increased $39.2 million when compared to the nine months ended September 30, 2012, which was largely the result of a $32.5 million improvement in our homebuilding operations, with the remainder due to our financial services operations. The improvement in our homebuilding operations for the nine months ended September 30, 2013 was primarily due to a $34.9 million increase in homebuilding gross margin when compared to the nine months ended September 30, 2012, offset in part by an increase of $2.4 million in land impairments taken during the nine month period ended September 30, 2013.

The increase in homebuilding gross margin for both the three and nine months ended September 30, 2013 resulted from the increase in the average sales price of homes delivered and the increase in the number of homes delivered offset, in part, by an increase in construction costs. The increased sales prices for both the three and nine months ended September 30, 2013 were driven primarily by the performance of our newer communities, the strategic shift in our geographic footprint, which resulted in more homes delivered in our better performing markets, a shift in the mix of homes delivered to higher priced and larger homes and improving market conditions. This allowed for more pricing leverage in select locations and submarkets. The pricing and unit improvements were partially offset by higher construction costs related to both the mix of homes delivered as well as cost increases associated with improving homebuilding industry conditions and normal supply and demand dynamics. In both the third quarter and the nine month period ended September 30, 2013, we were able to pass a majority of the higher construction costs to our homebuyers in the form of higher sales prices and lower incentives. However, recent moderation in the stronger sales price appreciation trends


we experienced earlier in 2013 may make it more difficult to continue to fully offset any further increase in material, labor and land cost that we may experience going forward.

Selling, general and administrative expense increased $5.6 million and $19.0 million for the three and nine months ended September 30, 2013, respectively, which offset, in part, the increase in our gross margins discussed above. For the third quarter of 2013, selling expense increased $3.4 million from the prior year's third quarter but declined as a percentage of revenue to 6.6% compared to 7.0% in the third quarter of 2012. Variable selling expense for sales commissions contributed $2.9 million to the increase due to the increase in the number of homes delivered and the increase in our average sales price. During the third quarter of 2013, general and administrative expense increased $2.2 million but declined as a percentage of revenue to 6.6% compared to 7.7% for the third quarter of 2012. For the nine months ended September 30, 2013, selling expense increased $8.9 million from the nine months ended September 30, 2012 but declined as a percentage of revenue to 6.8% compared to 7.5% in the nine months ended September 30, 2012. Variable selling expense for sales commissions contributed $7.7 million to the increase due to the increase in the number of homes delivered and the higher average sales price. General and administrative expense increased $10.1 million compared to the nine months ended September 30, 2012 but declined as a percentage of revenue from 8.3% in the nine months ended September 30, 2012 to 7.5% in the nine months ended September 30, 2013. Overall, our selling, general and administrative expense was 13.2% and 14.2% of revenue in the third quarter and nine months ended September 30, 2013, respectively, compared to 14.7% and 15.8% for the same periods in 2012, respectively.

Summary of Operational Results

In addition to the improving financial results noted above, our operational metrics also improved. For the quarter ended September 30, 2013, we achieved a 15% increase in our new contracts and a 26% increase in homes delivered. For the nine months ended September 30, 2013, we achieved a 28% increase in our new contracts and a 25% increase in homes delivered. We also experienced a 36% increase in the number of homes in our backlog and a 46% increase in the overall sales value of our backlog as of September 30, 2013 compared to September 30, 2012. Furthermore, we continue to invest in communities and markets that we believe are helping us attain improved profitability as housing markets improve and enhance our ability to establish market share and create a platform for future growth in our current markets. During the nine month period ended September 30, 2013, we opened 47 new communities and closed 31 older communities. We have continued to make progress selling the remaining homes in our older communities, which have lower margins. For the nine months ended September 30, 2013, we reduced the number of homes delivered in older communities to 22% of our total homes delivered during the period, compared to 31% of the total homes delivered during the nine months ended September 30, 2012. Additionally, our absorption rates per community improved from 2.1 for the nine months ended September 30, 2012 to 2.4 for the nine months ended September 30, 2013.

Outlook

Looking ahead, although the rate of improvement in the overall housing industry may moderate due to the upward movement in interest rates which occurred during the second quarter of 2013 as well as a decline in consumer confidence resulting from recent political and economic uncertainty, we believe that the fundamentals supporting a sustained multi-year housing recovery remain strong. Despite a moderation in the pace of improvement in new home sales activity during the third quarter and concerns reflected in recent sales volatility, we believe that longer-term demand for new homes will continue to improve as consumers continue to perceive good values amidst limited supply and generally low interest rates. We believe that we will continue to benefit from the recovery in housing sales, though maybe not at the same rate of improvement that we experienced during the first six months of 2013. Specifically, the pace and increase in our new contracts and average sales price when compared to our prior year results may be less than what we have experienced to date in 2013, and this slower pace of improvement may lead to related impacts on the level of year-over-year improvements in our financial results.

Given our expectations with respect to homebuilding market conditions, and consistent with our focus on improving long-term returns, we will continue to emphasize the following strategic business objectives during the remainder of 2013:

profitably growing our presence in our existing markets;

strategically investing in new markets;

maintaining a strong balance sheet; and

emphasizing customer service, product design, and premier locations.

With these objectives and improving market conditions in mind, we took a number of steps during the nine months ended September 30, 2013 to position the Company for continued improvement throughout 2013 and beyond, including investing $156.7 million in land acquisition and $67.5 million in land development in the nine month period ended September 30, 2013 to help grow our


presence in our existing markets. We currently estimate that for fiscal 2013, we will spend approximately $300 million to $350 million on land purchases and land development.

We ended the third quarter of 2013 with $158.3 million of cash, no outstanding borrowings under our $200 million Credit Facility.

The following table shows, by segment, revenue; homebuilding gross margin; selling, general and administrative expense; operating income; and interest expense for the three and nine months ended September 30, 2013 and 2012, as well as the Company's income before income taxes for such periods:

                                         Three Months Ended September 30,           Nine Months Ended September 30,
(In thousands)                               2013                 2012                 2013                 2012
Revenue:
Midwest homebuilding                  $        82,689       $        79,015     $       222,890       $       198,994
Southern homebuilding                          96,275                50,828             216,181               123,400
Mid-Atlantic homebuilding                      89,550                72,649             239,061               172,977
Financial services (a)                          6,681                 6,383              22,343                15,623
Total revenue                         $       275,195       $       208,875     $       700,475       $       510,994

Gross margin:
Midwest homebuilding (b)              $        13,406       $        12,118     $        35,156       $        30,727
Southern homebuilding (b)                      17,992                11,962              40,077                25,410
Mid-Atlantic homebuilding (b)                  16,830                12,651              41,863                28,465
Financial services (a)                          6,681                 6,383              22,343                15,623
Total gross margin                    $        54,909       $        43,114     $       139,439       $       100,225

Selling, general and administrative
expense:
Midwest homebuilding                  $         8,292       $         8,178     $        23,460       $        21,715
Southern homebuilding                           9,721                 5,818              24,855                15,573
Mid-Atlantic homebuilding                       8,397                 6,864              22,902                18,969
Financial services (a)                          2,854                 2,423               8,892                 7,017
Corporate                                       6,996                 7,380              19,663                17,508
Total selling, general and
administrative expense                $        36,260       $        30,663     $        99,772       $        80,782

Operating income (loss):
Midwest homebuilding (b)              $         5,114       $         3,940     $        11,696       $         9,012
Southern homebuilding (b)                       8,271                 6,144              15,222                 9,837
Mid-Atlantic homebuilding (b)                   8,433                 5,787              18,961                 9,496
Financial services (a)                          3,827                 3,960              13,451                 8,606
Corporate                                      (6,996 )              (7,380 )           (19,663 )             (17,508 )
Total operating income                $        18,649       $        12,451     $        39,667       $        19,443

Interest expense:
Midwest homebuilding                  $         1,023       $         1,243     $         3,852       $         4,181
Southern homebuilding                           1,405                   999               4,510                 2,543
Mid-Atlantic homebuilding                         659                 1,342               2,809                 4,248
Financial services (a)                            362                   415               1,015                 1,094
Total interest expense                $         3,449       $         3,999     $        12,186       $        12,066

Equity in income of unconsolidated
joint ventures                                   (278 )                   -                (278 )                   -
Loss on early extinguishment of debt            1,726                     -               1,726                     -

Income before income taxes            $        13,752       $         8,452     $        26,033       $         7,377

(a) Our financial services operational results should be viewed in connection with our homebuilding business as its operations originate loans and provide title services primarily for our homebuying customers, with the exception of a small amount of mortgage re-financing.

(b) For the three months ended September 30, 2013 and 2012, the impact of charges relating to the impairment of inventory and investment in unconsolidated joint ventures and the write-off of abandoned land transaction costs was $2.1 million and $1.3 million, respectively. These charges reduced gross margin and operating income by $2.1 million and $1.3 million in the Midwest region for the three months ended September 30, 2013 and 2012, respectively. There were no charges in the Mid-Atlantic or Southern regions for the three months ended September 30, 2013 and 2012.

For the nine months ended September 30, 2013 and 2012, the impact of charges relating to the impairment of inventory and investment in unconsolidated joint ventures and the write-off of abandoned land transaction costs was $4.2 million and $2.1 million, respectively. These charges reduced operating income by $4.2 million and $1.9 million in the Midwest region for the nine months ended September 30, 2013 and 2012, respectively, and $0.1 million in each of


the Southern and Mid-Atlantic regions for the nine months ended September 30, 2012. There were no charges in the Mid-Atlantic or Southern regions for the nine months ended September 30, 2013.

The following tables show total assets by segment at September 30, 2013 and December 31, 2012:

                                                                At September 30, 2013
                                                                                     Corporate,
                                                                                 Financial Services
(In thousands)                      Midwest      Southern       Mid-Atlantic       and Unallocated         Total
Deposits on real estate under
option or contract                $   2,141     $   7,737     $        3,477     $               -     $    13,355
Inventory (a)                       241,233       212,665            209,083                     -         662,981
. . .
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