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MHO > SEC Filings for MHO > Form 10-Q on 25-Apr-2014All Recent SEC Filings

Show all filings for M I HOMES INC

Form 10-Q for M I HOMES INC


25-Apr-2014

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 more than 87,000 homes since we commenced homebuilding activities in 1976. The Company's homes are marketed and sold under the M/I Homes brand (M/I Homes and Showcase Collection (exclusively by M/I)). We also operate under the name Triumph Homes in certain communities in our Houston, Texas market. 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, 2013 for more information regarding those risk factors.

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, 2013 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 March 31, 2014 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, 2013.


RESULTS OF OPERATIONS

The Company's segment information is presented on the basis that its 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

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

We believe the housing market in general moderated in 2014's first quarter compared to 2013's first quarter, which we believe was due to a number of factors, including (1) the increase in mortgage rates since May 2013, (2) reduced affordability in certain markets as a result of increasing average sales prices as well as the higher mortgage rates, (3) the tepid pace of the economic recovery and uneven job creation, and (4) the imposition of lower loan limits on government-sponsored mortgages beginning in January 2014. We believe our first quarter results were also negatively impacted, comparatively, by the harsh weather conditions in many of our markets which kept potential homebuyers at home, delayed the opening of certain of our new communities and their contribution to our new contract results, and delayed the completion of construction of homes. Despite this moderation in the housing market and the unfavorable weather conditions, we experienced improvements in most of our financial and operating metrics, with the exception of our new contracts, which declined by 6% during the three months ended March 31, 2014 compared to a year ago.

During the quarter ended March 31, 2014, the Company reported a 23.1% increase in revenue compared to the same period in 2013 and achieved net income of $12.6 million, of which $7.3 million ($0.23 per diluted share) related to our core profitability and $5.3 million ($0.18 per diluted share) related to the accounting benefit from income taxes associated with the reversal of a portion of our remaining state deferred tax asset valuation allowance (see Note 9 to our Unaudited Condensed Consolidated Financial Statements for further information). We also achieved our highest gross and operating margins in any quarter since 2006, with gross margin reaching 21.7% and operating margin reaching 7.1%. We believe our improved results of operations are attributable to (1) our strategic growth and investment in new communities, along with a shift in our mix of communities towards better performing locations within each of our markets; (2) our continued progress in shifting our investment to housing markets with stronger economic growth, including expansion into new markets; and (3) the strong contribution from our financial services operations. Please see further discussion of our financial and operating metrics below in the "Summary of Company Results" and our "Year Over Year Comparison" section.

Summary of Financial Results

For the quarter ended March 31, 2014, we achieved net income to common shareholders of $11.4 million, or $0.41 per diluted share, which included a $5.3 million accounting benefit from income taxes associated with the reversal of a portion of the remaining valuation allowance against our state deferred tax assets 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 $2.4 million, or $0.11 per diluted share, for the first quarter of 2013, which included $0.9 million of pre-tax impairment charges and 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.


During the three months ended March 31, 2014, we recorded total revenue of $234.8 million of which $220.7 million was from homes delivered, $6.3 million was from land sales and $7.9 million was from our financial services operations. Revenue from homes delivered increased 24% driven primarily by the 110 additional homes delivered in 2014's first quarter compared to the same period in 2013 and a 5% increase in the average sales price of homes delivered ($15,000 per home delivered). In addition revenue from land sales increased $1.7 million during the first quarter of 2014 primarily due to two large land sales in our Midwest region offset partially by a slight decline in revenue from land sales in our Mid-Atlantic region compared to prior year. Revenue in our financial services segment decreased 6% to $7.9 million in the first quarter of 2014 primarily due to the factors discussed below in our "Year Over Year Comparison" section.

Total gross margin increased $12.6 million in the first quarter of 2014 compared to the first quarter of 2013 primarily as a result of a $12.5 million improvement in the gross margin of our homebuilding operations. The increase in homebuilding gross margin for the three months ended March 31, 2014 resulted primarily from the 5% increase in the average sales price of homes delivered ($15,000 per home delivered) and the 110 unit increase in the number of homes delivered. The increased sales prices for the three months ended March 31, 2014 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. We also experienced better pricing leverage in select locations and submarkets. The pricing and unit improvements were partially offset by higher average lot and construction costs related to both the mix of homes delivered as well as cost increases associated with homebuilding industry conditions and normal supply and demand dynamics. In the three month period ended March 31, 2014, we were able to pass a majority of the higher costs to our homebuyers in the form of higher sales prices and lower incentives. However, recent moderation in the sales price appreciation trends we experienced in the first half of 2013 may make it more difficult to continue to fully offset any additional increases in lot, material, labor and land costs that we may experience going forward.

Selling, general and administrative expense increased $5.2 million for the three months ended March 31, 2014, which partially offset the increase in our gross margins discussed above, but declined as a percentage of revenue to 14.6% compared to 15.3% for the three months ended March 31, 2013. Selling expense increased $2.9 million during the first quarter of 2014 from the prior year's first quarter but declined slightly as a percentage of revenue to 6.8% compared to 6.9% in the first quarter of 2013. Variable selling expense for sales commissions contributed $1.6 million to the increase due to the increase in the number of homes delivered and the higher average sales price. The increase in selling expense was also attributable to a $1.3 million increase in non-variable selling expense primarily related to an increase in expenses associated with our sales offices and models resulting from the increase in our number of communities. General and administrative expense increased $2.3 million during the first quarter of 2014 but declined as a percentage of revenue to 7.8% compared to 8.4% for the first quarter of 2013. This increase was primarily due to a $0.7 million increase in incentive compensation expense and a $1.5 million increase in payroll-related expense, resulting primarily from a 29% increase in our employee count related to our community count and backlog growth. Summary of Operational Results

In addition to the improving financial results noted above, certain of our operational metrics also improved. For the quarter ended March 31, 2014, we achieved an 18% increase in the number of homes delivered and a 5% increase in the average sales price of homes delivered compared to the same period a year ago. We also experienced a 10% increase in the number of homes in our backlog, a 12% increase in the average sales price of homes in backlog, and a 24% increase in the overall sales value of our backlog at March 31, 2014 compared to March 31, 2013. We continue to invest in communities and markets that we believe will help 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 three month period ended March 31, 2014, we opened 13 communities and closed 12 communities. However, new contracts declined by 6% during the three months ended March 31, 2014 compared to a year ago, and our absorption rates per community declined from 2.6 for the three months ended March 31, 2013 to 2.1 for the three months ended March 31, 2014. We believe this decline in new contracts and absorption rates from 2013's first quarter was the result of a more cautious homebuyer in 2014 as described above and harsh winter weather conditions that kept potential homebuyers at home and delayed our new community openings to late in the quarter. Additionally, the comparison of new contracts in the first quarter of 2014 with the prior year's first quarter was challenging as a result of our strong level of new contracts in the first quarter of 2013, which represented a 37% increase compared to the first quarter of 2012.
Outlook

Looking ahead, we continue to believe that the long-term fundamentals supporting a sustained multi-year housing recovery remain in place, despite recent softening in the demand for new homes. Taking into account normal seasonality, we believe an improving economy and job market should lead to a healthy level of demand for housing through the remainder of 2014, although likely at a more moderate and uneven pace. We expect that the level of demand will remain largely dependent on the extent of job growth and consumer confidence, along with stability in mortgage loan underwriting standards and interest rates. Furthermore, despite


increased home prices and higher mortgage rates (which remain at historically low levels), we believe that the average cost of new home ownership currently provides value compared to the average cost of renting in most markets, and the current limited availability of housing inventory should increase the need for construction of new homes. We believe these conditions in the housing market, combined with our investments in land for new communities in desirable locations, should lead to continued positive comparisons in the Company's financial performance through the remainder of 2014.

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 2014:

profitably growing our presence in our existing markets;

strategically investing in new markets;

maintain a strong balance sheet; and

emphasizing customer service, product quality and design, and premier locations.

With these objectives in mind and given our belief that we remain in the early stages of a broad, sustainable recovery in the U.S. new home market, we took a number of steps during the first three months of 2014 to position the Company for the remainder of 2014 and beyond, including investing $53.0 million in land acquisitions and $17.5 million in land development to help grow our presence in our existing markets. We currently estimate that we will spend approximately $400 million to $500 million in 2014 on land purchases and land development. However, given varying results in each of our local markets, we will continue to adjust our strategies and investments based on housing demand and our performance in each of our markets.
Despite our positive expectations, it is unclear whether our financial results will continue to improve at the rate they did in 2013 and the first quarter of 2014 or whether our financial services operations will experience the same favorable operating results as in 2013. Going forward, we believe our abilities to leverage our fixed costs, obtain land at desired rates of return, and grow our active communities provide our best opportunities to continue improving our financial results. However, we can provide no assurance that the rate of positive annual trends and/or sequential trends experienced in our financial and operating metrics in 2013 and the first quarter of 2014 will continue throughout the remainder of 2014.


The following table shows, by segment, revenue; gross margin; selling, general and administrative expense; operating income (loss); interest expense; and income before income taxes for the three months ended March 31, 2014 and 2013:

                                                                Three Months Ended March 31,
(In thousands)                                                    2014                 2013
Revenue:
Midwest homebuilding                                        $       79,604       $       60,702
Southern homebuilding                                               80,200               50,961
Mid-Atlantic homebuilding                                           67,172               70,654
Financial services (a)                                               7,865                8,410
Total revenue                                               $      234,841       $      190,727

Gross margin:
Midwest homebuilding                                        $       15,397       $        9,189
Southern homebuilding                                               15,216                9,786
Mid-Atlantic homebuilding                                           12,399               10,929
Financial services (a)                                               7,865                8,410
Total gross margin                                          $       50,877       $       38,314

Selling, general and administrative expense:
Midwest homebuilding                                        $        8,154       $        6,988
Southern homebuilding                                                9,339                6,695
Mid-Atlantic homebuilding                                            7,606                6,584
Financial services (a)                                               2,839                2,955
Corporate                                                            6,346                5,866
Total selling, general and administrative expense           $       34,284       $       29,088

Operating income (loss):
Midwest homebuilding                                        $        7,243       $        2,201
Southern homebuilding                                                5,877                3,091
Mid-Atlantic homebuilding                                            4,793                4,345
Financial services (a)                                               5,026                5,455
Corporate                                                           (6,346 )             (5,866 )
Total operating income                                      $       16,593       $        9,226

Interest expense:
Midwest homebuilding                                        $        1,269       $        1,474
Southern homebuilding                                                1,591                1,304
Mid-Atlantic homebuilding                                              995                1,244
Financial services (a)                                                 315                  318
Total interest expense                                      $        4,170       $        4,340

Equity in income of unconsolidated joint ventures                      (62 )                  -

Income before income taxes                                  $       12,485       $        4,886

(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 refinancing.


The following tables show total assets by segment at March 31, 2014 and December 31, 2013:

                                                                  At March 31, 2014
                                                                                     Corporate,
                                                                                 Financial Services
(In thousands)                      Midwest      Southern       Mid-Atlantic       and Unallocated         Total
Deposits on real estate under
option or contract                $   2,040     $   9,353     $        5,517     $               -     $    16,910
Inventory (a)                       240,696       256,348            209,673                     -         706,717
Investments in unconsolidated
joint ventures                        4,361        40,486                  -                     -          44,847
Other assets                         11,115        16,268              8,121               280,925         316,429
Total assets                      $ 258,212     $ 322,455     $      223,311     $         280,925     $ 1,084,903


                                                                 At December 31, 2013
                                                                                     Corporate,
                                                                                 Financial Services
(In thousands)                      Midwest      Southern       Mid-Atlantic       and Unallocated         Total
Deposits on real estate under
option or contract                $   2,003     $   7,107     $        5,255     $               -     $    14,365
Inventory (a)                       248,218       236,505            191,847                     -         676,570
Investments in unconsolidated
joint ventures                        5,331        29,935                  -                     -          35,266
Other assets                         10,571           982             11,050               361,372         383,975
Total assets                      $ 266,123     $ 274,529     $      208,152     $         361,372     $ 1,110,176

(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.


Reportable Segments

The following table presents, by reportable segment, selected operating and
financial information as of and for the three months ended March 31, 2014 and
2013:
                                                             Three Months Ended March 31,
(Dollars in thousands)                                            2014             2013
Midwest Region
Homes delivered                                                        259            232
New contracts, net                                                     374            349
Backlog at end of period                                               660            535
Average sales price per home delivered                      $          296     $      262
Average sales price of homes in backlog                     $          317     $      270
Aggregate sales value of homes in backlog                   $      209,311     $  144,480
Revenue homes                                               $       76,656     $   60,702
Revenue third party land sales                              $        2,948     $        -
Operating income homes                                      $        6,336     $    2,849
Operating income (loss) land                                $          907     $     (648 )
Number of active communities                                            67             61
Southern Region
Homes delivered                                                        275            191
New contracts, net                                                     336            378
Backlog at end of period                                               510            528
Average sales price per home delivered                      $          284     $      258
Average sales price of homes in backlog                     $          331     $      280
Aggregate sales value of homes in backlog                   $      168,607     $  147,679
Revenue homes                                               $       78,146     $   49,258
Revenue third party land sales                              $        2,054     $    1,703
Operating income homes                                      $        5,756     $    2,061
Operating income land                                       $          121     $    1,030
Number of active communities                                            52             39
Mid-Atlantic Region
Homes delivered                                                        203            204
New contracts, net                                                     272            320
Backlog at end of period                                               355            322
Average sales price per home delivered                      $          325     $      332
Average sales price of homes in backlog                     $          334     $      339
Aggregate sales value of homes in backlog                   $      118,510     $  109,026
. . .
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