Search the web
Welcome, Guest
[Sign Out, My Account]
EDGAR_Online

Quotes & Info
Enter Symbol(s):
e.g. YHOO, ^DJI
Symbol Lookup | Financial Search
MHO > SEC Filings for MHO > Form 10-Q on 25-Jul-2014All Recent SEC Filings

Show all filings for M I HOMES INC

Form 10-Q for M I HOMES INC


25-Jul-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 88,000 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 June 30, 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 that housing market conditions, in general, remain healthy despite a moderation in the pace of new contracts in 2014's first half compared to 2013's first half. We believe this moderation in the housing industry was due to a number of factors, including (1) higher mortgage rates in the first half of 2014, (2) reduced affordability in certain markets as a result of higher average sales prices and higher mortgage rates, (3) a tepid economic recovery and uneven job creation, and (4) the imposition of lower loan limits on government-sponsored mortgages beginning in January 2014. Our results during the three and six months ended June 30, 2014 were also negatively impacted by the harsh weather conditions early in the year, which delayed the opening of certain of our new communities and their expected contribution to our new contracts, as well as lower traffic levels. Our new contracts declined by 6% for the three and six months ended June 30, 2014. Despite the moderation in new contracts in the first half of 2014, we experienced improvements in most of our financial and operating metrics for the three and six months ended June 30, 2014.

During the six months ended June 30, 2014, the Company reported revenue of $516.4 million, a 21.4% increase compared to the same period in 2013, and achieved net income of $26.2 million, of which $16.9 million ($0.54 per diluted share) related to our core profitability, and $9.3 million ($0.31 per diluted share) related to the accounting benefit from income taxes associated with the reversal 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 year-to-date gross and operating margins since 2006, with gross margin reaching 21.5% and operating margin reaching 6.7% for the six months ended June 30, 2014. 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 contributions 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 June 30, 2014, we achieved net income to common shareholders of $12.3 million, or $0.44 per diluted share, which included a $4.0 million accounting benefit from income taxes associated with the reversal of the remaining valuation allowance against our state deferred tax assets, $1.2 million of dividend payments made to holders of our Series A Preferred Shares and $0.8 million of pre-tax impairment charges. This compares to net income to common shareholders of $6.0 million, or $0.25 per diluted share, for the second quarter of 2013, which included $1.2 million of dividend payments made to holders of our Series A Preferred Shares and $1.2 million of pre-tax impairment charges. For the six months ended June 30, 2014, we achieved net income to common shareholders of $23.7 million, or $0.85 per diluted share, which included a $9.3 million accounting benefit from income taxes associated with the reversal of the remaining valuation allowance against our state deferred tax assets, $2.4 million of dividend payments made to holders of our Series A Preferred Shares and $0.8 million of pre-tax impairment charges.


This compares to net income to common shareholders of $8.4 million, or $0.36 per diluted share, for the six months ended June 30, 2013, which included 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, $2.1 million of pre-tax impairment charges and $1.2 million of dividend payments made to holders of our Series A Preferred Shares.

During the quarter ended June 30, 2014, we recorded total revenue of $281.6 million, of which $273.4 million was from homes delivered, $1.8 million was from land sales and $6.4 million was from our financial services operations. Revenue from homes delivered increased 23% driven primarily by the 106 additional homes delivered in 2014's second quarter compared to the same period in 2013 and a 9% increase in the average sales price of homes delivered ($25,000 per home delivered). Revenue from land sales decreased $3.8 million during the second quarter of 2014 primarily due to two large land sales in our Midwest region and a large land sale in our Mid-Atlantic region in the prior year. Revenue in our financial services segment decreased 11% to $6.4 million in the second quarter of 2014 primarily due to the factors discussed below in our "Year Over Year Comparison" section. For the first half of 2014, we recorded total revenue of $516.4 million, of which $494.1 million was from homes delivered, $8.0 million was from land sales and $14.3 million was from our financial services operations. Revenue from homes delivered increased 24% driven primarily by the 216 additional homes delivered in the first half of 2014 compared to the same period in 2013 and a 7% increase in the average sales price of homes delivered ($21,000 per home delivered). Revenue from land sales decreased $2.1 million from 2013's first half primarily due to a large land sale in our Mid-Atlantic region in the prior year. Revenue in our financial services segment decreased 8% to $14.3 million in the first half of 2014 primarily due to the factors discussed below in our "Year Over Year Comparisons" section.

Total gross margin increased $13.4 million in the second quarter of 2014 compared to the second quarter of 2013 primarily as a result of a $14.2 million improvement in the gross margin of our homebuilding operations, offset partially by a $0.8 million decline in gross margin from our financial services operations. The increase in homebuilding gross margin for the second quarter of 2014 resulted primarily from the 9% increase in the average sales price of homes delivered ($25,000 per home delivered) and the 106 unit increase in the number of homes delivered. For the six months ended June 30, 2014, total gross margin increased $26.0 million compared to the first half of 2013, which was largely the result of a $27.3 million improvement in the gross margin of our homebuilding operations, offset partially by a $1.3 million decline in gross margin from our financial services operations. The increase in homebuilding gross margin for the first half of 2014 resulted primarily from the 7% increase in the average sales price of homes delivered ($21,000 per home delivered) and the 216 unit increase in the number of homes delivered.

The increased sales prices for both the three and six months ended June 30, 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 and a shift in the mix of homes delivered to higher priced and larger homes. 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 six month period ended June 30, 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 pace of improvement in the homebuilding industry 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 $7.1 million and $12.3 million for the three and six months ended June 30, 2014, respectively, which offset, in part, the increase in our gross margins discussed above. For the second quarter of 2014, selling expense increased $4.0 million from the prior year's second quarter and increased as a percentage of revenue to 7.2% compared to 6.9% in the second quarter of 2013. Variable selling expense for sales commissions contributed $2.7 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 compared to 2013's second quarter. General and administrative expense increased $3.1 million during the second quarter of 2014 but improved slightly as a percentage of revenue to 7.6% compared to 7.7% for the second quarter of 2013. This increase was primarily due to a $0.8 million increase in incentive compensation expense and a $1.3 million increase in payroll-related expense, resulting primarily from the increase in our employee count related to our community count and backlog growth. For the six months ended June 30, 2014, selling expense increased $6.8 million from the first half of 2013 and increased slightly as a percentage of revenue to 7.0% compared to 6.9% in the first half of 2013. Variable selling expense for sales commissions contributed $4.3 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 $2.6 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 $5.5 million compared to the six months ended June 30, 2013 but improved as a percentage of revenue from 8.0% in the first half of 2013 to 7.7% in the first half of 2014. This increase was primarily due to a $1.9 million increase in incentive compensation expense and


a $2.5 million increase in payroll-related expense, resulting primarily from a 22% increase in our employee count related to our community count and backlog growth. Overall, our selling, general and administrative expense was 14.7% of revenue in both the second quarter and first half of 2014, respectively, compared to 14.7% and 14.9% for the same periods in 2013, respectively. Summary of Operational Results

In addition to the improving financial results noted above, certain of our operational metrics also improved. For the quarter ended June 30, 2014, we achieved a 13% increase in the number of homes delivered and a 9% increase in the average sales price of homes delivered compared to the same period a year ago. For the six months ended June 30, 2014, we achieved a 15% increase in the number of homes delivered and a 7% increase in the average sales price of homes delivered compared to 2013's first half. We also experienced a 13% increase in the average sales price of homes in backlog and an 11% increase in the overall sales value of our backlog at June 30, 2014 compared to June 30, 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 six month period ended June 30, 2014, we opened 22 communities and closed 34 communities. However, new contracts declined by 6% during the three and six months ended June 30, 2014 compared to a year ago and the number of homes in our backlog at June 30, 2014 declined by 2% compared to June 30, 2013. Our absorption rates per community also declined from 2.6 for the six months ended June 30, 2013 to 2.2 for the six months ended June 30, 2014. We believe this decline in new contracts, units in backlog and absorption rates from 2013's first half was the result of the general moderation of the pace of improvement in the housing market in the first half of 2014 compared to 2013's same period as well as harsh winter weather conditions that kept potential homebuyers at home and delayed our new community openings to later in the year. Additionally, comparing new contracts levels in the second quarter and first half of 2014 with the second quarter and first half of 2013 was challenging as a result of our strong level of new contracts in the first half of 2013, which represented a 34% increase compared to the first half of 2012. Outlook

Looking ahead, we continue to believe that the fundamentals supporting the housing recovery remain in place, despite recent moderation in the demand for new homes. We believe overall housing market conditions will continue to be positive over the next several quarters but expect the pace of new contracts to be more moderate than we experienced in 2013. We expect that the level of demand for housing will be uneven and will remain largely dependent on (1) our ability to open new communities during the second half of 2014, (2) traffic levels, (3) the extent of job growth and consumer confidence, and (4) the 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 of the Company's financial performance to prior year results 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;

review new markets for investment opportunities;

maintaining a strong balance sheet; and

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

With these objectives in mind, we took a number of steps during the first half of 2014 to position the Company for the remainder of 2014 and beyond, including investing $124.9 million in land acquisitions and $51.9 million in land development to help grow our presence in our existing markets. We currently estimate that we will spend approximately $425 million to $475 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 half of 2014. 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 half 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 and six months ended June 30, 2014 and 2013:

                                                Three Months Ended June 30,          Six Months Ended June 30,
(In thousands)                                    2014               2013               2014             2013
Revenue:
Midwest homebuilding                        $      85,549       $      79,498     $     165,153       $ 140,201
Southern homebuilding                             101,122              68,946           181,322         119,906
Mid-Atlantic homebuilding                          88,467              78,857           155,639         149,511
Financial services (a)                              6,470               7,252            14,335          15,662
Total revenue                               $     281,608       $     234,553     $     516,449       $ 425,280

Gross margin:
Midwest homebuilding                        $      16,382       $      12,560     $      31,779       $  21,750
Southern homebuilding                              20,180              12,299            35,396          22,084
Mid-Atlantic homebuilding                          16,555              14,105            28,954          25,034
Financial services (a)                              6,470               7,252            14,335          15,662
Total gross margin                          $      59,587       $      46,216     $     110,464       $  84,530

Selling, general and administrative
expense:
Midwest homebuilding                        $       9,656       $       8,180     $      17,810       $  15,168
Southern homebuilding                              11,531               8,441            20,870          15,136
Mid-Atlantic homebuilding                           8,971               7,921            16,577          14,504
Financial services (a)                              3,096               3,082             5,935           6,037
Corporate                                           8,278               6,800            14,624          12,667
Total selling, general and administrative
expense                                     $      41,532       $      34,424     $      75,816       $  63,512

Operating income (loss):
Midwest homebuilding                        $       6,726       $       4,381     $      13,969       $   6,582
Southern homebuilding                               8,649               3,858            14,526           6,949
Mid-Atlantic homebuilding                           7,584               6,184            12,377          10,529
Financial services (a)                              3,374               4,169             8,400           9,625
Corporate                                          (8,278 )            (6,800 )         (14,624 )       (12,667 )
Total operating income                      $      18,055       $      11,792     $      34,648       $  21,018

Interest expense:
Midwest homebuilding                        $         492       $       1,356     $       1,761       $   2,830
Southern homebuilding                               1,368               1,800             2,959           3,104
Mid-Atlantic homebuilding                             568                 906             1,563           2,149
Financial services (a)                                302                 335               617             654
Total interest expense                      $       2,730       $       4,397     $       6,900       $   8,737

Equity in loss (income) of unconsolidated
joint ventures                                         22                   -               (40 )             -

Income before income taxes                  $      15,303       $       7,395     $      27,788       $  12,281

(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 June 30, 2014 and December 31, 2013:

                                                                   At June 30, 2014
                                                                                     Corporate,
                                                                                 Financial Services
(In thousands)                      Midwest      Southern       Mid-Atlantic       and Unallocated         Total
Deposits on real estate under
option or contract                $   3,009     $   8,364     $        5,175     $               -     $    16,548
Inventory (a)                       274,305       295,883            229,404                     -         799,592
Investments in unconsolidated
joint ventures                        3,671        38,511                  -                     -          42,182
Other assets                         13,707        19,165             11,532               223,980         268,384
Total assets                      $ 294,692     $ 361,923     $      246,111     $         223,980     $ 1,126,706


                                                                 At December 31, 2013
                                                                                     Corporate,
. . .
  Add MHO to Portfolio     Set Alert         Email to a Friend  
Get SEC Filings for Another Symbol: Symbol Lookup
Quotes & Info for MHO - All Recent SEC Filings
Copyright © 2014 Yahoo! Inc. All rights reserved. Privacy Policy - Terms of Service
SEC Filing data and information provided by EDGAR Online, Inc. (1-800-416-6651). All information provided "as is" for informational purposes only, not intended for trading purposes or advice. Neither Yahoo! nor any of independent providers is liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. By accessing the Yahoo! site, you agree not to redistribute the information found therein.