M/I Homes(MHO) - 2020 Q2 - Quarterly Report

PART I. FINANCIAL INFORMATION This section presents the company's unaudited condensed consolidated financial statements and management's discussion and analysis of financial condition and results of operations Item 1. Financial Statements This section presents the unaudited condensed consolidated financial statements for M/I Homes, Inc. for the period ended June 30, 2020, including Balance Sheets, Statements of Income, Statement of Shareholders' Equity, and Statements of Cash Flows, along with detailed notes Unaudited Condensed Consolidated Balance Sheets As of June 30, 2020, total assets increased to $2.33 billion from $2.11 billion at December 31, 2019, driven by higher cash and inventory, while total liabilities rose to $1.23 billion from $1.10 billion, primarily due to new senior notes, and total shareholders' equity grew to $1.09 billion from $1.00 billion Condensed Consolidated Balance Sheet Data (in thousands) | Account | June 30, 2020 (unaudited) | December 31, 2019 | | :--- | :--- | :--- | | Total Assets | $2,327,708 | $2,105,594 | | Cash, cash equivalents and restricted cash | $94,023 | $6,083 | | Inventory | $1,830,810 | $1,769,507 | | Total Liabilities | $1,233,303 | $1,102,117 | | Senior notes due 2028 - net | $394,174 | — | | Senior notes due 2021 - net | — | $298,988 | | Total Shareholders' Equity | $1,094,405 | $1,003,477 | Unaudited Condensed Consolidated Statements of Income For the second quarter of 2020, M/I Homes reported a significant increase in performance, with revenue growing 14.5% year-over-year to $714.2 million and net income surging 80.2% to $54.5 million, with similar strong growth observed for the six-month period Consolidated Income Statement Highlights (in thousands, except per share data) | Metric | Q2 2020 | Q2 2019 | % Change | H1 2020 | H1 2019 | % Change | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Revenue | $714,194 | $623,686 | 14.5% | $1,291,797 | $1,104,795 | 17.0% | | Income before income taxes | $71,727 | $41,203 | 74.1% | $113,083 | $64,682 | 74.8% | | Net income | $54,508 | $30,246 | 80.2% | $86,254 | $47,969 | 79.8% | | Diluted EPS | $1.89 | $1.08 | 75.0% | $2.98 | $1.71 | 74.3% | Unaudited Condensed Consolidated Statements of Cash Flows For the six months ended June 30, 2020, net cash provided by operating activities was $82.8 million, a significant improvement from $10.6 million in the same period of 2019, with financing activities providing $25.8 million primarily from new senior notes, leading to an $87.9 million increase in the company's cash position Cash Flow Summary for Six Months Ended June 30 (in thousands) | Cash Flow Activity | 2020 | 2019 | | :--- | :--- | :--- | | Net cash provided by operating activities | $82,826 | $10,617 | | Net cash used in investing activities | ($20,702) | ($16,730) | | Net cash provided by financing activities | $25,816 | $4,977 | | Net increase (decrease) in cash | $87,940 | ($1,136) | Notes to Unaudited Condensed Consolidated Financial Statements The notes detail the basis of financial statement preparation, significant accounting policies, and provide breakdowns of key financial items, including inventory composition, debt structure changes, fair value measurements, warranty reserve activity, segment performance, and revenue recognition policies - The company adopted new accounting standards ASU 2016-13 (Credit Losses) and ASU 2018-13 (Fair Value Measurement) on January 1, 2020, which did not have a material impact on its financial statements[19][20] Inventory Breakdown (in thousands) | Category | June 30, 2020 | December 31, 2019 | | :--- | :--- | :--- | | Single-family lots, land and land development costs | $843,649 | $858,065 | | Homes under construction | $834,661 | $756,998 | | Model homes and furnishings - at cost | $94,532 | $98,777 | | Total inventory | $1,830,810 | $1,769,507 | - In January 2020, the company issued $400.0 million of 4.95% Senior Notes due 2028 and used the proceeds to redeem all $300 million of its 6.75% Senior Notes due 2021[92][93] Disaggregated Revenue (in thousands) | Revenue Source | H1 2020 | H1 2019 | | :--- | :--- | :--- | | Housing | $1,254,149 | $1,064,178 | | Land sales | $5,133 | $14,531 | | Financial services | $32,515 | $26,086 | | Total revenue | $1,291,797 | $1,104,795 | Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) Management discusses the company's record-setting financial performance for the second quarter and first half of 2020, highlighting significant growth in new contracts, homes delivered, revenue, and net income despite the COVID-19 pandemic, with a strong rebound in May and June after an April slowdown Results of Operations The company achieved record results in Q2 and H1 2020, with new contracts rising 31% in Q2 and homes delivered increasing by 19%, driving a 15% revenue increase to $714.2 million and a 74% surge in pre-tax income to $71.7 million for the quarter, attributed to strong demand, low interest rates, and a rebound in sales activity Key Performance Highlights - Q2 & H1 2020 vs 2019 | Metric | Q2 2020 vs Q2 2019 | H1 2020 vs H1 2019 | | :--- | :--- | :--- | | New Contracts | +31% | +29% | | Homes Delivered | +19% | +22% | | Revenue | +15% | +17% | | Income Before Income Taxes | +74% | +75% | | Net Income | +80% | +80% | - Despite the COVID-19 pandemic causing a substantial decline in new contracts in late March and April, sales activity rebounded significantly in May and June, leading to record quarterly results[147] - Housing gross margin percentage improved to 19.8% in Q2 2020 from 17.6% in Q2 2019, primarily due to the mix of homes delivered[154] Liquidity and Capital Resources As of June 30, 2020, the company had a strong liquidity position with $94.0 million in cash and $430.5 million available under its $500 million homebuilding credit facility, having enhanced its capital structure by issuing $400 million in 4.95% Senior Notes due 2028 and redeeming its $300 million 6.75% Senior Notes due 2021 - At June 30, 2020, the company had $94.0 million in cash and $430.5 million available under its Credit Facility, with no borrowings outstanding on the facility[206][208] - The company's homebuilding debt to capital ratio was 37% at June 30, 2020, compared to 38% at December 31, 2019[216] Available Sources of Cash (as of June 30, 2020, in thousands) | Facility | Outstanding Balance | Available Amount | | :--- | :--- | :--- | | Notes payable – homebuilding | $0 | $430,537 | | Notes payable – financial services | $134,184 | $25,582 | Off-Balance Sheet Arrangements The company utilizes off-balance sheet arrangements, primarily land option agreements, to secure lots while minimizing risk, with options on land totaling approximately $715.7 million in aggregate purchase price and a maximum exposure of $58.1 million in deposits and prepaid costs as of June 30, 2020 - At June 30, 2020, the company had options and contingent purchase agreements to acquire land and lots with an aggregate purchase price of approximately $715.7 million[80][211] - The company's maximum exposure related to land option agreements is estimated at $58.1 million, comprising cash deposits, prepaid costs, and letters of credit[243] - As of June 30, 2020, the company had $256.0 million of outstanding completion bonds and standby letters of credit, primarily for land development work[244] Item 3. Quantitative and Qualitative Disclosures About Market Risk The company's primary market risk is from interest rate fluctuations, affecting its variable-rate credit facilities and mortgage origination services, which M/I Financial hedges using derivative instruments like Interest Rate Lock Commitments (IRLCs) and Forward Sales of Mortgage-Backed Securities (FMBSs) - The company's primary market risk stems from interest rate fluctuations impacting its revolving credit facilities and mortgage origination operations[247] - To mitigate interest rate risk in its mortgage business, the company uses derivative instruments, including Interest Rate Lock Commitments (IRLCs) and Forward Sales of Mortgage-Backed Securities (FMBSs)[248][250] Notional Amounts of Key Financial Instruments (in thousands) | Description | June 30, 2020 | December 31, 2019 | | :--- | :--- | :--- | | Uncommitted IRLCs | $216,377 | $87,340 | | FMBSs related to uncommitted IRLCs | $186,000 | $88,000 | | Mortgage loans held for sale covered by FMBSs | $157,345 | $144,411 | Item 4. Controls and Procedures Based on an evaluation involving the CEO and CFO, management concluded that the company's disclosure controls and procedures were effective as of June 30, 2020, with no material changes to internal control over financial reporting during the second quarter of 2020 - The company's principal executive officer and principal financial officer concluded that disclosure controls and procedures were effective as of the end of the period covered by the report[255] - No changes in internal control over financial reporting occurred during the quarter ended June 30, 2020, that have materially affected, or are reasonably likely to materially affect, internal controls[256] PART II. OTHER INFORMATION This section covers legal proceedings, risk factors, equity security sales, defaults, mine safety, and other disclosures Item 1. Legal Proceedings The company is involved in legal proceedings related to stucco installation claims from homeowners in its Tampa and Orlando, Florida markets, in addition to other legal proceedings incidental to its business, though management believes the ultimate resolution will not have a material effect on the company's financial condition - The company is facing claims and legal proceedings from homeowners in Tampa and Orlando, Florida, related to stucco installation on their homes[257] - Management does not currently believe that the resolution of these and other incidental legal proceedings will have a material effect on the company's financial position or results of operations[258] Item 1A. Risk Factors The primary update to risk factors is the significant and adverse disruption caused by the COVID-19 pandemic, which has impacted operations, leading to sales declines and construction delays, and could continue to negatively affect consumer confidence, demand, supply chains, and overall financial performance - The company's business has been and may continue to be materially and adversely disrupted by the COVID-19 pandemic and the governmental measures implemented to address it[260] - The pandemic caused a significant decline in sales pace and an increase in cancellation rates in late March and April, though conditions improved in May and June[264] - Longer-term risks from COVID-19 include decreased consumer confidence, prolonged economic downturn, increased unemployment, and potential charges for inventory impairments or land option abandonments[265] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The company reported no unregistered sales of equity securities during the period and no repurchases of its common shares were made during the three months ended June 30, 2020, with $17.2 million remaining available for future repurchases under the 2018 Share Repurchase Program - There were no purchases of the company's common shares during the three months ended June 30, 2020[271] - As of June 30, 2020, $17.2 million remains available for repurchases under the 2018 Share Repurchase Program[127] Item 3. Defaults Upon Senior Securities The company reported no defaults upon senior securities during the reporting period - None[275] Item 4. Mine Safety Disclosures The company reported no mine safety disclosures - None[276] Item 5. Other Information The company reported no other information required to be disclosed under this item - None[277] Item 6. Exhibits This section lists the exhibits filed with the Form 10-Q, including amendments to credit and mortgage warehousing agreements, and certifications by the CEO and CFO as required by the Sarbanes-Oxley Act - Exhibits filed include the Third Amendment to the Credit Agreement and the Fourth Amendment to the Mortgage Warehousing Agreement[280] - Certifications by the CEO and CFO pursuant to Sections 302 and 906 of the Sarbanes-Oxley Act were filed with the report[280] Signatures This section provides the official signatures and date of filing for the report - The report was duly signed on July 31, 2020, by Robert H. Schottenstein, Chairman, CEO, and President, and Ann Marie W. Hunker, Vice President, Corporate Controller[282]