M/I Homes(MHO) - 2023 Q2 - Quarterly Report

PART I. FINANCIAL INFORMATION Item 1. Financial Statements The unaudited condensed consolidated financial statements for the period ended June 30, 2023, show a slight decrease in quarterly revenue and net income compared to the prior year, but an increase in revenue for the six-month period, with a strengthened balance sheet and improved cash flow from operations Condensed Consolidated Balance Sheets As of June 30, 2023, total assets increased to $3.86 billion from $3.71 billion at year-end 2022, primarily driven by a more than doubling of cash and cash equivalents to $668.3 million, while total liabilities decreased to $1.56 billion, contributing to a rise in total shareholders' equity to $2.30 billion Condensed Consolidated Balance Sheet Highlights (in thousands) | Account | June 30, 2023 (unaudited) | December 31, 2022 | | :--- | :--- | :--- | | Assets | | | | Cash, cash equivalents and restricted cash | $668,287 | $311,542 | | Inventory | $2,687,014 | $2,828,602 | | Total Assets | $3,861,749 | $3,714,923 | | Liabilities & Equity | | | | Total Liabilities | $1,563,290 | $1,644,198 | | Total Shareholders' Equity | $2,298,459 | $2,070,725 | | Total Liabilities and Shareholders' Equity | $3,861,749 | $3,714,923 | Condensed Consolidated Statements of Income For the second quarter of 2023, revenue was $1.01 billion, a slight decrease from $1.04 billion in Q2 2022, with net income for the quarter at $118.0 million ($4.12 per diluted share), down from $136.8 million ($4.79 per diluted share) year-over-year, while for the six-month period, revenue increased to $2.01 billion from $1.90 billion, and net income slightly decreased to $221.1 million from $228.7 million Consolidated Income Statement Summary (in thousands, except per share amounts) | Metric | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :--- | :--- | :--- | :--- | :--- | | Revenue | $1,014,013 | $1,040,654 | $2,014,543 | $1,901,465 | | Net Income | $118,001 | $136,838 | $221,067 | $228,677 | | Diluted EPS | $4.12 | $4.79 | $7.77 | $7.93 | Condensed Consolidated Statements of Cash Flows For the six months ended June 30, 2023, the company generated $417.7 million in net cash from operating activities, a substantial increase from $78.5 million in the same period of 2022, primarily driven by a significant positive change in inventory, while net cash used in financing activities decreased to $58.1 million from $114.7 million year-over-year Cash Flow Summary for Six Months Ended June 30 (in thousands) | Cash Flow Activity | 2023 | 2022 | | :--- | :--- | :--- | | Net cash provided by operating activities | $417,689 | $78,540 | | Net cash used in investing activities | ($2,802) | ($11,463) | | Net cash used in financing activities | ($58,142) | ($114,690) | | Net increase (decrease) in cash | $356,745 | ($47,613) | Notes to Financial Statements The notes detail the company's accounting policies and provide further breakdown of financial statement items, including inventory composition, fair value measurements for financial instruments, debt structure and covenants, segment performance, and the share repurchase program, with no significant changes to accounting policies reported Inventory Breakdown (in thousands) | Category | June 30, 2023 | December 31, 2022 | | :--- | :--- | :--- | | Single-family lots, land and land development costs | $1,296,486 | $1,294,779 | | Homes under construction | $1,207,759 | $1,366,804 | | Total inventory | $2,687,014 | $2,828,602 | Debt Structure (in thousands) | Debt Instrument | June 30, 2023 | December 31, 2022 | | :--- | :--- | :--- | | Notes payable bank - financial services | $186,396 | $245,741 | | Senior notes due 2028 - net | $396,492 | $396,105 | | Senior notes due 2030 - net | $296,613 | $296,361 | - The company repurchased 0.2 million common shares for $15.2 million in Q2 2023, with $77.9 million remaining available for repurchases under the 2021 Share Repurchase Program as of June 30, 2023[99] Management's Discussion and Analysis (MD&A) Management reported a strong second quarter with better-than-expected revenues and deliveries, driven by improved homebuyer demand despite higher interest rates, with new contracts increasing 21% year-over-year, and while gross margins declined from the prior year due to higher costs, they improved sequentially from Q1 2023, maintaining a strong balance sheet and liquidity, and planning to grow community count by approximately 15% by year-end 2023, despite acknowledging macroeconomic uncertainty - Key results for Q2 2023 versus Q2 2022 include a 21% increase in new contracts to 2,197, a 3% increase in average sales price of delivered homes to a record $493,000, and a 7% decrease in homes delivered to 1,990[117] - The company's strategic objectives for the remainder of 2023 include managing land spend, improving build cycle times, opening new communities, managing overhead, maintaining a strong balance sheet, and emphasizing customer service and quality[135] - The company ended Q2 2023 with approximately 41,300 lots under control, representing about a 5-year supply, and 195 active communities, up from 168 a year prior[132][133] Results of Operations For Q2 2023, total revenue decreased 3% to $1.01 billion, and income before taxes fell 15% to $155.4 million compared to Q2 2022, driven by lower homebuilding revenue in the Northern region and a 230 basis point drop in housing gross margin to 23.7% company-wide due to higher construction costs and incentives, while SG&A expenses increased as a percentage of revenue to 10.6%, with the Southern region showing revenue growth and the Financial Services segment's income improving Q2 2023 vs Q2 2022 Performance Summary (in millions) | Metric | Q2 2023 | Q2 2022 | Change | | :--- | :--- | :--- | :--- | | Total Revenue | $1,014.0 | $1,040.7 | -3% | | Income Before Taxes | $155.4 | $182.2 | -15% | | Net Income | $118.0 | $136.8 | -14% | | Housing Gross Margin % | 23.7% | 26.0% | -230 bps | - The total cancellation rate for new contracts improved to 10.4% in Q2 2023 from 11.2% in Q2 2022[145] Liquidity and Capital Resources The company's liquidity position strengthened significantly, with unrestricted cash increasing by $356.8 million during the first half of 2023 to reach $667.4 million, driven by strong operating cash flow of $417.7 million, with no borrowings under its $650 million homebuilding credit facility and $568.8 million available, and the homebuilding debt-to-capital ratio improved to 23% from 25% at year-end 2022 - Cash, cash equivalents, and restricted cash increased to $668.3 million at June 30, 2023, up from $311.5 million at December 31, 2022[173] Key Liquidity Metrics | Metric | June 30, 2023 | | :--- | :--- | | Cash from Operations (YTD) | $417.7 million | | Available Homebuilding Credit Facility | $568.8 million | | Homebuilding Debt to Capital Ratio | 23% | - During the first half of 2023, the company invested $141.7 million in land acquisitions and $201.3 million in land development[131] Quantitative and Qualitative Disclosures About Market Risk The company's primary market risk stems from interest rate fluctuations, which affect its variable-rate debt and mortgage origination operations, with the financial services segment using derivative instruments, such as Interest Rate Lock Commitments (IRLCs) and Forward Sales of Mortgage-Backed Securities (FMBSs), to hedge against the risk of interest rate changes between a loan rate lock and its sale - The company is exposed to interest rate risk through its variable-rate revolving credit facilities, which permitted total borrowings up to $940 million as of June 30, 2023[219] Hedging Instrument Notional Amounts (in thousands) | Instrument | June 30, 2023 | December 31, 2022 | | :--- | :--- | :--- | | Uncommitted IRLCs | $222,123 | $262,529 | | FMBSs related to uncommitted IRLCs | $212,000 | $341,088 | | FMBSs related to mortgage loans held for sale | $175,000 | $232,518 | Controls and Procedures Based on an evaluation by management, including the CEO and CFO, the company concluded that its disclosure controls and procedures were effective as of June 30, 2023, with no material changes made to the internal control over financial reporting during the quarter - The principal executive officer and principal financial officer concluded that the company's disclosure controls and procedures were effective as of the end of the reporting period[227] - There were no changes in internal control over financial reporting during the quarter that have materially affected, or are reasonably likely to materially affect, internal controls[228] PART II. OTHER INFORMATION Legal Proceedings The company is involved in legal proceedings incidental to its business, and management believes the ultimate resolution will not have a material effect on the company's financial position, with a reserve of $1.1 million for legal expenses recorded as of June 30, 2023 - The company's legal proceedings are discussed in Note 6 to the Consolidated Financial Statements[229] - As of June 30, 2023, the company had reserved $1.1 million for legal expenses[70] Risk Factors There have been no material changes to the risk factors disclosed in the company's Annual Report on Form 10-K for the year ended December 31, 2022 - No material changes to the risk factors from the 2022 Form 10-K were reported[230] Unregistered Sales of Equity Securities and Use of Proceeds During the second quarter of 2023, the company repurchased 210,000 of its common shares for a total of approximately $15.2 million under its publicly announced share repurchase program, with approximately $77.9 million remaining available for future repurchases as of June 30, 2023 Common Share Purchases in Q2 2023 | Period | Total Shares Purchased | Average Price Paid per Share | Dollar Value Remaining for Purchase | | :--- | :--- | :--- | :--- | | April 2023 | — | $— | $93.1 million | | May 2023 | 120,000 | $70.60 | $84.7 million | | June 2023 | 90,000 | $74.84 | $77.9 million | | Q2 Total | 210,000 | $72.42 | $77.9 million |