M/I Homes(MHO) - 2022 Q3 - Quarterly Report

Financial Information This section presents the company's financial performance and position for the three and nine months ended September 30, 2022 Unaudited Condensed Consolidated Financial Statements Presents unaudited condensed consolidated financial statements, highlighting significant increases in Q3 2022 net income and EPS, driven by revenue growth and substantial inventory asset rise Consolidated Financial Statements Total assets grew to $3.59 billion driven by inventory, with Q3 2022 net income at $131.6 million and diluted EPS at $4.67 - Total assets grew to $3.59 billion as of September 30, 2022, from $3.24 billion at December 31, 2021. This was primarily driven by an increase in inventory from $2.45 billion to $3.02 billion. Total shareholders' equity increased to $1.94 billion from $1.62 billion[11] Consolidated Statement of Income Highlights (in thousands, except per share) | Metric | Q3 2022 | Q3 2021 | 9M 2022 | 9M 2021 | | :--- | :--- | :--- | :--- | :--- | | Revenue | $1,012,928 | $904,319 | $2,914,393 | $2,694,135 | | Net Income | $131,590 | $91,012 | $360,267 | $283,485 | | Diluted EPS | $4.67 | $3.03 | $12.59 | $9.46 | - For the nine months ended September 30, 2022, net cash used in operating activities was $14.1 million, an improvement from the $34.3 million used in the same period in 2021. The cash usage was primarily due to a $533.0 million increase in inventory[16] Notes to Financial Statements Detailed notes reveal inventory growth to $3.02 billion, no impairments, increased share repurchase program, and an $8.4 million tax benefit from the Inflation Reduction Act - Total inventory increased to $3.02 billion at September 30, 2022, from $2.45 billion at year-end 2021. Homes under construction grew significantly to $1.62 billion from $1.19 billion[22] - The company did not record any impairment charges on its inventory or investments in unconsolidated joint ventures during the three and nine months ended September 30, 2022 and 2021[50][51] - The Board of Directors increased the 2021 Share Repurchase Program by an additional $100 million, bringing the total authorization to $200 million. In Q3 2022, the company repurchased 0.3 million shares for $15.1 million[106][108] - The enactment of the Inflation Reduction Act (IRA) in August 2022 resulted in the company recognizing an $8.4 million year-to-date tax benefit during Q3 2022 related to the extension of energy-efficient homes credits[95] Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses record Q3 2022 results despite market weakening, with revenue and net income up, but new contracts declined and cancellations rose Results of Operations Q3 2022 saw record revenue of $1.01 billion and net income of $131.6 million, despite a 31% drop in new contracts and a 17.0% cancellation rate - Despite a weakening housing market, the company achieved record third-quarter revenue ($1.01 billion), income before income taxes ($166.6 million), and net income ($131.6 million)[127][129] Key Operating Metrics Comparison (Q3 2022 vs Q3 2021) | Metric | Q3 2022 | Q3 2021 | Change | | :--- | :--- | :--- | :--- | | Homes Delivered | 2,026 | 2,045 | -1% | | New Contracts, net | 1,349 | 1,964 | -31% | | Cancellation Rate | 17.0% | 7.8% | +9.2 p.p. | | Avg. Sales Price Delivered | $487k | $430k | +13% | | Backlog (units) | 4,536 | 5,407 | -16% | - Housing gross margin percentage improved by 270 basis points to 25.4% in Q3 2022 from 22.7% in Q3 2021, primarily as a result of increased average sales prices[132] - Selling, general and administrative (SG&A) expense as a percentage of revenue improved to a third-quarter record of 10.3% in Q3 2022 from 10.7% in Q3 2021[134] Outlook Management anticipates a challenging 2022-2023 due to macroeconomic headwinds, focusing on land spend management, community expansion, and maintaining a strong balance sheet - The company acknowledges that the housing market decline worsened in Q3 2022 due to steep increases in mortgage rates, high inflation, and recession concerns[135] - Strategic objectives for the remainder of 2022 and into 2023 include: managing land spend, opening new communities, maintaining strong liquidity, and expanding affordable Smart Series homes[138] - The company ended Q3 2022 with approximately 46,100 lots under control, a 7% increase YoY, representing a 5.5-year supply. It expects to grow its community count by approximately 10% by the end of 2022[139][140] Liquidity and Capital Resources As of September 30, 2022, the company held $67.8 million in cash, with $453.4 million available liquidity and an improved homebuilding debt to capital ratio of 26% - As of September 30, 2022, the company had $67.8 million of cash, cash equivalents and restricted cash[181] Available Liquidity Sources (as of Sep 30, 2022, in thousands) | Facility | Expiration Date | Outstanding Balance | Available Amount | | :--- | :--- | :--- | :--- | | Notes payable – homebuilding (Credit Facility) | July 18, 2025 | $0 | $453,371 | | Notes payable – financial services | Various | $189,371 | $2,334 | - The ratio of homebuilding debt to capital improved to 26% at September 30, 2022, from 30% at December 31, 2021[194] - During the nine months ended September 30, 2022, the company repurchased 1.2 million common shares for $55.3 million under its share repurchase program[192] Quantitative and Qualitative Disclosures About Market Risk Primary market risk is interest rate fluctuations, hedged by derivative instruments like FMBSs against $477.1 million in uncommitted IRLCs - The company's primary market risk results from fluctuations in interest rates, which impact borrowings under its variable-rate credit facilities and its mortgage loan origination services[229] - To mitigate interest rate risk, the financial services segment uses derivative instruments, including forward sales of mortgage-backed securities (FMBSs) and whole loan delivery commitments, to hedge its interest rate lock commitments (IRLCs) and mortgage loans held for sale[231][232][233] Hedging Position (in thousands) | Instrument | Sep 30, 2022 | Dec 31, 2021 | | :--- | :--- | :--- | | Uncommitted IRLCs | $477,065 | $228,831 | | FMBSs related to uncommitted IRLCs | $476,000 | $223,000 | Controls and Procedures Management concluded disclosure controls and procedures were effective as of September 30, 2022, with no material changes to internal control over financial reporting - Based on an evaluation by management, the principal executive officer and principal financial officer concluded that the company's disclosure controls and procedures were effective as of September 30, 2022[237] - There were no changes in internal control over financial reporting during the quarter ended September 30, 2022, that have materially affected, or are reasonably likely to materially affect, internal controls[238] Other Information This section provides additional disclosures on legal proceedings, risk factors, equity sales, and other required information Legal Proceedings Details on legal proceedings, including $2.1 million stucco-related and $0.6 million other legal expense reserves, are provided in Note 6 - The company is involved in legal proceedings incidental to its business. Details are provided in Note 6 to the financial statements[239][75] - The company has received claims related to stucco installation in its Tampa and Orlando, Florida markets. As of September 30, 2022, the remaining reserve for these potential repairs was $2.1 million[70][71] - As of September 30, 2022, the company had reserved $0.6 million for other legal expenses, a decrease from $1.2 million at year-end 2021[75] Risk Factors Highlights material changes to risk factors, focusing on adverse effects of rising mortgage rates and inflation, potentially compressing profit margins - A significant increase in mortgage interest rates or a reduction in the availability of mortgage financing could adversely affect the business. Mortgage rates increased significantly during the first nine months of 2022[241][243] - The company may not be able to offset the impact of inflation on its costs for land, materials, and labor through home price increases, which could reduce profit margins[245] Unregistered Sales of Equity Securities and Use of Proceeds Details Q3 2022 share repurchase activity, with 340,000 shares bought for $15.1 million, leaving $93.1 million available under the program Share Repurchases in Q3 2022 | Period | Shares Purchased | Average Price Paid per Share | | :--- | :--- | :--- | | July 2022 | 10,000 | $46.24 | | August 2022 | 230,000 | $45.72 | | September 2022 | 100,000 | $41.20 | | Total Q3 2022 | 340,000 | $44.41 | - The Board of Directors increased the 2021 Share Repurchase Program by an additional $100 million, bringing the total authorization to $200 million[246] Other Required Disclosures Reports no defaults on senior securities, no mine safety disclosures, and no other material information, with a list of filed exhibits provided - The company reported no defaults on senior securities (Item 3), no mine safety disclosures (Item 4), and no other material information (Item 5) for the period[249][250][251] - A list of exhibits filed with the report is provided under Item 6, including amendments to agreements, a list of subsidiary guarantors, officer certifications, and XBRL data files[254]