10-Q 1 mho-20170331x10q.htm 10-Q Document


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 2017
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES ACT OF 1934
Commission File Number 1-12434

M/I HOMES, INC.
(Exact name of registrant as specified in it charter)
 
Ohio
 
31-1210837
 
 
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
3 Easton Oval, Suite 500, Columbus, Ohio 43219
(Address of principal executive offices) (Zip Code)
(614) 418-8000
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes
X
 
No
 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes
X
 
No
 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer
 
 
Accelerated filer
X
 
 
Non-accelerated filer
 
 
Smaller reporting company
 
 
 
 (Do not check if a smaller reporting company)
 
 
Emerging growth company
 
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. q

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes
 
 
No
X
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Common shares, par value $.01 per share: 24,794,792 shares outstanding as of April 26, 2017.




M/I HOMES, INC.
FORM 10-Q
 
 
 
 
TABLE OF CONTENTS
 
 
 
 
PART 1.
FINANCIAL INFORMATION
 
 
 
 
 
Item 1.
M/I Homes, Inc. and Subsidiaries Unaudited Condensed Consolidated Financial Statements
 
 
 
 
 
 
 
Unaudited Condensed Consolidated Balance Sheets at March 31, 2017 and December 31, 2016
 
 
 
 
 
 
Unaudited Condensed Consolidated Statements of Income for the Three Months ended March 31, 2017 and 2016
 
 
 
 
 
 
Unaudited Condensed Consolidated Statement of Shareholders’ Equity for the Three Months Ended March 31, 2017
 
 
 
 
 
 
Unaudited Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2017 and 2016
 
 
 
 
 
 
Notes to Unaudited Condensed Consolidated Financial Statements
 
 
 
 
 
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
 
 
 
 
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
 
 
 
 
 
Item 4.
Controls and Procedures
 
 
 
 
PART II.
OTHER INFORMATION
 
 
 
 
 
Item 1.
Legal Proceedings
 
 
 
 
 
Item 1A.
Risk Factors
 
 
 
 
 
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
 
 
 
 
 
Item 3.
Defaults Upon Senior Securities
 
 
 
 
 
Item 4.
Mine Safety Disclosures
 
 
 
 
 
Item 5.
Other Information
 
 
 
 
 
Item 6.
Exhibits
 
 
 
 
Signatures
 
 
 
 
 
 
Exhibit Index
 
 



2





M/I HOMES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except par values)
 
March 31,
2017
 
December 31,
2016
 
 
(unaudited)
 
 
 
 
 
 
 
ASSETS:
 
 
 
 
Cash, cash equivalents and restricted cash
 
$
38,898

 
$
34,441

Mortgage loans held for sale
 
113,596

 
154,020

Inventory
 
1,286,618

 
1,215,934

Property and equipment - net
 
22,338

 
22,299

Investment in unconsolidated joint ventures
 
24,218

 
28,016

Deferred income taxes
 
30,449

 
30,875

Other assets
 
56,148

 
62,926

TOTAL ASSETS
 
$
1,572,265

 
$
1,548,511

 
 
 
 
 
LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
 
 
 
 
 
 
LIABILITIES:
 
 
 
 
Accounts payable
 
$
94,403

 
$
103,212

Customer deposits
 
26,680

 
22,156

Other liabilities
 
97,576

 
123,162

Community development district obligations
 
6,277

 
476

Obligation for consolidated inventory not owned
 
11,968

 
7,528

Notes payable bank - homebuilding operations
 
110,900

 
40,300

Notes payable bank - financial services operations
 
106,937

 
152,895

Notes payable - other
 
7,022

 
6,415

Convertible senior subordinated notes due 2017 - net
 
57,237

 
57,093

Convertible senior subordinated notes due 2018 - net
 
85,600

 
85,423

Senior notes due 2021 - net
 
295,953

 
295,677

TOTAL LIABILITIES
 
$
900,553

 
$
894,337

 
 
 
 
 
Commitments and contingencies (Note 6)
 

 

 
 
 
 
 
SHAREHOLDERS’ EQUITY:
 
 
 
 
Preferred shares - $.01 par value; authorized 2,000,000 shares; 2,000 shares issued and outstanding at both
     March 31, 2017 and December 31, 2016
 
$
48,163

 
$
48,163

Common shares - $.01 par value; authorized 58,000,000 shares at both March 31, 2017 and December 31, 2016; issued 27,092,723 shares at both March 31, 2017 and December 31, 2016
 
271

 
271

Additional paid-in capital
 
246,092

 
246,549

Retained earnings
 
422,825

 
407,161

Treasury shares - at cost - 2,297,931 and 2,415,290 shares at March 31, 2017 and December 31, 2016, respectively
 
(45,639
)
 
(47,970
)
TOTAL SHAREHOLDERS’ EQUITY
 
$
671,712

 
$
654,174

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
 
$
1,572,265

 
$
1,548,511


See Notes to Unaudited Condensed Consolidated Financial Statements.

3



M/I HOMES, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME

 
Three Months Ended March 31,
(In thousands, except per share amounts)
2017
 
2016
 
 
 
 
Revenue
$
406,980

 
$
324,370

Costs and expenses:
 
 
 
Land and housing
320,281

 
260,172

General and administrative
27,760

 
22,259

Selling
27,283

 
22,266

Equity in income of unconsolidated joint ventures
(17
)
 
(307
)
Interest
5,338

 
5,265

Total costs and expenses
380,645

 
309,655

 
 
 
 
Income before income taxes
26,335

 
14,715

 
 
 
 
Provision for income taxes
9,452

 
5,526

 
 
 
 
Net income
16,883

 
9,189

 
 
 
 
Preferred dividends
1,219

 
1,219

 
 
 
 
Net income to common shareholders
$
15,664

 
$
7,970

 
 
 
 
Earnings per common share:
 
 
 
Basic
$
0.63

 
$
0.32

Diluted
$
0.55

 
$
0.30

 
 
 
 
Weighted average shares outstanding:
 
 
 
Basic
24,738

 
24,657

Diluted
30,329

 
30,032


See Notes to Unaudited Condensed Consolidated Financial Statements.

4



M/I HOMES, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY

 
Three Months Ended March 31, 2017
 
Preferred Shares
 
Common Shares
 
 
 
 
 
 
 
 
 
Shares Outstanding
 
 
 
Shares Outstanding
 
 
 
Additional Paid-in Capital
 
Retained Earnings
 
Treasury Shares
 
Total Shareholders’ Equity
(Dollars in thousands)
 
Amount
 
 
Amount
 
 
 
 
Balance at December 31, 2016
2,000

 
$
48,163

 
24,677,433

 
$
271

 
$
246,549

 
$
407,161

 
$
(47,970
)
 
$
654,174

Net income

 

 

 

 

 
16,883

 

 
16,883

Dividends declared to preferred shareholders

 

 

 

 

 
(1,219
)
 

 
(1,219
)
Stock options exercised

 

 
37,326

 

 
(245
)
 

 
741

 
496

Stock-based compensation expense

 

 

 

 
1,028

 

 

 
1,028

Deferral of executive and director compensation

 

 

 

 
350

 

 

 
350

Executive and director deferred compensation distributions

 

 
80,033

 

 
(1,590
)
 

 
1,590

 

Balance at March 31, 2017
2,000

 
$
48,163

 
24,794,792

 
$
271

 
$
246,092

 
$
422,825

 
$
(45,639
)
 
$
671,712


See Notes to Unaudited Condensed Consolidated Financial Statements.

5



M/I HOMES, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 
Three Months Ended March 31,
(Dollars in thousands)
2017
 
2016
OPERATING ACTIVITIES:
 
 
 
Net income
$
16,883

 
$
9,189

Adjustments to reconcile net income to net cash used in operating activities:
 
 
 
Equity in income of joint venture arrangements
(17
)
 
(307
)
Mortgage loan originations
(217,346
)
 
(177,038
)
Proceeds from the sale of mortgage loans
262,644

 
210,960

Fair value adjustment of mortgage loans held for sale
(4,874
)
 
(1,359
)
Capitalization of originated mortgage servicing rights
(975
)
 
(1,561
)
Amortization of mortgage servicing rights
448

 
339

Depreciation
2,281

 
2,033

Amortization of debt discount and debt issue costs
854

 
851

Stock-based compensation expense
1,028

 
916

Deferred income tax expense
426

 
4,995

Change in assets and liabilities:
 
 
 
Inventory
(54,758
)
 
(29,510
)
Other assets
(348
)
 
(3,013
)
Accounts payable
(8,809
)
 
(5,284
)
Customer deposits
4,524

 
3,900

Accrued compensation
(20,159
)
 
(14,457
)
Other liabilities
(5,077
)
 
761

Net cash (used in) provided by operating activities
(23,275
)
 
1,415

 
 
 
 
INVESTING ACTIVITIES:
 
 
 
Purchase of property and equipment
(993
)
 
(10,706
)
Investment in unconsolidated joint ventures
(3,197
)
 
(2,846
)
Net proceeds from sale of mortgage servicing rights
7,396

 

Net cash provided by (used in) investing activities
3,206

 
(13,552
)
 
 
 
 
FINANCING ACTIVITIES:
 
 
 
Proceeds from bank borrowings - homebuilding operations
162,000

 
154,100

Repayment of bank borrowings - homebuilding operations
(91,400
)
 
(83,400
)
Net repayment of bank borrowings - financial services operations
(45,958
)
 
(36,462
)
Proceeds from notes payable-other and community development district bond obligations
607

 
364

Dividends paid on preferred shares
(1,219
)
 
(1,219
)
Debt issue costs

 
(99
)
Proceeds from exercise of stock options
496

 
73

Net cash provided by financing activities
24,526

 
33,357

Net increase in cash, cash equivalents and restricted cash
4,457

 
21,220

Cash, cash equivalents and restricted cash balance at beginning of period
34,441

 
13,101

Cash, cash equivalents and restricted cash balance at end of period
$
38,898

 
$
34,321

 
 
 
 
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
 
 
 
Cash paid during the year for:
 
 
 
Interest — net of amount capitalized
$
10,503

 
$
253

Income taxes
$
72

 
$
451

 
 
 
 
NON-CASH TRANSACTIONS DURING THE PERIOD:
 
 
 
Community development district infrastructure
$
5,801

 
$
(186
)
Consolidated inventory not owned
$
4,440

 
$
(1,086
)
Distribution of single-family lots from joint venture arrangements
$
7,012

 
$
14,427

 
 
 
 

See Notes to Unaudited Condensed Consolidated Financial Statements.

6



M/I HOMES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1. Basis of Presentation

The accompanying Unaudited Condensed Consolidated Financial Statements (the “financial statements”) of M/I Homes, Inc. and its subsidiaries (the “Company”) and notes thereto have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission (the “SEC”) for interim financial information. The financial statements include the accounts of the Company. All intercompany transactions have been eliminated. Results for the interim period are not necessarily indicative of results for a full year. In the opinion of management, the accompanying financial statements reflect all adjustments (all of which are normal and recurring in nature) necessary for a fair presentation of financial results for the interim periods presented. These financial statements should be read in conjunction with the Consolidated Financial Statements and Notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016 (the “2016 Form 10-K”).

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during that period. Actual results could differ from these estimates and have a significant impact on the financial condition and results of operations and cash flows. With regard to the Company, estimates and assumptions are inherent in calculations relating to valuation of inventory and investment in unconsolidated joint ventures, property and equipment depreciation, valuation of derivative financial instruments, accounts payable on inventory, accruals for costs to complete inventory, accruals for warranty claims, accruals for self-insured general liability claims, litigation, accruals for health care and workers’ compensation, accruals for guaranteed or indemnified loans, stock-based compensation expense, income taxes, and contingencies. Items that could have a significant impact on these estimates and assumptions include the risks and uncertainties listed in “Item 1A. Risk Factors” in Part I of our 2016 Form 10-K, as the same may be updated from time to time in our subsequent filings with the SEC.

Reclassifications

Certain financial statement line items reflected on the March 31, 2016 Statement of Cash Flows were affected by the Company’s early adoption of Accounting Standards Update (“ASU”) No. 2016-18, Statement of Cash Flows: Restricted Cash (“ASU 2016-18”) during the fourth quarter of 2016 as a result of the change in accounting principle.

Recently Adopted Accounting Standards

In March 2016, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting (“ASU 2016-09”). ASU 2016-09 simplifies several aspects of the accounting for share-based payment transactions, including the income tax consequences and classification on the statement of cash flows. For public entities, ASU 2016-09 is effective for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years. The Company adopted the new standard in the first quarter of 2017. Excess tax benefits or deficiencies for stock-based compensation are now reflected in the Condensed Consolidated Statements of Income as a component of income tax expense, whereas previously they were recognized in equity. The adoption of this standard did not have a material impact on the Company’s consolidated financial statements and disclosures.
Impact of New Accounting Standards
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”), which provides guidance for revenue recognition. ASU 2014-09 affects any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets and supersedes the revenue recognition requirements in ASC 605, Revenue Recognition, and most industry-specific guidance. This ASU also supersedes some cost guidance included in Subtopic 605-35, “Revenue Recognition-Construction-Type and Production-Type Contracts.” ASU 2014-09’s core principle is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which a company expects to be entitled in exchange for those goods or services. In doing so, companies will need to use more judgment and make more estimates than under today’s guidance, including identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation. In August 2015, the FASB issued ASU No. 2015-14, Revenue from Contracts with Customers: Deferral of the Effective Date, which delayed the effective date of ASU 2014-09 by one year. ASU 2014-09, as amended, is effective for public companies for annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period. Early adoption is permitted as of the original effective date for annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period.

7



Subsequent to the issuance of ASU 2014-09, the FASB has issued several ASUs, such as ASU 2016-08, Revenue from Contracts with Customers: Principal versus Agent Considerations (Reporting Revenue Gross versus Net), ASU 2016-10, Revenue from Contracts with Customers: Identifying Performance Obligations and Licensing, and ASU 2016-12, Revenue from Contracts with Customers: Narrow-Scope Improvements and Practical Expedients. These ASUs do not change the core principle of the guidance stated in ASU 2014-09. Instead, these amendments are intended to clarify and improve the operability of certain topics addressed by ASU 2014-09. These additional ASUs will have the same effective date and transition requirements as ASU 2014-09, as amended. See below for additional explanation of each of these additional ASUs. The Company does not believe the adoption of these additional ASUs will not have a material impact on our consolidated financial statements.
The guidance in ASU 2014-09 permits two methods of adoption: retrospectively to each prior reporting period presented (full retrospective method), or retrospectively with the cumulative effect of initially applying the guidance recognized at the date of initial application (the cumulative catch-up transition method). The new standard is effective for our fiscal year beginning January 1, 2018, and, at that time, we currently anticipate adopting the standard using the cumulative catch-up transition method.

We anticipate this standard will not have a material impact on our consolidated financial statements. While we are continuing to assess all potential impacts of the standard, and have been involved in industry-specific discussions with the FASB on the treatment of certain items, we currently believe the most significant impact could relate to our accounting for sale of land and/or lots to third parties that have continuing performance obligations. We expect the amount and timing of our homebuilding revenue to remain substantially unchanged. Due to the complexity of certain of our land contracts, however, the actual revenue recognition treatment required under the standard for land sales will depend on contract-specific terms, and may vary in some instances from recognition at the time of closing. We are continuing to evaluate the impact the adoption of ASU 2014-09 may have on other aspects of our business and on our consolidated financial statements and disclosures.

In February 2016, the FASB issued ASU No. 2016-02, Leases (“ASU 2016-02”). ASU 2016-02 will require organizations that lease assets - referred to as “lessees” - to recognize on the balance sheet the assets and liabilities for the rights and obligations created by those leases. Under ASU 2016-02, a lessee will be required to recognize assets and liabilities for leases with lease terms of more than 12 months. Lessor accounting remains substantially similar to current GAAP. In addition, disclosures of leasing activities will expand to include qualitative and specific quantitative information. For public entities, ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. ASU 2016-02 mandates a modified retrospective transition method. The Company is currently evaluating the potential impact the adoption of ASU 2016-02 will have on the Company’s consolidated financial statements and disclosures.

In March 2016, the FASB issued ASU No. 2016-08, Revenue from Contracts with Customers: Principal versus Agent Considerations (Reporting Revenue Gross versus Net) (“ASU 2016-08”). The amendments in this ASU are intended to improve the operability and understandability of the implementation guidance stated in ASU 2014-09 on principal versus agent considerations and whether an entity reports revenue on a gross or net basis.

In April 2016, the FASB issued ASU No. 2016-10, Revenue from Contracts with Customers: Identifying Performance Obligations and Licensing (“ASU 2016-10”).  ASU 2016-10 provides guidance on identifying performance obligations and licensing. This update clarifies the guidance in ASU 2014-09 relating to identifying performance obligations and licensing.

In May 2016, the FASB issued ASU No. 2016-12, Revenue from Contracts with Customers: Narrow Scope Improvements and Practical Expedients (“ASU 2016-12”). ASU 2016-12 provides for amendments to ASU 2014-09 regarding transition, collectability, noncash consideration, and presentation of sales tax and other similar taxes.  Specifically, ASU 2016-12 clarifies that, for a contract to be considered completed at transition, all or substantially all of the revenue must have been recognized under legacy GAAP. In addition, ASU 2016-12 clarifies how an entity should evaluate the collectability threshold and when an entity can recognize nonrefundable consideration received as revenue if an arrangement does not meet the standard’s contract criteria.
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (“ASU 2016-15”). ASU 2016-15 provides guidance on how certain cash receipts and cash payments are to be presented and classified in the statement of cash flows. For public entities, ASU 2016-15 is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted. The adoption of ASU 2016-15 will modify the Company's current disclosures and reclassifications within the condensed consolidated statement of cash flows but is not expected to have a material effect on the Company’s consolidated financial statements and disclosures.
In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business (“ASU 2017-01”), which provides a more robust framework for determining whether transactions should be accounted for as acquisitions (or dispositions) of assets or businesses. ASU 2017-01 is effective for fiscal years beginning after December 15, 2017,

8



and interim periods within those fiscal years. The Company is currently evaluating the potential impact the adoption of ASU 2017-01 will have on the Company’s consolidated financial statements and disclosures.

In January 2017, the FASB issued ASU 2017-04, Simplifying the Test for Goodwill Impairment, which eliminates Step 2 from the goodwill impairment test in order to simplify the subsequent measurement of goodwill. The guidance is effective for fiscal years beginning after December 15, 2019. Early application is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company does not believe the adoption of ASU 2017-04 will have a material impact on the Company’s consolidated financial statements and disclosures.

In February 2017, the FASB issued ASU 2017-05, Other Income - Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20): Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets (“ASU 2017-05”). ASU 2017-05 is intended to clarify the scope of the original guidance within Subtopic 610-20 that was issued in connection with ASU 2014-09, which provides guidance for recognizing gains and losses from the transfer of nonfinancial assets in contracts with noncustomers. ASU 2017-05 additionally added guidance for partial sales of nonfinancial assets. ASU 2017-05 is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. We are required to adopt ASU 2017-05 concurrent with the adoption of ASU 2014-09. The Company is currently evaluating the potential impact the adoption of ASU 2017-05 will have on the Company’s consolidated financial statements and disclosures.

In March 2017, the FASB issued ASU 2017-08, Receivables - Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities (“ASU 2017-08”), which shortens the amortization period for certain callable debt securities held at a premium. Specifically, the amendments require the premium to be amortized to the earliest call date. The amendments do not require an accounting change for securities held at a discount; the discount continues to be amortized to maturity. For public entities, ASU 2017-08 is effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. The Company does not believe the adoption of ASU 2017-08 will have a material impact on the Company’s consolidated financial statements and disclosures.

NOTE 2. Inventory and Capitalized Interest
Inventory
Inventory is recorded at cost, unless events and circumstances indicate that the carrying value of the land is impaired, at which point the inventory is written down to fair value (see Note 4 for additional details relating to our procedures for evaluating our inventories for impairment). Inventory includes the costs of land acquisition, land development and home construction, capitalized interest, real estate taxes, direct overhead costs incurred during development and home construction, and common costs that benefit the entire community, less impairments, if any.
A summary of the Company’s inventory as of March 31, 2017 and December 31, 2016 is as follows:
(In thousands)
March 31, 2017
 
December 31, 2016
Single-family lots, land and land development costs
$
616,239

 
$
602,528

Land held for sale
10,475

 
12,155

Homes under construction
538,758

 
494,664

Model homes and furnishings - at cost (less accumulated depreciation: March 31, 2017 - $12,795;
   December 31, 2016 - $11,835)
72,108

 
68,727

Community development district infrastructure
6,277

 
476

Land purchase deposits
30,795

 
29,856

Consolidated inventory not owned
11,966

 
7,528

Total inventory
$
1,286,618

 
$
1,215,934


Single-family lots, land and land development costs include raw land that the Company has purchased to develop into lots, costs incurred to develop the raw land into lots, and lots for which development has been completed, but which have not yet been used to start construction of a home.
Homes under construction include homes that are in various stages of construction. As of March 31, 2017 and December 31, 2016, we had 993 homes (with a carrying value of $194.4 million) and 996 homes (with a carrying value of $199.4 million), respectively, included in homes under construction that were not subject to a sales contract.
Model homes and furnishings include homes that are under construction or have been completed and are being used as sales models. The amount also includes the net book value of furnishings included in our model homes. Depreciation on model home furnishings is recorded using an accelerated method over the estimated useful life of the assets, which is typically three years.

9



We own lots in certain communities in Florida that have Community Development Districts (“CDDs”). The Company records a liability for the estimated developer obligations that are probable and estimable and user fees that are required to be paid or transferred at the time the parcel or unit is sold to an end user.  The Company reduces this liability at the time of closing and the transfer of the property.  The Company recorded a $6.3 million and $0.5 million liability related to these CDD bond obligations as of March 31, 2017 and December 31, 2016, respectively, along with the related inventory infrastructure.

Land purchase deposits include both refundable and non-refundable amounts paid to third party sellers relating to the purchase of land. On an ongoing basis, the Company evaluates the land option agreements relating to the land purchase deposits. In the period during which the Company makes the decision not to proceed with the purchase of land under an agreement, the Company expenses any deposits and accumulated pre-acquisition costs relating to such agreement.
Capitalized Interest
The Company capitalizes interest during land development and home construction.  Capitalized interest is charged to land and housing costs and expensed as the related inventory is delivered to a third party.  The summary of capitalized interest for the three months ended March 31, 2017 and 2016 is as follows:
 
Three Months Ended March 31,
(In thousands)
2017
 
2016
Capitalized interest, beginning of period
$
16,012

 
$
16,740

Interest capitalized to inventory
3,762

 
3,756

Capitalized interest charged to land and housing costs and expenses
(3,766
)
 
(3,544
)
Capitalized interest, end of period
$
16,008

 
$
16,952

 
 
 
 
Interest incurred
$
9,100

 
$
9,021

NOTE 3. Investment in Joint Venture Arrangements
Investment in Joint Venture Arrangements
In order to minimize our investment and risk of land exposure in a single location, we have periodically partnered with other land developers or homebuilders to share in the land investment and development of a property through joint ownership and development agreements, joint ventures, and other similar arrangements. During the three month period ended March 31, 2017, we decreased our total investment in such joint venture arrangements by $3.8 million from $28.0 million at December 31, 2016 to $24.2 million at March 31, 2017, which was driven primarily by our increased lot distributions from unconsolidated joint ventures of $7.0 million, offset, in part, by our cash contributions to our unconsolidated joint ventures during the first quarter of 2017 of $3.2 million.
We believe that the Company’s maximum exposure related to its investment in these joint venture arrangements as of March 31, 2017 is the amount invested of $24.2 million, which is reported as Investment in Joint Venture Arrangements on our Unaudited Condensed Consolidated Balance Sheets, although we expect to invest further amounts in these joint venture arrangements as development of the properties progresses.
We use the equity method of accounting for investments in unconsolidated joint ventures over which we exercise significant influence but do not have a controlling interest. Under the equity method, our share of the unconsolidated joint ventures’ earnings or loss, if any, is included in our consolidated statement of income. The Company assesses its investments in unconsolidated joint ventures for recoverability on a quarterly basis. Refer to Note 4 for additional details relating to our procedures for evaluating our investments for impairment.
For joint venture arrangements where a special purpose entity is established to own the property, we generally enter into limited liability company or similar arrangements (“LLCs”) with the other partners. The Company’s ownership in these LLCs as of both March 31, 2017 and December 31, 2016 ranged from 25% to 74%. These entities typically engage in land development activities for the purpose of distributing or selling developed lots to the Company and its partners in the LLC.

10



Variable Interest Entities
With respect to our investments in these LLCs, we are required, under ASC 810-10, Consolidation (“ASC 810”), to evaluate whether or not such entities should be consolidated into our consolidated financial statements. We initially perform these evaluations when each new entity is created and upon any events that require reconsideration of the entity. See Note 1, “Summary of Significant Accounting Policies - Variable Interest Entities” in the Company’s 2016 Form 10-K for additional information regarding the Company’s methodology for evaluating entities for consolidation.
Land Option Agreements
In the ordinary course of business, the Company enters into land option or purchase agreements for which we generally pay non-refundable deposits. Pursuant to these land option agreements, the Company provides a deposit to the seller as consideration for the right to purchase land at different times in the future, usually at predetermined prices. In accordance with ASC 810, we analyze our land option or purchase agreements to determine whether the corresponding land sellers are VIEs and, if so, whether we are the primary beneficiary, as further described in Note 1, “Summary of Significant Accounting Policies - Land Option Agreements” in the Company’s 2016 Form 10-K. If we are deemed to be the primary beneficiary of the VIE, we will consolidate the VIE in our consolidated financial statements and reflect such assets and liabilities in our Consolidated Inventory not Owned in our Unaudited Condensed Consolidated Balance Sheets. At both March 31, 2017 and December 31, 2016, we concluded that we were not the primary beneficiary of any VIEs from which we are purchasing land under option or purchase agreements.
NOTE 4. Fair Value Measurements
There are three measurement input levels for determining fair value: Level 1, Level 2, and Level 3. Fair values determined by Level 1 inputs utilize quoted prices in active markets for identical assets or liabilities that the Company has the ability to access. Fair values determined by Level 2 inputs utilize inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs include quoted prices for similar assets and liabilities in active markets, and inputs other than quoted prices that are observable for the asset or liability, such as interest rates and yield curves that are observable at commonly quoted intervals. Level 3 inputs are unobservable inputs for the asset or liability, and include situations where there is little, if any, market activity for the asset or liability.
Assets Measured on a Recurring Basis
The Company measures both mortgage loans held for sale and interest rate lock commitments (“IRLCs”) at fair value. Fair value measurement results in a better presentation of the changes in fair values of the loans and the derivative instruments used to economically hedge them.
In the normal course of business, our financial services segment enters into contractual commitments to extend credit to buyers of single-family homes with fixed expiration dates.  The commitments become effective when the borrowers “lock-in” a specified interest rate within established time frames.  Market risk arises if interest rates move adversely between the time of the “lock-in” of rates by the borrower and the sale date of the loan to an investor.  To mitigate the effect of the interest rate risk inherent in providing rate lock commitments to borrowers, the Company enters into optional or mandatory delivery forward sale contracts to sell whole loans and mortgage-backed securities to broker/dealers.  The forward sale contracts lock in an interest rate and price for the sale of loans similar to the specific rate lock commitments.  The Company does not engage in speculative trading or derivative activities.  Both the rate lock commitments to borrowers and the forward sale contracts to broker/dealers or investors are undesignated derivatives, and accordingly, are marked to fair value through earnings.  Changes in fair value measurements are included in earnings in the accompanying statements of income.
The fair value of mortgage loans held for sale is estimated based primarily on published prices for mortgage-backed securities with similar characteristics.  To calculate the effects of interest rate movements, the Company utilizes applicable published mortgage-backed security prices, and multiplies the price movement between the rate lock date and the balance sheet date by the notional loan commitment amount.  The Company sells loans on a servicing released or servicing retained basis, and receives servicing compensation.  Thus, the value of the servicing rights included in the fair value measurement is based upon contractual terms with investors and depends on the loan type. The Company applies a fallout rate to IRLCs when measuring the fair value of rate lock commitments.  Fallout is defined as locked loan commitments for which the Company does not close a mortgage loan and is based on management’s judgment and company experience.
The fair value of the Company’s forward sales contracts to broker/dealers solely considers the market price movement of the same type of security between the trade date and the balance sheet date.  The market price changes are multiplied by the notional amount of the forward sales contracts to measure the fair value.

11



Interest Rate Lock Commitments. IRLCs are extended to certain home-buying customers who have applied for a mortgage loan and meet certain defined credit and underwriting criteria. Typically, the IRLCs will have a term of less than six months; however, in certain markets, the term could extend to nine months.
Some IRLCs are committed to a specific third party investor through the use of best-efforts whole loan delivery commitments matching the exact terms of the IRLC loan. Uncommitted IRLCs are considered derivative instruments and are fair value adjusted, with the resulting gain or loss recorded in current earnings.
Forward Sales of Mortgage-Backed Securities. Forward sales of mortgage-backed securities (“FMBSs”) are used to protect uncommitted IRLC loans against the risk of changes in interest rates between the lock date and the funding date. FMBSs related to uncommitted IRLCs are classified and accounted for as non-designated derivative instruments and are recorded at fair value, with gains and losses recorded in current earnings.
Mortgage Loans Held for Sale. Mortgage loans held for sale consists primarily of single-family residential loans collateralized by the underlying property.  Generally, all of the mortgage loans and related servicing rights are sold to third-party investors shortly after origination.  During the period between when a loan is closed and when it is sold to an investor, the interest rate risk is covered through the use of a best-efforts contract or by FMBSs. The FMBSs are classified and accounted for as non-designated derivative instruments, with gains and losses recorded in current earnings.
The table below shows the notional amounts of our financial instruments at March 31, 2017 and December 31, 2016:
Description of Financial Instrument (in thousands)
March 31, 2017
 
December 31, 2016
Best efforts contracts and related committed IRLCs
$
7,681

 
$
6,607

Uncommitted IRLCs
111,427

 
66,875

FMBSs related to uncommitted IRLCs
112,000

 
66,000

Best efforts contracts and related mortgage loans held for sale
15,515

 
125,348

FMBSs related to mortgage loans held for sale
97,000

 
33,000

Mortgage loans held for sale covered by FMBSs
96,333

 
32,870

The table below shows the level and measurement of assets and liabilities measured on a recurring basis at March 31, 2017 and December 31, 2016:
Description of Financial Instrument (in thousands)
Fair Value Measurements
March 31, 2017
Quoted Prices in Active Markets for Identical Assets
(Level 1)
Significant Other Observable Inputs
(Level 2)
Significant Unobservable Inputs
(Level 3)
Mortgage loans held for sale
$
113,596

 
$

 
$
113,596

 
$

 
Forward sales of mortgage-backed securities
(681
)
 

 
(681
)
 

 
Interest rate lock commitments
1,092

 

 
1,092

 

 
Best-efforts contracts
(324
)
 

 
(324
)
 

 
Total
$
113,683

 
$

 
$
113,683

 
$

 
Description of Financial Instrument (in thousands)
Fair Value Measurements
December 31, 2016
Quoted Prices in Active Markets for Identical Assets
(Level 1)
Significant Other Observable Inputs
(Level 2)
Significant Unobservable Inputs
(Level 3)
Mortgage loans held for sale
$
154,020

 
$

 
$
154,020

 
$

 
Forward sales of mortgage-backed securities
230

 

 
230

 

 
Interest rate lock commitments
250

 

 
250

 

 
Best-efforts contracts
(90
)
 

 
(90
)
 

 
Total
$
154,410

 
$

 
$
154,410

 
$

 

The following table sets forth the amount of gain (loss) recognized, within our revenue in the Unaudited Condensed Consolidated Statements of Income, on assets and liabilities measured on a recurring basis for the three months ended March 31, 2017 and 2016:
 
Three Months Ended March 31,
Description (in thousands)
2017
 
2016
Mortgage loans held for sale
$
4,874

 
$
1,360

Forward sales of mortgage-backed securities
(911
)
 
(766
)
Interest rate lock commitments
842

 
569

Best-efforts contracts
(234
)
 
69

Total gain recognized
$
4,571

 
$
1,232


12




The following tables set forth the fair value of the Company’s derivative instruments and their location within the Unaudited Condensed Consolidated Balance Sheets for the periods indicated (except for mortgage loans held for sale which is disclosed as a separate line item):
 
 
Asset Derivatives
 
Liability Derivatives
 
 
March 31, 2017
 
March 31, 2017
Description of Derivatives
 
Balance Sheet
Location
 
Fair Value
(in thousands)
 
Balance Sheet Location
 
Fair Value
(in thousands)
Forward sales of mortgage-backed securities
 
Other assets
 
$

 
Other liabilities
 
$
681

Interest rate lock commitments
 
Other assets
 
1,092

 
Other liabilities
 

Best-efforts contracts
 
Other assets
 

 
Other liabilities
 
324

Total fair value measurements
 
 
 
$
1,092

 
 
 
$
1,005

 
 
Asset Derivatives
 
Liability Derivatives
 
 
December 31, 2016
 
December 31, 2016
Description of Derivatives
 
Balance Sheet
Location
 
Fair Value
(in thousands)
 
Balance Sheet Location
 
Fair Value
(in thousands)
Forward sales of mortgage-backed securities
 
Other assets
 
$
230

 
Other liabilities
 
$

Interest rate lock commitments
 
Other assets
 
250

 
Other liabilities
 

Best-efforts contracts
 
Other assets
 

 
Other liabilities
 
90

Total fair value measurements
 
 
 
$
480

 
 
 
$
90

Assets Measured on a Non-Recurring Basis
Inventory. The Company assesses inventory for recoverability on a quarterly basis based on the difference in the carrying value of the inventory and its fair value at the time of the evaluation. Determining the fair value of a community’s inventory involves a number of variables, estimates and projections, which are Level 3 measurement inputs. See Note 1, “Summary of Significant Accounting Policies - Inventory” in the Company’s 2016 Form 10-K for additional information regarding the Company’s methodology for determining fair value.
The Company uses significant assumptions to evaluate the recoverability of its inventory, such as estimated average selling price, construction and development costs, absorption pace (reflecting any product mix change strategies implemented or to be implemented), selling strategies, alternative land uses (including disposition of all or a portion of the land owned), or discount rates. Changes in these assumptions could materially impact future cash flow and fair value estimates and may lead the Company to incur additional impairment charges in the future. Our analysis is conducted only if indicators of a decline in value of our inventory exist, which include, among other things, declines in gross margin on sales contracts in backlog or homes that have been delivered, slower than anticipated absorption pace, declines in average sales price or high incentive offers by management to improve absorptions, declines in margins regarding future land sales, or declines in the value of the land itself as a result of third party appraisals. If communities are not recoverable based on the estimated future undiscounted cash flows, the impairment to be recognized is measured as the amount by which the carrying amount of the assets exceeds the estimated fair value of the assets. During the three months ended March 31, 2017 and 2016, the Company did not record any impairment charges on its inventory.
Investment in Unconsolidated Joint Ventures.  We evaluate our investments in unconsolidated joint ventures for impairment on a quarterly basis based on the difference in the investment’s carrying value and its fair value at the time of the evaluation. If the Company has determined that the decline in value is other than temporary, the Company would write down the value of the investment to its estimated fair value. Determining the fair value of investments in unconsolidated joint ventures involves a number of variables, estimates and assumptions, which are Level 3 measurement inputs. See Note 1, “Summary of Significant Accounting Policies - Investment in Unconsolidated Joint Ventures,” in the Company’s 2016 Form 10-K for additional information regarding the Company’s methodology for determining fair value. Because of the high degree of judgment involved in developing these assumptions, it is possible that changes in these assumptions could materially impact future cash flow and fair value estimates of the investments which may lead the Company to incur additional impairment charges in the future. During the three months ended March 31, 2017 and 2016, the Company did not record any impairment charges on its investments in unconsolidated joint ventures.
Financial Instruments
Counterparty Credit Risk. To reduce the risk associated with losses that would be recognized if counterparties failed to perform as contracted, the Company limits the entities with whom management can enter into commitments. This risk of accounting loss is the difference between the market rate at the time of non-performance by the counterparty and the rate to which the Company committed.

13



The following table presents the carrying amounts and fair values of the Company’s financial instruments at March 31, 2017 and December 31, 2016. The objective of the fair value measurement is to estimate the price at which an orderly transaction to sell the asset or transfer the liability would take place between market participants at the measurement date under current market conditions.
 
 
March 31, 2017
 
December 31, 2016
(In thousands)
 
Carrying Amount
 
Fair Value
 
Carrying Amount
 
Fair Value
Assets:
 
 
 
 
 
 
 
 
Cash, cash equivalents and restricted cash
 
$
38,898

 
$
38,898

 
$
34,441

 
$
34,441

Mortgage loans held for sale
 
113,596

 
113,596

 
154,020

 
154,020

Split dollar life insurance policies
 
212

 
212

 
214

 
214

Notes receivable
 
312

 
281

 
763

 
687

Commitments to extend real estate loans
 
1,092

 
1,092

 
250

 
250

Forward sales of mortgage-backed securities
 

 

 
230

 
230

Liabilities:
 
 
 
 
 
 
 
 
Notes payable - homebuilding operations
 
110,900

 
110,900

 
40,300

 
40,300

Notes payable - financial services operations
 
106,937

 
106,937

 
152,895

 
152,895

Notes payable - other
 
7,022

 
6,744

 
6,415

 
5,999

Convertible senior subordinated notes due 2017 (a)
 
57,500

 
64,759

 
57,500

 
65,957

Convertible senior subordinated notes due 2018 (a)
 
86,250

 
87,759

 
86,250

 
88,105

Senior notes due 2021 (a)
 
300,000

 
313,500

 
300,000

 
314,250

Best-efforts contracts for committed IRLCs and mortgage loans held for sale
 
324

 
324

 
90

 
90

Forward sales of mortgage-backed securities
 
681

 
681

 

 

Off-Balance Sheet Financial Instruments:
 
 
 
 
 
 
 
 
Letters of credit
 

 
617

 

 
702

(a)
Our senior notes and convertible senior subordinated notes are stated at the principal amount outstanding which does not include the impact of premiums, discounts, and debt issuance costs that are amortized to interest cost over the respective terms of the notes.
The following methods and assumptions were used by the Company in estimating its fair value disclosures of financial instruments at March 31, 2017 and December 31, 2016:
Cash, Cash Equivalents and Restricted Cash. The carrying amounts of these items approximate fair value because they are short-term by nature.
Mortgage Loans Held for Sale, Forward Sales of Mortgage-Backed Securities, Commitments to Extend Real Estate Loans, Best-Efforts Contracts for Committed IRLCs and Mortgage Loans Held for Sale, Convertible Senior Subordinated Notes due 2017, Convertible Senior Subordinated Notes due 2018 and Senior Notes due 2021. The fair value of these financial instruments was determined based upon market quotes at March 31, 2017 and December 31, 2016. The market quotes used were quoted prices for similar assets or liabilities along with inputs taken from observable market data by correlation. The inputs were adjusted to account for the condition of the asset or liability.
Split Dollar Life Insurance Policy and Notes Receivable. The estimated fair value was determined by calculating the present value of the amounts based on the estimated timing of receipts using discount rates that incorporate management’s estimate of risk associated with the corresponding note receivable.
Notes Payable - Homebuilding Operations. The interest rate available to the Company during the quarter ended March 31, 2017 fluctuated with the Alternate Base Rate or the Eurodollar Rate for the Company’s $400 million unsecured revolving credit facility, dated July 18, 2013, as amended (the “Credit Facility”), and thus the carrying value is a reasonable estimate of fair value. Refer to Note 7 for additional information regarding the Credit Facility.
Notes Payable - Financial Services Operations. M/I Financial, LLC (“M/I Financial”) is a party to two credit agreements: (1) a $125 million secured mortgage warehousing agreement, dated June 24, 2016 (the “MIF Mortgage Warehousing Agreement”); and (2) a $15 million mortgage repurchase agreement, dated November 3, 2015, as amended on October 31, 2016 (the “MIF Mortgage Repurchase Facility”). For each of these credit facilities, the interest rate is based on a variable rate index, and thus their carrying value is a reasonable estimate of fair value. The interest rate available to M/I Financial during the first quarter of 2017 fluctuated with LIBOR. Refer to Note 7 for additional information regarding the MIF Mortgage Warehousing Agreement and the MIF Mortgage Repurchase Facility.

14



Notes Payable - Other. The estimated fair value was determined by calculating the present value of the future cash flows using the Company’s current incremental borrowing rate.
Letters of Credit. Letters of credit of $33.9 million and $37.7 million represent potential commitments at March 31, 2017 and December 31, 2016, respectively. The letters of credit generally expire within one or two years. The estimated fair value of letters of credit was determined using fees currently charged for similar agreements.
NOTE 5. Guarantees and Indemnifications
In the ordinary course of business, M/I Financial, a 100%-owned subsidiary of M/I Homes, Inc., enters into agreements that guarantee certain purchasers of its mortgage loans that M/I Financial will repurchase a loan if certain conditions occur, primarily if the mortgagor does not meet the terms of the loan within the first six months after the sale of the loan. Loans totaling approximately $31.9 million and $27.6 million were covered under these guarantees as of March 31, 2017 and December 31, 2016, respectively.  The increase in loans covered by these guarantees from December 31, 2016 is a result of a change in the mix of investors and their related purchase terms.  A portion of the revenue paid to M/I Financial for providing the guarantees on these loans was deferred at March 31, 2017, and will be recognized in income as M/I Financial is released from its obligation under the guarantees. The risk associated with the guarantees above is offset by the value of the underlying assets.
M/I Financial has received inquiries concerning underwriting matters from purchasers of its loans regarding certain loans totaling approximately $0.8 million and $0.9 million at March 31, 2017 and December 31, 2016, respectively.
M/I Financial has also guaranteed the collectability of certain loans to third party insurers (U.S. Department of Housing and Urban Development and U.S. Veterans Administration) of those loans for periods ranging from five to thirty years. As of March 31, 2017 and December 31, 2016, the total of all loans indemnified to third party insurers relating to the above agreements was $1.4 million and $1.6 million, respectively. The maximum potential amount of future payments is equal to the outstanding loan value less the value of the underlying asset plus administrative costs incurred related to foreclosure on the loans, should this event occur.
The Company recorded a liability relating to the guarantees described above totaling $0.8 million and $0.9 million at March 31, 2017 and December 31, 2016, respectively, which is management’s best estimate of the Company’s liability.
NOTE 6. Commitments and Contingencies
Warranty
We use subcontractors for nearly all aspects of home construction. Although our subcontractors are generally required to repair and replace any product or labor defects, we are, during applicable warranty periods, ultimately responsible to the homeowner for making such repairs. As such, we record warranty reserves to cover our exposure to the costs for materials and labor not expected to be covered by our subcontractors to the extent they relate to warranty-type claims. Warranty reserves are established by charging cost of sales and crediting a warranty reserve for each home delivered. Warranty reserves are recorded for warranties under our Home Builder’s Limited Warranty (“HBLW”), and our 30-year (offered on all homes sold after April 25, 1998 and on or before December 1, 2015 in all of our markets except our Texas markets), 15-year (offered on all homes sold after December 1, 2015 in all of our markets except our Texas markets) or 10-year (offered on all homes sold in our Texas markets) transferable structural warranty in Other Liabilities on the Company’s Unaudited Condensed Consolidated Balance Sheets.
The warranty reserves for the HBLW are established as a percentage of average sales price and adjusted based on historical payment patterns determined, generally, by geographic area and recent trends. Factors that are given consideration in determining the HBLW reserves include: (1) the historical range of amounts paid per average sales price on a home; (2) type and mix of amenity packages added to the home; (3) any warranty expenditures not considered to be normal and recurring; (4) timing of payments; (5) improvements in quality of construction expected to impact future warranty expenditures; and (6) conditions that may affect certain projects and require a different percentage of average sales price for those specific projects. Changes in estimates for warranties occur due to changes in the historical payment experience and differences between the actual payment pattern experienced during the period and the historical payment pattern used in our evaluation of the warranty reserve balance at the end of each quarter. Actual future warranty costs could differ from our current estimated amount.
Our warranty reserves for our transferable structural warranty programs are established on a per-unit basis. While the structural warranty reserve is recorded as each house is delivered, the sufficiency of the structural warranty per unit charge and total reserve is re-evaluated on an annual basis, with the assistance of an actuary, using our own historical data and trends, industry-wide historical data and trends, and other project specific factors. The reserves are also evaluated quarterly and adjusted if we encounter activity that is inconsistent with the historical experience used in the annual analysis. These reserves are subject to variability due

15



to uncertainties regarding structural defect claims for products we build, the markets in which we build, claim settlement history, insurance and legal interpretations, among other factors.
While we believe that our warranty reserves are sufficient to cover our projected costs, there can be no assurances that historical data and trends will accurately predict our actual warranty costs.
A summary of warranty activity for the three months ended March 31, 2017 and 2016 is as follows:
 
Three Months Ended March 31,
(In thousands)
2017
 
2016
Warranty reserves, beginning of period
$
27,732

 
$
14,282

Warranty expense on homes delivered during the period
2,429

 
2,039

Changes in estimates for pre-existing warranties
730

 
683

Charges related to stucco-related claims (a)

 
2,155

Settlements made during the period
(5,911
)
 
(3,864
)
Warranty reserves, end of period
$
24,980

 
$
15,295

(a)
Estimated stucco-related claim costs, as described below, have been included in warranty accruals.
We have received claims related to stucco installation from homeowners in certain of our communities in our Tampa and Orlando, Florida markets and have been named as a defendant in legal proceedings initiated by certain of such homeowners. These claims primarily relate to homes built prior to 2014 which have second story elevations with frame construction.

During 2015, we repaired certain of the identified homes and accrued for the estimated future cost of repairs for the other identified homes on which repairs had yet to be completed. The aggregate amounts of such repair costs and accruals were not material, and the reserve for identified homes in need of more than minor repair at December 31, 2015 was $0.5 million.

During 2016, we recorded $19.4 million for repair costs for (1) homes in our Florida communities that we had identified as needing repair but have not yet completed the repair and (2) estimated repair costs for homes in our Florida communities that we have not yet identified as needing repair but that may require repair in the future. These charges are included as changes in estimate within our warranty reserve. The remaining reserve for both known repair costs and an estimate of future costs of stucco-related repairs at March 31, 2017 included within our warranty reserve was $8.8 million. We believe that this amount is sufficient to cover both known and estimated future repair costs as of March 31, 2017.

Our estimate of future costs of stucco-related repairs is based on our judgment, various assumptions and internal data. Due to the degree of judgment and the potential for variability in our underlying assumptions and data, as we obtain additional information, we may revise our estimate, including to reflect additional estimated future stucco repairs costs, which revision could be material.

We also are continuing to investigate the extent to which we may be able to recover a portion of our stucco repair and claims handling costs from other sources, including our direct insurers, the subcontractors involved with the construction of the homes and their insurers. As of March 31, 2017, we are unable to estimate an amount, if any, that we believe is probable that we will recover from these sources and, accordingly, we have not recorded a receivable for estimated recoveries nor included an estimated amount of recoveries in determining our warranty reserves.

Performance Bonds and Letters of Credit

At March 31, 2017, the Company had outstanding approximately $146.5 million of completion bonds and standby letters of credit, some of which were issued to various local governmental entities that expire at various times through September 2024. Included in this total are: (1) $104.7 million of performance and maintenance bonds and $28.6 million of performance letters of credit that serve as completion bonds for land development work in progress; (2) $5.3 million of financial letters of credit, of which $3.5 million represent deposits on land and lot purchase agreements; and (3) $7.9 million of financial bonds.

Land Option Contracts and Other Similar Contracts

At March 31, 2017, the Company also had options and contingent purchase agreements to acquire land and developed lots with an aggregate purchase price of approximately $622.8 million. Purchase of properties under these agreements is contingent upon satisfaction of certain requirements by the Company and the sellers.

16



Legal Matters

In addition to the legal proceedings related to stucco, the Company and certain of its subsidiaries have been named as defendants in certain other legal proceedings which are incidental to our business. While management currently believes that the ultimate resolution of these other legal proceedings, individually and in the aggregate, will not have a material effect on the Company’s financial position, results of operations and cash flows, such legal proceedings are subject to inherent uncertainties. The Company has recorded a liability to provide for the anticipated costs, including legal defense costs, associated with the resolution of these other legal proceedings. However, the possibility exists that the costs to resolve these legal proceedings could differ from the recorded estimates and, therefore, have a material effect on the Company’s net income for the periods in which they are resolved. At both March 31, 2017 and December 31, 2016, we had $0.3 million reserved for legal expenses.

NOTE 7. Debt
Notes Payable - Homebuilding
The Credit Facility provides for an aggregate commitment amount of $400 million, including a $125 million sub-facility for letters of credit. The Credit Facility expires on October 20, 2018. For the quarter ended March 31, 2017, interest on amounts borrowed under the Credit Facility was payable at either the Alternate Base Rate plus a margin of 150 basis points, or at the Eurodollar Rate plus a margin of 250 basis points. These interest rates are subject to adjustment in subsequent periods based on the Company's leverage ratio. The Credit Facility also contains certain financial covenants. At March 31, 2017, the Company was in compliance with all financial covenants of the Credit Facility.
The available amount under the Credit Facility is computed in accordance with a borrowing base , which is calculated by applying various advance rates for different categories of inventory, and totaled $588.4 million of availability for additional senior debt at March 31, 2017. As a result, the full $400 million commitment amount of the Credit Facility was available, less any borrowings and letters of credit outstanding. At March 31, 2017, there were $110.9 million of borrowings outstanding and $33.3 million of letters of credit outstanding, leaving net remaining borrowing availability of $255.8 million.
The Company’s obligations under the Credit Facility are guaranteed by all of the Company’s subsidiaries, with the exception of subsidiaries that are primarily engaged in the business of mortgage financing, title insurance or similar financial businesses relating to the homebuilding and home sales business, certain subsidiaries that are not 100%-owned by the Company or another subsidiary, and other subsidiaries designated by the Company as Unrestricted Subsidiaries (as defined in Note 11), subject to limitations on the aggregate amount invested in such Unrestricted Subsidiaries in accordance with the terms of the Credit Facility and the indenture for the Company’s $300.0 million aggregate principal amount of 6.75% Senior Notes due 2021 (the “2021 Senior Notes”). The guarantors for the Credit Facility (the “Guarantor Subsidiaries”) are the same subsidiaries that guarantee the 2021 Senior Notes, the Company’s $57.5 million aggregate principal amount of 3.25% Convertible Senior Subordinated Notes due 2017 (the “2017 Convertible Senior Subordinated Notes”) and the Company’s $86.3 million aggregate principal amount of 3.0% Convertible Senior Subordinated Notes due 2018 (the “2018 Convertible Senior Subordinated Notes”).
The Company’s obligations under the Credit Facility are general, unsecured senior obligations of the Company and the Guarantor Subsidiaries and rank equally in right of payment with all our and the Guarantor Subsidiaries’ existing and future unsecured senior indebtedness. Our obligations under the Credit Facility are effectively subordinated to our and the Guarantor Subsidiaries’ existing and future secured indebtedness with respect to any assets comprising security or collateral for such indebtedness.
As of March 31, 2017, the Company was party to a secured credit agreement for the issuance of letters of credit (the “Letter of Credit Facility”), with a maturity date of September 30, 2017, which allows for the issuance of letters of credit up to a total of $2.0 million. At both March 31, 2017 and December 31, 2016, there was $0.6 million of outstanding letters of credit in aggregate under the Company’s Letter of Credit Facility, which were collateralized with $0.6 million of the Company’s cash.
Notes Payable — Financial Services
The MIF Mortgage Warehousing Agreement is used to finance eligible residential mortgage loans originated by M/I Financial. The Agreement provides a maximum borrowing availability of $125 million. The MIF Mortgage Warehousing Agreement expires on June 23, 2017. In December 2016, the MIF Mortgage Warehousing Agreement was amended to include a “seasonal increase” provision which increased the maximum borrowing availability to $150 million through February 1, 2017.  Interest on amounts borrowed under the MIF Mortgage Warehousing Agreement is payable at a per annum rate equal to the greater of (1) the floating LIBOR rate plus 250 basis points and (2) 2.75%. The MIF Mortgage Warehousing Agreement also contains certain financial covenants. At March 31, 2017, M/I Financial was in compliance with all financial covenants of the MIF Mortgage Warehousing Agreement. M/I Financial expects to enter into an amendment to the MIF Mortgage Warehousing Agreement prior to its expiration

17



that would extend its term for an additional year, but M/I Financial can provide no assurances that it will be able to obtain such an extension.
The MIF Mortgage Repurchase Facility is used to finance eligible residential mortgage loans originated by M/I Financial and is structured as a mortgage repurchase facility with a maximum borrowing availability of $15 million. The MIF Mortgage Repurchase Facility expires on October 30, 2017. In December 2016, the MIF Mortgage Repurchase Facility was amended to include a “seasonal increase” provision which increased the maximum borrowing availability to $35 million through February 1, 2017.  M/I Financial pays interest on each advance under the MIF Mortgage Repurchase Facility at a per annum rate equal to the floating LIBOR rate plus 250 or 275 basis points depending on the loan type. The MIF Mortgage Repurchase Facility also contains certain financial covenants. At March 31, 2017, M/I Financial was in compliance with all financial covenants of the MIF Mortgage Repurchase Facility.
At March 31, 2017, M/I Financial’s total combined maximum borrowing availability under the two credit facilities was $140.0 million, a decrease from $185.0 million at December 31, 2016 due to the expiration of the seasonal increases on the two credit facilities as described in further detail above. At March 31, 2017 and December 31, 2016, M/I Financial had $106.9 million and $152.9 million outstanding on a combined basis under its credit facilities, respectively.
Senior Notes
As of both March 31, 2017 and December 31, 2016, we had $300.0 million of our 2021 Senior Notes outstanding. The 2021 Senior Notes bear interest at a rate of 6.75% per year, payable semiannually in arrears on January 15 and July 15 of each year, and mature on January 15, 2021. The 2021 Senior Notes are general, unsecured senior obligations of the Company and the Guarantor Subsidiaries and rank equally in right of payment with all our and the Guarantor Subsidiaries’ existing and future unsecured senior indebtedness. The 2021 Senior Notes are effectively subordinated to our and the Guarantor Subsidiaries’ existing and future secured indebtedness with respect to any assets comprising security or collateral for such indebtedness.
The 2021 Senior Notes contain certain covenants, as more fully described and defined in the indenture governing the 2021 Senior Notes, which limit the ability of the Company and the restricted subsidiaries to, among other things: incur additional indebtedness; make certain payments, including dividends, or repurchase any shares, in an aggregate amount exceeding our “restricted payments basket”; make certain investments; and create or incur certain liens, consolidate or merge with or into other companies, or liquidate or sell or transfer all or substantially all of our assets. These covenants are subject to a number of exceptions and qualifications as described in the indenture governing the 2021 Senior Notes. As of March 31, 2017, the Company was in compliance with all terms, conditions, and covenants under the indenture.
The 2021 Senior Notes are fully and unconditionally guaranteed jointly and severally on a senior unsecured basis by the Guarantor Subsidiaries.
The Company may redeem all or any portion of the 2021 Senior Notes on or after January 15, 2018 at a stated redemption price, together with accrued and unpaid interest thereon. The redemption price will initially be 103.375% of the principal amount outstanding, but will decline to 101.688% of the principal amount outstanding if redeemed during the 12-month period beginning on January 15, 2019, and will further decline to 100.000% of the principal amount outstanding if redeemed on or after January 15, 2020, but prior to maturity.
The indenture governing our 2021 Senior Notes limits our ability to pay dividends on, and repurchase, our common shares and our 9.75% Series A Preferred Shares (the “Series A Preferred Shares”) to the amount of the positive balance in our “restricted payments basket,” as defined in the indenture. The “restricted payments basket” is equal to $125.0 million plus (1) 50% of our aggregate consolidated net income (or minus 100% of our aggregate consolidated net loss) from October 1, 2015, excluding income or loss from Unrestricted Subsidiaries, plus (2) 100% of the net cash proceeds from either contributions to the common equity of the Company after December 31, 2016 or the sale of qualified equity interests, plus other items and subject to other exceptions. The restricted payments basket was $149.5 million and $144.9 million at March 31, 2017 and December 31, 2016, respectively. The determination to pay future dividends on, or make future repurchases of, our common shares or Series A Preferred Shares will be at the discretion of our board of directors and will depend upon our results of operations, financial condition, capital requirements and compliance with debt covenants and the terms of our Series A Preferred Shares, and other factors deemed relevant by our board of directors.
Convertible Senior Subordinated Notes
As of both March 31, 2017 and December 31, 2016, we had $86.3 million of our 2018 Convertible Senior Subordinated Notes outstanding. The 2018 Convertible Senior Subordinated Notes bear interest at a rate of 3.0% per year, payable semiannually in arrears on March 1 and September 1 of each year. The 2018 Convertible Senior Subordinated Notes mature on March 1, 2018.

18



At any time prior to the close of business on the second scheduled trading day immediately preceding the maturity date, holders may convert their 2018 Convertible Senior Subordinated Notes into the Company’s common shares. The conversion rate initially equals 30.9478 shares per $1,000 of principal amount. This corresponds to an initial conversion price of approximately $32.31 per common share, which equates to approximately 2.7 million common shares. The conversion rate is subject to adjustment upon the occurrence of certain events. The 2018 Convertible Senior Subordinated Notes are fully and unconditionally guaranteed jointly and severally on a senior subordinated unsecured basis by the Guarantor Subsidiaries. The 2018 Convertible Senior Subordinated Notes are senior subordinated unsecured obligations of the Company and the Guarantor Subsidiaries, are subordinated in right of payment to our and the Guarantor Subsidiaries’ existing and future senior indebtedness and are also effectively subordinated to our and the Guarantor Subsidiaries’ existing and future secured indebtedness with respect to any assets comprising security or collateral for such indebtedness. The indenture governing the 2018 Convertible Senior Subordinated Notes requires the Company to repurchase the notes (subject to certain exceptions), at a holder’s option, upon the occurrence of a fundamental change (as defined in the indenture).
The Company may redeem for cash any or all of the 2018 Convertible Senior Subordinated Notes (except for any 2018 Convertible Senior Subordinated Notes that the Company is required to repurchase in connection with a fundamental change), but only if the last reported sale price of the Company’s common shares exceeds 130% of the applicable conversion price for the notes on each of at least 20 applicable trading days. The 20 trading days do not need to be consecutive, but must occur during a period of 30 consecutive trading days that ends within 10 trading days immediately prior to the date the Company provides the notice of redemption. The redemption price for the 2018 Convertible Senior Subordinated Notes to be redeemed will equal 100% of the principal amount, plus accrued and unpaid interest, if any.
As of both March 31, 2017 and December 31, 2016, we had $57.5 million of our 2017 Convertible Senior Subordinated Notes outstanding. The 2017 Convertible Senior Subordinated Notes bear interest at a rate of 3.25% per year, payable semiannually in arrears on March 15 and September 15 of each year. The 2017 Convertible Senior Subordinated Notes mature on September 15, 2017. At any time prior to the close of business on the second scheduled trading day immediately preceding the maturity date, holders may convert their 2017 Convertible Senior Subordinated Notes into the Company’s common shares. The conversion rate initially equals 42.0159 shares per $1,000 of principal amount. This corresponds to an initial conversion price of approximately $23.80 per common share, which equates to approximately 2.4 million common shares. The conversion rate is subject to adjustment upon the occurrence of certain events. The 2017 Convertible Senior Subordinated Notes are fully and unconditionally guaranteed jointly and severally on a senior subordinated unsecured basis by the Guarantor Subsidiaries. The 2017 Convertible Senior Subordinated Notes are senior subordinated unsecured obligations of the Company and the Guarantor Subsidiaries, are subordinated in right of payment to our and the Guarantor Subsidiaries’ existing and future senior indebtedness and are also effectively subordinated to our and the Guarantor Subsidiaries’ existing and future secured indebtedness with respect to any assets comprising security or collateral for such indebtedness. The indenture governing the 2017 Convertible Senior Subordinated Notes provides that we may not redeem the notes prior to their stated maturity date, but also contains provisions requiring the Company to repurchase the 2017 Convertible Senior Subordinated Notes (subject to certain exceptions), at a holder’s option, upon the occurrence of a fundamental change (as defined in the indenture).
Notes Payable - Other
The Company had other borrowings, which are reported in Notes Payable - Other in our Unaudited Condensed Consolidated Balance Sheets, totaling $7.0 million and $6.4 million as of March 31, 2017 and December 31, 2016, respectively.  The balance includes a mortgage note payable on our office building with a $3.3 million principal balance outstanding at March 31, 2017 (and $3.4 million principal balance outstanding at December 31, 2016), which was subsequently paid off in April 2017. The remaining balance is made up of other notes payable incurred through the normal course of business.

19



NOTE 8. Earnings Per Share
The table below presents a reconciliation between basic and diluted weighted average shares outstanding, net income available to common shareholders and basic and diluted income per share for the three months ended March 31, 2017 and 2016:
 
 
Three Months Ended
 
 
March 31,
(In thousands, except per share amounts)
 
2017
 
2016
NUMERATOR
 
 
 
 
Net income
 
$
16,883

 
$
9,189

Preferred stock dividends
 
(1,219
)
 
(1,219
)
Net income to common shareholders
 
15,664

 
7,970

Interest on 3.25% convertible senior subordinated notes due 2017
 
392

 
385

Interest on 3.00% convertible senior subordinated notes due 2018
 
528

 
520

Diluted income available to common shareholders
 
$
16,584

 
$
8,875

DENOMINATOR
 
 
 
 
Basic weighted average shares outstanding
 
24,738

 
24,657

Effect of dilutive securities:
 
 
 
 
Stock option awards
 
332

 
168

Deferred compensation awards
 
174

 
122

3.25% convertible senior subordinated notes due 2017
 
2,416

 
2,416

3.00% convertible senior subordinated notes due 2018
 
2,669

 
2,669

Diluted weighted average shares outstanding - adjusted for assumed conversions
 
30,329

 
30,032

Earnings per common share:
 
 
 
 
Basic
 
$
0.63

 
$
0.32

Diluted
 
$
0.55

 
$
0.30

Anti-dilutive equity awards not included in the calculation of diluted earnings per common share
 
95

 
1,539

For the three months ended March 31, 2017 and 2016, the effect of convertible debt was included in the diluted earnings per share calculations.
NOTE 9. Income Taxes
During the three months ended March 31, 2017, the Company recorded a tax provision of $9.5 million which reflects income tax expense related to the period’s income before income taxes. The effective tax rate for the three months ended March 31, 2017 was 35.9% which included tax expense related to the expected tax benefits for the domestic production activities deduction. During the three months ended March 31, 2016, the Company recorded a tax provision of $5.5 million which reflects income tax expense related to the period’s income before income taxes. The effective tax rate for the three months ended March 31, 2016 was 37.6%.
During 2016, the Company fully utilized its federal NOL carryforwards and federal credit carryforwards. The Company had $5.1 million of state NOL carryforwards, net of the federal benefit, at March 31, 2017. Our state NOLs may be carried forward from one to 16 years, depending on the tax jurisdiction, with $1.4 million expiring between 2022 and 2027 and $3.7 million expiring between 2028 and 2032, absent sufficient state taxable income.
NOTE 10. Business Segments
The Company’s chief operating decision makers evaluate the Company’s performance in various ways, including: (1) the results of our 15 individual homebuilding operating segments and the results of our financial services operations; (2) the results of our three homebuilding reportable segments; and (3) our consolidated financial results.
In accordance with ASC 280, Segment Reporting (“ASC 280”), we have identified each homebuilding division as an operating segment as each homebuilding division engages in business activities from which it earns revenue, primarily from the sale and construction of single-family attached and detached homes, acquisition and development of land, and the occasional sale of lots to third parties. Our financial services operations generate revenue primarily from the origination, sale and servicing of mortgage loans and title services primarily for purchasers of the Company’s homes and are included in our financial services reportable segment. In accordance with the aggregation criteria defined in ASC 280, we have determined our reportable segments as follows: Midwest homebuilding, Southern homebuilding, Mid-Atlantic homebuilding and financial services operations.  The homebuilding

20



operating segments that are included within each reportable segment have been aggregated because they share similar aggregation characteristics as prescribed in ASC 280 in the following regards: (1) long-term economic characteristics; (2) historical and expected future long-term gross margin percentages; (3) housing products, production processes and methods of distribution; and (4) geographical proximity.  
The homebuilding operating segments that comprise each of our reportable segments are as follows:
Midwest
Southern
Mid-Atlantic
Chicago, Illinois
Orlando, Florida
Charlotte, North Carolina
Cincinnati, Ohio
Sarasota, Florida
Raleigh, North Carolina
Columbus, Ohio
Tampa, Florida
Washington, D.C.
Indianapolis, Indiana
Austin, Texas
 
Minneapolis/St. Paul, Minnesota
Dallas/Fort Worth, Texas
 
 
Houston, Texas
 
 
San Antonio, Texas
 

The following table shows, by segment: revenue, operating income and interest expense for the three months ended March 31, 2017 and 2016:
 
Three Months Ended March 31,
(In thousands)
2017
 
2016
Revenue:
 
 
 
Midwest homebuilding
$
146,422

 
$
118,170

Southern homebuilding
149,365

 
122,694

Mid-Atlantic homebuilding
96,886

 
73,453

Financial services (a)
14,307

 
10,053

Total revenue
$
406,980

 
$
324,370

 
 
 
 
Operating income:
 
 
 
Midwest homebuilding
$
14,859

 
$
10,328

Southern homebuilding (b)
8,712

 
6,430

Mid-Atlantic homebuilding
7,253

 
3,884

Financial services (a)
9,230

 
6,275

Less: Corporate selling, general and administrative expense
(8,398
)
 
(7,244
)
Total operating income (b)
$
31,656

 
$
19,673

 
 
 
 
Interest expense:
 
 
 
Midwest homebuilding
$
1,377

 
$
1,279

Southern homebuilding
2,377

 
2,194

Mid-Atlantic homebuilding
916

 
1,408

Financial services (a)
668

 
384

Total interest expense
$
5,338

 
$
5,265

 
 
 
 
Equity in income of joint venture arrangements
(17
)
 
(307
)
 
 
 
 
Income before income taxes
$
26,335

 
$
14,715

(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 an immaterial amount of mortgage refinancing.
(b)
Includes a $2.2 million charge for stucco-related repair costs in certain of our Florida communities (as more fully discussed in Note 6) taken during the three months ended March 31, 2016.

21



The following tables show total assets by segment at March 31, 2017 and December 31, 2016:
 
March 31, 2017
(In thousands)
Midwest
 
Southern
 
Mid-Atlantic
 
Corporate, Financial Services and Unallocated
 
Total
Deposits on real estate under option or contract
$
5,521

 
$
21,122

 
$
4,152

 
$

 
$
30,795

Inventory (a)
417,867

 
539,395

 
298,561

 

 
1,255,823

Investments in joint venture arrangements
3,965

 
12,924

 
7,329

 

 
24,218

Other assets
14,009

 
27,983

(b) 
16,633

 
202,804

 
261,429

Total assets
$
441,362

 
$
601,424

 
$
326,675

 
$
202,804

 
$
1,572,265


 
December 31, 2016
(In thousands)
Midwest
 
Southern
 
Mid-Atlantic
 
Corporate, Financial Services and Unallocated
 
Total
Deposits on real estate under option or contract
$
3,989

 
$
22,607

 
$
3,260

 
$

 
$
29,856

Inventory (a)
399,814

 
484,038

 
302,226

 

 
1,186,078

Investments in joint venture arrangements
10,155

 
10,630

 
7,231

 

 
28,016

Other assets
25,747

 
35,622

(b) 
13,912

 
229,280

 
304,561

Total assets
$
439,705

 
$
552,897

 
$
326,629

 
$
229,280

 
$
1,548,511

(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.
(b)
Includes development reimbursements from local municipalities.
NOTE 11. Supplemental Guarantor Information
The Company’s obligations under the 2021 Senior Notes, the 2017 Convertible Senior Subordinated Notes and the 2018 Convertible Senior Subordinated Notes are not guaranteed by all of the Company’s subsidiaries and therefore, the Company has disclosed condensed consolidating financial information in accordance with SEC Regulation S-X Rule 3-10, Financial Statements of Guarantors and Issuers of Guaranteed Securities Registered or Being Registered. The Guarantor Subsidiaries of the 2021 Senior Notes, the 2017 Convertible Senior Subordinated Notes and the 2018 Convertible Senior Subordinated Notes are the same.
The following condensed consolidating financial information includes balance sheets, statements of income and cash flow information for M/I Homes, Inc. (the parent company and the issuer of the aforementioned guaranteed notes), the Guarantor Subsidiaries, collectively, and for all other subsidiaries and joint ventures of the Company (the “Unrestricted Subsidiaries”), collectively. Each Guarantor Subsidiary is a direct or indirect 100%-owned subsidiary of M/I Homes, Inc. and has fully and unconditionally guaranteed the (a) 2021 Senior Notes on a joint and several senior unsecured basis, (b) 2017 Convertible Senior Subordinated Notes on a joint and several senior subordinated unsecured basis and (c) 2018 Convertible Senior Subordinated Notes on a joint and several senior subordinated unsecured basis.
There are no significant restrictions on the parent company’s ability to obtain funds from its Guarantor Subsidiaries in the form of a dividend, loan, or other means.
As of March 31, 2017, each of the Company’s subsidiaries is a Guarantor Subsidiary, with the exception of subsidiaries that are primarily engaged in the business of mortgage financing, title insurance or similar financial businesses relating to the homebuilding and home sales business, certain subsidiaries that are not 100%-owned by the Company or another subsidiary, and other subsidiaries designated by the Company as Unrestricted Subsidiaries, subject to limitations on the aggregate amount invested in such Unrestricted Subsidiaries in accordance with the terms of the Credit Facility and the indenture governing the 2021 Senior Notes.
In the condensed financial tables presented below, the parent company presents all of its 100%-owned subsidiaries as if they were accounted for under the equity method. All applicable corporate expenses have been allocated appropriately among the Guarantor Subsidiaries and Unrestricted Subsidiaries.

22



UNAUDITED CONDENSED CONSOLIDATING STATEMENTS OF INCOME
 
 
 
 
 
 
 
 
 
Three Months Ended March 31, 2017
(In thousands)
 
M/I Homes, Inc.
Guarantor Subsidiaries
Unrestricted Subsidiaries
Eliminations
Consolidated
 
 
 
 
 
 
 
Revenue
 
$

$
392,673

$
14,307

$

$
406,980

Costs and expenses:
 
 
 
 
 
 
Land and housing
 

320,281



320,281

General and administrative
 

22,460

5,300


27,760

Selling
 

27,283



27,283

Equity in income of joint venture arrangements
 


(17
)

(17
)
Interest
 

4,670

668


5,338

Total costs and expenses
 

374,694

5,951


380,645

 
 
 
 
 
 
 
Income before income taxes
 

17,979

8,356


26,335

 
 
 
 
 
 
 
Provision for income taxes
 

6,489

2,963


9,452

 
 
 
 
 
 
 
Equity in subsidiaries
 
16,883



(16,883
)

 
 
 
 
 
 
 
Net income
 
16,883

11,490

5,393

(16,883
)
16,883

 
 
 
 
 
 
 
Preferred dividends
 
1,219




1,219

 
 
 
 
 
 
 
Net income to common shareholders
 
$
15,664

$
11,490

$
5,393

$
(16,883
)
$
15,664


 
 
Three Months Ended March 31, 2016
(In thousands)
 
M/I Homes, Inc.
Guarantor Subsidiaries
Unrestricted Subsidiaries
Eliminations
Consolidated
 
 
 
 
 
 
 
Revenue
 
$

$
314,317

$
10,053

$

$
324,370

Costs and expenses:
 
 
 
 
 
 
Land and housing
 

260,172



260,172

General and administrative
 

18,302

3,957


22,259

Selling
 

22,266



22,266

Equity in income of joint venture arrangements
 


(307
)

(307
)
Interest
 

4,881

384


5,265

Total costs and expenses
 

305,621

4,034


309,655

 
 
 
 
 
 
 
Income before income taxes
 

8,696

6,019


14,715

 
 
 
 
 
 
 
Provision for income taxes
 

3,444

2,082


5,526

 
 
 
 
 
 
 
Equity in subsidiaries
 
9,189



(9,189
)

 
 
 
 
 
 
 
Net income
 
9,189

5,252

3,937

(9,189
)
9,189

 
 
 
 
 
 
 
Preferred dividends
 
1,219




1,219

 
 
 
 
 
 
 
Net income to common shareholders
 
$
7,970

$
5,252

$
3,937

$
(9,189
)
$
7,970



23



UNAUDITED CONDENSED CONSOLIDATING BALANCE SHEET
 
 
 
 
 
 
 
 
 
March 31, 2017
(In thousands)
 
M/I Homes, Inc.
Guarantor Subsidiaries
Unrestricted Subsidiaries
Eliminations
Consolidated
 
 
 
 
 
 
 
ASSETS:
 
 
 
 
 
 
Cash,cash equivalents and restricted cash
 
$

$
15,158

$
23,740

$

$
38,898

Mortgage loans held for sale
 


113,596


113,596

Inventory
 

1,286,618



1,286,618

Property and equipment - net
 

21,298

1,040


22,338

Investment in joint venture arrangements
 

13,339

10,879


24,218

Deferred income taxes, net of valuation allowances
 

30,342

107


30,449

Investment in subsidiaries
 
682,691



(682,691
)

Intercompany assets
 
426,355



(426,355
)

Other assets
 
1,456

44,788

9,904


56,148

TOTAL ASSETS
 
$
1,110,502

$
1,411,543

$
159,266

$
(1,109,046
)
$
1,572,265

 
 
 
 
 
 

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 

 
 
 
 
 
 

LIABILITIES:
 
 
 
 
 

Accounts payable
 
$

$
94,129

$
274

$

$
94,403

Customer deposits
 

26,680



26,680

Intercompany liabilities
 

415,164

11,191

(426,355
)

Other liabilities
 

90,563

7,013


97,576

Community development district obligations
 

6,277



6,277

Obligation for consolidated inventory not owned
 

11,968



11,968

Notes payable bank - homebuilding operations
 

110,900



110,900

Notes payable bank - financial services operations
 


106,937


106,937

Notes payable - other
 

7,022



7,022

Convertible senior subordinated notes due 2017 - net
 
57,237




57,237

Convertible senior subordinated notes due 2018 - net
 
85,600




85,600

Senior notes due 2021 - net
 
295,953




295,953

TOTAL LIABILITIES
 
438,790

762,703

125,415

(426,355
)
900,553

 
 
 
 
 
 
 
SHAREHOLDERS’ EQUITY
 
671,712

648,840

33,851

(682,691
)
671,712

 
 
 
 
 
 
 
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
 
$
1,110,502

$
1,411,543

$
159,266

$
(1,109,046
)
$
1,572,265




24



CONDENSED CONSOLIDATING BALANCE SHEET
 
 
 
 
 
 
 
 
 
December 31, 2016
(In thousands)
 
M/I Homes, Inc.
Guarantor Subsidiaries
Unrestricted Subsidiaries
Eliminations
Consolidated
 
 
 
 
 
 
 
ASSETS:
 
 
 
 
 
 
Cash,cash equivalents and restricted cash
 
$

$
20,927

$
13,514

$

$
34,441

Mortgage loans held for sale
 


154,020


154,020

Inventory
 

1,215,934



1,215,934

Property and equipment - net
 

21,242

1,057


22,299

Investment in joint venture arrangements
 

12,537

15,479


28,016

Deferred income taxes, net of valuation allowances
 

30,767

108


30,875

Investment in subsidiaries
 
666,008



(666,008
)

Intercompany assets
 
424,669



(424,669
)

Other assets
 
1,690

43,809

17,427


62,926

TOTAL ASSETS
 
$
1,092,367

$
1,345,216

$
201,605

$
(1,090,677
)
$
1,548,511

 
 
 
 
 
 

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 

 
 
 
 
 
 

LIABILITIES:
 
 
 
 
 

Accounts payable
 
$

$
102,663

$
549

$

$
103,212

Customer deposits
 

22,156



22,156

Intercompany liabilities
 

411,196

13,473

(424,669
)

Other liabilities
 

117,133

6,029


123,162

Community development district obligations
 

476



476

Obligation for consolidated inventory not owned
 

7,528



7,528

Notes payable bank - homebuilding operations
 

40,300



40,300

Notes payable bank - financial services operations
 


152,895


152,895

Notes payable - other
 

6,415



6,415

Convertible senior subordinated notes due 2017 - net
 
57,093




57,093

Convertible senior subordinated notes due 2018 - net
 
85,423




85,423

Senior notes due 2021 - net
 
295,677




295,677

TOTAL LIABILITIES
 
438,193

707,867

172,946

(424,669
)
894,337

 
 
 
 
 
 
 
SHAREHOLDERS’ EQUITY
 
654,174

637,349

28,659

(666,008
)
654,174

 
 
 
 
 
 
 
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
 
$
1,092,367

$
1,345,216

$
201,605

$
(1,090,677
)
$
1,548,511




25



UNAUDITED CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
 
 
 
 
 
 
 
Three Months Ended March 31, 2017
(In thousands)
M/I Homes, Inc.
Guarantor Subsidiaries
Unrestricted Subsidiaries
Eliminations
Consolidated
 
 
 
 
 
 
OPERATING ACTIVITIES:
 
 
 
 
 
Net cash provided by (used in) operating activities
$
200

$
(77,003
)
$
53,728

$
(200
)
$
(23,275
)
 
 
 
 
 
 
INVESTING ACTIVITIES:
 
 
 
 
 
Purchase of property and equipment

(932
)
(61
)

(993
)
Intercompany investing
523



(523
)

Investments in and advances to joint venture arrangements

(857
)
(2,340
)

(3,197
)
Net proceeds from the sale of mortgage servicing rights


7,396


7,396

Net cash provided by (used in) investing activities
523

(1,789
)
4,995

(523
)
3,206

 
 
 
 
 
 
FINANCING ACTIVITIES:
 
 
 
 
 
Proceeds from bank borrowings - homebuilding operations

162,000



162,000

Principal repayments of bank borrowings - homebuilding operations

(91,400
)


(91,400
)
Net repayments of bank borrowings - financial services operations


(45,958
)

(45,958
)
Principal proceeds from notes payable - other and CDD bond obligations

607



607

Proceeds from exercise of stock options
496




496