Hovnanian Enterprises, Inc. — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended April 30, 2023. Unless noted otherwise, dollar amounts are USD millions. The company builds and sells homes across three homebuilding segments—Northeast, Southeast and West—and provides mortgage and title services.
Financial performance
| Metric | Three months ended April 30, 2023 | Six months ended April 30, 2023 |
|---|---|---|
| Total revenue | $703.7; up 0.2% year over year | $1,219.0; down 3.9% |
| Net income | $34.1, versus $62.4 | $52.9, versus $87.2 |
| Net income available to common stockholders | $31.5 | $47.5 |
| Diluted EPS | $4.47, versus $8.39 | $6.74, versus $11.44 |
| Homebuilding gross margin | 17.8%, versus 23.3% | 18.1%, versus 21.8% |
| Cash flow from operating activities | $66.0, versus cash used of $62.2 in the prior-year six-month period |
- Second-quarter home-sale revenue was $670.7, down 2.2%; 1,225 homes were delivered, down 9.5%. Average selling price rose 8.0% to $547,517.
- For the first half, home-sale revenue fell 5.4%; deliveries declined 14.4% to 2,163, partly offset by a 10.5% increase in average selling price to $541,079.
- Gross margin pressure primarily reflected greater use of buyer incentives and concessions. The filing reports gross margin before cost-of-sales interest and land charges of 20.9% for the quarter, versus 26.6% a year earlier.
- Cash and cash equivalents were $333.3 in homebuilding at April 30. Total liquidity was $463.8, including $125.0 of unused revolving-credit capacity. Total assets were $2,483.8 and total liabilities were $2,054.3.
- Senior notes and credit facilities were $1,144.1 net of discounts and issuance costs; nonrecourse community mortgages were another $134.1. The company had no borrowings on its $125.0 revolving facility. Its debt includes high coupon notes, including secured notes bearing rates of 10.0%–11.25% and unsecured notes at 13.5%.
- Cash used in investing activities was $20.5 and cash used in financing activities was $57.0 for the six months. Cash and restricted cash combined decreased $11.5 to $370.7.
Changes versus prior comparable periods
- Second-quarter revenue was broadly flat overall, but earnings declined substantially as homebuilding margins compressed. Pretax income was $46.1, down from $80.9; the prior-year quarter included a $6.8 debt-extinguishment loss.
- Net contracts declined 3.1% in the quarter and 26.4% for the first half year over year. Sales pace improved sequentially during the quarter; net contracts per average active selling community nearly doubled from the first quarter to 12.5.
- Backlog at April 30 was 2,318 homes valued at $1,324.8, down 38.9% by homes and 35.7% by value year over year.
- Segment results were mixed: second-quarter Southeast homebuilding revenue rose 38.0% and pretax income rose 38.0%; Northeast revenue declined 12.0% and pretax income declined 24.4%. West revenue was nearly flat, but pretax income fell 55.6%, primarily due to lower gross margin.
- First-half operating cash flow improved year over year, partly reflecting inventory changes. The company reported $48.5 of cash benefit from inventory changes, compared with a $238.6 use in the prior-year period.
Outlook, risks and unusual items
- Management described demand as recovering and reported increased pricing power: prices were raised in approximately 69% of communities during the quarter. Mortgage rates had eased to about 6.4% at April 2023 month-end from a peak of 7.1% in October 2022. No numerical earnings or revenue guidance was provided.
- Management said available cash and revolving capacity should fund working-capital needs for at least the next 12 months. It expects current conditions and results, if sustained, to permit preferred dividends through the remainder of fiscal 2023; Series A dividends are noncumulative and remain subject to debt restrictions and board declaration.
- Management cited continuing uncertainty from inflation, possible recession, employment risk and potential mortgage-rate increases. Lingering supply-chain issues have extended build times; the company expects potential improvement as labor availability increases. It completed workforce reductions and other overhead-reduction measures during the quarter.
- On May 30, 2023, after quarter-end, the company redeemed $100.0 principal of 7.75% secured notes for $104.2 including accrued interest, using cash on hand. The remaining principal was $150.0.
- Construction-defect litigation includes a New Jersey condominium association claim seeking approximately $119.5, potentially subject to treble damages. A partial settlement was described as immaterial; trial was adjourned, with no new date stated. The company intends to defend the remaining claims. A separate New Jersey environmental lawsuit alleges more than $5.3 of public investigation and mitigation costs; discovery is ongoing. The filing does not provide a clear estimate of potential loss for these matters.
- Land and lot options involved $184.3 of deposits against $1.8 billion of purchase commitments; stated maximum exposure is deposits plus predevelopment costs. The company also disclosed environmental, regulatory, warranty, supply, financing, leverage and homebuyer-cancellation risks.
- The company consolidated a joint venture’s remaining assets and liabilities in the second quarter, increasing inventory by $14.9 and accounts payable by $5.3 while reducing its joint-venture investment by $10.8.
Important facts for investors to verify
- Whether improving sales pace and pricing power persist, and whether backlog rebuilds from its year-over-year decline.
- Whether buyer incentives, construction costs and interest expense continue to pressure homebuilding margins.
- Cash availability after the subsequent $104.2 note redemption, together with debt maturities, borrowing capacity and covenant limits.
- Developments, potential exposure and reserve adequacy for the Great Notch construction-defect litigation and Hickory Manor environmental case.
- How management’s 12-month liquidity assessment and expectation for preferred dividends evolve as market conditions and operating results change.