Hovnanian Enterprises, Inc. — Q3 FY2022 Form 10-Q
Period: Three and nine months ended July 31, 2022; balance-sheet comparisons are to October 31, 2021. Financial statements are unaudited. Amounts below are in millions of dollars except per-share data and percentages.
Business context and operating results
Hovnanian builds and sells homes across six U.S. regions and provides mortgage and title services, primarily to its homebuyers. Higher selling prices supported revenue and margins, while rising mortgage rates, inflation, slowing demand and construction delays pressured new orders and deliveries.
| Metric | Q3 FY2022 | Q3 FY2021 | Nine months FY2022 | Nine months FY2021 |
|---|---|---|---|---|
| Total revenue | $767.6 | $690.7 | $2,035.4 | $1,968.5 |
| Home-sale revenue | $736.7 | $663.3 | $1,973.8 | $1,894.2 |
| Income before tax | $111.9 | $61.8 | $228.3 | $112.4 |
| Net income | $82.6 | $47.7 | $169.9 | $555.3 |
| Net income per common share, basic / diluted | $10.92 / $10.82 | $6.85 / $6.72 | $22.05 / $21.77 | $80.02 / $78.51 |
| Homebuilding gross margin | 23.1% | 19.2% | 22.3% | 18.3% |
Home-sale revenue rose 11.1% in Q3 and 4.2% year to date, as average selling prices increased 17.8% and 19.1%, respectively, offsetting fewer deliveries (down 5.7% and 12.5%). Homebuilding gross margin before cost-of-sales interest and land charges was 26.3% in Q3 and 25.3% year to date, compared with 22.1% and 21.4%. Financial-services pretax profit declined to $3.7 million in Q3 and $11.6 million year to date, versus $8.6 million and $28.1 million.
Cash flow, debt and liquidity
- Cash used in operating activities was $28.6 million for the nine months, compared with $82.3 million provided in the prior-year period. Investing activities used $3.3 million and financing activities used $0.9 million. Cash, cash equivalents and restricted cash totaled $278.6 million at July 31; homebuilding cash was $225.1 million.
- Management reported total liquidity of $357.4 million, including $125.0 million of available capacity under the revolving facility; this exceeded its stated target range of $170–$245 million. Management expected available sources and borrowing capacity to fund working capital through FY2022.
- Senior notes and credit facilities, net of discounts, premiums and issuance costs, totaled $1,147.9 million, down from $1,248.4 million at October 31, 2021. This excludes $187.8 million of nonrecourse mortgages secured by inventory and $178.5 million of liabilities related to inventory not owned. Total liabilities were $2,198.8 million and total equity was $338.7 million.
- In April, the company redeemed $100 million principal amount of 7.75% secured notes for $105.5 million, including accrued interest, recording a $6.8 million extinguishment loss. The company reported compliance with debt covenants at July 31; debt agreements include restrictive covenants.
Changes, outlook and risks
- Net contracts fell 34.0% in Q3 and 18.6% for the nine months. Q3 net contracts per average active selling community declined to 7.6 from 12.0. The Q3 cancellation rate rose to 27% of gross sales contracts, above the company’s cited historical normal range; cancellations were 8% of beginning backlog.
- Backlog declined to 3,183 homes from 3,673 a year earlier, while its dollar value increased 2.4% to $1.8 billion, reflecting higher prices. Active selling communities were down to 108 from 124 at October 31, 2021, but controlled lots increased to 31,913 from 31,002 a year earlier.
- Management attributed weaker orders to rapidly rising mortgage rates, high inflation and consumer recession concerns. It cited supply-chain constraints and longer construction cycles as factors delaying deliveries. The filing provides no specific earnings or revenue guidance; management said community count was expected to grow in Q4 and liquidity was expected to cover working capital through FY2022.
- On August 19, 2022, the company amended its $125 million revolving facility to extend its stated maturity to June 30, 2024 and replace fixed-rate pricing with floating SOFR-based pricing, subject to customary collateral conditions. On September 1, it authorized a new share-repurchase program of up to $50 million, with no specified expiration.
- Net income for the nine months was substantially below 2021 despite higher pretax income, primarily because the prior-year period included a $442.9 million tax benefit from reversing much of the deferred-tax valuation allowance. FY2022 nine-month tax expense was $58.4 million; the company reported $376.6 million in net deferred tax assets and an $80.6 million valuation allowance for certain state tax assets.
- Material contingencies include a New Jersey construction-defect lawsuit alleging approximately $119.5 million in damages, potentially subject to treble damages; trial was scheduled for January 2023. A separate New Jersey environmental case alleges more than $5.3 million in government investigation and mitigation costs. The company said it intends to defend these claims. Separately, it agreed to contribute $0.8 million to an EPA cleanup settlement; the court filed the consent decree in August 2022.
- Other identified risks include housing-market and interest-rate volatility, affordability, inflation and labor/material availability, land development delays, high leverage and financing access, regulation, environmental compliance, litigation, and warranty/construction-defect exposure. Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Whether orders, cancellation rates, backlog conversion and community openings stabilized after the July quarter as mortgage rates rose.
- Whether the reported liquidity remains available after operating needs, debt service, land investment and any share repurchases; confirm the revolving-facility amendment’s effectiveness and terms.
- How margins respond to slower sales, buyer incentives, construction-cost inflation and regional delivery mix.
- Debt maturities, cash interest burden, covenant restrictions and the company’s ability to refinance or reduce high-cost debt.
- Potential outcomes and reserve adequacy for the Great Notch and Hickory Manor cases, warranty claims, and the realization of deferred tax assets.