Hovnanian Enterprises, Inc. — Q2 FY2012 Form 10-Q
Reporting period: Quarter and six months ended April 30, 2012. The company builds and sells homes across six U.S. regions and provides mortgage and title services. Financial figures below are in millions unless otherwise noted.
Financial performance and key metrics
| Metric | Three months ended Apr. 30, 2012 | Six months ended Apr. 30, 2012 |
|---|---|---|
| Total revenue | $341.7 | $611.3 |
| Net income (loss) | $1.8 | $(16.5) |
| Net income (loss), prior year | $(72.7) | $(136.8) |
| Operating cash flow | Not presented quarterly | $(39.9) |
| Homebuilding gross margin, before interest and land charges | 17.4% | 17.0% |
- Q2 revenue increased 33.9% year over year; six-month revenue increased 20.4%. Home sales revenue rose 26.5% and 17.0%, respectively, reflecting higher deliveries and average selling prices.
- Q2 homebuilding gross margin before interest and land charges improved from 14.8% to 17.4%; the six-month comparison improved from 15.8% to 17.0%. After cost-of-sales interest and land charges, margins were 13.3% and 12.2%, respectively.
- Q2 net income included a $27.0 million gain on debt extinguishment. Inventory impairment and land option charges were $3.2 million in Q2 and $6.5 million for six months, down from $16.9 million and $30.5 million in the prior-year periods.
- At April 30, cash and cash equivalents were $207.0 million, including $57.2 million of restricted cash. Total assets were $1.518 billion; total liabilities were $1.973 billion; stockholders’ equity remained in deficit at $454.8 million.
- Notes payable were $1.474 billion, net of discounts, compared with $1.624 billion at October 31, 2011. The mortgage warehouse line had $64.5 million outstanding. The company had no revolving credit facility.
- Six-month operating cash use improved to $39.9 million from $96.0 million in the prior year. Cash declined $43.7 million during the period. Management said available sources were expected to fund working capital and other needs through fiscal 2012.
Material changes versus prior comparable periods
- Home deliveries rose 16.0% in Q2 and 10.8% for six months; average selling price increased to $300,000 in Q2 from $275,000 and to $292,000 for six months from $277,000.
- Net contracts for six months increased to 2,466 homes from 1,838; backlog at April 30 rose to 1,921 homes from 1,293 a year earlier. Contract cancellations were 16% in Q2 versus 20% a year earlier.
- Selling, general and administrative expense, including corporate costs, was $47.4 million in Q2 versus $51.8 million. Homebuilding SG&A was 10.5% of homebuilding revenue versus 15.9% a year earlier.
- Financial services pretax income improved to $3.2 million in Q2 and $4.7 million for six months, versus $0.1 million and $1.8 million.
- The company issued 25 million Class A shares at $2.00 per share in April, receiving $47.3 million net, and used the proceeds with cash on hand to repurchase senior notes. It also exchanged shares for approximately $12.2 million of debt.
Outlook, risks and unusual items
- Management reported improved sales activity, margins and cancellations in Q2 and said prices had been raised in approximately 40% of communities. It cautioned that unemployment, economic uncertainty and potential foreclosures could impede a housing recovery. No specific earnings or revenue guidance was provided.
- The company continued to invest in land and development, spending approximately $118.3 million in the first half. It stated that sustained positive operating cash flow could remain difficult until profitability returns; potential liquidity measures include joint ventures, land sales, additional equity or debt, and reducing or delaying land spending.
- Inventory totaled $946.1 million, net of $720.3 million of impairments recorded on 116 communities. The company had 54 mothballed communities with $141.0 million net book value. Further impairment charges may arise if estimates or market conditions worsen.
- Debt repurchases and exchanges produced a $51.7 million six-month gain on extinguishment. Separately, the November 2011 debt-for-debt exchange was accounted for as a troubled debt restructuring; its $4.7 million costs were expensed.
- Preferred dividends were restricted by debt covenants, and management expected the restriction to continue for the foreseeable future. The company reported compliance with debt indenture covenants at April 30.
- A New Jersey class action concerning HVAC systems in potentially 1,065 homes received class certification. The company said a loss was not probable, but it could not estimate a loss range; it believes insurance coverage is available.
- Other exposures include warranty and general-liability reserves of $123.6 million, mortgage representations-and-warranties claims, regulatory and environmental requirements, and construction input costs. The filing notes drywall prices had increased approximately 35% for 2012.
Most important facts for investors to verify
- Whether contract, backlog, pricing and margin improvements persisted after April 30, particularly across regions; the Southeast remained loss-making and the Northeast reported a six-month pretax loss.
- Cash availability and the timing of debt maturities, refinancing needs, covenant restrictions, and the company’s access to capital; cash balances include restricted amounts.
- Whether operating cash use, land investment and debt-service needs remain manageable under management’s fiscal 2012 liquidity outlook.
- The sustainability of reported Q2 profitability after excluding the debt-extinguishment gain, and the continued level of inventory impairments and option write-offs.
- Potential dilution and capital-structure effects from share issuance, outstanding equity-unit purchase contracts, and future debt exchanges.
- Developments in the HVAC class action, warranty reserves, mortgage repurchase claims, and other legal or regulatory contingencies.