Hovnanian Enterprises, Inc. — FY2012 Form 10-K
Business context and reporting period. The filing covers the fiscal year ended October 31, 2012 (including the fourth quarter). Hovnanian builds and sells homes across six U.S. geographic segments and provides mortgage and title services to its homebuyers. Homebuilding generated approximately 97% of consolidated revenue.
Key financial metrics
| Metric | FY2012 | FY2011 |
|---|---|---|
| Revenue | $1.485 billion | $1.135 billion |
| Net loss | $66.2 million | $286.1 million |
| Loss before income taxes | $101.2 million | $291.6 million |
| Cash used in operating activities | $67.0 million | $207.4 million |
| Homebuilding gross margin before interest and land charges | 17.8% | 15.6% |
| Homebuilding gross margin after interest and land charges | 13.4% | 0.8% |
- Home sales revenue increased 31.1%; consolidated deliveries rose 22.0% to 4,676 homes, and average selling price increased to $300,595 from $279,873.
- Net contracts rose 27.7% by number to 5,137; net sales-contract value increased 41.4% to $1.598 billion. Active selling communities declined to 172 from 192, while contracts per average active community increased to 28.1 from 21.3.
- SG&A, including corporate costs, fell to $190.3 million from $211.4 million; as a share of revenue it declined to 12.8% from 18.6%. Financial services reported $15.1 million pretax profit, versus $8.1 million.
- Year-end cash and cash equivalents were $273.2 million, including $258.3 million in homebuilding and $14.9 million in financial services. Restricted cash totaled $64.2 million. Total assets were $1.684 billion; total equity remained in deficit at $485.3 million.
- Notes payable were $1.562 billion on the balance sheet. The filing separately reports $1.559 billion of debt excluding nonrecourse secured debt and financial-subsidiary debt. The company had no revolving credit facility; mortgage warehouse borrowings were $107.5 million.
- Land and land development spending was approximately $363.8 million. Management reported that homebuilding cash increased $14.0 million during the year, while consolidated cash increased $22.5 million.
Material changes and notable items
- Operating trends improved from FY2011: higher deliveries and selling prices, stronger sales pace, improved margins, and substantially lower impairment and land-option charges. Total land charges fell to $12.5 million from $101.7 million; owned-inventory impairments were $9.8 million versus $77.5 million.
- The company issued $797 million of 2020 secured notes and $100 million of exchangeable note units, then used the proceeds and cash on hand to tender for and redeem its 10.625% secured notes due 2016. The transaction produced an $87.0 million extinguishment loss in Q4. Other debt repurchases and exchanges generated gains; the full-year net extinguishment loss was $29.1 million.
- Hovnanian issued 25 million Class A shares in April 2012 for net proceeds of $47.3 million and also exchanged debt for common shares, increasing share count and diluting existing holders.
- Land transactions with GSO and model-home sale-leasebacks generated financing proceeds but were accounted for as financing arrangements, with related inventory and liabilities recorded on the balance sheet.
Outlook, risks, and contingencies
- Management said it believes cash resources and other sources will be sufficient to finance working-capital and other needs through FY2013. It also expected demand to remain historically low, with uneven improvement by market, and said negative cash flow after land purchases could continue. No specific earnings or revenue guidance was provided.
- Liquidity and solvency remain central risks: substantial debt service, restrictive debt covenants, no corporate revolving credit facility, and reliance on cash and operating cash flows. The company reported compliance with debt covenants at year-end and was prohibited from paying common and preferred dividends.
- Other principal risks include housing and mortgage-market weakness, financing availability and interest rates, land and construction-cost fluctuations, inventory impairment, weather, regulation, and reliance on joint ventures. Federal NOL carryforwards were approximately $1.5 billion, but their use could be limited by an ownership change; a valuation allowance of $937.9 million was recorded against deferred tax assets.
- Environmental matters include an ongoing EPA stormwater consent decree, approximately $120,000 in stipulated penalties paid in 2012, and alleged permit violations at two Maryland projects under negotiation. The company did not expect the latter proceedings to have a material impact. A New Jersey HVAC class action potentially covers 1,065 homes; management said a loss was not probable but could not estimate a range.
- Mortgage investors may seek loan repurchases or make-whole payments for alleged breaches of representations and warranties. Loan-origination reserves rose to $9.3 million from $5.1 million, and inquiries increased to 66 from 39.
Important facts for investors to verify
- Whether sales pace, backlog, pricing, and margins continue improving, and whether contract cancellations remain near normalized levels.
- Liquidity after land investment and debt service, including the availability and terms of mortgage warehouse and letter-of-credit facilities; assess restricted cash separately from available cash.
- The cash cost, maturity profile, collateral, and covenant implications of the FY2012 debt refinancing, along with potential dilution from equity-linked securities and share issuances.
- Whether inventory assumptions and impairment estimates remain supportable if prices, absorption rates, or construction costs change.
- Potential exposure from stormwater proceedings, the HVAC class action, warranty claims, and mortgage repurchase demands; compare developments with recorded reserves.