Hovnanian Enterprises, Inc. — Q2 FY2022 Form 10-Q
Reporting period: Three and six months ended April 30, 2022. The company builds homes across six U.S. regions and operates a mortgage and title-services business. Figures below are in millions of dollars except per-share data and where noted.
Financial results and liquidity
| Metric | Q2 FY2022 | Q2 FY2021 | Six months FY2022 | Six months FY2021 |
|---|---|---|---|---|
| Total revenue | $702.5 | $703.2 | $1,267.9 | $1,277.8 |
| Pre-tax income | $80.9 | $31.0 | $116.3 | $50.6 |
| Net income | $62.4 | $488.7 | $87.2 | $507.6 |
| Diluted EPS | $8.39 | $69.65 | $11.44 | $72.71 |
| Homebuilding gross margin | 23.3% | 18.1% | 21.8% | 17.7% |
- Home-sale revenue was nearly flat: $685.8 million in Q2 and $1,237.2 million for the first half. Higher average selling prices—up 20.7% in Q2 and 19.4% for six months—offset fewer deliveries, down 16.4% and 15.9%, respectively. The Q2 average home price was $506,891.
- Homebuilding gross margin before cost-of-sales interest and land charges was 26.6% in Q2 and 24.7% for six months, compared with 21.3% and 21.0% a year earlier. Management attributed the improvement mainly to pricing and delivery mix.
- Operating cash flow was a use of $62.2 million for the first half, versus cash provided of $15.5 million a year earlier. Inventory growth was a major use; the company spent $349.6 million on land purchases and development.
- At April 30, cash and cash equivalents were $149.4 million; total cash including restricted cash was $206.8 million. Reported total liquidity was $282.2 million, including $125 million available under the revolving credit facility. Management said liquidity was above its $170–$245 million target range and expected available sources to fund working capital through fiscal 2022.
- Senior notes and credit facilities, net, were $1,149.1 million, down from $1,248.4 million at October 31, 2021. Nonrecourse inventory mortgages were $196.2 million, up from $125.1 million. Total liabilities were $2,125.8 million; total equity was $258.4 million.
Material changes and unusual items
- Pre-tax income increased substantially, but reported net income and EPS were far below FY2021 comparatives because Q2 FY2021 included a $457.6 million income-tax benefit, primarily from reversing much of the valuation allowance on deferred tax assets. FY2022 recorded tax expense of $18.5 million in Q2 and $29.1 million for six months.
- On April 29, the company redeemed $100 million principal of 7.75% senior secured notes for $105.5 million, including accrued interest. The transaction produced a $6.8 million debt-extinguishment loss.
- Financial-services pre-tax profit fell to $4.9 million in Q2 from $10.4 million, and to $7.8 million for six months from $19.5 million, reflecting lower deliveries and narrower mortgage origination/sale spreads.
- Total selling, general and administrative expense was $68.2 million in Q2, or 9.7% of revenue, versus $82.6 million, or 11.7%. The comparison was influenced by phantom-stock compensation tied to the company’s share price.
Outlook, commentary and risks
- Net contracts declined 13.9% in Q2 and 13.3% for six months year over year. Backlog at April 30 was 3,796 homes, down from 3,897, but its value rose 16.1% to $2.1 billion. May sales pace was 3.3 net contracts per community, versus 4.3 in May 2021.
- Management described current sales pace as more normalized than the unusually strong prior-year period. It noted that mortgage rates rose from 3.2% to 5.1% by the end of April 2022 and warned that higher rates, inflation and fuel costs could affect future results. U.S. CPI inflation was 8.3% in April 2022.
- Supply-chain constraints lengthened construction cycles and delayed deliveries. Other stated risks include labor and material shortages and costs, housing affordability, land availability, cancellations, financing access, high leverage, regulation, weather and litigation. The filing gives no specific full-year earnings or revenue guidance.
- Debt agreements contain restrictive covenants, though the company reported compliance at April 30. Management said it was evaluating transactions to reduce leverage or interest costs and extend maturities; future transactions depend on market conditions and covenant limits.
- Litigation and contingencies include a New Jersey construction-defect case with approximately $119.5 million in claimed damages, potentially subject to treble damages; trial was scheduled for September 2022. In an EPA matter, the company received a $2.7 million cleanup-cost demand and said the extent of any obligation was uncertain, while stating reserves were adequate. A separate NJDEP case alleges more than $5.3 million in investigation and mitigation costs at Hickory Manor; the company intends to defend it.
Important facts for investors to verify
- Whether higher mortgage rates and housing costs weaken sales pace, backlog, cancellations or pricing after the reporting date.
- Whether supply-chain and construction delays continue to constrain deliveries and cash generation.
- Cash use, land-development spending and liquidity relative to the company’s stated target range and debt obligations.
- Progress on the construction-defect, EPA and Hickory Manor matters, including possible exposure beyond recorded reserves.
- The sustainability of gross-margin gains and the effect of lower financial-services earnings and share-price-linked compensation.