Hovnanian Enterprises, Inc. — FY2017 Form 10-K
Reporting period: Fiscal year ended October 31, 2017. This annual filing also reports fourth-quarter results; it is not a standalone quarterly filing. Hovnanian builds and sells homes across six U.S. regions and provides mortgage and title services to its homebuyers.
Financial performance and position
| Metric | FY2017 | FY2016 |
|---|---|---|
| Total revenue | $2.452 billion | $2.752 billion |
| Homebuilding revenue | $2.393 billion | $2.680 billion |
| Net income (loss) | $(332.2) million | $(2.8) million |
| Loss (income) before taxes | $(45.2) million | $2.4 million |
| Operating cash flow | $297.6 million | $387.7 million |
| Homebuilding cash and equivalents, year-end | $463.7 million | $339.8 million |
- Home sales revenue fell 10.0%; deliveries declined 13.3% to 5,602, while average delivered home price rose 3.8% to $417,714. Including unconsolidated joint ventures, the company reported 6,149 deliveries.
- Homebuilding gross margin was 13.2%, up from 12.2%; margin before cost-of-sales interest and land charges was 17.2%, versus 16.9%. Management attributed improvement mainly to community mix, lower land charges, and reduced warranty reserves—not broad-based price or cost improvement.
- Financial-services pretax profit declined to $26.4 million from $35.5 million, primarily due to fewer home deliveries and a lower average price of loans settled.
- At year-end, total assets were $1.901 billion and stockholders’ equity was a deficit of $460.4 million. Homebuilding inventories, including consolidated inventory not owned, totaled $1.010 billion.
- Debt excluding nonrecourse secured debt and financial-subsidiary debt was reported at $1.662 billion. The company had $52.0 million drawn on its $75.0 million revolving facility and $14.6 million of letters of credit outstanding, leaving $8.4 million available. Homebuilding cash was above management’s stated $170–$245 million target range.
Changes versus FY2016
- Open-for-sale communities fell 22.2%, from 167 to 130; net home contracts declined 14.9% to 5,196 and contract value fell 17.3% to $2.084 billion. Sales pace per average active community improved 12.1% to 35.1 contracts.
- Backlog excluding unconsolidated joint ventures fell 17.3% to 1,983 homes valued at $808.0 million. Including joint ventures, backlog was 2,437 homes with a stated value of $1.1 billion.
- Cash from operations decreased from $387.7 million to $297.6 million. The company spent $555.0 million on land purchases and development during FY2017 and reported a $123.9 million increase in homebuilding cash.
- Total revenue declined 10.9%. The reduced community count, following earlier liquidity-preservation measures and market exits, was a principal driver of lower deliveries and revenue.
- Land impairments and option write-offs totaled $17.8 million, down from $33.4 million. A $12.5 million construction-defect reserve adjustment partly offset cost reductions.
Outlook, risks, and unusual items
- Debt refinancing: In July 2017, the company issued $440 million of 10.0% secured notes due 2022 and $400 million of 10.5% secured notes due 2024, refinancing certain secured maturities. The transaction extended maturities but increased borrowing costs and contributed to a $42.3 million transaction loss on extinguishment; after other debt-repurchase gains and costs, the income statement reported a net $34.9 million loss on extinguishment for the year.
- Tax charge: A $294.1 million noncash increase in the deferred-tax-asset valuation allowance contributed to FY2017 tax expense of $286.9 million and the $332.2 million net loss. The company reported a full valuation allowance of $918.2 million at year-end, citing cumulative losses and uncertainty about future taxable income. Federal NOL carryforwards were $1.6 billion; state NOLs were $2.3 billion.
- Management outlook: The company said extended debt maturities and available cash allowed greater investment in communities. It expected community-count growth in the second half of FY2018, with delivery and revenue growth to follow, subject to market conditions and the time needed to entitle and open land. Management stated that identified cash sources were expected to fund working-capital needs through FY2018.
- Near-term operating pressures: Hurricane Harvey disrupted Houston deliveries and construction; management said impacts could continue in FY2018. A fire-resistance coating issue affected 63 homes in Delaware and New Jersey, delaying closings and causing some cancellations; the supplier accepted responsibility, and the company expected no material cost. Southern California wildfires could create labor, construction, or utility delays.
- Liquidity and leverage risks: The $75 million revolving facility matured in 2018; approximately $369 million of unsecured senior notes and the $75 million term loan were due in 2019, subject to stated refinancing provisions. Debt covenants restrict additional borrowing, asset transactions, and dividends; the company said common and preferred dividends were prohibited for the foreseeable future. Interest expense and refinancing access remain significant risks.
- Legal and regulatory matters: In the Grandview at Riverwalk case, the company disclosed a probable, reserved loss with a stated range of $0–$10.8 million, including fees and costs; appeals were intended. A separate Grandview II case, with claimed damages of $69–$79 million potentially subject to trebling, was settled after year-end and was fully reserved at October 31. The EPA’s Newark, New Jersey lead-contamination matter remained unresolved, with the company unable to estimate potential obligations or rule out material impact.
- Other risks include construction-cost and labor pressures, mortgage availability and interest rates, land availability, housing-market cyclicality, construction-defect claims, and the potential limitation of NOLs by an ownership change. Deloitte issued an unqualified opinion on the financial statements and internal controls; management also concluded controls were effective.
Important facts for investors to verify
- How the company will refinance or repay the 2018 revolver and 2019 maturities, and whether covenant terms constrain that plan.
- Whether higher land investment translates into community-count, backlog, delivery, and revenue growth as management projected, and whether margins improve beyond mix and reserve effects.
- The quality and accessibility of reported liquidity, including restricted cash, borrowing availability, and cash needed for debt service and land investment.
- Developments in construction-defect litigation and the Newark EPA matter, including reserve adequacy and any cash or earnings effects.
- The realizability of deferred tax assets and the effect of tax-law changes and any ownership change on NOL utilization.