Hovnanian Enterprises, Inc. — FY2015 Form 10-K
Reporting period: Fiscal year ended October 31, 2015. The filing also reports results for the three months ended October 31, 2015. Hovnanian builds and sells homes across six U.S. regions and provides mortgage and title services to its homebuyers.
Financial and operating results
| Metric | FY2015 | FY2014 |
|---|---|---|
| Total revenue | $2.148 billion | $2.063 billion |
| Net income (loss) | $(16.1) million | $307.1 million |
| Income (loss) before tax | $(21.8) million | $20.2 million |
| Operating cash flow | $(320.5) million | $(190.6) million |
| Cash and cash equivalents, year-end | $253.7 million | $261.9 million |
| Total assets | $2.602 billion | $2.290 billion |
| Equity deficit | $(128.1) million | $(117.8) million |
Home-sale revenue was $2.088 billion, up 3.7%; deliveries were 5,507, essentially flat, while average selling price rose 3.5% to $379,177. Gross margin before cost-of-sales interest and land charges fell to 17.6% from 19.9%. Including cost-of-sales interest and land charges, gross margin was 14.1%, versus 17.0%.
Fourth-quarter FY2015 revenue was $693.2 million, pretax income $37.4 million, and net income $25.5 million. The other three quarters each reported a net loss.
At year-end, the balance sheet included $1.936 billion of notes payable, including $47.0 million drawn on the revolving facility; $108.9 million of mortgage warehouse lines; and $159.4 million of nonrecourse mortgages. Separately, the company reported $1.906 billion of debt excluding nonrecourse and financial-subsidiary debt, net of discount. These measures have different scopes and should not be added without checking for overlap.
Changes versus FY2014
- Revenue increased 4.1%, driven principally by higher average selling prices and financial-services revenue; home deliveries remained nearly unchanged.
- Net results swung from $307.1 million of income to a $16.1 million loss. FY2014 earnings included a $287.0 million income-tax benefit, so the comparison is materially affected by tax accounting.
- Margin pressure reflected discounts on started unsold homes and higher incentives on homes yet to be built. Land impairment and option write-off charges rose to $12.0 million from $5.2 million.
- Net sales contracts increased 11.2% in units and 16.2% in value; year-end backlog value rose 42.1% to $1.216 billion for 2,905 homes, excluding unconsolidated joint ventures.
- Operating cash use increased to $320.5 million, with inventory rising as the company invested in land and development. It spent $656.5 million on land and land development.
Outlook, liquidity, and notable items
- Management said backlog, increased community count, and stronger sales pace positioned the company for improved revenue and profitability in FY2016. This is an expectation, not a quantified earnings forecast. Management also said sustained profitability and positive operating cash flow remained uncertain.
- Management expected available cash and other sources to fund needs through FY2016, while noting reliance on operating cash flows, financing, land banking, joint ventures, and model-home sale-leasebacks. It expected negative or slightly positive operating cash flow after land purchases.
- Senior notes of $172.7 million at 6.25% were due January 15, 2016, and $86.5 million at 7.5% were due May 15, 2016. Management preferred refinancing but warned it might not be available or attractive. It cited up to $300 million in land-banking arrangements as one alternative source of funds.
- The $75 million revolving credit facility had $47.0 million drawn and $25.9 million of letters of credit outstanding, leaving $2.1 million of borrowing capacity, subject to conditions. Moody’s and Fitch downgraded ratings after year-end, in November and December 2015; management said downgrades could make capital access more difficult or costly.
- SG&A benefited from a $15.2 million reduction in construction-defect reserves based on an annual actuarial review. Prior-period impairment reversals of $35.6 million also favorably affected FY2015 homebuilding gross margin.
- The EPA identified the company as a potentially responsible party in a Newark, New Jersey lead-contamination cleanup matter. The company said the scope of any obligation was unknown and could not assure the matter would not have a material impact.
- The $21 million D’Andrea HVAC class-action settlement was paid and the matter concluded; most of the settlement was funded by insurers. An insurer dispute was settled in October 2015 with no financial impact reported.
- Other key risks include housing-market and regional weakness, mortgage availability and interest rates, labor and weather-related construction delays, land and inventory impairments, warranty and construction-defect claims, and restrictive debt covenants. Common and preferred dividends were restricted by debt covenants.
Important facts for investors to verify
- Near-term debt maturities, refinancing progress, land-banking proceeds, and remaining usable liquidity after letters of credit and other restrictions.
- Whether backlog converts to closings and cash as expected, including cancellation trends, incentives, and delivery delays.
- Whether gross margins stabilize and whether growth in land and inventory can be funded without continued heavy operating cash use.
- The assumptions supporting deferred tax assets and the $635.3 million valuation allowance, including future taxable income and NOL utilization.
- Potential costs or developments in the EPA matter, construction-defect reserves, and mortgage-loan repurchase claims.