Hovnanian Enterprises, Inc. — Q3 FY2011 Form 10-Q
Reporting period: Three and nine months ended July 31, 2011. Hovnanian is a U.S. homebuilder operating across six geographic segments, with a related mortgage and title-services business. Financial figures below are in millions of dollars unless stated otherwise.
Financial results and liquidity
| Metric | Three months ended July 31, 2011 | Nine months ended July 31, 2011 |
|---|---|---|
| Total revenue | $285.6 | $793.3 |
| Net income (loss) | $(50.9) | $(187.7) |
| Loss before income taxes | $(55.6) | $(193.8) |
| Operating cash flow | Not stated separately for the quarter | $(179.2) |
| Homebuilding gross margin before interest and land charges | 15.3% | 15.6% |
- Q3 diluted loss per share was $0.47; nine-month diluted loss per share was $1.92.
- At July 31, cash and cash equivalents were $282.4, including $273.4 in homebuilding; restricted cash was $83.3. Cash and cash equivalents declined $84.8 from the start of the fiscal year.
- Notes payable totaled $1,663.3, including $786.2 of senior secured notes, $827.7 of senior notes and $14.5 of tangible equity unit amortizing notes, each net of discount. Total liabilities were $2,097.1; stockholders’ equity deficit was $399.5.
- Management reported $59.0 of letters of credit outstanding, supported by $60.8 of restricted cash collateral. The mortgage subsidiary had $41.7 outstanding on its $50 million warehouse facility.
Material changes versus the prior comparable period
- Q3 revenue fell 25.0% year over year; nine-month revenue declined 22.1%. Home sales revenue decreased 24.9% and 23.1%, respectively, chiefly as deliveries fell 24.5% in the quarter and 22.4% for the nine months.
- Average home selling price was $278,000 in Q3 versus $280,000 a year earlier, and $277,000 for the nine months versus $280,000. Management attributed price changes primarily to delivery mix.
- Homebuilding gross margin before interest and land charges decreased to 15.3% in Q3 from 17.1%, and to 15.6% for nine months from 16.8%. Nine-month margin after interest and land charges was 4.6%, versus 5.2%.
- Land charges (inventory impairments and land-option write-offs) were $11.4 in Q3, down from $49.0, and $41.9 for nine months, down from $55.1. The company recorded $28.2 of inventory impairments and $13.7 of option-related write-offs in the nine-month period.
- Operating cash use contrasted with $91.9 of cash provided in the prior-year nine-month period, reflecting ongoing investment in inventory, including approximately $305 spent on land and land development.
- Net loss for the nine months compared with net income of $134.7 in 2010; the prior-year result included a $291.3 tax benefit from carrying back losses. The current-period tax benefit was $6.1.
Management commentary, outlook and risks
- Management described housing conditions as choppy, citing weak demand, high unemployment, foreclosures, constrained mortgage credit and financial-market uncertainty. It remained “cautiously optimistic” but noted that recovery remained challenging.
- Q3 net contracts increased 29.6% from the prior-year quarter; contracts per average active selling community rose to 6.3 from 5.0. For the first nine months, that measure declined to 16.1 from 17.1. Q3 cancellation rate was 18%, compared with 23% a year earlier.
- Management said available cash and other expected sources should be sufficient through fiscal 2012 to meet working-capital and other needs. This outlook is subject to market conditions and execution; the filing notes that generating positive operating cash flow may be difficult until profitability returns.
- The company had $1.0 billion of inventory, net of $833.5 of impairments; 57 mothballed communities had $174.4 of net book value. Management warned that further market deterioration or adverse changes in pricing, incentives, sales pace or cost assumptions could trigger additional impairments.
- Capital actions included February 2011 issuances of Class A shares, tangible equity units and $155 million of 11⅞% senior notes, with proceeds partly used to repurchase or redeem debt. In May, it issued $12 million of 10⅝% secured notes. Subsequent to quarter-end, it repurchased $18.4 million principal amount of unsecured notes for $10.7 million cash, reporting a $7.7 million gain before unamortized fees and discounts.
- Credit risks include S&P’s June 2011 downgrade to CCC, a high debt burden and restrictive indenture covenants. Preferred dividends are currently restricted and management expected the restriction to continue for the foreseeable future. The company reported compliance with its debt covenants at July 31.
- Other exposures include warranty and construction-defect claims, mortgage-loan representation and warranty claims, land-option commitments, joint-venture performance and environmental or regulatory costs. The filing states ordinary-course litigation is not expected to materially adversely affect results; a Florida class action settlement was agreed for an immaterial amount, with documents still being drafted.
Most important facts for investors to verify
- Whether home orders, backlog conversion, cancellation rates and deliveries improve in subsequent quarters, especially outside the Southwest, which was the only profitable homebuilding segment in the nine-month period.
- Cash burn, unrestricted liquidity, collateral requirements and the company’s ability to meet its stated liquidity needs through fiscal 2012.
- Debt maturities, interest burden, covenant restrictions and access to refinancing or additional capital.
- Whether inventory assumptions remain supportable and whether further impairments, land-option write-offs or joint-venture losses arise.
- The collectability and potential cost of mortgage repurchase claims, warranty and construction-defect liabilities, and other contingencies.