Business context and reporting period
Hovnanian Enterprises, Inc. (HOV) filed this unaudited Form 10-Q for its fiscal first quarter, the three months ended January 31, 2022. The company builds and sells homes across six U.S. regions and provides mortgage and title services. Comparisons are with the three months ended January 31, 2021, unless noted. Dollar amounts below are in millions except per-share data.
Financial performance and position
| Metric | Q1 FY2022 | Prior-year quarter | Change / context |
|---|---|---|---|
| Total revenue | $565.3 | $574.7 | Down 1.6% |
| Homebuilding revenue | $552.0 | $555.2 | Down 0.6%; home-sale revenue was essentially flat |
| Net income | $24.8 | $19.0 | Up 30.8% |
| Net income available to common stockholders | $22.1 | $19.0 | After $2.7 of preferred dividends in Q1 FY2022 |
| Basic / diluted EPS | $3.12 / $3.07 | $2.79 / $2.75 | Higher year over year |
| Homebuilding gross margin | 19.9% | 17.3% | Gross margin dollars rose 15.0%; margin before cost-of-sales interest and land charges was 22.4% versus 20.7% |
| Operating cash flow | $(115.7) | $(94.1) | Greater cash use, principally reflecting inventory investment and working-capital movements |
Revenue and margins: The average selling price rose 18.0% to $469,647, while deliveries fell 15.2% to 1,174 homes. Management attributed fewer deliveries in part to supply-chain constraints and longer construction cycles, as well as unusually high deliveries in the prior-year quarter. Higher prices and delivery mix supported gross-margin improvement. Total selling, general and administrative expense was $72.2, or 12.8% of revenue, versus $63.7, or 11.1%; higher compensation and incentive costs contributed to the increase.
Cash, liquidity and debt: At January 31, 2022, cash and cash equivalents were $137.9 for homebuilding; total cash, cash equivalents and restricted cash were $209.9. Management reported total liquidity of $271.0, including $125.0 of undrawn senior secured revolver capacity, above its stated $170–$245 target range. The company reported $1,247.2 of senior notes and credit facilities, net, plus $196.4 of nonrecourse mortgages secured by inventory. The revolver had no borrowings outstanding. Senior notes and facilities include high-coupon obligations, including secured notes bearing rates of 7.75% to 11.25% and unsecured notes at 13.5% and 5.0%. Debt agreements contain restrictive covenants, although the company reported compliance at quarter-end. Total equity was $196.9.
Other balance-sheet items: Total inventory was $1,413.4, up from $1,254.3 at October 31, 2021, reflecting land purchases and development. Deferred tax assets, net, were $416.2; the company retained a $101.6 valuation allowance against certain state tax assets. Accrued interest increased to $47.3 from $28.2 at fiscal year-end.
Material changes and operating trends
- Net contracts declined 12.8% year over year. Net contracts per average active selling community were 13.1, compared with 16.0 in the unusually strong prior-year quarter; cancellations were 14% of gross contracts versus 17%.
- Backlog declined to 3,624 homes from 3,795 a year earlier, but its dollar value increased 13.2% to $1,885.6, reflecting higher prices.
- Active selling communities fell to 111 from 124 at October 31, 2021, as 26 communities closed and 13 opened during the quarter. Controlled lots rose to 32,328 from 30,874.
- Financial-services revenue fell 31.7% to $13.3, and segment pretax income fell to $2.9 from $9.1. Management cited fewer home deliveries and a narrower spread on mortgage originations and loan sales.
- Income from unconsolidated joint ventures rose to $8.2 from $1.9, mainly reflecting recognition of a higher share of prior-year profits after partner return hurdles were achieved.
- Other interest expense decreased to $13.4 from $24.0, partly due to lower debt following fiscal 2021 reductions. No inventory impairment losses were recorded in Q1 FY2022, compared with $0.8 of impairment in the prior-year quarter.
Outlook, risks and contingencies
The filing provides no quantified earnings or delivery guidance. Management said available cash and revolver capacity were expected to fund working-capital requirements through fiscal 2022, while noting uncertainty in economic and housing-market conditions. It expected substantially all homes in inventory under construction or completed at quarter-end to be delivered within six to nine months.
Management described continuing demand and price increases, but highlighted supply-chain and labor constraints, construction-cost inflation, mortgage rates and affordability, land availability, cancellation trends, and the possibility that costs could rise faster than home prices. The filing cited U.S. inflation of 7.5% in January 2022. It also identified high leverage, debt restrictions, financing access, COVID-19 uncertainty, weather and environmental regulation among material risks.
Legal and other contingencies: The company reported ordinary-course litigation, principally construction-defect matters, and said most matters were not expected to materially adversely affect results, while specific proceedings remain uncertain. A New Jersey condominium association asserted approximately $119.5 of damages in the Great Notch construction-defect case, potentially subject to treble damages; trial was scheduled for June 2022. In an environmental matter, the EPA demanded $2.7 for cleanup costs relating to a former Newark-area site; the company stated it had adequate reserves but could not assure the matter would not have a material impact. A separate NJDEP case concerning Hickory Manor seeks recovery of costs, further remediation and disgorgement; the complaint alleges more than $5.3 of agency costs.
Important facts for investors to verify
- Whether supply-chain delays, construction costs and mortgage-rate changes affect delivery volumes, home affordability and the improved gross margin.
- Whether contract trends, backlog value and community replenishment support future revenue, particularly as the number of backlog homes and active communities declined.
- Cash conversion and liquidity: operating cash use was $115.7 despite quarterly net income, and reported liquidity includes restricted cash in the broader cash-flow balance but the stated $271.0 liquidity measure specifically includes homebuilding cash and revolver capacity.
- Debt service, refinancing options and covenant headroom, given substantial leverage and high stated interest rates.
- Developments, reserves and potential exposure in the Great Notch and environmental proceedings, including the Newark and Hickory Manor matters.