Hovnanian Enterprises, Inc. — FY2020 Form 10-K Summary
Reporting period: Fiscal year ended October 31, 2020. The filing is an annual report, not a standalone Q4 filing; selected fourth-quarter results are noted below. Hovnanian builds and sells homes across six U.S. regions and provides mortgage and title services.
Financial and operating performance
| Metric | FY2020 | FY2019 |
|---|---|---|
| Total revenue | $2.344 billion | $2.017 billion |
| Home-sale revenue | $2.252 billion | $1.950 billion |
| Pre-tax income (loss) | $55.4 million | $(39.7) million |
| Net income (loss) | $50.9 million | $(42.1) million |
| Basic / diluted EPS | $7.48 / $7.03 | $(7.06) / $(7.06) |
| Cash from operating activities | $292.8 million | $(249.1) million |
| Homebuilding gross margin | 14.7% | 14.2% |
| Gross margin before cost-of-sales interest and land charges | 18.4% | 18.1% |
| SG&A as a percentage of revenue | 10.3% | 11.6% |
- Consolidated home deliveries rose 15.0% to 5,686; average selling price increased 0.5% to $396,065. Home-sale revenue increased 15.5%.
- Net contracts increased 30.2% to 6,953, despite 6.6% fewer average open-for-sale communities. Contracts per average active community rose to 54.3 from 39.0.
- Consolidated year-end backlog was 3,402 homes valued at $1.420 billion, up 55.3% in homes and 61.3% in value year over year. Including unconsolidated joint ventures, backlog was 4,820 homes valued at approximately $1.8 billion.
- Financial services generated $32.1 million of pre-tax profit, up from $17.6 million, primarily reflecting higher deliveries, loan values and mortgage-sale spreads. Joint-venture income declined to $16.6 million from $28.9 million.
- Year-end total assets were $1.827 billion; total liabilities were $2.263 billion and equity deficit was $436.1 million.
Q4 FY2020: Revenue was $683.4 million and net income was $40.6 million, compared with revenue of $713.6 million and a net loss of $1.8 million in Q4 FY2019.
Liquidity, debt and cash flow
- Management reported total liquidity of $399.1 million at October 31, 2020, including $262.5 million of homebuilding cash and $125.0 million available under its senior secured revolving facility. The facility had no borrowings outstanding at year-end.
- Cash from operations was $292.8 million; investing activities provided $2.1 million and financing activities used $167.8 million. The company spent $624.2 million on land purchases and land development.
- Senior notes and credit facilities were $1.436 billion in principal amount ($1.431 billion net of discounts, premiums and issuance costs). Debt service payments during the year were $349.3 million. Additional obligations included $135.1 million of nonrecourse inventory mortgages and $87.2 million outstanding under mortgage warehouse lines.
- Debt carried high stated rates, including senior secured notes at 7.75% to 11.25%; weighted-average interest on long-term debt was 9.48%. Other interest expense rose to $103.8 million from $90.1 million.
- Debt agreements restrict additional borrowing, dividends, investments and certain asset sales. The company was in covenant compliance at year-end but remained prohibited from paying common or preferred dividends.
Material changes, outlook and risks
- COVID-19 disrupted sales and construction in March and April 2020; sales pace recovered from May and exceeded pre-pandemic levels through year-end. Management cited low mortgage rates, limited existing-home supply and demand for more space as contributing factors, but said the pandemic’s duration and longer-term effects remained uncertain.
- Management expected available cash and revolving-facility capacity to fund working capital needs through FY2021, while warning that housing weakness could reduce cash flow and profitability. No specific revenue or earnings guidance was provided.
- In May 2020, the company streamlined operations, consolidated divisions and began phasing out Chicago as existing communities sell through. Restructuring charges were $2.9 million; management estimated approximately $20 million of annualized overhead savings beginning FY2021, but said higher variable costs could more than offset the savings.
- Debt transactions and repurchases generated a $13.3 million gain on extinguishment of debt in FY2020. The company also incurred $8.8 million of inventory impairment losses and land-option write-offs, including $6.8 million of option-related write-offs; it walked away from 3,900 optioned lots.
- Deferred tax assets of $577.5 million were fully reserved by a valuation allowance. Federal net operating loss carryforwards were approximately $1.4 billion; utilization could be limited by an ownership change under tax rules.
- Material risks include high leverage and refinancing needs, covenant restrictions, possible further COVID-related disruption, housing-market cyclicality, mortgage availability and cancellations, labor and material costs, land and inventory impairment, weather and regulatory exposure, and construction-defect claims.
- The Great Notch, New Jersey condominium plaintiff asserted approximately $119.5 million in damages, potentially subject to treble damages; trial was scheduled for June 2021. The company said it would defend the claims. Separately, the EPA demanded $2.7 million related to a Newark-area cleanup; negotiations continued, and the company stated it had adequate reserves.
- The audited financial statements received an unqualified opinion, and the auditor and management reported effective internal control over financial reporting as of October 31, 2020.
Important facts for investors to verify
- Whether strong contract pace and the $1.420 billion consolidated backlog convert to completed closings, revenue and cash flow, particularly if pandemic-related demand fades.
- Cash availability after land investment, debt service, restricted cash and collateral requirements; confirm the company’s FY2021 liquidity outlook and refinancing timetable.
- Whether gross-margin gains persist as labor, materials and land-development costs change, and whether new inventory impairments or option write-offs arise.
- The status and potential exposure of the Great Notch litigation and Newark EPA matter, including any changes to reserves or settlement discussions.
- How much of the stated overhead savings is realized after bonuses, stock compensation and other costs, and the pace and cost of the Chicago wind-down.