Hovnanian Enterprises, Inc. — FY2021 Form 10-K
Reporting period: Fiscal year ended October 31, 2021. This is an annual filing; the supplied text does not provide a separate Q4 income statement summary. The company builds homes across six U.S. segments and provides mortgage and title services.
Financial and operating results
| Metric | FY2021 | FY2020 |
|---|---|---|
| Total revenue | $2.783 billion | $2.344 billion |
| Pretax income | $189.9 million | $55.4 million |
| Net income | $607.8 million | $50.9 million |
| Cash from operations | $210.2 million | $292.8 million |
| Cash from investing activities | $9.0 million | $2.1 million |
| Cash used in financing activities | $217.3 million | $167.8 million |
| Homebuilding gross margin | 18.6% | 14.7% |
- Home sales revenue rose 18.7%; deliveries increased 9.1% to 6,204 homes and average selling price rose 8.8% to $430,966.
- Net income included a $418.0 million income tax benefit, principally from reversing much of the valuation allowance on deferred tax assets. The company reported $425.7 million of net deferred tax assets at year-end and retained a $101.6 million valuation allowance. Net income therefore substantially exceeded pretax income.
- Homebuilding gross margin improvement was attributed primarily to higher selling prices and community mix. Selling, general and administrative expense was 9.9% of total revenue, versus 10.3% in FY2020.
- The company spent $698.3 million on land purchases and development. It reported $210.2 million of operating cash flow, down from $292.8 million in FY2020.
- At October 31, 2021, homebuilding cash was $246.0 million and reported total liquidity was $380.9 million, including $125.0 million available under its revolving facility.
- Notes and credit facilities totaled $1.255 billion face amount, or $1.248 billion net of discounts, premiums and issuance costs, excluding nonrecourse mortgages and financial-services borrowings. Nonrecourse inventory mortgages were $125.1 million. The revolving facility was undrawn; debt maturities were concentrated in 2026, with $1.044 billion due that year.
Changes versus FY2020
- Total revenue increased 18.7%, and pretax income rose to $189.9 million from $55.4 million. Net income growth was amplified by the tax benefit described above.
- Backlog at year-end excluding unconsolidated joint ventures fell 4.6% in homes to 3,247, but increased 15.4% in value to $1.639 billion, reflecting higher prices. Including joint ventures, backlog rose 14.8% to 5,535 homes worth $2.2 billion.
- Net contracts declined 13.4% to 6,023, alongside a 14.8% decrease in average open-for-sale communities. Sales pace per average active community increased 1.8% to 55.3 homes.
- The company redeemed $180.9 million face amount of 10.0% notes due 2022 and 10.5% notes due 2024, using cash on hand. These redemptions reduced annual interest incurred by approximately $19 million; they also generated a combined $3.7 million loss on debt extinguishment.
- Year-end equity improved to $175.4 million from a $436.1 million deficit, principally reflecting the reported net income and deferred-tax valuation allowance reversal.
Outlook, risks and notable items
- Management said it expects to continue growing community count, although it may fluctuate in the first half of FY2022. It stated that cash and available revolving borrowings should be sufficient to fund working-capital needs through FY2022. No specific FY2022 revenue or earnings guidance is provided in the supplied filing text.
- Management cited persistent labor and material shortages, construction cycle times extended by 45–60 days in many markets, and elevated land, labor and material costs. Lumber prices had recently begun to decline, but future shortages, costs and demand remained uncertain.
- The filing warns that a weaker housing market, rising mortgage rates, inflation, construction delays, lower affordability, cancellations, or renewed COVID-19 disruption could reduce sales, deliveries, margins and cash generation, and could prompt inventory impairments or land-option write-offs. Operating cash flow may also vary materially with land investment.
- Debt remains substantial and carries high stated interest rates; restrictive covenants limit additional debt, asset sales, investments and distributions. The company reported compliance with debt covenants at year-end and said it was no longer restricted from paying dividends. After year-end, the board authorized a $2.7 million preferred dividend, payable January 15, 2022.
- Materially notable contingencies include an EPA demand seeking $2.7 million for cleanup costs at a Newark, New Jersey site, with the company’s ultimate obligation unclear; a New Jersey construction-defect case in which plaintiffs asserted approximately $119.5 million in damages, potentially subject to treble damages; and a separate NJDEP lawsuit alleging more than $5.3 million in investigation and mitigation costs at Hickory Manor. The company intends to defend the claims; it states it has adequate reserves for the EPA matter.
Investor facts to verify
- How much of the $607.8 million net income and positive equity reflects the deferred-tax valuation allowance reversal, and what assumptions support future use of deferred tax assets and NOLs.
- Whether backlog value converts to closings as expected, given lower consolidated backlog unit counts, construction delays and potential cancellations.
- Whether higher home prices can continue to offset inflation in labor, materials and land without hurting affordability or sales pace.
- Debt repayment and refinancing capacity, especially the 2026 maturity concentration, high borrowing costs, covenant limits and liquidity needs as land investment increases.
- Developments and potential exposure in the Great Notch, Newark EPA and Hickory Manor matters, including reserve adequacy and any settlement or trial outcomes.