Hovnanian Enterprises, Inc. — Q3 FY2023 Form 10-Q
Reporting period: Fiscal third quarter and nine months ended July 31, 2023. The company builds homes across three reported regions—Northeast, Southeast and West—and provides mortgage and title services. Financial amounts below are in millions unless stated otherwise.
Key financial results
| Metric | Q3 FY2023 | Q3 FY2022 | Nine months FY2023 | Nine months FY2022 |
|---|---|---|---|---|
| Total revenue | $650.0 | $767.6 | $1,869.0 | $2,035.4 |
| Income before taxes | $70.4 | $111.9 | $134.6 | $228.3 |
| Net income | $55.8 | $82.6 | $108.6 | $169.9 |
| Diluted EPS | $7.38 | $10.82 | $13.97 | $21.77 |
| Homebuilding gross margin | 20.1% | 23.1% | 18.8% | 22.3% |
| Operating cash flow | Not separately provided for the quarter | $291.6 | $(28.6) |
- Revenue and deliveries: Q3 home-sale revenue declined 14.4%; deliveries fell 15.2% to 1,198, while average selling price increased 0.9% to $526,186. For the nine months, home-sale revenue declined 8.8%, deliveries fell 14.7%, and average selling price rose 6.9% to $535,770.
- Margins and earnings: Gross margin weakened as the company used more incentives and concessions to support affordability. Management reported that gross margin improved sequentially from Q2 FY2023 as demand and pricing power recovered.
- Cash and liquidity: At July 31, cash and cash equivalents were $325.2 at homebuilding, with $8.6 of restricted homebuilding cash. Cash, cash equivalents and restricted cash across the cash-flow statement totaled $367.4. The company reported total liquidity of $455.5, including $325.2 of homebuilding cash and $125.0 of revolver capacity; those stated components do not fully reconcile to the reported total.
- Debt: Senior notes and credit facilities were $1,054.9 principal, or $1,044.8 net of discounts and financing costs, versus $1,154.9 principal at October 31, 2022. Nonrecourse community mortgages were $129.1, with a weighted-average rate of 8.6%. The company redeemed $100.0 principal of 7.75% secured notes in May, paying $104.2 including accrued interest and recording a $4.1 debt-extinguishment loss.
- Cash generation and investment: Nine-month operating cash flow was $291.6, compared with cash use of $28.6 a year earlier, supported in part by a $217.2 decrease in inventories. Investing used $78.4 and financing used $228.0. The company spent $459.7 on land purchases and development.
- Balance sheet: Total assets were $2,393.9 and total equity $482.5 at July 31, compared with $2,562.0 and $383.1 at October 31, 2022. Total inventory was $1,411.3, including $251.1 of consolidated inventory not owned.
Changes in demand and operating performance
- Q3 net contracts increased 80.7% year over year; nine-month net contracts decreased 4.3%. Net contracts per average active selling community were 13.4 in Q3 versus 7.6 a year earlier, but 32.3 for the nine months versus 34.9.
- Backlog at July 31 was 2,403 homes valued at $1,326.3, down 24.5% by homes and 26.0% by value from a year earlier.
- Regional performance diverged: Q3 Southeast homebuilding revenue rose 69.5%, while Northeast revenue fell 34.0% and West revenue fell 17.7%. For the nine months, Southeast revenue increased 47.8%; Northeast and West declined 13.3% and 16.0%.
- Gross contract cancellations were 16% in Q3, versus 27% in Q3 FY2022; cancellations as a share of beginning backlog were 12%.
Outlook, risks and unusual items
- Management outlook: Management said demand improved from Q2, aided by quick move-in homes and low existing-home listings, and that it raised prices in approximately 71% of communities during Q3. It cited shorter build times and continued cost-control efforts. No specific earnings or revenue guidance was provided. Management believed available cash and revolver capacity would fund working capital needs for at least 12 months.
- Market uncertainty: Management highlighted mortgage rates, inflation, recession and employment risks, affordability, and the possibility of further rate increases. It said these conditions make the remainder of FY2023 and beyond difficult to predict.
- Nonrecurring gain and tax benefits: Nine-month results included a $19.1 gain upon consolidating a joint venture, a $6.2 energy-efficient-home tax-credit benefit and a $3.9 state valuation-allowance release. These items affected comparability.
- Debt after quarter-end: On August 29, the company redeemed another $100.0 principal of the 7.75% notes for $102.2 including accrued interest, leaving $50.0 principal outstanding.
- Litigation and contingencies: In the Great Notch construction-defect case, plaintiffs asserted approximately $119.5 of damages, potentially subject to treble damages; the company reported an immaterial partial settlement, and trial had been adjourned without a new date. A separate New Jersey environmental lawsuit seeks recovery of more than $5.3 of alleged state investigation and mitigation costs, among other relief. Management intends to defend both matters. The filing does not provide a clear estimate of potential loss for these claims.
- Other exposures: Warranty and general-liability reserves were $90.4; most nine-month charges included payments relating to settlements of three construction-defect matters. Land-option deposits and predevelopment costs exposed the company to a maximum stated loss of $186.0 in deposits plus related costs; deposits covered land and lots with a stated purchase price of $1.9 billion.
Important facts for investors to verify
- Reconcile the reported $455.5 total liquidity with the disclosed $325.2 homebuilding cash and $125.0 revolver availability, and assess cash restrictions and near-term funding needs.
- Track backlog conversion, order growth, cancellations, incentives and gross margins; Q3 sales pace recovered, but backlog and year-to-date deliveries were lower year over year.
- Review the debt maturity and refinancing profile, interest burden, covenant limits and cash remaining after the August 2023 note redemption.
- Assess how much reported earnings depended on the $19.1 joint-venture gain and tax benefits, and whether tax assets and NOL carryforwards can be realized.
- Monitor the Great Notch and environmental litigation, construction-defect reserves, and any change in claimed amounts or estimated exposure.