Hovnanian Enterprises, Inc. — Q1 FY2021 10-Q
Reporting period: Three months ended January 31, 2021; balance-sheet figures are as of January 31, 2021. Comparisons are with the three months ended January 31, 2020 unless stated otherwise. Amounts are in millions, except per-share data and where noted.
Business context and operating performance
Hovnanian builds homes across six U.S. regions and provides mortgage and title services. Management attributed the quarter’s improvement to strong housing demand, low interest rates, limited existing-home supply, higher selling prices and increased sales absorption. Operations continued despite COVID-19 restrictions, with housing treated as essential in the company’s markets.
Key financial metrics
| Metric | Q1 FY2021 | Q1 FY2020 / comparison |
|---|---|---|
| Total revenue | $574.7 | $494.1; up 16.3% |
| Homebuilding revenue | $555.2 | $480.0 |
| Financial services revenue | $19.5 | $14.0 |
| Net income (loss) | $19.0 | $(9.1) |
| Basic / diluted EPS | $2.79 / $2.75 | $(1.49) / $(1.49) |
| Homebuilding gross margin | $95.4; 17.3% | $62.0; 12.9% |
| Gross margin before cost-of-sales interest and land charges (non-GAAP) | 20.7% | 17.3% |
| Operating cash flow | $(94.1) | $27.6 provided |
- Home deliveries rose 12.1% to 1,385; average selling price increased 2.7% to $398,097. Management reported that price increases across markets and delivery mix supported margin expansion.
- Net contracts increased 34.5% to 1,778. Sales pace reached 16.0 net contracts per average active selling community, versus 9.7. Backlog grew to 3,795 homes valued at $1.67 billion, up 85.2% in value year over year.
- Financial services pretax profit increased to $9.1 from $4.5, supported by delivery volume and mortgage spreads. Total pretax income was $19.6; income tax expense was $0.6.
Liquidity, debt and balance sheet
- Homebuilding cash and cash equivalents were $172.1, down from $262.5 at October 31, 2020. Total cash, cash equivalents and restricted cash were $226.7. Reported total liquidity was $306.4, including $125.0 of available capacity on the senior secured revolving facility.
- Management said liquidity exceeded its $170–$245 target range and expected available resources to cover working-capital needs through FY2021. Cash from operations was negative mainly as inventory investment increased; the company spent $178.6 on land purchases and development.
- Senior notes and credit facilities, net, totaled $1.430 billion, broadly unchanged from fiscal year-end. In addition, nonrecourse inventory mortgages were $127.3; mortgage warehouse borrowings were approximately $111.1. Debt instruments impose restrictive covenants, and management reported covenant compliance at quarter-end.
- Total liabilities were $2.267 billion against total assets of $1.851 billion; stockholders’ equity deficit was $417.2 and total equity deficit was $416.3. Preferred dividends were unpaid because of debt covenant restrictions; common dividends are also currently restricted.
- Inventory excluding consolidated inventory not owned increased $101.6 from fiscal year-end, principally reflecting land purchases and development. Total reported inventory was $1.281 billion, including $166.0 of consolidated inventory not owned.
Material changes and unusual items
- The prior-year quarter included a $9.5 gain on extinguishment of debt from 2019 exchanges; no debt transactions occurred in Q1 FY2021. The current quarter’s return to profitability therefore reflects operating improvement despite the absence of that prior-year gain.
- Corporate general and administrative expense rose to $23.5 from $19.7, primarily because incentive compensation was forecast to exceed target following improved results. Consolidated selling, general and administrative expense as a share of revenue declined to 11.1% from 12.2%.
- The company recorded $1.9 of inventory impairment and land-option write-offs, including a $0.8 impairment for one community and $1.1 of option and related cost write-offs. It had recorded no inventory impairment in the comparable quarter. The company walked away from 420 lots versus 1,285.
- Federal and state deferred tax assets remained fully reserved; the valuation allowance was $571.5. Management cited uncertainty about whether the recent housing demand and profitability would persist.
Outlook, risks and contingencies
- Management did not provide specific earnings or revenue guidance. It said liquidity should fund working-capital requirements through FY2021, while warning that COVID-19 and housing-market uncertainty could lead to material declines in contracts, deliveries, revenue, cash flow or profitability and to future inventory impairments.
- Key risks include pandemic effects, housing demand and mortgage rates, land and labor availability and costs, construction inflation, cancellations, high leverage and debt restrictions, and regulatory, environmental and construction-defect matters.
- Litigation disclosures include a Great Notch construction-defect case in which plaintiffs assert approximately $119.5 of damages, potentially subject to treble damages; a June 2021 trial was scheduled. A separate New Jersey environmental case alleges more than $5.3 of public investigation and mitigation costs at Hickory Manor. The company also disclosed an EPA Newark cleanup cost demand of $2.7 and said it believes adequate reserves are recorded, but cannot assure the matter will not have a material impact. The company intends to defend the claims.
- Management stated disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether strong contract pace, backlog growth and pricing persist, and whether the reduced active community count can be replenished.
- How land investment and construction spending affect operating cash flow and liquidity, and whether the stated FY2021 liquidity outlook remains achievable.
- Debt maturities, cash interest burden, covenant restrictions, refinancing options and continued suspension of preferred dividends.
- Potential future inventory impairments, the realizability of tax assets despite the full valuation allowance, and the status and exposure of the disclosed legal and environmental matters.
- The filing’s non-GAAP gross-margin measure alongside GAAP margins; results may also be affected by delivery mix, land charges and prior-year debt-extinguishment gains.