Hovnanian Enterprises reports Q4 net loss of US$84.4M from loss of US$93.3M a year earlier on revenues up 42.6% to US$487.0M; CEO cites modest homebuilding recovery, stable company expenses

RED BANK, New Jersey , December 13, 2012 (press release) – Fourth Quarter Net Income, Excluding Debt Extinguishment Charge, Exceeds Consensus Estimate

Reports First Quarterly Pre-Tax Profit, Excluding Gains or Losses on Extinguishment of Debt, Since the Industry Downturn Began in 2006


Hovnanian Enterprises, Inc. (NYSE:HOV), a leading national homebuilder, reported results for its fourth quarter and year ended October 31, 2012.

RESULTS FOR THREE AND TWELVE MONTH PERIODS ENDED OCTOBER 31, 2012:

  • Total revenues were $487.0 million in the fiscal 2012 fourth quarter up 42.6% compared with $341.6 million in the prior year's fourth quarter. For all of fiscal 2012, total revenues were $1.5 billion, up 30.9%, compared with $1.1 billion during all of fiscal 2011.

  • The dollar value of net contracts, including unconsolidated joint ventures, for the fourth quarter ended October 31, 2012 increased 46.3% to $513.4 million compared with $350.9 million in the 2011 fourth quarter. The number of net contracts increased 22.8% to 1,443 homes for the three months ended October 31, 2012 from 1,175 homes in the fourth quarter of the prior year.

  • In all of fiscal 2012, the dollar value of net contracts, including unconsolidated joint ventures, increased 43.9% to $1.9 billion compared with $1.3 billion in all of fiscal 2011 and the number of net contracts increased 30.1% to 5,838 homes compared with 4,488 homes of the previous year.

  • Deliveries, including unconsolidated joint ventures, were 1,750 homes during the fourth quarter of 2012, up 40.6% compared with 1,245 homes in the same period of the prior year. During the twelve months ended October 31, 2012, deliveries, including unconsolidated joint ventures, were 5,356 homes compared with 4,216 homes during the twelve month period a year ago, an increase of 27.0%.

  • Contract backlog, as of October 31, 2012, including unconsolidated joint ventures, was $742.2 million for 2,145 homes, which was an increase of 34.4% and 29.0%, respectively, compared to October 31, 2011.

  • Homebuilding gross margin percentage, before interest expense included in cost of sales, increased 280 basis points to 18.3% for the fourth quarter ended October 31, 2012, compared to 15.5% in last year's fourth quarter. The fourth quarter of fiscal 2012 represented the sixth sequential increase in quarterly gross margin percentage. During all of 2012, homebuilding gross margin percentage, before interest expense included in cost of sales, was 17.8% compared with 15.6% in same period of the prior year.

  • Total SG&A was $48.7 million, or 10.0% of total revenues, for the three months ended October 31, 2012 compared to $57.8 million, or 16.9% of total revenues, during the same quarter a year ago and $48.1 million, or 12.4% of total revenues, in the third quarter of 2012. During all of fiscal 2012, total SG&A was $190.3 million, or 12.8% of total revenues, compared with $211.4 million, or 18.6% of total revenues, last year.

  • Consolidated pre-tax land-related charges in the fiscal 2012 fourth quarter were $5.3 million compared with $59.9 million in the prior year's fourth quarter. For all of fiscal 2012 consolidated pre-tax land-related charges were $12.5 million compared with $101.7 million during all of 2011.

  • Excluding land-related charges and gains or losses on extinguishment of debt, the pre-tax income in the fiscal 2012 fourth quarter was $8.1 million compared with a pre-tax loss of $45.2 million in the previous year's fourth quarter. After $5.3 million in land-related charges, the pre-tax income, excluding gains or losses on extinguishment of debt, was $2.8 million for the fourth quarter of fiscal 2012. For the twelve months ended October 31, 2012, excluding land-related charges, expenses associated with the debt exchange offer and gains or losses on extinguishment of debt, the pre-tax loss was $55.0 million compared with $194.1 million last year.

  • The pre-tax loss for the fourth quarter ended October 31, 2012, including an $87.0 million loss on extinguishment of debt, was $84.2 million compared with $97.8 million in the 2011 fourth quarter. For the twelve months ended October 31, 2012, the pre-tax loss, including gains or losses on extinguishment of debt, was $101.2 million compared with $291.6 million for all of the prior year.

  • The net loss was $84.4 million during the fourth quarter of 2012, or $0.59 per common share, compared with a net loss of $98.3 million, or $0.90 per common share, in the 2011 fourth quarter. For all of fiscal 2012, the net loss was $66.2 million, or $0.52 per common share, compared with a net loss of $286.1 million, or $2.85 per common share, in the prior year. The net loss in the fiscal 2012 fourth quarter and for the full year included an $87.0 million loss on extinguishment of debt, associated with the 2012 fourth quarter $797 million debt refinancing.

  • The contract cancellation rate, including unconsolidated joint ventures, for the fourth quarter ended October 31, 2012 was 23%, compared with 21% in last year's fourth quarter.

  • During November of 2012, the dollar value of net contracts and the number of net contracts, including unconsolidated joint ventures, increased 38.1% and 18.5% respectively to $131.5 million compared with $95.2 million and to 385 homes from 325 homes in the same month last year.

  • The valuation allowance was $937.9 million as of October 31, 2012. The valuation allowance is a non-cash reserve against the tax assets for GAAP purposes. For tax purposes, the tax deductions associated with the tax assets may be carried forward for 20 years from the date the deductions were incurred.

LIQUIDITY AND INVENTORY AS OF OCTOBER 31, 2012:

  • After spending $127.9 million during the fourth quarter of 2012 on land and land development, homebuilding cash increased $36.9 million from the third quarter to $289.0 million, as of October 31, 2012, including $30.7 million of restricted cash required to collateralize letters of credit.

  • As of October 31, 2012, the land position, including unconsolidated joint ventures, was 29,619 lots, consisting of 11,418 lots under option and 18,201 owned lots.

  • Refinanced $797 million of secured senior notes during the fourth quarter of fiscal 2012, which reduces annual cash interest payments by approximately $17 million and extends the maturity of the refinanced debt from 2016 until 2020.

  • Announced an increase of our land banking arrangement with GSO Capital Partners LP, the credit arm of The Blackstone Group, for up to an additional $125 million of total acquisition and future development costs.

COMMENTS FROM MANAGEMENT:

"We are very happy to report a pre-tax profit before debt extinguishment gains or losses for the first time in 25 quarters. The fourth quarter marked the sixth sequential increase in our quarterly gross margin percentage, and our gross margin has improved 350 basis points over that period," said Ara K. Hovnanian, Chairman of the Board, President and Chief Executive Officer. "During fiscal 2012, we were able to generate significant operating leverage by holding our total SG&A and interest expenses at a fairly constant dollar amount, while growing our revenues by more than 30%. As a result, our SG&A as a percentage of total sales declined to 10.0% during the fourth quarter, which by historical standards we consider a normalized level. Furthermore, our sales growth continued with a 46% increase in dollar value of net contracts for the quarter and a 34% increase in dollar value of our backlog.

"After the worst downturn that the homebuilding industry has ever seen, I do not think there is any question that the industry is finally in a period of modest recovery. Building homes creates jobs for carpenters, electricians, plumbers and many other trades, as well as jobs in related industries like manufacturing appliances and home furnishings. A sustained recovery in the homebuilding sector will help drive overall improvement in the U.S. economy and that will encourage even more consumers to buy a home," concluded Mr. Hovnanian.

WEBCAST INFORMATION:

Hovnanian Enterprises will webcast its fiscal 2012 fourth quarter financial results conference call at 11:00 a.m. E.T. on Thursday, December 13, 2012. The webcast can be accessed live through the "Investor Relations" section of Hovnanian Enterprises' Website at http://www.khov.com. For those who are not available to listen to the live webcast, an archive of the broadcast will be available under the "Audio Archives" section of the Investor Relations page on the Hovnanian Website at http://www.khov.com. The archive will be available for 12 months.

ABOUT HOVNANIAN ENTERPRISES®, INC.:

Hovnanian Enterprises, Inc., founded in 1959 by Kevork S. Hovnanian, is headquartered in Red Bank, New Jersey. The Company is one of the nation's largest homebuilders with operations in Arizona, California, Delaware, Florida, Georgia, Illinois, Maryland, Minnesota, New Jersey, North Carolina, Ohio, Pennsylvania, South Carolina, Texas, Virginia, Washington, D.C. and West Virginia. The Company's homes are marketed and sold under the trade names K. Hovnanian® Homes®, Matzel & Mumford, Brighton Homes, Parkwood Builders, Town & Country Homes and Oster Homes. As the developer of K. Hovnanian's® Four Seasons communities, the Company is also one of the nation's largest builders of active adult homes.

Additional information on Hovnanian Enterprises, Inc., including a summary investment profile and the Company's 2011 annual report, can be accessed through the "Investor Relations" section of the Hovnanian Enterprises' website at http://www.khov.com. To be added to Hovnanian's investor e-mail or fax lists, please send an e-mail to IR@khov.com or sign up at http://www.khov.com.

NON-GAAP FINANCIAL MEASURES:

Consolidated earnings before interest expense and income taxes ("EBIT") and before depreciation and amortization ("EBITDA") and before inventory impairment loss and land option write-offs, expenses associated with debt exchange offer and loss (gain) on extinguishment of debt ("Adjusted EBITDA") are not U.S. generally accepted accounting principles (GAAP) financial measures. The most directly comparable GAAP financial measure is net loss. The reconciliation of EBIT, EBITDA and Adjusted EBITDA to net loss is presented in a table attached to this earnings release.

Income (Loss) Before Income Taxes Excluding Land-Related Charges, Expenses Associated with Debt Exchange Offer and Loss (Gain) on Extinguishment of Debt is a non-GAAP financial measure. The most directly comparable GAAP financial measure is Loss Before Income Taxes. The reconciliation of Income (Loss) Before Income Taxes Excluding Land-Related Charges, Expenses Associated with Debt Exchange Offer and Loss (Gain) on Extinguishment of Debt to Loss Before Income Taxes is presented in a table attached to this earnings release.

FORWARD-LOOKING STATEMENTS

All statements in this press release that are not historical facts should be considered as "forward-looking statements." Such statements involve known and unknown risks, uncertainties and other factors that may cause actual results, performance or achievements of the Company to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. Although we believe that our plans, intentions and expectations reflected in, or suggested by, such forward looking statements are reasonable, we can give no assurance that such plans, intentions, or expectations will be achieved. Such risks, uncertainties and other factors include, but are not limited to, (1) changes in general and local economic and industry and business conditions and impacts of the sustained homebuilding downturn, (2) adverse weather and other environmental conditions and natural disasters, (3) changes in market conditions and seasonality of the Company's business, (4) changes in home prices and sales activity in the markets where the Company builds homes, (5) government regulation, including regulations concerning development of land, the home building, sales and customer financing processes, tax laws, and the environment, (6) fluctuations in interest rates and the availability of mortgage financing, (7) shortages in, and price fluctuations of, raw materials and labor, (8) the availability and cost of suitable land and improved lots, (9) levels of competition, (10) availability of financing to the Company, (11) utility shortages and outages or rate fluctuations, (12) levels of indebtedness and restrictions on the Company's operations and activities imposed by the agreements governing the Company's outstanding indebtedness, (13) the Company's sources of liquidity, (14) changes in credit ratings, (15) availability of net operating loss carryforwards, (16) operations through joint ventures with third parties, (17) product liability litigation, warranty claims and claims by mortgage investors, (18) successful identification and integration of acquisitions, (19) significant influence of the Company's controlling stockholders, (20) changes in tax laws affecting the after-tax costs of owning a home, (21) geopolitical risks, terrorist acts and other acts of war, and (22) other factors described in detail in the Company's Annual Report on Form 10-K for the year ended October 31, 2011 and the Company's Quarterly Report on Form 10-Q for the quarterly period ended April 30, 2012. Except as otherwise required by applicable securities laws, we undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, changed circumstances or any other reason.

 (Financial Tables Follow)

Hovnanian Enterprises, Inc.        
October 31, 2012        
Statements of Consolidated Operations        
(Dollars in Thousands, Except Per Share Data)        
  Three Months Ended
October 31,
Twelve Months Ended
October 31,
  2012 2011 2012 2011
  (Unaudited) (Unaudited)  
Total Revenues $487,045 $341,625 $1,485,353 $1,134,907
Costs and Expenses (a) 487,296 447,477 1,562,936 1,425,065
(Loss) Gain on Extinguishment of Debt (87,033) 10,563 (29,066) 7,528
Gain (Loss) from Unconsolidated Joint Ventures 3,077 (2,479) 5,401 (8,958)
Loss Before Income Taxes (84,207) (97,768) (101,248) (291,588)
Income Tax Provision (Benefit)  203 580 (35,051) (5,501)
Net Loss $(84,410) $(98,348) $(66,197) $(286,087)
         
Per Share Data:        
Basic:        
Loss Per Common Share  $(0.59) $(0.90) $(0.52) $(2.85)
Weighted Average Number of        
Common Shares Outstanding (b) 142,249 108,740 126,350 100,444
Assuming Dilution:        
Loss Per Common Share  $(0.59) $(0.90) $(0.52) $(2.85)
Weighted Average Number of        
Common Shares Outstanding (b) 142,249 108,740 126,350 100,444
         
(a) Includes inventory impairment loss and land option write-offs.      
(b) For periods with a net loss, basic shares are used in accordance with GAAP rules.  
         
Hovnanian Enterprises, Inc.        
October 31, 2012        
Reconciliation of Income (Loss) Before Income Taxes Excluding Land-Related  
Charges, Expenses Associated with the Debt Exchange Offer and     
Loss (Gain) on Extinguishment of Debt to Loss Before Income Taxes    
(Dollars in Thousands)        
  Three Months Ended
October 31,
Twelve Months Ended
October 31,
  2012 2011 2012 2011
  (Unaudited) (Unaudited)
Loss Before Income Taxes $(84,207) $(97,768) $(101,248) $(291,588)
Inventory Impairment Loss and Land Option Write-Offs 5,300 59,873 12,530 101,749
Expenses Associated with the Debt Exchange Offer  -- -- 4,694 -- 
Unconsolidated Joint Venture Investment and Land-Related Charges -- 3,289 -- 3,289
Loss (Gain) on Extinguishment of Debt 87,033 (10,563) 29,066 (7,528)
Income (Loss) Before Income Taxes Excluding Land-Related Charges, Expenses Associated with the Debt Exchange Offer and Loss (Gain) on Extinguishment of Debt (a) $8,126 $(45,169) $(54,958) $(194,078)
         
(a) Income (Loss) Before Income Taxes Excluding Land-Related Charges, Expenses Associated with the Debt Exchange Offer, and Loss (Gain) on Extinguishment of Debt is a non-GAAP Financial measure. The most directly comparable GAAP financial measure is Loss Before Income Taxes.
         
Hovnanian Enterprises, Inc.        
October 31, 2012        
Gross Margin        
(Dollars in Thousands)        
     
  Homebuilding Gross Margin
Three Months Ended
October 31,
Homebuilding Gross Margin
Twelve Months Ended
October 31,
  2012 2011 2012 2011
  (Unaudited) (Unaudited)
Sale of Homes $469,275 $313,136 $1,405,580 $1,072,474
Cost of Sales, Excluding Interest (a) 383,275 264,747 1,155,643 905,253
Homebuilding Gross Margin, Excluding Interest 86,000 48,389 249,937 167,221
Homebuilding Cost of Sales Interest 14,014 15,345 48,843 57,016
Homebuilding Gross Margin, Including Interest $71,986 $33,044 $201,094 $110,205
         
Gross Margin Percentage, Excluding Interest 18.3% 15.5% 17.8% 15.6%
Gross Margin Percentage, Including Interest 15.3% 10.6% 14.3% 10.3%
         
  Land Sales Gross Margin
Three Months Ended
October 31,
Land Sales Gross Margin
Twelve Months Ended
October 31,
  2012 2011 2012 2011
  (Unaudited) (Unaudited)
Land Sales $3,051 $18,529 $31,788 $26,745
Cost of Sales, Excluding Interest (a) 2,358 3,005 24,158 8,648
Land Sales Gross Margin, Excluding Interest 693 15,524 7,630 18,097
Land Sales Interest 433 15,527 5,695 17,660
Land Sales Gross Margin, Including Interest $260 $(3) $1,935 $437
         
(a) Does not include cost associated with walking away from land options or inventory impairment losses which are recorded as Inventory impairment loss and land option write-offs in the Consolidated Statements of Operations.
         
Hovnanian Enterprises, Inc.         
October 31, 2012         
Reconciliation of Adjusted EBITDA to Net Loss         
(Dollars in Thousands)         
  Three Months Ended
October 31,
Twelve Months Ended
October 31,
  2012 2011 2012 2011
  (Unaudited) (Unaudited)
 Net Loss  $(84,410) $(98,348) $(66,197) $(286,087)
 Income Tax Provision (Benefit)  203 580 (35,051) (5,501)
 Interest Expense  39,701 53,962 152,433 171,845
 EBIT (a) (44,506) (43,806) 51,185 (119,743)
 Depreciation  1,513 2,174 6,223 9,340
 Amortization of Debt Costs  905 1,041 3,713 3,978
 EBITDA (b) (42,088) (40,591) 61,121 (106,425)
 Inventory Impairment Loss and Land Option Write-offs  5,300 59,873 12,530 101,749
 Expenses Associated with Debt Exchange Offer   --   --  4,694 -- 
 Loss (Gain) on Extinguishment of Debt  87,033 (10,563) 29,066 (7,528)
 Adjusted EBITDA (c) $50,245 $8,719 $107,411 $(12,204)
         
 Interest Incurred  $36,733 $39,225 $147,048 $156,998
         
 Adjusted EBITDA to Interest Incurred  1.37 0.22 0.73 (0.08)
         
(a) EBIT is a non-GAAP financial measure. The most directly comparable GAAP financial measure is net loss. EBIT represents earnings before interest expense and income taxes.
(b) EBITDA is a non-GAAP financial measure. The most directly comparable GAAP financial measure is net loss. EBITDA represents earnings before interest expense, income taxes, depreciation and amortization. 
(c) Adjusted EBITDA is a non-GAAP financial measure. The most directly comparable GAAP financial measure is net loss. Adjusted EBITDA represents earnings before interest expense, income taxes, depreciation, amortization, inventory impairment loss and land option write-offs, expenses associated with debt exchange offer, and loss (gain) on extinguishment of debt.
         
Hovnanian Enterprises, Inc.        
October 31, 2012        
Interest Incurred, Expensed and Capitalized        
(Dollars in Thousands)        
  Three Months Ended
October 31,
Twelve Months Ended
October 31,
  2012 2011 2012 2011
  (Unaudited) (Unaudited)
Interest Capitalized at Beginning of Period $119,024 $136,178 $121,441 $136,288
Plus Interest Incurred 36,733 39,225 147,048 156,998
Less Interest Expensed 39,701 53,962 152,433 171,845
Interest Capitalized at End of Period (a) $116,056 $121,441 $116,056 $121,441
         
(a) The Company incurred significant inventory impairments in recent years, which are determined based on total inventory including capitalized interest. However, the capitalized interest amounts are shown gross before allocating any portion of impairments to capitalized interest.
     
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES    
CONSOLIDATED BALANCE SHEETS    
(In Thousands)    
     
  October 31,
2012
October 31,
2011
  (Unaudited) (1)
ASSETS    
     
Homebuilding:    
Cash and cash equivalents $258,323 $244,356
     
Restricted cash 41,732 73,539
     
Inventories:    
Sold and unsold homes and lots under development 671,851 720,149
     
Land and land options held for future development or sale 218,996 245,529
     
Consolidated inventory not owned:    
Specific performance options -- 2,434
Other options 90,619 --
     
Total consolidated inventory not owned 90,619 2,434
     
Total inventories 981,466 968,112
     
Investments in and advances to unconsolidated joint ventures 61,083 57,826
     
Receivables, deposits, and notes 61,794 52,277
     
Property, plant, and equipment – net 48,524 53,266
     
Prepaid expenses and other assets 66,694 67,698
     
Total homebuilding 1,519,616 1,517,074
     
Financial services:    
Cash and cash equivalents 14,909 6,384
Restricted cash 22,470 4,079
Mortgage loans held for sale 117,024 72,172
Other assets 10,231 2,471
     
Total financial services 164,634 85,106
     
Total assets $1,684,250 $1,602,180
     
(1) Derived from the audited balance sheet as of October 31, 2011.    

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