HOV - Hovnanian Enterprises Reports Fiscal 2019 Fourth Quarter Results

Despite a $42 Million Loss on Extinguishment of Debt, Pretax Income was Roughly Breakeven
Pretax Income, Excluding Loss on Extinguishment of Debt and Land Related Charges, was $45 Million
Total Revenues Increased 16% Year-over-Year
15% Year-over-Year Expansion in Consolidated Community Count
Consolidated Contracts Grew 34% Year-over-Year

MATAWAN, N.J., Dec. 05, 2019 (GLOBE NEWSWIRE) -- Hovnanian Enterprises, Inc. (NYSE: HOV), a leading national homebuilder, reported results for its fiscal fourth quarter and year ended October 31, 2019.

• Total revenues increased 16.1% to $713.6 million in the fourth quarter of fiscal 2019, compared with $614.8 million in the fourth quarter of fiscal 2018. For the year ended October 31, 2019, total revenues increased to $2.02 billion compared with $1.99 billion in the same period during the prior fiscal year.
   
• Homebuilding gross margin percentage, after cost of sales interest expense and land charges, was 14.5% for the fourth quarter of fiscal 2019 compared with 16.5% during the prior year’s fourth quarter. For the year ended October 31, 2019, homebuilding gross margin percentage, after cost of sales interest expense and land charges, was 14.2% compared with 15.2% last year.
   
• Homebuilding gross margin percentage, before cost of sales interest expense and land charges, was 18.9% for the fourth quarter of fiscal 2019 compared with 19.2% in the fourth quarter of fiscal 2018. Sequentially, on the same basis, gross margin increased 50 basis points from 18.4% in the third quarter of fiscal 2019. For fiscal 2019, homebuilding gross margin percentage, before cost of sales interest expense and land charges, was 18.1% compared with 18.4% in the previous fiscal year.
   
• Total SG&A was $53.9 million, or 7.6% of total revenues, in the fourth quarter of fiscal 2019 compared `with $50.8 million, or 8.3% of total revenues, in the same quarter one year ago. For fiscal 2019, total SG&A was $233.1 million, or 11.6% of total revenues, compared with $228.8 million, or 11.5% of total revenues, in the prior fiscal year.
   
• Interest incurred (some of which was expensed and some of which was capitalized) was $43.6 million for the fourth quarter of fiscal 2019 compared with $39.4 million in the same quarter one year ago. For the year ended October 31, 2019, interest incurred (some of which was expensed and some of which was capitalized) was $165.9 million compared with $161.0 million last year.
   
• Income from unconsolidated joint ventures was $8.4 million for the quarter ended October 31, 2019 compared with $17.1 million in the fourth quarter of the previous year. For fiscal 2019, income from unconsolidated joint ventures was $28.9 million compared with $24.0 million in the same period a year ago.
   
• Including a $42.4 million loss on early extinguishment of debt, loss before income taxes for the quarter ended October 31, 2019 was $0.6 million compared with income of $48.1 million during the fourth quarter of fiscal 2018. For fiscal 2019, the loss before income taxes was $39.7 million compared with income of $8.1 million during same period of fiscal 2018.
   
• Income before income taxes excluding land-related charges, joint venture write-downs and loss on extinguishment of debt, was $44.5 million during the fourth quarter of fiscal 2019 compared with income before these items of $50.9 million in the fourth quarter of fiscal 2018. For fiscal 2019, income before income taxes, excluding land-related charges, joint venture write-downs and loss on extinguishment of debt, was $9.9 million compared with income before these items of $20.4 million during all of fiscal 2018.
   
• Net loss was $1.8 million, or $0.30 per common share, in the fourth quarter of fiscal 2019 compared with net income of $46.2 million, or $7.75 per common share, during the same quarter a year ago. For fiscal 2019, net loss was $42.1 million, or $7.06 per common share, compared with net income of $4.5 million, or $0.73 per common share, in the same period during fiscal 2018.
   
• Consolidated contracts per community increased 15.9% to 9.5 contracts per community for the fourth quarter of fiscal 2019 compared with 8.2 contracts per community in the fourth quarter of fiscal 2018. Contracts per community, including domestic unconsolidated joint ventures⁽¹⁾, increased 9.6% to 9.1 contracts per community for the quarter ended October 31, 2019 compared with 8.3 contracts per community, including domestic unconsolidated joint ventures, in last year’s fourth quarter.
   
• The consolidated community count was 141 as of October 31, 2019. This was a 14.6% year-over-year increase from 123 communities at the end of the prior year’s fourth quarter. As of the end of the fourth quarter of fiscal 2019, community count, including domestic unconsolidated joint ventures, was 162 communities. This was a 14.1% year-over-year increase compared with 142 communities at October 31, 2018.
   
• The number of consolidated contracts increased 34.0% to 1,345 homes, during the fourth quarter of fiscal 2019, compared with 1,004 homes during the fourth quarter of fiscal 2018. The number of contracts, including domestic unconsolidated joint ventures, for the fourth quarter ended October 31, 2019, increased 25.9% to 1,479 homes from 1,175 homes for the same quarter last year.
   
• The number of consolidated contracts increased 14.3% to 5,340 homes, during the year ended October 31, 2019, compared with 4,671 homes in the previous fiscal year. During all of fiscal 2019, the number of contracts, including domestic unconsolidated joint ventures, was 5,976 homes, an increase of 7.8% from 5,543 homes during the same period in fiscal 2018.
   
• For November 2019, consolidated contracts per community were 2.9 compared with 2.2 for the same month one year ago. During November 2019, the number of consolidated contracts increased 41.8% to 404 homes from 285 homes in November 2018.
   
• The dollar value of consolidated contract backlog, as of October 31, 2019, increased 18.0% to $880.1 million compared with $745.6 million as of October 31, 2018. The dollar value of contract backlog, including domestic unconsolidated joint ventures, as of October 31, 2019, was $1.04 billion, an increase of 6.7% compared with $976.3 million as of October 31, 2018.
   
• Consolidated deliveries were 1,709 homes for the fourth quarter of fiscal 2019, a 16.7% increase compared with 1,465 homes during the same quarter a year ago. For the quarter ended October 31, 2019, deliveries, including domestic unconsolidated joint ventures, increased 6.8% to 1,941 homes compared with 1,818 homes during the fourth quarter of fiscal 2018.
   
• Consolidated deliveries were 4,946 homes in all of fiscal 2019, a 2.0% increase compared with 4,847 homes in the same period in fiscal 2018. For the year ended October 31, 2019, deliveries, including domestic unconsolidated joint ventures, decreased slightly to 5,713 homes compared with 5,758 homes in the same period of the prior fiscal year.
   
• The contract cancellation rate for consolidated contracts was 21% for the fourth quarter of fiscal 2019 compared with 23% for the same quarter one year ago. The contract cancellation rate for contracts including domestic unconsolidated joint ventures was 22% for both the three months ended October 31, 2019 and the same quarter in fiscal 2018.

⁽¹⁾When we refer to “Domestic Unconsolidated Joint Ventures”, we are excluding results from our single community unconsolidated joint venture in the Kingdom of Saudi Arabia (KSA).

• The Company issued $350.0 million of 7.75% Senior Secured 1.125 Lien Notes due 2026 in part for cash and in part in exchange for, and cash payments made in connection with, the exchange of $221.0 million of existing 10% Senior Secured Notes due 2022 and $114.0 million of existing 10.5% Senior Secured Notes due 2024 and exchanged $99.6 million of existing 10.5% Senior Secured Notes due 2024 for $103.1 million of 11.25% Senior Secured 1.5 Lien Notes due 2026.

• The Company also issued $282.3 million of 10.5% Senior Secured 1.25 Lien Notes due 2026, the net proceeds of which, together with cash on hand, were used to refinance its 9.5% Senior Secured Notes due 2020, 2.0% Senior Secured Notes due 2021, and 5.0% Senior Secured Notes due 2021.
   
• Additionally, the Company entered into a $125.0 million 7.75% secured first lien revolver maturing in December 2022 to replace its prior 10.0% secured first lien revolver, which had revolving commitments terminating in December 2019.
  

• Total liquidity at the end of the of the fourth quarter of fiscal 2019 was $275.9 million, which is above the $245 million upper end of our target range.
   
• In the fourth quarter of fiscal 2019, approximately 2,400 lots were put under option or acquired in 35 communities, including unconsolidated joint ventures.
   
• As of October 31, 2019, consolidated lots controlled totaled 29,378; which, based on trailing twelve-month deliveries, equaled a 5.9 years supply.

“The fourth quarter was illustrative of our efforts towards achieving our growth strategy. We experienced solid double-digit percentage gains in deliveries, total revenues, community count, contracts, backlog and contracts per community,” stated Ara K. Hovnanian, Chairman of the Board, President and Chief Executive Officer. “Our adjusted pretax profit of $45 million for the quarter beat consensus estimates and made us profitable on this basis for the full year. Our increased level of revenues and the resultant lower SG&A expense ratio for the fourth quarter demonstrate the benefits of leveraging our SG&A expenses with higher revenues. We are encouraged by the current housing environment and economic backdrop which we believe should allow us to execute on our objectives.”

J. Larry Sorsby, Chief Financial Officer and Executive Vice President commented, “During the fourth quarter, we took steps to significantly improve our capital structure and better position the Company to execute on our growth strategy. We successfully exchanged or refinanced over $800 million of debt. We eliminated all maturities until 2022 and pushed out over 50% of the debt maturing in 2022 and 2024. Additionally, we simplified the capital structure by creating a single collateral pool for all secured debt holders. The long-term benefits of extending our debt maturities far outweighed the short-term impact of the $42 million charge for the early extinguishment of debt. At the end of the fourth quarter, we had $276 million of liquidity, which enables us to continue to invest in new land to further our community count, revenues and profitability growth in the future.”

Hovnanian Enterprises will webcast its fiscal 2019 fourth quarter financial results conference call at 11:00 a.m. E.T. on Thursday, December 5, 2019. 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 “Past Events” section of the Investor Relations page on the Hovnanian website at http://www.khov.com. The archive will be available for 12 months.

Hovnanian Enterprises, Inc., founded in 1959 by Kevork S. Hovnanian, is headquartered in Matawan, New Jersey and, through its subsidiaries, is one of the nation’s largest homebuilders with operations in Arizona, California, Delaware, Florida, Georgia, Illinois, Maryland, New Jersey, Ohio, Pennsylvania, South Carolina, Texas, Virginia, Washington, D.C. and West Virginia. The Company’s homes are marketed and sold under the trade name K. Hovnanian^® Homes. Additionally, the Company’s subsidiaries, as developers of K. Hovnanian’s^® Four Seasons communities, make the Company one of the nation’s largest builders of active lifestyle communities.

Additional information on Hovnanian Enterprises, Inc. 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 list, please send an e-mail to IR@khov.com or sign up at http://www.khov.com.

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 and loss 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) income. The reconciliation for historical periods of EBIT, EBITDA and Adjusted EBITDA to net (loss) income is presented in a table attached to this earnings release.

Homebuilding gross margin, before cost of sales interest expense and land charges, and homebuilding gross margin percentage, before cost of sales interest expense and land charges, are non-GAAP financial measures. The most directly comparable GAAP financial measures are homebuilding gross margin and homebuilding gross margin percentage, respectively. The reconciliation for historical periods of homebuilding gross margin, before cost of sales interest expense and land charges, and homebuilding gross margin percentage, before cost of sales interest expense and land charges, to homebuilding gross margin and homebuilding gross margin percentage, respectively, is presented in a table attached to this earnings release.

Income before income taxes excluding land-related charges, joint venture write-downs and loss on extinguishment of debt is a non-GAAP financial measure. The most directly comparable GAAP financial measure is (loss) income before income taxes. The reconciliation for historical periods of income before income taxes excluding land-related charges, joint venture write-downs and loss on extinguishment of debt to (loss) income before income taxes is presented in a table attached to this earnings release.

Total liquidity is comprised of $131.0 million of cash and cash equivalents, $19.9 million of restricted cash required to collateralize letters of credit and $125.0 million of availability under the senior secured revolving credit facility as of October 31, 2019.

FORWARD-LOOKING STATEMENTS

All statements in this press release that are not historical facts should be considered as “Forward-Looking Statements” within the meaning of the “Safe Harbor” provisions of the Private Securities Litigation Reform Act of 1995. 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. Such forward-looking statements include but are not limited to statements related to the Company’s goals and expectations with respect to its financial results for future financial periods. 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. By their nature, forward-looking statements: (i) speak only as of the date they are made, (ii) are not guarantees of future performance or results and (iii) are subject to risks, uncertainties and assumptions that are difficult to predict or quantify. Therefore, actual results could differ materially and adversely from those forward-looking statements as a result of a variety of factors. Such risks, uncertainties and other factors include, but are not limited to, (1) changes in general and local economic, industry and business conditions and impacts of a significant homebuilding downturn; (2) adverse weather and other environmental conditions and natural disasters; (3) high leverage and restrictions on the Company’s operations and activities imposed by the agreements governing the Company’s outstanding indebtedness; (4) availability and terms of financing to the Company; (5) the Company’s sources of liquidity; (6) changes in credit ratings; (7) the seasonality of the Company’s business; (8) the availability and cost of suitable land and improved lots and sufficient liquidity to invest in such land and lots; (9) shortages in, and price fluctuations of, raw materials and labor including due to changes in trade policies, such as the imposition of tariffs and duties on homebuilding materials and products, and related trade disputes with and retaliatory measures taken by other countries; (10) reliance on, and the performance of, subcontractors; (11) regional and local economic factors, including dependency on certain sectors of the economy, and employment levels affecting home prices and sales activity in the markets where the Company builds homes; (12) increases in cancellations of agreements of sale; (13) fluctuations in interest rates and the availability of mortgage financing; (14) changes in tax laws affecting the after-tax costs of owning a home; (15) operations through unconsolidated joint ventures with third parties; (16) government regulation, including regulations concerning development of land, the home building, sales and customer financing processes, tax laws and the environment; (17) legal claims brought against us and not resolved in our favor, such as product liability litigation, warranty claims and claims made by mortgage investors; (18) levels of competition; (19) successful identification and integration of acquisitions; (20) significant influence of the Company’s controlling stockholders; (21) availability of net operating loss carryforwards; (22) utility shortages and outages or rate fluctuations; (23) geopolitical risks, terrorist acts and other acts of war; (24) loss of key management personnel or failure to attract qualified personnel; (25) information technology failures and data security breaches; (26) negative publicity; and (27) certain risks, uncertainties and other factors described in detail in the Company’s Annual Report on Form 10-K for the fiscal year ended October 31, 2018 and subsequent filings with the Securities and Exchange Commission. 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. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)

(1) Derived from the audited balance sheet as of October 31, 2018

HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands Except Per Share Data)
(Unaudited)