Hovnanian Enterprises(HOV) - 2024 Q4 - Annual Report

Part I Business Hovnanian Enterprises, Inc. is a US homebuilder focusing on QMI homes and Build-For-Rent strategies across 13 states - The company operates through two main divisions: homebuilding and financial services. Homebuilding is divided into three geographic segments: Northeast, Southeast, and West[14][28] - In fiscal 2024, the company and its unconsolidated joint ventures delivered a total of 6,201 homes[14] - The company has strategically shifted its focus to increasing the availability of Quick-Move-In (QMI) homes and executing "Build-For-Rent" agreements to adapt to market conditions and improve inventory turnover[41] FY 2024 Homebuilding Operations by Segment | Segment | Housing Revenues (in thousands) | Homes Delivered | Average Sales Price | | :--- | :--- | :--- | :--- | | Northeast | $1,007,596 | 1,646 | $612,148 | | Southeast | $447,804 | 878 | $510,027 | | West | $1,420,088 | 2,824 | $502,864 | | Consolidated Total | $2,875,488 | 5,348 | $537,675 | - As of October 31, 2024, the company employed 1,878 full-time associates, with 1,211 in homebuilding, 171 in financial services, and 496 in corporate operations. The company emphasizes diversity, with 27.3% non-white associates and 43.6% women[29][32] Risk Factors The company faces significant business, financial, regulatory, and organizational risks - Business & Industry Risks: The homebuilding industry is cyclical and highly sensitive to economic factors like interest rates, employment levels, inflation, and consumer confidence. Raw material and labor shortages can cause delays and increase costs[88][89][94] - Debt & Liquidity Risks: The company has a significant amount of debt ($881.6 million as of Oct 31, 2024, excluding certain items), which could limit its ability to obtain future financing and requires a substantial portion of cash flow for debt service. Restrictive covenants in debt instruments may also limit operational flexibility[141][143][153] - Regulatory & Legal Risks: Operations are subject to extensive and complex laws regarding land development, environmental protection, and building standards, which can cause delays and increase costs. The company is also exposed to product liability and warranty claims[159][161][166] - Organizational Risks: The Hovnanian family holds significant voting power (approx. 58%), enabling them to exert substantial control. The company also has a federal net operating loss (NOL) carryforward of $398.8 million, the use of which could be limited by an "ownership change" under Section 382 of the IRC[177][178] Cybersecurity Cybersecurity risks are managed via a NIST-aligned program, overseen by a Board subcommittee, with no material breaches - The company's cybersecurity program is aligned with the National Institute of Standards and Technology (NIST) framework and includes regular scans, penetration tests, and vulnerability assessments[185] - A Cybersecurity Subcommittee of the Board of Directors, established in fiscal 2018, provides primary oversight, receiving regular updates on risks, mitigation efforts, and the threat landscape[191] - An Executive Incident Response Team, including the CFO and CIO, meets at least bi-annually to review the company's cybersecurity posture. The company has not experienced a significant cybersecurity breach with a material impact to date[193][190] Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Hovnanian's Class A common stock significantly outperformed market indices over the past five years Five-Year Cumulative Total Return Comparison | Investment | 10/2019 | 10/2020 | 10/2021 | 10/2022 | 10/2023 | 10/2024 | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Hovnanian Enterprises, Inc. | $100.00 | $126.63 | $335.96 | $160.81 | $277.03 | $701.91 | | S&P 500 | $100.00 | $109.71 | $156.79 | $133.88 | $147.46 | $203.52 | | S&P Homebuilding | $100.00 | $117.37 | $155.67 | $132.48 | $186.63 | $310.37 | Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) Fiscal 2024 revenues increased to $3.0 billion with higher net income, driven by QMI homes and mortgage buydowns FY 2024 vs. FY 2023 Key Financial Results | Metric | FY 2024 (in thousands) | FY 2023 (in thousands) | Change | | :--- | :--- | :--- | :--- | | Total Revenues | $3.00B | $2.76B | +9.0% | | Sale of Homes Revenues | $2.88B | $2.63B | +9.3% | | Net Income | $242.0M | $205.9M | +17.5% | | Diluted EPS | $31.79 | $26.88 | +18.3% | | Homes Delivered | 5,348 | 4,878 | +9.6% | | Net Contracts (Homes) | 5,186 | 4,647 | +11.6% | - Homebuilding gross margin percentage decreased from 19.6% in FY2023 to 18.7% in FY2024, primarily due to increased use of incentives and concessions, including mortgage interest rate buydowns[223][241] - The company increased spending on land purchases and development to $995.4 million in FY2024, reflecting a shift back to growth after several years of focusing on debt reduction[221][42] - Total liquidity remained strong at $338.2 million as of October 31, 2024, comprising $210.0 million in cash and $125.0 million in available credit facility borrowings[282] Results of Operations Fiscal 2024 revenues rose to $3.0 billion and net income to $242.0 million, despite lower homebuilding gross margin Homebuilding Gross Margin Reconciliation (FY 2024 vs. FY 2023) | Metric | FY 2024 | FY 2023 | | :--- | :--- | :--- | | Gross Margin % | 18.7% | 19.6% | | Gross Margin %, before interest and land charges (Non-GAAP) | 22.0% | 22.7% | - The increase in homes delivered in FY2024 was a result of a 15.0% increase in community count and an increase in Quick-Move-In (QMI) contracts[222] - Financial services income before taxes increased to $24.1 million in FY2024 from $19.4 million in FY2023, due to higher loan volume and average loan size. The capture rate for noncash buyers rose to 79.4% from 70.1%[264] - Corporate G&A expenses increased by $36.5 million in FY2024, mainly due to higher compensation expense from increased headcount and phantom stock awards linked to stock price performance[265] Homebuilding Key Performance Indicators Fiscal 2024 KPIs showed strong demand with increased net contracts and improved cancellation rates due to QMI focus Quarterly Contract Cancellation Rates (as % of Gross Sales) | Quarter | 2024 | 2023 | | :--- | :--- | :--- | | First | 14% | 30% | | Second | 14% | 18% | | Third | 17% | 16% | | Fourth | 18% | 25% | Consolidated Contract Backlog (as of Oct 31) | Metric | 2024 | 2023 | % Change | | :--- | :--- | :--- | :--- | | Number of Homes | 1,649 | 1,824 | -9.6% | | Dollar Value | $936.8M | $1,060.6M | -11.7% | - The decrease in backlog was primarily driven by an increase in sales of QMI homes and an improved contract backlog conversion ratio[253] Capital Resources and Liquidity The company maintained $338.2 million in liquidity, increased land spending, and reduced debt in fiscal 2024 Debt Balances (in thousands) | Debt Category | Oct 31, 2024 (in thousands) | Oct 31, 2023 (in thousands) | | :--- | :--- | :--- | | Total Senior Secured Notes | $655,000 | $768,502 | | Total Senior Notes | $51,556 | $180,710 | | Term Loans & Credit Facilities | $175,000 | $121,049 | | Subtotal | $881,556 | $1,070,261 | - In May 2024, the company completed a debt exchange that resulted in a $75.3 million principal reduction of its senior notes and term loans, involving a cash payment of $31.5 million[42][419] - The company repurchased 188,800 shares of its Class A common stock for $26.5 million in fiscal 2024[300] Total Controlled Home Sites (Consolidated) | Date | Owned | Optioned | Total | | :--- | :--- | :--- | :--- | | Oct 31, 2024 | 6,632 | 35,259 | 41,895 | | Oct 31, 2023 | 7,337 | 24,389 | 31,754 | Critical Accounting Policies Critical accounting policies for inventory, joint ventures, warranty costs, and deferred taxes require significant judgment - Inventories: Assets are evaluated for impairment at the community level when indicators are present. This requires significant estimates of future selling prices, costs, and sales pace, which are dependent on specific market conditions[323][324][325] - Warranty Costs: Reserves for construction defects and warranty claims are established with the help of a third-party actuary and are subject to high variability due to uncertainties in claim trends, settlement patterns, and legal interpretations[334] - Deferred Income Taxes: The realization of deferred tax assets is dependent on generating future taxable income. A valuation allowance is established if it is 'more likely than not' that some portion of the DTAs will not be realized, requiring significant judgment in forecasting[335] Quantitative and Qualitative Disclosures About Market Risk Primary market risk is interest rate exposure on fixed-rate long-term debt, with mortgage loan risk hedged Long-Term Debt Obligations by Maturity (as of Oct 31, 2024) | (In thousands) | 2026 | 2028 | 2029 | Thereafter | Total | | :--- | :--- | :--- | :--- | :--- | :--- | | Fixed Rate Debt (in thousands) | $26,588 | $400,000 | $430,000 | $24,968 | $881,556 | | Weighted-Avg Rate | 13.50% | 8.88% | 11.75% | 5.00% | 10.31% | - The company hedges interest rate risk on mortgage loans by obtaining forward commitments from private investors; it does not use financial instruments to hedge interest rate risk on its long-term debt[342] Controls and Procedures Disclosure controls and internal control over financial reporting were effective as of October 31, 2024 - Management concluded that the company's disclosure controls and procedures were effective as of October 31, 2024[347] - The independent auditor, Deloitte & Touche LLP, audited and confirmed the effectiveness of the company's internal control over financial reporting as of October 31, 2024[351] Other Information Paul Eberly was appointed Treasurer, and the Class A common stock repurchase authorization was increased - Paul Eberly was appointed to the position of Treasurer, effective January 1, 2025[352] - On December 18, 2024, the Board of Directors increased the company's stock repurchase authorization to a total of $26.5 million for its Class A common stock[353] Part III Directors, Executive Officers, and Corporate Governance This section details the company's executive officers and corporate governance guidelines - Ara K. Hovnanian has been the CEO since 1997 and Chairman since 2009[357] - Brad G. O'Connor was appointed CFO in November 2023, having previously served as Chief Accounting Officer since 2011[358] Security Ownership and Equity Compensation Plans This section details the company's equity compensation plans, including securities for issuance and future availability Equity Compensation Plan Information (as of Oct 31, 2024) | Plan Category | Securities to be Issued (Options, Warrants, Rights) | Securities Remaining for Future Issuance | | :--- | :--- | :--- | | Equity compensation plans approved by security holders | 1,236,106 (590,940 Class A, 645,166 Class B) | 541,154 | | Equity compensation plans not approved by security holders | - | - | | Total | 1,236,106 | 541,154 | Financial Statements and Supplementary Data Consolidated Financial Statements FY2024 consolidated financial statements show increased assets and equity, decreased liabilities, and higher net income Consolidated Balance Sheet Highlights | Account | Oct 31, 2024 (in thousands) | Oct 31, 2023 (in thousands) | | :--- | :--- | :--- | | Total Assets | $2,605,574 | $2,492,940 | | Total Liabilities | $1,805,225 | $1,911,151 | | Total Stockholders' Equity | $800,349 | $581,789 | Consolidated Statement of Operations Highlights | Account | FY 2024 (in thousands) | FY 2023 (in thousands) | FY 2022 (in thousands) | | :--- | :--- | :--- | :--- | | Total Revenues | $3,004,918 | $2,756,016 | $2,922,231 | | Income Before Income Taxes | $317,089 | $255,951 | $319,753 | | Net Income | $242,008 | $205,891 | $225,490 | Consolidated Statement of Cash Flows Highlights | Account | FY 2024 (in thousands) | FY 2023 (in thousands) | FY 2022 (in thousands) | | :--- | :--- | :--- | :--- | | Net cash provided by operating activities | $23,640 | $435,275 | $89,466 | | Net cash used in investing activities | ($46,472) | ($78,235) | ($2,152) | | Net cash used in financing activities | ($187,926) | ($261,711) | ($16,520) | Note 9: Senior Notes and Credit Facilities This note details the company's debt structure, including a $113.5 million note redemption and a debt exchange - On November 15, 2023, the company redeemed in full its $113.5 million of 10.0% Senior Secured 1.75 Lien Notes due 2025, resulting in a gain on extinguishment of debt of $1.4 million[498] - In May 2024, the company executed a series of private exchanges, swapping $168.8 million in aggregate principal of various senior notes and its unsecured term loan for $93.5 million in additional Secured Term Loans. This transaction simplified the capital structure and reduced total debt[499] - As of October 31, 2024, the company had a $125.0 million Senior Secured Revolving Credit Facility maturing in June 2026, with no borrowings outstanding[491][509] Note 12: Reduction of Inventory to Fair Value Fiscal 2024 saw $10.0 million in inventory impairment charges and $1.6 million in abandoned land cost write-offs Inventory Impairments by Segment (FY 2024) | Segment | Number of Communities | Impairment Amount (in millions) | | :--- | :--- | :--- | | Northeast | 2 | $4.8 | | West | 2 | $5.2 | | Total | 4 | $10.0 | - The company wrote off $1.6 million in costs for abandoned land options and related pre-development expenses in FY2024, compared to $1.5 million in FY2023 and $5.7 million in FY2022[542] Note 20: Investments in Unconsolidated Joint Ventures Investment in unconsolidated JVs increased to $142.9 million, with a $45.7 million gain from a JV consolidation - The company's investment in unconsolidated JVs increased by $45.0 million in FY2024, primarily due to the formation of a new joint venture[302] - Upon consolidating a previously unconsolidated JV in the third quarter of fiscal 2024, the company recorded a gain of $45.7 million[586] Unconsolidated Joint Venture Financial Summary (as of Oct 31, 2024, in thousands) | Account | Amount (in thousands) | | :--- | :--- | | Total Assets | $845,115 | | Total Liabilities | $557,973 | | Hovnanian's Equity | $140,540 | | Others' Equity | $146,602 |