Hovnanian Enterprises(HOV) - 2023 Q2 - Quarterly Report

PART I. Financial Information Item 1. Financial Statements The unaudited condensed consolidated financial statements detail the company's financial position and performance for the periods ended April 30, 2023 Condensed Consolidated Balance Sheets The balance sheet shows a slight decrease in total assets to $2.48 billion and an increase in total equity to $429.5 million Condensed Consolidated Balance Sheet Highlights (in thousands) | Account | April 30, 2023 | October 31, 2022 | | :--- | :--- | :--- | | Total Assets | $2,483,754 | $2,562,030 | | Cash and cash equivalents | $333,254 | $326,198 | | Total inventories | $1,484,992 | $1,519,184 | | Total Liabilities | $2,054,257 | $2,178,979 | | Senior notes and credit facilities | $1,144,090 | $1,146,547 | | Total Equity | $429,497 | $383,051 | Condensed Consolidated Statements of Operations Profitability declined year-over-year for the three and six months ended April 30, 2023, driven by lower gross margins Key Performance Metrics (in thousands, except per share data) | Metric | Q2 2023 | Q2 2022 | H1 2023 | H1 2022 | | :--- | :--- | :--- | :--- | :--- | | Total Revenues | $703,661 | $702,537 | $1,219,027 | $1,267,850 | | Net Income | $34,146 | $62,435 | $52,862 | $87,243 | | Diluted EPS | $4.47 | $8.39 | $6.74 | $11.44 | Condensed Consolidated Statements of Changes in Equity Stockholders' equity increased to $429.5 million, driven by net income partially offset by dividends and share repurchases - Total equity increased from $383.1 million at the start of the period to $429.5 million at April 30, 2023[13][14] - Key changes in equity for the six-month period included net income of $18.7M in Q1 and $34.1M in Q2, preferred dividend declarations of $5.3M, and share repurchases of $4.8M[13][14] Condensed Consolidated Statements of Cash Flows The company generated positive cash from operations, a significant improvement from the prior year, though total cash decreased slightly Cash Flow Summary for the Six Months Ended April 30 (in thousands) | Category | 2023 | 2022 | | :--- | :--- | :--- | | Net cash provided by (used in) operating activities | $65,967 | $(62,203) | | Net cash used in investing activities | $(20,455) | $(3,100) | | Net cash used in financing activities | $(56,988) | $(39,244) | | Net decrease in cash | $(11,476) | $(104,547) | Notes to Condensed Consolidated Financial Statements The notes provide context on accounting policies, segment realignment, debt, joint ventures, and a subsequent debt redemption - During the fourth quarter of fiscal 2022, the company realigned its homebuilding segments into three reportable segments: Northeast, Southeast, and West[27][100] - The company has a shareholder rights plan, effective until August 2024, designed to protect its net operating loss (NOL) carryforwards[91] - Subsequent to the quarter end, on May 30, 2023, the company redeemed $100.0 million of its 7.75% Senior Secured 1.125 Lien Notes due 2026 for an aggregate price of $104.2 million[128] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses macroeconomic impacts, a sequential recovery in sales pace, and declines in year-over-year profitability due to margin compression Overview and Market Conditions Housing market conditions improved in Q2 2023, allowing the company to increase prices amid rising customer demand - 30-year mortgage rates increased from 3.2% in January 2022 to a high of 7.1% in October 2022, negatively impacting housing demand, before moderating to 6.4% by April 2023[132] - During Q2 2023, improved demand and low existing home inventory allowed the company to increase prices in approximately 69% of its communities[133] Results of Operations Flat year-over-year revenues were accompanied by a significant decline in home sales gross margin, which impacted net income Homebuilding Gross Margin Percentage | Metric | Q2 2023 | Q2 2022 | H1 2023 | H1 2022 | | :--- | :--- | :--- | :--- | :--- | | Gross Margin % | 17.8% | 23.3% | 18.1% | 21.8% | | Gross Margin % (before interest & land charges) | 20.9% | 26.6% | 21.2% | 24.7% | - Total Selling, General & Administrative (SGA) costs increased to $75.5 million (10.7% of revenue) in Q2 2023 from $68.2 million (9.7% of revenue) in Q2 2022[139] Key Performance Indicators Metrics show a strong sequential sales pace improvement and normalized cancellation rates, though backlog decreased year-over-year - Net contracts per average active selling community decreased to 12.5 in Q2 2023 from 14.3 in Q2 2022, but nearly doubled from 6.5 in Q1 2023, indicating a strong sequential improvement[143][160] - The contract cancellation rate returned to a more normalized level of 18% in Q2 2023, down from a high of 41% in Q4 2022[161][162] - Contract backlog decreased 35.7% in dollar value to $1.3 billion as of April 30, 2023, compared to $2.1 billion a year prior[144][164] Capital Resources and Liquidity The company maintained a solid liquidity position while investing in land, repurchasing stock, and paying preferred dividends - Total liquidity at April 30, 2023 was $463.8 million, comprising $333.3 million in cash and $125.0 million of borrowing capacity[186] - During the six months ended April 30, 2023, the company repurchased 118,478 shares of Class A common stock for $4.8 million[203] - The company's fixed charge coverage ratio was above 2.0 to 1.0, permitting the payment of dividends on its preferred stock[194] Item 3. Quantitative and Qualitative Disclosures About Market Risk The company's primary market risk from interest rates is limited due to its fixed-rate long-term debt structure Long-Term Debt Maturity Profile as of April 30, 2023 (in thousands) | Fiscal Year of Maturity | Principal Amount | | :--- | :--- | | 2023-2025 | $0 | | 2026 | $943,683 | | 2027 | $39,551 | | Thereafter | $171,618 | | Total | $1,154,852 | Item 4. Controls and Procedures Management concluded that the company's disclosure controls and procedures were effective with no material changes to internal controls - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of April 30, 2023[225] PART II. Other Information Item 1. Legal Proceedings The company is involved in ongoing litigation, including notable cases concerning alleged construction defects and environmental costs - The company is defending a lawsuit from the Great Notch condominium association, which asserts damages of approximately $119.5 million[49] - The New Jersey Department of Environmental Protection (NJDEP) has sued the company to recover over $5.3 million in costs related to a development[50] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds No unregistered sales of equity securities or common stock repurchases occurred during the three months ended April 30, 2023 - No repurchases of common stock were made during the three months ended April 30, 2023[230] Item 6. Exhibits This section lists all exhibits filed with the report, including corporate governance documents and required officer certifications - The exhibits filed with this report include corporate governance documents, descriptions of securities, and required CEO/CFO certifications[233][235]