Hovnanian Enterprises(HOV) - 2021 Q3 - Quarterly Report

PART I. Financial Information This section presents the company's condensed consolidated financial statements, including balance sheets, statements of operations, equity, and cash flows, along with detailed notes Item 1. Financial Statements This item provides the company's condensed consolidated financial statements, offering a comprehensive overview of its financial position, performance, and cash flows Condensed Consolidated Balance Sheets The balance sheet shows a significant increase in total assets from $1,827,342 thousand at October 31, 2020, to $2,312,044 thousand at July 31, 2021, primarily driven by the recognition of deferred tax assets | Metric | July 31, 2021 (in thousands) | October 31, 2020 (in thousands) | Change (in thousands) | | :----- | :--------------------------- | :------------------------------ | :-------------------- | | Total Assets | $2,312,044 | $1,827,342 | $484,702 | | Total Liabilities | $2,191,353 | $2,263,436 | $(72,083) | | Total Equity (Deficit) | $120,691 | $(436,094) | $556,785 | - Deferred tax assets, net, increased from $0 at October 31, 2020, to $447,453 thousand at July 31, 2021, significantly contributing to the increase in total assets[8] - Senior notes and credit facilities (net) decreased from $1,431,110 thousand to $1,317,524 thousand, reflecting debt reduction efforts[8] Condensed Consolidated Statements of Operations The company reported a substantial increase in net income for both the three and nine months ended July 31, 2021, primarily driven by higher home sales revenue and a significant income tax benefit in the nine-month period | Metric | 3 Months Ended July 31, 2021 (in thousands) | 3 Months Ended July 31, 2020 (in thousands) | 9 Months Ended July 31, 2021 (in thousands) | 9 Months Ended July 31, 2020 (in thousands) | | :----- | :------------------------------------------ | :------------------------------------------ | :------------------------------------------ | :------------------------------------------ | | Total Revenues | $690,683 | $628,136 | $1,968,509 | $1,660,543 | | Total Expenses | $633,589 | $621,633 | $1,865,355 | $1,674,340 | | Income before income taxes | $61,799 | $16,216 | $112,416 | $12,959 | | Total income taxes | $14,097 | $853 | $(442,921) | $2,665 | | Net income | $47,702 | $15,363 | $555,337 | $10,294 | | Basic EPS | $6.85 | $2.27 | $80.02 | $1.52 | | Diluted EPS | $6.72 | $2.16 | $78.51 | $1.44 | - The nine-month net income was significantly boosted by a $442,921 thousand income tax benefit in 2021, compared to a $2,665 thousand provision in 2020[11] Condensed Consolidated Statements of Changes in Equity (Deficit) The company's total equity shifted from a deficit of $(436,094) thousand at October 31, 2020, to a positive $120,691 thousand at July 31, 2021, primarily due to a substantial net income of $555,337 thousand during the nine-month period | Metric | October 31, 2020 (in thousands) | July 31, 2021 (in thousands) | Change (in thousands) | | :----- | :------------------------------ | :--------------------------- | :-------------------- | | Total Equity (Deficit) | $(436,094) | $120,691 | $556,785 | | Accumulated Deficit | $(1,175,045) | $(619,708) | $555,337 | - Net income for the nine months ended July 31, 2021, was $555,337 thousand, a significant factor in the equity improvement[15] Condensed Consolidated Statements of Cash Flows For the nine months ended July 31, 2021, net cash provided by operating activities decreased significantly compared to the prior year, while investing activities shifted from a net use to a net provision of cash | Metric | 9 Months Ended July 31, 2021 (in thousands) | 9 Months Ended July 31, 2020 (in thousands) | | :----- | :------------------------------------------ | :------------------------------------------ | | Net cash provided by operating activities | $82,272 | $192,834 | | Net cash provided by (used in) investing activities | $6,979 | $(18,307) | | Net cash used in financing activities | $(163,645) | $(110,533) | | Net (decrease) increase in cash and cash equivalents, and restricted cash and cash equivalents | $(74,394) | $63,994 | | End of period cash and cash equivalents, and restricted cash and cash equivalents | $235,066 | $246,260 | - A major adjustment reconciling net income to operating cash flow was a $(447,453) thousand decrease in deferred tax assets in 2021, compared to $0 in 2020[22] - Noncash investing activities included the acquisition of remaining assets of an unconsolidated joint venture for $24.3 million, increasing inventory[25] Notes to Condensed Consolidated Financial Statements This section provides detailed explanations and disclosures supporting the condensed consolidated financial statements, covering accounting policies, debt, equity, and other financial instruments 1. Basis of Presentation Hovnanian Enterprises, Inc. (HEI) operates through consolidated subsidiaries, primarily in homebuilding across six geographic segments and a financial services segment - HEI conducts homebuilding and financial services through subsidiaries, with six homebuilding segments (Northeast, Mid-Atlantic, Midwest, Southeast, Southwest, West) and one Financial Services segment[30] - Unaudited Condensed Consolidated Financial Statements are prepared in accordance with GAAP for interim information, requiring management estimates and assumptions[32] 2. Stock Compensation Stock-based compensation expense significantly increased for the three and nine months ended July 31, 2021, compared to the prior year, primarily due to the vesting of stock options and the impact of the company's common stock price on phantom stock awards | Metric | 3 Months Ended July 31, 2021 (in thousands) | 3 Months Ended July 31, 2020 (in thousands) | 9 Months Ended July 31, 2021 (in thousands) | 9 Months Ended July 31, 2020 (in thousands) | | :----- | :------------------------------------------ | :------------------------------------------ | :------------------------------------------ | :------------------------------------------ | | Total stock-based compensation expense (net of tax) | $2,700 | $200 | $4,100 | $30 | - The increase in stock-based compensation is linked to the significant increase in the common stock price, affecting cash-settled phantom stock awards under the 2019 LTIP[33] 3. Interest Total interest incurred decreased for both the three and nine months ended July 31, 2021, compared to the prior year, with a notable decrease in other interest expensed, which includes interest not qualifying for capitalization | Metric | 3 Months Ended July 31, 2021 (in thousands) | 3 Months Ended July 31, 2020 (in thousands) | 9 Months Ended July 31, 2021 (in thousands) | 9 Months Ended July 31, 2020 (in thousands) | | :----- | :------------------------------------------ | :------------------------------------------ | :------------------------------------------ | :------------------------------------------ | | Interest incurred | $39,181 | $45,140 | $122,508 | $134,797 | | Cost of sales interest expensed | $19,240 | $21,814 | $58,130 | $58,539 | | Other interest expensed | $19,158 | $27,072 | $65,166 | $78,944 | | Cash paid for interest, net of capitalized interest | $7,621 | $13,615 | $54,823 | $49,395 | - Other interest expensed includes interest that does not qualify for capitalization, such as interest on completed homes and land in planning[36] 4. Reduction of Inventory to Fair Value The company recorded inventory impairment losses and land option write-offs for the three and nine months ended July 31, 2021, totaling $1.3 million and $3.3 million respectively, while no impairment losses were recorded in the prior year periods | Metric | 3 Months Ended July 31, 2021 (in thousands) | 3 Months Ended July 31, 2020 (in thousands) | 9 Months Ended July 31, 2021 (in thousands) | 9 Months Ended July 31, 2020 (in thousands) | | :----- | :------------------------------------------ | :------------------------------------------ | :------------------------------------------ | :------------------------------------------ | | Inventory impairment loss and land option write-offs | $1,309 | $2,364 | $3,267 | $6,202 | - For the nine months ended July 31, 2021, impairment losses of $2.0 million were recorded in three communities, and write-offs of options and capitalized costs totaled $1.3 million[40][42] - The net book value of mothballed communities decreased from $11.4 million at October 31, 2020, to $4.4 million at July 31, 2021, after selling two and reactivating two previously mothballed communities[43] - Sale and leaseback transactions for model homes and land banking arrangements are accounted for as financing, not sales, impacting "Consolidated inventory not owned" and "Liabilities from inventory not owned"[44][45] 5. Variable Interest Entities The company uses land and lot option purchase contracts, some of which may create variable interests in entities (VIEs) - The company analyzes option purchase contracts to determine if land sellers are VIEs and if the company is the primary beneficiary, which would require consolidation[46][47] - As of July 31, 2021, the company was not the primary beneficiary of any VIEs, and its maximum exposure to loss from land and lot options was limited to $89.5 million in deposits plus pre-development costs[47][48] 6. Warranty Costs The company accrues for warranty and construction defect costs, with additions to reserves for selling, general and administrative expenses and cost of sales | Metric | 3 Months Ended July 31, 2021 (in thousands) | 3 Months Ended July 31, 2020 (in thousands) | 9 Months Ended July 31, 2021 (in thousands) | 9 Months Ended July 31, 2020 (in thousands) | | :----- | :------------------------------------------ | :------------------------------------------ | :------------------------------------------ | :------------------------------------------ | | Balance, beginning of period | $90,025 | $87,139 | $86,417 | $89,371 | | Additions – Selling, general and administrative | $2,047 | $2,130 | $6,504 | $6,121 | | Additions – Cost of sales | $6,058 | $3,250 | $10,059 | $7,173 | | Charges incurred during the period | $(3,513) | $(1,821) | $(10,249) | $(13,037) | | Changes to pre-existing reserves | $789 | $(302) | $2,675 | $768 | | Balance, end of period | $95,406 | $90,396 | $95,406 | $90,396 | - The company's deductible under its general liability insurance for construction defect and warranty claims is $20 million aggregate for fiscal 2021 and 2020[50] 7. Commitments and Contingent Liabilities The company is involved in various legal proceedings, primarily construction defect claims, and is subject to extensive environmental laws and regulations - The company is involved in litigation, mainly construction defect claims, with estimated losses included in construction defect reserves[53] - The company is subject to environmental laws and regulations, which may cause delays, increase costs, or result in fines and penalties[54][55] - An ongoing EPA matter in Newark, NJ, involves a demand for $2.7 million for cleanup costs, with the company in negotiations and believing it has adequate reserves[56] - A lawsuit regarding the Four Seasons at Great Notch condominium community alleges construction defects with asserted damages of approximately $119.5 million, potentially subject to treble damages[57] 8. Cash and Cash Equivalents, Restricted Cash and Cash Equivalents and Customer's Deposits The company's cash and cash equivalents are held in major financial institutions, with restricted cash primarily collateralizing letter of credit agreements and including customer deposits | Metric | July 31, 2021 (in thousands) | October 31, 2020 (in thousands) | | :----- | :--------------------------- | :------------------------------ | | Homebuilding - Cash and cash equivalents | $172,748 | $262,489 | | Homebuilding - Restricted cash and cash equivalents | $15,100 | $14,731 | | Financial services restricted cash and cash equivalents | $41,031 | $27,400 | | Total Homebuilding Customers' deposits | $76,729 | $48,286 | - Financial services restricted cash includes $36.6 million in customer deposits and $4.4 million under mortgage warehouse lines of credit at July 31, 2021[61] 9. Leases The company leases office space, recognizing operating lease costs on a straight-line basis, with ROU assets and lease liabilities recorded on the balance sheet | Metric | 3 Months Ended July 31, 2021 (in thousands) | 3 Months Ended July 31, 2020 (in thousands) | 9 Months Ended July 31, 2021 (in thousands) | 9 Months Ended July 31, 2020 (in thousands) | | :----- | :------------------------------------------ | :------------------------------------------ | :------------------------------------------ | :------------------------------------------ | | Operating lease cost | $2,760 | $2,621 | $7,970 | $7,837 | | Cash payments on lease liabilities | $2,483 | $2,266 | $7,171 | $6,890 | | Metric | July 31, 2021 (in thousands) | October 31, 2020 (in thousands) | | :----- | :--------------------------- | :------------------------------ | | ROU assets | $18,108 | $20,016 | | Lease liabilities | $19,135 | $21,049 | | Weighted-average remaining lease term | 3.1 years | 3.5 years | | Weighted-average discount rate | 9.4% | 9.6% | - New leases commenced during the nine months ended July 31, 2021, resulted in an additional $4.6 million to both ROU assets and lease liabilities[67] 10. Mortgage Loans Held for Sale K. Hovnanian Mortgage originates and sells mortgage loans, primarily from home sales, and uses fair value accounting for loans held for sale and hedging instruments | Metric | July 31, 2021 (in thousands) | October 31, 2020 (in thousands) | | :----- | :--------------------------- | :------------------------------ | | Mortgage loans held for sale (Fair Value) | $131,411 | $104,378 | | Aggregate unpaid principal balance | $126,900 | $100,400 | - The company uses forward sales of mortgage-backed securities (MBS) and other commitments to hedge interest rate fluctuations[68] - Loan origination reserves increased to $1,582 thousand at July 31, 2021, from $1,414 thousand at July 31, 2020[70] 11. Mortgages The company has nonrecourse mortgage loans secured by real property, with a weighted-average interest rate of 4.8% at July 31, 2021, and finances loan originations through secured Master Repurchase Agreements | Metric | July 31, 2021 (in thousands) | October 31, 2020 (in thousands) | | :----- | :--------------------------- | :------------------------------ | | Nonrecourse mortgages secured by inventory (net) | $118,020 | $135,122 | | Weighted-average interest rate (nonrecourse) | 4.8% | 6.4% | | Total outstanding under Master Repurchase Agreements | $116,400 | $87,200 | - The Master Repurchase Agreements require K. Hovnanian Mortgage to satisfy financial ratios, which the company believes it was in compliance with as of July 31, 2021[76] 12. Senior Notes and Credit Facilities The company's senior notes and credit facilities decreased from $1,431,110 thousand at October 31, 2020, to $1,317,524 thousand at July 31, 2021, primarily due to the redemption of $111.2 million of 10.0% Senior Secured Notes due 2022 | Debt Type | July 31, 2021 (in thousands) | October 31, 2020 (in thousands) | | :----- | :--------------------------- | :------------------------------ | | Total Senior Secured Notes | $1,022,776 | $1,133,990 | | Total Senior Notes | $180,710 | $180,710 | | Senior Unsecured Term Loan Credit Facility | $39,551 | $39,551 | | Senior Secured 1.75 Lien Term Loan Credit Facility | $81,498 | $81,498 | | Total notes payable, net | $1,317,524 | $1,431,110 | - On July 30, 2021, K. Hovnanian redeemed $111.2 million of 10.0% Senior Secured Notes due 2022, resulting in a $0.3 million loss on extinguishment of debt[84] - The debt instruments do not contain financial maintenance covenants but include restrictive covenants limiting additional indebtedness, dividends, and other payments[80][82] - On August 2, 2021, K. Hovnanian redeemed $69.7 million of 10.5% Senior Secured Notes due 2024, which will result in a $3.4 million loss on extinguishment of debt in Q4 fiscal 2021[85][165] 13. Per Share Calculation Basic and diluted earnings per share significantly increased for both the three and nine months ended July 31, 2021, driven by higher net income | Metric | 3 Months Ended July 31, 2021 | 3 Months Ended July 31, 2020 | 9 Months Ended July 31, 2021 | 9 Months Ended July 31, 2020 | | :----- | :--------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | | Net income per common share (Basic) | $6.85 | $2.27 | $80.02 | $1.52 | | Net income per common share (Diluted) | $6.72 | $2.16 | $78.51 | $1.44 | | Weighted-average number of common shares outstanding (Basic) | 6,315 | 6,201 | 6,263 | 6,178 | | Weighted-average number of common shares outstanding (Diluted) | 6,434 | 6,518 | 6,370 | 6,502 | - Nonvested shares of restricted stock are considered participating securities and are included in EPS calculations using the two-class method[109] 14. Preferred Stock The company has 5,600 shares of 7.625% Series A Preferred Stock outstanding, with a liquidation preference of $25,000 per share - 5,600 shares of 7.625% Series A Preferred Stock are outstanding, with a liquidation preference of $25,000 per share[111] - No dividends were paid on Series A Preferred Stock in the reported periods due to debt covenant restrictions[111] 15. Common Stock The company has Class A and Class B Common Stock, with Class B having ten votes per share and convertible to Class A for sale - Class A Common Stock holders get one vote per share, while Class B Common Stock holders get ten votes per share and is convertible to Class A for sale[112] - A shareholder rights plan and transfer restrictions on Class A Common Stock are designed to prevent an "ownership change" under Section 382 of the Internal Revenue Code, preserving net operating loss (NOL) carryforwards[113] - As of July 31, 2021, 22 thousand shares of Class A Common Stock may still be purchased under the stock repurchase program[114] 16. Income Taxes The company recorded a total income tax expense of $14.1 million for the three months ended July 31, 2021, but a significant income tax benefit of $442.9 million for the nine months ended July 31, 2021, primarily due to the reversal of a substantial portion of its valuation allowance against deferred tax assets | Metric | 3 Months Ended July 31, 2021 (in thousands) | 3 Months Ended July 31, 2020 (in thousands) | 9 Months Ended July 31, 2021 (in thousands) | 9 Months Ended July 31, 2020 (in thousands) | | :----- | :------------------------------------------ | :------------------------------------------ | :------------------------------------------ | :------------------------------------------ | | Total income tax provision (benefit) | $14,097 | $853 | $(442,921) | $2,665 | - The nine-month benefit was primarily due to the reversal of a substantial portion of the valuation allowance against deferred tax assets, indicating a "more likely than not" expectation of realizing these assets[115][119][122] - As of July 31, 2021, the company reversed $396.5 million of federal deferred tax asset valuation allowance and $78.1 million of state deferred tax asset valuation allowance, with $102.9 million remaining for state DTAs[123] - The company has federal net operating losses (NOLs) of $1.3 billion expiring between 2028-2038 and $2.4 billion of state NOLs with various expiration periods[117] 17. Operating and Reporting Segments HEI operates six homebuilding segments and one financial services segment, with performance evaluated based on operating earnings before income taxes - HEI has six homebuilding segments (Northeast, Mid-Atlantic, Midwest, Southeast, Southwest, West) and a Financial Services segment[30][125][127] - Segment performance is primarily evaluated based on "Income (loss) before income taxes"[130] | Segment | 3 Months Ended July 31, 2021 (in thousands) | 3 Months Ended July 31, 2020 (in thousands) | 9 Months Ended July 31, 2021 (in thousands) | 9 Months Ended July 31, 2020 (in thousands) | | :----- | :------------------------------------------ | :------------------------------------------ | :------------------------------------------ | :------------------------------------------ | | Total homebuilding revenues | $670,833 | $606,806 | $1,907,424 | $1,610,414 | | Financial services revenues | $19,845 | $21,295 | $61,070 | $49,670 | | Total revenues | $690,683 | $628,136 | $1,968,509 | $1,660,543 | | Total homebuilding income before taxes | $84,424 | $37,074 | $213,232 | $76,978 | | Financial services income before taxes | $8,607 | $10,802 | $28,117 | $19,993 | | Segment | July 31, 2021 (in thousands) | October 31, 2020 (in thousands) | | :----- | :--------------------------- | :------------------------------ | | Total homebuilding assets | $1,449,941 | $1,371,150 | | Financial services assets | $180,218 | $140,607 | | Corporate and unallocated assets | $681,885 | $315,585 | | Total assets | $2,312,044 | $1,827,342 | 18. Investments in Unconsolidated Homebuilding and Land Development Joint Ventures The company engages in unconsolidated joint ventures for homebuilding and land development, accounted for under the equity method - Investments in and advances to unconsolidated joint ventures decreased by $34.3 million to $68.9 million at July 31, 2021, from $103.2 million at October 31, 2020[141] - During Q3 fiscal 2021, the company purchased the remaining equity interest in one unconsolidated joint venture for $6.3 million, taking control of four communities[137] | Metric | 3 Months Ended July 31, 2021 (in thousands) | 3 Months Ended July 31, 2020 (in thousands) | 9 Months Ended July 31, 2021 (in thousands) | 9 Months Ended July 31, 2020 (in thousands) | | :----- | :------------------------------------------ | :------------------------------------------ | :------------------------------------------ | :------------------------------------------ | | Joint venture net income (loss) | $5,923 | $5,827 | $10,458 | $8,750 | | Our share of net income (loss) | $5,012 | $6,099 | $9,768 | $13,289 | - Management fees received from unconsolidated joint ventures totaled $3.2 million and $8.5 million for the three and nine months ended July 31, 2021, respectively[145] 19. Recent Accounting Pronouncements The FASB issued ASU 2020-04, "Facilitation of the Effects of Reference Rate Reform on Financial Reporting," providing optional guidance to ease accounting burdens related to reference rate reform - ASU 2020-04 provides optional guidance to ease accounting burdens related to reference rate reform, effective March 12, 2020[149] - The company has not yet adopted ASU 2020-04 and is evaluating its potential impact on financial statements[149] 20. Fair Value of Financial Instruments The company measures certain financial instruments at fair value, primarily mortgage loans held for sale and forward contracts, using Level 2 and Level 3 inputs | Financial Instrument | Fair Value Hierarchy | July 31, 2021 (in thousands) | October 31, 2020 (in thousands) | | :----- | :------------------- | :--------------------------- | :------------------------------ | | Mortgage loans held for sale | Level 2 | $131,411 | $104,378 | | Forward contracts | Level 2 | $(374) | $(28) | | Interest rate lock commitments | Level 3 | $631 | $11 | - The company elected the fair value option for loans held for sale to mitigate earnings volatility from hedging instruments[152] - Inventory impairments of $1.2 million and $2.0 million were recorded for the three and nine months ended July 31, 2021, respectively, as nonrecurring fair value measurements (Level 3)[156] | Debt Instrument | Fair Value Hierarchy | July 31, 2021 (in thousands) | October 31, 2020 (in thousands) | | :----- | :------------------- | :--------------------------- | :------------------------------ | | 10.5% Senior Secured Notes due July 15, 2024 | Level 2 | $71,564 | $67,941 (Level 3) | | 10.0% Senior Secured 1.75 Lien Notes due November 15, 2025 | Level 3 | $166,427 | $132,246 | | 7.75% Senior Secured 1.125 Lien Notes due February 15, 2026 | Level 3 | $371,438 | $353,500 | | 10.5% Senior Secured 1.25 Lien Notes due February 15, 2026 | Level 3 | $304,908 | $274,558 | | 11.25% Senior Secured 1.5 Lien Notes due February 15, 2026 | Level 3 | $162,527 | $162,723 | | 13.5% Senior Notes due February 1, 2026 | Level 2 | $89,684 | $54,354 | | 5.0% Senior Notes due February 1, 2040 | Level 2 | $52,270 | $10,814 | | Senior Unsecured Term Loan Credit Facility due February 1, 2027 | Level 3 | $26,507 | $13,091 | | Senior Secured 1.75 Lien Term Loan Credit Facility due January 31, 2028 | Level 3 | $91,327 | $64,465 | | Total fair value | | $1,336,652 | $1,241,570 | 21. Transactions with Related Parties An engineering firm owned by a relative of the CEO provides services to the company - An engineering firm owned by a relative of the CEO provided services totaling $0.2 million for the three months ended July 31, 2021 and 2020[162] - Services from the related party firm totaled $0.4 million for the nine months ended July 31, 2021, and $0.6 million for the nine months ended July 31, 2020[162] 22. Subsequent Events On August 2, 2021, K. Hovnanian fully redeemed $69.7 million of 10.5% Senior Secured Notes due 2024 for $71.9 million - On August 2, 2021, K. Hovnanian redeemed $69.7 million of 10.5% Senior Secured Notes due 2024[165] - This redemption will result in a $3.4 million loss on extinguishment of debt for the fourth quarter of fiscal 2021[165] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on the company's financial condition, operating results, liquidity, and capital resources, highlighting key trends and performance drivers Overview The homebuilding industry experienced improving conditions at the start of fiscal 2020, but the COVID-19 pandemic caused initial slowdowns and supply chain delays, increasing construction cycle times by 45 days - COVID-19 pandemic caused supply chain delays, increasing construction cycle times by 45 days in many markets[167] - Homebuilding market conditions improved significantly from late April 2020 through July 2021, driven by low interest rates, low existing home inventory, and increased demand for indoor/outdoor space[168][170] - Key performance indicators include net contracts, contract backlog, active selling communities, net contracts per average active selling community, and contract cancellation rates[169] Operating Results The company achieved significant positive operating results for the three and nine months ended July 31, 2021, with substantial increases in home sales revenue, gross margin, pre-tax income, and net income | Metric | 3 Months Ended July 31, 2021 | 3 Months Ended July 31, 2020 | 9 Months Ended July 31, 2021 | 9 Months Ended July 31, 2020 | | :----- | :--------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | | Sale of homes revenues | +9.5% | | +17.8% | | | Average prices | +13.5% | | +7.6% | | | Gross margin dollars | +55.4% | | +57.2% | | | Gross margin percentage | 19.2% | 13.6% | 18.3% | 13.7% | | Pre-tax income | $61.8M | $16.2M | $112.4M | $13.0M | | Net income | $47.7M | $15.4M | $555.3M | $10.3M | | Basic EPS | $6.85 | $2.27 | $80.02 | $1.52 | | Diluted EPS | $6.72 | $2.16 | $78.51 | $1.44 | - Net contracts decreased by 45.6% for the three months and 5.5% for the nine months ended July 31, 2021, compared to prior year, partly due to consciously restricting sales and the prior year's COVID-19 surge in demand[175][176] - Contract backlog increased to 3,673 homes with a dollar value of $1.8 billion at July 31, 2021, a 41.8% increase in dollar value YoY[177] - Total liquidity was $307.7 million at July 31, 2021, including $172.7 million in homebuilding cash and $125.0 million borrowing capacity, after repurchasing $111.7 million of 10.0% 2022 Notes[178] Critical Accounting Policies The company's critical accounting policies, including income recognition from mortgage loans, inventories, unconsolidated joint ventures, and warranty and construction defect reserves, have not significantly changed since October 31, 2020 - No significant changes to critical accounting policies (income recognition from mortgage loans, inventories, unconsolidated joint ventures, warranty and construction defect reserves) since October 31, 2020[179] Capital Resources and Liquidity The company's total liquidity at July 31, 2021, was $307.7 million, exceeding its target range, and is deemed sufficient for working capital through fiscal 2021 - Total liquidity at July 31, 2021, was $307.7 million, including $172.7 million in homebuilding cash and $125.0 million borrowing capacity under the senior secured revolving credit facility[182] - Cash provided by operations was $82.3 million for the nine months ended July 31, 2021, after spending $531.2 million on land purchases and land development and repurchasing $111.7 million of debt[183] - The company is limited in incurring new debt due to covenant restrictions, which could impact business growth[181][193] Debt Transactions The company's total notes payable, net of discounts and issuance costs, decreased to $1,317,524 thousand at July 31, 2021, from $1,431,110 thousand at October 31, 2020 | Debt Type | July 31, 2021 (in thousands) | October 31, 2020 (in thousands) | | :----- | :--------------------------- | :------------------------------ | | Total Senior Secured Notes | $1,022,776 | $1,133,990 | | Total Senior Notes | $180,710 | $180,710 | | Senior Unsecured Term Loan Credit Facility | $39,551 | $39,551 | | Senior Secured 1.75 Lien Term Loan Credit Facility | $81,498 | $81,498 | | Total notes payable, net | $1,317,524 | $1,431,110 | - The company redeemed $111.2 million of 10.0% Senior Secured Notes due 2022 during the nine months ended July 31, 2021[183][186] - Debt instruments contain restrictive covenants but no financial maintenance covenants, and the company was in compliance as of July 31, 2021[189] - The company is currently restricted from paying dividends on its 7.625% Series A Preferred Stock if its consolidated fixed charge coverage ratio is less than 2.0 to 1.0[191] Inventory Activities Total inventory (excluding consolidated inventory not owned) increased by $201.7 million during the nine months ended July 31, 2021, driven by new land purchases and development, partially offset by home deliveries - Total inventory (excluding consolidated inventory not owned) increased by $201.7 million from October 31, 2020, to July 31, 2021, primarily due to new land purchases and development[199] - Consolidated inventory not owned decreased by $84.1 million, mainly due to a decrease in land banking and model sale-leaseback financing transactions[200] - Inventory impairment losses of $2.0 million and land option write-offs of $1.3 million were recorded for the nine months ended July 31, 2021[199] - The company controlled 31,385 home sites at July 31, 2021, an increase from 26,344 at October 31, 2020[205][208] Other Balance Sheet Activities Investments in unconsolidated joint ventures decreased by $34.3 million, primarily due to the acquisition of a remaining equity interest in one JV and partnership distributions - Investments in and advances to unconsolidated joint ventures decreased by $34.3 million to $68.9 million at July 31, 2021, mainly due to purchasing a remaining equity interest in one JV and partnership distributions[212] - Deferred tax assets, net, increased from zero at October 31, 2020, to $447.5 million at July 31, 2021, due to the full reversal of federal and partial reversal of state valuation allowances[217] - Accounts payable and other liabilities increased by $42.0 million, driven by increased construction spending, warranty reserves, and accrued compensation related to long-term incentive plans[219] - Customers' deposits increased by $28.4 million to $76.7 million, correlating with the increase in backlog[220] RESULTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED JULY 31, 2021 COMPARED TO THE THREE AND NINE MONTHS ENDED JULY 31, 2020 Total revenues increased by 10.0% for the three months and 18.5% for the nine months ended July 31, 2021, driven by higher home sales and land sales | Revenue Type | 3 Months Ended July 31, 2021 (in thousands) | 3 Months Ended July 31, 2020 (in thousands) | 9 Months Ended July 31, 2021 (in thousands) | 9 Months Ended July 31, 2020 (in thousands) | | :----- | :------------------------------------------ | :------------------------------------------ | :------------------------------------------ | :------------------------------------------ | | Homebuilding: Sale of homes | $663,279 | $605,933 | $1,894,159 | $1,608,513 | | Homebuilding: Land sales and other revenues | $7,559 | $908 | $13,280 | $2,360 | | Financial services | $19,845 | $21,295 | $61,070 | $49,670 | | Total revenues | $690,683 | $628,136 | $1,968,509 | $1,660,543 | Homebuilding Home sales revenues increased by 9.5% and 17.8% for the three and nine months ended July 31, 2021, respectively, primarily due to higher average home prices across most markets | Metric | 3 Months Ended July 31, 2021 | 3 Months Ended July 31, 2020 | 9 Months Ended July 31, 2021 | 9 Months Ended July 31, 2020 | | :----- | :--------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | | Sale of homes revenues | +9.5% | | +17.8% | | | Average price per home | $442,776 | $390,169 | $420,831 | $390,985 | | Homes delivered | 1,498 | 1,553 | 4,501 | 4,114 | - Homebuilding gross margin percentage increased to 19.2% (3 months) and 18.3% (9 months) in 2021, up from 13.6% and 13.7% in 2020, driven by price increases[236] | Metric | 3 Months Ended July 31, 2021 | 3 Months Ended July 31, 2020 | 9 Months Ended July 31, 2021 | 9 Months Ended July 31, 2020 | | :----- | :--------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | | Net contracts (homes) | 1,211 | 2,226 | 4,760 | 5,035 | | Contract backlog (homes) | 3,673 | 3,056 | 3,673 | 3,056 | | Contract backlog (dollars) | $1,750,428 | $1,234,419 | $1,750,428 | $1,234,419 | - Active selling community count decreased to 104 at July 31, 2021, from 116 at October 31, 2020, but increased sequentially from 97 at April 30, 2021[230] - Cancellation rates were below historical norms in fiscal 2021 (16% for Q3, 17% for Q1, 16% for Q2), indicating strong market conditions[232] Land Sales and Other Revenues Land sales and other revenues significantly increased for both the three and nine months ended July 31, 2021, primarily due to an increase in land and lot sales | Metric | 3 Months Ended July 31, 2021 (in thousands) | 3 Months Ended July 31, 2020 (in thousands) | 9 Months Ended July 31, 2021 (in thousands) | 9 Months Ended July 31, 2020 (in thousands) | | :----- | :------------------------------------------ | :------------------------------------------ | :------------------------------------------ | :------------------------------------------ | | Land and lot sales | $6,819 | $25 | $11,730 | $100 | | Land and lot sales gross margin, including interest | $62 | $(36) | $721 | $(133) | - The increase in land sales and other revenues was $6.7 million (3 months) and $10.9 million (9 months) YoY[239] Homebuilding Selling, General and Administrative Homebuilding SGA expenses increased for both the three and nine months ended July 31, 2021, primarily due to decreased unconsolidated joint venture management fees and higher compensation expenses related to long-term incentive programs - Homebuilding SGA expenses increased by $2.4 million (3 months) and $3.5 million (9 months) YoY[240] - The increase was due to decreased unconsolidated joint venture management fees and higher compensation expense from long-term incentive programs[240] - SGA expenses as a percentage of homebuilding revenues decreased to 6.4% (3 months) and 6.6% (9 months) in 2021, from 6.7% and 7.6% in 2020, respectively[240] HOMEBUILDING OPERATIONS BY SEGMENT Most homebuilding segments experienced increased income before income taxes for both the three and nine months ended July 31, 2021, driven by higher average sales prices and, in some cases, increased home deliveries - Overall homebuilding income before income taxes increased significantly for both periods, with the West segment showing the largest percentage increase[133] Northeast Northeast homebuilding revenue decreased for both periods due to fewer homes delivered, despite a significant increase in average sales price | Metric | 3 Months Ended July 31, 2021 | 3 Months Ended July 31, 2020 | 9 Months Ended July 31, 2021 | 9 Months Ended July 31, 2020 | | :----- | :--------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | | Homebuilding revenue | $(6,115) (14.8%) | | $(35,956) (26.9%) | | | Income before income taxes | $1,525 (29.1%) | | $(1,276) (7.2%) | | | Homes delivered | (51) (53.7%) | | (131) (48.5%) | | | Average sales price | $365,945 (84.1%) | | $190,476 (38.5%) | | Mid-Atlantic Mid-Atlantic homebuilding revenue decreased slightly for the three months but increased for the nine months ended July 31, 2021 | Metric | 3 Months Ended July 31, 2021 | 3 Months Ended July 31, 2020 | 9 Months Ended July 31, 2021 | 9 Months Ended July 31, 2020 | | :----- | :--------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | | Homebuilding revenue | $(4,983) (4.5%) | | $22,665 (7.8%) | | | Income before income taxes | $4,883 (44.3%) | | $18,070 (87.9%) | | | Homes delivered | (24) (11.3%) | | 45 (8.4%) | | | Average sales price | $40,000 (7.7%) | | $(2,428) (0.5%) | | Midwest Midwest homebuilding revenue decreased for the three months but increased for the nine months ended July 31, 2021 | Metric | 3 Months Ended July 31, 2021 | 3 Months Ended July 31, 2020 | 9 Months Ended July 31, 2021 | 9 Months Ended July 31, 2020 | | :----- | :--------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | | Homebuilding revenue | $(2,344) (3.7%) | | $17,775 (10.7%) | | | Income (loss) before income taxes | $2,593 (339.0%) | | $14,133 (461.4%) | | | Homes delivered | (7) (3.6%) | | 36 (6.7%) | | | Average sales price | $(410) (0.1%) | | $7,464 (2.4%) | | Southeast Southeast homebuilding revenue increased for both periods, driven by higher average sales prices and land sales, despite a decrease in homes delivered for the three-month period | Metric | 3 Months Ended July 31, 2021 | 3 Months Ended July 31, 2020 | 9 Months Ended July 31, 2021 | 9 Months Ended July 31, 2020 | | :----- | :--------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | | Homebuilding revenue | $3,064 (4.7%) | | $36,612 (23.0%) | | | Income (loss) before income taxes | $2,935 (1,160.1%) | | $14,054 (311.3%) | | | Homes delivered | (16) (10.3%) | | 29 (7.7%) | | | Average sales price | $22,691 (5.4%) | | $43,534 (10.4%) | | Southwest Southwest homebuilding revenue slightly decreased for the three months but increased for the nine months ended July 31, 2021, driven by higher average sales prices and increased home deliveries | Metric | 3 Months Ended July 31, 2021 | 3 Months Ended July 31, 2020 | 9 Months Ended July 31, 2021 | 9 Months Ended July 31, 2020 | | :----- | :--------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | | Homebuilding revenue | $(1,791) (0.8%) | | $71,377 (13.0%) | | | Income before income taxes | $8,451 (42.1%) | | $37,104 (88.9%) | | | Homes delivered | (48) (7.5%) | | 159 (9.6%) | | | Average sales price | $24,006 (7.2%) | | $10,182 (3.1%) | | West West homebuilding revenue significantly increased for both periods, driven by substantial increases in both homes delivered and average sales price | Metric | 3 Months Ended July 31, 2021 | 3 Months Ended July 31, 2020 | 9 Months Ended July 31, 2021 | 9 Months Ended July 31, 2020 | | :----- | :--------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | | Homebuilding revenue | $76,196 (69.1%) | | $184,537 (58.9%) | | | Income before income taxes | $26,963 (11,930.5%) | | $54,169 (1,187.9%) | | | Homes delivered | 91 (36.1%) | | 249 (33.6%) | | | Average sales price | $105,945 (24.2%) | | $79,925 (18.9%) | | Financial Services Financial services generated a pretax profit of $8.6 million for the three months and $28.1 million for the nine months ended July 31, 2021 | Metric | 3 Months Ended July 31, 2021 (in thousands) | 3 Months Ended July 31, 2020 (in thousands) | 9 Months Ended July 31, 2021 (in thousands) | 9 Months Ended July 31, 2020 (in thousands) | | :----- | :------------------------------------------ | :------------------------------------------ | :------------------------------------------ | :------------------------------------------ | | Pretax profit | $8,607 | $10,802 | $28,117 | $20,000 | - The decrease in Q3 2021 pretax profit was due to fewer homebuilding deliveries and a decrease in the basis point spread between originated loans and implied sale rates[269] - The increase in 9-month 2021 pretax profit was due to increased homebuilding deliveries and an increase in the average price of settled loans and basis point spread[269] Corporate General and Administrative Corporate G&A expenses decreased for the three months ended July 31, 2021, due to reduced medical claims reserves and lower phantom stock award expenses | Metric | 3 Months Ended July 31, 2021 (in thousands) | 3 Months Ended July 31, 2020 (in thousands) | 9 Months Ended July 31, 2021 (in thousands) | 9 Months Ended July 31, 2020 (in thousands) | | :----- | :------------------------------------------ | :------------------------------------------ | :------------------------------------------ | :------------------------------------------ | | Corporate G&A expenses | $17,300 | $19,300 | $81,100 | $54,300 | - The nine-month increase was primarily due to higher compensation expense from phantom stock awards under the 2019 LTIP, driven by the stock price increase from $51.16 to $104.39[270][271] Other Interest Other interest expense decreased for both the three and nine months ended July 31, 2021, primarily due to a reduction in nonrecourse mortgages and inventory financing arrangements - Other interest decreased by $7.9 million (3 months) and $13.8 million (9 months) YoY[272] - The decrease was primarily due to a reduction in nonrecourse mortgages and inventory financing arrangements[272] (Loss) Gain on Extinguishment of Debt The company recorded a $0.3 million loss on extinguishment of debt for the three months ended July 31, 2021, due to the redemption of $111.2 million of 10.0% 2022 Notes - A $0.3 million loss on extinguishment of debt was recorded for the three months ended July 31, 2021, from the redemption of $111.2 million of 10.0% 2022 Notes[273] - In the prior year, a $4.1 million gain was recorded for the three months ended July 31, 2020, from repurchasing $25.5 million of 10.0% 2022 Notes[274] Income from Unconsolidated Joint Ventures Income from unconsolidated joint ventures decreased for both the three and nine months ended July 31, 2021, primarily due to fewer home deliveries from certain joint ventures in the current fiscal year - Income from unconsolidated joint ventures decreased by $0.6 million (3 months) and $3.9 million (9 months) YoY[275] - The decrease was primarily due to fewer home deliveries from certain joint ventures[275] Total Taxes The company reported a $14.1 million income tax expense for the three months ended July 31, 2021, but a $442.9 million income tax benefit for the nine months ended July 31, 2021, primarily due to the reversal of a substantial portion of its deferred tax asset valuation allowance - Total income tax expense was $14.1 million for the three months ended July 31, 2021[276] - Total income tax benefit was $442.9 million for the nine months ended July 31, 2021, mainly due to the reversal of deferred tax asset valuation allowance[276] Inflation Inflation has a long-term effect on increasing land, materials, and labor costs, leading to higher home sale prices - Inflation increases land, materials, and labor costs, leading to higher home sale prices[277] - A risk is that construction costs could outpace buyer income, limiting home price increases and potentially lowering gross margins[277] - Construction costs represented approximately 52.9% of homebuilding cost of sales for the nine months ended July 31, 2021[278] Safe Harbor Statement This section contains forward-looking statements subject to known and unknown risks, uncertainties, and other factors that could cause actual results to differ materially - Forward-looking statements are subject to risks and uncertainties, including the impact of COVID-19, economic conditions, supply chain issues, and interest rate fluctuations[279][280] - The company undertakes no obligation to update or revise forward-looking statements[280] Item 3. Quantitative and Qualitative Disclosures About Market Risk The primary market risk is interest rate risk on long-term debt, though mortgage operations' interest rate risk is not material due to frequent repricing and hedging - Primary market risk is interest rate risk on long-term debt[281] - Mortgage operations' interest rate risk is not material due to frequent repricing and hedging with forward commitments[281] | Metric | Total (in thousands) | FV at 7/31/21 (in thousands) | Weighted average interest rate | | :----- | :------------------- | :--------------------------- | :----------------------------- | | Long term debt (Fixed rate) | $1,324,535 | $1,336,652 | 9.48% | Item 4. Controls and Procedures The company maintains disclosure controls and procedures designed to ensure timely and accurate reporting - Disclosure controls and procedures are designed for timely and accurate reporting[284] - CEO and CFO concluded that disclosure controls and procedures were effective as of July 31, 2021[284] - No material changes to internal control over financial reporting occurred during the quarter ended July 31, 2021[285] PART II. Other Information This section covers legal proceedings, equity security sales, other corporate information, and a list of exhibits filed with the quarterly report Item 1. Legal Proceedings Information regarding legal proceedings is incorporated by reference from Note 7 to the Condensed Consolidated Financial Statements - Legal proceedings information is incorporated from Note 7 of the financial statements[287] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds There were no unregistered sales of equity securities or issuer purchases of equity securities during the fiscal third quarter of 2021 - No unregistered sales or issuer purchases of equity securities occurred in Q3 2021[288] - The company has never paid a cash dividend to common stockholders due to debt agreement restrictions[289] Item 5. Other Information On September 7, 2021, the Board of Directors approved an amendment to the company's Bylaws, designating the Delaware Court of Chancery as the exclusive forum for stockholder claims and U.S. federal district courts for Securities Act claims - On September 7, 2021, Bylaws were amended to designate Delaware Court of Chancery as exclusive forum for stockholder claims and U.S. federal district courts for Securities Act claims[290] Item 6. Exhibits This section lists the exhibits filed with the Quarterly Report on Form 10-Q, including the Restated Certificate of Incorporation, Amended and Restated Bylaws, specimen stock certificates, rights agreements, and various performance share unit agreements - Exhibits include corporate governance documents (Certificate of Incorporation, Bylaws), stock certificates, rights agreements, and various performance share unit agreements[293] - Financial information in Inline XBRL format is provided as Exhibit 101[296] Signatures The report is duly signed on September 9, 2021, by J. Larry Sorsby, Executive Vice President, Chief Financial Officer and Director, and Brad G. O'Connor, Senior Vice President, Treasurer and Chief Accounting Officer - The report was signed on September 9, 2021, by J. Larry Sorsby (EVP, CFO, Director) and Brad G. O'Connor (SVP, Treasurer, Chief Accounting Officer)[299]