Hovnanian Enterprises, Inc. Annual Report 2009
Hovnanian Enterprises, Inc.
Communities Active Proposed Arizona 84 California 21 39 Delaware 1– Florida 711 Georgia 1– Illinois 1– Kentucky "On-Your-Lot" Operation Maryland 12 7 Minnesota 32 New Jersey 17 36 New York 1– North Carolina 613 Ohio 17 – Pennsylvania –– South Carolina –– Texas 70 10 Virginia 13 7 Washington DC 1– West Virginia –2 Total 179 131
Financial Highlights Years Ended October 31, 2009 2008 2007 2006 2005
REVENUES AND INCOME Dollars in Millions
Total Revenues $ 1,596.3 $ 3,308.1 $ 4,798.9 $ 6,148.2 $ 5,348.4 (Loss) Income Before Income Taxes Excluding Land-Related Charges, Intangible Impairments and Gain on $ (379.1) $ (391.3) $ (20.9) $ 581.4 $ 785.9 Extinguishment of Debt (1) (Loss) Income Before Income Taxes $ (672.0) $ (1,168.0) $ (647.0) $ 233.1 $ 780.6 Net (Loss) Income Attributable to Common Stockholders $ (716.7) $ (1,124.6) $ (637.8) $ 138.9 $ 469.1
ASSETS, DEBT AND EQUITY Dollars in Millions
Total Assets $ 2,024.6 $ 3,637.3 $ 4,540.5 $ 5,480.0 $ 4,726.1 Total Recourse Debt $ 1,751.7 $ 2,505.8 $ 2,117.4 $ 2,049.8 $ 1,498.7 Total Stockholders' (Deficit) Equity $ (349.6) $ 330.3 $ 1,321.8 $ 1,942.2 $ 1,791.4
INCOME PER COMMON SHARE Shares in Thousands
Assuming Dilution: (Loss) Income Per Common Share $ (9.16) $ (16.04) $ (10.11) $ 2.14 $ 7.16 Weighted Average Number of Common Shares Outstanding 78,238 70,131 63,079 64,838 65,549
(1) (Loss) Income Before Income Taxes Excluding Land-Related Charges, Intangible Impairments and Gain on Extinguishment of Debt is a non-GAAP financial measure. See page 5 of this Annual Report for a reconciliation to (Loss) Income Before Income Taxes, the most directly comparable GAAP measure.
This summary should be read in conjunction with the related consolidated financial statements and accompanying notes included elsewhere in this Annual Report. To our shareholders and associates
The housing downturn has been longer lasting and more severe homebuyers entering into contracts today are more realistic than most had predicted and has created the most difficult about the current housing environment. homebuilding environment for Hovnanian Enterprises since our founding. The 2009 year was nonetheless filled with significant Market conditions milestones and we are seeing some signs that the homebuilding After more than four years of deterioration in housing, 2009 was industry has reached or is at least approaching a bottom. a year of transition for the industry as there were several data points for both the new and existing home markets indicating We began the year with a celebration of our 50th year in that a bottom is close at hand. business. That is a monumental milestone for any company and is a particularly difficult accomplishment in homebuilding, as is Despite rising levels of foreclosures and unemployment, home evidenced by the number of private homebuilders that no longer prices showed initial signs of stabilizing throughout fiscal 2009. exist because of the severity of the most recent downturn. Near In fact the Case Shiller Index showed price increases for the last the end of our fiscal year, my father, Kevork S. Hovnanian, six months in a row. Mortgage rates hit the lowest level since passed away. We marked his passing with a celebration of his Freddie Mac started tracking 30-year mortgage rates in 1971. life and accomplishments but this one was more somber. My The combination of falling home prices and 30-year mortgage father was a great man in all respects and he is missed dearly. rates near all-time lows has led to much improved levels of He cared deeply for this company and wanted to be here to see affordability. an end to the current housing recession. He will be watching over us as we navigate through the end of this storm. Both the absolute level of existing home inventory and the months supply of existing homes declined throughout much of Knowing the right operational steps to implement from past our fiscal year. Homebuyers stepped into the market and took experiences, while maintaining the flexibility to take advantage advantage of levels of affordability, as well as the homebuyer of current opportunities, should enable us to prosper in an tax credit. Similar trends are evident in the inventory of new inevitably improving environment. homes.
Financial review Dealing with the current market conditions Difficult market conditions weighed heavily on our operating performance in fiscal 2009. Our revenues and deliveries were In fiscal 2008, we were very focused on generating and down from 2008, 52% and 49%, respectively. Our impairment preserving our cash position. We did not lose sight of that focus and walk away costs, while substantial, decreased year over in 2009 but we expanded our efforts to include using some of year, as the sharp drop-off in home prices slowed in 2009. our available cash to reduce the amount of outstanding debt. At These charges were largely offset by gains we realized from the same time we continued to adjust our staffing levels to better purchasing our debt in open market transactions at steep align them with production levels. discounts. Now that we are comfortable with our liquidity, in addition to For the first time since the beginning of the downturn more than focusing on cash flow, we can now be more focused on four years ago, we reported improvements in net contracts per returning to profitability. In order to get back to profitability, active selling community on a year-over-year basis for each we need to continue to sell through the land that we purchased at quarter in fiscal 2009. The magnitude of these improvements high prices, purchase new land at normal profit margins and steadily increased throughout the year with net contracts per leverage our SG&A and fixed costs by increasing volume. To active selling community rising 5% above 2008 during the first that end, we continued to whittle down our owned land quarter, while the second quarter not only exceeded 2008 by throughout 2009 and are beginning to see attractive land 25% but also was better than 2007. In the third and fourth purchase opportunities. quarters, we began to approach 2006 levels and the fourth quarter was 60% above the fourth quarter of 2008. This housing downturn, like other ones we have operated through, has created opportunities to purchase new parcels of In the first few months of fiscal 2010, the trend of improving net land at discounted prices. Before 2009, we couldn’t find land contracts has continued. However, it is important to keep these that would underwrite at the then current sales pace and sales improvements in perspective. Even though 2009 was better than price that would meet our investment criteria. That changed in 2008, it was still the second lowest level of net contracts per fiscal 2009, as we identified and purchased numerous parcels of active selling community going back to 1997. During normal land from banks. Many of the parcels were selling for times, the average net contracts per active selling community substantially less than the costs to improve the lots. was 47; in fiscal 2009 that figure was 23. So we still have some ways to go before we get back to more normalized levels. We did pursue some of the deals that did not require large amounts of upfront capital on a wholly owned basis. During the Cancellation rates, however, returned to a more normalized level last two quarters of the fiscal year, we contracted to purchase or of the low 20% range , during the last three quarters of fiscal purchased slightly more than 2,000 lots on a wholly-owned 2009. The improvement in cancellation rates implies that basis.
1 For larger land deals that were more capital intensive, we important than ever to be able to offer a broad array of product engaged with financial partners to purchase the lots in a joint that can suit just about anyone looking to purchase a new home. venture structure. These transactions are beneficial in that, we We offer smaller square footage, affordable products to those put up a minority equity investment, run the communities on a seeking a first home, as well as large, luxury homes to those day to day basis and have the potential to receive a buyers who want that type of home and everything in between. disproportionate percentage of the profits and cash flow as Our active adult communities, catering to the needs of the baby certain financial criteria are met. These community-specific boomers, offer “resort-at-home” lifestyle and world-class equity raises allow us to participate in the opportunities that are amenities. We will continue to build a wide product offering presenting themselves without diluting all of our shareholders. and have no plans to stray from one of our more important Joint ventures purchased 1,977 lots in 2009. strategic differentiators.
Capital market transactions Appreciation During fiscal 2009, we reduced our debt outstanding by $754 We have taken the right steps to ensure our ability to survive this million and extended our single largest debt maturity until 2016. current downturn. 2009 was a turbulent year but is likely one We started off the first quarter of fiscal 2009 by repurchasing that will mark the beginning of the next period of expansion. I debt and by executing an exchange offer for existing unsecured want to thank each of our associates for all of the hard work and notes for new secured notes. Through the remainder of the year, effort that was put forth throughout the year. It has certainly we continued to repurchase debt in the open market. been a difficult time as of late but the effort never seems to have wavered. To cap off the year, in the fourth quarter, we decreased the debt we had due between now and the end of 2013 from $816 million We would also like to thank all of our stakeholders for standing to $183 million. This was accomplished through a new $785 by us during these difficult times. We believe more firmly than million first lien secured notes offering and tender offers for ever before that we will not only survive in the inevitable existing second lien secured debt, third lien secured notes and recovery but will be in a position to thrive and grow once again. senior unsecured notes, as well as additional open market repurchases of debt.
While we were comfortable with our debt obligations prior to these transactions, the steps we took over the year afford us an even greater level of comfort and allow a longer runway for the housing markets to recover. Additionally, the increased Ara K. Hovnanian liquidity we gain provides us with dry powder to invest in new Chairman of the Board, President and Chief Executive Officer land parcels on a wholly owned basis, as well as in new joint ventures. The improvements in our capital structure should provide us with the liquidity we need to seize upon opportunities that are beginning to present themselves more frequently.
Long-term strategy Ours is an industry that provides a basic need of shelter. Not everyone needs to purchase a new home, some may choose to buy an existing home and others choose to rent. Regardless of the preference that households make on where to live, approximately 1.4 million new households are expected to form each year over the next ten years. Each of those households will need a place to live.
Across the country, about 554,000 homes were started in calendar 2009, according to the preliminary numbers from the Census Bureau. That means that despite marriages and divorces and a steady flow of immigration approximately 846,000 households did not set out on their own in 2009. The decision- making process to postpone establishing a new household can certainly affect any one year’s worth of data, but it is not a sustainable scenario. At some point, these households will set out on their own and buy or rent a home.
We expect to be one of the remaining homebuilders left standing to build a home for those who choose to live in a new home. Many of our competitors, particularly the small private builders, are either bankrupt or have left the market. This should allow us to capture greater market share. Given the pent-up demand that we believe is now building up throughout the country, it is more
2 Communities Under Development
Net Contracts(1) Deliveries Contract Backlog (Dollars In Thousands Except Average Price) (Unaudited) Twelve Months Ended October 31, October 31, 2009 2008 % Change 2009 2008 % Change 2009 2008 % Change Northeast Home 783 934 (16.2%) 823 1,412 (41.7%) 457 497 (8.0%) Dollars$ 350,515 $ 381,401 (8.1%)$ 357,745 $ 679,488 (47.4%)$ 196,262 $ 215,604 (9.0%) Average Price$ 447,656 $ 408,352 9.6%$ 434,684 $ 481,224 (9.7%)$ 429,457 $ 433,811 (1.0%) Mid-Atlantic Home 789 880 (10.3%) 788 1,248 (36.9%) 386 385 0.3% Dollars$ 281,194 $ 313,405 (10.3%)$ 296,286 $ 509,009 (41.8%)$ 150,819 $ 165,871 (9.1%) Average Price$ 356,393 $ 356,142 0.1%$ 375,997 $ 407,860 (7.8%)$ 390,723 $ 430,834 (9.3%) Midwest Home 482 497 (3.0%) 520 965 (46.1%) 253 291 (13.1%) Dollars$ 95,764 $ 106,887 (10.4%)$ 116,990 $ 209,759 (44.2%)$ 46,418 $ 61,108 (24.0%) Average Price$ 198,680 $ 215,064 (7.6%)$ 224,981 $ 217,367 3.5%$ 183,470 $ 209,993 (12.6%) Southeast Home 461 584 (21.1%) 489 2,572 (81.0%) 135 163 (17.2%) Dollars$ 103,173 $ 132,245 (22.0%)$ 113,034 $ 624,106 (81.9%)$ 35,970 $ 45,657 (21.2%) Average Price$ 223,803 $ 226,447 (1.2%)$ 231,153 $ 242,654 (4.7%)$ 266,444 $ 280,104 (4.9%) Southwest Home 1,798 2,285 (21.3%) 1,867 2,616 (28.6%) 351 420 (16.4%) Dollars$ 377,292 $ 518,565 (27.2%)$ 408,746 $ 603,513 (32.3%)$ 77,418 $ 100,305 (22.8%) Average Price$ 209,840 $ 226,944 (7.5%)$ 218,932 $ 230,701 (5.1%)$ 220,564 $ 238,819 (7.6%) West Home 914 1,366 (33.1%) 875 1,764 (50.4%) 190 151 25.8% Dollars$ 220,369 $ 421,292 (47.7%)$ 229,668 $ 551,978 (58.4%)$ 52,666 $ 57,642 (8.6%) Average Price$ 241,104 $ 308,413 (21.8%)$ 262,478 $ 312,913 (16.1%)$ 277,189 $ 381,735 (27.4%) Consolidated Total Home 5,227 6,546 (20.1%) 5,362 10,577 (49.3%) 1,772 1,907 (7.1%) Dollars$ 1,428,307 $ 1,873,795 (23.8%)$ 1,522,469 $ 3,177,853 (52.1%)$ 559,553 $ 646,187 (13.4%) Average Price$ 273,256 $ 286,251 (4.5%)$ 283,937 $ 300,449 (5.5%)$ 315,774 $ 338,850 (6.8%) Unconsolidated Joint Ventures Home 193 540 (64.3%) 297 704 (57.8%) 159 263 (39.5%) Dollars$ 56,886 $ 221,858 (74.4%)$ 113,016 $ 262,605 (57.0%)$ 88,263 $ 157,167 (43.8%) Average Price$ 294,751 $ 410,848 (28.3%)$ 380,525 $ 373,018 2.0%$ 555,119 $ 597,593 (7.1%) Total Home 5,420 7,086 (23.5%) 5,659 11,281 (49.8%) 1,931 2,170 (11.0%) Dollars$ 1,485,193 $ 2,095,653 (29.1%)$ 1,635,485 $ 3,440,458 (52.5%)$ 647,816 $ 803,354 (19.4%) Average Price$ 274,021 $ 295,746 (7.3%)$ 289,006 $ 304,978 (5.2%)$ 335,482 $ 370,209 (9.4%)
DELIVERIES INCLUDE EXTRAS
Note: (1) Net contracts are defined as new contracts signed during the period for the purchase of homes, less cancellations of prior contracts.
Note: All statements in this Annual Report that are not historical facts should be considered as "forward-looking statements" within the meaning 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 risks, uncertainties and other factors include, but are not limited to, (1) changes in general and local economic and industry and business conditions, (2) adverse weather 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, 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) operations through joint ventures with third parties, (14) product liability litigation and warranty claims, (15) successful identification and integration of acquisitions, (16) significant influence of the Company’s controlling stockholders, (17) geopolitical risks, terrorist acts and other acts of war and (18) other factors described in detail in the Company's Form 10-K for the year ended October 31, 2009, which is included in this Annual Report.
3 Five-Year Financial Review Years Ended October 31, (In Thousands Except Number of Homes and Per-Share Data) 2009 2008 2007 2006 2005 Statement of Operations Data: Total Revenues$ 1,596,290 $ 3,308,111 $ 4,798,921 $ 6,148,235 $ 5,348,417 Inventory Impairment Loss and Land Option Write-Offs $ 659,475 $ 710,120 $ 457,773 $ 336,204 $ 5,360 (Loss) Income from Unconsolidated Joint Ventures $ (46,041) $ (36,600) $ (28,223) $ 15,385 $ 35,039 (Loss) Income Before Income Taxes Excluding Land-Related Charges, Intangible Impairments $ (379,118) $ (391,323) $ (20,887) $ 581,360 $ 785,945 and Gain on Extinguishment of Debt (1) (Loss) Income Before Income Taxes $ (672,019) $ (1,168,048) $ (646,966) $ 233,106 $ 780,585 Net (Loss) Income Attributable to Common Stockholders $ (716,712) $ (1,124,590) $ (637,793) $ 138,858 $ 469,089 Net (Loss) Income Per Common Share: Diluted$ (9.16) $ (16.04) $ (10.11) $ 2.14 $ 7.16 Weighted Average Number of Common Shares Outstanding 78,238 70,131 63,079 64,838 65,549 Balance Sheet Data: Cash and Restricted Cash$ 584,020 $ 856,385 $ 34,399 $ 65,387 $ 229,499 Total Inventories $ 1,109,913 $ 2,159,082 $ 3,518,334 $ 4,070,841 $ 3,436,620 Total Assets $ 2,024,577 $ 3,637,322 $ 4,540,548 $ 5,480,035 $ 4,726,138 Total Recourse Debt$ 1,751,701 $ 2,505,805 $ 2,117,350 $ 2,049,778 $ 1,498,739 Total Non-Recourse Debt $ 21,507 $ 23,122 $ 32,415 $ 49,772 $ 73,012 Total Stockholders' (Deficit) Equity $ (349,598) $ 330,264 $ 1,321,803 $ 1,942,163 $ 1,791,357 Supplemental Financial Data: Adjusted EBIT (2) $ (222,260) $ (281,592) $ (47,439) $ 681,254 $ 875,666 Adjusted EBITDA (2) $ (197,757) $ (222,320) $ 135,544 $ 753,252 $ 933,366 Net Cash (Used in) Provided by Operating Activities $ (29,728) $ 462,066 $ 61,966 $ (650,710) $ (23,839) Interest Incurred $ 194,702 $ 190,801 $ 194,547 $ 166,427 $ 102,930 Adjusted EBIT/Interest Incurred N/A N/A N/A 4.1x 8.5x Adjusted EBITDA/Interest Incurred N/A N/A 0.7x 4.5x 9.1x Financial Statistics: Average Net Debt/Capitalization (3) 90.8% 68.9% 56.3% 49.0% 44.5% Homebuilding Inventory Turnover (4) 1.0x 1.2x 1.2x 1.4x 1.5x Homebuilding Gross Margin (5) 9.2% 6.7% 15.1% 23.1% 26.4% Adjusted EBITDA Margin (6) N/A N/A 2.8% 12.3% 17.5% Return on Average Common Equity N/A N/A N/A 8.4% 33.5% Operating Statistics: Net Sales Contracts – Homes 5,227 6,546 11,006 13,761 16,831 Net Sales Contracts – Dollars$ 1,428,307 $ 1,873,795 $ 3,633,180 $ 4,615,228 $ 5,579,946 Deliveries – Homes 5,362 10,577 13,564 17,940 16,274 Deliveries – Dollars $ 1,522,469 $ 3,177,853 $ 4,581,375 $ 5,903,387 $ 5,177,655 Backlog – Homes 1,772 1,907 5,938 8,496 12,591 Backlog – Dollars $ 559,553 $ 646,187 $ 2,009,891 $ 2,923,550 $ 4,058,222
(1) (Loss) Income Before Income Taxes Excluding Land-Related Charges, Intangible Impairments and Gain on Extinguishment of Debt is not a financial measure calculated in accordance with generally accepted accounting principals (GAAP). The most directly comparable GAAP financial measure is (Loss) Income Before Income Taxes. The reconciliation of (Loss) Income Before Income Taxes Excluding Land-Related Charges, Intangible Impairments and Gain on Extinguishment of Debt to (Loss) Income Before Income Taxes is presented on page 5 of this Annual Report. (Loss) Income Before Income Taxes Excluding Land-Related Charges, Intangible Impairments and Gain on Extinguishment of Debt should be considered in addition to, but not as a substitute for, (loss) income before income taxes, net (loss) income and other measures of financial performance prepared in accordance with GAAP that are presented on the financial statements included in the Company's reports filed with the Securities and Exchange Commission (SEC). Additionally, our calculation of (Loss) Income Before Income Taxes Excluding Land-Related Charges, Intangible Impairments and Gain on Extinguishment of Debt may be different than the calculation used by other companies, and, therefore, comparability may be affected. (2) Adjusted EBIT and Adjusted EBITDA are non-GAAP financial measures. The most directly comparable GAAP financial measure is Net (Loss) Income. The reconciliation of Adjusted EBIT and Adjusted EBITDA to Net (Loss) Income is presented on page 5 of this Annual Report. Adjusted EBIT and Adjusted EBITDA should be considered in addition to, but not as a substitute for, (loss) income before income taxes, net (loss) income, cash flow provided by (used in) operating activities and other measures of financial performance prepared in accordance with GAAP that are presented on the financial statements included in the Company's reports filed with the SEC. Because some analysts and companies may not calculate Adjusted EBIT and Adjusted EBITDA in the same manner as Hovnanian Enterprises, the Adjusted EBIT and Adjusted EBITDA information presented above may not be comparable to similar presentations by others. (3) Debt excludes CMOs, mortgage warehouse debt and non-recourse debt and is net of cash balances. Calculated based on a five quarter average. (4) Derived by dividing total home and land cost of sales by the two-year average homebuilding inventory, excluding inventory not owned. (5) Excludes interest related to homes sold. (6) Adjusted EBITDA Margin is derived by dividing Total Revenues by Adjusted EBITDA. This summary should be read in conjunction with the related consolidated financial statements and accompanying notes included elsewhere in this Annual Report.
4 Reconciliation of (Loss) Income Before Income Taxes Excluding Land-Related Charges, Intangible Impairments and Gain on Extinguishment of Debt to (Loss) Income Before Income Taxes
Years Ended October 31, (Dollars In Thousands) 2009 2008 2007 2006 2005 (Loss) Income Before Income Taxes$ (672,019) $ (1,168,048) $ (646,966) $ 233,106 $ 780,585 Inventory Impairment Loss and Land Option Write-Offs 659,475 710,120 457,773 336,204 5,360 Goodwill and Definite Life Intangible Impairments – 35,363 135,206 4,241 – Unconsolidated Joint Venture Investment, Intangible and 43,611 31,242 33,100 7,809 – Land-Related Charges Gain on Extinguishment of Debt (410,185) – – – – (Loss) Income Before Income Taxes Excluding Land-Related Charges, Intangible Impairments and Gain on $ (379,118) $ (391,323) $ (20,887) $ 581,360 $ 785,945 Extinguishment of Debt
Reconciliation of Adjusted EBIT and Adjusted EBITDA to Net (Loss) Income
Years Ended October 31, (Dollars In Thousands) 2009 2008 2007 2006 2005 Net (Loss) Income$ (716,712) $ (1,124,590) $ (627,119) $ 149,533 $ 471,847 Income Tax Provision (Benefit) 44,693 (43,458) (19,847) 83,573 308,738 Interest Expense 200,469 176,336 141,754 111,944 89,721 EBIT (471,550) (991,712) (505,212) 345,050 870,306 Inventory Impairment Loss and Land Option Write-offs 659,475 710,120 457,773 336,204 5,360 (Gain) on Extinguishment of Debt (410,185) – – – – Adjusted EBIT$ (222,260) $ (281,592) $ (47,439) $ 681,254 $ 875,666 EBIT (471,550) (991,712) (505,212) 345,050 870,306 Depreciation 18,527 18,426 18,283 14,884 9,076 Amortization of Debt Costs 5,976 3,963 2,576 2,293 2,012 Amortization and Impairment of Intangibles and Goodwill – 36,883 162,124 54,821 46,084 Other Amortization – – – – 528 EBITDA (447,047) (932,440) (322,229) 417,048 928,006 Inventory Impairment Loss and Land Option Write-offs 659,475 710,120 457,773 336,204 5,360 (Gain) on Extinguishment of Debt (410,185) – – – – Adjusted EBITDA$ (197,757) $ (222,320) $ 135,544 $ 753,252 $ 933,366
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
Form 10-K
⌧ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended OCTOBER 31, 2009