Hovnanian Enterprises Reports Fiscal 2022 Third Quarter Results

81% Year-over-Year Increase in Pretax Profit
Gross Margin Percentage Increased 390 Basis Points Year-over-Year
Interest Expense as Percent of Revenue Declined 140 Basis Points Year-over-Year
Backlog Cancellation Rate Increased to 8% From 6% Last Year
Consolidated Contract Dollars Declined 23% Year-over-Year
Increased Full Year EBITDA, Gross Margin and Adjusted Pretax Profit Guidance

MATAWAN, N.J., Sept. 01, 2022 (GLOBE NEWSWIRE) -- Hovnanian Enterprises, Inc. (NYSE: HOV), a leading national homebuilder, reported results for its fiscal third quarter and nine-month period ended July 31, 2022.

RESULTS FOR THE THREE-MONTH AND NINE-MONTH PERIODS ENDED JULY 31, 2022:

• Total revenues increased 11.1% to $767.6 million in the third quarter of fiscal 2022, compared with $690.7 million in the same quarter of the prior year. For the nine months ended July 31, 2022, total revenues were $2.04 billion compared with $1.97 billion in the same period during the prior year.
  
  
• Homebuilding gross margin percentage, after cost of sales interest expense and land charges, increased 390 basis points to 23.1% for the three months ended July 31, 2022 compared with 19.2% during the same period a year ago. During the first nine months of fiscal 2022, homebuilding gross margin percentage, after cost of sales interest expense and land charges, was 22.3%, up 400 basis points, compared with 18.3% during the same period a year ago.
  
  
• Homebuilding gross margin percentage, before cost of sales interest expense and land charges, increased 420 basis points to 26.3% during the fiscal 2022 third quarter compared with 22.1% in last year’s third quarter. For the nine months ended July 31, 2022, homebuilding gross margin percentage, before cost of sales interest expense and land charges, was 25.3%, up 390 basis points, compared with 21.4% in the same period of the previous year.
  
  
• Total SG&A was $74.9 million, or 9.8% of total revenues (excluding $0.3 million of incremental phantom stock expense, total SG&A would have been $74.6 million or 9.7% of total revenues), in the fiscal 2022 third quarter compared with $60.3 million, or 8.7% of total revenues (excluding $6.7 million of incremental phantom stock benefit, total SG&A would have been $67.0 million or 9.7% of total revenues), in the previous year’s third quarter. During the first nine months of fiscal 2022, total SG&A was $215.3 million, or 10.6% of total revenues (there was no incremental phantom stock expense), compared with $206.6 million, or 10.5% of total revenues (excluding $10.8 million of incremental phantom stock expense, total SG&A would have been $195.8 million or 9.9% of total revenues), in the same period of the prior fiscal year.
  
  
• Total interest expense as a percent of total revenues improved by 140 basis points to 4.2% for the third quarter of fiscal 2022 compared with 5.6% during the third quarter of fiscal 2021. For the first nine months of fiscal 2022, total interest expense as a percent of total revenues improved 170 basis points to 4.6% compared with 6.3% in the first nine months of the previous fiscal year.
  
  
• Income before income taxes for the third quarter of fiscal 2022 was $111.9 million, up 81.1%, compared with $61.8 million in the third quarter of the prior fiscal year. For the first nine months of fiscal 2022, income before income taxes increased 103.1% to $228.3 million compared with $112.4 million during the same period of the prior fiscal year.
  
  
• Net income was $82.6 million, or $10.82 per diluted common share, for the three months ended July 31, 2022 compared with net income of $47.7 million, or $6.72 per diluted common share, in the third quarter of the previous fiscal year. For the first nine months of fiscal 2022, net income was $169.9 million, or $21.77 per diluted common share, compared with net income, including the $468.6 million benefit of the valuation allowance reduction, of $555.3 million, or $78.51 per diluted common share, in the same period during fiscal 2021.
  
  
• Consolidated contract dollars in the third quarter of fiscal 2022 declined 23.2% to $467.9 million (799 homes) compared with $609.1 million (1,211 homes) in the same quarter last year. Contract dollars, including domestic unconsolidated joint ventures⁽¹⁾, for the three months ended July 31, 2022 declined to $549.5 million (914 homes) compared with $716.2 million (1,376 homes) in the third quarter of fiscal 2021.
  
  
• Consolidated contract dollars in the first nine months of fiscal 2022 were $2.13 billion (3,875 homes) compared with $2.23 billion (4,760 homes) in the same period last year. Contract dollars, including domestic unconsolidated joint ventures⁽¹⁾, for the nine months ended July 31, 2022 were $2.40 billion (4,262, homes) compared with $2.55 billion (5,298 homes) in the first nine months of fiscal 2021.
  
  

• Consolidated contracts per community were 7.4 for the third quarter ended July 31, 2022 compared to 11.6 contracts per community in last year’s third quarter. Contracts per community, including domestic unconsolidated joint ventures, decreased to 7.4 contracts per community for the third quarter of fiscal 2022 compared with 11.5 contracts per community for the third quarter of fiscal 2021.
  
  
• As of the end of the third quarter of fiscal 2022, consolidated community count increased to 108 communities, compared with 104 communities on July 31, 2021. Community count, including domestic unconsolidated joint ventures, was 124 as of July 31, 2022, compared with 120 communities at the end of the previous year’s third quarter.
  
  
• The dollar value of consolidated contract backlog, as of July 31, 2022, increased 2.4% to $1.79 billion compared with $1.75 billion as of July 31, 2021. The dollar value of contract backlog, including domestic unconsolidated joint ventures, as of July 31, 2022, increased 4.1% to $2.07 billion compared with $1.99 billion as of July 31, 2021.
  
  
• Sale of home revenues increased 11.1% to $736.7 million (1,412 homes) in the fiscal 2022 third quarter compared with $663.3 million (1,498 homes) in the previous year’s third quarter. During the fiscal 2022 third quarter, sale of homes revenues, including domestic unconsolidated joint ventures, increased to $815.0 million (1,533 homes) compared with $765.5 million (1,677 homes) during the third quarter of fiscal 2021.
  
  
• For the first nine months of fiscal 2022, sale of homes revenues were $1.97 billion (3,939 homes) compared with $1.89 billion (4,501) homes in the first nine months of the previous year. For the first nine months of fiscal 2022, sale of homes revenues, including domestic unconsolidated joint ventures, were $2.20 billion (4,311 homes) compared with $2.16 billion (4,954 homes) during the same period of fiscal 2021.
  
  
• The beginning backlog cancellation rate for consolidated contracts and for contracts including domestic unconsolidated joint ventures were both 8% for the third quarter ended July 31, 2022 compared with 6% for both in the fiscal 2021 third quarter. The historical average beginning backlog cancellation rate since fiscal 2013 is 13%.
  
  
• Primarily due to lower gross contracts, as a result of a sharp rise in mortgage rates since January, year-over-year home price increases, record high inflation levels and fears of an economic recession, the gross contract cancellation rate for consolidated contracts increased to 27% for the third quarter ended July 31, 2022 compared with 16% in the fiscal 2021 third quarter. The gross contract cancellation rate for contracts including domestic unconsolidated joint ventures was 26% for the third quarter of fiscal 2022 compared with 15% in the third quarter of the prior year.

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

• During the third quarter of fiscal 2022, land and land development spending was $204.5 million compared with $177.6 million in the same quarter one year ago. For the first nine months of fiscal 2022, land and land development spending was $554.1 million compared with $531.2 million in the same period one year ago.
  
  
• After early retirement of $100 million of senior secured notes in the second quarter of fiscal 2022 in addition to the $181 million of senior secured notes retired in fiscal 2021, total liquidity as of July 31, 2022 was $357.4 million, well above our targeted liquidity range of $170 million to $245 million.
  
  
• In the third quarter of fiscal 2022, approximately 1,900 lots were put under option or acquired in 27 consolidated communities.
  
  
• As of July 31, 2022, the total controlled consolidated lots were 31,913 an increase compared with 31,002 lots at the end of the third quarter of the previous year and a decrease compared to 33,501 lots on April 30, 2022. Based on trailing twelve-month deliveries, the current position equaled a 5.7 years’ supply.
  
  
• Amended our existing $125 million senior secured revolving credit agreement extending the maturity date to June 30, 2024, subject to the satisfaction of customary conditions in respect of the collateral securing the borrowings under the revolving credit facility. The revolving credit facility was undrawn as of July 31, 2022.
  

FINANCIAL GUIDANCE⁽²⁾:

The Company is increasing its gross margin, EBITDA and pretax profit guidance for the full year of fiscal 2022. Financial guidance below assumes no adverse changes in current market conditions, including further deterioration in the supply chain, material increase in mortgage rates, or increased inflation and excludes further impact to SG&A expenses from phantom stock expense related solely to stock price movements from the closing price of $48.51 at July 29, 2022.

• For fiscal 2022, total revenues are expected to be between $2.80 billion and $3.00 billion, gross margin, before cost of sales interest expense and land charges, is expected to be between 24.0% and 26.0%, adjusted pretax income is expected to be between $310 million and $325 million, adjusted EBITDA is expected to be between $460 million and $475 million and fully diluted earnings per share is expected to be between $32.00 and $33.50. At the midpoint of our guidance, we anticipate our shareholders' equity to increase year-over-year by approximately 120% at October 31, 2022.
  
  
• Continue to focus on strengthening our balance sheet and anticipate reducing senior secured notes by an additional $100 million during the fourth quarter of fiscal 2022.
  

⁽²⁾The Company cannot provide a reconciliation between its non-GAAP projections and the most directly comparable GAAP measures without unreasonable efforts because it is unable to predict with reasonable certainty the ultimate outcome of certain significant items required for the reconciliation. These items include, but are not limited to, land-related charges, inventory impairment loss and land option write-offs and loss (gain) on extinguishment of debt. These items are uncertain, depend on various factors and could have a material impact on GAAP reported results.

COMMENTS FROM MANAGEMENT:

“We are pleased that our third quarter adjusted pretax income exceeded our guidance, that Standard and Poor’s recognized our improved balance sheet and financial performance by upgrading our credit rating and that we are raising our full 2022 year guidance,” stated Ara K. Hovnanian, Chairman of the Board, President and Chief Executive Officer. “Beginning in May of 2022 home demand slowed and continued to slow further through the summer months. We believe this striking shift in homebuyers’ sentiment is due to the sharp rise in mortgage rates since January, year-over-year home price increases, record high inflation levels and fears of an economic recession. In response, to assist our homebuyers in lowering their monthly payments, we began offering concessions and incentives, including buying down mortgage interest rates; however, there has been little downward movement in base home prices for us or our competitors.”

“We are encouraged that website visits and leads have improved in recent weeks and remain above pre-Covid homebuying surge levels. This clearly demonstrates potential homebuyers continue to have strong interest in purchasing a new home. However, we believe consumers have temporarily paused finalizing their home buying decisions until uncertainty surrounding current economic and market conditions dissipates. While it is difficult to predict how long these factors will cause some homebuyers to delay their purchase decision, we remain confident that rising rents, combined with low supply of homes for sale will ultimately drive increased demand for new homes,” concluded Mr. Hovnanian.

WEBCAST INFORMATION:

Hovnanian Enterprises will webcast its fiscal 2022 third quarter financial results conference call at 11:00 a.m. E.T. on Thursday, September 1, 2022. The webcast can be accessed live through the “Investor Relations” section of Hovnanian Enterprises’ website at http://www.khov.com. For those who are not available to listen to the live webcast, an archive of the broadcast will be available under the “Past Events” section of the Investor Relations page on the Hovnanian website at http://www.khov.com. The archive will be available for 12 months.

ABOUT HOVNANIAN ENTERPRISES, INC.:

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

Additional information on Hovnanian Enterprises, Inc. can be accessed through the “Investor Relations” section of the Hovnanian Enterprises’ website at http://www.khov.com. To be added to Hovnanian's investor e-mail list, please send an e-mail to IR@khov.com or sign up at http://www.khov.com.

NON-GAAP FINANCIAL MEASURES:

Consolidated earnings before interest expense and income taxes (“EBIT”) and before depreciation and amortization (“EBITDA”) and before inventory impairment loss and land option write-offs and loss on extinguishment of debt (“Adjusted EBITDA”) are not U.S. generally accepted accounting principles (GAAP) financial measures. The most directly comparable GAAP financial measure is net income. The reconciliation for historical periods of EBIT, EBITDA and Adjusted EBITDA to net income is presented in a table attached to this earnings release.

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

Adjusted pretax income, which is defined as income before income taxes excluding land-related charges and loss on extinguishment of debt is a non-GAAP financial measure. The most directly comparable GAAP financial measure is income before income taxes. The reconciliation for historical periods of adjusted pretax income to income before income taxes is presented in a table attached to this earnings release.

SG&A excluding the impact of incremental phantom stock expense is a non-GAAP financial measure. The most directly comparable GAAP financial measure is SG&A, to which SG&A excluding the impact of incremental phantom stock expense is reconciled herein.

Total liquidity is comprised of $225.1 million of cash and cash equivalents, $7.3 million of restricted cash required to collateralize letters of credit and $125.0 million availability under the senior secured revolving credit facility as of July 31, 2022.

FORWARD-LOOKING STATEMENTS

All statements in this press release that are not historical facts should be considered as “Forward-Looking Statements” within the meaning of the “Safe Harbor” provisions of the Private Securities Litigation Reform Act of 1995. Such statements involve known and unknown risks, uncertainties and other factors that may cause actual results, performance or achievements of the Company to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. Such forward-looking statements include but are not limited to statements related to the Company’s goals and expectations with respect to its financial results for future financial periods and statements regarding demand for homes and underlying factors. Although we believe that our plans, intentions and expectations reflected in, or suggested by, such forward-looking statements are reasonable, we can give no assurance that such plans, intentions or expectations will be achieved. By their nature, forward-looking statements: (i) speak only as of the date they are made, (ii) are not guarantees of future performance or results and (iii) are subject to risks, uncertainties and assumptions that are difficult to predict or quantify. Therefore, actual results could differ materially and adversely from those forward-looking statements as a result of a variety of factors. Such risks, uncertainties and other factors include, but are not limited to, (1) changes in general and local economic, industry and business conditions and impacts of a significant homebuilding downturn; (2) shortages in, and price fluctuations of, raw materials and labor, including due to geopolitical events, changes in trade policies, including the imposition of tariffs and duties on homebuilding materials and products and related trade disputes with and retaliatory measures taken by other countries; (3) the outbreak and spread of COVID-19 and the measures that governments, agencies, law enforcement and/or health authorities implement to address it, as well as continuing macroeconomic effects of the pandemic; (4) adverse weather and other environmental conditions and natural disasters; (5) the seasonality of the Company’s business; (6) the availability and cost of suitable land and improved lots and sufficient liquidity to invest in such land and lots; (7) reliance on, and the performance of, subcontractors; (8) regional and local economic factors, including dependency on certain sectors of the economy, and employment levels affecting home prices and sales activity in the markets where the Company builds homes; (9) increases in cancellations of agreements of sale; (10) fluctuations in interest rates and the availability of mortgage financing; (11) changes in tax laws affecting the after-tax costs of owning a home; (12) legal claims brought against us and not resolved in our favor, such as product liability litigation, warranty claims and claims made by mortgage investors; (13) levels of competition; (14) utility shortages and outages or rate fluctuations; (15) information technology failures and data security breaches; (16) negative publicity; (17) high leverage and restrictions on the Company’s operations and activities imposed by the agreements governing the Company’s outstanding indebtedness; (18) availability and terms of financing to the Company; (19) the Company’s sources of liquidity; (20) changes in credit ratings; (21) government regulation, including regulations concerning development of land, the home building, sales and customer financing processes, tax laws and the environment; (22) operations through unconsolidated joint ventures with third parties; (23) significant influence of the Company’s controlling stockholders; (24) availability of net operating loss carryforwards; (25) loss of key management personnel or failure to attract qualified personnel; (26) increases in inflation; and (27) certain risks, uncertainties and other factors described in detail in the Company’s Annual Report on Form 10-K for the fiscal year ended October 31, 2021 and the Company’s Quarterly Reports on Form 10-Q for the quarterly periods during fiscal 2022 and subsequent filings with the Securities and Exchange Commission. Except as otherwise required by applicable securities laws, we undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, changed circumstances or any other reason.

HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands)

(1) Derived from the audited balance sheet as of October 31, 2021

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