Hovnanian Enterprises Reports Fiscal 2017 Third Quarter Results

Operating Results Consistent with Guidance
Contracts per Community Increased 11.9% Offsetting the Impact of Community Count Decline

RED BANK, N.J., Sept. 07, 2017 (GLOBE NEWSWIRE) -- Hovnanian Enterprises, Inc. (NYSE:HOV), a leading national homebuilder, reported results for its fiscal third quarter and nine months ended July 31, 2017.

“We continued to see strength in the underlying housing market and the 11.9% increase in our contracts per community during the third quarter of 2017 compared to last year’s third quarter reflected this trend,” stated Ara K. Hovnanian, Chairman of the Board, President and Chief Executive Officer. “While deliveries and revenues were lower than last year as a result of a decreased community count, the strong sales and our backlog as of July 31, 2017 should lead to a profitable fourth quarter.”

“Near the end of the third quarter, we successfully refinanced and extended the maturities of our secured debt that was scheduled to come due in the fall of 2018 and 2020 with $440 million of secured debt with maturities in July 2022 and $400 million of secured debt with maturities in July 2024. The refinancing, which has tremendous long term benefits, resulted in a $42 million loss on early extinguishment of debt. When added to prior period results, this created a three-year cumulative loss, which led to a $294 million non-cash increase in the valuation allowance for our deferred tax assets. Our third quarter operating results were consistent with our prior guidance.”

“Fortunately, less than ten homes within two of our 45 Houston communities experienced flood damage from Hurricane Harvey. The storm damage and construction delays caused by the storm will reduce our fourth quarter deliveries. In spite of the temporary impact from Hurricane Harvey, the long-term prospects for the Houston market remain strong.”

“As we move forward with the benefit of longer term financing, we remain focused on reloading our land position and returning to consistent profitability. While this has been a long and arduous recovery, we are confident that we can successfully deploy our strategies and remain on track for long term success in the future,” concluded Mr. Hovnanian.

RESULTS FOR THE THREE-MONTH AND NINE-MONTH PERIODS ENDED JULY 31, 2017:

• Primarily as a result of a 19.0% decline in community count and a conversion of 17 communities to joint ventures since the third quarter of fiscal 2016, total revenues decreased 17.4% to $592.0 million in the third quarter of fiscal 2017, compared with $716.9 million in the third quarter of fiscal 2016. For the nine months ended July 31, 2017, total revenues decreased 11.2% to $1.73 billion compared with $1.95 billion in the first nine months of the prior year.
   
• Homebuilding revenues for unconsolidated joint ventures increased 101.0% to $62.6 million in the third quarter of fiscal 2017, compared with $31.1 million in the third quarter of fiscal 2016. For the nine months ended July 31, 2017, homebuilding revenues for unconsolidated joint ventures increased 177.4% to $214.1 million compared with $77.2 million in the first nine months of the prior year.
   
• For the third quarter of 2017, total SG&A decreased by $5.4 million, or 8.0%, year over year. Total SG&A was $61.2 million, or 10.3% of total revenues, for the third quarter ended July 31, 2017 compared with $66.6 million, or 9.3% of total revenues, in last year’s third quarter. For the first nine months of 2017, total SG&A decreased by $16.5 million, or 8.3%, year over year. Total SG&A decreased to $182.8 million, or 10.6% of total revenues, for the first nine months of fiscal 2017 compared with $199.4 million, or 10.2% of total revenues, in the first nine months of the prior fiscal year.
   
• Interest incurred (some of which was expensed and some of which was capitalized) decreased by 3.0% to $39.1 million for the third quarter of fiscal 2017 compared with $40.3 million in the same quarter one year ago. For the nine months ended July 31, 2017, interest incurred decreased 7.5% to $116.9 million compared with $126.5 million during the same nine-month period last year.
   
• Total interest expense decreased 16.7% to $42.9 million in the third quarter of fiscal 2017 compared with $51.6 million in the third quarter of fiscal 2016. Total interest expense decreased 6.4% to $126.5 million for the first nine months of fiscal 2017 compared with $135.2 million in the first nine months of fiscal 2016.
   
• Homebuilding gross margin percentage, after interest expense and land charges included in cost of sales, was 12.8% for the third quarter of fiscal 2017 compared with 13.1% in the prior year’s third quarter. During the first nine months of fiscal 2017, this homebuilding gross margin percentage was 12.9% compared with 11.9% in the same period of the previous year.
   
• Homebuilding gross margin percentage, before interest expense and land charges included in cost of sales, was 16.8% for the third quarter of fiscal 2017 compared with 16.9% in the prior year’s third quarter. During the first nine months of fiscal 2017, this homebuilding gross margin percentage was 16.8% compared with 16.5% in the same period one year ago.
   
• Loss before income taxes for the quarter ended July 31, 2017 was $50.2 million, which included a $42.3 million loss on extinguishment of debt, compared to income before income taxes of $1.1 million during the third quarter of 2016. For the first nine months of fiscal 2017, the loss before income taxes was $57.5 million, which included a $34.9 million loss on extinguishment of debt, compared to a loss before income taxes of $29.7 million during the first nine months of fiscal 2016.
   
• Loss before income taxes, excluding land-related charges and loss on extinguishment of debt, for the quarter ended July 31, 2017 was $3.7 million compared to a profit of $2.7 million during the third quarter of 2016. For the first nine months of fiscal 2017, the loss before income taxes, excluding land-related charges and loss on extinguishment of debt, was $13.4 million compared to a loss of $6.8 million during the first nine months of fiscal 2016.
   
• The loss on extinguishment of debt of $42.3 million during the third quarter ended July 31, 2017 created a three-year cumulative loss, which resulted in a $294.0 million non-cash increase in the valuation allowance for our deferred tax assets.
   
• Total income taxes for the third quarter and nine months ended July 31, 2017 were $287.0 million and $286.5 million, respectively, primarily as a result of the $294.0 million non-cash increase in the valuation allowance for our deferred tax assets.
   
• Net loss was $337.2 million, or $2.28 per common share, in the third quarter of fiscal 2017, including the $294.0 million increase in the valuation allowance for our deferred tax assets, compared with a net loss of $0.5 million, or $0.00 per common share, during the same quarter a year ago. For the nine months ended July 31, 2017, the net loss was $344.0 million, or $2.33 per common share, including the $294.0 million increase in the valuation allowance for our deferred tax assets, compared with a net loss of $25.1 million, or $0.17 per common share, in the first nine months of fiscal 2016.
   
• Consolidated contracts per community increased 11.9% to 9.4 contracts per community for the third quarter of fiscal 2017 compared with 8.4 contracts per community in the third quarter of fiscal 2016. Contracts per community, including unconsolidated joint ventures, increased 15.0% to 9.2 contracts per community for the quarter ended July 31, 2017 compared with 8.0 contracts, including unconsolidated joint ventures, per community in last year’s third quarter.
   
• For August 2017, consolidated contracts per community increased to 3.0 contracts per community compared to 2.5 contracts per community for the same month one year ago. During August 2017 and August 2016, the number of consolidated contracts was 423 homes and the dollar value of contracts decreased 5.7% to $160.3 million in August 2017 compared with $170.0 million for August 2016.
   
• For August 2017, contracts per community, including unconsolidated joint ventures, increased to 3.0 contracts per community compared to 2.3 contracts per community for the same month one year ago. During August 2017, the number of contracts, including unconsolidated joint ventures, increased 10.8% to 492 homes from 444 homes in August 2016 and the dollar value of contracts, including unconsolidated joint ventures, increased 12.6% to $203.5 million in August 2017 compared with $180.8 million for August 2016.
   
• As of the end of the third quarter of fiscal 2017, community count, including unconsolidated joint ventures, decreased 13.5% to 167 communities compared with 193 communities at July 31, 2016. Consolidated community count decreased 19.0% to 141 communities as of July 31, 2017 from 174 communities at the end of the prior year’s third quarter.
   
• For the third quarter ended July 31, 2017, the number of contracts, including unconsolidated joint ventures, decreased 0.3% to 1,533 homes from 1,537 homes for the same quarter last year. The number of consolidated contracts, during the third quarter of fiscal 2017, decreased 10.0% to 1,321 homes compared with 1,467 homes during the third quarter of 2016.
   
• During the first nine months of fiscal 2017, the number of contracts, including unconsolidated joint ventures, was 4,593 homes, a decrease of 8.0% from 4,991 homes during the first nine months of fiscal 2016. The number of consolidated contracts, during the nine-month period ended July 31, 2017, decreased 15.1% to 4,084 homes compared with 4,810 homes in the same period of the previous year.
   
• The dollar value of contract backlog, including unconsolidated joint ventures, as of July 31, 2017, was $1.29 billion, a decrease of 12.9% compared with $1.48 billion as of July 31, 2016. The dollar value of consolidated contract backlog, as of July 31, 2017, decreased 20.4% to $1.04 billion compared with $1.31 billion as of July 31, 2016.
   
• For the quarter ended July 31, 2017, deliveries, including unconsolidated joint ventures, decreased 9.8% to 1,467 homes compared with 1,627 homes during the third quarter of fiscal 2016. Consolidated deliveries were 1,350 homes for the third quarter of fiscal 2017, a 14.2% decrease compared with 1,574 homes during the same quarter a year ago.
   
• For the nine months ended July 31, 2017, deliveries, including unconsolidated joint ventures, decreased 8.0% to 4,362, homes compared with 4,740 homes in the first nine months of the prior year. Consolidated deliveries were 3,998 homes in the first nine months of fiscal 2017, a 13.0% decrease compared with 4,594 homes in the same period in fiscal 2016.
   
• The consolidated contract cancellation rate for the three months ended July 31, 2017 decreased to 19%, compared with 21% in the third quarter of the prior year. The contract cancellation rate, including unconsolidated joint ventures, was 20% in the third quarter of fiscal 2017 compared with 22% in the third quarter of fiscal 2016.
   
• The valuation allowance was $922.0 million as of July 31, 2017, after a non-cash increase of $294.0 million during the third quarter of fiscal 2017. The valuation allowance is a non-cash reserve against the tax assets for GAAP purposes. For tax purposes, the tax deductions associated with the tax assets may be carried forward for 20 years from the date the deductions were incurred.

LIQUIDITY AND INVENTORY AS OF JULY 31, 2017:  

• Total liquidity at the end of the third quarter of fiscal 2017 was $288.2 million.
   
• During the third quarter of fiscal 2017, land and land development spending was $149.8 million compared with $132.3 million in last year’s third quarter and up from the 2017 second quarter’s spend of $99.7 million. For the nine months ended July 31, 2017, land and land development spending was $439.9 million compared with $435.6 million for the same period one year ago.
   
• The total land position, including unconsolidated joint ventures, was 31,143 lots, consisting of 14,467 lots under option and 16,676 owned lots, as of July 31, 2017, compared with a total of 32,125 lots as of July 31, 2016.
   
• In the third quarter of fiscal 2017, approximately 2,700 lots were put under option or acquired in 34 communities, including unconsolidated joint ventures.

WEBCAST INFORMATION:

Hovnanian Enterprises will webcast its fiscal 2017 third quarter financial results conference call at 11:00 a.m. E.T. on Thursday, September 7, 2017. 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 Red Bank, New Jersey. The Company 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 names K. Hovnanian^® Homes, Brighton Homes^® and Parkwood Builders. As the developer of K. Hovnanian’s^® Four Seasons communities, the Company is also one of the nation’s largest builders of active lifestyle communities.

Additional information on Hovnanian Enterprises, Inc., including a summary investment profile and the Company’s 2016 annual report, 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 loss. The reconciliation for historical periods of EBIT, EBITDA and Adjusted EBITDA to net loss is presented in a table attached to this earnings release.

Homebuilding gross margin, before costs of sales interest expense and land charges, and homebuilding gross margin percentage, before costs 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 costs of sales interest expense and land charges, and homebuilding gross margin percentage, before costs 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. 

(Loss) 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 (Loss) Income Before Income Taxes. The reconciliation for historical periods of (Loss) Income Before Income Taxes Excluding Land-Related Charges and Loss on Extinguishment of Debt to (Loss) Income Before Income Taxes is presented in a table attached to this earnings release.

Total liquidity is comprised of $278.5 million of cash and cash equivalents, $1.7 million of restricted cash required to collateralize letters of credit and $8.0 million of availability under the unsecured revolving credit facility as of July 31, 2017.

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. 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 sustained homebuilding downturn; (2) adverse weather and other environmental conditions and natural disasters; (3) levels of indebtedness and restrictions on the Company’s operations and activities imposed by the agreements governing the Company’s outstanding indebtedness; (4) the Company's sources of liquidity; (5) changes in credit ratings; (6) changes in market conditions and seasonality of the Company’s business; (7) the availability and cost of suitable land and improved lots; (8) shortages in, and price fluctuations of, raw materials and labor; (9) 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; (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) operations through joint ventures with third parties; (13) government regulation, including regulations concerning development of land, the home building, sales and customer financing processes, tax laws and the environment; (14) product liability litigation, warranty claims and claims made by mortgage investors; (15) levels of competition; (16) availability and terms of financing to the Company; (17) successful identification and integration of acquisitions; (18) significant influence of the Company’s controlling stockholders; (19) availability of net operating loss carryforwards; (20) utility shortages and outages or rate fluctuations; (21) geopolitical risks, terrorist acts and other acts of war; (22) increases in cancellations of agreements of sale; (23) loss of key management personnel or failure to attract qualified personnel; (24) information technology failures and data security breaches; (25) legal claims brought against us and not resolved in our favor; and (26) 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, 2016 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.

(Financial Tables Follow)

Contact:

J. Larry Sorsby
Executive Vice President & CFO
732-747-7800

Jeffrey T. O’Keefe
Vice President, Investor Relations
732-747-7800