HOVNANIAN ENTERPRISES, INC. Item 2.02. Results of Operations and Financial Condition.
Hovnanian Enterprises, Inc. (the "Company" or "Hovnanian") is providing selected preliminary financial results for its fiscal second quarter endedApril 30, 2020 as follows.
Selected Preliminary Second Quarter Financial Results
HOVNANIAN ENTERPRISES, INC. (CONSOLIDATED) (UNAUDITED) Net Contracts (1) Deliveries Contract Backlog (at month and quarter end) % % % 2020 2019 Change 2020 2019 Change 2020 2019 Change February (monthly) Consolidated Home 647 449 44.1 % 376 300 25.3 % 2,492 1,942 28.3 % March (monthly) Consolidated Home 463 553 (16.3 )% 446 341 30.8 % 2,509 2,154 16.5 % April (monthly) Consolidated Home 377 544 (30.7 )% 503 444 13.3 % 2,383 2,254 5.7 % SECOND QUARTER CONSOLIDATED ended April 30, Home 1,487 1,546 (3.8 )% 1,325 1,085 22.1 % 2,383 2,254 5.7 % Notes:
(1) Contracts are defined as new contracts signed during the period for the purchase of homes, less cancellations of prior contracts.
Total with UJVs (ex.KSA)(2)(3)
HOVNANIAN ENTERPRISES, INC. (UNAUDITED) Net Contracts (1) Deliveries Contract Backlog (at month and quarter end) % % % 2020 2019 Change 2020 2019 Change 2020 2019 Change February (monthly) Total with UJVs (ex. KSA) Home 721 519 38.9 % 426 339 25.7 % 2,852 2,317 23.1 % March (monthly) Total with UJVs (ex. KSA) Home 531 617 (13.9 )% 501 401 24.9 % 2,882 2,533 13.8 % April (monthly) Total with UJVs (ex. KSA) Home 390 605 (35.5 )% 586 539 8.7 % 2,686 2,599 3.3 % SECOND QUARTER TOTAL with UJVs (ex. KSA) ended April 30, Home 1,642 1,741 (5.7 )% 1,513 1,279 18.3 % 2,686 2,599 3.3 % Notes:
(1) Contracts are defined as new contracts signed during the period for the
purchase of homes, less cancellations of prior contracts.
(2) KSA is our single community unconsolidated joint venture in the Kingdom of
(3) Includes our unconsolidated homebuilding joint ventures for the period. We
provide this data as a supplement to our consolidated results as an indicator
of the volume managed in our unconsolidated homebuilding joint ventures. Our
proportionate share of the income or loss of unconsolidated homebuilding and
land development joint ventures is reflected as a separate line item in our
consolidated financial statements under "Income (loss) from unconsolidated
joint ventures."
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Second Quarter Results COVID-19 was declared a global pandemic inMarch 2020 , and it continues to have a significant impact on global andU.S. economies. The pandemic and related government responses thereto began to impact our business inMarch 2020 . Prior to the escalation of the pandemic, the Company was executing on its growth plans, and its fiscal 2020 contract results were well ahead of the same period last year. New home sales began to slow substantially, however, starting in mid-March. Since then, the Company's weekly consolidated sales pace has rebounded from the low in mid-April of approximately 42 homes (without taking into account joint ventures) to a pace of approximately 145 homes over the most recent two weeks, and May month-to-date contracts are ahead of the same period last year. Hovnanian achieved the higher 145 home sales pace without adjusting concessions or home prices in most communities from pre-COVID levels. Despite the effects of the pandemic, the vast majority of the Company's customers in backlog closed on their homes. While COVID-19 had an adverse impact on the Company's operations for the fiscal second quarter, deliveries were still up significantly, both for the quarter and for the month of April, as compared to the prior year periods. Taking into account the increase in land and land development spend from$110 million in last year's second quarter to$115 million in the fiscal 2020 second quarter, Hovnanian's total liquidity as ofApril 30, 2020 was$247 million , which is comprised of$233 million of cash and cash equivalents and$14 million of restricted cash required to collateralize letters of credit.
Item 5.02. Departure of Directors or Certain Officers; Election of Directors; Appointment of Certain Officers; Compensatory Arrangements of Certain Officers.
OnMay 15, 2020 , Lucian T. Smith III, Chief Operating Officer of the Company, notified the Company that he intends to retire effectiveNovember 30, 2020 . The Company does not intend to appoint a principal operating officer to fill the vacancy, andMr. Smith's responsibilities will be divided amongst senior management of the Company. In connection withMr. Smith's departure, the Company entered into a retirement agreement withMr. Smith , dated as ofMay 18, 2020 (the "Agreement"). Pursuant to the Agreement, and subject to his execution and non-revocation of a general release,Mr. Smith is entitled to:
? A lump sum cash payment of
his retirement date; and
? An annual bonus for the 2020 fiscal year to be determined based on normal
practices and payable in
least $1.0 million .
Additionally, following his retirement,
Item 7.01. Regulation FD Disclosure.
Response to COVID-19 Since the pandemic first escalated, the Company's primary focus has been the safety and health of its associates, its trade partners and its customers. Hovnanian has implemented appropriate health and safety protocols so that its community construction and sales activities, wherever authorized, could continue operations, and transitioned its non-essential office employees to a work from home environment. Given the uncertain economic environment, and consistent with many national homebuilders, the Company took measures to preserve cash by delaying certain land purchases and land development activity and beginning work on unsold homes. In light of recent record unemployment levels and other indicators of a potential recession, the Company is taking difficult measures to right size its organization to prepare for a further potential economic slowdown. -------------------------------------------------------------------------------- This strategy comprises several components. First, it is streamlining its organizational structure by transitioning from three homebuilding operational Groups to two. Additionally, Hovnanian is consolidating several business units, resulting in the reduction of three Divisional offices. Additionally, given the challenging conditions of theChicago market for several years, the Company has decided to gradually phase out of that market as it sells through its existingChicago communities. Considering these operational changes,Lucian Smith , our Chief Operating Officer, has decided to retire effectiveNovember 30, 2020 , as discussed in Item 5.02 above. In light of the challenging economic environment arising from the COVID-19 pandemic and in connection with the strategic decisions described above, the Company will be taking measures to reduce its overhead expenses through a combination of furloughs, layoffs and other cost reduction measures. Hovnanian expects these steps to reduce its annualized overhead expense by approximately$20 million . The Company expects to take a charge of approximately$3 million for severance and other related expenses in the third quarter of fiscal 2020.
As the market rebounds from the pandemic, the Company believes that this new organizational alignment should allow it to be even more cost-efficient in pursuing its growth plans and should result in a more rapid repair of its balance sheet.
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Statements in this Current Report on Form 8-K 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 its compliance with the NYSE's listing standards.
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) the
impact of COVID-19 and related economic conditions, (2) changes in general and
local economic, industry and business conditions and impacts of a significant
homebuilding downturn; (3) adverse weather and other environmental conditions
and natural disasters; (4) high leverage and restrictions on the Company's
operations and activities imposed by the agreements governing the Company's
outstanding indebtedness; (5) availability and terms of financing to the
Company; (6) the Company's sources of liquidity; (7) changes in credit ratings;
(8) the seasonality of the Company's business; (9) the availability and cost of
suitable land and improved lots and sufficient liquidity to invest in such land
and lots; (10) shortages in, and price fluctuations of, raw materials and labor
including due to changes in trade policies, such as the imposition of tariffs
and duties on homebuilding materials and products, and related trade disputes
with and retaliatory measures taken by other countries; (11) reliance on, and
the performance of, subcontractors; (12) 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; (13) increases in cancellations of agreements of sale; (14) fluctuations
in interest rates and the availability of mortgage financing; (15) changes in
tax laws affecting the after-tax costs of owning a home; (16) operations through
unconsolidated joint ventures with third parties; (17) government regulation,
including regulations concerning development of land, the homebuilding, sales
and customer financing processes, tax laws and the environment; (18) legal
claims brought against us and not resolved in our favor, such as product
liability litigation, warranty claims and claims made by mortgage investors;
(19) levels of competition; (20) successful identification and integration of
acquisitions; (21) significant influence of the Company's controlling
stockholders; (22) availability of net operating loss carryforwards; (23)
utility shortages and outages or rate fluctuations; (24) geopolitical risks,
terrorist acts and other acts of war; (25) diseases, pandemics or other severe
public health events; (26) loss of key management personnel or failure to
attract qualified personnel; (27) information technology failures and data
security breaches; (28) negative publicity; and (29) 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, 2019 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.
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