Hovnanian Enterprises : 2020 Annual Report

Hovnanian Enterprises, Inc.

Annual Report 2020

Hovnanian Enterprises, Inc.

Communities

Financial Highlights

2020

Proposed
Communities
Arizona	11
California	13
Delaware	6
Florida	11
Georgia	-
Illinois	2
Maryland	5
New Jersey	31
Ohio	9
Pennsylvania	-
South Carolina	8
Texas	33
Virginia/DC	18
West Virginia	2
Consolidated Total	149
Unconsolidated
Joint Ventures	-
Total	149
Years Ended October 31,
2019 2018

136

Active Selling Communities

8

25

5

8

1

6

8

2

5 - -

44

4 -

116

20

2017

2016

REVENUES AND INCOME (Dollars in Millions)

Total Revenues

• $2,343.9 $2,016.9

$1,991.2

$2,451.7

$2,752.2

Income (Loss) Before Income Taxes

$55.4

$(39.7)

$8.1

$(45.2) $2.4

Income Before Income Taxes Excluding Land-Related

Charges, Joint Venture Write-Downs and (Gain) Loss on

Extinguishment of Debt(1)

Net Income (Loss)

$50.9 $50.9

$9.9 $(42.1)

$20.4 $4.5

$10.2 $39.0

$(332.2) $(2.8)ASSETS, DEBT AND EQUITY (Dollars in Millions)

Total Assets

Total Recourse Debt(2)

Total Stockholders' Equity Deficit

$1,827.3 $1,431.1 $(436.1)

$1,881.4 $1,480.0 $(489.8)

$1,662.0 $1,439.2 $(453.5)

• $1,900.9 $2,355.0

• $1,637.9 $1,625.4

$(460.4) $(128.5)INCOME PER COMMON SHARE(3) (Shares in Thousands)

Assuming Dilution:

Net Income (Loss) Per Common Share

Weighted-Average Number of Common Shares Outstanding

$7.03 6,584

$(7.06) 5,968

$0.72 6,072

$(56.23) $(0.48)

5,908

5,898

(1) Income Before Income Taxes Excluding Land-Related Charges, Joint Venture Write-Downs and (Gain) Loss on Extinguishment of Debt is not a financial measure calculated in accordance with generally accepted accounting principles (GAAP). See page 3 of this Annual Report for a reconciliation to Income (Loss) Before Income Taxes, the most directly comparable GAAP financial measure.

• (2) Total Recourse Debt is derived by adding revolving and term loan credit facilities and notes payable, less accrued interest.

• (3) All share and per share amounts throughout this report have been retroactively adjusted to reflect the March 2019 reverse stock split.

This summary should be read in conjunction with the related consolidated financial statements and accompanying notes included elsewhere in this Annual Report.

Communities Under Development(1)

(Dollars In Thousands Except Average Price)

(Unaudited)

Northeast

Deliveries
2019	% Change	2020	2019	% Change	2020	2019	% Change
293	11.3%	348	192	81.3%	130	152	(14.5)%
$172,950	(1.0)%	$175,627	$116,889	50.3%	$82,111	$86,557	(5.1)%
$590,273	(11.0)%	$504,675	$608,797	(17.1)%	$631,623	$569,454	10.9%
728	36.0%	755	652	15.8%	557	343	62.4%
$385,862	32.2%	$402,647	$356,674	12.9%	$291,115	$193,387	50.5%
$530,030	(2.8)%	$533,307	$547,046	(2.5)%	$522,648	$563,810	(7.3)%
736	18.6%	727	680	6.9%	596	450	32.4%
$219,266	24.1%	$225,334	$203,734	10.6%	$169,517	$122,681	38.2%
$297,916	4.6%	$309,950	$299,609	3.5%	$284,424	$272,624	4.3%
576	4.0%	548	545	0.6%	298	282	5.7%
$233,645	15.7%	$232,333	$219,860	5.7%	$146,971	$121,921	20.5%
$405,634	11.2%	$423,965	$403,413	5.1%	$493,191	$432,344	14.1%
2,006	31.4%	2,233	1,866	19.7%	1,066	663	60.8%
$677,244	28.9%	$743,301	$627,201	18.5%	$360,225	$230,898	56.0%
$337,609	(1.9)%	$332,871	$336,121	(1.0)%	$337,922	$348,261	(3.0)%
1,001	52.7%	1,075	1,011	6.3%	755	301	150.8%
$411,577	74.4%	$472,786	$425,324	11.2%	$369,887	$124,700	196.6%
$411,166	14.2%	$439,801	$420,696	4.5%	$489,917	$414,286	18.3%
5,340	30.2%	5,686	4,946	15.0%	3,402	2,191	55.3%
$2,100,544	34.0%	$2,252,028	$1,949,682	15.5%	$1,419,826	$880,144	61.3%
$393,360	2.9%	$396,065	$394,194	0.5%	$417,350	$401,709	3.9%
1,629	840	93.9%	728	774	(5.9)%	1,418	461	207.6%
Dollars	$571,926	$431,419	32.6%	$432,602	$485,324	(10.9)%	$356,197	$194,123	83.5%
Avg. Price	$351,090	$513,594	(31.6)%	$594,234	$627,034	(5.2)%	$251,197	$421,091	(40.3)%
Total
Home	8,582	6,180	38.9%	6,414	5,720	12.1%	4,820	2,652	81.7%
Dollars	$3,386,386	$2,531,963	33.7%	$2,684,630	$2,435,006	10.3%	$1,776,023	$1,074,267	65.3%
Avg. Price	$394,592	$409,703	(3.7)%	$418,558	$425,700	(1.7)%	$368,470	$405,078	(9.0)%

Dollars $272,170

Net Contracts(2) Contract Backlog

2020

(NJ, PA)

Home

326

Dollars $171,181

Avg. Price $525,095

Mid-Atlantic

(DE, MD, VA, WV)

Home

990

Dollars $510,229

Avg. Price $515,383

Midwest

(IL, OH)

Home

873

Avg. Price $311,764

Southeast

(FL, GA, SC)

Home

599

Dollars $270,277

Avg. Price $451,214

Southwest

(AZ, TX)

Home

2,636

Dollars $872,630

Avg. Price $331,043

West

(CA)

Home

1,529

Dollars $717,973

Avg. Price $469,570

Consolidated Total

Home Dollars Avg. Price

6,953 $2,814,460 $404,784

Unconsolidated Joint Ventures(3)

Home

Years Ended October 31,

As of October 31,

DELIVERIES INCLUDE EXTRAS

Notes:

• (1) Segment data excludes unconsolidated joint ventures.

• (2) Net contracts are defined as new contracts signed during the period for the purchase of homes, less cancellations of prior contracts.

• (3) Represents home deliveries, home revenues and average prices for 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 from unconsolidated joint ventures".

Note: All statements in this annual report 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) the outbreak and spread of COVID-19 and the measures that governments, agencies, law enforcement and/or health authorities implement to address it; (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) the seasonality of the Company's business; (5) the availability and cost of suitable land and improved lots and sufficient liquidity to invest in such land and lots; (6) shortages in, and price fluctuations of, raw materials and labor, including due to changes in trade policies and the imposition of tariffs and duties on homebuilding materials and products and related trade disputes with, and retaliatory measures taken by, other countries; (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; and (26) certain risks, uncertainties and other factors that are described in detail in the Company's Annual Report on Form 10-K for the fiscal year ended October 31, 2020 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.

Five-Year Financial Review

Years Ended October 31,

(In Thousands Except Number of Homes and Per-Share Data)	2020	2019	2018	2017	2016
Statement of Operations Data:
Total Revenues	$2,343,901	$2,016,916	$1,991,233	$2,451,665	$2,752,247
Inventory Impairment Loss and Land Option Write-Offs	$8,813	$6,288	$3,501	$17,813	$33,353
Income (Loss) from Unconsolidated Joint Ventures	$16,565	$28,932	$24,033	$(7,047)	$(4,346)
Income (Loss) Before Income Taxes	$55,403	$(39,668)	$8,146	$(45,244)	$2,436
Income Before Income Taxes Excluding Land-Related Charges, Joint
Venture Write-Downs and (Gain) Loss on Extinguishment of Debt (1)	$50,879	$9,910	$20,444	$10,186	$38,989
Net Income (Loss)	$50,928	$(42,117)	$4,520	$(332,193)	$(2,819)
Assuming Dilution:(2)
Net Income (Loss) Per Common Share	$7.03	$(7.06)	$0.72	$(56.23)	$(0.48)
Weighted-Average Number of Common Shares Outstanding	6,584	5,968	6,072	5,908	5,898
Balance Sheet Data:
Cash, Restricted Cash and Cash Equivalents	$277,220	$182,266	$232,992	$493,742	$369,713
Total Inventories	$1,195,775	$1,292,485	$1,078,165	$1,009,827	$1,283,084
Total Assets	$1,827,342	$1,881,424	$1,662,042	$1,900,898	$2,354,956
Total Recourse Debt (3)	$1,431,110	$1,479,990	$1,439,235	$1,637,874	$1,625,358
Total Nonrecourse Debt	$135,122	$203,585	$95,557	$77,524	$96,427
Total Stockholders' Equity Deficit	$(436,094)	$(489,776)	$(453,504)	$(460,371)	$(128,510)
Supplemental Financial Data:
Adjusted EBIT (4)	$229,010	$169,837	$183,165	$193,263	$222,347
Adjusted EBITDA (4)	$234,314	$174,009	$186,321	$199,144	$231,173
Net Cash Provided by (Used in) Operating Activities (5)	$292,828	$(249,127)	$(66,822)	$301,578	$386,996
Interest Incurred	$176,457	$165,906	$161,048	$160,203	$166,824
Adjusted EBITDA/Interest Incurred	1.33x	1.05x	1.16x	1.24x	1.39x
Financial Statistics:
Average Net Debt/Net Capitalization (6)	158.8%	155.5%	160.8%	125.4%	110.4%
Inventory Turnover (7)	1.9x	1.6x	1.8x	2.1x	1.9x
Homebuilding Gross Margin Percentage, Before Cost of Sales
Interest Expense and Land Charges (8)	18.4%	18.1%	18.4%	17.2%	16.9%
Adjusted EBITDA Margin (4) (9)	10.0%	8.6%	9.4%	8.1%	8.4%
Operating Statistics:
Net Sales Contracts - Homes	6,953	5,340	4,671	5,196	6,109
Net Sales Contracts - Dollars	$2,814,460	$2,100,544	$1,835,213	$2,084,097	$2,519,648
Deliveries - Homes	5,686	4,946	4,847	5,602	6,464
Deliveries - Dollars	$2,252,028	$1,949,682	$1,906,228	$2,340,033	$2,600,790
Backlog - Homes	3,402	2,191	1,826	1,983	2,398
Backlog - Dollars	$1,419,826	$880,144	$745,630	$808,033	$1,069,102

(1) Income Before Income Taxes Excluding Land-Related Charges, Joint Venture Write-Downs and (Gain) Loss on Extinguishment of Debt is a non-GAAP financial measure. The most directly comparable GAAP financial measure is Income (Loss) Before Income Taxes. The reconciliation of Income Before Income Taxes Excluding Land-Related Charges, Joint Venture Write-Downs and (Gain) Loss on Extinguishment of Debt to Income (Loss) Before Income Taxes is presented on page 3 of this Annual Report. Income Before Income Taxes Excluding Land-Related Charges, Joint Venture Write-Downs and (Gain) Loss on Extinguishment of Debt should be considered in addition to, but not as a substitute for, Income (Loss) Before Income Taxes, Net Income (Loss) 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, the Company's calculation of Income Before Income Taxes Excluding Land-Related Charges, Joint Venture Write-Downs and (Gain) Loss on Extinguishment of Debt may be different than the calculation used by other companies, and, therefore, comparability may be affected.

• (2) All share and per share amounts throughout this report have been retroactively adjusted to reflect the March 2019 reverse stock split.

• (3) Total Recourse Debt is derived by adding revolving and term loan credit facilities and notes payable, less accrued interest.

• (4) Adjusted EBIT and Adjusted EBITDA are non-GAAP financial measures. The most directly comparable GAAP financial measure is Net Income (Loss). The reconciliation of Adjusted EBIT and Adjusted EBITDA to Net Income (Loss) is presented on page 3 of this Annual Report. Adjusted EBIT and Adjusted EBITDA should be considered in addition to, but not as a substitute for, Income (Loss) Before Income Taxes, Net Income (Loss) 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. Additionally, the Company's calculation of Adjusted EBIT and Adjusted EBITDA may be different than the calculation used by other companies, and, therefore, comparability may be affected.

(5) In connection with our adoption of Accounting Standards Update 2016-18 in November 2018, restricted cash amounts are no longer shown within the operating and investing activities as these balances are now included in the beginning and ending cash balances in our Consolidated Statements of Cash Flows. The adoption also resulted in the reclassification of restricted cash in operating and investing activities in prior periods.

(6) Net Debt excludes mortgage warehouse debt and nonrecourse debt and is net of accrued interest and homebuilding cash and cash equivalents balances. Net Capitalization includes Net Debt, as previously defined, and total stockholders' equity deficit. Calculated based on a five quarter average. The calculation of Average Net Debt/Net Capitalization is presented on page 4 of this Annual Report. The Company's calculation of Average Net Debt/Net Capitalization may be different than the calculation used by other companies and, therefore, comparability may be affected.

(7) Derived by dividing cost of sales, excluding cost of sales interest, by the five quarter average inventory, excluding inventory not owned and capitalized interest. The calculation of Inventory Turnover is presented on page 5 of this Annual Report. The Company's calculation of Inventory Turnover may be different than the calculation used by other companies and, therefore, comparability may be affected.

(8) Homebuilding Gross Margin Percentage, Before Cost of Sales Interest Expense and Land Charges is a non-GAAP financial measure. The most directly comparable GAAP financial measure is Homebuilding Gross Margin Percentage. The reconciliation of Homebuilding Gross Margin Percentage, Before Cost of Sales Interest Expense and Land Charges to Homebuilding Gross Margin Percentage is presented on page 3 of this Annual Report. Homebuilding Gross Margin, Before Cost of Sales Interest Expense and Land Charges should be considered in addition to, but not as an alternative to, Homebuilding Gross Margin Percentage determined in accordance with GAAP as an indicator of operating performance. Additionally, the Company's calculation of Homebuilding Gross Margin Percentage, Before Cost of Sales Interest Expense and Land Charges may be different than the calculation used by other companies, and, therefore, comparability may be affected. (9) Adjusted EBITDA Margin is derived by dividing Adjusted EBITDA by Total Revenues.

This summary should be read in conjunction with the related consolidated financial statements and accompanying notes included elsewhere in this Annual Report.