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Hovnanian Enterprises Inc. Reports Operating Results (10-K)
Posted by: gurufocus (IP Logged)
Date: December 20, 2012 10:06PM
Hovnanian Enterprises Inc. (HOV) filed Annual Report for the period ended 2012-10-31. Hovnanian Enterprises Inc has a market cap of $767.9 million; its shares were traded at around $6.13 with and P/S ratio of 0.6.
Highlight of Business Operations:Current base prices for our homes in contract backlog at October 31, 2012, range from $68,652 (low income housing) to $1,067,000 in the Northeast, from $174,990 to $1,032,195 in the Mid-Atlantic, from $89,000 to $547,650 in the Midwest, from $74,900 to $749,700 in the Southeast, from $101,625 to $800,990 in the Southwest, and from $104,294 to $835,000 in the West. Closings generally occur and are typically reflected in revenues within 12 months of when sales contracts are signed.
Total inventory, excluding consolidated inventory not owned, decreased $74.8 million during the year ended October 31, 2012. Total inventory, excluding consolidated inventory not owned, increased in the Midwest $12.0 million and in the Southwest by $17.9 million. This increase was offset by decreases in the Northeast of $20.5 million, in the Mid-Atlantic by $43.3 million, in the Southeast by $3.8 million and in the West of $37.1 million. The decreases were primarily attributable to inventory that was reclassified to consolidated inventory not owned during the period as discussed below and to delivering homes at a faster pace than replenishing with new land, as noted by the decrease in our community count from October 31, 2011 to October 31, 2012. There were also land sales in several of our segments throughout fiscal 2012, contributing to the decrease in inventory. These decreases were partially offset by the acquisition of new land parcels and consolidation of a community that was previously held in one of our unconsolidated joint ventures. During the year ended October 31, 2012, we incurred $9.8 million in impairments, which primarily related to a property that is held for sale in the Northeast, a community in the Midwest, several communities in the Southeast and two communities in the West in fringe markets in these areas that continue to see weakening market conditions. In addition, we wrote-off costs in the amount of $2.7 million during the year ended October 31, 2012 related to land options that expired or that we terminated, as the communities forecasted profitability was not projected to produce adequate returns on investment commensurate with the risk. In the last few years, we have been able to acquire new land parcels at prices that we believe will generate reasonable returns under current homebuilding market conditions. There can be no assurances that this trend will continue in the near term. Substantially all homes under construction or completed and included in inventory at October 31, 2012 are expected to be closed during the next 12 months.
Sale of homes revenues increased $333.1 million, or 31.1%, for the year ended October 31, 2012, decreased $255.0 million, or 19.2%, for the year ended October 31, 2011 and decreased $195.0 million or 12.8%, for the year ended October 31, 2010. The increased revenues in 2012 were primarily due to the number of home deliveries increasing 22.0% and the average price per home increasing to $300,595 from $279,873 in 2011. The decreased revenues in 2011 and 2010 were primarily due to the number of home deliveries declining 19.0%, and 11.8%, respectively. Average price per home also decreased to $279,873 in 2011 from $280,715 in 2010. The fluctuations in average prices were a result of the geographic and community mix of our deliveries, as well as price increases in certain of our individual communities. During fiscal 2012, we were able to raise prices in a number of our communities.
Reflected as inventory impairment loss and land option write-offs in cost of sales (“land charges”), we have written-off or written-down certain inventories totaling $12.5 million, $101.7 million, and $135.7 million during the years ended October 31, 2012, 2011, and 2010, respectively, to their estimated fair value. See “Note 13 to the Consolidated Financial Statements” for an additional discussion. During the years ended October 31, 2012, 2011, and 2010, we wrote-off residential land options and approval and engineering costs totaling $2.7 million, $24.3 million, and $13.2 million, respectively, which are included in the total land charges mentioned above. When a community is redesigned or abandoned, engineering costs are written-off. Option, approval and engineering costs are written-off when a community s pro forma profitability is not projected to produce adequate returns on the investment commensurate with the risk and when we believe it is probable we will cancel the option. Such write-offs were located in all of our segments. The inventory impairments amounted to $9.8 million, $77.5 million, and $122.5 million for the years ending October 31, 2012, 2011 and 2010, respectively. In 2012, inventory impairments were lower than they had been in several years as we began to see some stabilization in the prices and sales pace in some of our segments as reflected by the overall improvement of the housing industry. In 2011 and 2010, the majority of the impairments were in the Northeast and West segments. Impairments in the Northeast were primarily due to increased weakness in the market, primarily in Northern New Jersey and communities now classified as held for sale or sold and thus adjusted to fair value. In the West, where we had significant competition from foreclosures, we had reduced prices in order to maintain sales pace. This is especially true in some of the more fringe markets in our West segment. It is difficult to predict if this trend will continue, and should it become necessary to further lower prices, or should the estimates or expectations used in determining estimated cash flows or fair value decrease or differ from current estimates in the future, we may need to recognize additional impairments.
During the years ended October 31, 2012, 2011, and 2010, financial services provided a $15.1 million, $8.1 million and $8.9 million pretax profit, respectively. In fiscal 2012, financial services revenues increased $9.3 million to $38.7 million compared to fiscal 2011 due to the increase in the number of mortgage settlements and average price of the loans settled. In fiscal 2011, financial services revenue decreased $2.5 million to $29.5 million compared to fiscal 2010 due to the decrease in the number of mortgage settlements and a decrease in the average price of loans settled. In fiscal 2010, financial services revenue decreased $3.6 million to $32.0 million compared to fiscal 2009 due to a decrease in the number of mortgage settlements offset by a slight increase in the average price of the loans settled. In the market areas served by our wholly owned mortgage banking subsidiaries, approximately 76%, 77%, and 82% of our noncash homebuyers obtained mortgages originated by these subsidiaries during the years ended October 31, 2012, 2011, and 2010, respectively. Servicing rights on new mortgages originated by us are sold with the loans.
Stocks Discussed: HOV,