RED BANK, N.J. - Hovnanian Enterprises, the industry's sixth-largest builder, lost $80.5 million, or $1.27 per share, during the three months ending July 31. The builder's quarterly revenue fell 27.1 percent to $1.55 billion, as its deliveries declined by 32.1 percent to 3,179 homes. Through the first nine months of its fiscal year, Hovnanian's sales were down 22.6 percent to $3.41 billion, and it lost $168.5 million, versus an earnings gain of $256.8 million in the same period a year ago.

However, the builder's CEO, Ara Hovnanian, insisted during a teleconference with analysts this morning that his company is moving in the right direction in terms of cost-savings actions that are reducing debt. He projects that its cash flow in the fourth quarter would move into the positive column and be between $175 million and $200 million (up from a negative $271 million in the first quarter). He also projects cash flow in fiscal 2008 to be between $100 million and $400 million. Despite a 35 percent cancellation rate, Hovnanian sees positive signs in the fact that customer traffic per community during its latest quarter was off only 10 percent. "Customers are still buying, but they are also waiting to pick the bottom of the market decline." To lure more buyers, the builder will conduct a "Deal of the Century" sales event, from 9 a.m. to 9 p.m. on Sept. 14 through 16, during which each of its communities in 19 states will offer incentives to prospective buyers.

Hovnanian Enterprises is focused on improving its debt-to-capitalization ratio to 50 percent or better and has been aggressively reviewing all aspects of its business in light of current and possible future market conditions. For example, since June 2006 it has reduced its workforce by 30 percent. And in its latest quarter, the company took $108.6 million in pretax charges to cover land impairments, deposits, and predevelopment costs. The number of lots Hovnanian owned or controlled at the end of its third quarter totaled 79,323, or 31 percent below the same period a year ago. Its optioned lot total at the end of the quarter - 46,747 - is about half of what it was at this point a year ago. And, says CFO Larry Sorsby, "our owned lot position is down 11 percent ... and we expect it to continue to decline."

Sorsby spent a considerable amount of time discussing Hovnanian's mortgage business, whose pretax earnings were off 19.3 percent in the quarter, but up 4.4 percent through nine months. Its mortgage division captures 74 percent of its home buyers and has taken steps to raise the quality of the mortgages it originates. Sorsby notes that fewer borrowers are requesting adjustable-rate mortgages (10 percent in the third quarter, versus 32 percent last year), and says that alt-A loans in particular - which accounted for 27.9 percent of Hovnanian's originations in the quarter - should fall back to 15 percent in future months.

Hovnanian Enterprises expects to deliver between 13,200 and 13,800 homes this year (exclusive joint ventures), which would represent a 32 percent to 35 percent decline from 2006. Its projected revenue range for 2007 - between $4.5 billion and $4.9 billion - would be 30 percent to 35 percent below last year's number. In its latest quarter, gross margins had fallen to 15.9 percent, compared to 23.1 percent for all of 2006. All that being said, Hovnanian says his company isn't planning to exit markets or halt construction of communities, although it is entirely likely that it would walk away from more options if it can't negotiate better terms, and might slow some community development, planning, and expansion. He and Sorsby emphasize that any maneuvers their company takes would not restrict its ability to access capital through its borrowed credit line.

"This is a severe and significant correction in the industry, but we've been through this before," says Hovnanian, who points to his company's geographic and product diversity, and its management talent, as long-term strengths that would allow it to emerge as a stronger entity when the housing downturn abates.

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