If there was one overarching theme during Hovnanian Enterprises' fiscal fourth quarter and year-end conference call, it was that cash generation trumped profitability and would continue to do so through 2009. The company closed the quarter, ended Oct. 31, with a loss of $450.5 million.

"We're going to maximize cash flow even at the expense of margins," CEO Ara Hovnanian stated in his opening remarks.

And that's exactly what the deal was during the fourth quarter. The company generated $175 million in free cash flow, growing the corporate coffers to $838.2 million. However, gross margins took a big hit--minus impairment charges, which fell to 4.7% from 8.5% during the previous quarter--as the company's singular focus on cash generation led to an increase in sales incentives to produce sales and turn inventory.

However, despite beefed-up incentives and an aggressive pricing strategy, sales slid 56% from the same period a year ago to 1,225 net new orders. Deliveries also were down 42% from fiscal 4Q2007 to 2,294. Consequently, revenues fell 48% from a year ago to $721.4 million.

But the biggest contributors to the company's staggering loss were steeper-than-expected balance sheet charges. The company logged $215.6 million in impairments, $47.5 million in write-offs of option deposit and predevelopment costs, $32.7 million in write-downs of goodwill, $2.7 million in intangible impairments, an $21.4 million in charges related to certain unconsolidated joint ventures--not to mention a non-cash deferred tax asset charge of $169.5 million.

Factoring in this charge, the company's net debt-to-capitalization grew to almost 84%. Excluding the charge, net debt-to-cap was roughly 65%.

Concern over the company's leverage, particularly vis a vis peers, led analyst Ivy Zelman of Zelman & Associates to ask executives if, given the likelihood of further market deterioration and the risk of future impairments, the company could be on a slippery slope toward a no equity value situation.

"There's no question, with traditional balance sheet metrics, that we are highly levered. And if the market continues to deteriorate, we'll be even more highly levered," Hovnanian responded. "The good part of our balance sheet is we have a lot of cash handy and not a lot of debt maturing. Over the many years before our maturities come due, the market will come back."

The company has no debt due until 2010, when it has $100 million in senior subordinated notes maturing. Following that, the company's next debt obligations are in 2012 when it has $150 million in senior subordinated notes and $99 million in senior notes due.

This response led Zelman to question the company's ability to sustain positive cash flow into 2009. With the sales environment likely to worsen in the near term, she noted that the company's cash burn could be greater than expected.

Hovnanian acknowledged that cash generation was going to be more challenged as conditions continue to deteriorate. However, he pointed to several factors that he felt could offset some of that burn.

First up was that the company would receive roughly $145 million in tax refunds in February.

Second, with 53% of its owned lots largely developed, Hovnanian said the company would "not [be] sinking a lot of land development dollars into the balance sheet."

Third, management continued to make significant reductions in SG&A expenses, which at the end of the quarter were at 13.9% of revenues. This was up less than a percentage point from a year ago. Staffing, a big contributor to SG&A, was down 65% from its peak in June 2006; the company counted 2,391 employees on its payroll at fiscal 2008 year-end compared to 4,318 employees a year ago.

But Hovnanian admitted that there was still some more work to do to get SG&A in line with revenues to improve profitability and stem the balance sheet bleed. However, that would hinge on improving sales numbers community by community. In fiscal 2008, the company average roughly 18.3 net contracts per community, compared to a historical average of roughly 42 net contracts per community.

"If we could get to the 30s, we'd do a huge improvement on SG&A on the community level," he said.