Hovnanian Enterprises late on Tuesday (Dec. 18) reported a loss of $469 million (-$7.42 per common share) for the fourth quarter of 2007 and a loss of $638 million (-$10.11) for the full year.
Fourth-quarter revenue fell 20.3% from last year to $1.4 billion and were$4.8 billion for fiscal 2007, a decrease of 21.9% compared to last year.Homebuilding gross margin fell to 10.9% in the fourth quarter from 20.4% last year and was 15.1% for fiscal 2007, down from 23.1% in 2006.
The losses included $383 million in pretax charges including land impairments of $168 million, intangible impairments of $78 million and write-offs of predevelopment costs and land deposits of $105 million, as well as $32 million in impairment charges for unconsolidated joint ventures.
The losses also included a $216 million after-tax non-cash valuation allowance Hovnanian took during its fourth quarter by recording a reserve of that amount against its deferred tax assets, resulting in a $54 million tax expense in the fourth quarter instead of a $162 million tax benefit that management had anticipated. One analyst, Stephen East of Pali Research, said in a research note that that charge was an indication that the company's auditors believe the company has "no credible plan to show that they can make money before charges over the near term." East wrote that he suspected several other public builders may have to take similar allowances and charges.
The numbers were considerably worse than what Wall Street was expecting, and Hovnanian stock was punished with a decline of almost 12% to $7.40 in midday trading on the New York Stock Exchange. Minus the tax allowance, the loss per share was more than double analyst estimates. Still, one analyst, David Goldberg at UBS, wrote in a note to investors, "We believe management will successfully generate the requisite liquidity to withstand the downturn, though at the expense of profitability."
The company generated $376 million of positive cash flow during the fourth quarter, and it reduced total debt by $390 million. Excluding land-related and intangible charges, the Company reported a pretax loss of $30 million for the quarter and $21 million for the fiscal year.
Hovnanian delivered delivered 3,969 homes with an aggregate sales value of$1.3 billion in the fourth quarter, a decline of 22% from the same period last year. For the year, 13,564 homes with an aggregate sales value of $4.6 billion in fiscal 2007 were delivered, down 24.4% from 17,940 with an aggregate sales value of $5.9 billion in fiscal 2006.
The number of net contracts for for the fourth quarter fell 10.3% to 2,781, and for fiscal 2007, excluding unconsolidated joint ventures, net contracts declined 20% to 11,006. The cancellation rate during the fourth quarter increased to 40% from 35% both in third quarter 2007 and the comparable quarter in 2006.
Hovnanian had 431 active selling communities on October 31, 2007, excluding unconsolidated joint ventures, a decline of 18 active communities from the end of the third quarter on July 31, 2007. The company had 427 active selling communities on October 31, 2006, excluding unconsolidated joint ventures.
During fiscal 2007, the Company delivered 1,364 homes through unconsolidated joint ventures, compared with 2,261 homes last year. The Company delivered471 homes through unconsolidated joint ventures in the fourth quarter, compared with 566 homes in last year's fourth quarter.
Hovnanian decreased the number of lots controlled under option contracts from a peak of 87,129 at the end of April 2006 to 36,104 at the end of October. The company at that time owned 28,680 lots, down from a peak at July 31, 2006 of 36,500 lots, and a reduction of 3,896 lots from the end of the third quarter in 2007. The total land position of 64,784 lots represents a 47% decline from the peak total land position on April 30, 2006.
"Considering the challenging market conditions that homebuilders are continuing to face, we are pleased to have exceeded our expectations for cash generation in the fourth quarter and to have paid down our debt levels more than we projected," said CEO Ara K. Hovnanian.
J. Larry Sorsby, Hovnanian CFO, said the company is negotiating with lenders to obtain waivers and modifications of its loan agreements. "We have strong, longstanding relationships with many of the banks in our revolving credit facility, and we have initiated discussions with the bank group to further modify our covenants with respect to future periods. Based on our initial discussions, we believe that we will be able to successfully negotiate changes that are needed to the credit agreement to adjust for the change in tax treatment, as well as to provide us with adequate operating room as we manage through the remainder of the current housing slowdown. We expect to close the amendment in January," he said.