United States
Securities And Exchange Commission
Washington, D.C. 20549
Form 10-K/A
(Amendment No. 1)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended OCTOBER 31, 2005
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number: 1-8551
Hovnanian Enterprises, Inc.
(Exact Name of Registrant as Specified in Its Charter)
Delaware |
|
22-1851059 |
(State or Other Jurisdiction of Incorporation or Organization) |
|
(I.R.S. Employer Identification No.) |
110 West Front Street, P.O. Box 500, Red Bank, N.J. |
|
07701 |
(Address of Principal Executive Offices) |
|
(Zip Code) |
732-747-7800
(Registrant's Telephone Number,
Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class |
|
Name of Each Exchange on Which Registered |
Class A Common Stock, $.01 par value per share |
|
New York Stock Exchange |
Depositary Shares, each representing 1/1,000th of a share of 7.625% Series A Preferred Stock |
|
NASDAQ Global Market |
Securities registered pursuant to Section 12(g) of the Act:
Class
B Common Stock, $.01 par value per share
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o
Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes x No o
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity as of April 30, 2005 was $1,821,859,091.
As of the close of business on January 4, 2006, there were outstanding 46,986,873 shares of the Registrants Class A Common Stock and 14,673,399 shares of its Class B Common Stock.
EXPLANATORY PARAGRAPH
This Annual Report on Form 10-K/A is filed for the purpose of restating Note 10 in the Notes to Consolidated Financial Statements for the years ended October 31, 2005, 2004 and 2003, which includes expanded reportable segment footnote disclosure related to our homebuilding operations. We have restated the accompanying Consolidated Financial Statements to revise our segment disclosures for all periods presented to show six reportable homebuilding segments. The restatement has no impact on our consolidated balance sheets as of October 31, 2005 and 2004, or consolidated statements of income and related income per common share amounts, consolidated statements of cash flows or consolidated statements of stockholders equity for the years ended October 31, 2005, 2004 and 2003. Conforming and other changes that are responsive to certain disclosure comments, primarily relating to segment reporting, received from the Division of Corporation Finance of the Securities and Exchange Commission, have been made to the Business section in Item 1, Managements Discussion and Analysis of Financial Condition and Results of Operations in Item 7 and our Controls and Procedures discussion in Item 9A of this Form 10-K/A. See Note 10 in the Notes to Consolidated Financial Statements for further information relating to the restatement. This Form 10-K/A has not been updated for events or information subsequent to the date of filing of the original Form 10-K, except in connection with the foregoing.
Documents Incorporated by Reference:
Part III Those portions of registrants definitive proxy statement to be filed pursuant to Regulation 14A in connection with registrants annual meeting of shareholders to be held on March 8, 2006 which are responsive to Items 10, 11, 12, 13 and 14.
HOVNANIAN ENTERPRISES, INC.
Form 10-K/A
Table of Contents
HOVNANIAN ENTERPRISES, INC.
Items 1 and 2 Business and Properties
BUSINESS OVERVIEW
We design, construct, market and sell single-family detached homes, attached townhomes and condominiums, mid-rise and high-rise condominiums, urban infill and active adult homes in planned residential developments and are one of the nations largest builders of residential homes. Founded in 1959 by Kevork Hovnanian, Hovnanian Enterprises, Inc. was incorporated in New Jersey in 1967 and reincorporated in Delaware in 1983. Since the incorporation of our predecessor company, including unconsolidated joint ventures, we have delivered in excess of 233,000 homes, including 17,783 homes in fiscal 2005. The Company consists of two operating groups: homebuilding and financial services. Our financial services group provides mortgage loans and title services to our homebuilding customers.
We are currently offering homes for sale in 367 communities, excluding unconsolidated joint ventures, in 40 markets in 17 states throughout the United States. We market and build homes for first-time buyers, first-time and second-time move-up buyers, luxury buyers, active adult buyers and empty nesters. We offer a variety of home styles at base prices ranging from $49,000 to $1,988,000 with an average sales price, including options, of $318,000 in fiscal 2005.
Our operations span all significant aspects of the home-buying process from design, construction and sale, to mortgage origination and title services.
The following is a summary of our growth history:
1959 Founded by Kevork Hovnanian as a New Jersey homebuilder.
1983 Completed initial public offering.
1986 Entered the North Carolina market through the investment in New Fortis Homes.
1992 Entered the greater Washington D.C. market.
1994 Entered the Coastal Southern California market.
1998 Expanded in the greater Washington D.C. market through the acquisition of P.C. Homes.
1999 Entered the Dallas, Texas market through our acquisition of Goodman Homes. Further diversified and strengthened our position as New Jerseys largest homebuilder through the acquisition of Matzel & Mumford.
2001 Continued expansion in the greater Washington D.C. and North Carolina markets through the acquisition of Washington Homes. This acquisition further strengthened our operations in each of these markets.
2002 Entered the Central Valley market in Northern California and Inland Empire region of Southern California through the acquisition of Forecast Homes.
2003 Expanded operations in Texas and entered the Houston market through the acquisition of Parkside Homes and Brighton Homes. Entered the greater Ohio market through our acquisition of Summit Homes and entered the greater metro Phoenix market through our acquisition of Great Western Homes.
2004 Entered the greater Tampa, Florida market through the acquisition of Windward Homes, and started a new division in the Minneapolis/St. Paul, Minnesota market.
2005 Entered the Orlando, Florida market through our acquisition of Cambridge Homes and entered the greater Chicago, Illinois market and expanded our position in Florida and Minnesota through the acquisition of the operations of Town & Country Homes, which occurred concurrently, with our entering into a joint venture with affiliates of Blackstone Real Estate Advisors to own and develop Town & Countrys existing residential communities. We also entered the Fort Lauderdale market through the acquisition of First Home Builders of Florida, and the Cleveland, Ohio market through the acquisition of Oster Homes.
Hovnanian markets and builds homes that are constructed in 32 of the nations top 75 housing markets. We segregate our homebuilding business geographically into six segments, which are the Northeast, Mid-Atlantic, Midwest, Southeast, Southwest, and West.
GEOGRAPHIC BREAKDOWN OF MARKETS BY HOMEBUILDING SEGMENT
Northeast: New Jersey, New York, Pennsylvania
Mid-Atlantic: Delaware, Maryland, Virginia, West Virginia, Washington D.C.
Midwest: Illinois, Michigan, Minnesota, Ohio
Southeast: Florida, North Carolina, South Carolina
3
HOVNANIAN ENTERPRISES, INC.
Southwest: Arizona, Texas
West: California
We employed approximately 6,084 full-time associates as of October 31, 2005.
Our Corporate offices are located at 10 Highway 35, P. O. Box 500, Red Bank, New Jersey 07701, our telephone number is (732)747-7800, and our Internet website address is www.khov.com. We make available through our website our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to these reports filed or furnished pursuant to Section 13(d) or 15(d) of the Exchange Act as soon as reasonably practicable after they are filed with, or furnished to, the SEC. Copies of the Companys Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to these reports are available free of charge upon request.
BUSINESS STRATEGIES
The following is a summary of our key business strategies. We believe that these strategies separate us from our competitors in the residential homebuilding industry and the adoption, implementation, and adherence to these principles will continue to improve our business, lead to higher profitability for our shareholders and give us a clear advantage over our competitors.
Our market concentration strategy is a key factor that enables us to achieve powers and economies of scale and differentiate ourselves from most of our competitors. Our goal is to become a significant builder in each of the selected markets in which we operate.
We offer a broad product array to provide housing to a wide range of customers. Our customers consist of first-time buyers, first-time and second-time move-up buyers, luxury buyers, active adult buyers and empty nesters. Our diverse product array includes single family detached homes, attached townhomes and condominiums, mid-rise and high-rise condominiums, urban infill and active adult homes.
We are committed to customer satisfaction and quality in the homes that we build. We recognize that our future success rests in the ability to deliver quality homes to satisfied customers. We seek to expand our commitment to customer service through a variety of quality initiatives. In addition, our focus remains on attracting and developing quality associates. We use several leadership development and mentoring programs to identify key individuals and prepare them for positions of greater responsibility within our Company.
We focus on achieving high return on invested capital. Each new community, whether through organic growth or acquisition, is evaluated based on its ability to meet or exceed internal rate of return requirements. Incentives for both local and senior management are primarily based on the ability to generate returns on capital deployed. Our belief is that the best way to create lasting value for our shareholders is through a strong focus on return on invested capital.
We adhere to a strategy of achieving growth through expansion of our organic operations and through the selected acquisition of other homebuilders with excellent management teams interested in continuing with our Company. In our existing markets, we continue to introduce a broader product array to gain market share and reach a more diverse group of customers. Selective acquisitions have expanded our geographic footprint, strengthened our market share in existing markets and further diversified our product offerings. Integration of acquired companies is a core strength and organic growth after an acquisition is boosted by deployment of our broad product array. To enhance our pattern of geographic diversification, we may also choose to start up new homebuilding operations in selected markets that allow our Company to employ our broad product array to achieve growth and market penetration. Through our presence in multiple geographic markets, our goal is to reduce the effects that housing industry cycles, seasonality and local conditions in any one area may have on our business.
We utilize a risk averse land strategy. We attempt to acquire land with a minimum cash investment and negotiate takedown options, thereby limiting the financial exposure to the amounts invested in property and predevelopment costs. This policy significantly reduces our risk and generally allows us to obtain necessary development approvals before acquisition of the land.
We enter into homebuilding and land development joint ventures from time to time as a means of accessing lot positions, expanding our market opportunities, establishing strategic alliances, reducing our risk profile, leveraging our capital base and enhancing our returns on capital. Our homebuilding joint ventures are generally entered into with third party investors to develop land and construct homes that are sold directly to third party homebuyers. Our land development joint ventures include those with developers and other homebuilders as well as financial investors to develop finished lots for sale to the joint ventures members or other third
4
HOVNANIAN ENTERPRISES, INC.
parties. We also have created the Hovnanian Land Investment Group (HLIG), a wholly owned subsidiary, to identify, acquire, and develop large land parcels for sale to our homebuilding operations or to other homebuilders. HLIG may acquire the property directly or via joint ventures.
In 2005, we entered into a joint venture with affiliates of Blackstone Real Estate Advisors that acquired the right to build and sell homes in the existing residential communities of Town & Country Homes, giving us operations in the greater Chicago, Illinois market and expanding our operations in Florida and Minnesota.
We are committed to becoming a better and more efficient homebuilding company. Over the past few years, our strategies have included testing several initiatives to fundamentally transform our traditional practices used to design, build and sell homes and focus on building better. These performance enhancing initiatives, processes and systems have been successfully used in other manufacturing industries and include implementation of standardized best practice processes, rapid cycle times, vendor consolidation, vendor partnering, co-operative purchasing, distribution, fabrication and installation, and just-in-time material procurement. Other initiatives include standardized home designs that can be deployed in multiple geographic markets with minimal architectural modification.
We seek to expand our financial services operations to better serve all of our homebuyers. Our current mortgage financing and title service operations enhance the profitability and growth of our company.
OPERATING POLICIES AND PROCEDURES
We attempt to reduce the effect of certain risks inherent in the housing industry through the following policies and procedures:
Training Our training is designed to provide our associates with the knowledge, attitudes, skills and habits necessary to succeed at their jobs. Our Training Department regularly conducts training classes in sales, construction, administration, and managerial skills.
Land Acquisition, Planning and Development Before entering into a contract to acquire land, we complete extensive comparative studies and analyses which assist us in evaluating the economic feasibility of such land acquisition. We generally follow a policy of acquiring options to purchase land for future community developments.
We typically acquire land for future development principally through the use of land options which need not be exercised before the completion of the regulatory approval process. We attempt to structure these options with flexible take down schedules rather than with an obligation to take down the entire parcel upon receiving regulatory approval. Additionally, we purchase improved lots in certain markets by acquiring a small number of improved lots with an option on additional lots. This allows us to minimize the economic costs and risks of carrying a large land inventory, while maintaining our ability to commence new developments during favorable market periods.
Our option and purchase agreements are typically subject to numerous conditions, including, but not limited to, our ability to obtain necessary governmental approvals for the proposed community. Generally, the deposit on the agreement will be returned to us if all approvals are not obtained, although predevelopment costs may not be recoverable. By paying an additional, nonrefundable deposit, we have the right to extend a significant number of our options for varying periods of time. In most instances, we have the right to cancel any of our land option agreements by forfeiture of our deposit on the agreement. As land becomes more scarce, the conditions required by sellers are becoming more stringent.
Design Our residential communities are generally located in suburban areas easily accessible through public and personal transportation. Our communities are designed as neighborhoods that fit existing land characteristics. We strive to create diversity within the overall planned community by offering a mix of homes with differing architecture, textures and colors. Recreational amenities such as swimming pools, tennis courts, club houses and tot lots are frequently included.
Construction We design and supervise the development and building of our communities. Our homes are constructed according to standardized prototypes which are designed and engineered to provide innovative product design while attempting to minimize costs of construction. We generally employ subcontractors for the installation of site improvements and construction of homes. However, in a few cases, we employ general contractors to manage the construction of mid-rise or high-rise buildings. Agreements with subcontractors are generally short term and provide for a fixed price for labor and materials. We rigorously control costs through the use of computerized monitoring systems. Because of the risks involved in speculative building, our general policy is to construct an attached condominium or townhouse building only after signing contracts for the sale of at least 50% of the homes in that building. For our mid-rise and high-rise buildings our general policy is to begin building after signing contracts for the sale of at least
5
HOVNANIAN ENTERPRISES, INC.
40% of the homes in that building. A majority of our single family detached homes are constructed after the signing of a sales contract and mortgage approval has been obtained. This limits the build-up of inventory of unsold homes and the costs of maintaining and carrying that inventory.
Materials and Subcontractors We attempt to maintain efficient operations by utilizing standardized materials available from a variety of sources. In addition, we generally contract with subcontractors to construct our homes. We have reduced construction and administrative costs by consolidating the number of vendors serving certain markets and by executing national purchasing contracts with select vendors. In most instances, we use general contractors for high-rise construction. In recent years, with the exception of some delays in Arizona and Florida, we have experienced no significant construction delays due to shortages of materials or labor. We cannot predict, however, the extent to which shortages in necessary materials or labor may occur in the future.
Marketing and Sales Our residential communities are sold principally through on-site sales offices. In order to respond to our customers needs and trends in housing design, we rely upon our internal market research group to analyze information gathered from, among other sources, buyer profiles, exit interviews at model sites, focus groups and demographic data bases. We make use of newspaper, radio, magazine, our website, billboard, video and direct mail advertising, special promotional events, illustrated brochures, full-sized and scale model homes in our comprehensive marketing program. In addition, we have opened home design galleries in our New Jersey, Virginia, Maryland, Texas, North Carolina, Florida, Illinois, Ohio, and portions of our California markets, which offer a wide range of customer options to satisfy individual customer tastes, and which have increased option sales and profitability in these markets.
Customer Service and Quality Control In many of our markets, associates are responsible for customer service and pre-closing quality control inspections as well as responding to post-closing customer needs. Prior to closing, each home is inspected and any necessary completion work is undertaken by us. In some of our markets, our homes are enrolled in a standard limited warranty program which, in general, provides a homebuyer with a one-year warranty for the homes materials and workmanship, a two-year warranty for the homes heating, cooling, ventilating, electrical and plumbing systems and a ten-year warranty for major structural defects. All of the warranties contain standard exceptions, including, but not limited to, damage caused by the customer.
Customer Financing We sell our homes to customers who generally finance their purchases through mortgages. During the year ended October 31, 2005, for the markets in which our mortgage subsidiaries originated loans, 10.2% of our homebuyers paid in cash and over 67.2% of our non-cash homebuyers obtained mortgages from one of our wholly-owned mortgage banking subsidiaries or our mortgage joint ventures. Mortgages originated by our wholly-owned mortgage banking subsidiaries are sold in the secondary market within a short period of time.
Code of Ethics For more than 40 years of doing business, we have been committed to sustaining our shareholders investment through conduct that is in accordance with the highest levels of integrity. Our Code of Ethics is a collection of guidelines and policies that govern broad principles of ethical conduct and integrity embraced by our Company. Our Code of Ethics applies to our principal executive officer, principal financial officer, controller, and all other associates of our company, including our directors and other officers. The Companys Code of Ethics is available on the Companys website at www.khov.com under Investor Relations/Governance/Code of Ethics.
Corporate Governance We also remain committed to our shareholders in fostering sound corporate governance principles. The Company has adopted Corporate Governance Guidelines to assist the Board of Directors of the Company (the Board) in fulfilling its responsibilities related to corporate governance conduct. These guidelines serve as a framework, addressing the function, structure, and operations of the Board, for purposes of promoting consistency of the Boards role in overseeing the work of management.
RESIDENTIAL DEVELOPMENT ACTIVITIES
Our residential development activities include site planning and engineering, obtaining environmental and other regulatory approvals and constructing roads, sewer, water and drainage facilities, recreational facilities and other amenities and marketing and selling homes. These activities are performed by our staff, together with independent architects, consultants and contractors. Our staff also carries out long-term planning of communities. A residential development generally includes single family detached homes and/or a number of residential buildings containing from two to twenty-four individual homes per building, together with amenities such as recreational buildings, swimming pools, tennis courts and open areas. More recently, we are developing mid-rise and high-rise buildings including some that contain over 300 homes per building.
6
HOVNANIAN ENTERPRISES, INC.
Current base prices for our homes in contract backlog at October 31, 2005 range from $49,000 to $1,800,000 in the Northeast, from $125,000 to $1,300,000 in the Mid-Atlantic, from $68,000 to $740,000 in the Midwest, from $94,000 to $772,000 in the Southeast, from $91,000 to $1,030,000 in the Southwest, and from $146,000 to $1,988,000 in the West. Closings generally occur and are typically reflected in revenues within eighteen months of when sales contracts are signed.
Information on homes delivered by segment for the year ended October 31, 2005 is set forth below:
(Housing Revenue in Thousands) |
|
Housing |
|
Homes |
|
Average Price |
|
||
Northeast |
|
$ |
983,426 |
|
2,329 |
|
$ |
422,252 |
|
Mid-Atlantic |
|
909,458 |
|
1,915 |
|
$ |
474,913 |
|
|
Midwest |
|
90,131 |
|
599 |
|
$ |
150,469 |
|
|
Southeast |
|
744,810 |
|
3,433 |
|
$ |
216,956 |
|
|
Southwest |
|
738,417 |
|
3,883 |
|
$ |
190,167 |
|
|
West |
|
1,711,413 |
|
4,115 |
|
$ |
415,896 |
|
|
Consolidated Total |
|
$ |
5,177,655 |
|
16,274 |
|
$ |
318,155 |
|
Unconsolidated Joint Ventures |
|
529,944 |
|
1,509 |
|
$ |
351,189 |
|
|
Total Including Unconsolidated Joint Ventures |
|
$ |
5,707,599 |
|
17,783 |
|
$ |
320,958 |
|
The value of our net sales contracts, including unconsolidated joint ventures, increased 31% to $6.4 billion for the year ended October 31, 2005 from $4.9 billion for the year ended October 31, 2004. This increase was the net result of a 16% increase in the number of homes contracted to 18,738 in 2005 from 16,148 in 2004. By Segment, on a dollar basis, including unconsolidated joint ventures, the Northeast decreased 8%, the Mid-Atlantic increased 55%, the Midwest increased 626%, the Southeast increased 157%, the Southwest increased 25% and the West decreased 4%. Increases were due to increased sales and increased sales prices in all of our regions except in our West, where the number of homes contracted decreased slightly due to timing of opening new communities.
The following table summarizes our active selling communities under development as of October 31, 2005. The contracted not delivered and remaining home sites available in our active communities under development are included in the 121,006 consolidated total home sites under the total residential real estate chart in Item 7 Managements Discussion and Analysis of Financial Condition and Results of Operations.
Active Selling Communities
|
|
|
|
|
|
|
|
Contracted |
|
|
|
|
|
|
|
Approved |
|
Homes |
|
Not |
|
Home Sites |
|
|
|
Communities |
|
Home Sites |
|
Delivered |
|
Delivered(1) |
|
Available(2) |
|
Northeast |
|
40 |
|
12,173 |
|
4,994 |
|
1,583 |
|
5,596 |
|
Mid-Atlantic |
|
70 |
|
10,405 |
|
3,268 |
|
1,381 |
|
5,756 |
|
Midwest |
|
25 |
|
3,689 |
|
71 |
|
581 |
|
3,037 |
|
Southeast |
|
78 |
|
23,437 |
|
8,861 |
|
5,997 |
|
8,579 |
|
Southwest |
|
102 |
|
20,664 |
|
7,759 |
|
1,296 |
|
11,609 |
|
West |
|
52 |
|
16,205 |
|
6,920 |
|
1,753 |
|
7,532 |
|
Total |
|
367 |
|
86,573 |
|
31,873 |
|
12,591 |
|
42,109 |
|
(1) Includes 987 home sites under option.
(2) Of the total remaining home sites available, 2,380 were under construction or completed (including 318 models and sales offices), 24,059 were under option, and 426 were financed through purchase money mortgages.
BACKLOG
At October 31, 2005 and October 31, 2004, including unconsolidated joint ventures, we had a backlog of signed contracts for 14,931 homes and 7,851 homes, respectively, with sales values aggregating $5.1 billion and $2.7 billion, respectively. The majority of our backlog at October 31, 2005 is expected to be completed and closed within the next twelve months. At November 30, 2005 and 2004, our backlog of signed contracts, including unconsolidated joint ventures, was 15,090 homes and 7,972 homes, respectively, with sales values aggregating $5.2 billion and $2.8 billion, respectively.
Sales of our homes typically are made pursuant to a standard sales contract that provides the customer with a statutorily mandated right of rescission for a period ranging up to 15 days after execution. This contract requires a nominal customer deposit at the time of signing. In addition, in the Northeast and in the Mid-Atlantic we typically obtain an additional 5% to 10% down payment due 30 to 60 days after signing. The contract may include a financing contingency, which permits the customers to cancel their obligation in the event mortgage financing at prevailing interest rates (including
7
HOVNANIAN ENTERPRISES, INC.
financing arranged or provided by us) is unobtainable within the period specified in the contract. This contingency period typically is four to eight weeks following the date of execution. In markets with significant investor demand, our Companys policy states that sales contracts include an investor restriction on resale of homes for a stipulated time period, if the home is not occupied by the purchaser. Sales contracts are included in backlog once the sales contract is signed by the customer, which in some cases includes contracts that are in the rescission or cancellation periods. However, revenues from sales of homes are recognized in the income statement, in accordance with our accounting policies, when title to the home is conveyed to the buyer, adequate cash payment has been received and there is no continued involvement.
RESIDENTIAL LAND INVENTORY IN PLANNING
It is our objective to control a supply of land, primarily through options, consistent with anticipated homebuilding requirements in each of our housing markets. Controlled land as of October 31, 2005, exclusive of communities under development described above under Residential Development Activities and excluding unconsolidated joint ventures, is summarized in the following table. The proposed developable home sites in communities under development are included in the 121,006 consolidated total home sites under the total residential real estate chart in Item 7 Managements Discussion and Analysis of Financial Condition and Results of Operations.
Communities in Planning
|
|
Number of |
|
Proposed |
|
Total Land |
|
|
|
||
|
|
Proposed |
|
Developable |
|
Option |
|
Book |
|
||
(Dollars in Thousands) |
|
Communities |
|
Home Sites |
|
Price |
|
Value(1)(2) |
|
||
Northeast: |
|
|
|
|
|
|
|
|
|
||
Under Option |
|
107 |
|
16,690 |
|
$ |
1,133,897 |
|
$ |
81,540 |
|
Owned |
|
24 |
|
2,775 |
|
|
|
274,281 |
|
||
Total |
|
131 |
|
19,465 |
|
|
|
355,821 |
|
||
Mid-Atlantic: |
|
|
|
|
|
|
|
|
|
||
Under Option |
|
113 |
|
14,566 |
|
$ |
971,695 |
|
39,554 |
|
|
Owned |
|
18 |
|
1,942 |
|
|
|
51,558 |
|
||
Total |
|
131 |
|
16,508 |
|
|
|
91,112 |
|
||
Midwest: |
|
|
|
|
|
|
|
|
|
||
Under Option |
|
21 |
|
3,460 |
|
$ |
175,224 |
|
9,649 |
|
|
Owned |
|
1 |
|
3 |
|
|
|
699 |
|
||
Total |
|
22 |
|
3,463 |
|
|
|
10,348 |
|
||
Southeast: |
|
|
|
|
|
|
|
|
|
||
Under Option |
|
73 |
|
9,602 |
|
$ |
472,659 |
|
21,169 |
|
|
Owned |
|
1 |
|
3 |
|
|
|
461 |
|
||
Total |
|
74 |
|
9,605 |
|
|
|
21,630 |
|
||
Southwest: |
|
|
|
|
|
|
|
|
|
||
Under Option |
|
54 |
|
7,067 |
|
$ |
217,718 |
|
20,635 |
|
|
Owned |
|
3 |
|
480 |
|
|
|
8,197 |
|
||
Total |
|
57 |
|
7,547 |
|
|
|
28,832 |
|
||
West: |
|
|
|
|
|
|
|
|
|
||
Under Option |
|
48 |
|
9,264 |
|
$ |
816,834 |
|
160,333 |
|
|
Owned |
|
5 |
|
454 |
|
|
|
14,036 |
|
||
Total |
|
53 |
|
9,718 |
|
|
|
174,369 |
|
||
Totals: |
|
|
|
|
|
|
|
|
|
||
Under Option |
|
416 |
|
60,649 |
|
$ |
3,788,027 |
|
332,880 |
|
|
Owned |
|
52 |
|
5,657 |
|
|
|
349,232 |
|
||
Combined Total |
|
468 |
|
66,306 |
|
|
|
$ |
682,112 |
|
|
(1) Properties under option also include costs incurred on properties not under option but which are under evaluation. For properties under option, as of October 31, 2005, option fees and deposits aggregated approximately $150.6 million. As of October 31, 2005, we spent an additional $184.7 million in non-refundable predevelopment costs on such properties.
(2) The book value of $682.1 million is identified on the balance sheet as Inventories land and land options held for future development or sale, and does not include inventory in Poland amounting to $9.8 million. The book value does include option deposits of $7.3 million for specific performance options, $4.3 million for other option deposits, and $84.5 million for variable interest entity property reported under Consolidated Inventory Not Owned.
In the Northeast, our objective is to control a supply of land sufficient to meet anticipated building requirements for at least six years. We typically option parcels of unimproved land for development. In our other segments, we either acquire improved or unimproved home sites from land developers or other sellers. Under a typical agreement with the land developer, we purchase a minimal number of home sites. The balance of the home sites to be purchased is covered under an option agreement or a non-recourse purchase agreement. Due to the dwindling supply of improved lots in these segments, we have increasingly been optioning parcels of unimproved land for development.
8
HOVNANIAN ENTERPRISES, INC.
CUSTOMER FINANCING
At our communities, on-site personnel facilitate sales by offering to arrange financing for prospective customers through our mortgage subsidiaries. We believe that our ability to offer financing to customers on competitive terms as a part of the sales process is an important factor in completing sales.
Our financial services business consists of providing our customers with competitive financing and coordinating and expediting the loan origination transaction through the steps of loan application, loan approval and closing. We originate loans in New Jersey, New York, Pennsylvania, Maryland, Washington D.C., Virginia, West Virginia, North Carolina, South Carolina, Texas, Ohio, Minnesota, Florida, and California. During the year ended October 31, 2005, for the markets in which our mortgage subsidiaries originate loans, approximately 10.2% of our homebuyers paid in cash and over 67.2% of our non-cash homebuyers obtained mortgages from one of our wholly-owned mortgage banking subsidiaries or our mortgage joint ventures.
We customarily sell virtually all of the loans and loan servicing rights that we originate. Loans are sold either individually or in pools to GNMA, FNMA, or FHLMC or against forward commitments to institutional investors, including banks, mortgage banking firms, and savings and loan associations.
COMPETITION
Our residential business is highly competitive. We are among the top ten homebuilders in the United States in both homebuilding revenues and home deliveries. We compete with numerous real estate developers in each of the geographic areas in which we operate. Our competition ranges from small local builders to larger regional builders to publicly owned builders and developers, some of which have greater sales and financial resources than we do. Previously owned homes and the availability of rental housing provide additional competition. We compete primarily on the basis of reputation, price, location, design, quality, service and amenities.
REGULATION AND ENVIRONMENTAL MATTERS
General. We are subject to various local, state and federal statutes, ordinances, rules and regulations concerning zoning, building design, construction and similar matters, including local regulations which impose restrictive zoning and density requirements in order to limit the number of homes that can eventually be built within the boundaries of a particular locality. In addition, we are subject to registration and filing requirements in connection with the construction, advertisement and sale of our communities in certain states and localities in which we operate even if all necessary government approvals have been obtained. We may also be subject to periodic delays or may be precluded entirely from developing communities due to building moratoriums that could be implemented in the future in the states in which we operate. Generally, such moratoriums relate to insufficient water or sewerage facilities or inadequate road capacity.
Environmental. We are also subject to a variety of local, state and federal statutes, ordinances, rules and regulations concerning protection of health and the environment (environmental laws). The particular environmental laws which apply to any given community vary greatly according to the community site, the sites environmental conditions and the present and former uses of the site. These environmental laws may result in delays, may cause us to incur substantial compliance, remediation and/or other costs, and prohibit or severely restrict development in certain environmentally sensitive regions or areas.
Conclusion. Despite our past ability to obtain necessary permits and approvals for our communities, we anticipate that increasingly stringent requirements will be imposed on developers and homebuilders in the future. Although we cannot predict the effect of these requirements, they could result in time-consuming and expensive compliance programs and substantial expenditures for pollution and water quality control, which could have a material adverse effect on our profitability. In addition, the continued effectiveness of permits already granted or approvals already obtained is dependent upon many factors, some of which are beyond our control, such as changes in policies, rules and regulations and their interpretation and application.
COMPANY OFFICES
We own a 69,000 square foot office complex located in the Northeast that serves as our corporate headquarters. We own 215,000 square feet of office and warehouse space throughout the Northeast. We lease approximately 621,000 square feet of space for our other operating divisions located in the Northeast, Mid-Atlantic, Midwest, Southeast, Southwest and West.
9
HOVNANIAN ENTERPRISES, INC.
We are subject to extensive and complex regulations that affect the development and home building, sales and customer financing processes, including zoning, density, building standards and mortgage financing; and we are involved in litigation arising in the ordinary course of business, none of which is expected to have a material adverse effect on our financial position or results of operations. In addition, in March 2005, we received two requests for information pursuant to Section 308 of the Clean Water Act from Region 3 of the Environmental Protection Agency (EPA) requesting information about storm water discharge practices in connection with completed, ongoing and planned homebuilding projects by subsidiaries in the states and district that comprise EPA Region 3. We also received a notice of violations for one project in Pennsylvania and requests for sampling plan implementation in two projects in Pennsylvania. The amount requested by the EPA to settle the asserted violations at the one project was not material. We have provided the information requested. In November 2005, the EPA requested additional information on some of the same projects. We continue to provide such information. To the extent that the information provided were to lead the EPA to assert violations of state and/or federal regulatory requirements and request injunctive relief and/or civil penalties, we will defend and attempt to resolve such asserted violations.
Our sales and customer financing processes are subject to the jurisdiction of the U. S. Department of Housing and Urban Development (HUD). In connection with the Real Estate Settlement Procedures Act, HUD has recently inquired about our process of referring business to our affiliated mortgage company and has separately requested documents related to customer financing. We have responded to HUDs inquiries.
At this time, we cannot predict the outcome of the EPAs or HUDs reviews or estimate the costs that may be involved in resolving such matters.
In November 2005, we received two notices from the California Regional Water Quality Control Board alleging violations of certain storm water discharge rules and assessing an administrative civil liability of $0.2 million and $0.3 million. We do not consider these assessments to be material and are considering our response to the notices.
Item 4 Submission of Matters to a Vote of Security Holders
During the fourth quarter of the fiscal year ended October 31, 2005, no matters were submitted to a vote of security holders.
Item 5 Market for the Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Our Class A Common Stock is traded on the New York Stock Exchange and was held by 480 stockholders of record at January 4, 2006. There is no established public trading market for our Class B Common Stock, which was held by 300 stockholders of record at January 4, 2006. In order to trade Class B Common Stock, the shares must be converted into Class A Common Stock on a one-for-one basis. The high and low sales prices for our Class A Common Stock, after adjustment for a 2-for-1 stock dividend on March 5, 2004, were as follows for each fiscal quarter during the years ended October 31, 2005 and 2004:
|
|
Oct. 31, 2005 |
|
Oct. 31, 2004 |
|
||||||||
Quarter |
|
High |
|
Low |
|
High |
|
Low |
|
||||
First |
|
$ |
52.24 |
|
$ |
38.00 |
|
$ |
48.31 |
|
$ |
36.51 |
|
Second |
|
$ |
59.10 |
|
$ |
47.76 |
|
$ |
45.17 |
|
$ |
35.97 |
|
Third |
|
$ |
73.19 |
|
$ |
51.11 |
|
$ |
36.84 |
|
$ |
29.33 |
|
Fourth |
|
$ |
71.28 |
|
$ |
42.58 |
|
$ |
41.60 |
|
$ |
31.20 |
|
Certain debt instruments to which we are a party contain restrictions on the payment of cash dividends. As a result of the most restrictive of these provisions, approximately $564.9 million of retained earnings was free of such restrictions at October 31, 2005. We have never paid a cash dividend to common stockholders nor do we currently intend to pay a cash dividend to common stockholders.
10
HOVNANIAN ENTERPRISES, INC.
This table provides information with respect to purchases of shares of our Class A Common Stock made by or on behalf of Hovnanian Enterprises or any affiliated purchaser during the fiscal fourth quarter of 2005.
Issuer Purchases of Equity Securities (1)
|
|
|
|
|
|
|
Maximum |
|
||
|
|
|
|
|
|
|
|
Number of |
|
|
|
|
|
|
|
|
Total Number of |
|
Shares That |
|
|
|
|
|
|
|
|
Shares Purchased |
|
May Yet Be |
|
|
|
|
|
|
|
|
as Part of Publicly |
|
Purchased Under |
|
|
|
|
Total Number of |
|
Average Price Paid |
|
Announced Plans |
|
the Plans |
|
|
Period |
|
Shares Purchased |
|
Per Share |
|
or Programs |
|
or Programs |
|
|
August 1, 2005 Through |
|
|
|
|
|
|
|
|
|
|
August 31, 2005 |
|
100,000 |
|
$ |
61.45 |
|
100,000 |
|
1,587,668 |
|
September 1, 2005 Through |
|
|
|
|
|
|
|
|
|
|
September 30, 2005 |
|
100,000 |
|
$ |
57.75 |
|
100,000 |
|
1,487,668 |
|
October 1, 2005 Through |
|
|
|
|
|
|
|
|
|
|
October 31, 2005 |
|
|
|
|
|
|
|
1,487,668 |
|
|
Total |
|
200,000 |
|
$ |
59.60 |
|
200,000 |
|
1,487,668 |
|
(1) In July 2001, our Board of Directors authorized a stock repurchase program to purchase up to 4 million shares of Class A Common Stock. On March 5, 2004, our Board of Directors authorized a 2-for-1 stock split in the form of a 100% stock dividend. All share information reflects this stock dividend.
No shares of our Class B Common Stock or of our 7.625% Series A Preferred Stock were purchased by or on behalf of Hovnanian Enterprises or any affiliated purchaser during the fiscal fourth quarter of 2005.
Item 6 Selected Consolidated Financial Data
The following table sets forth selected consolidated financial data and should be read in conjunction with the financial statements included elsewhere in this Form 10-K. Per common share data and weighted average number of common shares outstanding reflect all stock splits.
|
|
Year Ended |
|
|||||||||||||
Summary Consolidated |
|
|
|
|
|
|
|
|
|
|
|
|||||
Income Statement Data |
|
|
|
|
|
|
|
|
|
|
|
|||||
(In Thousands, Except |
|
October 31, |
|
October 31, |
|
October 31, |
|
October 31, |
|
October 31, |
|
|||||
Per Share Data) |
|
2005 |
|
2004 |
|
2003 |
|
2002 |
|
2001 |
|
|||||
Revenues |
|
$ |
5,348,417 |
|
$ |
4,153,890 |
|
$ |
3,201,944 |
|
$ |
2,551,106 |
|
$ |
1,741,990 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Expenses |
|
4,602,871 |
|
3,608,909 |
|
2,790,339 |
|
2,325,376 |
|
1,635,636 |
|
|||||
Income (loss) from unconsolidated joint ventures |
|
35,039 |
|
4,791 |
|
(87 |
) |
|
|
|
|
|||||
Income before income taxes |
|
780,585 |
|
549,772 |
|
411,518 |
|
225,730 |
|
106,354 |
|
|||||
State and Federal income taxes |
|
308,738 |
|
201,091 |
|
154,138 |
|
88,034 |
|
42,668 |
|
|||||
Net income |
|
471,847 |
|
348,681 |
|
257,380 |
|
137,696 |
|
63,686 |
|
|||||
Less: preferred stock dividends |
|
2,758 |
|
|
|
|
|
|
|
|
|
|||||
Net income available to common stockholders |
|
$ |
469,089 |
|
$ |
348,681 |
|
$ |
257,380 |
|
$ |
137,696 |
|
$ |
63,686 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Per Share Data: |
|
|
|
|
|
|
|
|
|
|
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Basic: |
|
|
|
|
|
|
|
|
|
|
|
|||||
Income per common share |
|
$ |
7.51 |
|
$ |
5.63 |
|
$ |
4.16 |
|
$ |
2.26 |
|
$ |
1.19 |
|
Weighted average number of common shares outstanding |
|
62,490 |
|
61,892 |
|
61,920 |
|
60,810 |
|
53,620 |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Assuming Dilution: |
|
|
|
|
|
|
|
|
|
|
|
|||||
Income per common share |
|
$ |
7.16 |
|
$ |
5.35 |
|
$ |
3.93 |
|
$ |
2.14 |
|
$ |
1.15 |
|
Weighted average number of common shares outstanding |
|
65,549 |
|
65,133 |
|
65,538 |
|
64,310 |
|
55,584 |
|
11
HOVNANIAN ENTERPRISES, INC.
Summary Consolidated |
|
|
|
|
|
|
|
|
|
|
|
|||||
Balance Sheet Data |
|
October 31, |
|
October 31, |
|
October 31, |
|
October 31, |
|
October 31, |
|
|||||
(In Thousands) |
|
2005 |
|
2004 |
|
2003 |
|
2002 |
|
2001 |
|
|||||
Total assets |
|
$ |
4,719,955 |
|
$ |
3,156,267 |
|
$ |
2,332,371 |
|
$ |
1,678,128 |
|
$ |
1,064,258 |
|
Mortgages, term loans, revolving credit agreements, and notes payable |
|
$ |
271,868 |
|
$ |
354,055 |
|
$ |
326,216 |
|
$ |
215,365 |
|
$ |
111,795 |
|
Senior notes, and senior subordinated notes |
|
$ |
1,498,739 |
|
$ |
902,737 |
|
$ |
687,166 |
|
$ |
546,390 |
|
$ |
396,544 |
|
Stockholders equity |
|
$ |
1,791,357 |
|
$ |
1,192,394 |
|
$ |
819,712 |
|
$ |
562,549 |
|
$ |
375,646 |
|
Ratios of Earnings to Fixed Charges and Earnings to Combined Fixed Charges and Preferred Stock Dividends
For purposes of computing the ratio of earnings to fixed charges and the ratio of earnings to combined fixed charges and preferred stock dividends, earnings consist of earnings from continuing operations before income taxes, plus fixed charges, less interest capitalized. Fixed charges consist of all interest incurred plus the amortization of debt issuance costs and bond discount. Combined fixed charges and preferred stock dividends consist of fixed charges and preferred stock dividends declared. The fourth quarter of 2005 was the first period we declared and paid preferred stock dividends.
The following table sets forth the ratios of earnings to fixed charges and the ratio of earnings to combined fixed charges and preferred stock dividends for each of the periods indicated:
|
|
Years Ended October 31, |
|
||||||||
|
|
2005 |
|
2004 |
|
2003 |
|
2002 |
|
2001 |
|
Ratio of earnings to fixed charges |
|
7.9 |
|
6.3 |
|
6.7 |
|
4.7 |
|
3.1 |
|
Ratio of earnings to combined fixed charges and preferred stock dividends |
|
7.6 |
|
6.3 |
|
6.7 |
|
4.7 |
|
3.1 |
|
Item 7 Managements Discussion and Analysis of Financial Condition and Results of Operations
Restatement of Notes to Financial Statements
The discussion in the Results of Operations section of Managements Discussion and Analysis of Financial Condition and Results of Operations for the years ended October 31, 2005, 2004 and 2003 reflects a restatement to contain expanded disclosure of reportable segments in accordance with the provisions of Statement of Financial Accounting Standards (SFAS) No. 131. We had historically aggregated our homebuilding operating segments into a single, national reportable segment, but have restated our segment disclosure to include six reportable homebuilding segments for the years ended October 31, 2005, 2004 and 2003 (see Note 10 of the notes to our consolidated financial statements). The restatement has no impact on our consolidated balance sheets as of October 31, 2005 and 2004, or consolidated statements of income and related income per common share amounts, consolidated statements of cash flows or consolidated statements of stockholders equity for the years ended October 31, 2005, 2004 and 2003.
CRITICAL ACCOUNTING POLICIES
Management believes that the following critical accounting policies affect its more significant judgments and estimates used in the preparation of its Consolidated Financial Statements:
Business Combinations When we make an acquisition of another company, we use the purchase method of accounting in accordance with the Statement of Financial Accounting Standards No. 141 Business Combinations (SFAS 141). Under SFAS 141, we record as our cost the estimated fair value of the acquired assets less liabilities assumed. Any difference between the cost of an acquired company and the sum of the fair values of tangible and intangible assets less liabilities is recorded as goodwill. The reported income of an acquired company includes the operations of the acquired company from the date of acquisition.
Income Recognition from Home and Land Sales Income from home and land sales is recorded when title is conveyed to the home or land buyer, adequate cash payment has been received and there is no continued involvement.
Additionally, in certain markets, we sell lots to customers, transferring title, collecting proceeds, and entering into contracts to build homes on these lots. In these cases, we do not recognize the revenue from the lot sale until we deliver the completed home and have no continued involvement related to that home. The cash received on the lot is recorded as customer deposits until the revenue is recognized.
Income Recognition from Mortgage Loans Profits and losses relating to the sale of mortgage loans are recognized when legal control passes to the buyer of the mortgage and the sales price is collected.
Interest Income Recognition for Mortgage Loans Receivable and Recognition of Related Deferred Fees and Costs Interest income is recognized as earned for each mortgage loan during the period from the loan closing date to the sale date when legal control passes to the buyer and the sale price is collected. All fees related to the origination of mortgage loans and direct loan origination costs are deferred and recorded as either (a) an adjustment to the related mortgage loans upon the closing of a loan or (b) recognized as a deferred asset or deferred revenue while the loan is in process. These fees and costs include loan origination fees, loan discount, and salaries and wages
12
HOVNANIAN ENTERPRISES, INC.
for individuals that are directly related to loan origination. Such deferred fees and costs relating to the closed loans are recognized over the life of the loans as an adjustment of yield or taken into operations upon sale of the loan to a permanent investor.
Inventories Inventories and long-lived assets held for sale are recorded at the lower of cost or fair value less selling costs. Fair value is defined as the amount at which an asset could be bought or sold in a current transaction between willing parties, that is, other than in a forced or liquidation sale. Construction costs are accumulated during the period of construction and charged to cost of sales under specific identification methods. Land, land development, and common facility costs are allocated based on buildable acres to product types within each community, then charged to cost of sales equally based upon the number of homes to be constructed in each product type. For inventories of communities under development, a loss is recorded when events and circumstances indicate impairment and the undiscounted future cash flows generated are less than the related carrying amounts. The impairment loss is based on discounted future cash flows generated from expected revenue, cost to complete including interest, and selling costs.
Insurance Deductible Reserves For fiscal 2005, our deductible was $5 million per occurrence for general liability insurance and $500,000 per occurrence for workers compensation insurance. For fiscal 2004, our deductible was $150,000 per occurrence for workers compensation and general liability insurance. Reserves have been established based upon actuarial analysis of estimated future losses during 2005 and 2004. For fiscal 2006, our deductible increases to $20 million per occurrence with an aggregate $20 million for bodily injury and property damage claims, and an aggregate $20 million for product defect claims under our general liability insurance. Our workers compensation insurance deductible increases to $1 million per occurrence for 2006.
Interest Costs related to properties under development are capitalized during the land development and home construction period and expensed as cost of sales interest as the related inventories are sold. Costs related to properties not under development are charged to interest expense separately in the Consolidated Statements of Income.
Land Options Costs are capitalized when incurred and either included as part of the purchase price when the land is acquired or charged to operations when we determine we will not exercise the option. In accordance with Financial Accounting Standards Board (FASB) revision to Interpretation No. 46 (FIN 46-R) Consolidation of Variable Interest Entities an interpretation of Accounting Research Bulletin No. 51, SFAS No. 49 Accounting for Product Financing Arrangements (SFAS 49), SFAS No. 98 Accounting for Leases (SFAS 98), and Emerging Issues Task Force (EITF) No. 97-10 The Effects of Lessee Involvement in Asset Construction (EITF 97-10), we record on the Consolidated Balance Sheets specific performance options, options with variable interest entities, and other options under Consolidated Inventory Not Owned with the offset to Liabilities from inventory not owned, Minority interest from inventory not owned and Minority interest from consolidated joint ventures.
Intangible Assets The intangible assets recorded on our balance sheet are goodwill, tradenames, architectural designs, distribution processes, and contractual agreements with both definite and indefinite lives resulting from company acquisitions. We no longer amortize goodwill or indefinite life intangibles, but instead assess them periodically for impairment. We performed such assessments utilizing a fair value approach as of October 31, 2005 and 2004, and determined that no impairment of goodwill or indefinite life intangibles existed. We are amortizing the definite life intangibles over their expected useful life, ranging from three to eight years.
In May 2004, we made a decision to change our fiscal 2002 California acquisition brand name to K. Hovnanian Homes. This resulted in a reclassification of $50 million from goodwill and indefinite life intangibles to definite life intangibles on our Consolidated Balance Sheet at that time. We are amortizing the definite life intangible as the homes in the communities still using the old California acquisition brand name are delivered to customers and the revenue on the sale of these homes is recognized. Using this methodology, we expect this intangible to be substantially written off by our fourth quarter of 2008.
Post Development Completion Costs In those instances where a development is substantially completed and sold and we have additional construction work to be incurred, an estimated liability is provided to cover the cost of such work and is recorded in accounts payable and other liabilities in the Consolidated Balance Sheets.
Warranty Costs Based upon historical experience, we accrue warranty costs as part of cost of sales for essential repair costs over $1,000 to homes, community amenities and land development infrastructure. In addition, we accrue for warranty costs under our $5 million per occurrence general liability insurance deductible as part of selling, general and administrative costs. As previously stated, the deductible for our general liability insurance will increase for
13
HOVNANIAN ENTERPRISES, INC.
fiscal 2006 to $20 million per occurrence with an aggregate $20 million for bodily injury and property damage claims, and an aggregate $20 million for product defect claims.
CAPITAL RESOURCES AND LIQUIDITY
Our operations consist primarily of residential housing development and sales in the Northeast (New Jersey, New York, Pennsylvania) the Midwest (Illinois, Michigan, Minnesota and Ohio), the Mid-Atlantic (Delaware, Maryland, Virginia, West Virginia and Washington D.C.), the Southeast (Florida, North Carolina and South Carolina), the Southwest (Arizona and Texas), and the West (California). In addition, we provide financial services to our homebuilding customers.
Our cash uses during the twelve months ended October 31, 2005 were for operating expenses, increases in housing inventories, construction, income taxes, interest, the pay down of our revolving credit facility, the repurchase of common stock, investment in joint ventures (including Town & Country Homes), and acquisitions of Cambridge Homes, Oster Homes, and First Home Builders of Florida. We provided for our cash requirements from housing and land sales, the revolving credit facility, non-recourse mortgage secured by operating property, the issuance of $500 million Senior Notes, $100 million Senior Subordinated Notes, $135 million net proceeds from the issuance of Preferred Stock, financial service revenues, and other revenues. We believe that these sources of cash are sufficient to finance our working capital requirements and other needs.
Cash requirements for fiscal 2006 are projected to increase as we continue to open new communities fund organic growth and acquire other homebuilders. We anticipate issuing senior and/or senior subordinated notes and moderate usage under the existing revolving credit facility to replenish inventory associated with the construction of new homes.
Our net income historically does not approximate cash flow from operating activities. The difference between net income and cash flow from operating activities is primarily caused by changes in receivables, prepaid and other assets, interest and other accrued liabilities, accounts payable, inventory levels, mortgage loans and liabilities, and non-cash charges relating to depreciation, amortization of computer software costs, amortization of definite life intangibles and impairment losses. When we are expanding our operations, which was the case in fiscal 2005 and 2004, inventory levels, acquisition costs, receivables, prepaids and other assets increase causing cash flow from operating activities to decrease. Liabilities also increase as operations expand. The increase in liabilities partially offsets the negative effect on cash flow from operations caused by the increase in inventory levels, receivables, prepaids and other assets. Similarly, as our mortgage operations expand, net income from these operations increase, but for cash flow purposes are offset by the net change in mortgage assets and liabilities.
On July 3, 2001, our Board of Directors authorized a stock repurchase program to purchase up to 4 million shares of Class A Common Stock. As of October 31, 2005, 2.5 million shares have been purchased under this program, of which 0.6 million and 0.1 million shares were repurchased during the twelve months ended October 31, 2005 and 2004, respectively. In addition, in 2003, we retired at no cost 1.5 million shares that were held by a seller of a previous acquisition. On March 5, 2004, our Board of Directors authorized a 2-for-1 stock split in the form of a 100% stock dividend. All share information reflects this stock dividend.
On July 12, 2005, we issued 5,600 shares of 7.625% Series A Preferred Stock, with a liquidation preference of $25,000 per share. Dividends on the Series A Preferred Stock are not cumulative and will be paid at an annual rate of 7.625%. The Series A Preferred Stock is not convertible into the Companys common stock and is redeemable in whole or in part at our option at the liquidation preference of the shares beginning on the fifth anniversary of their issuance. The Series A Preferred Stock is traded as depositary shares, with each depositary share representing 1¤1000th of a share of Series A Preferred Stock. The depositary shares are listed on the Nasdaq National Market under the symbol HOVNP. The net proceeds from the offering of $135 million, reflected in Paid in Capital in the Consolidated Balance Sheet, were used for the partial repayment of the outstanding balance under our revolving credit facility as of July 12, 2005. On October 17, 2005, we paid $2.8 million as dividends on the Series A Preferred Stock.
Our homebuilding bank borrowings are made pursuant to an amended and restated unsecured revolving credit agreement (the Agreement) that provides a revolving credit line and letter of credit line of $1.2 billion through July 2009. The facility contains an accordion feature under which the aggregate commitment can be increased to $1.3 billion subject to the availability of additional commitments. Interest is payable monthly at various rates based on a margin ranging from 1.00% to 1.95% per annum, depending on our Consolidated Leverage Ratio, as defined in the Agreement plus, at the Companys option, either (1) a base rate determined by reference to the higher of (a) PNC Bank, National Associations prime rate and (b) the federal funds rate plus 1¤2% or (2) a LIBOR-based rate for a one, two, three or six month interest period as selected by us. In addition, we pay a fee ranging from 0.20% to 0.30% per annum on the unused portion of
14
HOVNANIAN ENTERPRISES, INC.
the revolving credit line depending on our Consolidated Leverage Ratio and the average percentage unused portion of the revolving credit line. At October 31, 2005, there was zero drawn under this Agreement and we had approximately $219 million of homebuilding cash. At October 31, 2005, we had issued $330.8 million of letters of credit which reduces cash available under the Agreement. We believe that we will be able either to extend the Agreement beyond July 2009 or negotiate a replacement facility, but there can be no assurance of such extension or replacement facility. We currently are in compliance and intend to maintain compliance with the covenants under the Agreement. We and each of our significant subsidiaries, except for various subsidiaries formerly engaged in the issuance of collateralized mortgage obligations, a subsidiary formerly engaged in homebuilding activity in Poland, our financial services subsidiaries, joint ventures, and certain other subsidiaries, is a guarantor under the Agreement.
At October 31, 2005, we had $1,105.3 million of outstanding senior debt ($1,098.7 million, net of discount), comprised of $140.3 million 101¤2% Senior Notes due 2007, $100 million 8% Senior Notes due 2012, $215 million 61¤2% Senior Notes due 2014, $150 million 63¤8% Senior Notes due 2014, $200 million of 61¤4% Senior Notes due 2015, and $300 million of 61¤4% Senior Notes due 2016. At October 31, 2005, we had outstanding $400 million of senior subordinated debt comprised of $150 million 87¤8% Senior Subordinated Notes due 2012, $150 million 73¤4% Senior Subordinated Notes due 2013, and $100 million of 6% Senior Subordinated Notes due 2010. We and each of our wholly owned subsidiaries, except for K. Hovnanian Enterprises, Inc., the issuer of the senior and senior subordinated notes, and various subsidiaries formerly engaged in the issuance of collateralized mortgage obligations, a subsidiary formerly engaged in homebuilding activity in Poland, our financial services subsidiaries, and joint ventures, is a guarantor of the senior notes and senior subordinated notes.
On May 3, 2004, we redeemed our 91¤8% Senior Notes due 2009, and we recorded $8.7 million of expenses associated with the extinguishment of this debt. On March 18, 2004, we paid off our $115 million Term Loan, and we recorded $0.9 million of expenses associated with the extinguishment of the debt. In both cases, these expenses have been reported as Expenses Related to Extinguishment of Debt on the Consolidated Statements of Income.
Our mortgage banking subsidiarys warehousing agreement was amended on April 26, 2005. Pursuant to the agreement, we may borrow up to $250 million. The agreement expires in April 2006 and interest is payable monthly at the Eurodollar rate plus 1.25%. We believe that we will be able either to extend this agreement beyond April 2006 or negotiate a replacement facility, but there can be no assurance of such extension or replacement facility. We also have a $100 million commercial paper facility. The facility expires in September 2006 and interest of LIBOR plus ..65% is payable monthly. As of October 31, 2005, the aggregate principal amount of all borrowings under both agreements was $198.9 million.
Total inventory increased $833.3 million during the twelve months ended October 31, 2005. This increase excluded the change in Consolidated Inventory Not Owned of $136.0 million consisting of specific performance options, options with variable interest entities, and other options that were added to our balance sheet in accordance with SFAS 49, SFAS 98, and EITF 97-10, and Variable Interest Entities in accordance with FIN 46. See the Recent Accounting Pronouncements section of Managements Discussion and Analysis of Financial Condition and Results of Operations for additional explanation of FIN 46. Excluding the impact from acquisitions of $336.9 million in the Northeast and Southeast, total inventory in the Northeast increased $207.6 million, the Mid-Atlantic increased $165.5 million, the Midwest increased $31.2 million, the Southeast decreased $2.6 million, the Southwest increased $98.7 million, and the West decreased $4.0 million. The increase in our existing homebuilding segments was primarily the result of planned future organic growth. Substantially all homes under construction or completed and included in inventory at October 31, 2005 are expected to be closed during the next eighteen months. Most inventory completed or under development is financed through our line of credit, and senior and senior subordinated indebtedness.
We usually option property for development prior to acquisition. By optioning property, we limit our financial exposure to the amounts invested in the option deposits and predevelopment costs. This significantly reduces our risk and generally allows us to obtain necessary development approvals before acquisition of the land.
15
HOVNANIAN ENTERPRISES, INC.
The following table summarizes home sites included in our total residential real estate:
|
|
|
|
Contracted |
|
Remaining |
|
|
|
Total |
|
Not |
|
Home Sites |
|
|
|
Home Sites |
|
Delivered |
|
Available |
|
October 31, 2005: |
|
|
|
|
|
|
|
Northeast |
|
26,644 |
|
1,583 |
|
25,061 |
|
Mid-Atlantic |
|
23,582 |
|
1,381 |
|
22,201 |
|
Midwest |
|
7,081 |
|
581 |
|
6,500 |
|
Southeast |
|
24,244 |
|
5,997 |
|
18,247 |
|
Southwest |
|
20,452 |
|
1,296 |
|
19,156 |
|
West |
|
19,003 |
|
1,753 |
|
17,250 |
|
Consolidated Total |
|
121,006 |
|
12,591 |
|
108,415 |
|
Unconsolidated Joint Ventures |
|
10,051 |
|
2,340 |
|
7,711 |
|
Total Including Unconsolidated Joint Ventures |
|
131,057 |
|
14,931 |
|
116,126 |
|
Owned |
|
30,388 |
|
6,681 |
|
23,707 |
|
Optioned |
|
85,695 |
|
987 |
|
84,708 |
|
Controlled lots |
|
116,083 |
|
7,668 |
|
108,415 |
|
Construction to permanent financing lots |
|
4,923 |
|
4,923 |
|
|
|
Lots controlled by unconsolidated joint ventures |
|
10,051 |
|
2,340 |
|
7,711 |
|
Total Including Unconsolidated Joint Ventures |
|
131,057 |
|
14,931 |
|
116,126 |
|
October 31, 2004: |
|
|
|
|
|
|
|
Northeast |
|
27,794 |
|
1,815 |
|
25,979 |
|
Mid-Atlantic |
|
18,261 |
|
1,132 |
|
17,129 |
|
Midwest |
|
1,042 |
|
497 |
|
545 |
|
Southeast |
|
13,978 |
|
1,267 |
|
12,711 |
|
Southwest |
|
20,064 |
|
924 |
|
19,140 |
|
West |
|
19,732 |
|
1,917 |
|
17,815 |
|
Consolidated Total |
|
100,871 |
|
7,552 |
|
93,319 |
|
Unconsolidated Joint Ventures |
|
638 |
|
299 |
|
339 |
|
Total Including Unconsolidated Joint Ventures |
|
101,509 |
|
7,851 |
|
93,658 |
|
Owned |
|
26,737 |
|
5,734 |
|
21,003 |
|
Optioned |
|
73,203 |
|
887 |
|
72,316 |
|
Controlled lots |
|
99,940 |
|
6,621 |
|
93,319 |
|
Construction to permanent financing lots |
|
931 |
|
931 |
|
|
|
Lots controlled by unconsolidated joint ventures |
|
638 |
|
299 |
|
339 |
|
Total Including Unconsolidated Joint Ventures |
|
101,509 |
|
7,851 |
|
93,658 |
|
Housing under contract at October 31, 2005 and October 31, 2004 was 14,931 homes and 7,851 homes, respectively, including our construction to permanent financing lot contracts and contracts in unconsolidated joint ventures not included in the above home sites table.
The following table summarizes our started or completed unsold homes, excluding unconsolidated joint ventures, in active and substantially completed communities:
|
|
October 31, 2005 |
|
October 31, 2004 |
|
||||||||
|
|
Unsold Homes |
|
Models |
|
Total |
|
Unsold Homes |
|
Models |
|
Total |
|
Northeast |
|
294 |
|
18 |
|
312 |
|
77 |
|
39 |
|
116 |
|
Mid-Atlantic |
|
167 |
|
19 |
|
186 |
|
49 |
|
18 |
|
67 |
|
Midwest |
|
175 |
|
17 |
|
192 |
|
|
|
|
|
|
|
Southeast |
|
250 |
|
37 |
|
287 |
|
173 |
|
17 |
|
190 |
|
Southwest |
|
901 |
|
70 |
|
971 |
|
683 |
|
78 |
|
761 |
|
West |
|
275 |
|
157 |
|
432 |
|
329 |
|
160 |
|
489 |
|
Total |
|
2,062 |
|
318 |
|
2,380 |
|
1,311 |
|
312 |
|
1,623 |
|
Started or completed unsold homes per active selling communities |
|
5.6 |
|
0.9 |
|
6.5 |
|
4.8 |
|
1.1 |
|
5.9 |
|
Receivables, deposits and notes increased $68.6 million to $125.4 million at October 31, 2005. The increase was primarily due to the timing of cash received from homes that closed during the last days of October and a receivable for the land sales in the fourth quarter. Receivables from home revenues amounted to $39.4 million and $17.6 million at October 31, 2005 and 2004, respectively.
Prepaid expenses and other assets are as follows as of:
(In Thousands) |
|
October 31, 2005 |
|
October 31, 2004 |
|
Dollar Change |
|
|||
Prepaid project costs |
|
$ |
61,773 |
|
$ |
48,695 |
|
$ |
13,078 |
|
Senior residential rental properties |
|
8,754 |
|
8,830 |
|
(76 |
) |
|||
Other prepaids |
|
24,547 |
|
16,632 |
|
7,915 |
|
|||
Other assets |
|
30,588 |
|
19,459 |
|
11,129 |
|
|||
Total |
|
$ |
125,662 |
|
$ |
93,616 |
|
$ |
32,046 |
|
Prepaid project costs consist of community specific expenditures that are used over the life of the community. Such prepaids are expensed as homes are delivered. The increase in prepaid
16
HOVNANIAN ENTERPRISES, INC.
project costs was primarily due to the opening of new communities in all our regions. Other prepaids and other assets are debt issuance fees, non-qualified associate benefit plan assets, and miscellaneous prepaids and assets, which have increased because of the issuance of our senior and senior subordinated debt, higher contributions to a deferred compensation plan, higher prepaid commissions as a result of business growth, and acquisitions of Cambridge Homes, Oster Homes, and First Home Builders of Florida.
Property, plant, and equipment increased $52.8 million to $96.9 million at October 31, 2005. The increase relates principally to the acquisition of First Home Builders of Florida, which has its own construction services business with equipment and plant space, as well as the new Corporate office building constructed in Red Bank, New Jersey.
Investments in and advances to unconsolidated joint ventures increased as we entered into five new homebuilding joint ventures during the twelve months ended October 31, 2005. As of October 31, 2005, we have investments in nine homebuilding joint ventures and nine land and land development joint ventures. Other than performance and completion guarantees and environmental indemnifications, no other guarantees associated with unconsolidated joint ventures have been given.
Definite life intangibles increased $124.0 million to $249.5 million at October 31, 2005. This increase was the result of our acquisitions of Cambridge Homes, Oster Homes, and First Home Builders of Florida offset by the intangible amortization for the year. To the extent the acquisition price was greater than the book value of tangible assets which were stepped up to fair values, purchase price premiums were classified as intangibles. Professionals are hired to appraise all acquired intangibles. The appraisals have not been completed yet for Oster Homes and First Home Builders of Florida acquisitions. The appraisals that have been completed for fiscal 2005 and 2004 acquisitions resulted in all premiums being categorized as definite life intangibles. See the Critical Accounting Policies section of Managements Discussion and Analysis of Financial Condition and Results of Operations for additional explanation of intangibles. For tax purposes all our intangibles, except those resulting from an acquisition classified as a tax free exchange, are being amortized over 15 years.
Mortgage loans held for sale consist of residential mortgages receivable of which $211.2 million and $209.2 million at October 31, 2005 and October 31, 2004, respectively, were being temporarily warehoused and awaiting sale in the secondary mortgage market. The slight increase in mortgage loans held for sale, while total volume increased significantly, was due to the shortening in the average amount of time between the loan closing and the sale of the mortgage. We may incur risk with respect to mortgages that become delinquent, but only to the extent the losses are not covered by mortgage insurance or resale value of the house. Historically, we have incurred minimal credit losses.
Accounts payable and other liabilities are as follows as of:
(In Thousands) |
|
October 31, 2005 |
|
October 31, 2004 |
|
Dollar Change |
|
|||
Accounts payable |
|
$ |
191,469 |
|
$ |
113,866 |
|
$ |
77,603 |
|
Reserves |
|
95,310 |
|
72,289 |
|
23,021 |
|
|||
Accrued expenses |
|
48,647 |
|
28,016 |
|
20,631 |
|
|||
Accrued compensation |
|
75,655 |
|
78,283 |
|
(2,628 |
) |
|||
Other liabilities |
|
99,448 |
|
37,167 |
|
62,281 |
|
|||
Total |
|
$ |
510,529 |
|
$ |
329,621 |
|
$ |
180,908 |
|
The increase in accounts payable and accrued expenses was due to our acquisitions during 2005, as well as the opening of new communities in our existing markets. Our reserves increased in accordance with our general liability and workmans compensation policies. The increase in other liabilities was due to a cash advance we received related to a structured lot option.
RESULTS OF OPERATIONS
TOTAL REVENUES
Compared to the same prior period, revenues increased (decreased) as follows:
|
|
Year Ended |
|
|||||||
(Dollars in Thousands) |
|
October 31, 2005 |
|
October 31, 2004 |
|
October 31, 2003 |
|
|||
Homebuilding: |
|
|
|
|
|
|
|
|||
Sale of homes |
|
$ |
1,095,392 |
|
$ |
952,433 |
|
$ |
667,735 |
|
Land sales |
|
85,595 |
|
(11,541 |
) |
(28,107 |
) |
|||
Other revenues |
|
1,457 |
|
2,051 |
|
695 |
|
|||
Financial services |
|
12,083 |
|
9,003 |
|
10,515 |
|
|||
Total change |
|
$ |
1,194,527 |
|
$ |
951,946 |
|
$ |
650,838 |
|
Total revenues percent change |
|
28.8 |
% |
29.7 |
% |
25.5 |
% |
17
HOVNANIAN ENTERPRISES, INC.
HOMEBUILDING
Compared to the same prior period, housing revenues increased $1,095.4 million, or 26.8%, for the year ended October 31, 2005, increased $952.4 million, or 30.4%, for the year ended October 31, 2004, and increased $667.7, million or 27.1%, for the year ended October 31, 2003 as a result of both organic growth and through the acquisition of other homebuilders. Housing revenues are recorded at the time when title is conveyed to the buyer, adequate cash payment has been received and there is no continued involvement.
Information on homes delivered by Segment is set forth below:
|
|
Year Ended |
|
|||||||
(Housing Revenue in Thousands) |
|
October 31, 2005 |
|
October 31, 2004 |
|
October 31, 2003 |
|
|||
Northeast: |
|
|
|
|
|
|
|
|||
Housing Revenues |
|
$ |
983,426 |
|
$ |
923,189 |
|
$ |
736,344 |
|
Homes Delivered |
|
2,329 |
|
2,406 |
|
2,108 |
|
|||
Average Price |
|
$ |
422,252 |
|
$ |
383,703 |
|
$ |
349,309 |
|
Mid-Atlantic: |
|
|
|
|
|
|
|
|||
Housing Revenues |
|
$ |
909,458 |
|
$ |
637,607 |
|
$ |
427,184 |
|
Homes Delivered |
|
1,915 |
|
1,672 |
|
1,310 |
|
|||
Average Price |
|
$ |
474,913 |
|
$ |
381,344 |
|
$ |
326,095 |
|
Midwest(1): |
|
|
|
|
|
|
|
|||
Housing Revenues |
|
$ |
90,131 |
|
$ |
104,167 |
|
$ |
37,865 |
|
Homes Delivered |
|
599 |
|
782 |
|
279 |
|
|||
Average Price |
|
$ |
150,469 |
|
$ |
133,206 |
|
$ |
135,717 |
|
Southeast(2): |
|
|
|
|
|
|
|
|||
Housing Revenues |
|
$ |
744,810 |
|
$ |
428,867 |
|
$ |
256,287 |
|
Homes Delivered |
|
3,433 |
|
2,304 |
|
1,419 |
|
|||
Average Price |
|
$ |
216,956 |
|
$ |
186,140 |
|
$ |
180,611 |
|
Southwest(3): |
|
|
|
|
|
|
|
|||
Housing Revenues |
|
$ |
738,417 |
|
$ |
681,083 |
|
$ |
481,634 |
|
Homes Delivered |
|
3,883 |
|
3,875 |
|
2,431 |
|
|||
Average Price |
|
$ |
190,167 |
|
$ |
175,763 |
|
$ |
198,122 |
|
West: |
|
|
|
|
|
|
|
|||
Housing Revenues |
|
$ |
1,711,413 |
|
$ |
1,307,350 |
|
$ |
1,190,516 |
|
Homes Delivered |
|
4,115 |
|
3,547 |
|
3,984 |
|
|||
Average Price |
|
$ |
415,896 |
|
$ |
368,579 |
|
$ |
298,824 |
|
Consolidated Total: |
|
|
|
|
|
|
|
|||
Housing Revenues |
|
$ |
5,177,655 |
|
$ |
4,082,263 |
|
$ |
3,129,830 |
|
Homes Delivered |
|
16,274 |
|
14,586 |
|
11,531 |
|
|||
Average Price |
|
$ |
318,155 |
|
$ |
279,875 |
|
$ |
271,427 |
|
Unconsolidated Joint Ventures(4): |
|
|
|
|
|
|
|
|||
Housing Revenues |
|
$ |
529,944 |
|
$ |
36,555 |
|
$ |
11,034 |
|
Homes Delivered |
|
1,509 |
|
84 |
|
54 |
|
|||
Average Price |
|
$ |
351,189 |
|
$ |
435,179 |
|
$ |
204,340 |
|
Total Including Unconsolidated Joint Ventures: |
|
|
|
|
|
|
|
|||
Housing Revenues |
|
$ |
5,707,599 |
|
$ |
4,118,818 |
|
$ |
3,140,864 |
|
Homes Delivered |
|
17,783 |
|
14,670 |
|
11,585 |
|
|||
Average Price |
|
$ |
320,958 |
|
$ |
280,765 |
|
$ |
271,115 |
|
(1) Midwest includes deliveries from our Ohio acquisitions of Oster Homes on August 3, 2005 and Summit Homes on April 1, 2003.
(2) Southeast includes deliveries from our Florida acquisitions of Cambridge Homes, First Home Builders of Florida, and Windward Homes on March 1, 2005, August 8, 2005, and November 1, 2003, respectively.
(3) Southwest includes deliveries from our Texas and Arizona acquisitions on November 1, 2002, January 1, 2003, and August 13, 2003, respectively.
(4) October 31, 2005 includes deliveries from our joint venture with affiliates of Blackstone Real Estate Advisors that acquired Town & Country Homes existing residential communities on March 2, 2005.
The increase in housing revenues during the year ended October 31, 2005 was primarily due to organic growth within our existing operations. Excluding acquisitions, housing revenues and average sales prices increased in all six of our homebuilding segments combined by 20.0% and 15.5%, respectively. Homes delivered, excluding acquisitions, decreased 3% and 31% in the Northeast and Midwest, respectively, and increased 15%, 3%, 0.2%, and 16.0% in the Mid-Atlantic, Southeast, Southwest and West, respectively.
18
HOVNANIAN ENTERPRISES, INC.
Unaudited quarterly housing revenues and net sales contracts by segment, excluding unconsolidated joint ventures, for the years ending October 31, 2005, 2004, and 2003 are set forth below:
|
|
Quarter Ended |
|
||||||||||
(In Thousands) |
|
October 31, 2005 |
|
July 31, 2005 |
|
April 30, 2005 |
|
January 31, 2005 |
|
||||
Housing Revenues: |
|
|
|
|
|
|
|
|
|
||||
Northeast |
|
$ |
283,494 |
|
$ |
231,198 |
|
$ |
248,843 |
|
$ |
219,891 |
|
Mid-Atlantic |
|
331,022 |
|
236,325 |
|
183,782 |
|
158,329 |
|
||||
Midwest |
|
39,384 |
|
13,775 |
|
18,402 |
|
18,570 |
|
||||
Southeast |
|
319,045 |
|
169,142 |
|
151,118 |
|
105,505 |
|
||||
Southwest |
|
248,607 |
|
189,766 |
|
164,133 |
|
135,911 |
|
||||
West |
|
461,089 |
|
449,167 |
|
423,394 |
|
377,763 |
|
||||
Consolidated Total |
|
$ |
1,682,641 |
|
$ |
1,289,373 |
|
$ |
1,189,672 |
|
$ |
1,015,969 |
|
Sales Contracts (Net of Cancellations): |
|
|
|
|
|
|
|
|
|
||||
Northeast |
|
$ |
257,950 |
|
$ |
272,100 |
|
$ |
235,509 |
|
$ |
181,373 |
|
Mid-Atlantic |
|
284,692 |
|
282,673 |
|
333,467 |
|
178,516 |
|
||||
Midwest |
|
47,064 |
|
14,195 |
|
18,227 |
|
8,232 |
|
||||
Southeast |
|
450,257 |
|
203,113 |
|
204,818 |
|
106,366 |
|
||||
Southwest |
|
191,365 |
|
247,440 |
|
235,487 |
|
165,048 |
|
||||
West |
|
389,589 |
|
411,976 |
|
506,363 |
|
354,124 |
|
||||
Consolidated Total |
|
$ |
1,620,917 |
|
$ |
1,431,497 |
|
$ |
1,533,871 |
|
$ |
993,659 |
|
|
|
Quarter Ended |
|
||||||||||
(In Thousands) |
|
October 31, 2004 |
|
July 31, 2004 |
|
April 30, 2004 |
|
January 31, 2004 |
|
||||
Housing Revenues: |
|
|
|
|
|
|
|
|
|
||||
Northeast |
|
$ |
333,430 |
|
$ |
236,988 |
|
$ |
185,598 |
|
$ |
167,173 |
|
Mid-Atlantic |
|
225,503 |
|
164,266 |
|
147,950 |
|
99,888 |
|
||||
Midwest |
|
31,928 |
|
24,482 |
|
23,022 |
|
24,735 |
|
||||
Southeast |
|
124,029 |
|
108,129 |
|
105,535 |
|
91,174 |
|
||||
Southwest |
|
217,214 |
|
181,491 |
|
154,564 |
|
127,814 |
|
||||
West |
|
447,333 |
|
329,254 |
|
284,274 |
|
246,489 |
|
||||
Consolidated Total |
|
$ |
1,379,437 |
|
$ |
1,044,610 |
|
$ |
900,943 |
|
$ |
757,273 |
|
Sales Contracts (Net of Cancellations): |
|
|
|
|
|
|
|
|
|
||||
Northeast |
|
$ |
317,355 |
|
$ |
249,410 |
|
$ |
291,860 |
|
$ |
189,675 |
|
Mid-Atlantic |
|
159,373 |
|
165,731 |
|
213,741 |
|
153,328 |
|
||||
Midwest |
|
16,606 |
|
18,282 |
|
15,267 |
|
13,809 |
|
||||
Southeast |
|
115,445 |
|
127,976 |
|
138,181 |
|
87,739 |
|
||||
Southwest |
|
170,958 |
|
179,232 |
|
202,748 |
|
121,177 |
|
||||
West |
|
426,910 |
|
507,214 |
|
533,685 |
|
299,020 |
|
||||
Consolidated Total |
|
$ |
1,206,647 |
|
$ |
1,247,845 |
|
$ |
1,395,482 |
|
$ |
864,748 |
|
|
|
Quarter Ended |
|
||||||||||
(In Thousands) |
|
October 31, 2003 |
|
July 31, 2003 |
|
April 30, 2003 |
|
January 31, 2003 |
|
||||
Housing Revenues: |
|
|
|
|
|
|
|
|
|
||||
Northeast |
|
$ |
260,663 |
|
$ |
195,570 |
|
$ |
143,348 |
|
$ |
136,763 |
|
Mid-Atlantic |
|
121,257 |
|
100,184 |
|
102,092 |
|
103,651 |
|
||||
Midwest |
|
18,589 |
|
14,469 |
|
4,807 |
|
N/A |
|
||||
Southeast |
|
81,088 |
|
65,399 |
|
54,070 |
|
55,730 |
|
||||
Southwest |
|
172,298 |
|
129,907 |
|
106,767 |
|
72,662 |
|
||||
West |
|
371,147 |
|
325,205 |
|
255,469 |
|
238,695 |
|
||||
Consolidated Total |
|
$ |
1,025,042 |
|
$ |
830,734 |
|
$ |
666,553 |
|
$ |
607,501 |
|
Sales Contracts (Net of Cancellations): |
|
|
|
|
|
|
|
|
|
||||
Northeast |
|
$ |
197,465 |
|
$ |
240,677 |
|
$ |
197,700 |
|
$ |
115,447 |
|
Mid-Atlantic |
|
145,852 |
|
167,496 |
|
160,623 |
|
94,358 |
|
||||
Midwest |
|
21,637 |
|
20,948 |
|
7,244 |
|
N/A |
|
||||
Southeast |
|
84,955 |
|
72,321 |
|
87,700 |
|
54,992 |
|
||||
Southwest |
|
142,412 |
|
125,292 |
|
143,979 |
|
68,927 |
|
||||
West |
|
261,606 |
|
336,889 |
|
312,469 |
|
233,616 |
|
||||
Consolidated Total |
|
$ |
853,927 |
|
$ |
963,623 |
|
$ |
909,715 |
|
$ |
567,340 |
|
19
HOVNANIAN ENTERPRISES, INC.
An important indicator of our future results are recently signed contracts and our home contract backlog for future deliveries. Our consolidated contract backlog, excluding unconsolidated joint ventures, using base sales prices by market area is set forth below:
(Dollars In Thousands) |
|
October 31, 2005 |
|
October 31, 2004 |
|
October 31, 2003 |
|
|||
Northeast: |
|
|
|
|
|
|
|
|||
Total Contract Backlog |
|
$ |
693,535 |
|
$ |
719,606 |
|
$ |
506,819 |
|
Number of Homes |
|
1,583 |
|
1,815 |
|
1,512 |
|
|||
Mid-Atlantic: |
|
|
|
|
|
|
|
|||
Total Contract Backlog |
|
$ |
713,021 |
|
$ |
519,999 |
|
$ |
393,501 |
|
Number of Homes |
|
1,381 |
|
1,132 |
|
1,083 |
|
|||
Midwest: |
|
|
|
|
|
|
|
|||
Total Contract Backlog |
|
$ |
90,348 |
|
$ |
54,410 |
|
$ |
75,046 |
|
Number of Homes |
|
581 |
|
497 |
|
706 |
|
|||
Southeast: |
|
|
|
|
|
|
|
|||
Total Contract Backlog |
|
$ |
1,493,084 |
|
$ |
250,805 |
|
$ |
132,847 |
|
Number of Homes |
|
5,997 |
|
1,267 |
|
678 |
|
|||
Southwest: |
|
|
|
|
|
|
|
|||
Total Contract Backlog |
|
$ |
283,739 |
|
$ |
164,655 |
|
$ |
157,655 |
|
Number of Homes |
|
1,296 |
|
924 |
|
989 |
|
|||
West: |
|
|
|
|
|
|
|
|||
Total Contract Backlog |
|
$ |
784,495 |
|
$ |
775,295 |
|
$ |
264,536 |
|
Number of Homes |
|
1,753 |
|
1,917 |
|
793 |
|
|||
Totals: |
|
|
|
|
|
|
|
|||
Total Consolidated Contract Backlog |
|
$ |
4,058,222 |
|
$ |
2,484,770 |
|
$ |
1,530,404 |
|
Number of Homes |
|
12,591 |
|
7,552 |
|
5,761 |
|
In the month of November 2005, excluding unconsolidated joint ventures, we signed an additional 1,219 net contracts amounting to $404.8 million. Between our October 31, 2005 contract backlog and November 2005 net contracts, we have sold approximately 67% of our projected deliveries for fiscal 2006 assuming all of this backlog and net contracts are delivered in fiscal 2006.
Cost of sales includes expenses for consolidated housing and land and lot sales. A breakout of such expenses for consolidated housing sales and housing gross margin is set forth below:
|
|
Year Ended |
|
|||||||
(Dollars In Thousands) |
|
October 31, 2005 |
|
October 31, 2004 |
|
October 31, 2003 |
|
|||
Sale of homes |
|
$ |
5,177,655 |
|
$ |
4,082,263 |
|
$ |
3,129,830 |
|
Cost of sales, excluding interest |
|
3,812,922 |
|
3,042,057 |
|
2,331,393 |
|
|||
Homebuilding gross margin, before interest expense |
|
1,364,733 |
|
1,040,206 |
|
798,437 |
|
|||
Cost of sales interest, excluding land sales interest |
|
68,290 |
|
54,965 |
|
44,069 |
|
|||
Homebuilding gross margin, after interest expense |
|
$ |
1,296,443 |
|
$ |
985,241 |
|
$ |
754,368 |
|
Gross margin percentage, before interest expense |
|
26.4 |
% |
25.5 |
% |
25.5 |
% |
|||
Gross margin percentage, after interest expense |
|
25.0 |
% |
24.1 |
% |
24.1 |
% |
Cost of sales expenses as a percentage of consolidated home sales revenues are presented below:
|
|
Year Ended |
|
||||
|
|
October 31, 2005 |
|
October 31, 2004 |
|
October 31, 2003 |
|
Sale of homes |
|
100.0 |
% |
100.0 |
% |
100.0 |
% |
Cost of sales, excluding interest: |
|
|
|
|
|
|
|
Housing, land and development costs |
|
65.6 |
|
66.5 |
|
67.1 |
|
Commissions |
|
2.3 |
|
2.2 |
|
2.1 |
|
Financing concessions |
|
1.0 |
|
1.0 |
|
0.9 |
|
Overheads |
|
4.7 |
|
4.8 |
|
4.4 |
|
Total cost of sales, before interest expense |
|
73.6 |
|
74.5 |
|
74.5 |
|
Gross margin percentage, before interest expense |
|
26.4 |
|
25.5 |
|
25.5 |
|
Cost of sales interest |
|
1.4 |
|
1.4 |
|
1.4 |
|
Gross margin percentage, after interest expense |
|
25.0 |
% |
24.1 |
% |
24.1 |
% |
20
We sell a variety of home types in various communities, each yielding a different gross margin. As a result, depending on the mix of both the communities and of home types delivered, consolidated gross margin will fluctuate up or down. The consolidated gross margins, before interest expense increased to 26.4% during the year ended October 31, 2005 compared to 25.5% for the same period last year due primarily to the mix of homes delivered both in terms of geography as well as type of home. Generally speaking homes in highly regulated markets in the Northeast, Southeast and West have higher margins than homes in less regulated markets. During the year ended October 31, 2004, our consolidated gross margin, before interest expense, remained flat from the previous year despite the fact that we believe gross margins were adversely impacted in 2005 due to the effect of price increases in lumber, concrete, and certain other building materials. The dollar increases in homebuilding gross margin, before interest expense for each of the three years ended October 31, 2005, 2004, and 2003 were attributed to increased sales, resulting from both organic growth in deliveries and our acquisitions of other homebuilders. Also shown in the table are our results of gross margins, after interest expense. After deducting interest expense, which was previously capitalized and amortized through cost of sales, our homebuilding gross margin was 25.0% for 2005 compared to 24.1% for 2004 and 2003, but as a percentage of revenue cost of sales interest has remained flat at 1.4% for the years ended October 31, 2005, 2004, and 2003.
Homebuilding selling, general, and administrative expenses as a percentage of homebuilding revenues increased 30 basis points to 8.4% for the year ended October 31, 2005. Such expenses increased to $441.9 million for the year ended October 31, 2005, and increased to $330.6 million for the year ended October 31, 2004 from $253.7 million for the previous year. The increased spending year over year was primarily due to our acquisitions and overhead costs for organically expanding operations ahead of our expected future growth in housing revenues.
We have written-off or written-down certain inventories totaling $5.4, $7.0, and $5.2 million during the years ended October 31, 2005, 2004, and 2003, respectively, to their estimated fair value. See Notes to Consolidated Financial Statements Note 13 for additional explanation. These write-offs and write-downs were incurred primarily because of the decision not to exercise certain options to purchase land, redesign of communities in planning, a change in the marketing strategy to liquidate a particular property or lower property values.
During the years ended October 31, 2005, 2004, and 2003, we wrote-off residential land options and approval and engineering costs amounting to $5.3, $5.4, and $4.5 million, respectively, which are included in the total write-offs mentioned above. When a community is redesigned, abandoned engineering costs are written-off. Option and approval and engineering costs are written-off when a communitys proforma profitability does not produce adequate returns on the investment commensurate with the risk and we cancel the option. Such write-offs were located in all our regions.
During the year ended October 31, 2004, we wrote-down a community $1.2 million in the Northeast, $0.1 million in the Mid-Atlantic, and $0.3 million in the Southwest. The write-down in the Northeast was attributed to a section of a community that was built in accordance with a low income housing clause. In preparation for selling this property, an outside appraisal was prepared resulting in a reduction in inventory carrying amount to fair value. The write-downs in the Mid-Atlantic and Southwest were attributed to the properties that were acquired as part of our acquisitions in these segments. A decision was made to liquidate these properties resulting in lower sales prices.
We wrote-down one community $0.7 million in the Southwest during the year ended October 31, 2003. This property was acquired as part of one of our acquisitions. A decision was made to liquidate this property resulting in lower sales prices.
Land sales and other revenues consist primarily of land and lot sales. A breakout of land and lot sales is set forth below:
|
|
Year Ended |
|
|||||||
(In Thousands) |
|
October 31, 2005 |
|
October 31, 2004 |
|
October 31, 2003 |
|
|||
Land and lot sales |
|
$ |
88,259 |
|
$ |
2,664 |
|
$ |
14,205 |
|
Cost of sales, excluding interest |
|
52,203 |
|
2,217 |
|
10,931 |
|
|||
Land and lot sales gross margin, excluding interest |
|
36,056 |
|
447 |
|
3,274 |
|
|||
Land sales interest expense |
|
1,715 |
|
20 |
|
550 |
|
|||
Land and lot sales gross margin, including interest |
|
$ |
34,341 |
|
$ |
427 |
|
$ |
2,724 |
|
Net pretax profits from land sales were $34.3 million during fiscal 2005. Although the amount of land sale profits varies from year-to-year, some land sale profits are typically recognized by
21
HOVNANIAN ENTERPRISES, INC.
the Company each year in the normal course of homebuilding and land development operations, wherein certain parcels are sold to other builders, land developers, and commercial property developers. Land and lot sales are often the result of acquiring large parcels for which we do not want to do all the development. In addition, this may happen more often in the future as HLIG continues to acquire large parcels, with the intent to sell portions to other builders.
FINANCIAL SERVICES
Financial services consists primarily of originating mortgages from our homebuyers, selling such mortgages in the secondary market, and title insurance activities. During the years ended October 31, 2005, October 31, 2004, and October 31, 2003, financial services provided a $24.0, $25.5, and $22.9 million pretax profit, respectively. In 2005, financial services revenue increased $12.1 million to $72.4 million, but this increase was more than offset by increased costs as the mortgage operations added overhead costs to prepare for future growth and the profit per loan declined as the mortgage market became more competitive with less mortgage refinancing occurring in 2005 versus 2004. The increase in 2004 was primarily due to increased activity in our mortgage operations, along with our homebuilding growth. In addition to our wholly-owned mortgage subsidiaries, customers obtained mortgages from our mortgage joint ventures in the Midwest (Ohio) and the West in 2004 and 2003, and also the Southeast in 2005. In the market areas served by our wholly-owned mortgage banking subsidiaries, approximately 67%, 66%, and 74% of our non-cash homebuyers obtained mortgages originated by these subsidiaries during the years ended October 31, 2005, 2004, and 2003, respectively. Servicing rights on new mortgages originated by us will be sold as the loans are closed.
CORPORATE GENERAL AND ADMINISTRATIVE
Corporate general and administrative expenses include the operations at our headquarters in Red Bank, New Jersey. Such expenses include our executive offices, information services, human resources, corporate accounting, training, treasury, process redesign, internal audit, construction services, and administration of insurance, quality, and safety. As a percentage of total revenues, such expenses were 1.7% for the year ended October 31, 2005, 1.5% for the year ended October 31, 2004, and 2.0% for the year ended October 31, 2003. The increase in corporate general and administrative expenses during the year ended October 31, 2005 compared to the same period last year was due to increased depreciation expense for new software systems, increased consulting services related to the new software implementation and Sarbanes Oxley compliance costs, and increased compensation with more headcount and higher profit based bonuses.
Other interest declined $0.3 million to $19.7 million for the year ended October 31, 2005. In 2004 other interest increased $0.5 million to $20.1 million for the year ended October 31, 2004. The fluctuation in other interest from year to year is a result of the relationship of total inventory and interest incurred in each year, because we capitalize interest related to inventory and the remainder is expensed.
Other operations consist primarily of miscellaneous residential housing operations expenses, senior residential property operations, earnout payments from homebuilding company acquisitions, amortization of the consultants agreement and the right of first refusal agreement from our California acquisition in fiscal 2002, minority interest relating to consolidated joint ventures, corporate-owned life insurance, and certain contributions.
In the ordinary course of business, we enter into land and lot option purchase contracts in order to procure land or lots for the construction of homes. Lot option contracts enable us to control significant lot positions with a minimal capital investment and substantially reduce the risks associated with land ownership and development. At October 31, 2005, we had $359.9 million in option deposits in cash and letters of credit to purchase land and lots with a total purchase price of $5.0 billion. Our liability is generally limited to forfeiture of the nonrefundable deposits, letters of credit and other nonrefundable amounts incurred. We have no material third party guarantees. However, $8.7 million of the $5.0 billion in land and lot option purchase contracts contained specific performance clauses which require us to purchase the land or lots upon satisfaction of certain requirements by both the sellers and the Company. Therefore, this specific performance obligation of $8.7 million is recorded on the balance sheet in Liabilities from inventory not owned.
Pursuant to FASB Interpretation No. 46 (FIN 46), Consolidation of Variable Interest Entities, we consolidated $242.8 million of inventory not owned at October 31, 2005,
22
HOVNANIAN ENTERPRISES, INC.
representing the fair value of the optioned property. Additionally, to reflect the fair value of the inventory consolidated under FIN 46, we eliminated $11.0 million of its related cash deposits for lot option contracts, which are included in Consolidated Inventory Not Owned. Since we do not own an equity interest in any of the unaffiliated variable interest entities that we must consolidate pursuant to FIN 46, we generally have little or no control or influence over the operations of these entities or their owners. When our requests for financial information are denied by the land sellers, certain assumptions about the assets and liabilities of such entities are required. In most cases, the fair value of the assets of the consolidated entities have been based on the remaining contractual purchase price of the land or lots we are purchasing. In these cases, it is assumed that the entities have no debt obligations and the only asset recorded is the land or lots we have the option to buy with a related offset to minority interest for the assumed third party investment in the variable interest entity. At October 31, 2005, the balance reported in Minority interest from inventory not owned was $180.2 million. At October 31, 2005, we had cash deposits and letters of credit totaling $23.1 million, representing our current maximum exposure associated with the consolidation of lot option contracts. Creditors of these VIEs, if any, have no recourse against us.
The following summarizes our aggregate contractual commitments at October 31, 2005:
|
|
Payments Due by Period |
|
|||||||||||||
|
|
|
|
Less than |
|
|
|
|
|
More than |
|
|||||
(In Thousands) |
|
Total |
|
1 year |
|
1 3 years |
|
3 5 years |
|
5 years |
|
|||||
Long Term Debt(1) |
|
$ |
2,340,027 |
|
$ |
111,808 |
|
$ |
347,388 |
|
$ |
288,117 |
|
$ |
1,592,714 |
|
Capital Lease Obligations |
|
|
|
|
|
|
|
|
|
|
|
|||||
Operating Leases |
|
50,403 |
|
14,038 |
|
22,511 |
|
9,988 |
|
3,866 |
|
|||||
Purchase Obligations(2) |
|
8,656 |
|
7,225 |
|
1,431 |
|
|
|
|
|
|||||
Other Long Term Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|||||
Total |
|
$ |
2,399,086 |
|
$ |
133,071 |
|
$ |
371,330 |
|
$ |
298,105 |
|
$ |
1,596,580 |
|
(1) Represents our Senior and Senior Subordinated Notes and Other Notes Payable, and related interest payments for the life of the debt. Interest on variable rate obligations is based on rates effective as of October 31, 2005.
(2) Represents obligations under option contracts with specific performance provisions, net of cash deposits.
We had outstanding letters of credit and performance bonds of approximately $330.8 million and $928.5 million, respectively, at October 31, 2005 related principally to our obligations to local governments to construct roads and other improvements in various developments. We do not believe that any such letters of credit or bonds are likely to be drawn upon.
RECENT ACCOUNTING PRONOUNCEMENTS
In December 2004, the FASB issued SFAS No. 123 (Revised 2004) Share Based Payment (SFAS 123R), which is a revision of SFAS 123 and supersedes APB 25 and SFAS 148. This statement requires that the cost resulting from all share-based payment transactions be recognized in an entitys financial statements. This statement establishes fair value as the measurement objective in accounting for share-based payment arrangements and requires all entities to apply a fair value based measurement method in accounting for share-based payment transactions with employees except for equity instruments held by employee share ownership plans.
SFAS 123R applies to all awards granted after the required effective date (the beginning of the first annual reporting period that begins after June 15, 2005) and to awards modified, repurchased, or cancelled after that date. As of the required effective date, all public entities that used the fair value based method for either recognition or disclosure under Statement 123 will apply SFAS 123R using a modified version of prospective application. Under that transition method, compensation cost is recognized on or after the required effective date for the portion of outstanding awards for which the requisite service has not yet been rendered, based on the grant-date fair value of those awards calculated under Statement 123 for either recognition or pro forma disclosures. For periods before the required effective date, those entities may elect to apply a modified version of the retrospective application under which financial statements for prior periods are adjusted on a basis consistent with the pro forma disclosures required for those periods by Statement 123. As a result, beginning in our fiscal first quarter of 2006, we will adopt SFAS 123R and begin reflecting the stock option expense determined under fair value based methods in our income statement rather than as pro forma disclosure in the notes to the financial statements. We expect the impact of the adoption of SFAS 123R to be a reduction of fiscal 2006 net income of approximately $7.0 million assuming modified prospective application.
23
HOVNANIAN ENTERPRISES, INC.
In March 2005, the Securities and Exchange Commission released SEC Staff Accounting Bulletin (SAB) No. 107, Share-Based Payment. SAB No. 107 provides the SEC staff position regarding the application of SFAS No. 123R. SAB No. 107 contains interpretive guidance related to the interaction between SFAS No. 123R and certain SEC rules and regulations, as well as provides the staffs views regarding the valuation of share-based payment arrangements for public companies. SAB No. 107 also highlights the importance of disclosures made related to the accounting for share-based payment transactions. We are currently evaluating SAB No. 107 and will be incorporating it as part of our adoption of SFAS No. 123R.
In December 2004, the FASB issued Staff Position 109-1 (FSP 109-1), Application of FASB Statement No. 109 (FASB No. 109), Accounting for Income Taxes, to the Tax Deduction on Qualified Production Activities Provided by the American Jobs Creation Act of 2004. FSP 109-1 clarifies guidance that applies to the new deduction for qualified domestic production activities. When fully phased-in, the deduction will be up to 9% of the lesser of qualified production activities income or taxable income. FSP 109-1 clarifies that the deduction should be accounted for as a special deduction under FASB No. 109 and will reduce tax expense in the period or periods that the amounts are deductible on the tax return. Any tax benefits resulting from the new deduction will be effective for our fiscal year ending October 31, 2006. We are in the process of assessing the impact, if any, the new deduction will have on our financial statements.
In May 2005, the FASB issued SFAS 154, Accounting Changes and Error Corrections. This statement, which replaces APB Opinion No. 20, Accounting Changes and SFAS No. 3, Reporting Accounting Changes in Interim Financial Statements, changes the requirements for the accounting for and reporting of a change in accounting principle. The statement requires retrospective application of changes in accounting principle to prior periods financial statements unless it is impracticable to determine the period-specific effects or the cumulative effect of the change. SFAS No. 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. The adoption of SFAS No. 154 is not expected to have a material impact on our consolidated financial position, results of operations or cash flows.
In June 2005, the Emerging Issues Task Force (EITF) released Issue No. 04-5 Determining Whether a General Partner, or the General Partners as a Group, Controls a Limited Partnership or Similar Entity When the Limited Partners Have Certain Rights (EITF 04-5). EITF 04-5 creates a framework for evaluating whether a general partner or a group of general partners controls a limited partnership and therefore should consolidate the partnership. EITF 04-5 states that the presumption of general partner control would be overcome only when the limited partners have certain specific rights as outlined in EITF 04-5. EITF 04-5 is effective immediately for all newly formed limited partnerships and for existing limited partnership agreements that are modified. For general partners in all other limited partnerships, EITF 04-5 is effective no later than the beginning of the first reporting period in fiscal years beginning after December 15, 2005. Implementation of EITF 04-5 is not expected to have a material impact on the Companys results of operations or financial position.
Total taxes as a percentage of income before taxes amounted to approximately 39.6%, 36.6%, and 37.5% for the years ended October 31, 2005, 2004, and 2003, respectively. The increase in the effective rate for 2005 was due to refunds recorded in 2004 related to previous years taxes, higher than estimated taxes upon filing our 2004 tax return in the third quarter of 2005, the elimination of certain state deductions, and the loss carryforward running out in one state. Deferred federal and state income tax assets primarily represent the deferred tax benefits arising from temporary differences between book and tax income which will be recognized in future years as an offset against future taxable income. If for some reason the combination of future years income (or loss) combined with the reversal of the timing differences results in a loss, such losses can be carried back to prior years to recover the deferred tax assets. As a result, management is confident such deferred tax assets reflected in the balance sheet are recoverable regardless of future income. See Notes to Consolidated Financial Statements Note 10 for an additional explanation of taxes.
Inflation has a long-term effect on us because increasing costs of land, materials, and labor result in increasing sale prices of our homes. In general, these price increases have been commensurate with the general rate of inflation in our housing markets and have not had a significant adverse effect on the sale of our homes. A significant risk faced by the housing industry generally is that rising house costs, including land and interest costs, will substantially outpace increases in the income of potential purchasers. In recent years, in the price ranges in which our homes sell, we have not found this risk to be a significant problem.
24
HOVNANIAN ENTERPRISES, INC.
Inflation has a lesser short-term effect on us because we generally negotiate fixed price contracts with our subcontractors and material suppliers for the construction of our homes. These prices usually are applicable for a specified number of residential buildings or for a time period of between four to twelve months. Construction costs for residential buildings represent approximately 57% of our homebuilding cost of sales.
On March 1, 2005, we acquired for cash the assets of Cambridge Homes, a privately held Orlando homebuilder and provider of related financial services, headquartered in Altamonte Springs, Florida. The acquisition provides us with a presence in the greater Orlando market. Cambridge Homes designs, markets and sells both single family homes and attached townhomes and focuses on first-time, move-up and luxury homebuyers. Cambridge Homes also provides mortgage financing, as well as title and settlement services to its homebuyers.
The Cambridge Homes acquisition was accounted for as a purchase, with the results of its operations included in our consolidated financial statements as of the date of the acquisition.
On March 2, 2005, we acquired the operations of Town & Country Homes, a privately held homebuilder and land developer headquartered in Lombard, Illinois, which occurred concurrently with our entering into a joint venture agreement with affiliates of Blackstone Real Estate Advisors in New York to own and develop Town & Countrys existing residential communities. The joint venture is being accounted for under the equity method. Town & Country Homes operations beyond the existing owned and optioned communities, as of the acquisition date, are wholly owned and included in our consolidated financial statements.
The Town & Country acquisition provides us with a strong initial position in the greater Chicago market, and expands our operations into the Florida markets of West Palm Beach, Boca Raton and Fort Lauderdale and bolsters our current presence in Minneapolis/St. Paul. Town & Country designs, markets and sells a diversified product portfolio in each of its markets, including single family homes and attached townhomes, as well as mid-rise condominiums in Florida. Town & Country serves a broad customer base including first-time, move-up and luxury homebuyers.
On August 8, 2005, we acquired substantially all of the assets of First Home Builders of Florida, a privately held homebuilder and provider of related financial services headquartered in Cape Coral, Florida. First Home Builders is a leading builder in Western Florida and ranked first in the greater Fort Myers-Cape Coral market. First Home Builders of Florida designs, markets and sells single family homes, with a focus on the first-time home buying segment. The company also provides mortgage financing, title and settlement services to its homebuyers.
On August 3, 2005, we acquired substantially all of the homebuilding assets of Oster Homes, a privately held Ohio homebuilder, headquartered in Lorain, Ohio. The acquisition provides Hovnanian with a complementary presence to its Ohio build-on-your-own-lot homebuilding operations. Oster Homes builds in Lorain County in Northeast Ohio, just west of Cleveland. Oster Homes designs, markets and sells single family homes, with a focus on first-time and move-up homebuyers. Additionally, Oster Homes utilizes a design center to market extensive pre-prices, options and upgrades.
Both the First Home Builders of Florida and the Oster Homes acquisitions were accounted for as purchases with the results of their operations included in our consolidated financial statements as of the dates of the acquisitions.
On November 6, 2003, we acquired a Tampa, Florida area homebuilder for cash and 489,236 shares of our Class A Common Stock. This acquisition was accounted for as a purchase, with the results of operations of this entity included in our consolidated financial statements as of the date of acquisition. On November 1, 2002 and December 31, 2002, we acquired two Texas homebuilding companies. On April 9, 2003, we acquired a build-on-your-own-lot homebuilder in Ohio, and on August 8, 2003, we acquired a homebuilder in Arizona.
All fiscal 2005, 2004, and 2003 acquisitions provide for other payments to be made, generally dependant upon achievement of certain future operating and return objectives.
All statements in this Form 10-K that are not historical facts should be considered as Forward-Looking Statements within the meaning 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. Although we believe that our plans, intentions and expectations reflected in, or suggested by such forward-looking statements are reasonable, we
25
HOVNANIAN ENTERPRISES, INC.
can give no assurance that such plans, intentions, or expectations will be achieved. Such risks, uncertainties and other factors include, but are not limited to:
· Changes in general and local economic and business conditions;
· Adverse weather conditions and natural disasters;
· Changes in market conditions;
· Changes in home prices and sales activity in the markets where the Company builds homes;
· Government regulation, including regulations concerning development of land, the home building, sales and customer financing processes, and the environment;
· Fluctuations in interest rates and the availability of mortgage financing;
· Shortages in, and price fluctuations of, raw materials and labor;
· The availability and cost of suitable land and improved lots;
· Levels of competition;
· Availability of financing to the Company;
· Utility shortages and outages or rate fluctuations; and
· Geopolitical risks, terrorist acts and other acts of war.
Certain risks, uncertainties, and other factors are described in detail in Item 1 and 2 Business and Properties in this Form 10-K.
Item 7A Quantitative and Qualitative Disclosures About Market Risk
The primary market risk facing us is interest rate risk on our long term debt. In connection with our mortgage operations, mortgage loans held for sale and the associated mortgage warehouse line of credit are subject to interest rate risk; however, such obligations reprice frequently and are short-term in duration. In addition, we hedge the interest rate risk on mortgage loans by obtaining forward commitments from private investors. Accordingly the risk from mortgage loans is not material. We do not hedge interest rate risk other than on mortgage loans using financial instruments. We are also subject to foreign currency risk but this risk is not material. The following tables set forth as of October 31, 2005 and 2004, our long term debt obligations, principal cash flows by scheduled maturity, weighted average interest rates and estimated fair market value (FMV). There have been no significant changes in our market risk from October 31, 2004 to October 31, 2005.
(Dollars in |
|
Long Term Debt as of October 31, 2005 |
|
|
|
|
|
FMV at |
|
||||||||||||||||
Thousands) |
|
2006 |
|
2007 |
|
2008 |
|
2009 |
|
2010 |
|
Thereafter |
|
Total |
|
10/31/05 |
|
||||||||
Long Term Debt(1): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
Fixed Rate |
|
$ |
49,327 |
|
$ |
140,949 |
|
$ |
748 |
|
$ |
800 |
|
$ |
100,855 |
|
$ |
1,285,583 |
|
$ |
1,578,262 |
|
$ |
1,510,091 |
|
Average interest rate |
|
6.76 |
% |
10.48 |
% |
6.71 |
% |
6.73 |
% |
6.01 |
% |
6.94 |
% |
7.19 |
% |
|
|
||||||||
(1) Does not include bonds collateralized by mortgages receivable or the mortgage warehouse line of credit.
(Dollars in |
|
Long Term Debt as of October 31, 2004 |
|
|