SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10Q
[ X ] Quarterly report pursuant to Section 13 or 15 (d) of the
Securities Exchange Act of 1934
For quarterly period ended JANUARY 31, 1997 or
[ ] 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 or (I.R.S. Employer
incorporation or organization) Identification No.)
l0 Highway 35, P.O. Box 500, Red Bank, N. J. 07701
(Address of principle executive offices)
908-747-7800
(Registrant's telephone number, including area code)
Same
(Former name, former address and former fiscal year, if changed
since last report)
Indicate by check mark whether the registrant (l) has filed all reports
required to be filed by Sections l3 or l5(d) of the Securities Exchange Act of
l934 during the preceding l2 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 [ ]
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date. 15,121,955 Class A Common
Shares and 7,840,098 Class B Common Shares were outstanding as of March 10,
1997.
HOVNANIAN ENTERPRISES, INC.
FORM 10Q
INDEX
PAGE NUMBER
PART I. Financial Information
Item l. Consolidated Financial Statements:
Consolidated Balance Sheets at January 31,
1997 (unaudited) and October 31, 1996 3
Consolidated Statements of Income for the
three months ended January 31, 1997
and 1996 (unaudited) 5
Consolidated Statements of Stockholders' Equity
for the three months ended January 31, 1997
(unaudited) 6
Consolidated Statements of Cash Flows
for the three months ended January 31,
1997 and 1996 (unaudited) 7
Notes to Consolidated Financial
Statements (unaudited) 8
Item 2. Management's Discussion and Analysis
of Financial Condition and Results
of Operations 9
PART II. Other Information
Item 6(b). Exhibit 27 - Financial Data Schedules
Item 6(c). No reports on Form 8K have been filed during
the quarter for which this report is filed.
Signatures 18
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands)
January 31, October 31,
ASSETS 1997 1996
----------- -----------
Homebuilding:
Cash and cash equivalents....................... $ 10,322 $ 16,535
----------- -----------
Inventories - At cost, not in excess of fair
value:
Sold and unsold homes and lots under
development.................................. 326,621 314,630
Land and land options held for future
development or sale......................... 93,167 61,677
----------- -----------
Total Inventories........................... 419,788 376,307
----------- -----------
Receivables, deposits, and notes................ 34,931 26,442
----------- -----------
Property, plant, and equipment - net............ 18,408 18,251
----------- -----------
Prepaid expenses and other assets............... 38,540 31,939
----------- -----------
Total Homebuilding.......................... 521,989 469,474
----------- -----------
Financial Services:
Cash and cash equivalents....................... 489 4,196
Mortgage loans held for sale.................... 18,691 57,812
Other assets.................................... 1,985 3,217
----------- -----------
Total Financial Services.................... 21,165 65,225
----------- -----------
Investment Properties:
Rental property - net........................... 51,418 51,892
Property under development or held for future
development................................... 13,546 13,502
Other assets.................................... 3,080 3,106
Investment in and advances to unconsolidated
joint venture................................. 145 186
----------- -----------
Total Investment Properties................. 68,189 68,686
----------- -----------
Collateralized Mortgage Financing:
Collateral for bonds payable.................... 9,104 9,478
Other assets.................................... 449 576
----------- -----------
Total Collateralized Mortgage Financing..... 9,553 10,054
----------- -----------
Income Taxes Receivable - Including deferred tax
benefits........................................ 9,914 672
----------- -----------
Total Assets...................................... $630,810 $614,111
=========== ===========
See notes to consolidated financial statements.
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands)
January 31, October 31,
LIABILITIES AND STOCKHOLDERS' EQUITY 1997 1996
----------- -----------
Homebuilding:
Nonrecourse land mortgages........................ $ 23,008 $ 25,151
Accounts payable and other liabilities............ 32,515 45,146
Customers' deposits............................... 18,260 12,371
Nonrecourse mortgages secured by operating
properties...................................... 3,897 3,918
----------- -----------
Total Homebuilding............................ 77,680 86,586
----------- -----------
Financial Services:
Accounts payable and other liabilities............ 453 1,631
Mortgage warehouse line of credit................. 16,333 55,196
----------- -----------
Total Financial Services...................... 16,786 56,827
----------- -----------
Investment Properties:
Accounts payable and other liabilities............ 775 721
Nonrecourse mortgages secured by rental property.. 30,959 31,071
----------- -----------
Total Investment Properties................... 31,734 31,792
----------- -----------
Collateralized Mortgage Financing:
Accounts payable and other liabilities............ 11 11
Bonds collateralized by mortgages receivable...... 8,759 9,231
----------- -----------
Total Collateralized Mortgage Financing....... 8,770 9,242
----------- -----------
Notes Payable:
Revolving credit agreement........................ 107,500 30,000
Subordinated notes................................ 190,000 200,000
Accrued interest.................................. 6,492 6,042
----------- -----------
Total Notes Payable........................... 303,992 236,042
----------- -----------
Total Liabilities............................. 438,962 420,489
----------- -----------
Stockholders' Equity:
Preferred Stock,$.01 par value-authorized 100,000
shares; none issued
Common Stock,Class A,$.01 par value-authorized
87,000,000 shares; issued 15,514,184 shares
(including 345,874 shares held in Treasury)..... 155 155
Common Stock,Class B,$.01 par value-authorized
13,000,000 shares; issued 8,214,617 shares
(including 345,874 shares held in Treasury)..... 82 82
Paid in Capital................................... 33,935 33,935
Retained Earnings................................. 162,975 164,749
Treasury Stock - at cost.......................... (5,299) (5,299)
----------- -----------
Total Stockholders' Equity.................... 191,848 193,622
----------- -----------
Total Liabilities and Stockholders' Equity.......... $630,810 $614,111
=========== ===========
See notes to consolidated financial statements.
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In Thousands Except Per Share Data)
Three Months Ended
January 31,
-------------------
1997 1996
--------- ---------
Revenues:
Homebuilding:
Sale of homes...................... $115,115 $108,570
Land sales and other revenues...... 960 1,931
--------- ---------
Total Homebuilding............... 116,075 110,501
Financial Services................... 1,858 1,650
Investment Properties................ 2,227 4,541
Collateralized Mortgage Financing.... 193 447
--------- ---------
Total Revenues................... 120,353 117,139
--------- ---------
Expenses:
Homebuilding:
Cost of sales...................... 100,217 94,082
Selling, general and administrative 9,896 8,225
--------- ---------
Total Homebuilding............... 110,113 102,307
Financial Services................... 2,392 2,350
Investment Properties................ 1,562 1,714
Collateralized Mortgage Financing.... 247 475
Corporate General and Administration. 3,594 3,643
Interest............................. 5,492 5,600
Other Operations..................... 808 734
--------- ---------
Total Expenses................... 124,208 116,823
--------- ---------
Income (Loss) Before Income Taxes...... (3,855) 316
--------- ---------
State and Federal Income Taxes:
State................................ 365 540
Federal.............................. (2,446) (724)
--------- ---------
Total Taxes........................ (2,081) (184)
--------- ---------
Net Income (Loss)...................... $ (1,774) $ 500
========= =========
Earnings (Loss) Per Common Share....... $ (.08) $ .02
========= =========
See notes to consolidated financial statements.
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Dollars In Thousands)
A Common Stock B Common Stock
------------------- -------------------
Shares Shares
Issued and Issued and Paid-In Retained Treasury
Outstanding Amount Outstanding Amount Capital Earnings Stock Total
----------- ------ ----------- ------ ------- -------- -------- --------
Balance, October 31, 1996. 15,135,348 $155 7,901,705 $82 $33,935 $164,749 $(5,299) $193,622
Conversion of Class B to
Class A Common Stock.... 32,962 (32,962)
Net Loss.................. (1,774) (1,774)
----------- ------ ----------- ------ ------- -------- -------- --------
Balance, January 31, 1997. 15,168,310 $155 7,868,743 $82 $33,935 $162,975 $(5,299) $191,848
=========== ====== =========== ====== ======= ======== ======== ========
See notes to consolidated financial statements.
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
Three Months Ended
January 31,
---------------------
1997 1996
---------- ----------
Cash Flows From Operating Activities:
Net Income (Loss)................................... $ (1,774) $ 500
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation.................................... 1,351 1,229
Loss (gain) on sale and retirement of property
and assets.................................... (2,114)
Deferred income taxes........................... 3,597 1,835
Decrease (increase) in assets:
Escrow cash................................... 1,144 668
Receivables, prepaids and other assets........ (14,159) (13,173)
Mortgage notes receivable..................... 39,386 22,047
Inventories................................... (43,481) (31,145)
Increase (decrease) in liabilities:
State and Federal income taxes................ (12,839) 56
Customers' deposits........................... 5,974 1,885
Interest and other accrued liabilities........ (2,585) (8,070)
Post development completion costs............. (1,574) (601)
Accounts payable.............................. (9,216) (11,558)
---------- ----------
Net cash used in operating activities....... (34,176) (38,441)
---------- ----------
Cash Flows From Investing Activities:
Proceeds from sale of property and assets........... 10,400
Purchase of property................................ (971) (1,448)
Investment in and advances to unconsolidated
affiliates........................................ 35 3,188
Investment in income producing properties........... (44) (387)
---------- ----------
Net cash used (provided by) in investing
activities................................ (980) 11,753
---------- ----------
Cash Flows From Financing Activities:
Proceeds from mortgages and notes................... 235,077 145,935
Principal payments on mortgages and notes........... (199,203) (126,770)
Principal payments on subordinated debt............. (10,000)
Investment in mortgage notes receivable............. 374 640
---------- ----------
Net cash provided by financing activities... 26,248 19,805
---------- ----------
Net Decrease In Cash.................................. (8,908) (6,883)
Cash Balance, Beginning Of Period..................... 15,323 11,914
---------- ----------
Cash Balance, End Of Period.......................... $ 6,415 $ 5,031
========== ==========
See notes to consolidated financial statements.
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
1. The consolidated financial statements, except for the October 31, 1996
consolidated balance sheets, have been prepared without audit. In the opinion
of management, all adjustments for interim periods presented have been made,
which include only normal recurring accruals and deferrals necessary for a fair
presentation of consolidated financial position, results of operations, and
changes in cash flows. Results for the interim periods are not necessarily
indicative of the results which might be expected for a full year.
2. Certain expenses which had been previously reported as selling, general
and administration were reclassified to cost of sales. These costs include
sales commissions, buyer concessions, the amortization of prepaid selling
expenses, property taxes and condominium association subsidies. The amount
reclassified for the quarter ended January 31, 1996 was $5,787,000. In
addition, the revenues and expenses of the Company's title division have been
reclassified out of homebuilding and other operations, respectively, into the
financial services section of the consolidated statements of income. The amount
of title revenues and expenses reclassified for the quarter ended January 31,
1996 was $529,000 and $536,000, respectively.
3. Interest costs incurred, expensed and capitalized were:
Three Months Ended
January 31,
-------------------
1997 1996
-------- --------
(Dollars in Thousands)
Interest Incurred (1):
Residential (3)............. $ 6,584 $ 7,085
Commercial(4)............... 1,317 1,510
-------- --------
Total Incurred............ $ 7,901 $ 8,595
======== ========
Interest Expensed:
Residential (3)............. $ 4,175 $ 4,090
Commercial (4).............. 1,317 1,510
-------- --------
Total Expensed........... $ 5,492 $ 5,600
======== ========
Interest Capitalized at
Beginning of Period......... $ 39,152 $ 36,182
Plus Interest Incurred........ 7,901 8,595
Less Interest Expensed........ 5,492 5,600
Less Charges to Reserves...... 10 147
-------- --------
Interest Capitalized at
End of Period .............. $ 41,551 $ 39,030
======== ========
Interest Capitalized at
End of Period (5):
Residential(3).............. $ 34,884 $ 32,532
Commercial(2)............... 6,667 6,498
-------- --------
Total Capitalized......... $ 41,551 $ 39,030
======== ========
(1) Does not include interest incurred by the Company's mortgage and finance
subsidiaries.
(2) Does not include a reduction for depreciation.
(3) Represents acquisition interest for construction, land and development
costs which is charged to interest expense when homes are delivered.
(4) Represents interest allocated to or incurred on long term debt for
investment properties and charged to interest expense.
(5) Capitalized commercial interest at January 31, 1997 includes $184,000
reported at October 31, 1996 as capitalized residential interest. This
reclassification is a result of the transfer of a parcel of land from
homebuilding to investment properties.
4. Homebuilding accumulated depreciation at January 31, 1997 and October
31, 1996 amounted to $15,665,000 and $14,970,000, respectively. Rental property
accumulated depreciation at January 31, 1997 and October 31, 1996 amounted to
$11,624,000 and $11,108,000, respectively.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
CAPITAL RESOURCES AND LIQUIDITY
The Company's uses for cash during the three months ended January 31, 1997
were for operating expenses, seasonal increases in housing inventories,
construction, income taxes, interest, and the reduction of subordinated notes.
The Company provided for its cash requirements from the revolving credit
facility, land purchase notes, and from housing and other revenues. The Company
believes that these sources of cash are sufficient to finance its working
capital requirements and other needs.
In December 1996 the Board of Directors authorized a stock repurchase
program to purchase up to 2 million shares of Class A Common Stock. As of
March 10, 1997, 75,000 shares were repurchased under this program.
The Company's bank borrowings are made pursuant to a revolving credit
agreement (the "Agreement") that provides a revolving credit line of up to
$245,000,000 (the "Revolving Credit Facility") through March 1999. Interest is
payable monthly and at various rates of either prime plus 1/4% or Libor plus
1.75%. The Company believes that it will be able either to extend the Agreement
beyond March 1999 or negotiate a replacement facility, but there can be no
assurance of such extension or replacement facility. The Company currently is
in compliance and intends to maintain compliance with its covenants under the
Agreement. As of January 31, 1997, borrowings under the Agreement were
$107,500,000.
The aggregate principal amount of subordinated indebtedness issued by the
Company and outstanding as of January 31, 1997 was $190,000,000. During the
three months ended January 31, 1997, the Company reduced its subordinated debt
by $10,000,000. Annual sinking fund payments of $10,000,000 and $20,000,000 are
required in April 2000 and 2001, respectively, with additional payments of
$60,000,000 and $100,000,000 due in April 2002 and June 2005, respectively.
The Company's mortgage banking subsidiary borrows under a bank warehousing
arrangement. Other finance subsidiaries formerly borrowed from a multi-builder
owned financial corporation and a builder owned financial corporation to finance
mortgage backed securities, but in fiscal 1988 decided to cease further
borrowing from multi-builder and builder owned financial corporations. These
non-recourse borrowings have been generally secured by mortgage loans originated
by one of the Company's subsidiaries. As of January 31, 1997, the aggregate
principal amount of all such borrowings was $25,092,000.
The book value of the Company's residential inventories, rental
condominiums, and commercial properties completed and under development amounted
to the following:
January 31, October 31,
1997 1996
------------ ------------
Residential real estate inventory.......... $419,788,000 $376,307,000
Residential rental property................ 11,883,000 12,190,000
------------ ------------
Total Residential Real Estate............ 431,671,000 388,497,000
Commercial properties...................... 53,081,000 53,204,000
------------ ------------
Combined Total........................... $484,752,000 $441,701,000
============ ============
Total residential real estate increased $43,174,000 during the three months
ended January 31, 1997 primarily as a result of an inventory increase of
$43,481,000. The increase in residential real estate inventory was primarily
due to the Company's seasonal increase in construction activities for deliveries
later this year. Substantially all residential homes under construction or
completed and included in real estate inventory at January 31, 1997 are expected
to be closed during the next twelve months. Most residential real estate
completed or under development is financed through the Company's line of credit
and subordinated indebtedness.
The following table summarizes housing lots in the Company's active selling
communities under development (including Poland):
(1) (2)
Homes Contracted Remaining
Commun- Approved Deliv- Not Home Sites
ities Lots ered Delivered Available
------- -------- ------ ---------- ----------
January 31, 1997...... 84 13,327 4,427 1,644 7,256
October 31, 1996...... 85 12,942 4,613 1,479 6,850
(1) Includes 308 and 274 lots under option at January 31, 1997 and October 31,
1996, respectively.
(2) Of the total home lots available, 493 and 528 were under construction or
complete (including 107 and 106 models and sales offices), 2,222 and 1,762 were
under option, and 1,259 and 1,280 were financed through purchase money mortgages
at January 31, 1997 and October 31, 1996, respectively.
In addition, at January 31, 1997 and October 31, 1996, respectively, in
substantially completed or suspended communities the Company owned or had under
option 428 and 448 home lots. The Company also controls a supply of land
primarily through options for future development. This land is consistent with
anticipated home building requirements in its housing markets. At January 31,
1997 the Company controlled such land to build 13,020 proposed homes, compared
to 13,083 homes at October 31, 1996.
The following table summarizes the Company's started or completed unsold
homes in active, substantially complete and suspended communities:
January 31, October 31,
1997 1996
----------------------- -----------------------
Unsold Unsold
Homes Models Total Homes Models Total
------ ------ ----- ------ ------ -----
Northeast Region.... 242 77 319 242 71 313
North Carolina...... 45 - 45 68 -- 68
Florida............. 59 9 68 51 10 61
Virginia............ 17 4 21 18 3 21
California.......... 50 17 67 67 24 91
Poland.............. 2 2 4 2 2 4
------ ------ ----- ------ ------ -----
Total 415 109 524 448 110 558
====== ====== ===== ====== ====== =====
The Company's commercial properties represent long-term investments in
commercial and retail facilities completed or under development (see "Investment
Properties" under "Results of Operations"). When individual facilities are
completed and substantially leased, the Company will have the ability to obtain
long-term financing on such properties. At January 31,1997, the Company had
long-term non-recourse financing aggregating $30,959,000 on six commercial
facilities, a decrease from October 31, 1996, due to $112,000 in principal
amortization. The decrease in commercial properties of $123,000 is primarily
the result of depreciation.
Collateral Mortgage Financing - collateral for bonds payable consist of
collateralized mortgages receivable which are pledged against non-recourse
collateralized mortgage obligations. Financial Services - mortgage loans held
for sale consist of residential mortgages receivable of which $17,976,000 and
$57,095,000 at January 31, 1997 and October 31, 1996, respectively, are being
temporarily warehoused and awaiting sale in the secondary mortgage market. The
balance of such mortgages is being held as an investment by the Company. The
Company may incur risk with respect to mortgages that are delinquent, but only
to the extent the losses are not covered by mortgage insurance or resale value
of the house. Historically, the Company has incurred minimal credit losses.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JANUARY 31, 1997 COMPARED TO
THE THREE MONTHS ENDED JANUARY 31, 1996
The Company's operations consist primarily of residential housing
development and sales in its Northeast Region (comprising primarily of New
Jersey, southern New York State and eastern Pennsylvania), North Carolina,
southeastern Florida, Virginia, southwestern California and Poland. In
addition, the Company develops and operates commercial properties as long-term
investments in New Jersey, and, to a lesser extent, Florida.
At October 31, 1996, the Company reclassified certain expenses previously
reported as selling, general and administration to cost of sales. These
expenses were sales commissions, buyer concessions, the amortization of prepaid
selling expenses, property taxes and condominium association subsidies. The
amount of reclassification for the quarter ended January 31, 1996 was
$5,787,000. In addition, the Company reclassified its title revenues previously
reported as other homebuilding revenues to financial services revenues, and
title expenses from other operation expenses to financial service expenses. The
amount of title revenues and expenses reclassified for the quarter ended January
31, 1996 was $529,000 and $536,000, respectively.
Historically, the Company's first quarter produces the least amount of
deliveries for the year. This was true for fiscal 1996 and management believes
this will be true for fiscal 1997. As a result, the first quarter produces the
lowest quarterly income (or loss) for the year. The $1.8 million loss for the
three months ended January 31, 1997 can be principally attributed to lower gross
margins, as well as increased general administration expenses.
Important indicators of the future results of the Company are recently
signed contracts and home contract backlog for future deliveries. The Company's
sales contracts and homes in contract (using base sales prices) by market area
is set forth below:
Sales Contracts for the
Three Months Ended Contract Backlog
January 31, as of January 31,
----------------------- --------------------
1997 1996 1997 1996
--------- --------- --------- ---------
Northeast Region:
Dollars............. $ 92,544 $ 55,785 $232,096 $180,973
Homes............... 472 330 1,119 935
North Carolina:
Dollars............. $ 31,506 $ 19,594 $ 53,108 $ 41,936
Homes............... 174 120 280 249
Florida:
Dollars............. $ 9,708 $ 19,315 $ 34,094 $ 38,588
Homes............... 60 131 198 257
Virginia:
Dollars............. $ 2,478 $ 3,463 $ 3,472 $ 6,010
Homes............... 10 19 16 26
California:
Dollars............. $ 16,268 $ 8,209 $ 12,194 $ 11,522
Homes............... 79 48 68 63
Poland:
Dollars............. $ 1,607 -- $ 3,293 --
Homes............... 22 -- 46 --
Totals:
Dollars............. $154,111 $106,366 $338,257 $279,029
Homes............... 817 648 1,727 1,530
Total Revenues:
Revenues for the three months ended January 31, 1997 increased $3.2 million
or 2.7%, compared to the same period last year. This was a result of increased
revenues from the sale of homes of $6.5 million and a $.2 million increase in
financial service revenues. These increases were partially offset by a $2.3
million decrease in investment properties revenues, a $1.0 million decrease in
land sales and other homebuilding revenues, and a $.2 million decrease in
collateralized mortgage financing revenues.
Homebuilding:
Revenues from the sale of homes increased $6.5 million or 6% during the
three months ended January 31, 1997. Revenues from sales of homes are recorded
at the time each home is delivered and title and possession have been
transferred to the buyer.
Information on homes delivered by market area is set forth below:
Three Months Ended
January 31,
-------------------
1997 1996
--------- --------
(Dollars in Thousands)
Northeast Region:
Housing Revenues..... $ 63,440 $ 55,365
Homes Delivered...... 330 280
North Carolina:
Housing Revenues..... $ 22,042 $ 21,062
Homes Delivered...... 127 124
Florida:
Housing Revenues..... $ 13,828 $ 17,878
Homes Delivered...... 79 117
Virginia:
Housing Revenues..... $ 3,407 $ 4,397
Homes Delivered...... 18 21
California:
Housing Revenues..... $ 12,333 $ 9,868
Homes Delivered...... 57 52
Poland:
Housing Revenues..... $ 65 --
Homes Delivered...... 1 --
Totals:
Housing Revenues..... $115,115 $108,570
Homes Delivered...... 612 594
The three months ended January 31, 1997 increase in sale of homes revenues
(compared to the prior year) was primarily due to increased home deliveries and
slightly higher overall average sales prices. The increase in the Northeast
Region deliveries was primarily due to a higher contract backlog at the
beginning of the quarter compared to the same period last year. The decrease in
Florida is due to a lower backlog at the beginning of the quarter. Florida's
contract backlog was down due to a reduction in net contracts resulting from a
highly competitive market.
Cost of sales include expenses for housing and land and lot sales. A
breakout of such expenses for housing sales and housing gross margin is set
forth below:
Three Months Ended
January 31,
---------------------
1997 1996
--------- ---------
(Dollars in Thousands)
Sale of Homes................$115,115 $108,570
Cost of Sales................ 99,783 93,078
--------- ---------
Housing Gross Margin.........$ 15,332 $ 15,492
========= =========
Gross Margin Percentage...... 13.3% 14.3%
Cost of Sales expenses as a percentage of home sales revenues are presented
below:
Year Ended
------------------------
January January
31, 1997 31, 1996
--------- ---------
Sale of Homes...................... 100.0% 100.0%
--------- ---------
Cost of Sales:
Housing, land & development
costs...................... 76.8% 75.9%
Commissions.................. 2.0% 1.8%
Financing concessions........ 1.0% 1.0%
Overheads.................... 6.9% 7.0%
--------- ---------
Total Cost of Sales................ 86.7% 85.7%
--------- ---------
Gross Margin....................... 13.3% 14.3%
========= =========
The Company sells a variety of home types in various local communities,
each yielding a different gross margin. As a result, depending on the mix of
both communities and of home types delivered, consolidated quarterly gross
margin will fluctuate up or down and may not be representative of the
consolidated gross margin for the year. In addition, gross margin percentages
are higher in the Northeast Region compared to the Company's other markets. For
the three months ended January 31, 1997 the Company's gross margin decreased by
1%. This can primarily be attributed to lower gross margins in the Northeast
Region and North Carolina. The decline in the Northeast Region's gross margin
can be principally attributed to cost adjustments in several communities, which
resulted in additional housing, land, and development charges. North Carolina's
lower gross margin is primarily attributed to a change in product mix, increased
lot costs and concessions on started unsold homes.
Selling, general, and administrative expenses increased $1.7 million during
the three months ended January 31, 1997 compared to the same period last year.
As a percentage of sale of homes revenues such expenses increased to 8.6% for
the three months ended January 31, 1997 from 7.6% for the prior year. The
dollar increase in selling, general and administrative expenses is principally
due to increased deliveries and increased general and administrative expenses in
the Northeast Region. The percentage increase is also primarily due to
increased general and administration expenses in the Northeast Region.
Land Sales and Other Revenues:
Land sales and other revenues consist primarily of land and lot sales. A
breakout of land and lot sales is set forth below:
Three Months Ended
January 31,
------------------
1997 1996
-------- --------
Land and Lot Sales................ $ 544 $ 1,193
Cost of Sales..................... 434 1,004
-------- --------
Land and Lot Sales Gross Margin... $ 110 $ 189
======== ========
Land and lot sales are incidental to the Company's residential housing
operations and are expected to continue in the future but may significantly
fluctuate up or down.
Financial Services
Financial services consist primarily of originating mortgages from sales of
the Company's homes, and selling such mortgages in the secondary market. In
addition, title insurance activities have been reclassified from other housing
operations to financial services, as noted above. For the three months ended
January 31, 1997 compared to the three months ended January 31, 1996, the loss
resulting from financial services decreased by $.2 million. This was a direct
result of the Company's wholly-owned mortgage banking subisidiary originating
mortgages on a higher percentage of homes closed by the Company's housing
operations, as well as higher interest rate spreads.
Investment Properties
Investment Properties consist of rental properties, property management,
and gains or losses from the sale of such property. At January 31, 1997, the
Company owned and was leasing two office buildings, three office/warehouse
facilities, two retail centers, and two senior citizen rental communities in New
Jersey. During the first quarter of fiscal 1996 the Company sold a retail
center and reported a pretax profit of $1.9 million. Investment Properties
expenses do not include interest expense which is reported below under
"Interest."
Collateralized Mortgage Financing
In the years prior to February 29, 1988 the Company pledged mortgage loans
originated by its mortgage banking subsidiaries against collateralized mortgage
obligations ("CMO's"). Subsequently the Company discontinued its CMO program.
As a result, CMO operations are diminishing as pledged loans are decreasing
through principal amortization and loan payoffs, and related bonds are reduced.
In recent years, as a result of bonds becoming callable, the Company has also
sold a portion of its CMO pledged mortgages.
Corporate General and Administrative
Corporate general and administration expenses includes the operations at
the Company's headquarters in Red Bank, New Jersey. Such expenses include the
Company's executive offices, information services, human resources, corporate
accounting, training, treasury, process redesign, internal audit, and
administration of insurance, quality, and safety. Corporate general and
administration expenses remained comparable to the same period last year. As a
percentage of total revenues such expenses decreased slightly from 3.1% in the
quarter ended January 31, 1996 to 3.0% in the quarter ended January 31, 1997.
This decrease is due to a one-time insurance adjustment expensed during the
three months ended January 31, 1996. Otherwise such expenses would have
increased due to higher depreciation expense, and increased salary and benefit
costs.
Interest
Interest expense includes housing, land and lot, and rental properties
interest. Interest expense is broken down as follows:
Three Months Ended
January 31,
------------------
1997 1996
-------- --------
Sale of Homes.................. $ 4,072 $ 4,050
Land and Lot Sales............. 103 40
Rental Properties.............. 1,317 1,510
-------- --------
Total.......................... $ 5,492 $ 5,600
======== ========
Housing interest as a percentage of sale of homes revenues amounted to 3.5%
and 3.7% for the three months ended January 31, 1997 and 1996, respectively.
Other Operations
Other operations consist primarily of miscellaneous residential housing
operations expenses, amortization of prepaid subordinated note issuance expenses
and corporate owned life insurance loan interest. The Company's title operation
expenses have been reclassified to financial services.
Total Taxes
Total tax credits for the periods ended January 31, 1997 and January 31,
1996 were $2.1 million and $.2 million, respectively. 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.
Inflation
Inflation has a long-term effect on the Company because increasing costs of
land, materials and labor result in increasing sale prices of its homes. In
general, these price increases have been commensurate with the general rate of
inflation in the Company's housing market and have not had a significant adverse
effect on the sale of the Company's 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 it sells homes, the
Company has not found this risk to be a significant problem.
Inflation has a lesser short-term effect on the Company because the Company
generally negotiates fixed price contracts with its subcontractors and material
suppliers for the construction of its 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 51% of the Company's total costs and expenses.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of l934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HOVNANIAN ENTERPRISES, INC.
(Registrant)
DATE: March 14, 1997 /S/KEVORK S. HOVNANIAN
Kevork S. Hovnanian,
Chairman of the Board and
Chief Executive Officer
DATE: March 14, 1997 /S/PAUL W. BUCHANAN
Paul W. Buchanan,
Senior Vice President
Corporate Controller
5
1000
3-MOS
OCT-31-1997
JAN-31-1997
10,811
0
34,931
0
419,788
538,189
34,096
15,688
630,810
205,347
233,615
237
0
0
191,611
630,810
115,669
120,353
100,217
118,716
0
0
5,492
(3,855)
(2,081)
(1,774)
0
0
0
(1,774)
(0.08)
(0.08)
