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5,600 140,000 140,000 0.01 0.01 16,000,000 16,000,000 5,984,678
5,973,727 0.01 0.01 2,400,000 2,400,000 652,154 650,363 470,430
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21 10.0 10.0 July 15, 2022 July 15, 2022 10.5 10.5 July 15, 2024
July 15, 2024 10.0 10.0 November 15, 2025 November 15, 2025 - 7.75
7.75 February 15, 2026 February 15, 2026 10.5 10.5 February 15,
2026 February 15, 2026 11.25 11.25 February 15, 2026 February 15,
2026 8.0 8.0 November 1, 2027 November 1, 2027 0 0 13.5 13.5
February 1, 2026 February 1, 2026 5.0 5.0 February 1, 2040 February
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February 15, 2026 10.5 February 15, 2026 11.25 February 15, 2026
13.5 February 1, 2026 5.0 February 1, 2040 10.0 July 15, 2022 10.5
Jul 15, 2024 7.75 February 15, 2026 10.5 February 15, 2026 11.25
February 15, 2026 13.5 February 1, 2026 5.0 February 1, 2040 - 0.6
0.6 Data does not include interest incurred by our mortgage and
finance subsidiaries. At July 31, 2020, provides for up to $125.0
million in aggregate amount of senior secured first lien revolving
loans. Availability thereunder will terminate on December 28, 2022.
Capitalized interest amounts are shown gross before allocating any
portion of impairments, if any, to capitalized interest. Represents
capitalized interest which was included as part of the assets
contributed to the joint venture the Company entered into in
December 2019, as discussed in Note 18. There was no impact to the
Condensed Consolidated Statement of Operations as a result of this
transaction. Cash paid for interest, net of capitalized interest,
is the sum of other interest expensed, as defined above, and
interest paid by our mortgage and finance subsidiaries adjusted for
the change in accrued interest on notes payable, which is
calculated as follows: Three Months Ended Nine Months Ended July
31, July 31, (In thousands) 2020 2019 2020 2019 Other interest
expensed $ 27,072 $ 22,377 $ 78,944 $ 67,313 Interest paid by our
mortgage and finance subsidiaries 419 673 1,698 1,876 (Increase)
decrease in accrued interest (13,876 ) 15,404 (31,247 ) 13,105 Cash
paid for interest, net of capitalized interest $ 13,615 $ 38,454 $
49,395 $ 82,294 $26.0 million of 8.0% Senior Notes are owned by a
wholly-owned consolidated subsidiary of HEI. Therefore, in
accordance with GAAP, such notes are not reflected on the Condensed
Consolidated Balance Sheets of HEI. On November 1, 2019, the
maturity of the 8.0% Senior Notes was extended to November 1, 2027.
Corporate and unallocated for the three months ended July 31, 2020
included corporate general and administrative costs of $19.3
million, interest expense of $15.9 million (a component of Other
interest on our Condensed Consolidated Statements of Operations),
$(4.1) million of gain on extinguishment of debt and $0.6 million
of other income and expenses primarily related to interest income
and stock compensation. Corporate and unallocated for the nine
months ended July 31, 2020 included corporate general and
administrative costs of $54.3 million, interest expense of $44.6
million (a component of Other interest on our Condensed
Consolidated Statements of Operations), $(13.3) million of gain on
extinguishment of debt and $(1.6) million of other income and
expenses. Corporate and unallocated for the three months ended July
31, 2019 included corporate general and administrative costs of
$15.0 million, interest expense of $14.7 million (a component of
Other interest on our Condensed Consolidated Statements of
Operations), $(0.3) million of other income and expenses primarily
related to interest income and stock compensation. Corporate and
unallocated for the nine months ended July 31, 2019 included
corporate general and administrative costs of $48.8 million,
interest expense of $45.4 million (a component of Other interest on
our Condensed Consolidated Statements of Operations), and $(1.4)
million of other income and expenses. The aggregate unpaid
principal balance was $95.1 million and $161.1 million at July 31,
2020 and October 31, 2019, respectively. Other interest expensed
includes interest that does not qualify for interest capitalization
because our assets that qualify for interest capitalization
(inventory under development) do not exceed our debt, which
amounted to $15.9 million and $13.7 million for the three months
ended July 31, 2020 and 2019, respectively, and $44.6 million and
$46.4 million for the nine months ended July 31, 2020 and 2019,
respectively. Other interest also includes interest on completed
homes, land in planning and fully developed lots without homes
under construction, which does not qualify for capitalization and
therefore is expensed. This component of other interest was $11.2
million and $8.7 million for the three months ended July 31, 2020
and 2019, respectively, and $34.3 million and $21.0 million for the
nine months ended July 31, 2020 and 2019, respectively.
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Tables of Content
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
☒
|
Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
|
For the quarterly period ended July 31, 2020
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 (State or Other Jurisdiction of Incorporation or
Organization)
22-1851059 (I.R.S. Employer Identification No.)
90 Matawan Road, 5th Floor, Matawan, NJ 07747 (Address of Principal
Executive Offices, Including Zip Code)
732-747-7800 (Registrant’s Telephone Number, Including Area
Code)
N/A (Former Name, Former Address and Former Fiscal Year, if Changed
Since Last Report)
Securities registered pursuant to Section 12(b) of the Act:
|
Title of each class
|
Trading symbol(s)
|
Name of each exchange on which registered
|
Class A Common Stock, $0.01 par value per share
|
HOV
|
New York Stock Exchange
|
Preferred Stock Purchase Rights(1)
|
N/A
|
New York Stock Exchange
|
Depositary Shares each representing
1/1,000th of a share of 7.625% Series A
Preferred Stock
|
HOVNP
|
Nasdaq Global Market
|
(1) Each share of Common Stock includes an associated Preferred
Stock Purchase Right. Each Preferred Stock Purchase Right initially
represents the right, if such Preferred Stock Purchase Right
becomes exercisable, to purchase from the Company one
ten-thousandth of a share of its Series B Junior Preferred Stock
for each share of Common Stock. The Preferred Stock Purchase Rights
currently cannot trade separately from the underlying Common
Stock.
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 ☒ No ☐
Indicate by check mark whether the registrant has submitted
electronically every Interactive Data File required to be submitted
pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter)
during the preceding 12 months (or for such shorter period that the
registrant was required to submit such files). Yes
☒ No ☐
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated filer, a
smaller reporting company or an emerging growth company. See the
definitions of “large accelerated filer,” “accelerated filer,”
“smaller reporting company,” and “emerging growth company” in Rule
12b-2 of the Exchange Act.
Large Accelerated Filer ☐
|
Accelerated Filer ☒
|
Nonaccelerated Filer ☐
|
Smaller Reporting Company ☐
|
Emerging Growth Company ☐
|
If an emerging growth company, indicate by check mark if the
registrant has elected not to use the extended transition period
for complying with any new or revised financial accounting
standards provided pursuant to Section 13(a) of the Exchange Act.
☐
Indicate by check mark whether the registrant is a shell company
(as defined in Rule 12b-2 of the Exchange Act). Yes
☐ No ☒
Indicate the number of shares outstanding of each of the issuer’s
classes of common stock, as of the latest practicable date.
5,517,612 shares of Class A Common Stock and
624,485 shares of Class B Common Stock were outstanding as of
September 1, 2020.
HOVNANIAN ENTERPRISES,
INC.
FORM 10-Q
HOVNANIAN ENTERPRISES, INC. AND
SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands)
|
|
July 31,
|
|
|
October 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
|
(Unaudited)
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Homebuilding:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$ |
198,098 |
|
|
$ |
130,976 |
|
Restricted cash and cash equivalents
|
|
|
13,433 |
|
|
|
20,905 |
|
Inventories:
|
|
|
|
|
|
|
|
|
Sold and unsold homes and lots under development
|
|
|
928,840 |
|
|
|
993,647 |
|
Land and land options held for future development or sale
|
|
|
89,903 |
|
|
|
108,565 |
|
Consolidated inventory not owned
|
|
|
194,760 |
|
|
|
190,273 |
|
Total inventories
|
|
|
1,213,503 |
|
|
|
1,292,485 |
|
Investments in and advances to unconsolidated joint ventures
|
|
|
125,680 |
|
|
|
127,038 |
|
Receivables, deposits and notes, net
|
|
|
37,328 |
|
|
|
44,914 |
|
Property, plant and equipment, net
|
|
|
18,869 |
|
|
|
20,127 |
|
Prepaid expenses and other assets
|
|
|
63,499 |
|
|
|
45,704 |
|
Total homebuilding
|
|
|
1,670,410 |
|
|
|
1,682,149 |
|
|
|
|
|
|
|
|
|
|
Financial services
|
|
|
135,334 |
|
|
|
199,275 |
|
Total assets
|
|
$ |
1,805,744 |
|
|
$ |
1,881,424 |
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND EQUITY
|
|
|
|
|
|
|
|
|
Homebuilding:
|
|
|
|
|
|
|
|
|
Nonrecourse mortgages secured by inventory, net of debt issuance
costs
|
|
|
179,767 |
|
|
|
203,585 |
|
Accounts payable and other liabilities
|
|
|
320,420 |
|
|
|
320,193 |
|
Customers’ deposits
|
|
|
40,992 |
|
|
|
35,872 |
|
Liabilities from inventory not owned, net of debt issuance
costs
|
|
|
144,922 |
|
|
|
141,033 |
|
Senior notes and credit facilities (net of discount, premium and
debt issuance costs)
|
|
|
1,432,075 |
|
|
|
1,479,990 |
|
Accrued interest
|
|
|
50,328 |
|
|
|
19,081 |
|
Total homebuilding
|
|
|
2,168,504 |
|
|
|
2,199,754 |
|
|
|
|
|
|
|
|
|
|
Financial services
|
|
|
114,202 |
|
|
|
169,145 |
|
Income taxes payable
|
|
|
2,557 |
|
|
|
2,301 |
|
Total liabilities
|
|
|
2,285,263 |
|
|
|
2,371,200 |
|
|
|
|
|
|
|
|
|
|
Equity:
|
|
|
|
|
|
|
|
|
Hovnanian Enterprises, Inc. stockholders’ equity deficit:
|
|
|
|
|
|
|
|
|
Preferred stock, $0.01 par value -
authorized 100,000 shares; issued and
outstanding 5,600 shares
with a liquidation preference of $140,000 at July 31, 2020
and October 31, 2019
|
|
|
135,299 |
|
|
|
135,299 |
|
Common stock, Class A, $0.01 par value –
authorized 16,000,000 shares; issued
5,984,678 shares at
July 31, 2020 and 5,973,727 shares at October 31,
2019
|
|
|
60 |
|
|
|
60 |
|
Common stock, Class B, $0.01 par value
(convertible to Class A at time of sale) – authorized 2,400,000 shares; issued
652,154 shares at
July 31, 2020 and 650,363 shares at October 31,
2019
|
|
|
7 |
|
|
|
7 |
|
Paid in capital – common stock
|
|
|
715,404 |
|
|
|
715,504 |
|
Accumulated deficit
|
|
|
(1,215,679 |
) |
|
|
(1,225,973 |
) |
Treasury stock – at cost – 470,430 shares of Class A
common stock and 27,669
shares of Class B common stock at July 31, 2020 and October 31,
2019
|
|
|
(115,360 |
) |
|
|
(115,360 |
) |
Total Hovnanian Enterprises, Inc. stockholders' equity deficit
|
|
|
(480,269 |
) |
|
|
(490,463 |
) |
Noncontrolling interest in consolidated joint ventures
|
|
|
750 |
|
|
|
687 |
|
Total equity deficit
|
|
|
(479,519 |
) |
|
|
(489,776 |
) |
Total liabilities and equity
|
|
$ |
1,805,744 |
|
|
$ |
1,881,424 |
|
See notes to condensed consolidated financial statements
(unaudited).
HOVNANIAN ENTERPRISES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands Except Per Share Data)
(Unaudited)
|
|
Three Months
Ended July 31,
|
|
|
Nine Months
Ended July 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Homebuilding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sale of homes
|
|
$ |
605,933 |
|
|
$ |
467,849 |
|
|
$ |
1,608,513 |
|
|
$ |
1,257,536 |
|
Land sales and other revenues
|
|
|
908 |
|
|
|
1,428 |
|
|
|
2,360 |
|
|
|
11,111 |
|
Total homebuilding
|
|
|
606,841 |
|
|
|
469,277 |
|
|
|
1,610,873 |
|
|
|
1,268,647 |
|
Financial services
|
|
|
21,295 |
|
|
|
12,764 |
|
|
|
49,670 |
|
|
|
34,679 |
|
Total revenues
|
|
|
628,136 |
|
|
|
482,041 |
|
|
|
1,660,543 |
|
|
|
1,303,326 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Homebuilding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales, excluding interest
|
|
|
499,695 |
|
|
|
381,939 |
|
|
|
1,324,077 |
|
|
|
1,042,343 |
|
Cost of sales interest
|
|
|
21,814 |
|
|
|
19,029 |
|
|
|
58,539 |
|
|
|
43,169 |
|
Inventory impairment loss and land option write-offs
|
|
|
2,364 |
|
|
|
1,435 |
|
|
|
6,202 |
|
|
|
3,601 |
|
Total cost of sales
|
|
|
523,873 |
|
|
|
402,403 |
|
|
|
1,388,818 |
|
|
|
1,089,113 |
|
Selling, general and administrative
|
|
|
40,608 |
|
|
|
43,559 |
|
|
|
121,887 |
|
|
|
130,474 |
|
Total homebuilding expenses
|
|
|
564,481 |
|
|
|
445,962 |
|
|
|
1,510,705 |
|
|
|
1,219,587 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial services
|
|
|
10,493 |
|
|
|
8,927 |
|
|
|
29,677 |
|
|
|
26,079 |
|
Corporate general and administrative
|
|
|
19,321 |
|
|
|
14,959 |
|
|
|
54,340 |
|
|
|
48,792 |
|
Other interest
|
|
|
27,072 |
|
|
|
22,377 |
|
|
|
78,944 |
|
|
|
67,313 |
|
Other operations
|
|
|
266 |
|
|
|
622 |
|
|
|
674 |
|
|
|
1,193 |
|
Total expenses
|
|
|
621,633 |
|
|
|
492,847 |
|
|
|
1,674,340 |
|
|
|
1,362,964 |
|
Gain on extinguishment of debt
|
|
|
4,055 |
|
|
|
- |
|
|
|
13,337 |
|
|
|
- |
|
Income from unconsolidated joint ventures
|
|
|
5,658 |
|
|
|
3,742 |
|
|
|
13,419 |
|
|
|
20,556 |
|
Income (loss) before income taxes
|
|
|
16,216 |
|
|
|
(7,064 |
) |
|
|
12,959 |
|
|
|
(39,082 |
) |
State and federal income tax provision:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
State
|
|
|
853 |
|
|
|
537 |
|
|
|
2,665 |
|
|
|
1,228 |
|
Federal
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Total income taxes
|
|
|
853 |
|
|
|
537 |
|
|
|
2,665 |
|
|
|
1,228 |
|
Net income (loss)
|
|
$ |
15,363 |
|
|
$ |
(7,601 |
) |
|
$ |
10,294 |
|
|
$ |
(40,310 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per share data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per common share
|
|
$ |
2.27 |
|
|
$ |
(1.27 |
) |
|
$ |
1.52 |
|
|
$ |
(6.76 |
) |
Weighted-average number of common shares outstanding
|
|
|
6,201 |
|
|
|
5,971 |
|
|
|
6,178 |
|
|
|
5,964 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assuming dilution: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per common share |
|
$ |
2.16 |
|
|
$ |
(1.27 |
) |
|
$ |
1.44 |
|
|
$ |
(6.76 |
) |
Weighted-average number of common shares outstanding |
|
|
6,518 |
|
|
|
5,971 |
|
|
|
6,502 |
|
|
|
5,964 |
|
See notes to condensed consolidated financial statements
(unaudited).
HOVNANIAN ENTERPRISES, INC. AND
SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY DEFICIT
NINE MONTH PERIOD ENDED July 31, 2020
(In Thousands Except Share Amounts)
(Unaudited)
|
|
A Common
Stock
|
|
|
B Common
Stock
|
|
|
Preferred
Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
|
|
|
|
|
Shares
|
|
|
|
|
|
|
Shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non
|
|
|
|
|
|
|
|
Issued and
|
|
|
|
|
|
|
Issued and
|
|
|
|
|
|
|
Issued and
|
|
|
|
|
|
|
Paid-In
|
|
|
Accumulated
|
|
|
Treasury
|
|
|
controlling
|
|
|
|
|
|
|
|
Outstanding
|
|
|
Amount
|
|
|
Outstanding
|
|
|
Amount
|
|
|
Outstanding
|
|
|
Amount
|
|
|
Capital
|
|
|
Deficit
|
|
|
Stock
|
|
|
Interest
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, October 31, 2019
|
|
|
5,503,297 |
|
|
$ |
60 |
|
|
|
622,694 |
|
|
$ |
7 |
|
|
|
5,600 |
|
|
$ |
135,299 |
|
|
$ |
715,504 |
|
|
$ |
(1,225,973 |
) |
|
$ |
(115,360 |
) |
|
$ |
687 |
|
|
$ |
(489,776 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options, amortization and issuances
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
162 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
162 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted stock amortization, issuances and forfeitures
|
|
|
3,000 |
|
|
|
|
|
|
|
1,796 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(330 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(330 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion of Class B to Class A common stock
|
|
|
4 |
|
|
|
|
|
|
|
(4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in noncontrolling interest in consolidated joint
ventures
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13 |
|
|
|
13 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(9,148 |
) |
|
|
|
|
|
|
|
|
|
|
(9,148 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance January 31, 2020
|
|
|
5,506,301 |
|
|
$ |
60 |
|
|
|
624,486 |
|
|
$ |
7 |
|
|
|
5,600 |
|
|
$ |
135,299 |
|
|
$ |
715,336 |
|
|
$ |
(1,235,121 |
) |
|
$ |
(115,360 |
) |
|
$ |
700 |
|
|
$ |
(499,079 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options, amortization and issuances
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
96 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
96 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted stock amortization, issuances and forfeitures
|
|
|
869 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(189 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(189 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion of Class B to Class A common stock
|
|
|
1 |
|
|
|
|
|
|
|
(1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in noncontrolling interest in consolidated joint
ventures
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20 |
|
|
|
20 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,079 |
|
|
|
|
|
|
|
|
|
|
|
4,079 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance April 30, 2020
|
|
|
5,507,171 |
|
|
$ |
60 |
|
|
|
624,485 |
|
|
$ |
7 |
|
|
|
5,600 |
|
|
$ |
135,299 |
|
|
$ |
715,243 |
|
|
$ |
(1,231,042 |
) |
|
$ |
(115,360 |
) |
|
$ |
720 |
|
|
$ |
(495,073 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options, amortization and issuances |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
79 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
79 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted stock amortization, issuances and forfeitures |
|
|
7,077 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
82 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
82 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion of Class B to Class A common stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in noncontrolling interest in consolidated joint
ventures |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30 |
|
|
|
30 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15,363 |
|
|
|
|
|
|
|
|
|
|
|
15,363 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, July 31, 2020 |
|
|
5,514,248 |
|
|
$ |
60 |
|
|
|
624,485 |
|
|
$ |
7 |
|
|
|
5,600 |
|
|
$ |
135,299 |
|
|
$ |
715,404 |
|
|
$ |
(1,215,679 |
) |
|
$ |
(115,360 |
) |
|
$ |
750 |
|
|
$ |
(479,519 |
) |
See notes to condensed consolidated financial statements
(unaudited).
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY DEFICIT
NINE MONTH PERIOD ENDED July 31, 2019
(In Thousands Except Share Amounts)
(Unaudited)
|
|
A Common
Stock
|
|
|
B Common
Stock
|
|
|
Preferred
Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
|
|
|
|
|
Shares
|
|
|
|
|
|
|
Shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non
|
|
|
|
|
|
|
|
Issued and
|
|
|
|
|
|
|
Issued and
|
|
|
|
|
|
|
Issued and
|
|
|
|
|
|
|
Paid-In
|
|
|
Accumulated
|
|
|
Treasury
|
|
|
controlling
|
|
|
|
|
|
|
|
Outstanding
|
|
|
Amount
|
|
|
Outstanding
|
|
|
Amount
|
|
|
Outstanding
|
|
|
Amount
|
|
|
Capital
|
|
|
Deficit
|
|
|
Stock
|
|
|
Interest
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, October 31, 2018
|
|
|
5,313,428 |
|
|
$ |
58 |
|
|
|
622,004 |
|
|
$ |
6 |
|
|
|
5,600 |
|
|
$ |
135,299 |
|
|
$ |
710,349 |
|
|
$ |
(1,183,856 |
) |
|
$ |
(115,360 |
) |
|
$ |
- |
|
|
$ |
(453,504 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options, amortization and issuances
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
107 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
107 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted stock amortization, issuances and forfeitures
|
|
|
2,830 |
|
|
|
|
|
|
|
922 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
485 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
485 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion of Class B to Class A common stock
|
|
|
20 |
|
|
|
|
|
|
|
(20 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(17,452 |
) |
|
|
|
|
|
|
|
|
|
|
(17,452 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance January 31, 2019
|
|
|
5,316,278 |
|
|
$ |
58 |
|
|
|
622,906 |
|
|
$ |
6 |
|
|
|
5,600 |
|
|
$ |
135,299 |
|
|
$ |
710,941 |
|
|
$ |
(1,201,308 |
) |
|
$ |
(115,360 |
) |
|
$ |
- |
|
|
$ |
(470,364 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options, amortization and issuances
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
108 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
108 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted stock amortization, issuances and forfeitures
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
468 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
468 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion of Class B to Class A common stock |
|
|
118 |
|
|
|
|
|
|
|
(118 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in noncontrolling interest in consolidated joint
ventures
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
566 |
|
|
|
566 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(15,257 |
) |
|
|
|
|
|
|
|
|
|
|
(15,257 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance April 30, 2019
|
|
|
5,316,396 |
|
|
$ |
58 |
|
|
|
622,788 |
|
|
$ |
6 |
|
|
|
5,600 |
|
|
$ |
135,299 |
|
|
$ |
711,517 |
|
|
$ |
(1,216,565 |
) |
|
$ |
(115,360 |
) |
|
$ |
566 |
|
|
$ |
(484,479 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options, amortization and issuances |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
438 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
438 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted stock amortization, issuances and forfeitures |
|
|
6,024 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,438 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,438 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion of Class B to Class A common stock |
|
|
8 |
|
|
|
|
|
|
|
(8 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in noncontrolling interest in consolidated joint
ventures |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9 |
|
|
|
9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(7,601 |
) |
|
|
|
|
|
|
|
|
|
|
(7,601 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, July 31, 2019 |
|
|
5,322,428 |
|
|
$ |
58 |
|
|
|
622,780 |
|
|
$ |
6 |
|
|
|
5,600 |
|
|
$ |
135,299 |
|
|
$ |
710,517 |
|
|
$ |
(1,224,166 |
) |
|
$ |
(115,360 |
) |
|
$ |
575 |
|
|
$ |
(493,071 |
) |
See notes to condensed consolidated financial statements
(unaudited).
HOVNANIAN ENTERPRISES, INC. AND
SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
|
|
Nine Months
Ended
|
|
|
|
July
31,
|
|
|
|
2020
|
|
|
2019
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$ |
10,294 |
|
|
$ |
(40,310 |
) |
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities:
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
3,897 |
|
|
|
2,942 |
|
Compensation from stock options and awards
|
|
|
38 |
|
|
|
197 |
|
Amortization of bond discounts, premiums and deferred financing
costs
|
|
|
1,718 |
|
|
|
6,003 |
|
Gain on sale and retirement of property and assets
|
|
|
(84 |
) |
|
|
(19 |
) |
Income from unconsolidated joint ventures
|
|
|
(13,419 |
) |
|
|
(20,556 |
) |
Distributions of earnings from unconsolidated joint ventures
|
|
|
30,411 |
|
|
|
16,532 |
|
Gain on extinguishment of debt
|
|
|
(13,337 |
) |
|
|
- |
|
Noncontrolling interest in consolidated joint venture
|
|
|
63 |
|
|
|
(29 |
) |
Inventory impairment and land option write-offs
|
|
|
6,202 |
|
|
|
3,601 |
|
(Increase) decrease in assets: |
|
|
|
|
|
|
|
|
Origination of mortgage loans
|
|
|
(931,602 |
) |
|
|
(698,444 |
) |
Sale of mortgage loans
|
|
|
998,935 |
|
|
|
745,285 |
|
Receivables, prepaids, deposits and other assets
|
|
|
14,381 |
|
|
|
(892 |
) |
Inventories
|
|
|
72,780 |
|
|
|
(280,354 |
) |
Increase (decrease) in liabilities:
|
|
|
|
|
|
|
|
|
State income tax payable
|
|
|
256 |
|
|
|
(1,813 |
) |
Customers’ deposits
|
|
|
5,120 |
|
|
|
10,272 |
|
Accounts payable, accrued interest and other accrued
liabilities
|
|
|
7,181 |
|
|
|
(473 |
) |
Net cash provided by (used in) operating activities
|
|
|
192,834 |
|
|
|
(258,058 |
) |
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
Proceeds from sale of property and assets
|
|
|
104 |
|
|
|
23 |
|
Purchase of property, equipment and other fixed assets and
acquisitions
|
|
|
(2,648 |
) |
|
|
(3,138 |
) |
Investments in and advances to unconsolidated joint ventures
|
|
|
(19,924 |
) |
|
|
(13,159 |
) |
Distributions of capital from unconsolidated joint ventures
|
|
|
4,161 |
|
|
|
6,766 |
|
Net cash used in investing activities
|
|
|
(18,307 |
) |
|
|
(9,508 |
) |
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
Proceeds from mortgages and notes
|
|
|
210,498 |
|
|
|
235,645 |
|
Payments related to mortgages and notes
|
|
|
(235,498 |
) |
|
|
(123,148 |
) |
Proceeds from model sale leaseback financing programs
|
|
|
18,355 |
|
|
|
21,276 |
|
Payments related to model sale leaseback financing programs
|
|
|
(16,764 |
) |
|
|
(14,477 |
) |
Proceeds from land bank financing programs
|
|
|
57,120 |
|
|
|
87,734 |
|
Payments related to land bank financing programs |
|
|
(55,173 |
) |
|
|
(18,740 |
) |
Proceeds from partner contribution to consolidated joint
ventures
|
|
|
- |
|
|
|
604 |
|
Net payments related to mortgage warehouse lines of credit
|
|
|
(55,030 |
) |
|
|
(46,284 |
) |
Borrowings from senior secured revolving credit facility
|
|
|
125,000 |
|
|
|
- |
|
Payments related to senior secured revolving credit facility |
|
|
(125,000 |
) |
|
|
- |
|
Proceeds from senior secured notes, net of discount
|
|
|
- |
|
|
|
21,348 |
|
Payments related to senior secured notes, net of discount |
|
|
(21,240 |
) |
|
|
-
|
|
Deferred financing costs from land bank financing program and note
issuances
|
|
|
(12,801 |
) |
|
|
(4,586 |
) |
Net cash (used in) provided by financing activities
|
|
|
(110,533 |
) |
|
|
159,372 |
|
Net increase (decrease) in cash and cash equivalents, and
restricted cash and cash equivalents
|
|
|
63,994 |
|
|
|
(108,194 |
) |
Cash, cash equivalents, and restricted cash and cash equivalents
balance, beginning of period
|
|
|
182,266 |
|
|
|
232,992 |
|
Cash, cash equivalents, and restricted cash and cash equivalents
balance, end of period
|
|
$ |
246,260 |
|
|
$ |
124,798 |
|
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands - Unaudited)
(Continued)
|
|
Nine Months
Ended
|
|
|
|
July
31,
|
|
|
|
2020
|
|
|
2019
|
|
Supplemental disclosures of cash flows:
|
|
|
|
|
|
|
|
|
Cash paid for interest, net of capitalized interest (see Note 3 to
the Condensed Consolidated Financial Statements)
|
|
$ |
49,395 |
|
|
$ |
82,294 |
|
Cash paid for income taxes
|
|
$ |
2,478 |
|
|
$ |
3,042 |
|
|
|
|
|
|
|
|
|
|
Reconciliation of Cash, cash equivalents and restricted cash
|
|
|
|
|
|
|
|
|
Homebuilding: Cash and cash equivalents
|
|
$ |
198,098 |
|
|
$ |
83,634 |
|
Homebuilding: Restricted cash and cash equivalents
|
|
|
13,433 |
|
|
|
16,919 |
|
Financial Services: Cash and cash equivalents, included in
Financial services assets
|
|
|
7,536 |
|
|
|
3,847 |
|
Financial Services: Restricted cash and cash equivalents, included
in Financial services assets
|
|
|
27,193 |
|
|
|
20,398 |
|
Total cash, cash equivalents and restricted cash shown in the
statement of cash flows
|
|
$ |
246,260 |
|
|
$ |
124,798 |
|
See notes to condensed consolidated financial statements
(unaudited).
Supplemental disclosure of noncash investing and
financing activities:
In accordance with the adoption of ASU 2016-02, in
the first quarter of fiscal
2020, we recorded a beginning
right-of-use asset of $23.3 million and a right-of-use lease
liability of $24.4 million.
In the first quarter of fiscal
2020, K. Hovnanian, the issuer of
our notes, completed a debt for debt exchange whereby
it issued $158.5 million aggregate principal amount of 10.0%
1.75 Lien Notes due 2025 in exchange for $23.2 million in
aggregate principal amount of its outstanding 10.0% Senior Secured
Notes due 2022 and $141.7 million
in aggregate principal amount of its outstanding 10.5% Senior
Secured Notes due 2024. K.
Hovnanian also exchanged $163.0 million in aggregate principal
amount of its unsecured term loans for $81.5 million in aggregate
principal amount of 1.75 Lien
secured term loans made under a new Senior Secured 1.75 Lien Term Loan Credit Facility due
January 31, 2028.
In the second quarter of
fiscal 2020, K. Hovnanian, the
issuer of the notes, completed a debt for debt exchange whereby it
issued $59.1 million aggregate principal amount of 11.25%
1.5 Lien Notes due 2026 in exchange for $59.1 million aggregate
principal amount of 10.0% Senior Secured Notes due 2022 Notes.
See Note 12 for further
information.
HOVNANIAN ENTERPRISES, INC. AND
SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -
UNAUDITED
Hovnanian Enterprises, Inc. (“HEI”) conducts all of its
homebuilding and financial services operations through its
subsidiaries (references herein to the “Company,” “we,” “us” or
“our” refer to HEI and its consolidated subsidiaries and should be
understood to reflect the consolidated business of HEI’s
subsidiaries). HEI has reportable segments consisting of six Homebuilding segments (Northeast,
Mid-Atlantic, Midwest, Southeast, Southwest and West) and the
Financial Services segment (see Note 17).
The accompanying unaudited Condensed Consolidated Financial
Statements include HEI's accounts and those of all of its
consolidated subsidiaries after elimination of all of its
significant intercompany balances and
transactions. Noncontrolling interest represents the
proportionate equity interest in a consolidated joint venture that
is not 100% owned by the Company. One of HEI's
subsidiaries owns a 99% controlling interest in
the consolidated joint venture, and therefore HEI is required
to consolidate the joint venture within its Condensed Consolidated
Financial Statements. The 1% that we do not own is accounted for as noncontrolling
interest.
The accompanying unaudited Condensed Consolidated Financial
Statements have been prepared in accordance with accounting
principles generally accepted in the United States (“GAAP”) for
interim financial information and with the instructions to Form
10-Q and Article 10 of Regulation S-X, and accordingly, they do not include all of the information and
footnotes required by GAAP for complete financial statements. These
Condensed Consolidated Financial Statements should be read in
conjunction with the consolidated financial statements and notes
thereto included in our Annual Report on Form 10-K for the fiscal year ended October 31, 2019. In the opinion of
management, all adjustments for interim periods presented have been
made, which include normal recurring accruals and deferrals
necessary for a fair presentation of our condensed consolidated
financial position, results of operations and cash flows. The
preparation of Condensed Consolidated Financial Statements in
conformity with GAAP requires management to make estimates and
assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual
results could differ from those estimates, and these differences
could have a significant impact on the Condensed Consolidated
Financial Statements. Results for interim periods are
not necessarily indicative of the
results which might be expected for a full
year.
For the three and nine months ended July 31, 2020, the Company’s total
stock-based compensation expense was $0.2 million (pre
and post-tax) and $38 thousand ($30 thousand net of tax),
respectively. These amounts are net of any credits to
expense as a result of the cancellation of certain Market
Stock Units based on performance conditions which were
not met. For the three months ended July 31, 2019, there was stock-based
compensation income of $1.0 million (pre and post-tax), as a
result of the cancellation of certain Market Stock Units based on
performance conditions which were not met. For the nine months ended July 31, 2019, the Company's total
stock-based compensation expense was $0.2 million. Included
in total stock-based compensation expense was the vesting of
stock options of $0.1 million and $0.3 million for the
three and nine months ended July 31, 2020, respectively, and $0.4 million
and $0.7 million for the three and
nine months ended July 31, 2019, respectively.
Interest costs incurred, expensed and capitalized were:
|
|
Three Months
Ended
|
|
|
Nine Months
Ended
|
|
|
|
July
31,
|
|
|
July
31,
|
|
(In thousands)
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
Interest capitalized at beginning of period
|
|
$ |
67,744 |
|
|
$ |
79,277 |
|
|
$ |
71,264 |
|
|
$ |
68,117 |
|
Plus interest incurred(1)
|
|
|
45,140 |
|
|
|
42,104 |
|
|
|
134,797 |
|
|
|
122,340 |
|
Less cost of sales interest expensed
|
|
|
21,814 |
|
|
|
19,029 |
|
|
|
58,539 |
|
|
|
43,169 |
|
Less other interest expensed(2)(3)
|
|
|
27,072 |
|
|
|
22,377 |
|
|
|
78,944 |
|
|
|
67,313 |
|
Less interest contributed to unconsolidated joint venture(4)
|
|
|
- |
|
|
|
1,978 |
|
|
|
4,580 |
|
|
|
1,978 |
|
Interest capitalized at end of period(5)
|
|
$ |
63,998 |
|
|
$ |
77,997 |
|
|
$ |
63,998 |
|
|
$ |
77,997 |
|
(1)
|
Data does not include interest
incurred by our mortgage and finance subsidiaries.
|
(2)
|
Other interest expensed includes interest that does not qualify for interest capitalization
because our assets that qualify for interest capitalization
(inventory under development) do not exceed our debt, which amounted to
$15.9 million and $13.7 million for the three months ended July 31, 2020 and 2019, respectively, and
$44.6 million and $46.4 million for the nine months ended July 31, 2020 and 2019, respectively. Other interest also
includes interest on completed homes, land in planning and fully
developed lots without homes under construction, which does
not qualify for
capitalization and therefore is expensed. This component
of other interest was $11.2 million and $8.7 million for the
three months ended July 31, 2020 and 2019, respectively, and $34.3 million
and $21.0 million for the nine
months ended July 31, 2020 and
2019, respectively.
|
(3)
|
Cash paid for interest, net of capitalized interest, is the sum of
other interest expensed, as defined above, and interest paid by our
mortgage and finance subsidiaries adjusted for the change in
accrued interest on notes payable, which is calculated as
follows:
|
|
|
Three Months
Ended
|
|
|
Nine Months
Ended
|
|
|
|
July
31, |
|
|
July
31, |
|
(In thousands)
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
Other interest expensed
|
|
$ |
27,072 |
|
|
$ |
22,377 |
|
|
$ |
78,944 |
|
|
$ |
67,313 |
|
Interest paid by our mortgage and finance subsidiaries
|
|
|
419 |
|
|
|
673 |
|
|
|
1,698 |
|
|
|
1,876 |
|
(Increase) decrease in accrued interest
|
|
|
(13,876 |
) |
|
|
15,404 |
|
|
|
(31,247 |
) |
|
|
13,105 |
|
Cash paid for interest, net of capitalized interest
|
|
$ |
13,615 |
|
|
$ |
38,454 |
|
|
$ |
49,395 |
|
|
$ |
82,294 |
|
(4)
|
Represents capitalized interest which was included as part of the
assets contributed to the joint venture the Company entered into in
December 2019, as discussed in Note
18. There was no impact to the Condensed Consolidated
Statement of Operations as a result of this transaction.
|
(5)
|
Capitalized interest amounts are shown gross before allocating any
portion of impairments, if any, to capitalized interest.
|
4.
|
Reduction of Inventory to Fair Value
|
We record impairment losses on inventories related to communities
under development and held for future development when events and
circumstances indicate that they may be impaired and the undiscounted cash
flows estimated to be generated by those assets are less than their
related carrying amounts. If the expected undiscounted cash
flows are less than the carrying amount, then the community is
written down to its fair value. We estimate the fair value of
each impaired community by determining the present value of the
estimated future cash flows at a discount rate commensurate with
the risk of the respective community. In the first three
quarters of fiscal 2020, we did
not record any impairment
losses. For the nine months
ended July 31, 2019, our discount
rate used for the impairments recorded ranged from 18.0% to
18.3%. Should the estimates or expectations used in
determining cash flows or fair value decrease or differ from
current estimates in the future, we may need to recognize additional
impairments.
During the nine months ended
July 31, 2020 and 2019, we evaluated inventories of all
354 and 398 communities under development and held for future
development or sale, respectively, for impairment indicators
through preparation and review of detailed budgets or other market
indicators of impairment. We performed undiscounted future cash
flow analyses during the nine
months ended July 31, 2020 for
one of those
communities (i.e., it had a projected operating loss or other
impairment indicators), with an aggregate carrying value of
$0.6 million. As a result of our undiscounted future cash flow
analyses, the community did not
require a discounted cash flow analysis to be performed,
and therefore, no impairment loss was recorded for the
nine months ended July 31, 2020. We performed undiscounted
future cash flow analyses during the nine months ended July 31, 2019 for seven of the
398 communities (i.e., those
which had a projected operating loss or other impairment
indicators) with an aggregate carrying value of $52.8 million. As a
result of our undiscounted future cash flow analyses, we performed
discounted cash flow analysis and recorded aggregate impairment
losses of $0.1 million in one community (which had an
aggregate pre-impairment value of $1.2 million) for the
three months ended July 31, 2019, and $1.1 million in four
communities (which had an aggregate pre-impairment value of
$11.4 million) for the nine
months ended July 31, 2019, which
is included in the Condensed Consolidated Statement of Operations
on the line entitled “Homebuilding: Inventory impairment loss and
land option write-offs” and deducted from inventory. The
pre-impairment value represents the carrying value, net of prior
period impairments, if any, at the time of recording the
impairments. The one
community for which we performed undiscounted future cash flow
analyses during the nine months
ended July 31, 2020, with an
aggregate carrying value of $0.6 million, did not have undiscounted future cash flows
that exceeded the carrying amount by less than 20%. Of those
communities for which we performed undiscounted future cash flow
analyses during the nine months
ended July 31, 2019, three communities, with an
aggregate carrying value of $41.3 million, had undiscounted future
cash flows that exceeded the carrying amount by less than 20%.
The Condensed Consolidated Statement of Operations line entitled
“Homebuilding: Inventory impairment loss and land option
write-offs” also includes write-offs of options and approval,
engineering and capitalized interest costs that we record when we
redesign communities and/or abandon certain engineering costs and
we do not exercise options in
various locations because the communities' pro forma profitability
is not projected to produce
adequate returns on investment commensurate with the risk. Total
aggregate write-offs related to these items were $2.4 million
and $1.3 million for the three
months ended July 31, 2020 and
2019, respectively, and
$6.2 million and $2.5 million for the nine months ended July 31, 2020 and 2019, respectively. Occasionally, these
write-offs are offset by recovered deposits (sometimes through
legal action) that had been written off in a prior period as
walk-away costs. Historically, these recoveries have
not been significant in comparison
to the total costs written off. The number of lots walked away from
during the three months ended
July 31, 2020 and 2019 were 1,131 and 1,852, respectively,
and 3,495 and 4,022 during the nine months ended July 31, 2020 and 2019, respectively. The walk-aways were
located in all segments in the first three
quarters of fiscal 2020 and
2019.
We decide to mothball (or stop development on) certain communities
when we determine that the current performance does not justify further investment at the time.
When we decide to mothball a community, the inventory is
reclassified on our Condensed Consolidated Balance Sheets from
“Sold and unsold homes and lots under development” to “Land and
land options held for future development or sale.” During the
first three quarters of fiscal 2020, we did not mothball any additional
communities, or sell any previously mothballed communities, but we
re-activated one previously mothballed community
and also re-activated a portion of one previously mothballed
community. As of July 31,
2020 and October 31, 2019, the
net book value associated with our 12 and 13 total mothballed
communities was $13.1 million and $13.8 million, respectively,
which was net of impairment charges recorded in prior periods of
$120.4 million and $138.1 million, respectively.
We sell and lease back certain of our model homes with the right to
participate in the potential profit when each home is sold to a
third party at the end of the
respective lease. As a result of our continued involvement, for
accounting purposes in accordance with ASC 606-10-55-68, these
sale and leaseback transactions are considered a financing rather
than a sale. Therefore, for purposes of our Condensed Consolidated
Balance Sheets, at July 31, 2020
and October 31, 2019, inventory of
$54.9 million and $54.2 million, respectively, was recorded to
“Consolidated inventory not owned,”
with a corresponding amount of $53.0 million and $51.2 million (net
of debt issuance costs), respectively, recorded to “Liabilities
from inventory not owned” for the
amount of net cash received from the transactions.
We have land banking arrangements, whereby we sell our land parcels
to the land bankers and they provide us an option to purchase back
finished lots on a predetermined schedule. Because of our options
to repurchase these parcels, for accounting purposes, in accordance
with ASC 606-10-55-70, these
transactions are considered a financing rather than a sale. For
purposes of our Condensed Consolidated Balance Sheets, at
July 31, 2020 and October 31, 2019, inventory of
$139.9 million and $136.1 million, respectively, was recorded
to “Consolidated inventory not
owned,” with a corresponding amount of $91.9 million and $89.8
million (net of debt issuance costs), respectively, recorded to
“Liabilities from inventory not
owned” for the amount of net cash received from the
transactions.
5.
|
Variable Interest Entities
|
The Company enters into land and lot option purchase contracts to
procure land or lots for the construction of homes. Under these
contracts, the Company will fund a stated deposit in consideration
for the right, but not the
obligation, to purchase land or lots at a future point in time with
predetermined terms. Under the terms of the option purchase
contracts, many of the option deposits are not refundable at the Company's
discretion. Under the requirements of ASC 810, certain option purchase contracts
may result in the creation of a
variable interest in the entity (“VIE”) that owns the land parcel
under option.
In compliance with ASC 810,
the Company analyzes its option purchase contracts to determine
whether the corresponding land sellers are VIEs and, if so, whether
the Company is the primary beneficiary. Although the Company does
not have legal title to the
underlying land, ASC 810
requires the Company to consolidate a VIE if the Company is
determined to be the primary beneficiary. In determining whether it
is the primary beneficiary, the Company considers, among other
things, whether it has the power to direct the activities of the
VIE that most significantly impact the VIE’s economic performance.
Such activities would include, among other things, determining or
limiting the scope or purpose of the VIE, selling or transferring
property owned or controlled by the VIE, or arranging financing for
the VIE. The Company also considers whether it has the obligation
to absorb losses of the VIE or the right to receive benefits from
the VIE. As a result of its analyses, the Company determined that
as of July 31, 2020 and October 31, 2019, it was not the primary beneficiary of any VIEs from
which it is purchasing land under option purchase contracts.
We will continue to secure land and lots using options, some of
which are with VIEs. Including deposits on our unconsolidated VIEs,
at July 31, 2020, we had total cash
and letters of credit deposits amounting to $79.7 million to
purchase land and lots with a total purchase price of
$1.2 billion. The maximum exposure to loss with respect to our
land and lot options is limited to the deposits plus any
pre-development costs invested in the property, although some
deposits are refundable at our request or refundable if certain
conditions are not met.
General liability insurance for homebuilding companies and their
suppliers and subcontractors is very difficult to obtain. The
availability of general liability insurance is limited due to a
decreased number of insurance companies willing to underwrite for
the industry. In addition, those few insurers willing to underwrite
liability insurance have significantly increased the premium costs.
To date, we have been able to obtain general liability insurance
but at higher premium costs with higher deductibles. Our
subcontractors and suppliers have advised us that they have also
had difficulty obtaining insurance that also provides us coverage.
As a result, we have an owner-controlled insurance program for
certain of our subcontractors whereby the subcontractors pay us an
insurance premium (through a reduction of amounts we would
otherwise owe such subcontractors for their work on our homes)
based on the risk type of the trade. We absorb the liability
associated with their work on our homes as part of our overall
general liability insurance at no
additional cost to us because our existing general liability and
construction defect insurance policy and related reserves for
amounts under our deductible covers construction defects regardless
of whether we or our subcontractors are responsible for the defect.
For the three and nine months ended July 31, 2020 and 2019, we received $0.8 million and $1.2
million, respectively, and $3.3 million and $3.4 million,
respectively, from subcontractors related to the owner-controlled
insurance program, which we accounted for as reductions to
inventory.
We accrue for warranty costs that are covered under our existing
general liability and construction defect policy as part of our
general liability insurance deductible. This accrual is expensed as
selling, general and administrative costs. For homes delivered
in each of fiscal 2020 and
2019, our deductible under our
general liability insurance is a $20 million aggregate for
construction defect and warranty claims. For bodily injury
claims, our deductible per occurrence in each of fiscal 2020 and 2019
is $0.25 million, up to a $5
million limit. Our aggregate retention for construction
defect, warranty and bodily injury claims is $20
million for each of fiscal 2020 and
2019. In addition, we establish a
warranty accrual for lower cost-related issues to cover home
repairs, community amenities and land development infrastructure
that are not covered under our
general liability and construction defect policy. We accrue an
estimate for these warranty costs as part of cost of sales at the
time each home is closed and title and possession have been
transferred to the homebuyer. Additions and charges in the
warranty reserve and general liability reserve for the three and nine months ended July 31, 2020 and 2019 were as follows:
|
|
Three Months
Ended
|
|
|
Nine Months
Ended
|
|
|
|
July
31,
|
|
|
July
31,
|
|
(In thousands)
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of period
|
|
$ |
87,139 |
|
|
$ |
92,849 |
|
|
$ |
89,371 |
|
|
$ |
95,064 |
|
Additions – Selling, general and administrative
|
|
|
2,130 |
|
|
|
2,332 |
|
|
|
6,121 |
|
|
|
6,449 |
|
Additions – Cost of sales
|
|
|
3,250 |
|
|
|
1,481 |
|
|
|
7,173 |
|
|
|
4,817 |
|
Charges incurred during the period
|
|
|
(1,821 |
) |
|
|
(3,657 |
) |
|
|
(13,037 |
) |
|
|
(13,768 |
) |
Changes to pre-existing reserves
|
|
|
(302 |
) |
|
|
900 |
|
|
|
768 |
|
|
|
1,343 |
|
Balance, end of period
|
|
$ |
90,396 |
|
|
$ |
93,905 |
|
|
$ |
90,396 |
|
|
$ |
93,905 |
|
Warranty accruals are based upon historical experience. We
engage a third-party actuary that
uses our historical warranty and construction defect data to assist
our management in estimating our unpaid claims, claim adjustment
expenses and incurred but not
reported claims reserves for the risks that we are assuming under
the general liability and construction defect programs. The
estimates include provisions for inflation, claims handling and
legal fees. The majority of the charges incurred during the
third quarter of fiscal 2020 represented a payment for construction
defect reserves related to the settlement of a litigation
matter.
Insurance claims paid by our insurance carriers, excluding
insurance deductibles paid, were less than $0.1 million for the
nine months ended July 31, 2020 and $0.1 million for the nine months ended July 31, 2019 for prior year
deliveries.
7.
|
Commitments and Contingent Liabilities
|
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,
results of operations or cash flows, and we are subject to
extensive and complex laws and regulations that affect the
development of land and home building, sales and customer financing
processes, including zoning, density, building standards and
mortgage financing. These laws and regulations often provide
broad discretion to the administering governmental
authorities. This can delay or increase the cost of
development or homebuilding. The significant majority of our
litigation matters are related to construction defect claims. Our
estimated losses from construction defect litigation matters, if
any, are included in our construction defect reserves.
We also are subject to a variety of local, state, federal and
foreign laws and regulations concerning protection of health and
the environment, including those regulating the emission or
discharge of materials into the environment, the management of
storm water runoff at construction sites, the handling, use,
storage and disposal of hazardous substances, impacts to wetlands
and other sensitive environments, and the remediation of
contamination at properties that we have owned or developed or
currently own or are developing (“environmental laws”). The
particular environmental laws that apply to a site may vary greatly according to the community
site, for example, due to the community, the environmental
conditions at or near the site, 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 can prohibit or severely
restrict development and homebuilding activity. In addition,
noncompliance with these laws and regulations could result in fines
and penalties, obligations to remediate, permit revocations or
other sanctions; and contamination or other environmental
conditions at or in the vicinity of our developments may result in claims against us for personal
injury, property damage or other losses.
We anticipate that increasingly stringent requirements will
continue to be imposed on developers and homebuilders in the
future. For example, for a number of years, the EPA and U.S. Army
Corps of Engineers have been engaged in rulemakings to clarify the
scope of federally regulated wetlands, which included a June 2015 rule many affected businesses
contend impermissibly expanded the scope of such wetlands that was
challenged in court, stayed, and remains in litigation. A proposal
was made in June 2017 to formally
rescind the June 2015 rule and
reinstate the rule scheme previously in place while the agencies
initiate a new substantive rulemaking on the issue. A February 2018 rule purported to delay the
effective date of the June 2015
rule until February 2020, but was
enjoined nationwide in August 2018
by a federal district court in South Carolina and later by a
federal district court in the State of Washington in response to
lawsuits (the net result of which, according to the EPA, was that
the June 2015 rule applied in
22 states, the District of
Columbia, and the United States territories, and that the pre-
June 2015 regime applied in the
rest). The EPA and U.S. Army Corps of Engineers have since
promulgated a new rule, which became effective in December 2019, repealing the June 2015 rule and reinstating for the time
being the previous rule scheme nationwide; it is now the subject of
several lawsuits contending it is invalid, including one by a coalition of 14 states and several local governments. And
in April 2020, the EPA and the U.S. Army Corps of
Engineers formally published the Navigable Waters Protection Rule,
which they characterize as more appropriate for determining
the scope of waters subject to federal permitting; it formally took
effect in June in all states except
Colorado, where a federal district court issued a preliminary
injunction against application of the rule in that state. This rule
is intended to replace the pre- June
2015 regime; it is being challenged by 17 states in one lawsuit and by a number of environmental
advocacy groups in at least three
other lawsuits, as well as by at least one group contending that the new rule still
exercises permitting authority over too many waters. It is unclear
how these and related developments, including at the state or local
level, ultimately may affect the
scope of regulated wetlands where we operate. Although we cannot
reliably predict the extent of any effect these developments
regarding wetlands, or any other requirements that may take effect may have on us, they could result in
time-consuming and expensive compliance programs and in substantial
expenditures, which could cause delays and increase our cost of
operations. In addition, our ability to obtain or renew permits or
approvals and 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 interpretations and
application.
In March 2013, we received a letter
from the Environmental Protection Agency (“EPA”) requesting
information about our involvement in a housing redevelopment
project in Newark, New Jersey that a Company entity undertook
during the 1990s. We understand
that the development is in the vicinity of a former lead smelter
and that tests on soil samples from properties within the
development conducted by the EPA showed elevated levels of lead. We
also understand that the smelter ceased operations many years
before the Company entity involved acquired the properties in the
area and carried out the re-development project. We responded to
the EPA’s request. In August 2013, we were notified that the EPA considers
us a potentially responsible party (or “PRP”) with respect to the
site, that the EPA will clean up the site, and that the EPA is
proposing that we fund and/or contribute towards the cleanup of the
contamination at the site. We began preliminary discussions with
the EPA concerning a possible resolution but do not know the scope or extent of the Company’s
obligations, if any, that may arise
from the site and therefore cannot provide any assurance that this
matter will not have a material
impact on the Company. The EPA requested additional information in
April 2014 and again in March 2017 and the Company responded to the
information requests. On May 2,
2018 the EPA sent a letter to the Company entity demanding
reimbursement for 100% of the EPA’s costs to clean-up the site in
the amount of $2.7 million. The Company responded to the EPA’s
demand letter on June 15, 2018
setting forth the Company’s defenses and expressing its willingness
to enter into settlement negotiations. The parties subsequently
executed a tolling agreement to toll the statute of limitations on
collection until December 20, 2019
and later amended it to extend it to June 20, 2020 to allow the parties time to
discuss settlement. The Company received a letter from the EPA on
November 4, 2019 asking if the
Company remained interested in settlement negotiations. The Company
responded affirmatively and such negotiations are ongoing. Two
other PRPs identified by the EPA are now also in negotiations with
the EPA and in preliminary negotiations with the Company regarding
the site. In the course of negotiations, the EPA informed the
Company that the New Jersey Department of Environmental Protection
has also incurred costs remediating part of the site. The EPA has
since requested that the three PRPs present a joint settlement
offer to the EPA. The parties entered into a second amendment to the Tolling
Agreement, extending the date until January 15, 2021. We believe that we have
adequate reserves for this matter.
In 2015, the condominium
association of the Four Seasons at Great Notch condominium
community (the “Great Notch Plaintiff”) filed a lawsuit in the
Superior Court of New Jersey, Law Division, Passaic County (the
“Court”) alleging various construction defects, design defects, and
geotechnical issues relating to the community. The operative
complaint (“Complaint”) asserts claims against Hovnanian
Enterprises, Inc. and several of its affiliates, including K.
Hovnanian at Great Notch, LLC, K. Hovnanian Construction
Management, Inc., and K. Hovnanian Companies, LLC. The Complaint
also asserts claims against various other design professionals and
contractors. The Great Notch Plaintiff has also filed a
motion, which remains pending, to permit it to pursue a claim to
pierce the corporate veil of K. Hovnanian at Great Notch, LLC to
hold its alleged parent entities liable for any damages awarded
against it. To date, the Hovnanian-affiliated defendants have
reached a partial settlement with the Great Notch Plaintiff as to a
portion of the Great Notch Plaintiff’s claims against them for an
amount immaterial to the Company. On its remaining claims
against the Hovnanian-affiliated defendants, the Great Notch
Plaintiff has asserted damages of approximately $119.5
million, which amount is potentially subject to treble damages
pursuant to the Great Notch Plaintiff’s claim under the New Jersey
Consumer Fraud Act. On August 17,
2018, the Hovnanian-affiliated defendants filed a motion for
summary judgment seeking dismissal of all of the Great Notch
Plaintiff’s remaining claims against them, which was withdrawn
without prejudice to re-file with supplemental
evidence. The trial is currently scheduled for January 12, 2021. An initial court-ordered
mediation session took place on November
19, 2019. Additional mediation sessions have been scheduled
for September and October of 2020. The Hovnanian-affiliated defendants
intend to defend these claims vigorously.
8.
|
Cash and Cash Equivalents, Restricted Cash and Cash Equivalents
and Customer's Deposits
|
Cash represents cash deposited in checking accounts. Cash
equivalents include certificates of deposit, Treasury bills
and government money–market funds with maturities of 90 days or less when purchased. Our cash
balances are held at a few financial institutions and may, at times, exceed insurable
amounts. We believe we help to mitigate this risk by
depositing our cash in major financial institutions. At
July 31, 2020 and October 31, 2019, $13.2 million and
$143.1 million, respectively, of the total cash and cash
equivalents was in cash equivalents and restricted cash
equivalents, the book value of which approximates fair value.
Homebuilding - Restricted cash and cash equivalents on the
Condensed Consolidated Balance Sheets totaled $13.4 million
and $20.9 million as of July 31,
2020 and October 31, 2019,
respectively, which primarily consists of cash collateralizing our
letter of credit agreements and facilities as discussed in Note
12.
Financial services restricted cash and cash equivalents, which are
included in Financial services assets on the Condensed Consolidated
Balance Sheets, totaled $27.2 million and $24.8 million as of
July 31, 2020 and October 31, 2019, respectively. Included in
these balances were (1)
financial services customers’ deposits of $24.0 million at
July 31, 2020 and $22.8 million as
of October 31, 2019, which
are subject to restrictions on our use, and (2) $3.2 million at July 31, 2020 and $2.0 million as of
October 31, 2019 of restricted cash
under the terms of our mortgage warehouse lines of credit.
Total Homebuilding Customers’ deposits are shown as a liability on
the Condensed Consolidated Balance Sheets. These liabilities are
significantly more than the applicable periods’ restricted cash
balances because in some states the deposits are not restricted from use and, in other states,
we are able to release the majority of these customer deposits to
cash by pledging letters of credit and surety bonds.
We lease certain office space for use in our operations. We assess
each of these contracts to determine whether the arrangement
contains a lease as defined by ASC 842 “Leases” ("ASC 842"). In order to meet the definition of a
lease under ASC 842, the
contractual arrangement must convey to us the right to control the
use of an identifiable asset for a period of time in exchange for
consideration. We recognize lease expense for these leases on a
straight-line basis over the lease term and combine lease and
non-lease components for all leases. Our office lease terms are
generally from three
to five years and
generally contain renewal options. In accordance with ASC
842, our lease terms include those
renewals only to the extent that they are reasonably certain to be
exercised. The exercise of these lease renewal options is generally
at our discretion. In accordance with ASC 842, the lease liability is equal to the
present value of the remaining lease payments while the right of
use (“ROU”) asset is based on the lease liability, subject to
adjustment, such as for lease incentives. Our leases do not provide a readily determinable implicit
interest rate and therefore, we must estimate our incremental
borrowing rate. In determining the incremental borrowing rate,
we consider the lease period and our collateralized borrowing
rates.
Our lease population at July 31,
2020 is comprised of operating leases where we are the lessee
and these leases are primarily real estate for office space for our
corporate office, division offices and design centers. As allowed
by ASC 842, we adopted an
accounting policy election to not
record leases with lease terms of twelve months or less on our Condensed
Consolidated Balance Sheets.
Lease cost included in our Condensed Consolidated Statements of
Operations in Selling, general and administrative expenses and
payments on our lease liabilities are presented in the table
below. Our short-term lease costs and sublease income are de
minimis.
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
(In thousands)
|
|
July 31, 2020
|
|
|
July 31, 2020
|
|
Operating lease cost
|
|
$ |
2,621 |
|
|
$ |
7,837 |
|
Cash payments on lease liabilities
|
|
$ |
2,266 |
|
|
$ |
6,890 |
|
ROU assets are classified within Prepaids and other assets on our
Condensed Consolidated Balance Sheets, while lease liabilities are
classified within Accounts payable and other liabilities on our
Condensed Consolidated Balance Sheets. The Company recorded a net
increase to both its ROU assets and
lease liabilities of $1.0 million as a result
of lease renewals that commenced during the three and nine months ended July 31, 2020. The following table contains
additional information about our leases:
(In thousands) |
|
At July 31, 2020 |
|
ROU assets
|
|
$ |
21,200 |
|
Lease liabilities
|
|
$ |
22,188 |
|
Weighted-average remaining lease term (in years)
|
|
|
3.7 |
|
Weighted-average discount rate (incremental borrowing rate)
|
|
|
9.6 |
% |
Maturities of our operating lease liabilities as of July 31, 2020 are as follows:
Year ended October 31,
|
|
(In thousands)
|
|
2020 (excluding the nine months ended July 31, 2020)
|
|
$ |
2,204 |
|
2021
|
|
|
8,250 |
|
2022
|
|
|
7,050 |
|
2023
|
|
|
3,756 |
|
2024
|
|
|
1,479 |
|
Thereafter
|
|
|
2,431 |
|
Total payments
|
|
|
25,170 |
|
Less: imputed interest
|
|
|
(2,982 |
) |
Present value of lease liabilities
|
|
$ |
22,188 |
|
10.
|
Mortgage Loans Held for Sale
|
Our wholly owned mortgage banking subsidiary, K. Hovnanian American
Mortgage, LLC (“ K. Hovnanian Mortgage”), originates mortgage
loans, primarily from the sale of our homes. Such mortgage loans
are sold in the secondary mortgage market within a short period of
time of origination. Mortgage loans held for sale consist primarily
of single-family residential loans collateralized by the underlying
property. We have elected the fair value option to record loans
held for sale and therefore these loans are recorded at fair value
with the changes in the value recognized in the Condensed
Consolidated Statements of Operations in “Revenues: Financial
services.” We currently use forward sales of mortgage-backed
securities (“MBS”), interest rate commitments from borrowers and
mandatory and/or best efforts forward commitments to sell loans to
third-party purchasers to protect
us from interest rate fluctuations. These short-term instruments,
which do not require any payments
to be made to the counterparty or purchaser in connection with the
execution of the commitments, are recorded at fair value. Gains and
losses on changes in the fair value are recognized in the Condensed
Consolidated Statements of Operations in “Revenues: Financial
services.”
At July 31, 2020 and October 31, 2019, $83.1 million and
$143.2 million, respectively, of mortgages held for sale were
pledged against our mortgage warehouse lines of credit (see Note
11). We may incur losses with respect to mortgages
that were previously sold that are delinquent and which had
underwriting defects, but only to the extent the losses are
not covered by mortgage insurance
or resale value of the home. The reserves for these estimated
losses are included in the “Financial services” balances on the
Condensed Consolidated Balance Sheets. As of both
July 31, 2020 and 2019, we had reserves specifically for
21 identified mortgage loans as well as reserves for an
estimate for future losses on mortgages sold but not yet identified to us.
The activity in our loan origination reserves during the three and nine months ended July 31, 2020 and 2019 was as follows:
|
|
Three Months
Ended
|
|
|
Nine Months
Ended
|
|
|
|
July
31,
|
|
|
July
31,
|
|
(In thousands)
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan origination reserves, beginning of period
|
|
$ |
1,358 |
|
|
$ |
1,269 |
|
|
$ |
1,268 |
|
|
$ |
2,563 |
|
Provisions for losses during the period
|
|
|
56 |
|
|
|
61 |
|
|
|
140 |
|
|
|
139 |
|
Adjustments to pre-existing provisions for losses from changes in
estimates
|
|
|
- |
|
|
|
- |
|
|
|
6 |
|
|
|
(22 |
) |
Payments/settlements
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(1,350 |
) |
Loan origination reserves, end of period
|
|
$ |
1,414 |
|
|
$ |
1,330 |
|
|
$ |
1,414 |
|
|
$ |
1,330 |
|
Nonrecourse. We have nonrecourse mortgage loans for certain
communities totaling $179.8 million and $203.6 million (net of
debt issuance costs) at July 31,
2020 and October 31, 2019,
respectively, which are secured by the related real property,
including any improvements, with an aggregate book value of
$396.3 million and $410.2
million, respectively. The weighted-average interest rate on these
obligations was 7.0% and 8.3% at July
31, 2020 and October 31, 2019,
respectively, and the mortgage loan payments on each community
primarily correspond to home deliveries.
Mortgage Loans. K. Hovnanian Mortgage originates mortgage
loans primarily from the sale of our homes. Such mortgage loans and
related servicing rights are sold in the secondary mortgage
market within a short period of time. In certain instances, we
retain the servicing rights for a small amount of loans. K.
Hovnanian Mortgage finances the origination of mortgage loans
through various master repurchase agreements, which are recorded in
financial services liabilities on the Condensed Consolidated
Balance Sheets.
Our secured Master Repurchase Agreement with JPMorgan Chase Bank,
N.A. (“Chase Master Repurchase Agreement”) is a short-term
borrowing facility that provides up to $50.0 million through its
maturity on December 11, 2020. The
loan is secured by the mortgages held for sale and is repaid when
we sell the underlying mortgage loans to permanent
investors. Interest is payable monthly on outstanding advances
at an adjusted LIBOR rate, which was 0.15% at July 31, 2020, plus the applicable margin of
2.5% or 2.625% based upon type of loan. As of July 31, 2020 and October 31, 2019, the aggregate principal
amount of all borrowings outstanding under the Chase Master
Repurchase Agreement was $15.1 million and $47.1 million,
respectively.
K. Hovnanian Mortgage has another secured Master Repurchase
Agreement with Customers Bank (“Customers Master Repurchase
Agreement”) which is a short-term borrowing facility that provides
up to $50.0 million through its maturity on February 12, 2021. The loan is secured by the
mortgages held for sale and is repaid when we sell the underlying
mortgage loans to permanent investors. Interest is payable
daily or as loans are sold to permanent investors on outstanding
advances at the current LIBOR rate, plus the applicable margin
ranging from 2.125% to 4.75% based on the type of loan and the
number of days outstanding on the warehouse line. As of
July 31, 2020 and October 31, 2019, the aggregate principal
amount of all borrowings outstanding under the Customers Master
Repurchase Agreement was $32.1 million and $47.6 million,
respectively.
K. Hovnanian Mortgage also has a secured Master Repurchase
Agreement with Comerica Bank (“Comerica Master Repurchase
Agreement”) which was amended on July
24, 2020 and is a short-term borrowing facility through
its maturity on June 18, 2021. The
Comerica Master Repurchase Agreement provides up to $60.0 million
on the 15th day
of the last month of the Company’s fiscal quarters,
and reverts back to up to $50.0 million after 30 days. The loan is secured by the mortgages
held for sale and is repaid when we sell the underlying mortgage
loans to permanent investors. Interest is payable monthly at
the current LIBOR rate, subject to a floor of 0.25%, plus the
applicable margin of 1.875% or 3.25% based upon the type of loan.
As of July 31, 2020 and October 31, 2019, the aggregate principal
amount of all borrowings outstanding under the Comerica Master
Repurchase Agreement was $38.0 million and $45.5 million,
respectively.
The Chase Master Repurchase Agreement, Customers Master Repurchase
Agreement and Comerica Master Repurchase Agreement (together, the
“Master Repurchase Agreements”) require K. Hovnanian Mortgage to
satisfy and maintain specified financial ratios and other financial
condition tests. Because of the extremely short period of time
mortgages are held by K. Hovnanian Mortgage before the mortgages
are sold to investors (generally a period of a few weeks), the
immateriality to us on a consolidated basis of the size of the
Master Repurchase Agreements, the levels required by these
financial covenants, our ability based on our immediately available
resources to contribute sufficient capital to cure any default,
were such conditions to occur, and our right to cure any conditions
of default based on the terms of the applicable agreement, we do
not consider any of these covenants
to be substantive or material. As of July 31, 2020, we believe we were in
compliance with the covenants under the Master Repurchase
Agreements.
12.
|
Senior Notes and Credit Facilities
|
Senior notes and credit facilities balances as of July 31, 2020 and October 31, 2019, were as follows:
|
|
July 31,
|
|
|
October 31,
|
|
(In thousands)
|
|
2020
|
|
|
2019
|
|
Senior Secured Notes:
|
|
|
|
|
|
|
|
|
10.0% Senior Secured Notes
due July 15, 2022
|
|
$ |
111,214 |
|
|
$ |
218,994 |
|
10.5% Senior Secured Notes
due July 15, 2024
|
|
|
69,683 |
|
|
|
211,391 |
|
10.0% Senior Secured 1.75
Lien Notes due November 15, 2025
|
|
|
158,502 |
|
|
|
- |
|
7.75% Senior Secured 1.125
Lien Notes due February 15, 2026
|
|
|
350,000 |
|
|
|
350,000 |
|
10.5% Senior Secured 1.25
Lien Notes due February 15, 2026
|
|
|
282,322 |
|
|
|
282,322 |
|
11.25% Senior Secured 1.5
Lien Notes due February 15, 2026
|
|
|
162,269 |
|
|
|
103,141 |
|
Total Senior Secured Notes
|
|
$ |
1,133,990 |
|
|
$ |
1,165,848 |
|
Senior Notes:
|
|
|
|
|
|
|
|
|
8.0% Senior Notes due
November 1, 2027 (1)
|
|
$ |
- |
|
|
$ |
- |
|
13.5% Senior Notes due
February 1, 2026
|
|
|
90,590 |
|
|
|
90,590 |
|
5.0% Senior Notes due
February 1, 2040
|
|
|
90,120 |
|
|
|
90,120 |
|
Total Senior Notes
|
|
$ |
180,710 |
|
|
$ |
180,710 |
|
Senior Unsecured Term Loan Credit Facility due February 1, 2027
|
|
$ |
39,551 |
|
|
$ |
202,547 |
|
Senior Secured 1.75 Lien Term Loan Credit Facility due January 31, 2028
|
|
$ |
81,498 |
|
|
$ |
- |
|
Senior Secured Revolving Credit Facility (2)
|
|
$ |
- |
|
|
$ |
- |
|
Net discounts and premiums
|
|
$ |
19,476 |
|
|
$ |
(49,145 |
) |
Net debt issuance costs
|
|
$ |
(23,150 |
) |
|
$ |
(19,970 |
) |
Total Senior Notes and Credit Facilities, net of discount, premium
and debt issuance costs
|
|
$ |
1,432,075 |
|
|
$ |
1,479,990 |
|
(1) $26.0 million of 8.0%
Senior Notes are owned by a wholly-owned consolidated subsidiary of
HEI. Therefore, in accordance with GAAP, such notes are not reflected on the Condensed Consolidated
Balance Sheets of HEI. On November 1,
2019, the maturity of the 8.0%
Senior Notes was extended to November 1,
2027.
(2) At July 31, 2020, provides for up to $125.0
million in aggregate amount of senior secured first lien revolving loans. Availability
thereunder will terminate on December
28, 2022.
General
Except for K. Hovnanian, the issuer of the notes and borrower under
the Credit Facilities (as defined below), our home mortgage
subsidiaries, certain of our title insurance subsidiaries, joint
ventures and subsidiaries holding interests in our joint ventures,
we and each of our subsidiaries are guarantors of the Credit
Facilities, the senior secured notes (subject in the case of the
10.5% 2024 Notes, to the 10.5% 2024
Notes Supplemental Indenture) and senior notes outstanding at
July 31, 2020 (collectively, the
“Notes Guarantors”).
The credit agreements governing the Credit Facilities and the
indentures governing the senior secured and senior notes (together,
the “Debt Instruments”) outstanding at July 31, 2020 do not contain any financial maintenance
covenants, but do contain restrictive covenants that limit, among
other things, the ability of HEI and certain of its subsidiaries,
including K. Hovnanian, to incur additional indebtedness (other
than non-recourse indebtedness, certain permitted indebtedness and
refinancing indebtedness), pay dividends and make distributions on
common and preferred stock, repay certain indebtedness prior to its
respective stated maturity, repurchase common and preferred stock,
make other restricted payments (including investments), sell
certain assets (including in certain land banking transactions),
incur liens, consolidate, merge, sell or otherwise dispose of all
or substantially all of their assets and enter into certain
transactions with affiliates. The Debt Instruments also contain
customary events of default which would permit the lenders or
holders thereof to exercise remedies with respect to the collateral
(as applicable), declare the loans made under the Unsecured Term
Loan Facility (defined below) (the “Unsecured Term Loans”), loans
made under the Secured Term Loan Facility (defined below) (the
“Secured Term Loans”) and loans made under the Secured Credit
Agreement (as defined below) (the “Secured Revolving Loans”) or
notes to be immediately due and payable if not cured within applicable grace periods,
including the failure to make timely payments on the Unsecured Term
Loans, Secured Term Loans, Secured Revolving Loans or notes or
other material indebtedness, cross default to other material
indebtedness, the failure to comply with agreements and covenants
and specified events of bankruptcy and insolvency, with respect to
the Unsecured Term Loans, Secured Term Loans and Secured Revolving
Loans, material inaccuracy of representations and warranties and
with respect to the Unsecured Term Loans, Secured Term Loans and
Secured Revolving Loans, a change of control, and, with respect to
the Secured Term Loans, Secured Revolving Loans and senior secured
notes, the failure of the documents granting security for the
obligations under the secured Debt Instruments to be in full force
and effect, and the failure of the liens on any material portion of
the collateral securing the obligations under the secured Debt
Instruments to be valid and perfected. As of July 31, 2020, we believe we were in
compliance with the covenants of the Debt Instruments.
If our consolidated fixed charge coverage ratio is less than 2.0 to
1.0, as defined in the applicable
Debt Instrument, we are restricted from making certain payments,
including dividends, and from incurring indebtedness other than
certain permitted indebtedness, refinancing indebtedness and
nonrecourse indebtedness. As a result of this ratio restriction, we
are currently restricted from paying dividends (in the case of the
payment of dividends on preferred stock, our secured debt leverage
ratio must also be less than 4.0 to 1.0), which are not cumulative, on our 7.625% Series A
Preferred Stock. We anticipate that we will continue to be
restricted from paying dividends for the foreseeable future. Our
inability to pay dividends is in accordance with covenant
restrictions and will not result in
a default under our Debt Instruments or otherwise affect compliance
with any of the covenants contained in our Debt Instruments.
Under the terms of our Debt Instruments, we have the right to make
certain redemptions and prepayments and, depending on market
conditions and covenant restrictions, may do so from time to time. We also continue
to actively analyze and evaluate our capital structure and explore
transactions to simplify our capital structure and to strengthen
our balance sheet, including those that reduce leverage and/or
extend maturities, and will seek to do so with the right
opportunity. We may also continue
to make debt purchases and/or exchanges for debt or equity from
time to time through tender offers, exchange offers, open market
purchases, private transactions, or otherwise, or seek to raise
additional debt or equity capital, depending on market conditions
and covenant restrictions.
Fiscal 2020
On December 10, 2019, K. Hovnanian
consummated an exchange offer (the "1.75 Lien Exchange Offer") pursuant to which
it issued $158.5 million aggregate principal amount of 10.0%
1.75 Lien Notes due 2025 (the “1.75 Lien Notes”) in exchange for $23.2
million in aggregate principal amount of its outstanding 10.0%
Senior Secured Notes due 2022 (the
“10.0% 2022 Notes”) and $141.7 million in aggregate
principal amount of its outstanding 10.5% Senior Secured Notes due
2024 (the “10.5% 2024
Notes” and, together with the 10.0%
2022 Notes, the “Second Lien
Notes”). K. Hovnanian also exchanged $163.0 million in aggregate
principal amount of its Unsecured Term Loans for $81.5 million in
aggregate principal amount of Secured Term Loans made under a new
Senior Secured 1.75 Lien Term Loan
Credit Facility due January 31, 2028
(the “Secured Term Loan Facility”). There was no cash consideration in these exchanges.
These secured notes and term loan exchanges were accounted for in
accordance with ASC 470-60, resulting in a carrying value of $164.9
million and $148.8 million, respectively, for the $158.5 million of 1.75 Lien Notes and $81.5 million of Secured Term Loans,
respectively, and a net gain on extinguishment of debt of
$9.2 million (including additional costs of $0.1 million
incurred in the third quarter of
fiscal 2020), which is included
in “Gain on extinguishment of debt” on the Condensed
Consolidated Statement of Operations. The effect of this gain on a
per share basis, assuming dilution, for the nine months ended July 31, 2020 was $1.42, excluding the impact of
taxes, as our deferred tax assets are fully reserved by a valuation
allowance.
In connection with the 1.75 Lien
Exchange Offer, K. Hovnanian obtained consents from a majority of
the holders of the 10.5% 2024 Notes to amendments to the indenture
under which such 10.5% 2024 Notes were issued and entered into the
Tenth Supplemental Indenture dated as of December 6, 2019 among HEI, K. Hovnanian, the
guarantors party thereto and Wilmington Trust, National
Association, as trustee and collateral agent (the “10.5% 2024
Notes Supplemental Indenture”) to provide for such amendments,
which became operative on December 10,
2019. The amendments eliminate most of the restrictive
covenants, certain of the affirmative covenants and certain events
of default, including eliminating the obligations of subsidiaries
that are formed after December 10,
2019 to become guarantors of the 10.5% 2024
Notes and to provide collateral in respect of their assets. As a
result, the 10.5% 2024 Notes do not have the same guarantors or collateral as
K. Hovnanian’s other secured debt obligations.
The 1.75 Lien Notes were issued
under an Indenture, dated as of December
10, 2019, among HEI, K. Hovnanian, the guarantors party
thereto and Wilmington Trust, National Association, as trustee and
collateral agent. The 1.75
Lien Notes are guaranteed by HEI and the Notes Guarantors and are
secured by substantially all of the assets owned by K. Hovnanian
and the Notes Guarantors, subject to permitted liens and certain
exceptions. Interest on the 1.75
Lien Notes is payable semi-annually on May 15 and November 15 of each year, beginning on
May 15, 2020, to holders of record
at the close of business on May 1
or November 1, as the case
may be, immediately preceding each
such interest payment date. The 1.75 Lien Notes have a maturity of November 15, 2025.
The 1.75 Lien Notes are redeemable
in whole or in part at K. Hovnanian’s option at any time prior to
November 15, 2021 at a redemption
price equal to 100.0% of their principal amount plus an applicable
“Make-Whole Amount”. At any time and from time to time on or after
November 15, 2021 and prior to
November 15, 2022, K. Hovnanian
may redeem some or all of the
1.75 Lien Notes at a redemption
price equal to 105.00% of their principal amount, at any time and
from time to time after November 15,
2022 and prior to November 15,
2023, K. Hovnanian may redeem
some or all of the 1.75 Lien Notes
at a redemption price equal to 102.50% of their principal amount
and at any time and from time to time after November 15, 2023, K. Hovnanian may redeem some or all of the 1.75 Lien Notes at a redemption price equal
to 100.0% of their principal amount. In addition, K. Hovnanian
may also redeem up to 35.0% of the
aggregate principal amount of the 1.75 Lien Notes prior to November 15, 2021 with the net cash proceeds
from certain equity offerings at 110.00% of
principal.
The Secured Term Loans and the guarantees thereof are secured
on a pari passu basis with the 1.75
Lien Notes by the same assets that secure the 1.75 Lien Notes, subject to permitted liens
and certain exceptions. The Secured Term Loans bear interest at a
rate equal to 10.0% per annum and
will mature on January 31,
2028. The Secured Term Loans bear interest at a rate
equal to 10.0% per annum and
interest is payable in arrears, on the last business day of each
fiscal quarter. The Secured Term Loans may be voluntarily prepaid in whole or in
part at K. Hovnanian’s option at any time prior to November 15, 2021 at a prepayment price equal
to 100.0% of their principal amount plus any applicable “Make-Whole
Amount”. At any time and from time to time on or after November 15, 2021 and prior to November 15, 2022, K. Hovnanian may voluntarily prepay some or all of the
Secured Term Loans at a prepayment price equal to 105.00% of their
principal amount, at any time and from time to time after
November 15, 2022 and prior to
November 15, 2023, K. Hovnanian
may voluntarily prepay some or all
of the Secured Term Loans at a prepayment price equal to 102.50% of
their principal amount and at any time and from time to time after
November 15, 2023, K. Hovnanian
may voluntarily prepay some or all
of the Secured Term Loans at a prepayment price equal to 100.0% of
their principal amount.
On March 25, 2020, K. Hovnanian
consummated a private exchange (the “Exchange”) pursuant to which
it issued $59.1 million aggregate principal amount of additional
1.5 Lien Notes (defined below) (the
“Additional 1.5 Lien Notes”) in
exchange for of $59.1 million
aggregate principal amount of 10.0% 2022 Notes held by certain participating
bondholders (the “Exchange Holders”) pursuant to an Exchange
Agreement, dated March 25, 2020
(the “Exchange Agreement”), among the K. Hovnanian, the Notes
Guarantors, the Exchanging Holders and certain holders of the
Initial 1.5 Lien Notes (defined
below) (the “Consenting Holders”). In connection therewith, the
Consenting Holders provided their consents (the “Consents”) under
the Indenture under which the 1.5
Lien Notes were issued to permit the issuance of the Additional
1.5 Lien Notes.
The Additional 1.5 Lien Notes were
issued as additional notes of the same series as the $103.1
million aggregate principal amount of K. Hovnanian’s 11.25%
Senior Secured 1.5 Lien Notes due
2026 issued on October 31, 2019 (the “Initial 1.5 Lien Notes” and, together with the
Additional 1.5 Lien Notes, the
“1.5 Lien Notes”). In connection
with the issuance of the Additional 1.5 Lien Notes in the Exchange, K. Hovnanian,
the Notes Guarantors and Wilmington Trust, National Association, as
trustee (the “Trustee”) and collateral agent (the “Collateral
Agent”), entered into the Fourth Supplemental Indenture, dated as
of March 25, 2020 (the
“Supplemental Indenture”), to the Indenture, dated as of October 31, 2019 (as amended and supplemented
prior to the Supplemental Indenture, the “Indenture”), among the K.
Hovnanian, the Notes Guarantors, the Trustee and the Collateral
Agent. The Supplemental Indenture also amends the Indenture in
accordance with the Consents to permit K. Hovnanian and the Notes
Guarantors to secure up to $162.3 million of 1.5 Lien Obligations (as defined in the
Indenture). As of March 25, 2020,
after giving effect to the issuance of the Additional 1.5 Lien Notes, $162.3 million aggregate
principal amount of 1.5 Lien
Obligations, which consist of the 1.5 Lien Notes, were outstanding. For a
discussion of the 1.5 Lien Notes
see “—Secured Obligations” below.
During the three months ended
July 31, 2020, the Company
repurchased in open market transactions $25.5 million aggregate
principal amount of the 10.0%
2022 Notes. The aggregate
purchase price for these repurchases was $21.4 million, which
included accrued and unpaid interest. These repurchases resulted in
a gain on extinguishment of debt of $4.1 million for the three months ended July 31, 2020, net of the write-off of
unamortized financing costs and fees. The gains from the
repurchases are included in the Condensed Consolidated Statement of
Operations as "Gain of extinguishment of debt".
Fiscal 2019
On January 15, 2019, K.
Hovnanian issued $25.0 million in aggregate principal amount
of additional 10.5% 2024
Notes to GSO Capital Partners LP (“GSO”) or one or more funds managed, advised or
sub-advised by GSO (collectively, the “GSO Entities”) at a discount
for a purchase price of $21.3 million in cash. The additional
10.5% 2024 Notes were issued as additional notes of
the same series as the 10.5%
2024 Notes.
On October 31, 2019, K. Hovnanian,
HEI, the Notes Guarantors, Wilmington Trust, National Association,
as administrative agent, and affiliates of certain investment
managers (the “Investors”), as lenders, entered into a credit
agreement (the “Secured Credit Agreement” and, together with the
Unsecured Term Loan Facility and the Secured Term Loan Facility,
the “Credit Facilities”) providing for up to $125.0 million in
aggregate amount of Secured Revolving Loans to be used for general
corporate purposes, upon the terms and subject to the conditions
set forth therein. Secured Revolving Loans are to be borrowed by K.
Hovnanian and guaranteed by the Notes Guarantors. Availability
under the Secured Credit Agreement will terminate on December 28, 2022. The Secured Revolving
Loans bear interest at a rate per annum equal to 7.75%, and
interest is payable in arrears, on the last business day of each
fiscal quarter.
On October 31, 2019, K. Hovnanian
completed private placements of senior secured notes as follows:
(i) K. Hovnanian issued an aggregate of $350.0 million of 7.75%
Senior Secured 1.125 Lien Notes due
2026 (the “1.125 Lien Notes”) in part pursuant to a
Note Purchase Agreement, dated October
31, 2019, among K. Hovnanian, the Notes Guarantors and certain
Investors as purchasers thereof (the “1.125 Lien Notes Purchase Agreement”) and in
part pursuant to the Exchange Agreement (as defined below), with
the proceeds from the sale of 1.125
Lien Notes under the 1.125 Lien
Notes Purchase Agreement used to fund the cash payments to certain
Exchanging Holders (as defined below) under the Exchange Agreement;
and (ii) K. Hovnanian issued an aggregate of $282.3 million of
10.5% Senior Secured 1.25 Lien
Notes due 2026 (the “1.25 Lien Notes”), pursuant to a Note
Purchase Agreement (the “1.25 Lien
Notes Purchase Agreement”), dated October 31, 2019, among K. Hovnanian, the
Notes Guarantors and certain Investors as purchasers thereof (the
“1.25 Lien Notes Purchasers”), the
proceeds of which were used to fund the Satisfaction and Discharge
(as defined below).
In addition, on October 31, 2019,
K. Hovnanian completed private exchanges of (i) approximately
$221.0 million aggregate principal amount of its 10.0% 2022 Notes and approximately $114.0 million
aggregate principal amount of its 10.5% 2024
Notes held by certain participating bondholders (the “Exchanging
Holders”) for a portion of the $350.0 million aggregate principal amount of
1.125 Lien Notes described above
and/or cash, and (ii) approximately $99.6 million aggregate
principal amount of its 10.5%
2024 Notes held by certain of the
Exchanging Holders for approximately $103.1 million aggregate
principal amount of 1.5 Lien
Notes (the 1.5 Lien
Notes together with the 1.125
Lien Notes and the 1.25 Lien Notes,
the “New Secured Notes”), pursuant to an Exchange Agreement, dated
October 30, 2019 (the “Exchange
Agreement”), among K. Hovnanian, the Notes Guarantors and the
Exchanging Holders.
On October 31, 2019, K. Hovnanian
issued notices of redemption for all of its outstanding 9.50%
Senior Secured Notes due 2020 (the
“9.50% Notes”), 2.000% Senior
Secured Notes due 2021 (the
“2.000% Notes”) and 5.000% Senior
Secured Notes due 2021 (the
“5.000% Notes”) and deposited with
Wilmington Trust, National Association, as trustee under the
indenture (the “9.50% Notes
Indenture”) governing the 9.50%
Notes and as trustee under the indenture (the “5.000%/2.000% Notes Indenture”) governing
the 5.000% Notes and the 2.000% Notes sufficient funds to satisfy and
discharge (collectively, the “Satisfaction and Discharge”) (i) the
9.50% Indenture and to fund the
redemption of all outstanding 9.50%
Notes and to pay accrued and unpaid interest on the redeemed notes
to, but not including, the
November 10, 2019 redemption date
and (ii) the 5.000%/2.000%
Indenture and to fund the redemption of all outstanding 5.000% Notes and 2.000% Notes and to pay accrued and unpaid
interest on the redeemed notes to, but not including, the November 30, 2019 redemption date. Proceeds
from the issuance of the 1.25 Lien
Notes together with cash on hand were used to fund the Satisfaction
and Discharge. Upon the Satisfaction and Discharge of the
9.50% Notes Indenture, all of the
collateral securing the 9.50% Notes
was released and the restrictive covenants and events of default
contained therein ceased to have effect and upon the Satisfaction
and Discharge of the 5.000%/2.000%
Notes Indenture, all of the collateral securing the 5.000% Notes and the 2.000% Notes was released and the restrictive
covenants and events of default contained therein ceased to have
effect as to both such series of Notes.
HEI and K. Hovnanian obtained the consent of certain
lenders/holders under its existing debt instruments to amend such
debt instruments in connection with the issuance of the New Secured
Notes and the execution of the indentures governing the New Secured
Notes and the Secured Credit Agreement. HEI, K. Hovnanian and the
guarantors also amended such debt instruments to add certain
subsidiaries as guarantors thereunder and, in the case of the
Second Lien Notes, to add such new guarantors as pledgors and
grantors of their assets (subject to permitted liens and certain
exceptions) to secure such Second Lien Notes.
Secured Obligations
The 10.0% 2022 Notes have a
maturity of July 15, 2022 and bear
interest at a rate of 10.0% per annum payable semi-annually on
January 15 and July 15 of each year, to holders of record at
the close of business on January 1
and July 1, as the case may be, immediately preceding such interest
payment dates. K. Hovnanian may
also redeem some or all of the 10.0% 2022
Notes at 105.0% of principal commencing July 15, 2019, at 102.50% of principal
commencing July 15, 2020 and at
100.0% of principal commencing July 15,
2021.
The 10.5% 2024 Notes have a maturity of July 15, 2024 and bear interest at a rate of
10.5% per annum payable
semi-annually on January 15 and
July 15 of each year, to holders of
record at the close of business on January 1 and July
1, as the case may be,
immediately preceding such interest payment dates. The 10.5% 2024
Notes are redeemable in whole or in part at our option at any time
prior to July 15, 2020 at 100.0% of
their principal amount plus an applicable “Make-Whole Amount.” K.
Hovnanian may also redeem some or
all of the 10.5% 2024 Notes at 105.25% of principal commencing
July 15, 2020, at 102.625% of
principal commencing July 15, 2021
and at 100.0% of principal commencing July 15, 2022.
The 1.125 Lien Notes have a
maturity of February 15, 2026 and
bear interest at a rate of 7.75% per annum payable semi-annually on
February 15 and August 15 of each year, to holders of record
at the close of business on February
1 and August 1, as the case
may be, immediately preceding such
interest payment dates. The 1.125
Lien Notes are redeemable in whole or in part at our option at any
time prior to February 15, 2022 at
100.0% of their principal amount plus an applicable “Make-Whole
Amount.” In addition, up to 35% of the original aggregate principal
amount of the 1.125 Lien Notes
may be redeemed with the net cash
proceeds from certain equity offerings at 107.75% of principal at
any time prior to February 15,
2022. K. Hovnanian may also
redeem some or all of the 1.125
Lien Notes at 103.875% of principal commencing February 15, 2022, at 101.937% of principal
commencing February 15, 2023 and at
100.0% of principal commencing February
15, 2024.
The 1.25 Lien Notes have a maturity
of February 15, 2026 and bear
interest at a rate of 10.5% per annum payable semi-annually on
February 15 and August 15 of each year, to holders of record
at the close of business on February
1 and August 1, as the case
may be, immediately preceding such
interest payment dates. The 1.25
Lien Notes are redeemable in whole or in part at our option at any
time prior to February 15, 2022 at
100.0% of their principal amount plus an applicable “Make-Whole
Amount.” In addition, up to 35% of the original aggregate principal
amount of the 1.25 Lien Notes
may be redeemed with the net cash
proceeds from certain equity offerings at 110.5% of principal at
any time prior to February 15,
2022. K. Hovnanian may also
redeem some or all of the 1.25 Lien
Notes at 105.25% of principal commencing February 15, 2022, at 102.625% of principal
commencing February 15, 2023 and at
100.0% of principal commencing February
15, 2024.
The 1.5 Lien Notes have a maturity
of February 15, 2026 and bear
interest at a rate of 11.25% per annum payable semi-annually on
February 15 and August 15 of each year, to holders of record
at the close of business on February
1 and August 1, as the case
may be, immediately preceding such
interest payment dates. The 1.5
Lien Notes are redeemable in whole or in part at our option at any
time prior to February 15, 2026 at
100.0% of their principal amount.
See “—Fiscal 2020” for a
discussion of the 1.75 Lien Notes
and the Secured Term Loans and “—Fiscal 2019” for a discussion of the Secured
Credit Agreement.
Each series of secured notes (subject in the case of the 10.5% 2024
Notes, to the 10.5% 2024 Notes Supplemental Indenture) and the
guarantees thereof, the Secured Term Loans and the guarantees
thereof and the Secured Credit Agreement and the guarantees thereof
are secured by the same assets. Among the secured debt, the liens
securing the Secured Credit Agreement are senior to the liens
securing all of K. Hovnanian’s other secured notes and the Secured
Term Loan. The liens securing the 1.125 Lien Notes are senior to the liens
securing the 1.25 Lien Notes,
1.5 Lien Notes, the 1.75 Lien Notes, the Secured Term Loans, the
Second Lien Notes and any other future secured obligations that are
junior in priority with respect to the assets securing the
1.125 Lien Notes, the liens
securing the 1.25 Lien Notes are
senior to the liens securing the 1.5 Lien Notes, the 1.75 Lien Notes, the Secured Term Loans, the
Second Lien Notes and any other future secured obligations that are
junior in priority with respect to the assets securing the
1.25 Lien Notes, the liens securing
the 1.5 Lien Notes are senior to
the liens securing the 1.75 Lien
Notes, the Secured Term Loans, the Second Lien Notes and any other
future secured obligations that are junior in priority with respect
to the assets securing the 1.5 Lien
Notes, the liens securing the 1.75
Lien Notes and the Secured Term Loans (which are secured on a pari
passu basis with each other) are senior to the liens securing the
Second Lien Notes and any other future secured obligations that are
junior in priority with respect to the assets securing the
1.75 Lien Notes and the Secured
Term Loans, in each case, with respect to the assets securing such
debt.
As of July 31, 2020, the collateral
securing the Secured Credit Agreement, the Secured Term Loan
Facility and the secured notes (subject in the case of the
10.5% 2024 Notes, to the 10.5% 2024
Notes Supplemental Indenture) included (1) $197.3 million of cash and cash
equivalents, which included $11.2 million of restricted cash
collateralizing certain letters of credit (subsequent to such date,
fluctuations as a result of cash uses include general business
operations and real estate and other investments along with cash
inflow primarily from deliveries); (2) $435.9 million aggregate book value of
real property, which does not
include the impact of inventory investments, home deliveries or
impairments thereafter and which may differ from the value if it were
appraised; and (3) equity interests
in joint venture holding companies with an aggregate book value of
$196.7 million.
Unsecured Obligations
On January 29, 2018, K. Hovnanian,
the Notes Guarantors, Wilmington Trust, National Association, as
administrative agent, and the GSO Entities entered into a senior
unsecured term loan credit facility (the “Unsecured Term Loan
Facility”). The Term Loans bear interest at a rate equal to 5.0%
per annum and interest is payable in arrears, on the last business
day of each fiscal quarter. The Term Loans will mature on
February 1, 2027. On February 1, 2018, K. Hovnanian issued $90.6
million aggregate principal amount of its 13.5% Senior Notes due
2026 (the “2026 Notes”) and $90.1 million aggregate
principal amount of its 5.0% Senior Notes due 2040 (the “2040 Notes”) under a new indenture in an
exchange offer (the “Exchange Offer”) for $170.2 million aggregate
principal amount of K. Hovnanian’s 8.0% Senior Notes. Also, as part
of the Exchange Offer, K. Hovnanian at Sunrise Trail III, LLC, a
wholly-owned subsidiary of HEI (the “Subsidiary Purchaser”),
purchased for $26.5 million in cash an aggregate of $26.0 million
in principal amount of the 8.0% Notes (the “Purchased 8.0% Notes”). The 2026 Notes and the 2040 Notes were issued by K. Hovnanian and
guaranteed by the Notes Guarantors, except for the Subsidiary
Purchaser which does not
guarantee the 2026 Notes or the
2040 Notes. The 2026 Notes bear interest at 13.5% per annum and mature on February 1, 2026. The 2040 Notes bear interest at 5.0% per annum and mature on February 1, 2040. Interest on the 2026 Notes and the 2040 Notes is payable semi-annually on
February 1 and August 1 of each year to holders of record at
the close of business on January 15
or July 15, as the case may be, immediately preceding each such
interest payment date.
K. Hovnanian’s 2026 Notes are
redeemable in whole or in part at K. Hovnanian’s option at any time
prior to February 1, 2025 at a
redemption price equal to 100% of their principal amount plus an
applicable “Make Whole Amount”. At any time and from time to time
on or after February 1, 2025, K.
Hovnanian may also redeem some or
all of the 2026 Notes at a
redemption price equal to 100.0% of their principal amount.
At any time and from time to time on or after February 1, 2020 and prior to February 1, 2021, K. Hovnanian may redeem some or all of the 2040 Notes at a redemption price equal to
102.50% of their principal amount and at any time and from time to
time after February 1, 2021, K.
Hovnanian may also redeem some or
all of the 2040 Notes at a
redemption price equal to 100.0% of their principal
amount.
Other
We have certain stand-alone cash collateralized letter of credit
agreements and facilities under which there was a total of $11.0
million and $19.2 million letters of credit outstanding at
July 31, 2020 and October 31, 2019, respectively. These
agreements and facilities require us to maintain specified amounts
of cash as collateral in segregated accounts to support the letters
of credit issued thereunder, which will affect the amount of cash
we have available for other uses. At July 31, 2020 and October 31, 2019, the amount of cash
collateral in these segregated accounts was $11.2 million and
$19.9 million, respectively, which is reflected in “Restricted cash
and cash equivalents” on the Condensed Consolidated Balance
Sheets.
13.
|
Per Share Calculation
|
Basic earnings per share is computed by dividing net
income (loss) (the “numerator”) by the weighted-average number
of common shares outstanding, adjusted for nonvested shares of
restricted stock (the “denominator”) for the period. Computing
diluted earnings per share is similar to computing basic earnings
per share, except that the denominator is increased to include the
dilutive effects of options and nonvested shares of restricted
stock. Any options that have an exercise price greater than
the average market price are considered to be anti-dilutive and are
excluded from the diluted earnings per share
calculation.
All outstanding nonvested shares that contain nonforfeitable rights
to dividends or dividend equivalents that participate in
undistributed earnings with common stock are considered
participating securities and are included in computing earnings per
share pursuant to the two-class
method. The two-class method is an
earnings allocation formula that determines earnings per share for
each class of common stock and participating securities according
to dividends or dividend equivalents and participation rights in
undistributed earnings in periods when we have net income. The
Company’s restricted common stock (“nonvested shares”) are
considered participating securities.
Basic and diluted earnings per share for the periods presented
below were calculated as follows:
|
|
Three Months
Ended
|
|
|
Nine Months
Ended
|
|
|
|
July
31,
|
|
|
July
31,
|
|
(In thousands, except per share data)
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings (loss) attributable to Hovnanian
|
|
$ |
15,363 |
|
|
$ |
(7,601 |
) |
|
$ |
10,294 |
|
|
$ |
(40,310 |
) |
Less: undistributed earnings allocated to nonvested shares
|
|
|
(1,294 |
) |
|
|
- |
|
|
|
(902 |
) |
|
|
- |
|
Numerator for basic earnings (loss) per share
|
|
|
14,069 |
|
|
|
(7,601 |
) |
|
|
9,392 |
|
|
|
(40,310 |
) |
Plus: undistributed earnings allocated to nonvested shares
|
|
|
1,294 |
|
|
|
- |
|
|
|
902 |
|
|
|
- |
|
Less: undistributed earnings reallocated to nonvested shares
|
|
|
(1,294 |
) |
|
|
- |
|
|
|
(902 |
) |
|
|
- |
|
Numerator for diluted earnings (loss) per share
|
|
|
14,069 |
|
|
|
(7,601 |
) |
|
|
9,392 |
|
|
|
(40,310 |
) |
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for basic earnings per share
|
|
|
6,201 |
|
|
|
5,971 |
|
|
|
6,178 |
|
|
|
5,964 |
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share based payments
|
|
|
317 |
|
|
|
- |
|
|
|
324 |
|
|
|
- |
|
Denominator for diluted earnings per share – weighted average
shares outstanding
|
|
|
6,518 |
|
|
|
5,971 |
|
|
|
6,502 |
|
|
|
5,964 |
|
Basic earnings (loss) per share
|
|
$ |
2.27 |
|
|
$ |
(1.27 |
) |
|
$ |
1.52 |
|
|
$ |
(6.76 |
) |
Diluted earnings (loss) per share
|
|
$ |
2.16 |
|
|
$ |
(1.27 |
) |
|
$ |
1.44 |
|
|
$ |
(6.76 |
) |
There were 0.2 and 0.3 million incremental shares attributed
to nonvested stock and outstanding options to purchase common stock
for the three and nine months ended July 31, 2019, respectively, which
were excluded from the computation of diluted earnings per
share because we had a net loss for the period.
In addition, shares related to out-of-the money stock options that
could potentially dilute basic earnings per share in the future
that were not included in the
computation of diluted earnings per share were 0.2 million for
each of the three and
nine months ended July 31, 2020 and the three and nine months ended July 31, 2019 because to do so would
have been anti-dilutive for the periods
presented.
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 are payable at an annual
rate of 7.625%. The Series A
Preferred Stock is not convertible
into the Company’s common stock and is redeemable in whole or in
part at our option at the liquidation preference of the shares. 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 Global Market under the symbol “HOVNP.” During the
three and nine months ended July 31, 2020 and 2019, we did not pay any
dividends on the Series A Preferred Stock due to covenant
restrictions in our debt instruments. We anticipate that we will
continue to be restricted from paying dividends, which are
not cumulative, for the foreseeable
future.
Each share of Class A Common Stock entitles its holder to
one vote per share,
and each share of Class B Common Stock generally entitles its
holder to ten votes
per share. The amount of any regular cash dividend payable on a
share of Class A Common Stock will be an amount equal to 110%
of the corresponding regular cash dividend payable on a share of
Class B Common Stock. If a shareholder desires to sell shares
of Class B Common Stock, such stock must be converted into
shares of Class A Common Stock at a one to one conversion rate.
On March 19, 2019, the
Company's stockholders approved at an annual meeting an amendment
to our Certificate of Incorporation to effect a reverse stock
split (the “Reverse Stock Split”) of the Company’s common stock at
a ratio of 1-for-25 and a
corresponding decrease in the number of authorized shares of the
common stock. Following the stockholders' approval, the Board of
Directors, on March 19, 2019,
determined to effectuate the Reverse Stock Split, which became
effective on March 29, 2019, and
every 25 issued shares (including treasury shares) of Class A
Common Stock, par value $0.01 per share (the “Class A Common
Stock”), were combined into one share of Class A Common
Stock, and every 25 issued shares (including treasury shares) of
Class B Common Stock, par value $0.01 per share (the “Class B
Common Stock”), were combined into one share of Class B Common Stock. No
fractional shares were issued in connection with the Reverse Stock
Split. All share and per share amounts have been retroactively
adjusted to reflect the reverse stock split.
On August 4, 2008, our
Board of Directors adopted a shareholder rights plan (the “Rights
Plan”), which was amended on January 11,
2018, designed to preserve shareholder value and the value of
certain tax assets primarily associated with net operating loss
(NOL) carryforwards and built-in losses under
Section 382 of the Internal
Revenue Code. Our ability to use NOLs and built-in losses would be
limited if there was an “ownership change” under
Section 382. This would occur
if shareholders owning (or deemed under Section 382 to own) 5% or more of our stock increase
their collective ownership of the aggregate amount of our
outstanding shares by more than 50 percentage points over a
defined period of time. The Rights Plan was adopted to reduce the
likelihood of an “ownership change” occurring as defined by
Section 382. Under the Rights
Plan, one right was
distributed for each share of Class A Common Stock and
Class B Common Stock outstanding as of the close of business
on August 15, 2008.
Effective August 15, 2008, if
any person or group acquires 4.9% or more of the outstanding shares
of Class A Common Stock without the approval of the Board of
Directors, there would be a triggering event causing significant
dilution in the voting power of such person or group. However,
existing stockholders who owned, at the time of the Rights Plan’s
initial adoption on August 4, 2008,
4.9% or more of the outstanding shares of Class A Common Stock
will trigger a dilutive event only if they acquire additional
shares. The approval of the Board of Directors’ decision to adopt
the Rights Plan may be terminated
by the Board of Directors at any time, prior to the Rights being
triggered. The Rights Plan will continue in effect until August 14, 2021,
unless it expires earlier in accordance with its terms. The
approval of the Board of Directors’ decision to initially adopt the
Rights Plan and the amendment thereto were approved by
shareholders. Our stockholders also approved an amendment to our
Certificate of Incorporation to restrict certain transfers of Class
A Common Stock in order to preserve the tax treatment of our NOLs
and built-in losses under Section 382 of the Internal Revenue Code. Subject to
certain exceptions pertaining to pre-existing 5% stockholders and Class B stockholders, the
transfer restrictions in our Restated Certificate of Incorporation
generally restrict any direct or indirect transfer (such as
transfers of our stock that result from the transfer of interests
in other entities that own our stock) if the effect would be to (i)
increase the direct or indirect ownership of our stock by any
person (or public group) from less than 5% to 5% or more of our
common stock; (ii) increase the percentage of our common stock
owned directly or indirectly by a person (or public group) owning
or deemed to own 5% or more of our common stock; or (iii) create a
new “public group” (as defined in the applicable United States
Treasury regulations). Transfers included under the transfer
restrictions include sales to persons (or public groups) whose
resulting percentage ownership (direct or indirect) of common stock
would exceed the 5% thresholds discussed above, or to persons whose
direct or indirect ownership of common stock would by attribution
cause another person (or public group) to exceed such
threshold.
On July 3, 2001, our Board of
Directors authorized a stock repurchase program to purchase up to
0.2 million shares of Class A Common Stock. There were
no shares purchased during
the three and nine months ended July 31, 2020. As of July 31, 2020, the maximum number of shares
of Class A Common Stock that may
yet be purchased under this program is 22 thousand.
The total income tax expense for the three and nine months ended July 31, 2020 was $0.9 million and
$2.7 million, respectively, and $0.5 million and $1.2 million,
respectively, for the same periods of the prior year. For both
the three and nine months ended July 31, 2020 and the three and nine months ended July 31, 2019, the total income tax expense
was primarily related to state tax expense from income generated
that was not offset by tax benefits
in states where we fully reserve the tax benefit from net operating
losses. In addition, the expense for the nine months ended July 31, 2020 was related to state tax
expense from the impact of a cancellation of debt income recorded
for tax purposes but not for GAAP
purposes, creating a permanent difference.
Our federal net operating losses of $1.5 billion expire between
2028 and 2037, and $32.2 million have an
indefinite carryforward period. Of our $2.5 billion of state NOLs,
$211.4 million expire between 2020
through 2024; $1.2 billion expire
between 2025 through 2029; $760.1 million expire between
2030 through 2034; $277.5 million expire between
2035 through 2039; and $74.9 million have an
indefinite carryforward period.
On March 27, 2020, the Coronavirus
Aid, Relief and Economic Security (CARES) Act was enacted and
signed into U.S. law to provide economic relief to individuals and
businesses facing economic hardship as a result of the
COVID-19 pandemic. The CARES Act
did not have a material impact on
the Company's consolidated financial condition or results of
operations as of and for the nine
months ended July 31, 2020.
The Company plans to defer the timing of estimated payments
and payroll taxes as permitted by federal and state legislation,
including under the CARES Act. We will continue to monitor
additional guidance issued by the U.S. Treasury Department, the
Internal Revenue Service and various state agencies.
Deferred federal and state income tax assets (“DTAs”) primarily
represent the deferred tax benefits arising from
NOL carryforwards and temporary differences between book and
tax income which will be recognized in future years as an offset
against future taxable income. If the combination of future years’
income (or loss) and the reversal of the timing differences results
in a loss, such losses can be carried forward to future years. In
accordance with ASC 740, we
evaluate our DTAs quarterly to determine if valuation allowances
are required. ASC 740 requires
that companies assess whether valuation allowances should be
established based on the consideration of all available evidence
using a “more likely than not”
standard.
As of July 31, 2020, we
considered all available positive and negative evidence to
determine whether, based on the weight of that evidence, our
valuation allowance for our DTAs was appropriate in accordance
with ASC 740. Listed below, in
order of the weighting of each factor, is the available positive
and negative evidence that we considered in determining that it is
more likely than not that all of
our DTAs will not be realized. In
analyzing these factors, overall the negative evidence, both
objective and subjective, outweighed the positive evidence. Based
on this analysis, we determined that the current valuation
allowance for deferred taxes of $592.9 million as of
July 31, 2020, which fully reserves
for our DTAs, is appropriate.
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1.
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As of July 31, 2020, on a tax
basis, the Company had pre-tax income when adjusted for
permanent differences on a three-year cumulative basis. However, on a
U.S. GAAP basis, the Company was still in a three-year cumulative pre-tax loss position
as of July 31, 2020. Therefore, it
is too early to conclude whether we will continue to
not be in a three-year cumulative loss position going
forward on a tax accounting basis. Per ASC 740, cumulative losses are one of the most objectively verifiable forms
of negative evidence. (Negative Objective Evidence)
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2.
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In the third quarter of fiscal
2017, second and third quarters of fiscal 2018, fourth
quarter of fiscal 2019, and
first and second quarters of fiscal 2020, we completed debt
refinancing/restructuring transactions which, by extending our debt
maturities, will enable us to allocate cash to invest in new
communities and grow our community count to get back to sustained
profitability. (Positive Objective Evidence)
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3.
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Our net contracts per average active selling
community increased in the third quarter of fiscal 2020 compared to the third quarter of 2019, which is the fifth consecutive quarter of
year-over-year increases. (Positive Objective Evidence)
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4.
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We incurred pre-tax losses during the housing market decline and
the slower than expected housing market recovery. (Negative
Objective Evidence)
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5.
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We exited two geographic markets in
fiscal 2016 and completed the
wind down of operations in two other markets in fiscal 2018, that have historically had losses. By
exiting these underperforming markets, the Company has been able to
redeploy capital to better performing markets, which over time
should improve our profitability. (Positive Subjective
Evidence)
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6.
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The historical cyclicality of the U.S. housing market, a more
restrictive mortgage lending environment compared to before the
housing downturn of 2007-2009, the uncertainty of the overall US
economy and government policies and consumer confidence, and
impacts of the COVID 19 pandemic,
all or any of which could continue to hamper a sustained, stronger
recovery of the housing market. (Negative Subjective Evidence)
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17.
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Operating and Reporting Segments
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HEI’s operating segments are components of the
Company’s business for which discrete financial information is
available and reviewed regularly by the chief operating decision
maker, our Chief Executive Officer, to evaluate performance and
make operating decisions. Based on this criteria, each of the
Company's communities qualifies as an operating segment, and
therefore, it is impractical to provide segment disclosures for
this many segments. As such, HEI has aggregated the
homebuilding operating segments into six reportable segments.
HEI’s homebuilding operating segments are aggregated into
reportable segments based primarily upon geographic proximity,
similar regulatory environments, land acquisition characteristics
and similar methods used to construct and sell homes.
HEI’s reportable segments consist of the following
six homebuilding
segments and a financial services segment noted below.
Homebuilding:
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(1)
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Northeast (New Jersey and Pennsylvania)
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(2)
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Mid-Atlantic (Delaware, Maryland, Virginia, Washington D.C. and
West Virginia)
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(3)
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Midwest (Illinois and Ohio)
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(4)
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Southeast (Florida, Georgia and South Carolina)
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(5)
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Southwest (Arizona and Texas)
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(6)
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West (California)
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Financial Services
Operations of the Homebuilding segments primarily include the
sale and construction of single-family attached and detached homes,
attached townhomes and condominiums, urban infill and active
lifestyle homes in planned residential developments. In
addition, from time to time, operations of the homebuilding
segments include sales of land. Operations of
the Financial Services segment include mortgage banking and
title services provided to the homebuilding operations’ customers.
Our financial services subsidiaries do not typically retain or service mortgages
that we originate but rather sell the mortgages and related
servicing rights to investors.
Corporate and unallocated primarily represents operations at our
headquarters in New Jersey. This includes our executive
offices, information services, human resources, corporate
accounting, training, treasury, process redesign, internal audit,
construction services, and administration of insurance, quality and
safety. It also includes interest income and interest expense
resulting from interest incurred that cannot be capitalized in
inventory in the Homebuilding segments, as well as the gains or
losses on extinguishment of debt from any debt repurchases or
exchanges.
Evaluation of segment performance is based primarily on operating
earnings from continuing operations before provision for income
taxes (“Income (loss) before income taxes”). Income (loss)
before income taxes for the Homebuilding segments consist of
revenues generated from the sales of homes and land, income (loss)
from unconsolidated entities, management fees and other income,
less the cost of homes and land sold, selling, general and
administrative expenses and interest expense. Income (loss)
before income taxes for the Financial Services segment consist of
revenues generated from mortgage financing, title insurance and
closing services, less the cost of such services and selling,
general and administrative expenses incurred by the Financial
Services segment.
Operational results of each segment are not necessarily indicative of the results
that would have occurred had the segment been an independent
stand-alone entity during the periods presented.
Financial information relating to HEI’s segment operations was as
follows:
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Three Months
Ended
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Nine Months
Ended
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July
31,
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July
31,
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(In thousands)
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