UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended APRIL 30, 2013
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.)
110 West Front Street, P.O. Box 500, Red Bank, NJ 07701 (Address of Principal Executive Offices)
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)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes [ X ] No [ ]
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files). Yes [ X ] No [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer [ ] Accelerated Filer [ X ]
Non-Accelerated Filer [ ] (Do not check if smaller reporting company) Smaller Reporting Company [ ]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [ X ]
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. 124,484,825 shares of Class A Common Stock and 14,657,325 shares of Class B Common Stock were outstanding as of June 3, 2013.
HOVNANIAN ENTERPRISES, INC.
FORM 10-Q
INDEX |
PAGE NUMBER |
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PART I. Financial Information |
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Item l. Financial Statements: |
|
|
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Condensed Consolidated Balance Sheets as of April 30, 2013 (unaudited) and October 31, 2012 |
3 |
|
|
Condensed Consolidated Statements of Operations (unaudited) for the three and six months ended April 30, 2013 and 2012 |
5 |
|
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Condensed Consolidated Statement of Equity (unaudited) for the six months ended April 30, 2013 |
6 |
|
|
Condensed Consolidated Statements of Cash Flows (unaudited) for the six months ended April 30, 2013 and 2012 |
7 |
|
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Notes to Condensed Consolidated Financial Statements (unaudited) |
9 |
|
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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations |
36 |
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Item 3. Quantitative and Qualitative Disclosures About Market Risk |
60 |
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Item 4. Controls and Procedures |
60 |
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PART II. Other Information |
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Item 1. Legal Proceedings |
61 |
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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds |
61 |
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Item 6. Exhibits |
61 |
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Signatures |
62 |
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands)
April 30, 2013 |
October 31, 2012 |
|||||||
(Unaudited) |
(1) | |||||||
ASSETS |
||||||||
Homebuilding: |
||||||||
Cash |
$ | 236,419 | $ | 258,323 | ||||
Restricted cash and cash equivalents |
32,764 | 41,732 | ||||||
Inventories: |
||||||||
Sold and unsold homes and lots under development |
700,921 | 671,851 | ||||||
Land and land options held for future development or sale |
228,265 | 218,996 | ||||||
Consolidated inventory not owned - other options |
106,121 | 90,619 | ||||||
Total inventories |
1,035,307 | 981,466 | ||||||
Investments in and advances to unconsolidated joint ventures |
52,821 | 61,083 | ||||||
Receivables, deposits, and notes – net |
45,129 | 61,794 | ||||||
Property, plant, and equipment – net |
47,037 | 48,524 | ||||||
Prepaid expenses and other assets |
55,127 | 66,694 | ||||||
Total homebuilding |
1,504,604 | 1,519,616 | ||||||
Financial services: |
||||||||
Cash |
8,443 | 14,909 | ||||||
Restricted cash and cash equivalents |
16,701 | 22,470 | ||||||
Mortgage loans held for sale at fair value |
85,463 | 117,024 | ||||||
Other assets |
2,193 | 10,231 | ||||||
Total financial services |
112,800 | 164,634 | ||||||
Income taxes receivable – including net deferred tax benefits |
1,483 | - | ||||||
Total assets |
$ | 1,618,887 | $ | 1,684,250 |
(1) Derived from the audited balance sheet as of October 31, 2012.
See notes to condensed consolidated financial statements (unaudited).
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands Except Share Amounts)
April 30, 2013 |
October 31, 2012 |
|||||||
(Unaudited) |
(1) | |||||||
LIABILITIES AND EQUITY |
||||||||
Homebuilding: |
||||||||
Nonrecourse mortgages |
$ | 30,384 | $ | 38,302 | ||||
Accounts payable and other liabilities |
271,736 | 296,510 | ||||||
Customers’ deposits |
32,993 | 23,846 | ||||||
Nonrecourse mortgages secured by operating properties |
18,263 | 18,775 | ||||||
Liabilities from inventory not owned |
91,150 | 77,791 | ||||||
Total homebuilding |
444,526 | 455,224 | ||||||
Financial services: |
||||||||
Accounts payable and other liabilities |
27,680 | 37,609 | ||||||
Mortgage warehouse lines of credit |
65,988 | 107,485 | ||||||
Total financial services |
93,668 | 145,094 | ||||||
Notes payable: |
||||||||
Senior secured notes |
977,980 | 977,369 | ||||||
Senior notes |
459,005 | 458,736 | ||||||
Senior amortizing notes |
23,149 | 23,149 | ||||||
Senior exchangeable notes |
64,880 | 76,851 | ||||||
TEU senior subordinated amortizing notes |
4,180 | 6,091 | ||||||
Accrued interest |
30,019 | 20,199 | ||||||
Total notes payable |
1,559,213 | 1,562,395 | ||||||
Income taxes payable |
- | 6,882 | ||||||
Total liabilities |
2,097,407 | 2,169,595 | ||||||
Equity: |
||||||||
Hovnanian Enterprises, Inc. stockholders’ equity deficit: |
||||||||
Preferred stock, $.01 par value - authorized 100,000 shares; issued 5,600 shares with a liquidation preference of $140,000 at April 30, 2013 and at October 31, 2012 |
135,299 | 135,299 | ||||||
Common stock, Class A, $.01 par value – authorized 400,000,000 shares; issued 136,244,962 shares at April 30, 2013 and 130,055,304 shares at October 31, 2012 (including 11,760,763 shares at April 30, 2013 and October 31, 2012 held in Treasury) |
1,363 | 1,300 | ||||||
Common stock, Class B, $.01 par value (convertible to Class A at time of sale) – authorized 60,000,000 shares; issued 15,349,699 shares at April 30, 2013 and 15,350,101 shares at October 31, 2012 (including 691,748 shares at April 30, 2013 and October 31, 2012 held in Treasury) |
153 | 154 | ||||||
Paid in capital - common stock |
685,398 | 668,735 | ||||||
Accumulated deficit |
(1,185,693 |
) |
(1,175,703 |
) | ||||
Treasury stock - at cost |
(115,360 |
) |
(115,360 |
) | ||||
Total Hovnanian Enterprises, Inc. stockholders’ equity deficit |
(478,840 |
) |
(485,575 |
) | ||||
Noncontrolling interest in consolidated joint ventures |
320 | 230 | ||||||
Total equity deficit |
(478,520 |
) |
(485,345 |
) | ||||
Total liabilities and equity |
$ | 1,618,887 | $ | 1,684,250 |
(1) Derived from the audited balance sheet as of October 31, 2012.
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 April 30, |
Six Months Ended April 30, |
|||||||||||||||
2013 |
2012 |
2013 |
2012 |
|||||||||||||
Revenues: |
||||||||||||||||
Homebuilding: |
||||||||||||||||
Sale of homes |
$ | 409,576 | $ | 312,494 | $ | 743,857 | $ | 564,824 | ||||||||
Land sales and other revenues |
2,740 | 20,691 | 15,011 | 31,270 | ||||||||||||
Total homebuilding |
412,316 | 333,185 | 758,868 | 596,094 | ||||||||||||
Financial services |
10,682 | 8,513 | 22,341 | 15,203 | ||||||||||||
Total revenues |
422,998 | 341,698 | 781,209 | 611,297 | ||||||||||||
Expenses: |
||||||||||||||||
Homebuilding: |
||||||||||||||||
Cost of sales, excluding interest |
333,143 | 271,563 | 621,898 | 488,990 | ||||||||||||
Cost of sales interest |
11,274 | 13,317 | 21,554 | 25,793 | ||||||||||||
Inventory impairment loss and land option write-offs |
2,191 | 3,216 | 2,856 | 6,541 | ||||||||||||
Total cost of sales |
346,608 | 288,096 | 646,308 | 521,324 | ||||||||||||
Selling, general and administrative |
37,802 | 35,125 | 74,573 | 68,379 | ||||||||||||
Total homebuilding expenses |
384,410 | 323,221 | 720,881 | 589,703 | ||||||||||||
Financial services |
7,137 | 5,363 | 14,565 | 10,540 | ||||||||||||
Corporate general and administrative |
13,725 | 12,264 | 26,228 | 25,049 | ||||||||||||
Other interest |
22,632 | 26,056 | 46,632 | 48,051 | ||||||||||||
Other operations |
(2,814 |
) |
990 | (1,914 |
) |
6,388 | ||||||||||
Total expenses |
425,090 | 367,894 | 806,392 | 679,731 | ||||||||||||
Gain on extinguishment of debt |
- | 27,039 | - | 51,737 | ||||||||||||
Income from unconsolidated joint ventures |
827 | 1,495 | 3,116 | 1,473 | ||||||||||||
(Loss) income before income taxes |
(1,265 |
) |
2,338 | (22,067 |
) |
(15,224 |
) | |||||||||
State and federal income tax (benefit) provision: |
||||||||||||||||
State |
(2,432 |
) |
468 | (2,199 |
) |
1,101 | ||||||||||
Federal |
(151 |
) |
68 | (9,878 |
) |
138 | ||||||||||
Total income taxes |
(2,583 |
) |
536 | (12,077 |
) |
1,239 | ||||||||||
Net income (loss) |
$ | 1,318 | $ | 1,802 | $ | (9,990 |
) |
$ | (16,463 |
) | ||||||
Per share data: |
||||||||||||||||
Basic: |
||||||||||||||||
Income (loss) per common share |
$ | 0.01 | $ | 0.02 | $ | (0.07 |
) |
$ | (0.15 |
) | ||||||
Weighted-average number of common shares outstanding |
145,948 | 116,021 | 144,373 | 112,338 | ||||||||||||
Assuming dilution: |
||||||||||||||||
Income (loss) per common share |
$ | 0.01 | $ | 0.02 | $ | (0.07 |
) |
$ | (0.15 |
) | ||||||
Weighted-average number of common shares outstanding |
147,231 | 116,117 | 144,373 | 112,338 |
See notes to condensed consolidated financial statements (unaudited).
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF EQUITY
(In Thousands Except Share Amounts)
(Unaudited)
A Common Stock |
B Common Stock |
Preferred Stock |
||||||||||||||||||||||||||||||||||||||||||
Shares Issued and Outstanding |
Amount |
Shares Issued and Outstanding |
Amount |
Shares Issued and Outstanding |
Amount |
Paid-In Capital |
Accumulated Deficit |
Treasury Stock |
Noncontrolling Interest |
Total |
||||||||||||||||||||||||||||||||||
Balance, November 1, 2012 |
118,294,541 | $ | 1,300 | 14,658,353 | $ | 154 | 5,600 | $ | 135,299 | $ | 668,735 | $ | (1,175,703 |
) |
$ | (115,360 |
) |
$ | 230 | $ | (485,345 |
) | ||||||||||||||||||||||
Stock options, amortization and issuances |
31,562 | 1,552 | 1,552 | |||||||||||||||||||||||||||||||||||||||||
Restricted stock amortization, issuances and forfeitures |
77,913 | 1 | 896 | 897 | ||||||||||||||||||||||||||||||||||||||||
Settlement of prepaid common stock purchase contracts |
2,683,679 | 27 | (27 |
) |
- | |||||||||||||||||||||||||||||||||||||||
Exchange of senior exchangeable notes for Class A Common Stock |
3,396,102 | 34 | 14,242 | 14,276 | ||||||||||||||||||||||||||||||||||||||||
Conversion of Class B to Class A Common Stock |
402 | 1 | (402 |
) |
(1 |
) |
- | |||||||||||||||||||||||||||||||||||||
Changes in noncontrolling interest in consolidated joint ventures |
90 | 90 | ||||||||||||||||||||||||||||||||||||||||||
Net loss |
(9,990 |
) |
(9,990 |
) | ||||||||||||||||||||||||||||||||||||||||
Balance, April 30, 2013 |
124,484,199 | $ | 1,363 | 14,657,951 | $ | 153 | 5,600 | $ | 135,299 | $ | 685,398 | $ | (1,185,693 |
) |
$ | (115,360 |
) |
$ | 320 | $ | (478,520 |
) |
See notes to condensed consolidated financial statements (unaudited).
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
Six Months Ended April 30, |
||||||||
2013 |
2012 |
|||||||
Cash flows from operating activities: |
||||||||
Net loss |
$ | (9,990 |
) |
$ | (16,463 |
) | ||
Adjustments to reconcile net loss to net cash used in operating activities: |
||||||||
Depreciation |
2,844 | 3,217 | ||||||
Compensation from stock options and awards |
2,455 | 2,867 | ||||||
Amortization of bond discounts and deferred financing costs |
3,646 | 3,493 | ||||||
Gain on sale and retirement of property and assets |
(4,484 |
) |
(127 |
) | ||||
Income from unconsolidated joint ventures |
(3,116 |
) |
(1,473 |
) | ||||
Distributions of earnings from unconsolidated joint ventures |
738 | 297 | ||||||
Gain on extinguishment of debt |
- | (51,737 |
) | |||||
Expenses related to the debt for debt exchange |
- | 4,683 | ||||||
Inventory impairment and land option write-offs |
2,856 | 6,541 | ||||||
Decrease (increase) in assets: |
||||||||
Mortgage loans held for sale |
31,561 | (2,905 |
) | |||||
Restricted cash, receivables, prepaids, deposits and other assets |
45,486 | 18,953 | ||||||
Inventories |
(66,205 |
) |
15,435 | |||||
(Decrease) increase in liabilities: |
||||||||
State and federal income tax liabilities |
(8,365 |
) |
1,106 | |||||
Customers’ deposits |
9,147 | 4,326 | ||||||
Accounts payable, accrued interest and other accrued liabilities |
(22,493 |
) |
(28,079 |
) | ||||
Net cash used in operating activities |
(15,920 |
) |
(39,866 |
) | ||||
Cash flows from investing activities: |
||||||||
Proceeds from sale of property and assets |
7,147 | 134 | ||||||
Purchase of property, equipment, and other fixed assets |
(668 |
) |
(728 |
) | ||||
Investments in and advances to unconsolidated joint ventures |
(3,012 |
) |
(2,768 |
) | ||||
Distributions of capital from unconsolidated joint ventures |
14,207 | 1,258 | ||||||
Net cash provided by (used in) investing activities |
17,674 | (2,104 |
) | |||||
Cash flows from financing activities: |
||||||||
Proceeds from mortgages and notes |
39,216 | 5,966 | ||||||
Payments related to mortgages and notes |
(38,138 |
) |
(4,477 |
) | ||||
Proceeds from model sale leaseback financing programs |
3,868 | 26,695 | ||||||
Payments related to model sale leaseback financing programs |
(3,201 |
) |
- | |||||
Proceeds from land bank financing program |
31,294 | - | ||||||
Payments related to land bank financing program |
(18,602 |
) |
- | |||||
Net proceeds from common stock issuance |
- | 47,250 | ||||||
Net payments related to mortgage warehouse lines of credit |
(41,497 |
) |
14,801 | |||||
Deferred financing costs from land bank financing programs and note issuances |
(1,153 |
) |
- | |||||
Principal payments and debt repurchases |
(1,911 |
) |
(73,024 |
) | ||||
Payments related to the debt for debt exchange |
- | (18,861 |
) | |||||
Purchase of treasury stock |
- | (103 |
) | |||||
Net cash used in financing activities |
(30,124 |
) |
(1,753 |
) | ||||
Net decrease in cash and cash equivalents |
(28,370 |
) |
(43,723 |
) | ||||
Cash and cash equivalents balance, beginning of period |
273,232 | 250,740 | ||||||
Cash and cash equivalents balance, end of period |
$ | 244,862 | $ | 207,017 |
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands - Unaudited)
(Continued)
Six Months Ended April 30, |
||||||||
2013 |
2012 |
|||||||
Supplemental disclosures of cash flow: |
||||||||
Cash (received) paid during the period for income taxes |
$ | (3,712 | ) | $ | 133 |
Supplemental disclosure of noncash financing activities:
In the second quarter of fiscal 2013, a property that we previously acquired when our partner in a land development joint venture transferred its interest in the venture to us, was foreclosed on by the note holder. As a result, the inventory with a book value of $9.5 million and corresponding non-recourse liability of equal amount were taken off of our balance sheet in the quarter.
In the first quarter of fiscal 2013, 18,305 of our senior exchangeable notes were exchanged for 3,396,102 shares of Class A Common Stock.
In the first quarter of fiscal 2013, we entered into a new unconsolidated homebuilding joint venture which resulted in the transfer of an existing receivable from our joint venture partners of $0.6 million at October 31, 2012, to an investment in the joint venture at January 31, 2013.
In the second quarter of fiscal 2012, we completed several debt for equity exchanges. See Notes 11, 12 and 16 for further information.
In the first quarter of fiscal 2012, we completed a debt for debt exchange. See Note 9 in our Annual Report on Form 10-K for the fiscal year ended October 31, 2012 for further information.
See notes to Condensed Consolidated Financial Statements (unaudited).
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
1. Hovnanian Enterprises, Inc. and Subsidiaries (the "Company”, “we”, “us” or “our”) has reportable segments consisting of six Homebuilding segments (Northeast, Mid-Atlantic, Midwest, Southeast, Southwest and West) and the Financial Services segment (see Note 18).
The accompanying unaudited Condensed Consolidated Financial Statements include our accounts and those of all wholly-owned subsidiaries after elimination of all significant intercompany balances and transactions. Certain immaterial prior year amounts have been reclassified to conform to the current year presentation.
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 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, 2012. 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 consolidated financial position, results of operations, and cash flows. The preparation of 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 financial statements. Results for interim periods are not necessarily indicative of the results which might be expected for a full year. The balance sheet at October 31, 2012 has been derived from the audited Consolidated Financial Statements at that date but does not include all of the information and footnotes required by GAAP for complete financial statements.
2. For the three and six months ended April 30, 2013, the Company’s total stock-based compensation expense was $1.3 million (pre and post tax) and $2.5 million (pre and post tax), respectively, and $1.7 million ($1.3 million net of tax) and $2.9 million (pre and post tax) for the three and six months ended April 30, 2012, respectively. Included in this total stock-based compensation expense was the vesting of stock options of $0.7 million and $1.5 million for the three and six months ended April 30, 2013, respectively, and $1.6 million and $2.6 million for the three and six months ended April 30, 2012, respectively.
3. Interest costs incurred, expensed and capitalized were:
Three Months Ended April 30, |
Six Months Ended April 30, |
|||||||||||||||
(In thousands) |
2013 |
2012 |
2013 |
2012 |
||||||||||||
Interest capitalized at beginning of period |
$ | 114,429 | $ | 123,315 | $ | 116,056 | $ | 121,441 | ||||||||
Plus interest incurred(1) |
31,965 | 34,493 | 64,618 | 70,838 | ||||||||||||
Less cost of sales interest expensed |
11,274 | 13,317 | 21,554 | 25,793 | ||||||||||||
Less other interest expensed(2)(3) |
22,632 | 26,056 | 46,632 | 48,051 | ||||||||||||
Interest capitalized at end of period(4) |
$ | 112,488 | $ | 118,435 | $ | 112,488 | $ | 118,435 |
(1) |
Data does not include interest incurred by our mortgage and finance subsidiaries. | ||
(2) |
Other interest expensed is comprised of interest that does not qualify for interest capitalization because our assets that qualify for interest capitalization (inventory under development) do not exceed our debt. Interest on completed homes and land in planning, which does not qualify for capitalization, is expensed. | ||
(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, which is calculated as follows: |
Three Months Ended April 30, |
Six Months Ended April 30, |
|||||||||||||||
(In thousands) |
2013 |
2012 |
2013 |
2012 |
||||||||||||
Other interest expensed |
$ | 22,632 | $ | 26,056 | $ | 46,632 | $ | 48,051 | ||||||||
Interest paid by our mortgage and finance subsidiaries |
631 | 468 | 1,508 | 944 | ||||||||||||
(Increase)/decrease in accrued interest |
(1,600 | ) | 14,350 | (9,820 | ) | 3,283 | ||||||||||
Cash paid for interest, net of capitalized interest |
$ | 21,663 | $ | 40,874 | $ | 38,320 | $ | 52,278 |
(4) |
Capitalized interest amounts are shown gross before allocating any portion of impairments to capitalized interest. |
4. Accumulated depreciation at April 30, 2013 and October 31, 2012 amounted to $77.7 million and $75.7 million, respectively, for our homebuilding property, plant and equipment.
5. 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. For the six months ended April 30, 2013 and 2012, our discount rates used for the impairments recorded ranged from 18.0% to 18.8% and from 16.8% to 18.5%, respectively. 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 six months ended April 30, 2013, we evaluated inventories of all 344 communities under development and held for future development for impairment indicators through preparation and review of detailed budgets or other market indicators of impairment. We performed detailed impairment calculations for 29 of those communities (i.e., those with a projected operating loss or other impairment indicators) with an aggregate carrying value of $82.0 million. As impairment indicators are assessed on a quarterly basis, some of the communities evaluated during the six months ended April 30, 2013 were evaluated in more than one quarterly period. Of those communities tested for impairment, one community with an aggregate carrying value of $2.7 million had undiscounted future cash flow that only exceeded the carrying amount by less than 20%. As a result of our impairment analysis, we recorded impairment losses, which are included in the Condensed Consolidated Statement of Operations and deducted from inventory, of $0.9 million and $2.1 million for the three months ended April 30, 2013 and 2012, respectively, and $1.5 million and $5.2 million for the six months ended April 30, 2013 and 2012, respectively.
The following tables represent inventory impairments by homebuilding segment for the three and six months ended April 30, 2013 and 2012:
(Dollars in millions) |
Three Months Ended April 30, 2013 |
Three Months Ended April 30, 2012 |
||||||||||||||||||||||
Number of Communities |
Dollar Amount of Impairment |
Pre- Impairment Value(1) |
Number of Communities |
Dollar Amount of Impairment |
Pre- Impairment Value(1) |
|||||||||||||||||||
Northeast |
1 | $ | 0.9 | $ | 2.3 | - | $ | - | $ | - | ||||||||||||||
Mid-Atlantic |
- | - | - | 1 | 0.1 | 0.2 | ||||||||||||||||||
Midwest |
- | - | - | - | - | - | ||||||||||||||||||
Southeast |
- | - | - | 5 | 2.0 | 4.5 | ||||||||||||||||||
Southwest |
- | - | - | - | - | - | ||||||||||||||||||
West |
- | - | - | - | - | - | ||||||||||||||||||
Total |
1 | $ | 0.9 | $ | 2.3 | 6 | $ | 2.1 | $ | 4.7 |
(Dollars in millions) |
Six Months Ended April 30, 2013 |
Six Months Ended April 30, 2012 |
||||||||||||||||||||||
Number of Communities |
Dollar Amount of Impairment(2) |
Pre- Impairment Value(1) |
Number of Communities |
Dollar Amount of Impairment |
Pre- Impairment Value(1) |
|||||||||||||||||||
Northeast |
2 | $ | 1.5 | $ | 5.2 | 5 | $ | 2.4 | $ | 16.1 | ||||||||||||||
Mid-Atlantic |
1 | - | 0.1 | 3 | 0.4 | 0.8 | ||||||||||||||||||
Midwest |
- | - | - | 1 | 0.1 | 1.1 | ||||||||||||||||||
Southeast |
1 | - | 0.4 | 8 | 2.3 | 5.4 | ||||||||||||||||||
Southwest |
- | - | - | - | - | - | ||||||||||||||||||
West |
- | - | - | - | - | - | ||||||||||||||||||
Total |
4 | $ | 1.5 | $ | 5.7 | 17 | $ | 5.2 | $ | 23.4 |
(1) |
Represents carrying value, net of prior period impairments, if any, at the time of recording the applicable period’s impairments. |
(2) |
During the six months ended April 30, 2013, the Mid-Atlantic had an impairment totaling $2 thousand and the Southeast had an impairment totaling $17 thousand. |
The Condensed Consolidated Statement of Operations line item 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 $1.3 million and $1.1 million for the three months ended April 30, 2013 and 2012, respectively, and $1.4 million and $1.3 million for the six months ended April 30, 2013 and 2012, 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 cost written off.
The following tables represent write-offs of such costs (after giving effect to any recovered deposits in the applicable period) and the number of lots walked away from by homebuilding segment for the three and six months ended April 30, 2013 and 2012:
Three Months Ended April 30, |
||||||||||||||||
2013 |
2012 |
|||||||||||||||
(Dollars in millions) |
Number of Walk-Away Lots |
Dollar Amount of Write-Offs (1) |
Number of Walk-Away Lots |
Dollar Amount of Write-Offs(1) |
||||||||||||
Northeast |
300 | $ | 0.1 | - | $ | 0.3 | ||||||||||
Mid-Atlantic |
24 | - | 3 | 0.1 | ||||||||||||
Midwest |
- | - | 67 | 0.1 | ||||||||||||
Southeast |
- | 0.1 | 593 | 0.6 | ||||||||||||
Southwest |
189 | 1.1 | 165 | - | ||||||||||||
West |
- | - | - | - | ||||||||||||
Total |
513 | $ | 1.3 | 828 | $ | 1.1 |
Six Months Ended April 30, |
||||||||||||||||
2013 |
2012 |
|||||||||||||||
(Dollars in millions) |
Number of Walk-Away Lots |
Dollar Amount of Write-Offs(1) |
Number of Walk-Away Lots |
Dollar Amount of Write-Offs(1) |
||||||||||||
Northeast |
300 | $ | 0.2 | - | $ | 0.3 | ||||||||||
Mid-Atlantic |
164 | - | 182 | 0.2 | ||||||||||||
Midwest |
- | - | 105 | 0.1 | ||||||||||||
Southeast |
- | 0.1 | 734 | 0.7 | ||||||||||||
Southwest |
234 | 1.1 | 165 | - | ||||||||||||
West |
- | - | - | - | ||||||||||||
Total |
698 | $ | 1.4 | 1,186 | $ | 1.3 |
(1) |
During the three and six months ended April 30, 2013 there were write-offs in the Mid-Atlantic totaling $2 thousand and $8 thousand, respectively. During the three and six months ended April 30, 2012 there were write-offs in the Southwest totaling $44 thousand and $52 thousand, respectively. |
We have decided to mothball (or stop development on) certain communities when we have determined the current performance does not justify further investment at the time. When we decide to mothball a community, the inventory is reclassified from “Sold and unsold homes and lots under development” to “Land and land options held for future development or sale”. During the first half of fiscal 2013, we mothballed one community and we re-activated two previously mothballed communities. As of April 30, 2013, the net book value associated with our 52 total mothballed communities was $125.2 million, net of impairment charges recorded in prior periods of $455.2 million.
During fiscal 2012 and 2013, we sold and leased 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 360-20-40-38, these sale and leaseback transactions are considered a financing rather than a sale. Therefore, for purposes of our Condensed Consolidated Balance Sheet, at April 30, 2013, inventory of $34.2 million was recorded to consolidated inventory not owned, with a corresponding amount of $33.6 million recorded to liabilities from inventory not owned.
In addition, we entered into a land banking arrangement in fiscal 2012 with GSO Capital Partners LP ("GSO"), that continued in fiscal 2013, whereby we sold a portfolio of our land parcels to GSO, and GSO provided us an option to purchase back finished lots on a quarterly basis. Because of our option to repurchase these parcels, for accounting purposes, in accordance with ASC 360-20-40-38, this transaction is considered a financing rather than a sale. For purposes of our Condensed Consolidated Balance Sheet, at April 30, 2013, inventory of $71.9 million was recorded as “Consolidated inventory not owned – other options”, with a corresponding amount of $57.5 million recorded to “Liabilities from inventory not owned” for the amount of net cash received from the transactions.
6. Over the past several years, general liability insurance for homebuilding companies and their suppliers and subcontractors has become very difficult to obtain. The availability of general liability insurance has been 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. We have been able to obtain general liability insurance but at higher premium costs with higher deductibles. We have been advised that a significant number of our subcontractors and suppliers have also had difficulty obtaining insurance that also provides us coverage. As a result, we introduced 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 value of their services. 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 six months ended April 30, 2013 and 2012 we received $1.0 million and $0.9 million, respectively, from subcontractors related to the owner controlled insurance program, which we accounted for as a reduction 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 fiscal 2013 and 2012, our deductible under our general liability insurance is $20 million per occurrence for construction defects and warranty claims. For bodily injury claims, our deductible per occurrence in fiscal 2013 and 2012 is $0.25 million and $0.1 million, respectively, up to a $5 million limit. Our aggregate retention in fiscal 2013 and 2012 is $21 million for construction defects, warranty and bodily injury claims. 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 six months ended April 30, 2013 and 2012 were as follows:
Three Months Ended April 30, |
Six Months Ended April 30, |
|||||||||||||||
(In thousands) |
2013 |
2012 |
2013 |
2012 |
||||||||||||
Balance, beginning of period |
$ | 121,135 | $ | 124,725 | $ | 121,149 | $ | 123,865 | ||||||||
Additions – Selling, general and administrative |
4,217 | 4,268 | 8,406 | 6,924 | ||||||||||||
Additions – Cost of sales |
3,516 | 4,224 | 6,311 | 10,158 | ||||||||||||
Charges incurred during the period |
(3,594 | ) | (9,637 |
) |
(10,592 |
) |
(17,367 |
) | ||||||||
Changes to pre-existing reserves |
- | - | - | - | ||||||||||||
Balance, end of period |
$ | 125,274 | $ | 123,580 | $ | 125,274 | $ | 123,580 |
Warranty accruals are based upon historical experience. We engage a third-party actuary that uses our historical warranty and construction defect data, worker’s compensation data, and other industry data to assist us in estimating our reserves for unpaid claims, claim adjustment expenses and incurred but not reported claims reserves for the risks that we are assuming under the general liability and workers compensation programs. The estimates include provisions for inflation, claims handling, and legal fees.
Insurance claims paid by our insurance carriers, excluding insurance deductibles paid, were $7.5 million and $1.9 million for the three months ended April 30, 2013 and 2012, respectively, and $8.5 million and $2.6 million for the six months ended April 30, 2013 and 2012, respectively, for prior year deliveries.
7. We are involved in litigation arising in the ordinary course of business, none of which is expected to have a material adverse effect on our financial position or results of operations, and we are subject to extensive and complex regulations that affect the development and home building, sales and customer financing processes, including zoning, density, building standards and mortgage financing. These regulations often provide broad discretion to the administering governmental authorities. This can delay or increase the cost of development or homebuilding.
We also are subject to a variety of local, state, federal and foreign laws and regulations concerning protection of health and the environment. The particular environmental laws that apply to any given community vary greatly according to the community site, the site’s environmental conditions and the present and former uses of the site. These environmental laws may result in delays, may cause us to incur substantial compliance, remediation and/or other costs, and can prohibit or severely restrict development and homebuilding activity.
We received in October 2012 a notice from Region III of the United States Environmental Protection Agency (“EPA”) concerning stipulated penalties, totaling approximately $120,000, based on the extent to which we reportedly did not meet certain compliance performance specified in the previously reported consent decree entered into in August 2010; we have since paid the stipulated penalties as assessed. Until terminated by court order, which can occur no sooner than three years from the date of its entry, the consent decree remains in effect and could give rise to additional assessments of stipulated penalties. In October 2012, we also received notices from Region III of EPA concerning alleged violations of stormwater discharge permits, issued in 2010 pursuant to the federal Clean Water Act, at two projects in Maryland; we negotiated with the EPA two orders, which the EPA issued in February 2013, to resolve the violations. One requires us to pay a penalty of $130,000, while the other obligates us to take certain measures to comply with those permits and detail the specific compliance measures we take, among other things; our obligations under the orders will not materially affect us.
In March 2013, we received a letter from the 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 recent tests on soil samples from properties within the development conducted by the EPA show elevated levels of lead. We also understand that the smelter operated before the City of Newark acquired properties, demolished structures existing on them, and sold the properties to the Company entity in connection with the redevelopment project. We responded to the EPA’s initial request and expect to receive an additional information request, to which we will also respond. The EPA’s investigation is in its early stages and we do not know what, if any, obligations the Company may have arising out of it beyond responding to the EPA’s requests for information.
We anticipate that increasingly stringent requirements will be imposed on developers and homebuilders in the future. Although we cannot predict the effect of these requirements, they could result in time-consuming and expensive compliance programs and in substantial expenditures, which could cause delays and increase our cost of operations. In addition, the continued effectiveness of permits already granted or approvals already obtained is dependent upon many factors, some of which are beyond our control, such as changes in policies, rules, and regulations and their interpretations and application.
The Company is also involved in the following litigation:
Hovnanian Enterprises, Inc. and K. Hovnanian Venture I, L.L.C. have been named as defendants in a class action suit. The action was filed by Mike D’Andrea and Tracy D’Andrea, on behalf of themselves and all others similarly situated in the Superior Court of New Jersey, Gloucester County. The action was initially filed on May 8, 2006 alleging that the HVAC systems installed in certain of the Company’s homes are in violation of applicable New Jersey building codes and are a potential safety issue. On December 14, 2011, the Superior Court granted class certification; the potential class is 1,065 homes. We filed a request to take an interlocutory appeal regarding the class certification decision. The Appellate Division denied the request, and we filed a request for interlocutory review by the New Jersey Supreme Court, which remanded the case back to the Appellate Division for a review on the merits of the appeal on May 8, 2012. The Appellate Division, on remand, heard oral arguments on December 4, 2012 reviewing the Superior Court’s original finding of class certification. We anticipate a ruling from the Appellate Division on the issue of class certification within the next few months. The plaintiff seeks unspecified damages as well as treble damages pursuant to the NJ Consumer Fraud Act. The Company believes there is insurance coverage available to it for this action. While we have determined that a loss related to this case is not probable, it is not possible to estimate a loss or range of loss related to this matter at this time given the class certification is still in review by the Appellate Division. On December 19, 2011, certain subsidiaries of the Company filed a separate action seeking indemnification against the various manufactures and subcontractors implicated by the class action.
8. Cash represents cash deposited in checking accounts. Cash equivalents includes 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.
Restricted cash and cash equivalents on the Condensed Consolidated Balance Sheets, totaled to $49.5 million and $64.2 million as of April 30, 2013 and October 31, 2012, respectively, which includes cash collateralizing our letter of credit agreements and facilities and is discussed in Note 10. Also included in this balance are homebuilding and financial services customers’ deposits of $5.7 million and $16.7 million at April 30, 2013, respectively, and $4.8 million and $22.5 million as of October 31, 2012, respectively, which are restricted from use by us. In addition, we previously collateralized our surety bonds with cash, but as of April 30, 2013 are no longer required to do so. The balance of this surety bond collateral was $6.2 million at October 31, 2012, which was in cash equivalents, the book value of which approximates fair value.
Total Homebuilding Customers’ deposits are shown as a liability on the Condensed Consolidated Balance Sheets. These liabilities are significantly more than the applicable years’ escrow 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 this escrow cash by pledging letters of credit and surety bonds.
9. Our mortgage banking subsidiary 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 Statements of Operations in “Revenues: Financial services.” We currently use forward sales of mortgage-backed securities, interest rate commitments from borrowers and mandatory and/or best efforts forward commitments to sell loans to investors to protect us from interest rate fluctuations. These short-term instruments, which do not require any payments to be made to the counterparty or investor 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 Statements of Operations in “Revenues: Financial services”.
At April 30, 2013 and October 31, 2012, respectively, $68.4 million and $104.6 million of mortgages held for sale were pledged against our mortgage warehouse lines of credit (see Note 10). 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 – Accounts payable and other liabilities” balances on the Condensed Consolidated Balance Sheet. We received 11 and 24 repurchase or make-whole inquiries during the three and six months ended April 30, 2013, respectively. We received 21 and 34 repurchase or make-whole inquiries during the three and six months ended April 30, 2012, respectively.
The activity in our loan origination reserves during the three and six months ended April 30, 2013 and 2012 was as follows:
Three Months Ended April 30, |
Six Months Ended April 30, |
|||||||||||||||
(In thousands) |
2013 |
2012 |
2013 |
2012 |
||||||||||||
Loan origination reserves, beginning of period |
$ | 9,118 | $ | 6,429 | $ | 9,334 | $ | 5,063 | ||||||||
Provisions for losses during the period |
709 | 724 | 1,335 | 2,388 | ||||||||||||
Adjustments to pre-existing provisions for losses from changes in estimates |
(61 |
) |
(39 |
) |
(253 |
) |
53 | |||||||||
Payments/settlements |
- | (544 |
) |
(650 |
) |
(934 |
) | |||||||||
Loan origination reserves, end of period |
$ | 9,766 | $ | 6,570 | $ | 9,766 | $ | 6,570 |
10. We have nonrecourse mortgages for a small number of our communities totaling $30.4 million at April 30, 2013, as well as our Corporate Headquarters totaling $18.3 million at April 30, 2013, which are secured by the related real property and any improvements. These loans have installment obligations with annual principal maturities in the years ending October 31 of approximately: $30.9 million in 2013, $1.1 million in 2014, $1.2 million in 2015, $1.3 million in 2016, $1.4 million in 2017 and $12.8 million after 2017. The interest rates on these obligations ranged from 4.25% to 10.0% at April 30, 2013.
We do not have a revolving credit facility. We have certain stand alone cash collateralized letter of credit agreements and facilities under which there were a total of $26.6 million and $29.5 million of letters of credit outstanding as of April 30, 2013 and October 31, 2012, 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. As of April 30, 2013 and October 31, 2012, the amount of cash collateral in these segregated accounts was $27.0 million and $30.7 million, respectively, which is reflected in “Restricted cash” on the Condensed Consolidated Balance Sheets.
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 and related servicing rights are sold in the secondary mortgage market within a short period of time. 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 million through January 17, 2014. 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 0.19820% at April 30, 2013, subject to a floor of 1%, plus the applicable margin of 2.5%. Therefore, at April 30, 2013, the interest rate was 3.5%. As of April 30, 2013, the aggregate principal amount of all borrowings outstanding under the Chase Master Repurchase Agreement was $32.2 million.
K. Hovnanian Mortgage has another secured Master Repurchase Agreement with Customers Bank (“Customers Master Repurchase Agreement”), which was amended on May 28, 2013 to extend the maturity date to May 27, 2014, that is a short-term borrowing facility that provides up to $37.5 million through maturity. 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 subject to a floor of 0.5% plus the applicable margin ranging from 3.0% to 5.5% based on the takeout investor and type of loan. As of April 30, 2013, the aggregate principal amount of all borrowings outstanding under the Customers Master Repurchase Agreement was $7.6 million.
K. Hovnanian Mortgage has a third secured Master Repurchase Agreement with Credit Suisse First Boston Mortgage Capital LLC (“Credit Suisse Master Repurchase Agreement”), which was amended on January 2, 2013, that is a short-term borrowing facility that provides up to $50.0 million through the earlier of (x) 364 days from receipt of a termination notice that is delivered by the lender on or before June 21, 2013 and (y) or June 20, 2014. To date, we have not received a notice of termination. 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 the Credit Suisse Cost of Funds, which was 0.54% at April 30, 2013, plus the applicable margin ranging from 3.75% to 4.0% based on the takeout investor and type of loan. As of April 30, 2013, the aggregate principal amount of all borrowings outstanding under the Credit Suisse Master Repurchase Agreement was $26.2 million.
The Chase Master Repurchase Agreement, Customers Master Repurchase Agreement and Credit Suisse 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 agreement, we do not consider any of these covenants to be substantive or material. As of April 30, 2013, we believe we were in compliance with the covenants under the Master Repurchase Agreements.
11. As of April 30, 2013, we had $992.0 million of outstanding senior secured notes ($978.0 million, net of discount), comprised of $577.0 million 7.25% Senior Secured First Lien Notes due 2020 (the “First Lien Notes”), $220.0 million 9.125% Senior Secured Second Lien Notes due 2020 (the “Second Lien Notes” and, together with the First Lien Notes, the “2020 Secured Notes”), $53.2 million 2.0% Senior Secured Notes due 2021 (the “2.0% 2021 Notes”) and $141.8 million 5.0% Senior Secured Notes due 2021 (the “5.0% 2021 Notes” and together with the 2.0% 2021 Notes, the “2021 Notes”). As of April 30, 2013, we also had $460.6 million of outstanding senior notes ($459.0 million, net of discount), comprised of $36.7 million 6.5% Senior Notes due 2014, $3.0 million 6.375% Senior Notes due 2014, $21.4 million 6.25% Senior Notes due 2015, $131.2 million 6.25% Senior Notes due 2016, $86.5 million 7.5% Senior Notes due 2016, $121.0 million 8.625% Senior Notes due 2017 and $60.8 million 11.875% Senior Notes due 2015. In addition, as of April 30, 2013, we had outstanding $23.1 million 11.0% Senior Amortizing Notes due 2017 (issued as a component of our 6.0% Exchangeable Note Units and discussed below in Note 13), $64.9 million Senior Exchangeable Notes due 2017 (issued as a component of our 6.0% Exchangeable Note Units and discussed below in Note 13) and $4.2 million 7.25% Senior Subordinated Amortizing Notes (issued as part of our 7.25% Tangible Equity Units and discussed below in Note 12). Except for K. Hovnanian Enterprises, Inc. (“K. Hovnanian”), the issuer of the notes, our home mortgage subsidiaries, joint ventures and subsidiaries holding interests in our joint ventures, certain of our title insurance subsidiaries and our foreign subsidiary, we and each of our subsidiaries are guarantors of the senior secured, senior, senior amortizing, senior exchangeable and senior subordinated amortizing notes outstanding at April 30, 2013 (see Note 23). In addition, the 2021 Notes are guaranteed by K. Hovnanian JV Holdings, L.L.C. and its subsidiaries except for certain joint ventures and joint venture holding companies (collectively, the “Secured Group”). Members of the Secured Group do not guarantee K. Hovnanian's other indebtedness.
The First Lien Notes are secured by a first-priority lien and the Second Lien Notes are secured by a second-priority lien, in each case, subject to permitted liens and other exceptions, on substantially all the assets owned by Hovnanian Enterprises, Inc., K. Hovnanian and the guarantors of such notes. At April 30, 2013, the aggregate book value of the real property that would constitute collateral securing the 2020 Secured Notes was approximately $560.0 million, 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. In addition, cash collateral that would secure the 2020 Secured Notes was $230.6 million as of April 30, 2013, which includes $27.0 million of restricted cash collateralizing certain letters of credit. Subsequent to such date, cash uses include general business operations and real estate and other investments.
The guarantees with respect to the 2021 Notes of the Secured Group are secured, subject to permitted liens and other exceptions, by a first-priority lien on substantially all of the assets of the members of the Secured Group. As of April 30, 2013, the collateral securing the guarantees included (1) $31.8 million of cash and cash equivalents and (2) equity interests in guarantors that are members of the Secured Group. Subsequent to such date, cash uses include general business operations and real estate and other investments. The aggregate book value of the real property of the Secured Group collateralizing the 2021 Notes was approximately $80.5 million as of April 30, 2013 (not including the impact of inventory investments, home deliveries, or impairments thereafter and which may differ from the appraised value). Members of the Secured Group also own equity in joint ventures, either directly or indirectly through ownership of joint venture holding companies, with a book value of $43.9 million as of April 30, 2013; this equity is not pledged to secure, and is not collateral for, the 2021 Notes. Members of the Secured Group are “unrestricted subsidiaries” under K. Hovnanian's other senior notes, senior secured notes and senior subordinated amortizing notes, and thus have not guaranteed such indebtedness.
The indentures governing our notes do not contain any financial maintenance covenants, but do contain restrictive covenants that limit, among other things, the Company’s ability and that of certain of its subsidiaries, including K. Hovnanian, to incur additional indebtedness (other than certain permitted indebtedness, refinancing indebtedness and non-recourse indebtedness), pay dividends and make distributions on common and preferred stock, repurchase subordinated indebtedness (with respect to certain of the senior secured notes), make other restricted payments, make investments, sell certain assets, incur liens, consolidate, merge, sell or otherwise dispose of all or substantially all assets and enter into certain transactions with affiliates. The indentures also contain events of default which would permit the holders of the notes to declare the notes to be immediately due and payable if not cured within applicable grace periods, including the failure to make timely payments on the notes or other material indebtedness, the failure to comply with agreements and covenants and specified events of bankruptcy and insolvency and, with respect to the indentures governing the senior secured notes, the failure of the documents granting security for the senior secured notes to be in full force and effect and the failure of the liens on any material portion of the collateral securing the senior secured notes to be valid and perfected. As of April 30, 2013, we believe we were in compliance with the covenants of the indentures governing our outstanding notes.
Under the terms of the indentures, we have the right to make certain redemptions and, depending on market conditions and covenant restrictions, may do so from time to time. We also continue to evaluate our capital structure and may also continue to make debt purchases and/or exchanges for debt or equity from time to time through tender offers, open market purchases, private transactions, or otherwise or seek to raise additional debt or equity capital, depending on market conditions and covenant restrictions.
If our consolidated fixed charge coverage ratio, as defined in the indentures governing our senior secured and senior notes (other than the Senior Exchangeable Notes discussed in Note 13 below), is less than 2.0 to 1.0, we are restricted from making certain payments, including dividends, and from incurring indebtedness other than certain permitted indebtedness, refinancing indebtedness, and non-recourse indebtedness. As a result of this restriction, we are currently restricted from paying dividends, which are not cumulative, on our 7.625% Series A Preferred Stock. If current market trends continue or worsen, 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 bond indentures or otherwise affect compliance with any of the covenants contained in the bond indentures.
During the three and six months ended April 30, 2012, we repurchased in open market and privately negotiated transactions $15.2 million and $21.0 million, respectively, principal amount of our 6.25% Senior Notes due 2016 and $22.8 million and $61.1 million, respectively, principal amount of 7.50% Senior Notes due 2016. In addition, during the second quarter of fiscal 2012, we repurchased, $37.4 million principal amount of 8.625% Senior Notes due 2017. The aggregate purchase price for these repurchases was $51.7 million and $70.7 million, respectively, for the three and six months ended April 30, 2012, plus accrued and unpaid interest. These repurchases resulted in a gain on extinguishment of debt of $23.3 million and $48.0 million, respectively, for the three and six months ended April 30, 2012, net of the write-off of unamortized discounts and fees. The gain is included in the Condensed Consolidated Statement of Operations as “Gain on extinguishment of debt”. Certain of these repurchases were funded with the proceeds from our April 11, 2012 issuance of 25,000,000 shares of our Class A Common Stock (see Note 16).
During the second quarter of fiscal 2012, we also purchased pursuant to agreements with bondholders, $9.1 million aggregate principal amount of our outstanding 8.625% Senior Notes due 2017 in exchange for Class A Common Stock, as discussed in Note 16. These transactions resulted in a gain on extinguishment of debt of $3.5 million for the three months ended April 30, 2012. The gain is included in the Condensed Consolidated Statement of Operations as “Gain on extinguishment of debt”.
12. On February 9, 2011, we issued an aggregate of 3,000,000 7.25% Tangible Equity Units (the “TEUs”), and on February 14, 2011, we issued an additional 450,000 TEUs pursuant to the over-allotment option granted to the underwriters. Each TEU initially consists of (i) a prepaid stock purchase contract (each a “Purchase Contract”) and (ii) a senior subordinated amortizing note due February 15, 2014 (each, a “Senior Subordinated Amortizing Note”). As of April 30, 2013, we had an aggregate principal amount of $4.2 million Senior Subordinated Amortizing Notes outstanding. On each February 15, May 15, August 15 and November 15, K. Hovnanian will pay holders of the Senior Subordinated Amortizing Notes equal quarterly cash installments of $0.453125 per Senior Subordinated Amortizing Note, which cash payments in the aggregate will be equivalent to 7.25% per year with respect to each $25 stated amount of TEUs. Each installment constitutes a payment of interest (at a rate of 12.072% per annum) and a partial repayment of principal on the Senior Subordinated Amortizing Note, allocated as set forth in the amortization schedule provided in the indenture under which the Amortizing Notes were issued. The Senior Subordinated Amortizing Notes have a scheduled final installment payment date of February 15, 2014. If we elect to settle the Purchase Contracts early, holders of the Senior Subordinated Amortizing Notes will have the right to require K. Hovnanian to repurchase such holders’ Senior Subordinated Amortizing Notes, except in certain circumstances as described in the indenture governing Senior Subordinated Amortizing Notes.
Unless settled earlier, on February 15, 2014 (subject to postponement under certain circumstances), each Purchase Contract will automatically settle and we will deliver a number of shares of Class A Common Stock based on the applicable market value, as defined in the purchase contract agreement, which will be between 4.7655 shares and 5.8140 shares per Purchase Contract (subject to adjustment). Each TEU may be separated into its constituent Purchase Contract and Senior Subordinated Amortizing Note after the initial issuance date of the TEUs, and the separate components may be combined to create a TEU. The Senior Subordinated Amortizing Note component of the TEUs is recorded as debt, and the Purchase Contract component of the TEUs is recorded in equity as additional paid in capital. We have recorded $68.1 million, the initial fair value of the Purchase Contracts, as additional paid in capital. As of April 30, 2013, 2.2 million Purchase Contracts had been converted into 10.4 million shares of our Class A Common Stock. There were no Purchase Contracts converted into common stock during the three months ended April 30, 2013 and 0.6 million Purchase Contracts converted into 2.7 million shares of our Class A Common Stock during the six months ended April 30, 2013.
During the second quarter of fiscal 2012, we purchased pursuant to agreements with bondholders $3.1 million aggregate principal amount of our Senior Subordinated Amortizing Notes in exchange for Class A Common Stock, as discussed in Note 16. These transactions resulted in a gain on extinguishment of debt of $0.2 million for the three months ended April 30, 2012. The gain is included in the Condensed Consolidated Statement of Operations as “Gain on extinguishment of debt”.
13. On October 2, 2012, the Company and K. Hovnanian issued $100,000,000 aggregate stated amount of 6.0% Exchangeable Note Units (the “Units”) (equivalent to 100,000 Units). Each $1,000 stated amount of Units initially consists of (1) a zero coupon senior exchangeable note due December 1, 2017 (a “Senior Exchangeable Note”) issued by K. Hovnanian, which bears no cash interest and has an initial principal amount of $768.51 per Exchangeable Note, and that will accrete to $1,000 at maturity and (2) a senior amortizing note due December 1, 2017 (the “Senior Amortizing Note”) issued by K. Hovnanian, which has an initial principal amount of $231.49 per Senior Amortizing Note, bears interest at a rate of 11.0% per annum, and has a final installment payment date of December 1, 2017. Each Unit may be separated into its constituent Senior Exchangeable Note and Senior Amortizing Note after the initial issuance date of the Units, and the separate components may be combined to create a Unit.
Each Senior Exchangeable Note had an initial principal amount of $768.51 (which will accrete to $1,000 over the term of the Senior Exchangeable Note at an annual rate of 5.17% from the date of issuance, calculated on a semi-annual bond equivalent yield basis). Holders may exchange their Senior Exchangeable Notes at their option at any time prior to 5:00 p.m., New York City time, on the business day immediately preceding December 1, 2017. Each Senior Exchangeable Note will be exchangeable for shares of Class A Common Stock at an initial exchange rate of 185.5288 shares of Class A Common Stock per Senior Exchangeable Note (equivalent to an initial exchange price, based on $1,000 principal amount at maturity, of approximately $5.39 per share of Class A Common Stock). The exchange rate will be subject to adjustment in certain events. Following certain corporate events that occur prior to the maturity date, the Company will increase the applicable exchange rate for any holder who elects to exchange its Senior Exchangeable Notes in connection with such corporate event. In addition, holders of Senior Exchangeable Notes will also have the right to require K. Hovnanian to repurchase such holders’ Senior Exchangeable Notes upon the occurrence of certain of these corporate events.
On each June 1 and December 1 commencing on June 1, 2013 (each, an “installment payment date”) K. Hovnanian will pay holders of Senior Amortizing Notes equal semi-annual cash installments of $30.00 per Senior Amortizing Note (except for the June 1, 2013 installment payment, which will be $39.83 per Senior Amortizing Note), which cash payment in the aggregate will be equivalent to 6.0% per year with respect to each $1,000 stated amount of Units. Each installment will constitute a payment of interest (at a rate of 11.0% per annum) and a partial repayment of principal on the Senior Amortizing Note. Following certain corporate events that occur prior to the maturity date, holders of the Senior Amortizing Notes will have the right to require K. Hovnanian to repurchase such holders’ Senior Amortizing Notes. As of April 30, 2013, 18.3 million Senior Exchangeable Notes have been converted into 3.4 million shares of our Class A Common Stock, all of which were converted during the first quarter of fiscal 2013 (there were no Senior Exchangeable Notes converted to common stock during the three months ended April 30, 2013).
14. Basic earnings per share is computed by dividing net income (loss) (the “numerator”) by the weighted-average number of common shares, adjusted for non-vested shares of restricted stock (the “denominator”) for the period. The basic weighted-average number of shares for the three months ended April 30, 2013 includes 6.1 million shares related to Purchase Contracts (issued as part of our 7.25% Tangible Equity Units) which are issuable in the future with no additional cash required to be paid by the holders thereof. This number of shares represents the minimum number of shares that will, under all circumstances, be issuable upon settlement of the Purchase Contracts. As discussed previously in Note 12, the actual number of shares of Class A Common Stock we may issue upon settlement of the Purchase Contracts will be between 4.7655 shares (which is the minimum settlement rate) and 5.8140 shares (which is the maximum settlement rate) per Purchase Contract (in each case, subject to customary anti-dilution adjustments) based on the applicable market value, as defined in the purchase contract agreement governing the Purchase Contracts, of our Class A Common Stock. 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 non-vested shares of restricted stock, as well as common shares issuable upon exchange of our Senior Exchangeable Notes issued as part of our 6.0% Exchangeable Note Units. 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 non-forfeitable 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. 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 April 30, |
Six Months Ended April 30, |
|||||||||||||||
(In thousands, except per share data) |
2013 |
2012 |
2013 |
2012 |
||||||||||||
Numerator: |
||||||||||||||||
Net earnings (loss) attributable to Hovnanian |
$ | 1,318 | $ | 1,802 | $ | (9,990 |
) |
$ | (16,463 |
) | ||||||
Less: undistributed earnings allocated to nonvested shares |
(2 |
) |
(3 | ) | - | - | ||||||||||
Numerator for basic earnings per share |
1,316 | 1,799 | (9,990 |
) |
(16,463 |
) | ||||||||||
Plus: undistributed earnings allocated to nonvested shares |
2 | 3 | ||||||||||||||
Less: undistributed earnings reallocated to nonvested shares |
(2 |
) |
(3 | ) | - | - | ||||||||||
Numerator for diluted earnings per share |
$ | 1,316 | $ | 1,799 | $ | (9,990 |
) |
$ | (16,463 |
) | ||||||
Denominator: |
||||||||||||||||
Denominator for basic earnings per share |
145,948 | 116,021 | 144,373 | 112,338 | ||||||||||||
Effect of dilutive securities: |
||||||||||||||||
Share based payments |
1,283 | 96 | - | - | ||||||||||||
Denominator for diluted earnings per share – weighted average shares outstanding |
147,231 | 116,117 | 144,373 | 112,338 | ||||||||||||
Basic earnings (loss) per share |
$ | 0.01 | $ | 0.02 | $ | (0.07 |
) |
$ | (0.15 |
) | ||||||
Diluted earnings (loss) per share |
$ | 0.01 | $ | 0.02 |