Hovnanian's Cash Statements Make No Sense

Hovnanian Enterprises, Inc. (HOV) released earnings for the second fiscal quarter earlier this week and held a conference call to discuss the results, which were much weaker than the market expected.

Financial Highlights
Revenues - $776.4 million
Pre-tax loss - $92.4 million (excluding charges)
Pre-tax loss - $343.4 million (including charges)
After tax loss -$340.7 million ($5.29 per share)

HOV reported a cash balance of $119.9 million, but stated that due to capital raising in May, they "would have had approximately $500 million in homebuilding cash and no borrowings on its revolving credit agreement as of April 30, 2008." I put this in quotes, of course, because it makes absolutely no sense whatsoever and didn't want you to think that it was my conclusion. HOV predicted its cash balance would reach $800 million by October 31, 2008.

Net Contracts - 2,226 homes
Cancellation Rate - 29%
FAS 109 deferred tax valuation allowance charge - $120.6 million
Pre-tax land-related charges - $251.0 million broken down:

Land impairments - $226.4 million
Write-offs of predevelopment costs and land deposits - $19.5 million
Unconsolidated joint ventures - $5.1 million

Management Comments
"The home-building industry continues to face challenging market conditions. During these touch market conditions, our focus has remained on reducing inventories, reducing costs, generating positive cash flow, and improving the liquidity of the company....One of the primary reasons that both the homebuilding industries and our sales are so weak is because as we look across the country, we see that existing home inventories remain at persistently high levels."

"In order from worst to best, our Florida and California markets remain the most challenged markets today. Markets like Arizona and the Midwest also have been through some difficult times but are operating at slightly better levels than California and Florida."

"If this housing correction follows the pattern and duration of the 1975 correction, the housing market should start improving in 2009, just in time for our company’s 50th anniversary celebration. On the other hand, if this housing correction should follow the pattern and duration of the 1981 correction, 2009 could remain as another difficult year, similar to 2008."

Questions

1. Why not write off everything at once on inventory, and get it over with?

"Our crystal ball is no better than anyone else’s. We don’t know what the future holds...so our approach has always been that we look at it based on current prices."

2. Would you be willing to give up some margin now to generate more sales because you have the balance sheet that enables you to do it today?

"Frankly we are constantly looking at this balance between velocity and margin...where we can get velocity with price decreases, we are not afraid to do that."

3. Impact of foreclosures on your communities?

"We are definitely competing with foreclosures in certain markets. We see it more really in Florida and northern California...that does drag down pricing but it is something we are dealing with and we feel like we are currently priced appropriately to compete with the foreclosures."

4. Why don't you use cash to buy your bonds trading at 60 cents on the dollar?

"The main reason we issued the new capital was we just felt we needed to get an insurance policy, if you will, on liquidity. At this point, until we get a clearer picture on the market, on when the bottom is going to come, on what the effect is of foreclosures or price decreases, we are not overly anxious to, in spite of the fact that it’s quite enticing, we are really placing a premium on liquidity and capital because it’s not easy to obtain in this marketplace."

My previous posts on HOV.

Disclosure - No Position.

Comments

[optionsgirl:]

Hov is a disaster. Probably one of the worst of the big builders. The writer doesn't have a stake in the company--the only position to have is short ( if at all). This company scares me.

2008 Jun 08 10:08 AM

[specks:]

options girl ... I'd have thought you'd like the "extra" confusion thereby creating more volatility. Isn't that where the real money is made with options regardless of stock price direction?

2008 Jun 08 12:46 PM

[User 206914:]

I don't argue he point that HOV is in bad shape, but I didn't hear him say that they would have had $500 million at April 30. I heard him say the net cash raised in May added to their cash their cash as of April $30, gives them $500 million.... and if I misheard and that wsn't what he said I think it is pretty clear that what he meant.

You could also pick on the phase "generate positive cash" as if anyone generates negative cash or cash flow being "less positive" a very odd way of saying negative or "actuaryalist" or the criticism that the census inventory data because it doesn't agree with his gossly extrapolated assumptions, but what be the point.

It would seem that the lack of strategy masqurading a multipronged liquidity strategy would be the real tell here. That strategy is morelike a 3 quilled porcopine than a three-pronged strategy . The strategy has every prong they could come up with unfortunetly there were only three.

What a bunch of prongs.

2008 Jun 08 01:52 PM

[Eric Fox:]

The purpose of the post was to provide a review of the earnings and the call. If I ever decide to evaluate a position in HOV, either short or long, then rather than go back to my blog post rather than sift through the original press release and transcript. As to the cash, HOV did some capital raising in May, after the quarter ended. During the call, what I thought they said was if we had done the capital raising in April then we would have had $500 million on April 30. This didn't make any sense because it was done in May not April. It sort of reminded me about how companies report earnings before charges, etc. I will check the exact quotes and make an additional comment soon. As to the positive cash flow they reported, I have some questions about how they arrived at it, but that wasn't the point of the post.

2008 Jun 09 12:42 PM

[Eric Fox:]

It was actually from the press release. Here is what they stated:

" At April 30, 2008, the Company had $119.9 million of homebuilding cash and the balance on the Company's revolving credit facility was $325.0 million."

Later on in the same press release:

HOV raised a net amount of $705 million in May..."After giving effect to these transactions, the Company would have had approximately $500 million in homebuilding cash and no borrowings on its revolving credit agreement as of April 30, 2008."

The capital was raised in May, so how can you say - if we had raised the capital in April,etc. It just didn't make any sense to me.

They should have said - after we raised the capital, our cash is this amount and our debt is this amount, as of the date of the conference call.

2008 Jun 09 12:55 PM

[jackooo:]

Eric,
HOV could not say it your way because it would of made "cents". Can't let the shareholders know anything useful so stun them with foot work.

2008 Jun 09 03:27 PM