0001437749-21-014176.txt : 20210604 0001437749-21-014176.hdr.sgml : 20210604 20210604161417 ACCESSION NUMBER: 0001437749-21-014176 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 94 CONFORMED PERIOD OF REPORT: 20210430 FILED AS OF DATE: 20210604 DATE AS OF CHANGE: 20210604 FILER: COMPANY DATA: COMPANY CONFORMED NAME: HOVNANIAN ENTERPRISES INC CENTRAL INDEX KEY: 0000357294 STANDARD INDUSTRIAL CLASSIFICATION: OPERATIVE BUILDERS [1531] IRS NUMBER: 221851059 STATE OF INCORPORATION: DE FISCAL YEAR END: 1031 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-32447 FILM NUMBER: 21996611 BUSINESS ADDRESS: STREET 1: 90 MATAWAN ROAD, 5TH FLOOR CITY: MATAWAN STATE: NJ ZIP: 07747 BUSINESS PHONE: 7327477800 MAIL ADDRESS: STREET 1: 90 MATAWAN ROAD, 5TH FLOOR CITY: MATAWAN STATE: NJ ZIP: 07747 10-Q 1 hov20210430_10q.htm FORM 10-Q hov20200525_10q.htm
0000357294 HOVNANIAN ENTERPRISES INC false --10-31 Q2 2021 0.01 0.01 100,000 100,000 5,600 5,600 5,600 5,600 140,000 140,000 0.01 0.01 16,000,000 16,000,000 6,030,903 5,990,310 0.01 0.01 2,400,000 2,400,000 657,554 649,886 470,430 470,430 27,669 27,669 6 0.1 0 1 1 0 2 2 2 20 0.25 5 20 0.1 0.1 3 5 2.3 4.0 419.7 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 158,502 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 1, 2040 February 1, 2027 February 1, 2027 January 31, 2028 January 31, 2028 81,498 0 0 495.4 0.2 0.001 0 0 1 10 1 1 0 396.5 6 63.9 33.7 8 4 1 0 0 50 2 2 2 0 0 0 0 0 10.0 July 15, 2022 10.5 July 15, 2024 10.0 November 15, 2025 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 February 1, 2027 January 31, 2028 10.0 10.0 July 15, 2022 10.5 July 15, 2024 10.0 November 15, 2025 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 February 1, 2027 January 31, 2028 0 Data does not include interest incurred by our mortgage and finance subsidiaries. Represents capitalized interest which was included as part of the assets contributed to joint ventures, as discussed in Note 18. There was no impact to the Condensed Consolidated Statement of Operations as a result of these transactions. The aggregate unpaid principal balance was $122.3 million and $100.4 million at April 30, 2021 and October 31, 2020, respectively. At April 30, 2021, 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. Corporate and unallocated for the three months ended April 30, 2021 included corporate general and administrative costs of $40.4 million, interest expense of $17.5 million (a component of Other interest on our Condensed Consolidated Statements of Operations), and $0.3 million of other income and expenses primarily related to interest income and stock compensation. Corporate and unallocated for the six months ended April 30, 2021 included corporate general and administrative costs of $63.9 million, interest expense of $33.7 million (a component of Other interest on our Condensed Consolidated Statements of Operations), and $0.1 million of other income and expenses. Corporate and unallocated for the three months ended April 30, 2020 included corporate general and administrative costs of $15.3 million, interest expense of $13.8 million (a component of Other interest on our Condensed Consolidated Statements of Operations), $0.2 million of loss on extinguishment of debt and $(1.1) million of other income and expenses primarily related to interest income and stock compensation. Corporate and unallocated for the six months ended April 30, 2020 included corporate general and administrative costs of $35.0 million, interest expense of $28.7 million (a component of Other interest on our Condensed Consolidated Statements of Operations), $(9.3) million of gain on extinguishment of debt and $(2.0) million of other income and expenses. 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 $17.5 million and $13.8 million for the three months ended April 30, 2021 and 2020, respectively, and $33.7 million and $28.7 million for the six months ended April 30, 2021 and 2020, 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 $4.5 million and $13.1 million for the three months ended April 30, 2021 and 2020, respectively, and $12.3 million and $23.2 million for the six months ended April 30, 2021 and 2020, respectively. Capitalized interest amounts are shown gross before allocating any portion of impairments, if any, to capitalized interest. 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: $26.0 million of 8.0% Senior Notes due 2027 (the "8.0% 2027 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. 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Table of Contents

 

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 April 30, 2021

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)

 

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. 5,562,840 shares of Class A Common Stock and 629,885 shares of Class B Common Stock were outstanding as of June 1, 2021.

 

 

 

 

 

HOVNANIAN ENTERPRISES, INC.  

 

FORM 10-Q  

 

INDEX

PAGE

NUMBER

  

  

PART I.  Financial Information

  

Item l.  Financial Statements:

  

  

  

Condensed Consolidated Balance Sheets (unaudited) as of April 30, 2021 and October 31, 2020

3

  

  

Condensed Consolidated Statements of Operations (unaudited) for the three and six months ended April 30, 2021 and 2020

4

  

  

Condensed Consolidated Statements of Changes in Equity (Deficit) (unaudited) for the six months ended April 30, 2021 and 2020

5

  

  

Condensed Consolidated Statements of Cash Flows (unaudited) for the six months ended April 30, 2021 and 2020

7

  

  

 

 

Notes to Condensed Consolidated Financial Statements (unaudited)

9

  

  

Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

33

  

  

Item 3.  Quantitative and Qualitative Disclosures About Market Risk

56

  

  

Item 4.  Controls and Procedures

56

  

  

 

 

PART II.  Other Information

  

Item 1.  Legal Proceedings

57

   

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

57

 

 

Item 6.  Exhibits

58

  

  

Signatures

60

 

 

 

HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In Thousands)

 

  

April 30,

  

October 31,

 
  

2021

  

2020

 

ASSETS

        

Homebuilding:

        

Cash and cash equivalents

 $218,321  $262,489 

Restricted cash and cash equivalents

  12,753   14,731 

Inventories:

        

Sold and unsold homes and lots under development

  1,029,089   921,594 

Land and land options held for future development or sale

  102,370   91,957 

Consolidated inventory not owned

  125,414   182,224 

Total inventories

  1,256,873   1,195,775 

Investments in and advances to unconsolidated joint ventures

  112,505   103,164 

Receivables, deposits and notes, net

  34,102   33,686 

Property, plant and equipment, net

  17,828   18,185 

Prepaid expenses and other assets

  56,712   58,705 

Total homebuilding

  1,709,094   1,686,735 
         

Financial services

  169,708   140,607 
         
Deferred tax assets, net  459,186   - 

Total assets

 $2,337,988  $1,827,342 
         

LIABILITIES AND EQUITY

        

Homebuilding:

        

Nonrecourse mortgages secured by inventory, net of debt issuance costs

 $113,861  $135,122 

Accounts payable and other liabilities

  379,381   359,274 

Customers’ deposits

  65,930   48,286 

Liabilities from inventory not owned, net of debt issuance costs

  90,430   131,204 

Senior notes and credit facilities (net of discounts, premiums and debt issuance costs)

  1,429,324   1,431,110 

Accrued Interest

  35,321   35,563 

Total homebuilding

  2,114,247   2,140,559 
         

Financial services

  148,439   119,045 

Income taxes payable

  2,588   3,832 

Total liabilities

  2,265,274   2,263,436 
         

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 April 30, 2021 and October 31, 2020

  135,299   135,299 

Common stock, Class A, $0.01 par value - authorized 16,000,000 shares; issued 6,030,903 shares at April 30, 2021 and 5,990,310 shares at October 31, 2020

  60   60 

Common stock, Class B, $0.01 par value (convertible to Class A at time of sale) - authorized 2,400,000 shares; issued 657,554 shares at April 30, 2021 and 649,886 shares at October 31, 2020

  7   7 

Paid in capital - common stock

  719,347   718,110 

Accumulated deficit

  (667,410)  (1,175,045)

Treasury stock - at cost – 470,430 shares of Class A common stock and 27,669 shares of Class B common stock at April 30, 2021 and October 31, 2020

  (115,360)  (115,360)

Total Hovnanian Enterprises, Inc. stockholders’ equity (deficit)

  71,943   (436,929)

Noncontrolling interest in consolidated joint ventures

  771   835 

Total equity (deficit)

  72,714   (436,094)

Total liabilities and equity

 $2,337,988  $1,827,342 

 

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,

 
  

2021

  

2020

  

2021

  

2020

 

Revenues:

                

Homebuilding:

                

Sale of homes

 $679,515  $523,347  $1,230,880  $1,002,580 

Land sales and other revenues

  1,919   643   5,721   1,452 

Total homebuilding

  681,434   523,990   1,236,601   1,004,032 

Financial services

  21,728   14,361   41,225   28,375 

Total revenues

  703,162   538,351   1,277,826   1,032,407 
                 

Expenses:

                

Homebuilding:

                

Cost of sales, excluding interest

  536,534   428,027   976,172   824,382 

Cost of sales interest

  21,725   18,589   38,890   36,725 

Inventory impairment loss and land option write-offs

  81   1,010   1,958   3,838 

Total cost of sales

  558,340   447,626   1,017,020   864,945 

Selling, general and administrative

  42,204   40,605   82,429   81,279 

Total homebuilding expenses

  600,544   488,231   1,099,449   946,224 
                 

Financial services

  11,361   9,630   21,715   19,184 

Corporate general and administrative

  40,382   15,275   63,865   35,019 

Other interest

  22,033   26,869   46,008   51,872 

Other operations

  451   214   729   408 

Total expenses

  674,771   540,219   1,231,766   1,052,707 

(Loss) gain on extinguishment of debt

  -   (174)  -   9,282 

Income from unconsolidated joint ventures

  2,641   6,221   4,557   7,761 

Income (loss) before income taxes

  31,032   4,179   50,617   (3,257)

State and federal income tax (benefit) provision:

                

State

  (91,374)  100   (90,748)  1,812 

Federal

  (366,270)  -   (366,270)  - 

Total income taxes

  (457,644)  100   (457,018)  1,812 

Net income (loss)

 $488,676  $4,079  $507,635  $(5,069)
                 

Per share data:

                

Basic:

                

Net income (loss) per common share

 $71.11  $0.63  $74.00  $(0.82)

Weighted-average number of common shares outstanding

  6,248   6,172   6,236   6,166 

Assuming dilution:

                

Net income (loss) per common share

 $69.65  $0.60  $72.71  $(0.82)

Weighted-average number of common shares outstanding

  6,368   6,432   6,331   6,166 

 

See notes to condensed consolidated financial statements (unaudited).

 

 

 

HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (DEFICIT)

SIX MONTH PERIOD ENDED APRIL 30, 2021

(In Thousands Except Share Amounts)

(Unaudited)

 

  

A Common Stock

  

B Common Stock

  

Preferred Stock

                     
  

Shares

      

Shares

      

Shares

                         
  

Issued and

      

Issued and

      

Issued and

      

Paid-In

  

Accumulated

  

Treasury

  

Noncontrolling

     
  

Outstanding

  

Amount

  

Outstanding

  

Amount

  

Outstanding

  

Amount

  

Capital

  

Deficit

  

Stock

  

Interest

  

Total

 
                                             

Balance, October 31, 2020

  5,519,880  $60   622,217  $7   5,600  $135,299  $718,110  $(1,175,045) $(115,360) $835  $(436,094)
                                             

Stock options, amortization and issuances

                    54            54 
                                             

Restricted stock amortization, issuances and forfeitures

  7,207      2,370            668            668 
                                             

Conversion of Class B to Class A common stock

  45      (45)                       - 
                                             

Changes in noncontrolling interest in consolidated joint ventures

                                78   78 
                                             

Net income

                          18,959         18,959 
                                             

Balance, January 31, 2021

  5,527,132  $60   624,542  $7   5,600  $135,299  $718,832  $(1,156,086) $(115,360) $913  $(416,335)
                                             
Stock options, amortization and issuances  33,316      5,368            (255)           (255)
                                             
Restricted stock amortization, issuances and forfeitures                       770            770 
                                             
Conversion of Class B to Class A common stock  25      (25)                       - 
                                             
Changes in noncontrolling interest in consolidated joint ventures                                (142)  (142)
                                             
Net income                          488,676         488,676 
                                             
Balance, April 30, 2021  5,560,473  $60   629,885  $7   5,600  $135,299  $719,347  $(667,410) $(115,360) $771  $72,714 

 

See notes to condensed consolidated financial statements (unaudited).

 

 

HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (DEFICIT)

SIX MONTH PERIOD ENDED APRIL 30, 2020

(In Thousands Except Share Amounts)

(Unaudited)

 

  

A Common Stock

  

B Common Stock

  

Preferred Stock

                     
  

Shares

      

Shares

      

Shares

                         
  

Issued and

      

Issued and

      

Issued and

      

Paid-In

  

Accumulated

  

Treasury

  

Noncontrolling

     
  

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)

  

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,

 
  

2021

  

2020

 

Cash flows from operating activities:

        

Net income (loss)

 $507,635  $(5,069)

Adjustments to reconcile net income (loss) to net cash provided by operating activities:

        

Depreciation

  2,822   2,542 

Compensation from stock options and awards

  1,753   (204)

Amortization of bond discounts, premiums and deferred financing costs

  534   1,442 

Gain on sale and retirement of property and assets

  (14)  (24)

Income from unconsolidated joint ventures

  (4,557)  (7,761)

Distributions of earnings from unconsolidated joint venture

  5,397   14,935 

Gain on extinguishment of debt

  -   (9,282)

Noncontrolling interest in consolidated joint ventures

  190   33 

Inventory impairment and land option write-offs

  1,958   3,838 

(Increase) decrease in assets:

        

Origination of mortgage loans

  (728,674)  (562,842)

Sale of mortgage loans

  706,446   653,979 

Receivables, prepaids, deposits and other assets

  2,541   17,345 

Inventories

  (63,056)  150 

Deferred tax assets

  (459,186)  - 

(Decrease) increase in liabilities:

        

State income tax payable

  (1,244)  616 

Customers’ deposits

  17,644   (745)

Accounts payable, accrued interest and other accrued liabilities

  25,271   (29,234)

Net cash provided by operating activities

  15,460   79,719 

Cash flows from investing activities:

        

Proceeds from sale of property and assets

  15   31 

Purchase of property, equipment, and other fixed assets and acquisitions

  (2,461)  (1,867)

Investment in and advances to unconsolidated joint ventures

  (29,578)  (19,924)

Distributions of capital from unconsolidated joint ventures

  19,596   441 

Net cash used in investing activities

  (12,428)  (21,319)

Cash flows from financing activities:

        

Proceeds from mortgages and notes

  121,340   139,861 

Payments related to mortgages and notes

  (143,115)  (132,352)

Proceeds from model sale leaseback financing programs

  2,738   3,307 

Payments related to model sale leaseback financing programs

  (9,879)  (11,606)

Proceeds from land bank financing programs

  16,494   48,260 

Payments related to land bank financing programs

  (50,606)  (36,839)

Payments for partner distributions to consolidated joint venture

  (254)  - 

Net proceeds (payments) related to mortgage warehouse lines of credit

  23,274   (80,813)

Net borrowings from senior secured credit facility

  -   125,000 

Deferred financing costs from land banking financing programs and note issuances

  (844)  (12,117)

Net cash (used in) provided by financing activities

  (40,852)  42,701 

Net (decrease) increase in cash and cash equivalents, and restricted cash and cash equivalents

  (37,820)  101,101 

Cash and cash equivalents, and restricted cash and cash equivalents balance, beginning of period

  309,460   182,266 

Cash and cash equivalents, and restricted cash and cash equivalents balance, end of period

 $271,640  $283,367 
         

Supplemental disclosures of cash flows:

        

Cash paid received during the period for:

        

Interest, net of capitalized interest (see Note 3 to the Condensed Consolidated Financial Statements)

 $47,202  $35,780 

Income taxes

 $3,412  $1,266 
         

Reconciliation of Cash, cash equivalents and restricted cash

        

Homebuilding: Cash and cash equivalents

 $218,321  $232,801 

Homebuilding: Restricted cash and cash equivalents

  12,753   16,052 

Financial Services: Cash and cash equivalents, included in Financial services assets

  4,117   4,787 

Financial Services: Restricted cash and cash equivalents, included in Financial services assets

  36,449   29,727 

Total cash, cash equivalents and restricted cash shown in the statement of cash flows

 $271,640  $283,367 

 

 

HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In Thousands - Unaudited)

(Continued)

 

 

 

 

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 our notes, completed a debt for debt exchange whereby it issued $59.1 million aggregate principal amount of 11.25% Senior Secured 1.5 Lien Notes due 2026 in exchange for $59.1 million aggregate principal amount of 10.0% Senior Secured Notes due 2022.

 

See Note 12 for further information.

 

8

 

HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED

 

 

 

1.

Basis of Presentation

 

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, 2020. 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.  

 

 

2.

Stock Compensation

 

For the three and six months ended April 30, 2021, the Company’s total stock-based compensation expense was $0.9 million (pre and post tax) and $1.8 million (pre and post tax), respectively.  For the three and six months ended April 30, 2020, the Company’s total stock-based compensation income was $0.1 million and $0.2 million, respectively, net of expense of $0.3 million and $0.9 million, respectively, as a result of the cancellation of certain market stock units awards based on performance conditions which were not met and a reduction in certain long-term incentive program shares with respect to which performance conditions are no longer expected to meet target.  Included in total stock-based compensation expense was the vesting of stock options of $0.1 million for both the three and six months ended April 30, 2021, and $0.1 million and $0.3 million for the three and six months ended April 30, 2020, respectively. See Item 2 "Management's Discussion and Analysis of Financial Condition and Results of Operation" for a discussion of our phantom stock awards under our 2019 Long Term Incentive Plan (“2019 LTIP”), the expense for which varies depending on our common stock price, which has significantly increased.

 

9

 

 

3.

Interest

 

Interest costs incurred, expensed and capitalized were:

 

  

Three Months Ended

  

Six Months Ended

 
  

April 30,

  

April 30,

 

(In thousands)

 

2021

  

2020

  

2021

  

2020

 

Interest capitalized at beginning of period

 $65,327  $67,879  $65,010  $71,264 

Plus interest incurred(1)

  41,870   45,323   83,327   89,657 

Less cost of sales interest expensed

  21,725   18,589   38,890   36,725 

Less other interest expensed(2)(3)

  22,033   26,869   46,008   51,872 

Less interest contributed to unconsolidated joint venture(4)

  3,667   -   3,667   4,580 

Interest capitalized at end of period(5)

 $59,772  $67,744  $59,772  $67,744 

 

(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 $