Hovnanian Enterprises, Inc.
Annual Report 2017
Hovnanian Enterprises, Inc.
Communities
Active Selling
Communities
Proposed
Communities
Arizona
California
Delaware
Florida
Georgia
Illinois
Maryland
New Jersey
Ohio
Pennsylvania
South Carolina
Texas
Virginia/DC
West Virginia
Consolidated Total
Unconsolidated
Joint Ventures
Total
5
14
8
11
-
3
5
3
12
-
4
54
10
1
130
27
157
4
21
4
5
1
10
9
41
7
2
6
21
10
2
143
4
147
Financial Highlights
REVENUES AND INCOME
(Dollars in Millions)
Total Revenues
(Loss) Income Before Income Taxes
Income (Loss) Before Income Taxes Excluding Land-Related
Charges, Joint Venture Write-Downs and Loss on
Extinguishment of Debt(1)
Net (Loss) Income
ASSETS, DEBT AND EQUITY
(Dollars in Millions)
Total Assets
Total Recourse Debt
Total Stockholders' Equity Deficit
INCOME PER COMMON SHARE
(Shares in Thousands)
Assuming Dilution:
(Loss) Income Per Common Share
Weighted-Average Number of Common Shares Outstanding
Years Ended October 31,
2017
2016
2015
2014
2013
$2,451.7
$(45.2)
$2,752.2
$2.4
$2,148.5
$(21.8)
$2,063.4
$20.2
$1,851.3
$21.9
$10.2
$(332.2)
$39.0
$(2.8)
$(9.7)
$(16.1)
$26.6
$307.1
$27.7
$31.3
$1,900.9
$1,637.9
$(460.4)
$2,355.0
$1,625.4
$(128.5)
$2,577.4
$1,874.9
$(128.1)
$2,264.4
$1,636.4
$(117.8)
$1,737.4
$1,511.2
$(432.8)
$(2.25)
147,703
$(0.02)
147,451
$(0.11)
146,899
$1.87
162,441
$0.22
162,329
(1) Income (Loss) Before Income Taxes Excluding Land-Related Charges, Joint Venture Write-Downs and Loss on Extinguishment of Debt is not a financial measure
calculated in accordance with generally accepted accounting principles (GAAP). See page 3 of this Annual Report for a reconciliation to Income (Loss) Before Income
Taxes, the most directly comparable GAAP financial measure.
This summary should be read in conjunction with the related consolidated financial statements and accompanying notes included elsewhere in this Annual Report.
Communities Under Development(1)
(Dollars In Thousands Except Average Price)
(Unaudited)
Years Ended October 31,
As of October 31,
Net Contracts(2)
Deliveries
Contract Backlog
2017
2016 % Change
2017
2016 % Change
2017
2016 % Change
Northeast
(NJ, PA)
Home
Dollars
Avg. Price
Mid-Atlantic
245
$119,018
$485,789
468
$226,635
$484,261
(DE, MD, VA, WV)
Home
Dollars
Avg. Price
735
$399,420
$543,429
949
$467,782
$492,920
(47.6)%
(47.5)%
0.3%
(22.6)%
(14.6)%
10.2%
351
$166,752
$475,077
557
$274,126
$492,147
(37.0)%
(39.2)%
(3.5)%
98
$51,778
$528,349
204
$99,512
$487,803
856
$463,271
$541,205
960
$457,906
$476,985
(10.8)%
1.2%
13.5%
309
$185,123
$599,104
430
$248,974
$579,009
(52.0)%
(48.0)%
8.3%
(28.1)%
(25.6)%
3.5%
648
$193,451
$298,535
724
$229,671
$317,225
(10.5)%
(15.8)%
(5.9)%
640
$199,009
$310,951
921
$287,469
$312,127
(30.5)%
(30.8)%
(0.4)%
382
$98,969
$259,082
374
$104,527
$279,485
2.1%
(5.3)%
(7.3)%
Midwest(3)
(IL, MN, OH)
Home
Dollars
Avg. Price
Southeast(4)
(FL, GA, NC, SC)
Home
Dollars
Avg. Price
Southwest
(AZ, TX)
Home
Dollars
Avg. Price
West
(CA)
Home
Dollars
Avg. Price
Consolidated Total
Home
Dollars
Avg. Price
567
$232,278
$409,662
701
$287,538
$410,183
2,103
$718,595
$341,700
2,480
$887,341
$357,799
898
$421,335
$469,192
787
$420,681
$534,539
5,196
$2,084,097
$401,096
6,109
$2,519,648
$412,449
Unconsolidated Joint Ventures(5)
Home
Dollars
Avg. Price
Total
Home
Dollars
Avg. Price
741
$436,538
$589,120
271
$154,088
$568,590
5,937
$2,520,635
$424,564
6,380
$2,673,736
$419,081
DELIVERIES INCLUDE EXTRAS
(19.1)%
(19.2)%
(0.1)%
(15.2)%
(19.0)%
(4.5)%
14.1%
0.2%
(12.2)%
(14.9)%
(17.3)%
(2.8)%
173.4%
183.3%
3.6%
(6.9)%
(5.7)%
1.3%
614
$257,066
$418,675
581
$214,585
$369,339
5.7%
19.8%
13.4%
285
$120,382
$422,394
332
$145,171
$437,261
(14.2)%
(17.1)%
(3.4)%
2,357
$826,422
$350,624
2,750
$1,024,410
$372,512
(14.3)%
(19.3)%
(5.9)%
509
$177,818
$349,347
763
$285,644
$374,370
(33.3)%
(37.7)%
(6.7)%
784
$427,513
$545,297
695
$342,294
$492,509
5,602
$2,340,033
$417,714
6,464
$2,600,790
$402,350
547
$310,573
$567,774
248
$140,576
$566,836
6,149
$2,650,606
$431,063
6,712
$2,741,366
$408,427
12.8%
24.9%
10.7%
(13.3)%
(10.0)%
3.8%
120.6%
120.9%
0.2%
(8.4)%
(3.3)%
5.5%
400
$173,963
$434,906
295
$185,274
$628,047
1,983
$808,033
$407,480
2,398
$1,069,102
$445,831
454
$283,528
$624,510
251
$152,430
$607,292
2,437
$1,091,561
$447,912
2,649
$1,221,532
$461,130
35.6%
(6.1)%
(30.8)%
(17.3)%
(24.4)%
(8.6)%
80.9%
86.0%
2.8%
(8.0)%
(10.6)%
(2.9)%
Notes:
(1) Segment data excludes unconsolidated joint ventures.
(2) Net contracts are defined as new contracts signed during the period for the purchase of homes, less cancellations of prior contracts.
(3) The Midwest net contracts include 65 homes and $27.4 million in 2016 from Minneapolis, MN. Contract backlog as of October 31, 2016 reflects the reduction of 64 homes and $24.1 million,
related to the sale of our land portfolio in Minneapolis, MN.
(4) The Southeast net contracts include 70 homes and $31.6 million in 2016 from Raleigh, NC. Contract backlog as of October 31, 2016 reflects the reduction of 67 homes and $33.7 million,
related to the sale of our land portfolio in Raleigh, NC.
(5) Represents home deliveries, home revenues and average prices for our unconsolidated homebuilding joint ventures for the period. We provide this data as a supplement to our consolidated
results as an indicator of the volume managed in our unconsolidated homebuilding joint ventures. Our proportionate share of the income or loss of unconsolidated homebuilding and land
development joint ventures is reflected as a separate line item in our consolidated financial statements under “(Loss) income from unconsolidated joint ventures”.
Note: All statements in this Annual Report that are not historical facts should be considered as “Forward-Looking Statements” within the meaning of the “Safe Harbor” provisions of the Private Securities
Litigation Reform Act of 1995. Such statements involve known and unknown risks, uncertainties and other factors that may cause actual results, performance or achievements of the Company to be materially
different from any future results, performance or achievements expressed or implied by the forward-looking statements. Such forward-looking statements include but are not limited to statements related to the
Company’s goals and expectations with respect to its financial results for future financial periods. Although we believe that our plans, intentions and expectations reflected in, or suggested by, such forward-
looking statements are reasonable, we can give no assurance that such plans, intentions or expectations will be achieved. By their nature, forward-looking statements: (i) speak only as of the date they are made,
(ii) are not guarantees of future performance or results and (iii) are subject to risks, uncertainties and assumptions that are difficult to predict or quantify. Therefore, actual results could differ materially and
adversely from those forward-looking statements as a result of a variety of factors. Such risks, uncertainties and other factors include, but are not limited to, (1) changes in general and local economic, industry
and business conditions and impacts of a sustained homebuilding downturn; (2) adverse weather and other environmental conditions and natural disasters; (3) levels of indebtedness and restrictions on the
Company’s operations and activities imposed by the agreements governing the Company’s outstanding indebtedness; (4) the Company's sources of liquidity; (5) changes in credit ratings; (6) changes in market
conditions and seasonality of the Company’s business; (7) the availability and cost of suitable land and improved lots; (8) shortages in, and price fluctuations of, raw materials and labor; (9) regional and local
economic factors, including dependency on certain sectors of the economy, and employment levels affecting home prices and sales activity in the markets where the Company builds homes; (10) fluctuations in
interest rates and the availability of mortgage financing; (11) changes in tax laws affecting the after-tax costs of owning a home; (12) operations through joint ventures with third parties; (13) government
regulation, including regulations concerning development of land, the home building, sales and customer financing processes, tax laws and the environment; (14) product liability litigation, warranty claims and
claims made by mortgage investors; (15) levels of competition; (16) availability and terms of financing to the Company; (17) successful identification and integration of acquisitions; (18) significant influence of
the Company’s controlling stockholders; (19) availability of net operating loss carryforwards; (20) utility shortages and outages or rate fluctuations; (21) geopolitical risks, terrorist acts and other acts of war; (22)
increases in cancellations of agreements of sale; (23) loss of key management personnel or failure to attract qualified personnel; (24) information technology failures and data security breaches; (25) legal claims
brought against us and not resolved in our favor; and (26) certain risks, uncertainties and other factors described in detail in the Company’s Annual Report on Form 10-K for the fiscal year ended October 31,
2017 and subsequent filings with the Securities and Exchange Commission. Except as otherwise required by applicable securities laws, we undertake no obligation to publicly update or revise any forward-
looking statements, whether as a result of new information, future events, changed circumstances or any other reason.
1 Five-Year Financial Review
(In Thousands Except Number of Homes and Per-Share Data)
Statement of Operations Data:
Total Revenues
Inventory Impairment Loss and Land Option Write-Offs
(Loss) Income from Unconsolidated Joint Ventures
(Loss) Income Before Income Taxes
Income (Loss) Before Income Taxes Excluding Land-Related Charges,
Joint Venture Write-Downs and Loss on Extinguishment of Debt (1)
Net (Loss) Income
Net (Loss) Income Per Common Share:
Diluted
Weighted-Average Number of Common Shares Outstanding
Balance Sheet Data:
Cash and Restricted Cash
Total Inventories
Total Assets (2)
Total Recourse Debt (2)
Total Nonrecourse Debt (2)
Total Stockholders' Equity Deficit
Supplemental Financial Data:
Adjusted EBIT (3)
Adjusted EBITDA (3)
Net Cash Provided by (Used in) Operating Activities
Interest Incurred
Adjusted EBITDA/Interest Incurred
Financial Statistics:
Average Net Debt/Net Capitalization (4)
Inventory Turnover (5)
Homebuilding Gross Margin (6)
Adjusted EBITDA Margin (7)
Operating Statistics:
Net Contracts – Homes
Net Contracts – Dollars
Deliveries – Homes
Deliveries – Dollars
Backlog – Homes
Backlog – Dollars
2017
2016
2015
2014
2013
Years Ended October 31,
$2,451,665
$17,813
$(7,047)
$(45,244)
$2,752,247
$33,353
$(4,346)
$2,436
$2,148,480
$12,044
$4,169
$(21,765)
$2,063,380
$5,224
$7,897
$20,180
$1,851,253
$4,965
$12,040
$21,935
$10,186
$38,989
$(9,721)
$26,559
$(332,193)
$(2,819)
$(16,100)
$307,144
$(2.25)
147,703
$(0.02)
147,451
$(0.11)
146,899
$1.87
162,441
$493,742
$1,009,827
$1,900,898
$1,637,874
$77,524
$(460,371)
$369,713
$1,283,084
$2,354,956
$1,625,358
$96,427
$(128,510)
$193,263
$199,144
$297,553
$160,203
1.24x
125.4%
2.1x
17.2%
8.1%
$222,347
$231,173
$387,665
$166,824
1.39x
110.4%
1.9x
16.9%
8.4%
$280,267
$1,644,578
$2,577,398
$1,874,924
$154,797
$(128,084)
$141,727
$150,574
$(320,535)
$166,188
0.91x
109.3%
1.3x
17.6%
7.0%
$291,220
$1,344,310
$2,264,433
$1,636,402
$116,185
$(117,799)
$167,903
$175,712
$(190,585)
$145,409
1.21x
139.1%
1.5x
19.9%
8.5%
$27,660
$31,295
$0.22
162,329
$361,047
$1,078,764
$1,737,373
$1,511,171
$77,153
$(432,799)
$171,234
$179,605
$9,268
$132,611
1.35x
159.4%
1.7x
20.1%
9.7%
5,196
$2,084,097
5,602
$2,340,033
1,983
$808,033
6,109
$2,519,648
6,464
$2,600,790
2,398
$1,069,102
6,183
$2,448,207
5,507
$2,088,129
2,905
$1,215,925
5,559
$2,106,421
5,497
$2,013,013
2,229
$855,847
5,544
$1,914,448
5,266
$1,784,327
2,167
$762,439
(1) Income (Loss) Before Income Taxes Excluding Land-Related Charges, Joint Venture Write-Downs and Loss on Extinguishment of Debt is a non-GAAP financial measure. The most directly
comparable GAAP financial measure is Income (Loss) Before Income Taxes. The reconciliation of Income (Loss) Before Income Taxes Excluding Land-Related Charges, Joint Venture Write-
Downs and Loss on Extinguishment of Debt to Income (Loss) Before Income Taxes is presented on page 3 of this Annual Report. Income (Loss) Before Income Taxes Excluding Land-Related
Charges, Joint Venture Write-Downs and Loss on Extinguishment of Debt should be considered in addition to, but not as a substitute for, Income (Loss) Before Income Taxes, Net (Loss) Income
and other measures of financial performance prepared in accordance with GAAP that are presented on the financial statements included in the Company's reports filed with the Securities and
Exchange Commission (SEC). Additionally, the Company's calculation of Income (Loss) Before Income Taxes Excluding Land-Related Charges, Joint Venture Write-Downs and Loss on
Extinguishment of Debt may be different than the calculation used by other companies, and, therefore, comparability may be affected.
(2) In connection with our adoption of Accounting Standards Update 2015-03 in November 2016, certain prior year amounts for unamortized debt issuance costs were reclassified between “Total
assets”, “Total recourse debt” and “Total nonrecourse debt”.
(3) Adjusted EBIT and Adjusted EBITDA are non-GAAP financial measures. The most directly comparable GAAP financial measure is Net (Loss) Income. The reconciliation of Adjusted EBIT and
Adjusted EBITDA to Net (Loss) Income is presented on page 3 of this Annual Report. Adjusted EBIT and Adjusted EBITDA should be considered in addition to, but not as a substitute for, Income
(Loss) Before Income Taxes, Net (Loss) Income and other measures of financial performance prepared in accordance with GAAP that are presented on the financial statements included in the
Company's reports filed with the SEC. Additionally, the Company's calculation of Adjusted EBIT and Adjusted EBITDA may be different than the calculation used by other companies, and,
therefore, comparability may be affected.
(4) Net Debt excludes mortgage warehouse debt and nonrecourse debt and is net of accrued interest and homebuilding cash and cash equivalents balances. Net Capitalization includes Net Debt, as
previously defined, and total stockholders' equity deficit. Calculated based on a five quarter average. The calculation of Average Net Debt/Net Capitalization is presented on page 4 of this Annual
Report. The Company’s calculation of Average Net Debt/Net Capitalization may be different than the calculation used by other companies and, therefore, comparability may be affected.
(5) Derived by dividing cost of sales, excluding cost of sales interest, by the five quarter average inventory, excluding inventory not owned and capitalized interest. The calculation of Inventory
Turnover is presented on page 5 of this Annual Report. The Company’s calculation of Inventory Turnover may be different than the calculation used by other companies and, therefore,
comparability may be affected.
(6) Excludes cost of sales interest.
(7) Adjusted EBITDA Margin is derived by dividing Adjusted EBITDA by Total Revenues.
This summary should be read in conjunction with the related consolidated financial statements and accompanying notes included elsewhere in this Annual Report.
2 Reconciliation of Income (Loss) Before Income Taxes Excluding Land-Related Charges, Joint Venture Write-Downs and Loss on Extinguishment of Debt to Income
(Loss) Before Income Taxes:
(Dollars In Thousands)
Income (Loss) Before Income Taxes
Inventory Impairment Loss and Land Option Write-Offs
Unconsolidated Joint Venture Investment Write-Downs
Loss on Extinguishment of Debt
Income (Loss) Before Income Taxes Excluding Land-Related Charges,
Joint Venture Write-Downs and Loss on
Extinguishment of Debt
2017
$(45,244)
17,813
2,763
(34,854)
Years Ended October 31,
2016
$2,436
33,353
–
(3,200)
2015
$(21,765)
12,044
–
–
2014
$20,180
5,224
–
(1,155)
2013
$21,935
4,965
–
(760)
$10,186
$38,989
$(9,721)
$26,559
$27,660
Reconciliation of Adjusted EBIT and Adjusted EBITDA to Net (Loss) Income:
(Dollars In Thousands)
Net (Loss) Income
Income Tax Provision (Benefit)
Interest Expense
EBIT
Inventory Impairment Loss and Land Option Write-offs
Loss on Extinguishment of Debt
Adjusted EBIT
EBIT
Depreciation
Amortization of Debt Costs
EBITDA
Inventory Impairment Loss and Land Option Write-offs
Loss on Extinguishment of Debt
Adjusted EBITDA
Years Ended October 31,
2017
$(332,193)
286,949
185,840
140,596
17,813
(34,854)
$193,263
$140,596
4,249
1,632
146,477
17,813
(34,854)
$199,144
2016
$(2,819)
5,255
183,358
185,794
33,353
(3,200)
$222,347
$185,794
3,565
5,261
194,620
33,353
(3,200)
$231,173
2015
$(16,100)
(5,665)
151,448
129,683
12,044
–
$141,727
$129,683
3,388
5,459
138,530
12,044
–
$150,574
2014
$307,144
(286,964)
141,344
161,524
5,224
(1,155)
$167,903
$161,524
3,417
4,392
169,333
5,224
(1,155)
$175,712
2013
$31,295
(9,360)
143,574
165,509
4,965
(760)
$171,234
$165,509
4,712
3,659
173,880
4,965
(760)
$179,605
3 Calculation of Average Net Debt/Net Capitalization(1)
(Dollars In Thousands)
Notes Payable, Term Loans and Revolving Credit Facility
Less Accrued Interest
Less Homebuilding Cash and Cash Equivalents
Net Debt
Notes Payable, Term Loans and Revolving Credit Facility
Total Stockholders' Equity Deficit
Total Capitalization
Less Accrued Interest
Less Homebuilding Cash and Cash Equivalents
Net Capitalization
Average Net Debt/Net Capitalization
(Dollars In Thousands)
Total Notes Payable(2)
Less Accrued Interest
Less Homebuilding Cash and Cash Equivalents
Net Debt
Total Notes Payable
Total Stockholders' Equity Deficit
Total Capitalization
Less Accrued Interest
Less Homebuilding Cash and Cash Equivalents
Net Capitalization
Average Net Debt/Net Capitalization
(Dollars In Thousands)
Total Notes Payable(2)
Less Accrued Interest
Less Homebuilding Cash and Cash Equivalents
Net Debt
Total Notes Payable
Total Stockholders' Equity Deficit
Total Capitalization
Less Accrued Interest
Less Homebuilding Cash and Cash Equivalents
Net Capitalization
Average Net Debt/Net Capitalization
(1) Income (Loss) Before Income Taxes Excluding Land-
(Dollars In Thousands)
Total Notes Payable(2)
Less Accrued Interest
Less Homebuilding Cash and Cash Equivalents
Net Debt
Total Notes Payable
Total Stockholders' Equity Deficit
Total Capitalization
Less Accrued Interest
Less Homebuilding Cash and Cash Equivalents
Net Capitalization
Average Net Debt/Net Capitalization
(Dollars In Thousands)
Total Notes Payable(2)
Less Accrued Interest
Less Homebuilding Cash and Cash Equivalents
Net Debt
Total Notes Payable
Total Stockholders' Equity Deficit
Total Capitalization
Less Accrued Interest
Less Homebuilding Cash and Cash Equivalents
Net Capitalization
Average Net Debt/Net Capitalization
10/31/2016
$1,657,758
32,425
339,773
$1,285,560
$1,657,758
(128,510)
$1,529,248
32,425
339,773
$1,157,050
10/31/2015
$1,915,312
40,388
245,398
$1,629,526
$1,915,312
(128,084)
$1,787,228
40,388
245,398
$1,501,442
As of
10/31/2014
$1,668,624
32,222
255,117
$1,381,285
$1,668,624
(117,799)
$1,550,825
32,222
255,117
$1,263,486
As of
10/31/2013
$1,539,432
28,261
319,142
$1,192,029
$1,539,432
(432,799)
$1,106,633
28,261
319,142
$759,230
As of
10/31/2012
$1,541,990
20,199
258,323
$1,263,468
$1,541,990
(485,345)
$1,056,645
20,199
258,323
$778,123
1/31/2017
$1,619,673
31,700
195,830
$1,392,143
$1,619,673
(128,280)
$1,491,393
31,700
195,830
$1,263,863
1/31/2016
$1,731,760
29,172
147,124
$1,555,464
$1,731,760
(143,140)
$1,588,620
29,172
147,124
$1,412,324
1/31/2015
$1,913,831
31,212
269,282
$1,613,337
$1,913,831
(129,984)
$1,783,847
31,212
269,282
$1,483,353
1/31/2014
$1,684,815
26,977
282,476
$1,375,362
$1,684,815
(456,124)
$1,228,691
26,977
282,476
$919,238
1/31/2013
$1,537,322
28,419
232,793
$1,276,110
$1,537,322
(481,233)
$1,056,089
28,419
232,793
$794,877
As of
4/30/2017
$1,621,375
31,100
275,011
$1,315,264
$1,621,375
(133,903)
$1,487,472
31,100
275,011
$1,181,361
As of
4/30/2016
$1,747,260
39,119
120,661
$1,587,480
$1,747,260
(152,322)
$1,594,938
39,119
120,661
$1,435,158
4/30/2015
$1,925,496
39,938
256,866
$1,628,692
$1,925,496
(146,334)
$1,779,162
39,938
256,866
$1,482,358
4/30/2014
$1,669,954
32,272
238,116
$1,399,566
$1,669,954
(462,513)
$1,207,441
32,272
238,116
$937,053
4/30/2013
$1,540,227
30,019
236,419
$1,273,789
$1,540,227
(478,520)
$1,061,707
30,019
236,419
$795,269
7/31/2017
$1,650,543
13,500
278,486
$1,358,557
$1,650,543
(471,162)
$1,179,381
13,500
278,486
$887,395
7/31/2016
$1,652,087
30,479
181,526
$1,440,082
$1,652,087
(151,943)
$1,500,144
30,479
181,526
$1,288,139
7/31/2015
$1,916,961
30,599
207,302
$1,679,060
$1,916,961
(151,507)
$1,765,454
30,599
207,302
$1,527,553
7/31/2014
$1,655,230
27,027
176,639
$1,451,564
$1,655,230
(443,120)
$1,212,110
27,027
176,639
$1,008,444
7/31/2013
$1,534,014
25,002
221,500
$1,287,512
$1,534,014
(467,204)
$1,066,810
25,002
221,500
$820,308
10/31/2017
$1,679,674
41,800
463,697
$1,174,177
$1,679,674
(460,371)
$1,219,303
41,800
463,697
$713,806
10/31/2016
$1,657,758
32,425
339,773
$1,285,560
$1,657,758
(128,510)
$1,529,248
32,425
339,773
$1,157,050
10/31/2015
$1,915,312
40,388
245,398
$1,629,526
$1,915,312
(128,084)
$1,787,228
40,388
245,398
$1,501,442
10/31/2014
$1,668,624
32,222
255,117
$1,381,285
$1,668,624
(117,799)
$1,550,825
32,222
255,117
$1,263,486
10/31/2013
$1,539,432
28,261
319,142
$1,192,029
$1,539,432
(432,799)
$1,106,633
28,261
319,142
$759,230
Five
Quarter
Average
$1,305,140
$1,040,695
125.4%
Five
Quarter
Average
$1,499,622
$1,358,823
110.4%
Five
Quarter
Average
$1,586,380
$1,451,638
109.3%
Five
Quarter
Average
$1,359,961
$977,490
139.1%
Five
Quarter
Average
$1,258,582
$789,561
159.4%
(1) Net Debt excludes mortgage warehouse debt and nonrecourse debt and is net of accrued interest and homebuilding cash and cash equivalents balances. Net Capitalization
includes Net Debt, as previously defined, and total stockholders' equity deficit. Calculated based on a five quarter average. The Company’s calculation of Average Net Debt/Net
Capitalization may be different than the calculation used by other companies and, therefore, comparability may be affected.
(2) In connection with our adoption of Accounting Standards Update 2015-03 in November 2016, certain prior year amounts for unamortized debt issuance costs were reclassified
to “Total Notes Payable”.
4 Calculation of Inventory Turnover(1)
(Dollars In Thousands)
Cost of Sales, Excluding Interest
Total Inventories
Consolidated Inventory Not Owned
Capitalized Interest
Inventories less Consolidated Inventory Not
Owned and Capitalized Interest
Inventory Turnover
(Dollars In Thousands)
Cost of Sales, Excluding Interest
Total Inventories
Consolidated Inventory Not Owned
Capitalized Interest
Inventories less Consolidated Inventory Not
Owned and Capitalized Interest
Inventory Turnover
(Dollars In Thousands)
Cost of Sales, Excluding Interest
Total Inventories
Consolidated Inventory Not Owned
Capitalized Interest
Inventories less Consolidated Inventory Not
Owned and Capitalized Interest
Inventory Turnover
(Dollars In Thousands)
Cost of Sales, Excluding Interest
Total Inventories
Consolidated Inventory Not Owned
Capitalized Interest
Inventories less Consolidated Inventory Not
Owned and Capitalized Interest
Inventory Turnover
(Dollars In Thousands)
Cost of Sales, Excluding Interest
Total Inventories
Consolidated Inventory Not Owned
Capitalized Interest
Inventories less Consolidated Inventory Not
Owned and Capitalized Interest
Inventory Turnover
1/31/2017
$445,027
For the Quarter Ended
4/30/2017
$475,440
7/31/2017
$478,886
10/31/2017
$562,451
10/31/2016
$1,283,084
208,701
96,688
1/31/2017
$1,293,426
171,572
94,438
As of
4/30/2017
$1,209,212
154,620
90,960
7/31/2017
$1,188,849
138,529
87,119
10/31/2017
$1,009,827
124,784
71,051
$977,695
$1,027,416
$963,632
$963,201
$813,992
1/31/2016
$464,146
For the Quarter Ended
4/30/2016
$536,050
7/31/2016
$583,783
10/31/2016
$646,478
Year
Ended
10/31/2017
$1,961,804
Five
Quarter
Average
$949,187
2.1x
Year
Ended
10/31/2016
$2,230,457
10/31/2015
$1,644,578
122,225
123,898
1/31/2016
$1,651,986
338,067
117,113
As of
4/30/2016
$1,676,136
312,841
115,809
7/31/2016
$1,466,754
280,728
104,544
10/31/2016
$1,283,084
208,701
96,688
Five
Quarter
Average
$1,398,455
$1,196,806
$1,247,486
$1,081,482
$977,695
$1,180,385
For the Quarter Ended
1/31/2015
$354,812
4/30/2015
$382,139
7/31/2015
$432,625
10/31/2015
$552,462
1.9x
Year
Ended
10/31/2015
$1,722,038
As of
10/31/2014
$1,344,310
108,853
109,158
1/31/2015
$1,481,976
90,098
114,241
4/30/2015
$1,538,757
100,806
119,901
7/31/2015
$1,612,489
109,355
122,941
10/31/2015
$1,644,578
122,225
123,898
Five
Quarter
Average
$1,126,299
$1,277,637
$1,318,050
$1,380,193
$1,398,455
$1,300,127
For the Quarter Ended
1/31/2014
$288,887
4/30/2014
$350,433
7/31/2014
$424,145
10/31/2014
$551,734
1.3x
Year
Ended
10/31/2014
$1,615,199
As of
10/31/2013
$1,078,764
100,863
105,093
1/31/2014
$1,209,934
98,596
107,089
4/30/2014
$1,295,656
107,964
107,992
7/31/2014
$1,376,157
126,232
108,757
10/31/2014
$1,344,310
108,853
109,158
Five
Quarter
Average
$872,808
$1,004,249
$1,079,700
$1,141,168
$1,126,299
$1,044,845
For the Quarter Ended
1/31/2013
$288,755
4/30/2013
$333,143
7/31/2013
$370,464
10/31/2013
$449,682
As of
10/31/2012
$981,466
90,619
116,056
1/31/2013
$1,005,888
90,894
114,429
4/30/2013
$1,035,307
106,121
112,488
7/31/2013
$1,118,008
109,665
109,977
10/31/2013
$1,078,764
100,863
105,093
$774,791
$800,565
$816,698
$898,366
$872,808
1.5x
Year
Ended
10/31/2013
$1,442,044
Five
Quarter
Average
$832,646
1.7x
(1) Derived by dividing cost of sales, excluding cost of sales interest, by the five quarter average inventory, excluding inventory not owned and capitalized interest. The
Company’s calculation of Inventory Turnover may be different than the calculation used by other companies and, therefore, comparability may be affected.
5 (This page has been left blank intentionally.)
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended OCTOBER 31, 2017
☐ 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)
110 West Front Street, P.O. Box 500, Red Bank, N.J.
(Address of Principal Executive Offices)
22-1851059
(I.R.S. Employer Identification No.)
07701
(Zip Code)
732-747-7800
(Registrant’s Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
Class A Common Stock, $0.01 par value per share
Preferred Stock Purchase Rights
Depositary Shares, each representing 1/1,000th of a share of
7.625% Series A Preferred Stock
Name of Each Exchange on Which Registered
New York Stock Exchange
New York Stock Exchange
NASDAQ Global Market
Securities registered pursuant to Section 12(g) of the Act:
Class B Common Stock, $0.01 par value per share
Preferred Stock Purchase Rights
(Title of Class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act of 1933.
Yes ☐ No ☒
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes ☐ No ☒
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 and posted on its corporate “website”, 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 ☒ No ☐
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not
be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of
this Form 10-K or any amendment to this Form 10-K. ☒
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a nonaccelerated 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 ☒
(Do Not Check if a smaller reporting Company)
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 ☒
The aggregate market value of the voting and nonvoting common equity held by non-affiliates computed by reference to the price at
which the common equity was last sold, or the average bid and asked price of such common equity as of April 30, 2017 (the last business
day of the registrant’s most recently completed second fiscal quarter) was $283,280,186.
As of the close of business on December 15, 2017, there were outstanding 132,286,691 shares of the Registrant’s Class A Common
Stock and 15,306,226 shares of its Class B Common Stock.
HOVNANIAN ENTERPRISES, INC.
DOCUMENTS INCORPORATED BY REFERENCE:
Part III — Those portions of the registrant’s definitive proxy statement to be filed pursuant to Regulation 14A in connection
with registrant’s annual meeting of stockholders to be held on March 13, 2018, which are responsive to those parts of Part III,
Items 10, 11, 12, 13 and 14 as identified herein.
FORM 10-K
TABLE OF CONTENTS
Item
Page
PART I ................................................................................................................................................................... 1
1
Business ................................................................................................................................................................... 1
1A Risk Factors ............................................................................................................................................................. 10
1B Unresolved Staff Comments ................................................................................................................................... 21
2
Properties ................................................................................................................................................................. 21
Legal Proceedings ................................................................................................................................................... 21
3
4 Mine Safety Disclosures .......................................................................................................................................... 23
Executive Officers of the Registrant ....................................................................................................................... 23
PART II .................................................................................................................................................................. 24
5 Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities ................................................................................................................................................................. 24
6
Selected Financial Data ........................................................................................................................................... 25
7 Management’s Discussion and Analysis of Financial Condition and Results of Operations .................................. 26
7A Quantitative and Qualitative Disclosures About Market Risk ................................................................................. 57
Financial Statements and Supplementary Data ....................................................................................................... 57
8
9
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure .................................. 57
9A Controls and Procedures .......................................................................................................................................... 58
9B Other Information .................................................................................................................................................... 60
PART III ................................................................................................................................................................ 60
10 Directors, Executive Officers and Corporate Governance ...................................................................................... 60
Executive Compensation ......................................................................................................................................... 61
11
12
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters ................ 62
13 Certain Relationships and Related Transactions, and Director Independence ........................................................ 63
Principal Accountant Fees and Services .................................................................................................................. 63
14
PART IV ................................................................................................................................................................ 63
15
16
Exhibits and Financial Statement Schedules ........................................................................................................... 63
Form 10-K Summary............................................................................................................................................... 63
Signatures ................................................................................................................................................................ 69
i
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Part I
ITEM 1
BUSINESS
Business Overview
We design, construct, market, and sell single-family detached homes, attached
townhomes and
condominiums, urban infill, and active lifestyle homes in planned residential developments and are one of the nation’s largest
builders of residential homes. Founded in 1959 by Kevork Hovnanian, Hovnanian Enterprises, Inc. (the “Company,” “we,”
“us” or “our”) was incorporated in New Jersey in 1967 and reincorporated in Delaware in 1983. Since the incorporation of
our predecessor company and including unconsolidated joint ventures, we have delivered in excess of 331,000 homes,
including 6,149 homes in fiscal 2017. The Company has two distinct operations: homebuilding and financial services. Our
homebuilding operations consist of six segments: Northeast, Mid-Atlantic, Midwest, Southeast, Southwest and West. Our
financial services operations provide mortgage loans and title services to the customers of our homebuilding operations.
We are currently, excluding unconsolidated joint ventures, offering homes for sale in 130 communities in 24 markets
in 14 states throughout the United States. We market and build homes for first-time buyers, first-time and second-time move-
up buyers, luxury buyers, active lifestyle buyers and empty nesters. We offer a variety of home styles at base prices ranging
from $135,000 to $2,675,000 with an average sales price, including options, of $418,000 nationwide in fiscal 2017.
Our operations span all significant aspects of the home-buying process – from design, construction, and sale, to
mortgage origination and title services.
The following is a summary of our growth history:
1959 - Founded by Kevork Hovnanian as a New Jersey homebuilder.
1983 - Completed initial public offering.
1986 - Entered the North Carolina market through the investment in New Fortis Homes.
1992 - Entered the greater Washington, D.C. market.
1994 - Entered the Coastal Southern California market.
1998 - Expanded in the greater Washington, D.C. market through the acquisition of P.C. Homes.
1999 - Entered the Dallas, Texas market through our acquisition of Goodman Homes. Further diversified and
strengthened our position as New Jersey’s largest homebuilder through the acquisition of Matzel & Mumford.
2001 - Continued expansion in the greater Washington D.C. and North Carolina markets through the acquisition of
Washington Homes. This acquisition further strengthened our operations in each of these markets.
2002 - Entered the Central Valley market in Northern California and Inland Empire region of Southern California
through the acquisition of Forecast Homes.
2003 - Expanded operations in Texas and entered the Houston market through the acquisition of Parkside Homes
and Brighton Homes. Entered the greater Ohio market through our acquisition of Summit Homes and entered the
greater metro Phoenix market through our acquisition of Great Western Homes.
2004 - Entered the greater Tampa, Florida market through the acquisition of Windward Homes and started operations
in the Minneapolis/St. Paul, Minnesota market.
1
2005 - Entered the Orlando, Florida market through our acquisition of Cambridge Homes and entered the greater
Chicago, Illinois market and expanded our position in Florida and Minnesota through the acquisition of the
operations of Town & Country Homes, which occurred concurrently with our entering into a joint venture with
affiliates of Blackstone Real Estate Advisors to own and develop Town & Country Homes’ existing residential
communities. We also entered the Cleveland, Ohio market through the acquisition of Oster Homes.
2006 - Entered the coastal markets of South Carolina and Georgia through the acquisition of Craftbuilt Homes.
During fiscal 2016, we exited the Minneapolis, Minnesota and Raleigh, North Carolina markets and sold land
portfolios in those markets. We are in the process of completing a wind down of our operations in the San Francisco Bay
area in Northern California and in Tampa, Florida by building and delivering homes to sell through our existing land position.
Geographic Breakdown of Markets by Segment
The Company markets and builds homes that are constructed in 18 of the nation’s top 50 housing markets. We
segregate our homebuilding operations geographically into the following six segments:
Northeast: New Jersey and Pennsylvania
Mid-Atlantic: Delaware, Maryland, Virginia, Washington, D.C. and West Virginia
Midwest: Illinois and Ohio
Southeast: Florida, Georgia and South Carolina
Southwest: Arizona and Texas
West: California
For financial information about our segments, see Item 7 “Management’s Discussion and Analysis of Financial
Condition and Results of Operations,” and Note 10 to the Consolidated Financial Statements.
Employees
We employed 1,905 full-time employees (whom we refer to as associates) as of October 31, 2017.
Corporate Offices and Available Information
Our corporate offices are currently located at 110 West Front Street, P.O. Box 500, Red Bank, New Jersey 07701
(See Item 2-Properties). Our telephone number is 732-747-7800, and our Internet web site address is www.khov.com.
Information available on or through our web site is not a part of this Form 10-K. We make available through our web site our
Annual Report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to these reports
filed or furnished pursuant to Section 13(d) or 15(d) of the Securities Exchange Act of 1934, as amended (“Exchange Act”),
as soon as reasonably practicable after they are filed with, or furnished to, the Securities and Exchange Commission (SEC).
Copies of the Company’s Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to
these reports are available free of charge upon request. Any materials we file with the SEC may be read and copied at the
SEC’s Public Reference Room at 100 F Street, NE, Washington, D.C., 20549. Information on the operation of the Public
Reference Room may be obtained by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet site
(http://www.sec.gov) that contains reports, proxy and information statements and other information regarding issuers that
file electronically with the SEC.
Business Strategies
Given the low levels of total U.S. housing starts, and our belief in the long-term recovery of the homebuilding
market, we remain focused on identifying new land parcels, which are critical to improving our financial performance. During
fiscal 2016, we had approximately $260 million of bonds mature, which we were unable to refinance because financing was
unavailable in the capital and loan markets to companies with comparable credit ratings to ours. As a result, we shifted our
focus from growth to gaining operating efficiencies and improving our bottom line, and in order to preserve and increase
cash to fund our maturing debt, we decided to temporarily reduce the amount of cash we were spending on future land
2
acquisitions and to exit from four underperforming markets during fiscal 2016. In addition, we increased our use of
land banking and joint ventures in order to enhance our liquidity position. The net effect of these liquidity enhancing efforts
was to temporarily reduce our ability to invest as aggressively in new land parcels as previously planned. This resulted in a
reduction in our community count in fiscal 2016 and 2017, along with a decrease in net contracts during these periods, as
compared to the prior year periods. As a result of our decreased community count, we had fewer deliveries, revenues and
profit in 2017 as compared to the prior year.
In the fourth quarter of fiscal 2016 and in July 2017, we were able to refinance certain of our debt maturities
including certain of our senior secured notes which were scheduled to mature in October 2018 and October and November
2020, with $440.0 million of new senior secured notes maturing in July 2022 and $400.0 million of new senior secured notes
maturing in July 2024. While these transactions extended the maturities of a significant amount of debt giving us the ability
to more fully invest in new communities again, they also resulted in a $42.3 million loss on early extinguishment of debt.
When added to prior period results, this created a three-year cumulative loss, which led us to reconsider the realizability of
our deferred tax assets in accordance with GAAP and record a $294.1 million non-cash increase in the valuation allowance
for our deferred tax assets. See Note 11 to our Consolidated Financial Statements. We continue to see opportunities to
purchase land at prices that make economic sense in light of our current sales prices and sales pace and plan to continue
actively pursuing such land acquisitions.
In addition to our current focus on maintaining adequate liquidity and evaluating new investment opportunities, we
intend to continue to focus on our historic key business strategies, as enumerated below. We believe that these strategies
separate us from our competitors in the residential homebuilding industry and the adoption, implementation and adherence
to these principles will continue to benefit our business.
Our goal is to become a significant builder in each of the selected markets in which we operate, which will enable
us to achieve powers and economies of scale and differentiate ourselves from most of our competitors.
As noted above, we offer a broad product array to provide housing to a wide range of customers. Our customers
consist of first-time buyers, first-time and second-time move-up buyers, luxury buyers, active lifestyle buyers and empty
nesters. Our diverse product array includes single-family detached homes, attached townhomes and condominiums, urban
infill and active lifestyle homes.
We are committed to customer satisfaction and quality in the homes that we build. We recognize that our future
success rests in the ability to deliver quality homes to satisfied customers. We seek to expand our commitment to customer
service through a variety of quality initiatives. In addition, our focus remains on attracting and developing quality associates.
We use several leadership development and mentoring programs to identify key individuals and prepare them for positions
of greater responsibility within our Company.
We focus on achieving high return on invested capital. Each new community is evaluated based on its ability to
meet or exceed internal rate of return requirements. Our belief is that the best way to create lasting value for our shareholders
is through a strong focus on return on invested capital.
We prefer to use a risk-averse land acquisition strategy. We attempt to acquire land with a minimum cash investment
and negotiate takedown options, thereby limiting the financial exposure to the amounts invested in property and
predevelopment costs. This approach significantly reduces our risk and generally allows us to obtain necessary development
approvals before acquisition of the land.
We enter into homebuilding and land development joint ventures from time to time as a means of controlling lot
positions, expanding our market opportunities, establishing strategic alliances, reducing our risk profile, leveraging our
capital base and enhancing our returns on capital. Our homebuilding joint ventures are generally entered into with third-party
investors to develop land and construct homes that are sold directly to home buyers. Our land development joint ventures
include those with developers and other homebuilders, as well as financial investors to develop finished lots for sale to the
joint venture’s members or other third parties.
We manage our financial services operations to better serve all of our home buyers. Our current mortgage financing
and title service operations enhance our contact with customers and allow us to coordinate the home-buying experience from
beginning to end.
3
Operating Policies and Procedures
We attempt to reduce the effect of certain risks inherent in the housing industry through the following policies and
procedures:
Training - Our training is designed to provide our associates with the knowledge, attitudes, skills and habits
necessary to succeed in their jobs. Our training department regularly conducts online or webinar training in sales,
construction, administration and managerial skills.
Land Acquisition, Planning, and Development - Before entering into a contract to acquire land, we complete
extensive comparative studies and analyses which assist us in evaluating the economic feasibility of such land acquisition.
We generally follow a policy of acquiring options to purchase land for future community developments.
● Where possible, we acquire land for future development through the use of land options, which need not be
exercised before the completion of the regulatory approval process. We attempt to structure these options with
flexible takedown schedules rather than with an obligation to take down the entire parcel upon receiving
regulatory approval. If we are unable to negotiate flexible takedown schedules, we will buy parcels in a single
bulk purchase. Additionally, we purchase improved lots in certain markets by acquiring a small number of
improved lots with an option on additional lots. This allows us to minimize the economic costs and risks of
carrying a large land inventory, while maintaining our ability to commence new developments during favorable
market periods.
● Our option and purchase agreements are typically subject to numerous conditions, including, but not limited to,
our ability to obtain necessary governmental approvals for the proposed community. Generally, the deposit on
the agreement will be returned to us if all approvals are not obtained, although predevelopment costs may not
be recoverable. By paying an additional nonrefundable deposit, we have the right to extend a significant number
of our options for varying periods of time. In most instances, we have the right to cancel any of our land option
agreements by forfeiture of our deposit on the agreement. In fiscal 2017, 2016 and 2015, rather than purchase
additional lots in underperforming communities, we took advantage of this right and walked away from 3,930
lots, 6,102 lots and 4,730 lots, respectively, out of 17,837 total lots, 19,210 total lots and 20,653 total lots,
respectively, under option, resulting in pretax charges of $2.7 million, $8.9 million and $4.7 million,
respectively.
Design - Our residential communities are generally located in urban and suburban areas easily accessible through
public and personal transportation. Our communities are designed as neighborhoods that fit existing land characteristics. We
strive to create diversity within the overall planned community by offering a mix of homes with differing architecture, textures
and colors. Recreational amenities, such as swimming pools, tennis courts, clubhouses, open areas and tot lots, are frequently
included.
Construction - We design and supervise the development and building of our communities. Our homes are
constructed according to standardized prototypes, which are designed and engineered to provide innovative product design
while attempting to minimize costs of construction. We generally employ subcontractors for the installation of site
improvements and construction of homes. Agreements with subcontractors are generally short term and provide for a fixed
price for labor and materials. We rigorously control costs through the use of computerized monitoring systems.
Because of the risks involved in speculative building, our general policy is to construct an attached condominium
or townhouse building only after signing contracts for the sale of at least 50% of the homes in that building. A majority of
our single-family detached homes are constructed after the signing of a sales contract and mortgage approval has been
obtained. This limits the buildup of inventory of unsold homes and the costs of maintaining and carrying that inventory.
Materials and Subcontractors - We attempt to maintain efficient operations by utilizing standardized materials
available from a variety of sources. In addition, we generally contract with subcontractors to construct our homes. We have
reduced construction and administrative costs by consolidating the number of vendors serving certain markets and by
executing national purchasing contracts with select vendors. In recent years, we have experienced some construction delays
due to shortage of labor in certain markets like Houston and Dallas; and we cannot predict the extent to which shortages in
necessary materials or labor may occur in these or other markets in the future.
4
Marketing and Sales - Our residential communities are sold principally through on-site sales offices. In order to
respond to our customers’ needs and trends in housing design, we rely upon our internal market research group to analyze
information gathered from, among other sources, buyer profiles, exit interviews at model sites, focus groups and demographic
databases. We make use of our website, internet, newspaper, radio, television, magazine, billboard, video and direct mail
advertising, special and promotional events, illustrated brochures and full-sized and scale model homes in our comprehensive
marketing program. In addition, we have home design galleries in our Florida, Illinois, New Jersey and Virginia markets,
which offer a wide range of customer options to satisfy individual customer tastes.
Customer Service and Quality Control - In many of our markets, associates are responsible for customer service and
preclosing quality control inspections as well as responding to postclosing customer needs. Prior to closing, each home is
inspected and any necessary completion work is undertaken by us or our subcontractors. Our homes are enrolled in a standard
limited warranty program which, in general, provides a homebuyer with a limited warranty for the home’s materials and
workmanship which follows each State’s applicable statute of repose. All of the warranties contain standard exceptions,
including, but not limited to, damage caused by the customer.
Customer Financing - We sell our homes to customers who generally finance their purchases through mortgages.
Our financial services segment provides our customers with competitive financing and coordinates and expedites the loan
origination transaction through the steps of loan application, loan approval, and closing and title services. We originate loans
in each of the states in which we build homes, except Ohio. We believe that our ability to offer financing to customers on
competitive terms as a part of the sales process is an important factor in completing sales.
During the year ended October 31, 2017, for the markets in which our mortgage subsidiaries originated loans, 13.9%
of our home buyers paid in cash and 67.8% of our noncash home buyers obtained mortgages from our mortgage banking
subsidiary. The loans we originated in fiscal 2017 were 74.9% prime and 25.1% Federal Housing Administration/Veterans
Affairs (“FHA/VA”).
We customarily sell virtually all of the loans and loan-servicing rights that we originate within a short period of
time. Loans are sold either individually or against forward commitments to institutional investors, including banks, mortgage
banking firms, and savings and loan associations.
Residential Development Activities
Our residential development activities include site planning and engineering, obtaining environmental and other
regulatory approvals and constructing roads, sewer, water, and drainage facilities, recreational facilities, and other amenities
and marketing and selling homes. These activities are performed by our associates, together with independent architects,
consultants and contractors. Our associates also carry out long-term planning of communities. A residential development
generally includes single-family detached homes and/or a number of residential buildings containing from two to 24
individual homes per building, together with amenities, such as club houses, swimming pools, tennis courts, tot lots and open
areas.
Current base prices for our homes in contract backlog at October 31, 2017, range from $160,000 to $970,000 in the
Northeast, from $171,000 to $2,675,000 in the Mid-Atlantic, from $135,000 to $831,000 in the Midwest, from $224,000 to
$880,000 in the Southeast, from $179,000 to $625,000 in the Southwest and from $208,000 to $965,000 in the West. Closings
generally occur and are typically reflected in revenues within six to nine months of when sales contracts are signed.
5
Information on homes delivered by segment for the year ended October 31, 2017, is set forth below:
(Housing revenue in thousands)
Northeast
Mid-Atlantic
Midwest
Southeast
Southwest
West
Consolidated total
Unconsolidated joint ventures (1)
Housing
Revenues
166,752
463,271
199,009
257,066
826,422
427,513
2,340,033
310,573
Homes
Delivered Average Price
475,077
541,205
310,951
418,675
350,624
545,297
417,714
567,774
351 $
856
640
614
2,357
784
5,602 $
547
$
$
(1) Represents housing revenues and home deliveries for our unconsolidated homebuilding joint ventures for the period. We
provide this data as a supplement to our consolidated results as an indicator of the volume managed in our
unconsolidated joint ventures. See Note 20 to the Consolidated Financial Statements for a further discussion of our
unconsolidated joint ventures.
The value of our net sales contracts, excluding unconsolidated joint ventures, decreased 17.3% to $2.1 billion for
the year ended October 31, 2017 from $2.5 billion for the year ended October 31, 2016. The number of homes contracted
decreased 14.9% to 5,196 in fiscal 2017 from 6,109 in fiscal 2016. The decrease in the number of homes contracted occurred
along with a 22.2% decrease in the number of open-for-sale communities from 167 at October 31, 2016 to 130 at October
31, 2017. We contracted an average of 35.1 homes per average active selling community in fiscal 2017 compared to 31.3
homes per average active selling community in fiscal 2016, a 12.1% increase in sales pace per community as our performance
per community improved in fiscal 2017 as compared to fiscal 2016.
Information on the value of net sales contracts by segment for the years ended October 31, 2017 and 2016, is set
forth below:
(Value of net sales contracts in thousands)
Northeast
Mid-Atlantic
Midwest
Southeast
Southwest
West
Consolidated total
Unconsolidated joint ventures (1)
$
$
2017
119,018 $
399,420
193,451
232,278
718,595
421,335
2,084,097 $
436,538
2016
226,635
467,782
229,671
287,538
887,341
420,681
2,519,648
154,088
Percentage
of Change
(47.5)%
(14.6)%
(15.8)%
(19.2)%
(19.0)%
0.2%
(17.3)%
183.3%
(1) Represents net contract dollars for our unconsolidated homebuilding joint ventures for the period. We provide this data
as a supplement to our consolidated results as an indicator of the volume managed in our unconsolidated joint ventures.
See Note 20 to the Condensed Consolidated Financial Statements for a further discussion of our unconsolidated joint
ventures.
The following table summarizes our active selling communities under development as of October 31, 2017. The
contracted not delivered and remaining homes available in our active selling communities are included in the consolidated
total homesites under the total residential real estate chart in Item 7 “Management’s Discussion and Analysis of Financial
Condition and Results of Operations.”
6
Active Selling Communities
Northeast
Mid-Atlantic
Midwest
Southeast
Southwest
West
Total
Approved
Communities
3
24
15
15
59
14
130
Homes
977
3,601
2,746
2,847
10,260
3,097
23,528
Contracted
Not
Homes
Delivered
658
2,113
1,092
875
7,027
1,791
13,556
Delivered(1)
98
309
382
285
509
400
1,983
Remaining
Homes
Available(2)
221
1,179
1,272
1,687
2,724
906
7,989
(1) Includes 301 home sites under option.
(2) Of the total remaining homes available, 685 were under construction or completed (including 83 models and sales
offices), and 3,776 were under option.
Backlog
At October 31, 2017 and 2016, including unconsolidated joint ventures, we had a backlog of signed contracts for
2,437 homes and 2,649 homes, respectively, with sales values aggregating $1.1 billion and $1.2 billion, respectively. The
majority of our backlog at October 31, 2017 is expected to be completed and closed within the next six to nine months. At
November 30, 2017 and 2016, our backlog of signed contracts, including unconsolidated joint ventures, was 2,606 homes
and 2,644 homes, respectively, with sales values aggregating $1.2 billion for both periods. For information on our backlog
excluding unconsolidated joint ventures, see the table on page 45 under Item 7 “Management’s Discussion and Analysis of
Financial Condition and Results of Operations – Results of Operations -Homebuilding.”
Sales of our homes typically are made pursuant to a standard sales contract that provides the customer with a
statutorily mandated right of rescission for a period ranging up to 15 days after execution. This contract requires a nominal
customer deposit at the time of signing. In addition, in the Northeast, and some sections of the Mid-Atlantic and Midwest,
we typically obtain an additional 5% to 10% down payment due within 30 to 60 days after signing. In most markets, an
additional deposit is required when a customer selects and commits to optional upgrades in the home. The contract may
include a financing contingency, which permits customers to cancel their obligation in the event mortgage financing at
prevailing interest rates (including financing arranged or provided by us) is unobtainable within the period specified in the
contract. This contingency period typically is four to eight weeks following the date of execution of the contract. When
housing values decline in certain markets, some customers cancel their contracts and forfeit their deposits. Cancellation rates
are discussed further in Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
Sales contracts are included in backlog once the sales contract is signed by the customer, which in some cases includes
contracts that are in the rescission or cancellation periods. However, revenues from sales of homes are recognized in the
Consolidated Statement of Operations, when title to the home is conveyed to the buyer, adequate initial and continuing
investments have been received, and there is no continued involvement.
Residential Land Inventory in Planning
It is our objective to control a supply of land, primarily through options, whenever possible, consistent with
anticipated homebuilding requirements in each of our housing markets. Controlled land (land owned and under option) as of
October 31, 2017, exclusive of communities under development described above under “Active Selling Communities” and
excluding unconsolidated joint ventures, is summarized in the following table. The proposed developable home sites in
communities in planning are included in the 25,549 consolidated total home sites under the total residential real estate table
in Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” on page 38.
7
Communities in Planning
(Dollars in thousands)
Northeast:
Under option(1)
Owned
Total
Mid-Atlantic:
Under option(1)
Owned
Total
Midwest:
Under option(1)
Owned
Total
Southeast:
Under option(1)
Owned
Total
Southwest:
Under option(1)
Owned
Total
West:
Under option(1)
Owned
Total
Totals:
Under option(1)
Owned
Combined total
Number
of Proposed
Communities
Proposed
Developable
Home Sites
Total
Land
Option
Price
Book
Value
6,628
49,589
56,217
3,955
27,929
31,884
2,169
5,305
7,474
3,479 $
729
4,208
221,566 $
$
$
1,343 $
1,410
2,753
139,720 $
$
$
1,152 $
586
1,738
1,311 $
73
1,384
67,453 $
$
$
44,679 $
$
$
1,043
14,412
15,455
2,200 $
-
2,200
141,810 $
$
$
8,410
-
8,410
345 $
2,949
3,294
43,006 $
$
$
7,486
13,998
21,484
33
10
43
11
14
25
9
8
17
8
4
12
25
-
25
5
16
21
91
52
143
9,830 $
5,747
15,557
658,234 $
29,691
$ 111,233
$ 140,924
(1) The book value of properties under option also includes costs incurred on properties not under option but which are
under evaluation. For properties under option, as of October 31, 2017, option fees and deposits aggregated $24.4
million. As of October 31, 2017, we spent an additional $5.3 million in nonrefundable predevelopment costs on such
properties.
We either option or acquire improved or unimproved home sites from land developers or other sellers. Under a
typical agreement with the land developer, we purchase a minimal number of home sites. The balance of the home sites to
be purchased is covered under an option agreement or a nonrecourse purchase agreement. During the declining homebuilding
market, we decided to mothball (or stop development on) certain communities where we determined that current market
conditions did not justify further investment at that time. When we decide to mothball a community, the inventory is
reclassified on our Consolidated Balance Sheet from Sold and unsold homes and lots under development to Land and land
options held for future development or sale. See Note 3 to the Consolidated Financial Statements for further discussion on
mothballed communities. For additional financial information regarding our homebuilding segments, see Note 10 to the
Consolidated Financial Statements.
Raw Materials
The homebuilding industry has from time to time experienced raw material and labor shortages. In particular,
shortages and fluctuations in the price of lumber or in other important raw materials could result in delays in the start or
completion of or increase the cost of developing one or more of our residential communities. We attempt to maintain efficient
operations by utilizing standardized materials available from a variety of sources. In recent years, we have experienced some
construction delays due to shortage of labor in certain markets like Houston and Dallas, and anticipate that the supply of raw
materials could be affected in the near future as a result of Hurricane Harvey in Houston and Hurricane Irma in Florida. We
8
cannot predict, however, the extent to which shortages in necessary raw materials or labor may occur in the future. In addition,
we generally contract with subcontractors to construct our homes. We have reduced construction and administrative costs by
consolidating the number of vendors serving certain markets and by executing national purchasing contracts with select
vendors.
Seasonality
Our business is seasonal in nature and, historically, weather-related problems, typically in the fall, late winter and
early spring, can delay starts or closings and increase costs.
Competition
Our homebuilding operations are highly competitive. We are among the top 10 homebuilders in the United States
in both homebuilding revenues and home deliveries. We compete with numerous real estate developers in each of the
geographic areas in which we operate. Our competition ranges from small local builders to larger regional builders to publicly
owned builders and developers, some of which have greater sales and financial resources than we do. Previously owned
homes and the availability of rental housing provide additional competition. We compete primarily on the basis of reputation,
price, location, design, quality, service and amenities.
Regulation and Environmental Matters
We are subject to extensive and complex laws and regulations that affect the development of land and home building,
sales and customer financing processes concerning zoning, building design, construction, and similar matters, including local
regulations which impose restrictive zoning and density requirements in order to limit the number of homes that can
eventually be built within the boundaries of a particular locality. In addition, we are subject to registration and filing
requirements in connection with the construction, advertisement and sale of our communities in certain states and localities
in which we operate even if all necessary government approvals have been obtained. We may also be subject to periodic
delays or may be precluded entirely from developing communities due to building moratoriums that could be implemented
in the future in the states in which we operate. Generally, such moratoriums relate to insufficient water or sewerage facilities
or inadequate road capacity.
In addition, some state and local governments in markets where we operate have approved, and others may approve,
slow-growth, or no-growth initiatives that could negatively affect the availability of land and building opportunities within
those areas. Approval of these initiatives could adversely affect our ability to build and sell homes in the affected markets
and/or could require the satisfaction of additional administrative and regulatory requirements, which could result in slowing
the progress or increasing the costs of our homebuilding operations in these markets. Any such delays or costs could have a
negative effect on our future revenues and earnings.
We are also subject to a variety of local, state, federal and foreign laws and regulations concerning protection of
health and the environment, including those regulating the emission or discharge of materials into the environment, the
management of storm water runoff at construction sites, the handling, use, storage and disposal of hazardous substances,
impacts to wetlands and other sensitive environments, and the remediation of contamination at properties that we have owned
or developed or currently own or are developing (“environmental laws”). The particular environmental laws which 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. See Risk Factors – “Homebuilders are subject to a number of federal, local, state, and foreign laws
and regulations concerning the development of land, the homebuilding, sales, and customer financing processes and the
protection of the environment, which can cause us to incur delays and costs associated with compliance and which can
prohibit or restrict our activity in some regions or areas”, Item 3 “Legal Proceedings” and Note 18 to the Consolidated
Financial Statements.
Despite our past ability to obtain necessary permits and approvals for our communities, we anticipate that
increasingly stringent requirements will be imposed on developers and homebuilders in the future. Although we cannot
reliably predict the extent of any effect these requirements may have on us, they could result in time-consuming and expensive
compliance programs and in substantial expenditures, which could cause delays and increase our cost of operations. In
addition, our ability to obtain or renew permits or approvals and the continued effectiveness of permits already granted or
approvals already obtained is dependent upon many factors, some of which are beyond our control, such as changes in
policies, rules and regulations and their interpretation and application.
9
ITEM 1A
RISK FACTORS
You should carefully consider the following risks in addition to the other information included in this Annual Report
on Form 10-K, including the Consolidated Financial Statements and the notes thereto.
The homebuilding industry is significantly affected by changes in general and local economic conditions, real estate markets,
and weather and other environmental conditions, which could affect our ability to build homes at prices our customers are
willing or able to pay, could reduce profits that may not be recaptured, could result in cancellation of sales contracts, and
could affect our liquidity.
The homebuilding industry is cyclical, has from time to time experienced significant difficulties, and is significantly
affected by changes in general and local economic conditions such as:
●
●
●
●
●
●
●
●
●
●
Employment levels and job growth;
Availability of financing for home buyers;
Interest rates;
Adverse changes in tax laws;
Foreclosure rates;
Inflation;
Consumer confidence;
Housing demand in general and for our particular community locations and product designs, as well as consumer
interest in purchasing a home compared to other housing alternatives;
Population growth; and
Availability of water supply in locations in which we operate.
Turmoil in the financial markets could affect our liquidity. In addition, our cash balances are primarily invested in
short-term government-backed instruments. The remaining cash balances are held at numerous financial institutions and may,
at times, exceed insurable amounts. We seek to mitigate this risk by depositing our cash in major financial institutions and
diversifying our investments. In addition, our homebuilding operations often require us to obtain letters of credit. We have
an unsecured revolving credit facility that can be used for general purposes, or under which letters of credit may be issued,
which matures in 2018. We also have certain stand-alone letter of credit facilities and agreements pursuant to which letters
of credit are issued. However, we may need additional letters of credit above the amounts provided under these facilities and
agreements. If we are unable to obtain such additional letters of credit as needed to operate our business, we may be adversely
affected, particularly in light of the upcoming maturity of our unsecured revolving credit facility.
Weather conditions and man-made or natural disasters such as hurricanes, tornadoes, earthquakes, floods, droughts,
fires and other environmental conditions, can harm the local homebuilding business. For example, in September 2017,
Hurricane Harvey and Hurricane Irma caused disruption and delays in Houston and Florida which may continue to impact
results in these markets in fiscal 2018. Similarly, our production process slowed and our cost of operations increased in Texas
during fiscal 2015 as a result of record wet conditions in this state and, in August 2011 and October 2012, Hurricane Irene
and Hurricane Sandy, respectively, caused widespread flooding and disruptions on the Atlantic seaboard, which impacted
our sales and construction activity in affected markets during those months.
The difficulties described above could cause us to take longer and incur more costs to build our homes. In addition,
our insurance may not fully cover business interruptions or losses caused by weather conditions and manmade or natural
disasters and we may not be able to recapture increased costs by raising prices in many cases because we fix our prices up to
12 months in advance of delivery by signing home sales contracts. Some home buyers may also cancel or not honor their
home sales contracts altogether.
10
Our business, liquidity and results of operations are still recovering from the significant and sustained homebuilding
downturn and another downturn in the homebuilding industry could materially and adversely affect our business.
The homebuilding industry experienced a significant and sustained downturn that began in 2007, during which the
lowest volumes of housing starts were significantly below troughs in previous downturns. This downturn resulted in an
industry-wide softening of demand for new homes due to a lack of consumer confidence, decreased availability of mortgage
financing, and large supplies of resale and new home inventories, among other factors. In addition, an oversupply of
alternatives to new homes, such as rental properties, resale homes, and foreclosures, depressed prices and reduced margins
for the sale of new homes. Industry conditions had a material adverse effect on our business and results of operations in fiscal
years 2007 through 2011. Further, we had substantially increased our inventory through fiscal 2006, which required
significant cash outlays and which increased our price and margin exposure as we worked through this inventory. Although
the homebuilding market has improved in the last few years, the volume of 2017 housing starts is still just above previous
volume troughs in historical cycles, and our business, liquidity and results of operations continue to be impacted by the lasting
effects of the significant and sustained downturn and it may continue to materially adverse our business and results of
operations in future years. If the homebuilding industry experiences another significant or sustained downturn, it would
materially adversely affect our business and results of operations in future years.
Several challenges, such as general U.S. economic uncertainty and the potential for more rapid inflation, extreme
weather conditions, increasing cycle times due to labor shortages, increasing labor and materials costs, the restrictive
mortgage lending environment and rising mortgage interest rates, could further impact the housing market and, consequently,
our performance. For example, if rising house construction costs substantially outpace increases in the income of potential
purchasers we may be limited in our ability to raise home sales prices, which may result in lower gross margins.
Our leverage places burdens on our ability to comply with the terms of our indebtedness, may restrict our ability to operate,
may prevent us from fulfilling our obligations, and may adversely affect our financial condition.
We have a significant amount of debt.
●
●
Our debt (excluding nonrecourse secured debt and debt of our financial subsidiaries), as of October 31, 2017,
including the debt of the subsidiaries that guarantee our debt, was $1,661.5 million ($1,654.0 million net of
discount), which includes borrowings under our $75.0 million revolving credit facility under which at October
31, 2017, there were $52.0 million of borrowings and $14.6 million of letters of credit outstanding resulting in
available borrowing capacity of $8.4 million.
Our debt service payments for the 12-month period ended October 31, 2017, were $109.7 million, substantially
all of which represented interest incurred and the remainder of which represented payments on the principal of
our amortizing notes, and do not include repurchases of our debt in open market transactions, principal and
interest on nonrecourse secured debt, debt of our financial subsidiaries and fees under our letter of credit and
other credit facilities and agreements.
As of October 31, 2017, in addition to the $14.6 million letters of credit outstanding under the revolving credit
facility, we had $1.7 million in aggregate outstanding face amount of letters of credit issued under various letter of credit and
other credit facilities and agreements, certain of which were collateralized by $1.7 million of cash. Our fees for these letters
of credit for the year ended October 31, 2017, which are based on both the used and unused portion of the facilities and
agreements, were $1.2 million. We also had substantial contractual commitments and contingent obligations, including
$199.5 million of performance bonds as of October 31, 2017. See Item 7 “Management’s Discussion and Analysis of
Financial Condition and Results of Operations—Contractual Obligations.”
Our significant amount of debt could have important consequences. For example, it could:
●
●
●
●
Limit our ability to obtain future financing for working capital, capital expenditures, acquisitions, debt service
requirements, or other requirements;
Require us to dedicate a substantial portion of our cash flow from operations to the payment of our debt and
reduce our ability to use our cash flow for other purposes, including land investments;
Limit our flexibility in planning for, or reacting to, changes in our business;
Place us at a competitive disadvantage because we have more debt than some of our competitors;
11
●
●
●
Limit our ability to implement our strategies and operational actions;
Require us to consider selling some of our assets or debt or equity securities, possibly on unfavorable terms, to
satisfy obligations; and
Make us more vulnerable to downturns in our business and general economic conditions.
Our ability to meet our debt service and other obligations will depend upon our future performance. We are engaged
in businesses that are substantially affected by changes in economic cycles. Our revenues and earnings vary with the level of
general economic activity in the markets we serve. Our businesses are also affected by customer sentiment and financial,
political, business, and other factors, many of which are beyond our control. The factors that affect our ability to generate
cash can also affect our ability to raise additional funds for these purposes through the sale of equity securities, the refinancing
of debt, or the sale of assets. Changes in prevailing interest rates may affect our ability to meet our debt service obligations
to the extent we have any floating rate indebtedness. A higher interest rate on our debt service obligations could result in
lower earnings or increased losses.
Our sources of liquidity are limited and may not be sufficient to meet our needs.
We are largely dependent on our current cash balance and future cash flows from operations (which may not be
positive) to enable us to service our indebtedness, to cover our operating expenses, and/or to fund our other liquidity needs.
Cash provided from operating activities in fiscal 2017 and fiscal 2016 were $297.6 million and $387.7 million, respectively.
Depending on the levels of our land purchases, we could generate negative or positive cash flow in future years. In 2016, we
used a significant portion of cash to repay debt because financing was unavailable to us in the capital and loan markets. If the
homebuilding industry does not experience improved conditions over the next several years, our cash flows could be
insufficient to fund our obligations and support land purchases; if we cannot buy additional land we would ultimately be
unable to generate future revenues from the sale of houses. In addition, we will need to refinance all or a portion of our debt
on or before maturity including amounts outstanding under our unsecured revolving credit facility which matures in 2018,
$369 million principal of unsecured senior notes which will mature during calendar year 2019, and our $75 million Term
Loan which will mature in 2019 (subject to earlier maturity if our 7.0% Senior Notes due 2019 have not been refinanced with
a maturity date after January 15, 2021), which we may not be able to do on favorable terms or at all. If our cash flows and
capital resources are insufficient to fund our debt service obligations (pursuant to the terms of certain of our senior secured
notes we generally must refinance our unsecured senior notes due 2019 and may not use cash to satisfy our obligations
thereunder) or we are unable to refinance our indebtedness, we may be forced to reduce or delay investments and capital
expenditures, sell assets, seek additional capital, or restructure our indebtedness. These alternative measures may not be
successful or, if successful, made on desirable terms and may not permit us to meet our debt service obligations. We have
also entered into certain cash collateralized letters of credit agreements and facilities that require us to maintain specified
amounts of cash in segregated accounts as collateral to support our letters of credit issued thereunder. If our available cash
and capital resources are insufficient to meet our debt service and other obligations, we could face liquidity problems and
might be required to dispose of material assets or operations to meet our debt service and other obligations. We may not be
able to consummate those dispositions or the proceeds from the dispositions may not be permitted under the terms of our
debt instruments to be used to service indebtedness or may not be adequate to meet any debt service obligations then due.
For additional information about capital resources and liquidity, see Item 7 “Management’s Discussion and Analysis of
Financial Condition and Results of Operations—Capital Resources and Liquidity.”
Our cash flows, liquidity and consolidated financial statements could be materially and adversely affected if we are unable
to obtain letters of credit.
Our homebuilding operations often require us to obtain letters of credit. We have an unsecured revolving credit
facility under which letters of credit may be issued, which matures in 2018. We also have certain stand-alone letter of credit
facilities and agreements pursuant to which letters of credit are issued. However, we may need additional letters of credit
above the amounts provided under these facilities and agreements. If we are unable to obtain such additional letters of credit
as needed to operate our business, we may be adversely affected, particularly in light of the upcoming maturity of our
unsecured revolving credit facility.
12
We may have difficulty in obtaining the additional financing required to operate and develop our business.
Our operations require significant amounts of cash, and we may be required to seek additional capital, whether from
sales of debt or equity securities or borrowing additional money, for the future growth and development of our business. The
terms and/or availability of additional capital is uncertain. Moreover, the agreements governing our outstanding debt
instruments contain provisions that restrict the debt we may incur in the future (including a requirement (i) to refinance our
7% Senior Notes due 2019 and 8% Senior Notes due 2019 (the “Existing Unsecured Notes”) with indebtedness that may not
be scheduled to mature earlier than our 10.50% Senior Notes due 2024 or equity, subject to an exception for up to $50 million
of cash repurchases and (ii) in our $75.0 million senior secured term loan facility (the “Term Loan Facility”) and the 9.50%
Senior Secured Notes due 2020 that any new or refinancing indebtedness may not be scheduled to mature earlier than
specified dates in 2021) and our ability to pay dividends on equity. If we are not successful in obtaining sufficient capital, it
could reduce our sales and may hinder our future growth and results of operations. In addition, pledging substantially all of
our assets to support our term loans and our senior secured notes may make it more difficult to raise additional financing in
the future.
Restrictive covenants in our debt instruments may restrict our and certain of our subsidiaries’ ability to operate, and if our
financial performance worsens, we may not be able to undertake transactions within the restrictions of our debt instruments.
The indentures governing our outstanding debt securities, the Term Loan Facility and our revolving credit facility
impose certain restrictions on our and certain of our subsidiaries’ operations and activities. The most significant restrictions
relate to debt incurrence (including maturity date requirements), creating liens, sales of assets (including in certain land
banking transactions), cash distributions, including paying dividends on common and preferred stock, capital stock, Existing
Unsecured Notes and subordinated debt repurchases, and investments by us and certain of our subsidiaries. Because of these
restrictions, we are currently prohibited from paying dividends on our common and preferred stock and anticipate that we
will remain prohibited for the foreseeable future.
The restrictions in our debt instruments could prohibit or restrict our and certain of our subsidiaries’ activities, such
as undertaking capital raising or restructuring activities or entering into other transactions. In such a situation, we may be
unable to amend the instrument or obtain a waiver. In addition, if we fail to comply with these restrictions or to make timely
payments on this debt and other material indebtedness, an event of default could occur and our debt under these debt
instruments could become due and payable prior to maturity. Any such event of default could lead to cross defaults under
certain of our other debt or negatively impact other covenants. In these situations, we may be unable to amend the applicable
instrument or obtain a waiver without significant additional cost, or at all. In such a situation, there can be no assurance that
we would be able to obtain alternative financing. Any such situation could have a material adverse effect on the solvency of
the Company.
The terms of our debt instruments allow us to incur additional indebtedness.
Under the terms of our indebtedness under our indentures and credit facilities, we have the ability, subject to our
debt covenants, to incur additional amounts of debt. The incurrence of additional indebtedness could magnify the risks
described above. In addition, certain obligations, such as standby letters of credit and performance bonds issued in the
ordinary course of business, including those issued under our stand-alone letter of credit agreements and facilities, are not
considered indebtedness under our debt instruments (and may be secured), and therefore, are not subject to limits in our debt
covenants.
We could be adversely affected by a negative change in our credit rating.
Our ability to access capital on favorable terms is a key factor in our ability to service our indebtedness to cover our
operating expenses and to fund our other liquidity needs. For example, during fiscal 2011 and thereafter, credit agencies took
a series of negative actions with respect to their credit ratings of us and our debt. More recently, in April, May and August
2016, Moody’s Investor Services and S&P Global Ratings, respectively, took certain negative rating actions, including
downgrades with respect to their credit ratings of us and our debt, as discussed in Item 7 “Management’s Discussion and
Analysis of Financial Conditions and Results of Operations—Capital Resources and Liquidity.” Downgrades may make it
more difficult and costly for us to access capital. Therefore, any further downgrade by any of the principal credit agencies
may exacerbate these difficulties. There can be no assurances that our credit ratings will not be further downgraded in the
future, whether as a result of deteriorating general economic conditions, a more protracted downturn in the housing industry,
failure to successfully implement our operating strategy, the adverse impact on our results of operations or liquidity position
of any of the above, or otherwise.
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Our business is seasonal in nature and our quarterly operating results can fluctuate.
Our quarterly operating results generally fluctuate by season. The construction of a customer’s home typically begins
after signing the agreement of sale and can take six to nine months or more to complete. Weather-related problems, typically
in the fall, winter and early spring, can delay starts or closings and increase costs and thus reduce profitability. In addition,
delays in opening communities could have an adverse effect on our sales and revenues. Due to these factors, our quarterly
operating results will likely continue to fluctuate.
Our success depends on the availability of suitable undeveloped land and improved lots at acceptable prices and our having
sufficient liquidity to fund such investments.
Our success in developing land and in building and selling homes depends in part upon the continued availability of
suitable undeveloped land and improved lots at acceptable prices. The homebuilding industry is highly competitive for land
that is suitable for residential development and the availability of undeveloped land and improved lots for purchase at
favorable prices depends on a number of factors outside of our control, including the risk of competitive overbidding on land
and lots, geographical or topographical constraints and restrictive governmental regulation. Should suitable land opportunities
become less available, our ability to implement our strategies and operational actions would be limited and the number of
homes we may be able to build and sell would be reduced, which would reduce revenue and profits. In addition, our ability
to make land purchases will depend upon us having sufficient liquidity to fund such purchases. We may be at a disadvantage
in competing for land due to our significant debt obligations, which require substantial cash resources.
Raw material and labor shortages and price fluctuations could delay or increase the cost of home construction and adversely
affect our operating results.
The homebuilding industry has from time to time experienced raw material and labor shortages. In particular,
shortages and fluctuations in the price of lumber or in other important raw materials could result in delays in the start or
completion of, or increase the cost of, developing one or more of our residential communities. For example, manufacturers
increased the price of drywall in 2013 by approximately 20% as compared to the prior year, and there is a potential for
significant future price increases. In addition, we contract with subcontractors to construct our homes. Therefore, the timing
and quality of our construction depends on the availability, skill, and cost of our subcontractors. Delays or cost increases
caused by shortages and price fluctuations, including as a result of inflation, could harm our operating results, the impact of
which may be further affected depending on our ability to raise sales prices to offset increased costs. We have experienced
some labor shortages and increased labor costs over the past few years, including fiscal 2017 during which we also
experienced increased materials and construction costs. It is uncertain whether these shortages will continue as is, improve
or worsen. If rising labor and house construction costs substantially outpace increases in the income of potential purchasers
we may be limited in our ability to raise home sale prices, which may result in lower gross margins.
We rely on subcontractors to construct our homes and should our homes not be properly constructed, it may be costly.
We engage subcontractors to perform the actual construction of our homes. Despite our quality control efforts, we
may discover that our subcontractors failed to properly construct our homes. The occurrence of such events could require us
to repair the homes in accordance with our standards and as required by law. The cost of satisfying our legal obligations in
these instances may be significant, and we may be unable to recover the cost of repair from subcontractors and insurers.
Changes in economic and market conditions could result in the sale of homes at a loss or holding land in inventory longer
than planned, the cost of which can be significant.
Land inventory risk can be substantial for homebuilders. We must continuously seek and make acquisitions of land
for expansion into new markets and for replacement and expansion of land inventory within our current markets. We incur
many costs even before we begin to build homes in a community. Depending on the stage of development of a land parcel
when we acquire it, these may include costs of preparing land, finishing and entitling lots, installing roads, sewers, water
systems and other utilities, taxes and other costs related to ownership of the land on which we plan to build homes. The
market value of undeveloped land, buildable lots, and housing inventories can fluctuate significantly as a result of changing
economic and market conditions. In the event of significant changes in economic or market conditions, we may have to sell
homes at a loss or hold land in inventory longer than planned. In the case of land options, we could choose not to exercise
them, in which case we would write-off the value of these options. Inventory carrying costs can be significant and can result
in losses in a poorly performing project or market. The assessment of communities for indication of impairment is performed
quarterly. While we consider available information to determine what we believe to be our best estimates as of the reporting
period, these estimates are subject to change in future reporting periods as facts and circumstances change. See Item 7
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“Management’s Discussion and Analysis of Financial Condition and Results of Operation—Critical Accounting Policies.”
For example, during more recent years, we did not have significant land option write-offs or impairments; however, during
fiscal 2011, 2010 and 2009, we decided not to exercise many option contracts and walked away from land option deposits
and predevelopment costs, which resulted in land option write-offs of $24.3 million, $13.2 million, and $45.4 million,
respectively. Also, in fiscal 2011, 2010 and 2009, as a result of the difficult market conditions, we recorded inventory
impairment losses on owned property of $77.5 million, $122.5 million and $614.1 million, respectively. If market conditions
worsen, additional inventory impairment losses and land option write-offs will likely be necessary.
We conduct a significant portion of our business in Arizona, California, Florida, New Jersey, Texas and Virginia, and
accordingly, regional factors affecting home sales and activities in these markets may have a large impact on our results of
operations.
We presently conduct a significant portion of our business in Arizona, California, Florida, New Jersey, Texas and
Virginia, which subjects us to risks associated with the regional and local economies of these markets. Home prices and sales
activities in these markets and in most of the other markets in which we operate have declined from time to time, particularly
as a result of slow economic growth. These markets may also depend, to a degree, on certain sectors of the economy and any
declines in those sectors may impact home sales and activities in that region. For example, to the extent the oil and gas
industries, which can be very volatile, are negatively impacted by declining commodity prices, climate change, legislation or
other factors, it could result in reduced employment, or other negative economic consequences, which in turn could adversely
impact our home sales and activities in Texas. Furthermore, precarious economic and budget situations at the state
government level may adversely affect the market for our homes in the affected areas. Events impacting these markets could
also negatively affect the other markets in which we operate. If home prices and sales activity decline in one or more of the
markets in which we operate, our costs may not decline at all or at the same rate and the Company’s business, financial
condition and results of operations could be materially adversely affected.
Because almost all of our customers require mortgage financing, increases in interest rates or the decreased availability of
mortgage financing could impair the affordability of our homes, lower demand for our products, limit our marketing
effectiveness, and limit our ability to fully realize our backlog.
Virtually all of our customers finance their acquisitions through lenders providing mortgage financing. Increases in
interest rates (or the perception that interest rates will rise, including as a result of government actions), increases in the costs
to obtain mortgages or decreases in availability of mortgage financing could lower demand for new homes because of the
increased monthly mortgage costs and cash required to close on mortgages to potential home buyers. Even if potential
customers do not need financing, changes in interest rates and mortgage availability could make it harder for them to sell
their existing homes to potential buyers who need financing. This could prevent or limit our ability to attract new customers
as well as our ability to fully realize our backlog because our sales contracts generally include a financing contingency.
Financing contingencies permit the customer to cancel his/her obligation in the event mortgage financing at prevailing interest
rates, including financing arranged or provided by us, is unobtainable within the period specified in the contract. This
contingency period is typically four to eight weeks following the date of execution of the sales contract.
Starting in 2007, many lenders have been significantly tightening their underwriting standards, even above the
minimum standards set by Fannie Mae, Freddie Mac and HUD/FHA, and subprime and other alternative mortgage products
are no longer being made available in the marketplace. If these trends continue and mortgage loans continue to be difficult
to obtain, the ability and willingness of prospective buyers to finance home purchases or to sell their existing homes will be
adversely affected, which will adversely affect our operating results. In addition, we believe that the availability of mortgage
financing, including Federal National Mortgage Association, Federal Home Loan Mortgage Corp, and FHA/VA financing,
is an important factor in marketing many of our homes. The maximum size of mortgage loans that are treated as conforming
by Fannie Mae and Freddie Mac was reduced in the past few years, which could further weaken home sales in general as
mortgages may become more expensive and, if conforming loan limits are further reduced, it could have a material adverse
effect on the Company. In addition, in 2010 HUD tightened FHA underwriting standards and the mortgage environment
remains constrained. Any limitations or restrictions on the availability of those types of financing could reduce our sales.
Further, if we are unable to originate mortgages for any reason going forward, our customers may experience significant
mortgage loan funding issues, which could have a material impact on our homebuilding business and our consolidated
financial statements.
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Increases in cancellations of agreements of sale could have an adverse effect on our business.
Our backlog reflects agreements of sale with our home buyers for homes that have not yet been delivered. We have
received a deposit from our home buyer for each home, which is reflected in our backlog, and we generally have the right to
retain the deposit if the home buyer does not complete the purchase. In some situations, however, a home buyer may cancel
the agreement of sale and receive a complete or partial refund of the deposit for reasons such as state and local law, his or
her inability to obtain mortgage financing at prevailing interest rates (including financing arranged or provided by us), his or
her inability to sell his or her current home, or our inability to complete and deliver the home within the specified time. At
October 31, 2017, including unconsolidated joint ventures, we had a backlog of signed contracts for 2,437 homes with a sales
value aggregating $1.1 billion. If mortgage financing becomes less accessible, or if economic conditions deteriorate, more
home buyers may cancel their agreements of sale with us, which could have an adverse effect on our business and results of
operations.
Increases in the after-tax costs of owning a home could prevent potential customers from buying our homes and adversely
affect our business or financial results.
Significant expenses of owning a home, including mortgage interest expenses and real estate taxes, generally are,
under current tax law, deductible expenses for an individual’s federal, and in some cases state, income taxes, subject to
limitations under current tax law and policy. If the federal government or a state government changes its income tax laws to
eliminate or substantially limit these income tax deductions, the after-tax cost of owning a new home would increase for
many of our potential customers. The "Tax Cuts and Jobs Act" which was recently signed into law includes provisions which
would impose significant limitations with respect to these income tax deductions. For instance, under the "Tax Cuts and Jobs
Act", the annual deduction for real estate taxes and state and local income or sales taxes would generally be limited to $10,000.
Furthermore, through the end of 2025, the deduction for mortgage interest would generally only be available with respect to
acquisition indebtedness that does not exceed $750,000. The loss or reduction of these homeowner tax deductions, if such
tax law changes were enacted without any offsetting legislation, would adversely impact demand for and sales prices of new
homes, including ours. In addition, increases in property tax rates or fees on developers by local governmental authorities, as
experienced in response to reduced federal and state funding or to fund local initiatives, such as funding schools or road
improvements, or increases in insurance premiums can adversely affect the ability of potential customers to obtain financing
or their desire to purchase new homes, and can have an adverse impact on our business and financial results.
We conduct certain of our operations through unconsolidated joint ventures with independent third parties in which we do
not have a controlling interest. These investments involve risks and are highly illiquid.
We currently operate through a number of unconsolidated homebuilding and land development joint ventures with
independent third parties in which we do not have a controlling interest. At October 31, 2017, we had invested an aggregate
of $115.1 million in these joint ventures, including advances and a note receivable to these joint ventures of $22.4 million.
In addition, as part of our strategy, we intend to continue to evaluate additional joint venture opportunities.
These investments involve risks and are highly illiquid. There are a limited number of sources willing to provide
acquisition, development, and construction financing to land development and homebuilding joint ventures, and if market
conditions become more challenging, it may be difficult or impossible to obtain financing for our joint ventures on
commercially reasonable terms. Over the past few years, it has been difficult to obtain financing for newly created joint
ventures. In addition, we lack a controlling interest in these joint ventures and, therefore, are usually unable to require that
our joint ventures sell assets or return invested capital, make additional capital contributions, or take any other action without
the vote of at least one of our venture partners. Therefore, absent partner agreement, we will be unable to liquidate our joint
venture investments to generate cash.
Homebuilders are subject to a number of federal, local, state, and foreign laws and regulations concerning the development
of land, the homebuilding, sales, and customer financing processes and the protection of the environment, which can cause
us to incur delays and costs associated with compliance and which can prohibit or restrict our activity in some regions or
areas.
We are subject to extensive and complex laws and regulations that affect the development of land and homebuilding,
sales and customer financing processes, including zoning, density, building standards and mortgage financing. These laws
and regulations often provide broad discretion to the administering governmental authorities. This can delay or increase the
cost of development or homebuilding. In light of recent developments in the home building industry and the financial markets,
federal, state, or local governments may seek to adopt regulations that limit or prohibit homebuilders from providing mortgage
financing to their customers. If adopted, any such regulations could adversely affect future revenues and earnings. In addition,
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some state and local governments in markets where we operate have approved, and others may approve, slow-growth or no-
growth initiatives that could negatively impact the availability of land and building opportunities within those areas. Approval
of these initiatives could adversely affect our ability to build and sell homes in the affected markets and/or could require the
satisfaction of additional administrative and regulatory requirements, which could result in slowing the progress or increasing
the costs of our homebuilding operations in these markets. Any such delays or costs could have a negative effect on our future
revenues and earnings.
We also are subject to a variety of local, state, federal and foreign laws and regulations concerning protection of
health and the environment, including those regulating the emission or discharge of materials into the environment, the
management of storm water runoff at construction sites, the handling, use, storage and disposal of hazardous substances,
impacts to wetlands and other sensitive environments, and the remediation of contamination at properties that we have owned
or developed or currently own or are developing (“environmental laws”). The particular environmental laws that apply to a
site may vary greatly according to the community's site, for example, due to the community, the environmental conditions at
or near the site, and the present and former uses of the site. These environmental laws may result in delays, may cause us to
incur substantial compliance, remediation and/or other costs, and can prohibit or severely restrict development and
homebuilding activity. In addition, noncompliance with these laws and regulations could result in fines and penalties,
obligations to remediate, permit revocations or other sanctions; and contamination or other environmental conditions at or in
the vicinity of our developments may result in claims against us for personal injury, property damage or other losses.
For example, in March 2013, we received a letter from the U.S. Environmental Protection Agency (“EPA”)
requesting information about our involvement in a housing redevelopment project in Newark, New Jersey that a Company
entity undertook during the 1990s. We understand that the development is in the vicinity of a former lead smelter and that
tests on soil samples from properties within the development conducted by the EPA show elevated levels of lead. We also
understand that the smelter ceased operations many years before the Company entity involved acquired the properties in the
area and carried out the re-development project. We responded to the EPA’s request. In August 2013, we were notified that
the EPA considers us a potentially responsible party (or “PRP”) with respect to the site, that the EPA will clean up the site,
and that the EPA is proposing that we fund and/or contribute towards the cleanup of the contamination at the site. We began
preliminary discussions with the EPA concerning a possible resolution but do not know the scope or extent of the Company’s
obligations, if any, that may arise from the site and therefore cannot provide any assurance that this matter will not have a
material impact on the Company. The EPA requested additional information in April 2014 and again in March 2017 and the
Company has responded to its information requests.
We anticipate that increasingly stringent requirements will be imposed on developers and homebuilders in the future.
For example, for a number of years, the EPA and U.S. Army Corps of Engineers have been engaged in rulemakings to clarify
the scope of federally regulated wetlands, which included a June 2015 rule many affected businesses contend impermissibly
expanded the scope of such wetlands that was challenged in court, stayed, and remains in litigation, and a proposal in June
2017 to formally rescind the June 2015 rule and reinstate the rule scheme previously in place while the agencies initiate a
new substantive rulemaking on the issue. It is unclear how these and related developments, including at the state or local
level, ultimately may affect the scope of regulated wetlands where we operate. Although we cannot reliably predict the extent
of any effect these developments regarding wetlands, or any other requirements that may take effect may have on us, they
could result in time-consuming and expensive compliance programs and in substantial expenditures, which could cause
delays and increase our cost of operations. In addition, our ability to obtain or renew permits or approvals and the continued
effectiveness of permits already granted or approvals already obtained is dependent upon many factors, some of which are
beyond our control, such as changes in policies, rules, and regulations and their interpretations and application.
Several other homebuilders have received inquiries from regulatory agencies regarding the potential for
homebuilders using contractors to be deemed employers of the employees of their contractors under certain circumstances.
Contractors are independent of the homebuilders that contract with them under normal management practices and the terms
of trade contracts and subcontracts within the industry; however, if regulatory agencies reclassify the employees of
contractors as employees of homebuilders, homebuilders using contractors could be responsible for wage, hour and other
employment-related liabilities of their contractors.
Product liability litigation and warranty claims that arise in the ordinary course of business may be costly.
As discussed in Item 3 – “Legal Proceedings,” in the ordinary course of business we are involved in litigation from
time to time, including with home owners associations, home buyers and other persons with whom we have relationships. As
a homebuilder, we are subject to construction defect and home warranty claims, including moisture intrusion and related
claims, arising in the ordinary course of business. Such claims are common in the homebuilding industry and can be costly.
For example, in the past we have received construction defect and home warranty claims associated with, and we were
17
involved in a multidistrict litigation concerning, allegedly defective drywall manufactured in China (“Chinese Drywall”) that
may have been responsible for noxious smells and accelerated corrosion of certain metals in certain homes we have
constructed. We remediated certain homes in response to such claims and settled the litigation.
With regard to certain general liability exposures such as product liability claims, construction defect claims and
related claims, assessment of claims and the related liability and reserve estimation process is highly judgmental and subject
to a high degree of variability due to uncertainties such as trends in construction defect claims relative to our markets and the
types of products we build, claim settlement patterns, insurance industry practices and legal interpretations, among others.
Because of the high degree of judgment required in determining these estimated liability amounts, actual future costs could
differ significantly from our currently estimated amounts. Furthermore, after claims are asserted for construction defects, it
can be difficult to determine the extent to which assertions of such claims will expand geographically. For example, we are
party to litigation in New Jersey concerning alleged defects in construction (see Item 3 – “Legal Proceedings” and Note 18
to our Consolidated Financial Statements for the year ended October 31, 2017). In addition, the amount and scope of coverage
offered by insurance companies is currently limited, and this coverage may be further restricted and become more costly. If
we are not able to obtain adequate insurance against such claims, if the costs associated with such claims significantly exceed
the amount of our insurance coverage, or if our insurers do not pay on claims under our policies (whether because of dispute,
inability, or otherwise), we may experience losses that could hurt our financial results.
Our financial results could also be adversely affected if we were to experience an unusually high number of claims
or unusually severe claims. Our insurance companies have the right to review our claims and claims history, and do so from
time to time, and could decline to pay on such claims if such reviews determine the claims did not meet the terms for coverage.
For example, we had a dispute with XL, our insurance carrier for the fiscal year ended October 31, 2006 through the fiscal
year ended October 31, 2010, regarding coverage issues pertaining to the fiscal 2006 insurance policy. Specifically, XL
maintained that the Company had not satisfied its aggregate retention of $21 million for fiscal 2006 and therefore the
Company’s submitted claims in excess of the aggregate retention for fiscal 2006 were not reimbursable by XL under the
policy terms (XL disputed the Company’s interpretation of certain definitions within the policy and therefore was denying
coverage). The dispute was resolved as a result of mediation pursuant to which XL made a payment in October 2015 to the
Company to fully settle coverage for its 2006 and 2007 insurance policy years. The Company is therefore self-insured for
those policy years (policy years 2008 through 2010 remain in effect and to date, the Company has not met the aggregate
retention for any of these other policy years). Additionally, we may need to significantly increase our construction defect and
home warranty reserves as a result of insurance not being available for any of the reasons discussed above, such claims or
the results of our annual actuarial study.
Mortgage investors could seek to have us buy back loans or compensate them for losses incurred on mortgages we have sold
based on claims that we breached our limited representations or warranties.
Our financial services segment originates mortgages, primarily for our homebuilding customers. Substantially all of
the mortgage loans originated are sold within a short period of time in the secondary mortgage market on a servicing released,
nonrecourse basis, although we remain liable for certain limited representations, such as fraud, and warranties related to loan
sales. Accordingly, mortgage investors have in the past and could in the future seek to have us buy back loans or compensate
them for losses incurred on mortgages we have sold based on claims that we breached our limited representations or
warranties. We believe there continues to be an industry-wide issue with the number of purchaser claims in which purchasers
purport to have found inaccuracies related to sellers’ representations and warranties in particular loan sale agreements. We
have established reserves for potential losses. While we believe these reserves are adequate for known losses and projected
repurchase requests, given the volatility in the mortgage industry and the uncertainty regarding the ultimate resolution of
these claims, if either actual repurchases or the losses incurred resolving those repurchases exceed our expectations, additional
expense may be incurred. There can be no assurance that we will not have significant liabilities in respect of such claims in
the future, which could exceed our reserves, or that the impact of such claims on our results of operations will not be material.
Further, an increase in the default rate on the mortgages we originate may adversely affect our ability to sell mortgages or
the pricing we receive upon the sale of mortgages.
We compete on several levels with homebuilders that may have greater sales and financial resources, which could hurt future
earnings.
We compete not only for home buyers but also for desirable properties, financing, raw materials, and skilled labor
often within larger subdivisions designed, planned, and developed by other homebuilders. Our competitors include other
local, regional, and national homebuilders, some of which have greater sales and financial resources or more established
relationships with suppliers and subcontractors in the markets in which we operate. In addition, we compete with other
housing alternatives, such as existing homes and rental housing. In the homebuilding industry, we compete primarily on the
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basis of reputation, price, location, design, quality, service and amenities. Our financial services segment competes with other
mortgage bankers, primarily on the basis of fees, interest rates and other features of mortgage loan products.
The competitive conditions in the homebuilding industry together with current market conditions have, and could
continue to, result in:
●
●
●
●
●
difficulty in acquiring suitable land at acceptable prices;
increased selling incentives;
lower sales;
delays in construction; or
impairment of our ability to implement our strategies and operational actions.
Any of these problems could increase costs and/or lower profit margins.
Our future growth may include additional acquisitions of companies that may not be successfully integrated and may not
achieve expected benefits.
Acquisitions of companies have contributed to our historical growth and may again be a component of our growth
strategy in the future. In the future, we may acquire businesses, some of which may be significant. As a result of acquisitions
of companies, we may need to seek additional financing and integrate product lines, dispersed operations, and distinct
corporate cultures. These integration efforts may not succeed or may distract our management from operating our existing
business. Additionally, we may not be able to enhance our earnings as a result of acquisitions. Our failure to successfully
identify and manage future acquisitions could harm our operating results.
Our controlling stockholders are able to exercise significant influence over us.
Members of the Hovnanian family, including Ara K. Hovnanian, our chairman of the board, president, and chief
executive officer, have voting control, through personal holdings, the limited partnership and the limited liability company
established for members of Mr. Hovnanian’s family and family trusts of Class A and Class B common stock that enabled
them to cast approximately 57% of the votes that could be cast by the holders of our outstanding Class A and Class B common
stock combined as of October 31, 2017. Their combined stock ownership enables them to exert significant control over us,
including power to control the election of the Board of Directors and to approve matters presented to our stockholders. This
concentration of ownership may also make some transactions, including mergers or other changes in control, more difficult
or impossible without their support. Also, because of their combined voting power, circumstances may occur in which their
interests could be in conflict with the interests of other stakeholders.
Our net operating loss carryforwards could be substantially limited if we experience an ownership change as defined in the
Internal Revenue Code.
Based on past impairments and our current financial performance, we generated a federal net operating loss
carryforward of $1.6 billion through the fiscal year ended October 31, 2017, and we may generate net operating loss
carryforwards in future years.
Section 382 of the United States Internal Revenue Code of 1986, as amended (the “Code”) contains rules that limit
the ability of a company that undergoes an ownership change, which is generally any change in ownership of more than 50%
of its stock over a three year period, to utilize its net operating loss carryforwards and certain built-in losses recognized in
years after the ownership change. These rules generally operate by focusing on ownership shifts among stockholders owning
directly or indirectly 5% or more of the stock of a company and any change in ownership arising from a new issuance of
stock by the company.
If we undergo an ownership change for purposes of Section 382 as a result of future transactions involving our stock,
including purchases or sales of stock between 5% shareholders, our ability to use our net operating loss carryforwards and to
recognize certain built-in losses would be subject to the limitations of Section 382. Depending on the resulting limitation, a
significant portion of our net operating loss carryforwards could expire before we would be able to use them. A limitation
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imposed under Section 382 on our ability to utilize our net operating loss carryforwards could have a negative impact on our
financial position and results of operations.
In August 2008, we announced that the Board of Directors adopted a shareholder rights plan (the “Rights Plan”)
designed to preserve shareholder value and the value of certain tax assets primarily associated with net operating loss
carryforwards and built-in losses under Section 382 of the Code, and on December 5, 2008, our stockholders approved the
Board’s decision to adopt the Rights Plan. The Rights Plan is intended to act as a deterrent to any person or group acquiring
4.9% or more of our outstanding Class A common stock (any such person an “Acquiring Person”), without the approval of
the Company’s Board of Directors. Subject to the terms, provisions and conditions of the Rights Plan, if and when they
become exercisable, each right would entitle its holder to purchase from the Company one ten-thousandth of a share of the
Company’s Series B Junior Preferred Stock for a purchase price of $35.00 per share (the “purchase price”). The rights will
not be exercisable until the earlier of (i) 10 business days after a public announcement by us that a person or group has
become an Acquiring Person and (ii) 10 business days after the commencement of a tender or exchange offer by a person or
group for 4.9% of the Class A common stock (the “distribution date”). If issued, each fractional share of Series B Junior
Preferred Stock would give the stockholder approximately the same dividend, voting and liquidation rights as does one share
of the Company’s Class A common stock. However, prior to exercise, a right does not give its holder any rights as a
stockholder of the Company, including without limitation any dividend, voting or liquidation rights. After the distribution
date, each holder of a right, other than rights beneficially owned by the Acquiring Person (which will thereupon become
void), will thereafter have the right to receive upon exercise of a right and payment of the purchase price, that number of
shares of Class A common stock or Class B common stock, as the case may be, having a market value of two times the
purchase price. After the distribution date, our Board of Directors may exchange the rights (other than rights owned by an
Acquiring Person which will have become void), in whole or in part, at an exchange ratio of one share of common stock, or
a fractional share of Series B Junior Preferred Stock (or of a share of a similar class or series of Hovnanian’s preferred stock
having similar rights, preferences and privileges) of equivalent value, per right (subject to adjustment).
In addition, on December 5, 2008, our stockholders approved an amendment to our Certificate of Incorporation to
restrict certain transfers of our common stock in order to preserve the tax treatment of our net operating loss carryforwards
and built-in losses under Section 382 of the Code. Subject to certain exceptions pertaining to pre-existing 5% stockholders
and Class B stockholders, the transfer restrictions in the amended Certificate of Incorporation generally restrict any direct or
indirect transfer (such as transfers of the Company’s stock that result from the transfer of interests in other entities that own
the Company’s stock) if the effect would be to: (i) increase the direct or indirect ownership of the Company’s stock by any
person (or public group) from less than 5% to 5% or more of the Company’s stock; (ii) increase the percentage of the
Company’s stock owned directly or indirectly by a person (or public group) owning or deemed to own 5% or more of the
Company’s stock; or (iii) create a new “public group” (as defined in the applicable United States Treasury regulations).
Utility shortages and outages or rate fluctuations could have an adverse effect on our operations.
In prior years, the areas in which we operate in California have experienced power shortages, including periods
without electrical power, as well as significant fluctuations in utility costs. We may incur additional costs and may not be
able to complete construction on a timely basis if such power shortages and outages and utility rate fluctuations continue.
Furthermore, power shortages and outages and rate fluctuations may adversely affect the regional economies in which we
operate, which may reduce demand for our homes. Our operations may be adversely affected if further rate fluctuations and/or
power shortages and outages occur in California, the Northeast or in our other markets.
Geopolitical risks and market disruption could adversely affect our operating results and financial condition.
Geopolitical events, acts of war or terrorism, civil unrest, or any outbreak or escalation of hostilities throughout the
world or health pandemics, may have a substantial impact on the economy, consumer confidence, the housing market, our
associates and our customers. Further, perceived threats to national security and other actual or potential conflicts or wars
and related geopolitical risks have created many economic and political uncertainties. If any such events were to occur, it
could have a material adverse impact on our results of operations and financial condition.
We could be adversely impacted by the loss of key management personnel or if we fail to attract qualified personnel.
To a significant degree, our future success depends on the efforts of our senior management, many of whom have
been with the Company for a significant number of years, and our ability to attract qualified personnel. Our operations could
be adversely affected if key members of our senior management leave the Company or if we cannot attract qualified personnel
to manage growth in our business.
20
Information technology failures and data security breaches could harm our business.
We use information technology, digital telecommunications and other computer resources to carry out important
operational activities and to maintain our business records. Our computer systems, including our backup systems, are subject
to damage or interruption from computer and telecommunications failures, computer viruses, power outages, security
breaches (including through data-theft and cyber-attack), usage errors by our associates and catastrophic events, such as fires,
floods, hurricanes and tornadoes. If our computer systems and our backup systems are breached, compromised, damaged, or
otherwise cease to function properly, we could suffer interruptions in our operations or unintentionally allow
misappropriation of proprietary or confidential information, including information about our business partners and home
buyers, which could require us to incur significant costs to remediate or otherwise resolve these issues and could damage our
reputation.
ITEM 1B
UNRESOLVED STAFF COMMENTS
None.
ITEM 2
PROPERTIES
At October 31, 2017, we owned a 69,000 square-foot office complex located in the Northeast that has served as our
corporate headquarters, which was sold on November 1, 2017. We plan on renting approximately 57,000 square feet of office
space in the Northeast beginning in January 2018 for our corporate headquarters. We own 215,000 square feet of office and
warehouse space throughout the Midwest. We lease approximately 433,000 square feet of space for our segments located in
the Northeast, Mid-Atlantic, Midwest, Southeast, Southwest and West. Included in this amount is 6,800 square feet of
abandoned lease space.
ITEM 3
LEGAL PROCEEDINGS
We are involved in litigation arising in the ordinary course of business, none of which is expected to have a material
adverse effect on our financial position, results of operations or cash flows, and we are subject to extensive and complex laws
and regulations that affect the development of land and home building, sales and customer financing processes, including
zoning, density, building standards and mortgage financing. These laws and regulations often provide broad discretion to the
administering governmental authorities. This can delay or increase the cost of development or homebuilding.
We also are subject to a variety of local, state, federal and foreign laws and regulations concerning protection of
health and the environment, including those regulating the emission or discharge of materials into the environment, the
management of storm water runoff at construction sites, the handling, use, storage and disposal of hazardous substances,
impacts to wetlands and other sensitive environments, and the remediation of contamination at properties that we have owned
or developed or currently own or are developing (“environmental laws”). The particular environmental laws that apply to a
site may vary greatly according to the community site, for example, due to the community, the environmental conditions at
or near the site, and the present and former uses of the site. These environmental laws may result in delays, may cause us to
incur substantial compliance, remediation and/or other costs, and can prohibit or severely restrict development and
homebuilding activity. In addition, noncompliance with these laws and regulations could result in fines and penalties,
obligations to remediate, permit revocations or other sanctions; and contamination or other environmental conditions at or in
the vicinity of our developments may result in claims against us for personal injury, property damage or other losses.
We anticipate that increasingly stringent requirements will be imposed on developers and homebuilders in the future.
For example, for a number of years, the EPA and U.S. Army Corps of Engineers have been engaged in rulemakings to clarify
the scope of federally regulated wetlands, which included a June 2015 rule many affected businesses contend impermissibly
expanded the scope of such wetlands that was challenged in court, stayed, and remains in litigation, and a proposal in June
2017 to formally rescind the June 2015 rule and reinstate the rule scheme previously in place while the agencies initiate a
new substantive rulemaking on the issue. It is unclear how these and related developments, including at the state or local
level, ultimately may affect the scope of regulated wetlands where we operate. Although we cannot reliably predict the extent
of any effect these developments regarding wetlands, or any other requirements that may take effect may have on us, they
could result in time-consuming and expensive compliance programs and in substantial expenditures, which could cause
delays and increase our cost of operations. In addition, our ability to obtain or renew permits or approvals and the continued
21
effectiveness of permits already granted or approvals already obtained is dependent upon many factors, some of which are
beyond our control, such as changes in policies, rules and regulations and their interpretations and application.
In March 2013, we received a letter from the Environmental Protection Agency (“EPA”) requesting information
about our involvement in a housing redevelopment project in Newark, New Jersey that a Company entity undertook during
the 1990s. We understand that the development is in the vicinity of a former lead smelter and that 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 ceased operations many years before the Company entity involved acquired the properties in the area and carried out
the re-development project. We responded to the EPA’s request. In August 2013, we were notified that the EPA considers us
a potentially responsible party (or “PRP”) with respect to the site, that the EPA will clean up the site, and that the EPA is
proposing that we fund and/or contribute towards the cleanup of the contamination at the site. We began preliminary
discussions with the EPA concerning a possible resolution but do not know the scope or extent of the Company’s obligations,
if any, that may arise from the site and therefore cannot provide any assurance that this matter will not have a material impact
on the Company. The EPA requested additional information in April 2014 and again in March 2017 and the Company has
responded to its information requests.
The Grandview at Riverwalk Port Imperial Condominium Association, Inc. (“Grandview Plaintiff”) filed a
construction defect lawsuit against Hovnanian Enterprises, Inc. and several of its affiliates, including K. Hovnanian at Port
Imperial Urban Renewal II, LLC, K. Hovnanian Construction Management, Inc., K. Hovnanian Companies, LLC, K.
Hovnanian Enterprises, Inc., K. Hovnanian North East, Inc. aka and/or dba K. Hovnanian Companies North East, Inc., K.
Hovnanian Construction II, Inc., K. Hovnanian Cooperative, Inc., K. Hovnanian Developments of New Jersey, Inc., and K.
Hovnanian Holdings NJ, LLC, as well as the project architect, the geotechnical engineers and various construction contractors
for the project alleging various construction defects, design defects and geotechnical issues totaling approximately $41.3
million. The lawsuit included claims against the geotechnical engineers for differential soil settlement under the building,
against the architects for failing to design the correct type of structure allowable under the New Jersey Building Code, and
against the Hovnanian-affiliated developer entity (K. Hovnanian at Port Imperial Urban Renewal II, LLC ) alleging that it:
(1) had knowledge of and failed to disclose the improper building classification to unit purchasers and was therefore liable
for treble damages under the New Jersey Consumer Fraud Act; and (2) breached an express warranty set forth in the Public
Offering Statements that the common elements at the building were fit for their intended purpose. The Grandview Plaintiff
further alleged that Hovnanian Enterprises, Inc., K. Hovnanian Holdings NJ, LLC, K. Hovnanian Developments of New
Jersey, Inc., and K. Hovnanian Developments of New Jersey II, Inc. were jointly liable for any damages owed by the
Hovnanian development entity under a veil piercing theory.
The parties reached a settlement on the construction defect issues prior to trial, but attempts to settle the subsidence,
building classification issue and Consumer Fraud Act claims were unsuccessful. The trial commenced on April 17, 2017 in
Hudson County, New Jersey. In the third week of the trial, all of the Hovnanian defendants resolved the geotechnical claims
for an amount immaterial to the Company, but the balance of the case continued to be tried before the jury. On June 1, 2017,
the jury rendered a verdict against K. Hovnanian at Port Imperial Urban Renewal II, LLC on the breach of warranty and New
Jersey Consumer Fraud claims in the total amount of $3 million, which resulted in a total verdict of $9 million against that
entity due to statutory trebling, plus a to-be-determined portion of Grandview Plaintiff’s counsel fees, per the statute. The
jury also found in favor of Grandview Plaintiff on its veil piercing theory. Certain Hovnanian-affiliated defendants filed post-
trial motions on three issues: (1) a motion for a judgment notwithstanding the verdict or a new trial; (2) a motion addressing
whether any of the Hovnanian-affiliated entities could be jointly liable under a veil piercing theory for the damages awarded
against K. Hovnanian at Port Imperial Urban Renewal II, LLC; and (3) a motion for contractual indemnification against the
project architect. On October 27, 2017, the Court addressed a number of post-trial motions. The Court denied the motion for
a judgment notwithstanding the verdict or a new trial, and held that Hovnanian Enterprises, Inc. and its affiliate, K. Hovnanian
Developments of New Jersey, Inc., are jointly liable for the damages awarded against K. Hovnanian at Port Imperial Urban
Renewal II, LLC. On November 18, 2017, the Court awarded approximately $1.8 million in attorney fees and costs to
Grandview Plaintiff out of the approximately $4.8 million it had sought. Certain Hovnanian-affiliated defendants filed a
motion for reconsideration of the Court’s decision on attorney fees and costs, which remains pending.
Once a final judgment is entered, the relevant Hovnanian-affiliated defendants intend to appeal all aspects of the
verdict against them. With respect to this case, depending on the outcome of all appeals, the range of loss is between $0 and
$10.8 million, inclusive of attorneys’ fees and costs. Management believes that a loss is probable and reasonably estimable
and that the Company has reserved for its estimated probable loss amount in its construction defect reserves. However, our
assessment of the probable loss may differ from the ultimate resolution of this matter.
22
In 2014, the condominium association of the Grandview II at Riverwalk Port Imperial condominium building (the
“Grandview II Plaintiff”) filed a lawsuit in the Superior Court of New Jersey, Law Division, Hudson County (the “Court”)
alleging various construction defects, design defects, and geotechnical issues relating to the building along with a claim for
piercing the corporate veil as to certain defendants. The operative complaint (“Complaint”) brought claims against Hovnanian
Enterprises, Inc. and several of its affiliates, including K. Hovnanian at Port Imperial Urban Renewal III, LLC, PI Investments
I, LLC, K. Hovnanian Investments, LLC, K. Hovnanian Homes (not a legal entity but named as a defendant), K. Hovnanian
Shore Acquisitions, LLC, K. Hovnanian Construction Management, Inc., K. Hovnanian Companies, LLC, K. Hovnanian
Northeast, Inc., K. Hovnanian Enterprises, Inc., K. Hovnanian Construction III, Inc. and K. Hovnanian Cooperative, Inc. The
Complaint also brought claims against various other design professionals and contractors. Grandview II Plaintiff asserted
damages of approximately $69 million to $79 million, which amount was potentially subject to treble damages. On December
7, 2017, the Court issued orders adjudicating various parties’ motions for summary judgment. The Court issued an order that
granted Grandview II Plaintiff’s motion for partial summary judgment on the claim seeking to pierce the corporate veil of K.
Hovnanian at Port Imperial Urban Renewal III, LLC and ordered that Hovnanian Enterprises, Inc. shall be jointly and
severally liable for any damages awarded against K. Hovnanian at Port Imperial Urban Renewal III, LLC, including any
treble damages and attorney’s fees and costs. The Court also issued an order dismissing Grandview II Plaintiff’s claims for
negligence and breach of implied warranties against certain Hovnanian-affiliated defendants. As of December 14, 2017, the
Hovnanian-affiliated defendants reached a settlement with Grandview II Plaintiff that resolved all claims in the case involving
the Hovnanian-affiliated defendants. As of October 31, 2017, the Company had fully reserved for this settlement amount. On
December 15, 2017, the Court issued an order dismissing the action.
On December 21, 2016, the members of the Company’s Board were named as defendants in a derivative and class
action lawsuit filed in the Delaware Court of Chancery by Plaintiff Joseph Hong ("Plaintiff Hong"). Plaintiff Hong had
previously made a demand for inspection of the books and records of the Company pursuant to Delaware law. The Company
had provided certain company documents in response to Plaintiff Hong’s demand. The complaint relates to the Board of
Directors’ decisions to grant Ara K. Hovnanian equity awards in the form of Class B Common Stock, alleging that the
defendants breached their fiduciary duties to the Company and its stockholders; that the equity awards granted in Class B
Common Stock amounted to corporate waste; and that Ara. K Hovnanian was unjustly enriched by equity awards granted to
him in Class B Common Stock. The complaint seeks a declaration that the equity awards granted to Ara K. Hovnanian in
Class B Common Stock between June 13, 2014 and June 10, 2016 were ultra vires, invalidation or rescission of those awards,
injunctive relief, and unspecified damages.
On December 18, 2017, the parties finalized a settlement agreement to resolve the litigation. Pursuant to the
settlement agreement, which remains subject to approval by the Chancery Court, the Company will submit for stockholder
approval at the next Annual Meeting of Stockholders a resolution to amend the Company’s Certificate of Incorporation to
affirm that in the event of a merger, consolidation, acquisition, tender offer, recapitalization, reorganization or other business
combination, the same consideration will be provided for shares of Class A Common Stock and Class B Common Stock
unless different treatment of the shares of each such class is approved separately by a majority of each class. The Company
has also agreed to implement certain operational and corporate governance measures regarding the granting of equity awards
in Class B Common Stock and, further, that it will not oppose an application by Plaintiff Hong for attorney’s fees up to
$275,000, the amount of which is subject to approval by the Court.
ITEM 4
MINE SAFETY DISCLOSURES
Not applicable
EXECUTIVE OFFICERS OF THE REGISTRANT
Information on executive officers of the registrant is incorporated herein from Part III, Item 10.
23
Part II
ITEM 5
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND ISSUER
PURCHASES OF EQUITY SECURITIES
Our Class A Common Stock is traded on the New York Stock Exchange under the symbol “HOV” and was held
by 457 stockholders of record at December 15, 2017. There is no established public trading market for our Class B Common
Stock, which was held by 230 stockholders of record at December 15, 2017. If a shareholder desires to sell shares of Class B
Common Stock (other than to Permitted Transferees (as defined in the Company’s amended Certificate of Incorporation)),
such stock must be converted into shares of Class A Common Stock at a one to one conversion rate. The high and low closing
sales prices for our Class A Common Stock were as follows for each fiscal quarter during the years ended October 31, 2017
and 2016:
Quarter
First
Second
Third
Fourth
October 31, 2017
Low
October 31, 2016
Low
High
High
$
$
$
$
2.89 $
2.48 $
2.96 $
2.42 $
1.54 $
2.16 $
2.20 $
1.72 $
2.05 $
1.79 $
1.93 $
1.98 $
1.36
1.30
1.54
1.55
Certain debt instruments to which we are a party contain restrictions on the payment of cash dividends. As a result
of the most restrictive of these provisions, we are not currently able to pay any cash dividends. We have never paid a cash
dividend to common stockholders.
For information regarding the equity securities that are authorized for issuance under our equity compensation plans,
see Part III. Item 12. “Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters”
– Equity Compensation Plan Information.
Recent Sales of Unregistered Equity Securities
None.
Issuer Purchases of Equity Securities
No shares of our Class A Common Stock or Class B Common Stock were purchased by or on behalf of the Company
or any affiliated purchaser during the fiscal fourth quarter of 2017. The maximum number of shares that may yet be purchased
under the Company’s repurchase plans or programs is 0.5 million.
24
ITEM 6
SELECTED FINANCIAL DATA
The following table sets forth our selected consolidated financial data and should be read in conjunction with Item
7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our Consolidated Financial
Statements and Notes thereto included elsewhere in this Annual Report on Form 10-K.
Year Ended
Summary of Consolidated Statements of
Operations Data
(In thousands, except per share data)
Revenues
Expenses excluding inventory impairment loss
October 31,
October 31,
2013
$ 2,451,665 $ 2,752,247 $ 2,148,480 $ 2,063,380 $ 1,851,253
October 31,
October 31,
October 31,
2015
2014
2016
2017
and land option write-offs
2,437,195
2,708,912
2,162,370
2,044,718
1,835,633
Inventory impairment loss and land option write-
offs
Total expenses
Loss on extinguishment of debt
(Loss) income from unconsolidated joint ventures
(Loss) income before income taxes
State and federal income tax provision (benefit)
Net (loss) income
Per share data:
Basic:
17,813
2,455,008
(34,854)
(7,047)
(45,244)
286,949
(332,193) $
33,353
2,742,265
(3,200)
(4,346)
2,436
5,255
(2,819) $
12,044
2,174,414
-
4,169
(21,765)
(5,665)
(16,100) $
5,224
2,049,942
(1,155)
7,897
20,180
(286,964)
307,144 $
4,965
1,840,598
(760)
12,040
21,935
(9,360)
31,295
$
(Loss) income per common share
$
(2.25) $
(0.02) $
(0.11) $
2.05 $
0.22
Weighted-average number of common shares
outstanding
Assuming dilution:
147,703
147,451
146,899
146,271
145,087
(Loss) income per common share
$
(2.25) $
(0.02) $
(0.11) $
1.87 $
0.22
Weighted-average number of common shares
outstanding
147,703
147,451
146,899
162,441
162,329
Summary of Consolidated Balance Sheet Data
(In thousands)
Total assets(1)
Mortgages, lines of credit and revolving credit
October 31,
October 31,
2013
$ 1,900,898 $ 2,354,956 $ 2,577,398 $ 2,264,433 $ 1,737,373
October 31,
October 31,
October 31,
2016
2014
2015
2017
agreement(1)
$
244,088 $
294,015 $
310,672 $
193,104 $
168,816
Senior secured term loan, senior secured notes,
senior notes, senior amortizing notes, senior
exchangeable notes and tangible equity unit
(“TEU”) senior subordinated amortizing notes
(net of discount)
Total equity deficit
$ 1,585,837 $ 1,573,333 $ 1,827,924 $ 1,636,402 $ 1,511,171
(432,799)
$
(128,510) $
(460,371) $
(117,799) $
(128,084) $
(1) In connection with our adoption of Accounting Standards Update 2015-03 in November 2016, certain prior year
amounts for unamortized debt issuance costs were reclassified between the lines “Total assets” and “Mortgages,
lines of credit and revolving credit agreement” and “Senior secured term loans, senior secured notes, senior notes,
senior amortizing notes, senior exchangeable notes and tangible equity unit (“TEU”) senior subordinated amortizing
note (net of discount”. See Note 1 to the Consolidated Financial Statements for additional information.
25
ITEM 7
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Overview
During fiscal 2016, we had approximately $260 million of bonds mature, which we were unable to refinance because
financing was unavailable in the capital markets to companies with comparable credit ratings to ours. As a result, we shifted
our focus from growth to gaining operating efficiencies and improving our bottom line, and in order to preserve and increase
cash to fund our maturing debt, we decided to temporarily reduce the amount of cash we were spending on future land
acquisitions and to exit from four underperforming markets during fiscal 2016. In addition, we increased our use of
land banking and joint ventures in order to enhance our liquidity position. The net effect of these liquidity enhancing efforts
was to temporarily reduce our ability to invest as aggressively in new land parcels as previously planned. This resulted in a
reduction in our community count in fiscal 2016 and 2017, along with a decrease in net contracts during these periods, as
compared to the prior year periods. However, in the fourth quarter of fiscal 2016, we were able to refinance certain of our
debt maturities and had homebuilding cash of $339.8 million as of October 31, 2016. In addition, in July 2017, we
successfully refinanced and extended the maturities of certain of our senior secured notes which were scheduled to mature in
October 2018 and October and November 2020, with $440.0 million of new senior secured notes maturing in July 2022 and
$400.0 million of new senior secured notes maturing in July 2024. While these transactions extended the maturities of a
significant amount of debt giving us the ability to more fully invest in new communities again, they also resulted in a $42.3
million loss on early extinguishment of debt. When added to prior period results, this created a three-year cumulative loss,
which led us to reconsider the realizability of our deferred tax assets in accordance with GAAP and record a $294.1 million
non-cash increase in the valuation allowance for our deferred tax assets. See Note 11 to our Consolidated Financial
Statements.
Our cash position in fiscal 2017 has allowed us to spend $555.0 million on land purchases and land development
during fiscal 2017 and still have $463.7 million of homebuilding cash and cash equivalents as of October 31, 2017. This cash
and the July 2017 refinancing transaction, by extending our debt maturities, will enable us to allocate additional cash to
further grow our business. We continue to see opportunities to purchase land at prices that make economic sense in light of
our current sales prices and sales pace and plan to continue actively pursuing such land acquisitions. New land purchases at
pricing that we believe will generate appropriate investment returns and drive greater operating efficiencies are needed to
return to sustained profitability.
The above factors during fiscal 2016 led to a reduction in our land position and a 22.2% decline in our community
count for fiscal 2017 as compared to fiscal 2016 and as a result, during fiscal 2017, we experienced mixed operating results
compared to the prior year. Net contracts per average active selling community increased 12.1% to 35.1 for the year ended
October 31, 2017 compared to 31.3 in the same period in the prior year. This improvement in net contracts per average active
selling community demonstrates an increase in sales absorption, which allows us to be more efficient by permitting us to
deliver more homes per community without any increase in fixed overheads in those communities. Active selling
communities decreased from 167 at October 31, 2016 to 130 at October 31, 2017, and net contracts decreased 14.9% for the
year ended October 31, 2017, compared to the same period of the prior year. For the year ended October 31, 2017, sale of
homes revenues decreased 10.0% as compared to the same period of the prior year, as a result of the decreased community
count. Gross margin percentage increased from 12.2% for the year ended October 31, 2016 to 13.2% for the year ended
October 31, 2017. Gross margin percentage, before cost of sales interest expense and land charges, increased slightly from
16.9% for the year ended October 31, 2016 to 17.2% for the year ended October 31, 2017. The improvements in both gross
margin percentage and gross margin percentage, before cost of sales interest expense and land charges, are primarily the
result of the mix of communities delivering homes and the reduction of our warranty reserves, rather than significant changes
in prices or costs. Additionally, gross margin percentage improved due to a decrease in land charges for the year ended
October 31, 2017 compared to the prior year because of the impairments recorded in fiscal 2016, which related to the sale of
our land portfolio in Minneapolis, Minnesota. Selling, general and administrative costs (including corporate general and
administrative expenses) increased $2.6 million for the year ended October 31, 2017 as compared to the prior year. As a
percentage of total revenue such costs increased from 9.2% for the year ended October 31, 2016, to 10.4% for the year ended
October 31, 2017 due to the decrease in sale of homes revenues resulting from our decreased community count, as discussed
above. The increase in selling, general and administrative costs (including corporate general and administrative expenses) is
primarily due to a $12.5 million adjustment recorded during the fourth quarter of fiscal 2017 to our construction defect
reserves related to litigation. Excluding this adjustment, selling, general and administrative costs (including corporate general
and administrative expenses) decreased $9.9 million for the year ended October 31, 2017 as compared to the prior year.
26
When comparing sequentially from the third quarter of fiscal 2017 to the fourth quarter of fiscal 2017, our gross
margin percentage increased from 12.8% to 13.7% and our gross margin percentage, before cost of sales interest expense and
land charges, increased from 16.8% to 18.2%. Gross margin percentage increased primarily as a result of product mix and
the reduction of our warranty reserves, along with price increases in certain communities primarily in the West. Selling,
general and administrative costs (including corporate general and administrative expenses) as a percentage of total revenues
decreased slightly from 10.3% to 10.1%, as compared to the third quarter of fiscal 2017, and decreased to 8.4% excluding
the adjustment to our construction defect reserves discussed above. Selling, general and administrative costs include some
fixed costs that are not impacted by delivery volume. Therefore, as revenues increased from the third quarter of fiscal 2017
to the fourth quarter of fiscal 2017, consistent with our normal seasonality trends, selling, general and administrative costs as
a percentage of total revenues decreased. Improving the efficiency of our selling, general and administrative expenses will
continue to be a significant area of focus.
We had 1,983 homes in backlog with a dollar value of $808.0 million at October 31, 2017 (a decrease of 24.4% in
dollar value compared to the prior year). As discussed above, we have invested $555.0 million in land purchases and land
development during fiscal 2017, which along with continued land acquisitions is expected to eventually result in community
count growth. However, there is typically a significant time lag from when we first control lots until the time that we open a
community for sale. This timeline can vary significantly from a few months (in a market such as Houston) to three to five
years (in a market such as New Jersey). Given the mix of land that we currently control and the land investment we currently
anticipate, we are not expecting community count growth until the second half of fiscal 2018. Once our community count
grows, absent adverse market factors, we expect delivery and revenue growth will follow.
Our fourth quarter results in fiscal 2017 were impacted by Hurricane Harvey. Fortunately, less than ten homes
within two of our 45 Houston communities experienced flood damage. The storm damage and construction delays caused by
Hurricane Harvey reduced our fourth quarter deliveries and may impact fiscal 2018 results. In spite of this temporary impact,
the long-term prospect for the Houston market remains strong. The fourth quarter of fiscal 2017 results were also negatively
impacted by an issue related to I-joist’s coated with a certain type of fire resistance product that were manufactured by
Weyerhaeuser Company. The Company identified a total of 63 homes located in our Delaware and New Jersey markets that
were affected. Of these 63 impacted homes, 30 were scheduled to close in fiscal 2017 and did not as a result of this issue.
Weyerhaeuser has accepted responsibility and is presently remediating all affected homes and we will not incur any material
costs, expenses or charges as a result. We experienced a combination of delayed closings and cancellations with respect to
these units which had a negative impact on net orders, closings and revenue in the fourth quarter of fiscal 2017. Subsequent
to our fiscal year-end, there have been significant wildfires throughout Southern California. While none of our communities
have been directly affected, we could experience labor shortages, construction delays or utility company delays, which in
turn could impact our fiscal 2018 results.
Critical Accounting Policies
Management believes that the following critical accounting policies require its most significant judgments and
estimates used in the preparation of the consolidated financial statements:
Income Recognition from Mortgage Loans - Our Financial Services segment originates mortgages, primarily for our
homebuilding customers. We use mandatory investor commitments and forward sales of mortgage backed securities (“MBS”)
to hedge our mortgage-related interest rate exposure on agency and government loans.
We elected the fair value option for our mortgage loans held for sale in accordance with Accounting Standards
Codification (“ASC”) 825, “Financial Instruments,” which permits us to measure our loans held for sale at fair value.
Management believes that the election of the fair value option for loans held for sale improves financial reporting by
mitigating volatility in reported earnings caused by measuring the fair value of the loans and the derivative instruments used
to economically hedge them without having to apply complex hedge accounting provisions.
Substantially all of the mortgage loans originated are sold within a short period of time in the secondary mortgage
market on a servicing released, nonrecourse basis, although the Company remains liable for certain limited representations,
such as fraud, and warranties related to loan sales. Mortgage investors could seek to have us buy back loans or compensate
them for losses incurred on mortgages we have sold based on claims that we breached our limited representations and
warranties. We believe there continues to be an industry-wide issue with the number of purchaser claims in which purchasers
purport to have found inaccuracies related to the sellers’ representations and warranties in particular loan sale agreements. We
have established reserves for probable losses. While we believe these reserves are adequate for known losses and projected
repurchase requests, given the volatility in the mortgage industry and the uncertainty regarding the ultimate resolution of
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these claims, if either actual repurchases or the losses incurred resolving those repurchases exceed our expectations, additional
expense may be incurred.
Inventories - Inventories consist of land, land development, home construction costs, capitalized interest,
construction overhead and property taxes. Construction costs are accumulated during the period of construction and charged
to cost of sales under specific identification methods. Land, land development and common facility costs are allocated based
on buildable acres to product types within each community, then charged to cost of sales equally based upon the number of
homes to be constructed in each product type.
We record inventories in our consolidated balance sheets at cost unless the inventory is determined to be impaired,
in which case the inventory is written down to its fair value. Our inventories consist of the following three components:
(1) sold and unsold homes and lots under development, which includes all construction, land, capitalized interest and land
development costs related to started homes and land under development in our active communities; (2) land and land options
held for future development or sale, which includes all costs related to land in our communities in planning or mothballed
communities; and (3) consolidated inventory not owned, which includes all costs related to specific performance options,
variable interest entities and other options, which consists primarily of model homes financed with an investor and inventory
related to land banking arrangements accounted for as financings.
We decide to mothball (or stop development on) certain communities when we determine that the current
performance does not justify further investment at the time. When we decide to mothball a community, the inventory is
reclassified on our Consolidated Balance Sheets from “Sold and unsold homes and lots under development” to “Land and
land options held for future development or sale.” As of October 31, 2017, the net book value associated with our 22
mothballed communities was $36.7 million, net of impairment charges recorded in prior periods of $214.1 million. We
regularly review communities to determine if mothballing is appropriate. During fiscal 2017, we did not mothball any
communities, but we sold five previously mothballed communities and re-activated two previously mothballed communities.
From time to time we enter into option agreements that include specific performance requirements, whereby we are
required to purchase a minimum number of lots. Because of our obligation to purchase these lots, for accounting purposes in
accordance with ASC 360-20-40-38, we are required to record this inventory on our Consolidated Balance Sheets. As of
October 31, 2017, we had no specific performance options recorded on our Consolidated Balance Sheets. Consolidated
inventory not owned also consists of other options that were included on our Consolidated Balance Sheets in accordance with
accounting principles generally accepted in the United States of America (“US GAAP”).
We sell and lease back certain of our model homes with the right to participate in the potential profit when each
home is sold to a third party at the end of the respective lease. As a result of our continued involvement, for accounting
purposes in accordance with ASC 360-20-40-38, these sale and leaseback transactions are considered a financing rather than
a sale. Therefore, for purposes of our Consolidated Balance Sheets, at October 31, 2017, inventory of $58.5 million was
recorded to “Consolidated inventory not owned,” with a corresponding amount of $51.8 million recorded to “Liabilities from
inventory not owned.”
We have land banking arrangements, whereby we sell our land parcels to the land banker and they provide us an
option to purchase back finished lots on a quarterly basis. Because of our options to repurchase these parcels, for accounting
purposes, in accordance with ASC 360-20-40-38, these transactions are considered financings rather than sales. For purposes
of our Consolidated Balance Sheets, at October 31, 2017, inventory of $66.3 million was recorded as “Consolidated inventory
not owned,” with a corresponding amount of $39.3 million recorded to “Liabilities from inventory not owned” for the amount
of net cash received from the transactions.
The recoverability of inventories and other long-lived assets is assessed in accordance with the provisions of ASC
360-10, “Property, Plant and Equipment − Overall” (“ASC 360-10”). ASC 360-10 requires long-lived assets, including
inventories, held for development to be evaluated for impairment based on undiscounted future cash flows of the assets at
the lowest level for which there are identifiable cash flows. As such, we evaluate inventories for impairment at the individual
community level, the lowest level of discrete cash flows that we measure.
We evaluate inventories of communities under development and held for future development for impairment when
indicators of potential impairment are present. Indicators of impairment include, but are not limited to, decreases in local
housing market values, decreases in gross margins or sales absorption rates, decreases in net sales prices (base sales price net
of sales incentives), or actual or projected operating or cash flow losses. The assessment of communities for indication of
impairment is performed quarterly. As part of this process, we prepare detailed budgets for all of our communities at least
semi-annually and identify those communities with a projected operating loss. For those communities with projected losses,
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we estimate the remaining undiscounted future cash flows and compare those to the carrying value of the community, to
determine if the carrying value of the asset is recoverable.
The projected operating profits, losses, or cash flows of each community can be significantly impacted by our
estimates of the following:
●
●
●
●
future base selling prices;
future home sales incentives;
future home construction and land development costs; and
future sales absorption pace and cancellation rates.
These estimates are dependent upon specific market conditions for each community. While we consider available
information to determine what we believe to be our best estimates as of the end of a quarterly reporting period, these estimates
are subject to change in future reporting periods as facts and circumstances change. Local market-specific conditions that
may impact our estimates for a community include:
●
●
●
●
●
●
●
the intensity of competition within a market, including available home sales prices and home sales
incentives offered by our competitors;
the current sales absorption pace for both our communities and competitor communities;
community specific attributes, such as location, availability of lots in the market, desirability and uniqueness
of our community, and the size and style of homes currently being offered;
potential for alternative product offerings to respond to local market conditions;
changes by management in the sales strategy of the community;
current local market economic and demographic conditions and related trends of forecasts; and
existing home inventory supplies, including foreclosures and short sales.
These and other local market-specific conditions that may be present are considered by management in preparing
projection assumptions for each community. The sales objectives can differ between our communities, even within a given
market. For example, facts and circumstances in a given community may lead us to price our homes with the objective of
yielding a higher sales absorption pace, while facts and circumstances in another community may lead us to price our homes
to minimize deterioration in our gross margins, although it may result in a slower sales absorption pace. In addition, the key
assumptions included in our estimate of future undiscounted cash flows may be interrelated. For example, a decrease in
estimated base sales price or an increase in homes sales incentives may result in a corresponding increase in sales absorption
pace. Additionally, a decrease in the average sales price of homes to be sold and closed in future reporting periods for one
community that has not been generating what management believes to be an adequate sales absorption pace may impact the
estimated cash flow assumptions of a nearby community. Changes in our key assumptions, including estimated construction
and development costs, absorption pace and selling strategies, could materially impact future cash flow and fair-value
estimates. Due to the number of possible scenarios that would result from various changes in these factors, we do not believe
it is possible to develop a sensitivity analysis with a level of precision that would be meaningful to an investor.
If the undiscounted cash flows are more than the carrying value of the community, then the carrying amount is
recoverable, and no impairment adjustment is required. However, if the undiscounted cash flows are less than the carrying
amount, then the community is deemed impaired and is written down to its fair value. We determine the estimated fair value
of each community by determining the present value of its estimated future cash flows at a discount rate commensurate with
the risk of the respective community, or in limited circumstances, prices for land in recent comparable sale transactions,
market analysis studies, which include the estimated price a willing buyer would pay for the land (other than in a forced
liquidation sale), and recent bona fide offers received from outside third parties. Our discount rates used for all impairments
recorded from October 31, 2015 to October 31, 2017 ranged from 16.8% to 19.8%. The estimated future cash flow
assumptions are virtually the same for both our recoverability and fair value assessments. Should the estimates or expectations
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used in determining estimated cash flows or fair value, including discount rates, decrease or differ from current estimates in
the future, we may be required to recognize additional impairments related to current and future communities. The impairment
of a community is allocated to each lot on a relative fair value basis.
From time to time, we write off deposits and approval, engineering and capitalized interest costs when we determine
that it is no longer probable that we will exercise options to buy land in specific locations or when we redesign communities
and/or abandon certain engineering costs. In deciding not to exercise a land option, we take into consideration changes in
market conditions, the timing of required land takedowns, the willingness of land sellers to modify terms of the land option
contract (including timing of land takedowns), and the availability and best use of our capital, among other factors. The write-
off is recorded in the period it is deemed not probable that the optioned property will be acquired. In certain instances, we
have been able to recover deposits and other pre-acquisition costs that were previously written off. These recoveries have not
been significant in comparison to the total costs written off.
Inventories held for sale are land parcels ready for sale in their current condition, where we have decided not to
build homes but are instead actively marketing for sale. These land parcels represented $23.6 million and $48.7 million of
our total inventories at October 31, 2017 and 2016, respectively, and are reported at the lower of carrying amount or fair
value less costs to sell. In determining fair value for land held for sale, management considers, among other things, prices for
land in recent comparable sale transactions, market analysis studies, which include the estimated price a willing buyer would
pay for the land (other than in a forced liquidation sale) and recent bona fide offers received from outside third parties.
Unconsolidated Homebuilding and Land Development Joint Ventures - Investments in unconsolidated
homebuilding and land development joint ventures are accounted for under the equity method of accounting. Under the equity
method, we recognize our proportionate share of earnings and losses earned by the joint venture upon the delivery of lots or
homes to third parties. Our ownership interests in the joint ventures vary but our voting interests are generally 50% or less.
In determining whether or not we must consolidate joint ventures where we are the managing member of the joint venture,
we assess whether the other partners have specific rights to overcome the presumption of control by us as the manager of the
joint venture. In most cases, the presumption is overcome because the joint venture agreements require that both partners
agree on establishing the significant operating and capital decisions of the partnership, including budgets, in the ordinary
course of business. The evaluation of whether or not we control a venture can require significant judgment. In accordance
with ASC 323-10, “Investments - Equity Method and Joint Ventures – Overall,” we assess our investments in unconsolidated
joint ventures for recoverability, and if it is determined that a loss in value of the investment below its carrying amount is
other than temporary, we write down the investment to its fair value. We evaluate our equity investments for impairment
based on the joint venture’s projected cash flows. This process requires significant management judgment and estimates.
During fiscal 2017, we wrote down certain joint venture investments by $2.8 million. There were no write-downs in fiscal
2016 or 2015.
Post-Development Completion, Warranty Costs and Insurance Deductible Reserves - In those instances where a
development is substantially completed and sold and we have additional construction work to be incurred, an estimated
liability is provided to cover the cost of such work. 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 2017 and 2016, our deductible under our general liability
insurance is a $20 million aggregate for construction defect and warranty claims. For bodily injury claims, our deductible per
occurrence in fiscal 2017 and 2016 is $0.25 million, up to a $5 million limit. Our aggregate retention in fiscal 2017 and 2016
is $21 million for construction defect, warranty and bodily injury claims. We do not have a deductible on our worker's
compensation insurance. Reserves for estimated losses for construction defects, warranty and bodily injury claims have been
established using the assistance of a third-party actuary. We engage a third-party actuary that uses our historical warranty
and construction defect data to assist our management in estimating our unpaid claims, claim adjustment expenses and
incurred but not reported claims reserves for the risks that we are assuming under the general liability and construction defect
programs. The estimates include provisions for inflation, claims handling and legal fees. These estimates are subject to a high
degree of variability due to uncertainties such as trends in construction defect claims relative to our markets and the types of
products we build, claim settlement patterns, insurance industry practices and legal interpretations, among others. Because
of the high degree of judgment required in determining these estimated liability amounts, actual future costs could differ
significantly from our currently estimated amounts. 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. See Note 16 to the Consolidated
Financial Statements for additional information on the amount of warranty costs recognized in cost of goods sold and
administrative expenses.
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Deferred Income Taxes - Deferred income taxes are provided for temporary differences between amounts recorded
for financial reporting and for income tax purposes. If the combination of future years’ income (or loss) combined with the
reversal of the timing differences results in a loss, such losses can be carried back to prior years or carried forward to future
years to recover the deferred tax assets. In accordance with ASC 740-10, “Income Taxes - Overall” (“ASC 740-10”), we
evaluate our deferred tax assets quarterly to determine if valuation allowances are required. ASC 740-10 requires that
companies assess whether valuation allowances should be established based on the consideration of all available evidence
using a “more-likely-than-not” standard. See “Total Taxes” below under “Results of Operations” for further discussion of
the valuation allowances.
In evaluating the exposures associated with our various tax filing positions, we recognize tax liabilities in accordance
with ASC 740-10, for more likely than not exposures. We re-evaluate the exposures associated with our tax positions on a
quarterly basis. This evaluation is based on factors such as changes in facts or circumstances, changes in tax law, new audit
activity by taxing authorities and effectively settled issues. Determining whether an uncertain tax position is effectively
settled requires judgment. Such a change in recognition or measurement would result in the recognition of a tax benefit or an
additional charge to the tax provision. A number of years may elapse before a particular matter for which we have established
a liability is audited and fully resolved or clarified. We adjust our liability for unrecognized tax benefits and income tax
provision in the period in which an uncertain tax position is effectively settled, or the statute of limitations expires for the
relevant taxing authority to examine the tax position or when more information becomes available. Due to the complexity of
some of these uncertainties, the ultimate resolution may result in a liability that is materially different from our current
estimate. Any such changes will be reflected as increases or decreases to income tax expense in the period in which they are
determined.
Recent Accounting Pronouncements
See Note 3 to the Consolidated Financial Statements included elsewhere in this Annual Report on Form 10-K.
Capital Resources and Liquidity
Our operations consist primarily of residential housing development and sales in the Northeast (New Jersey and
Pennsylvania), the Mid-Atlantic (Delaware, Maryland, Virginia, Washington D.C. and West Virginia), the Midwest (Illinois
and Ohio), the Southeast (Florida, Georgia and South Carolina), the Southwest (Arizona and Texas) and the West
(California). In addition, we provide certain financial services to our homebuilding customers.
We have historically funded our homebuilding and financial services operations with cash flows from operating
activities, borrowings under our credit facilities, the issuance of new debt and equity securities and other financing activities.
Due to covenant restrictions in our debt instruments, we are currently limited in the amount of debt we can incur that does
not qualify as refinancing indebtedness with certain maturity requirements (a limitation that we expect to continue for the
foreseeable future), even if market conditions would otherwise be favorable, which could also impact our ability to grow our
business. In fiscal 2016, as a result of our evaluation of our geographic operating footprint as it relates to our strategic
objectives, we exited the Minneapolis, Minnesota and Raleigh, North Carolina markets, and completed the sale of our land
portfolios in those markets. In addition, we entered into a new joint venture by transferring eight communities to the joint
venture and receiving cash in return. In fiscal 2017, we transferred an additional four communities to the joint venture, which
resulted in $11.2 million of net cash proceeds to us during the period. We are in the process of completing a wind down of
our operations in the San Francisco Bay area in Northern California and in Tampa, Florida by building and delivering homes
to sell through our existing land position. Any other liquidity-enhancing transaction will depend on identifying counterparties,
negotiation of documentation and applicable closing conditions and any required approvals.
Operating, Investing and Financing Activities – Overview
Our homebuilding cash balance at October 31, 2017 increased $123.9 million from October 31, 2016 to $463.7
million, which is above our target liquidity range of $170 million to $245 million. We would prefer to have our cash fully
invested, but we are being disciplined in our underwriting of new land deals and the methods in which we control land
(through more options and fewer direct purchases). In addition to using cash to pay down debt during fiscal 2017, we spent
$555.0 million on land and land development. After considering this land and land development and all other operating
activities, including revenue received from deliveries, we generated $297.6 million of cash from operations. During fiscal
2017, cash used in investing activities was $27.2 million, primarily related to investments in existing joint ventures, along
with an investment in a new joint venture. Cash used in financing activities was $147.8 million during fiscal 2017, which
included $862.0 million for repurchases of debt, $840.0 million of proceeds for debt issuances, $61.1 million used for model
finance and land banking programs and a $31.0 million reduction in mortgage warehouse lines of credit. We intend to
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continue to use nonrecourse mortgage financings, model sale leaseback, joint ventures, and, subject to covenant restrictions
in our debt instruments, land banking programs as our business needs dictate.
Our cash uses during the year ended October 31, 2017 and 2016 were for operating expenses, land purchases, land
deposits, land development, construction spending, debt payments, state income taxes, interest payments and investments in
joint ventures. During these periods, we provided for our cash requirements from available cash on hand, housing and land
sales, financing transactions, model sale leasebacks, land banking transactions, joint ventures, financial service revenues and
other revenues. We believe that these sources of cash will be sufficient through fiscal 2018 to finance our working capital
requirements.
Our net income (loss) historically does not approximate cash flow from operating activities. The difference between
net income (loss) and cash flow from operating activities is primarily caused by changes in inventory levels together with
changes in receivables, prepaid and other assets, mortgage loans held for sale, interest and other accrued liabilities, deferred
income taxes, accounts payable and other liabilities, and noncash charges relating to depreciation, stock compensation awards
and impairment losses for inventory. When we are expanding our operations, inventory levels, prepaids and other assets
increase causing cash flow from operating activities to decrease. Certain liabilities also increase as operations expand and
partially offset the negative effect on cash flow from operations caused by the increase in inventory levels, prepaids and other
assets. Similarly, as our mortgage operations expand, net income from these operations increases, but for cash flow purposes
net income is partially offset by the net change in mortgage assets and liabilities. The opposite is true as our investment in
new land purchases and development of new communities decrease, causing us to generate positive cash flow from
operations. In fiscal 2017, with spending on land purchases and land development relatively flat as compared to fiscal 2016,
we continued to generate cash from operations. As we continue to increase spending on land purchases and land development,
cash flow from operations will decrease. As we continue to actively seek land investment opportunities, we will also remain
focused on liquidity.
See “Inventory Activities” below for a detailed discussion of our inventory position.
Debt Transactions
As of October 31, 2017, we had a $75.0 million outstanding senior secured term loan facility (the “Term Loan
Facility”) ($73.0 million net of debt issuance costs), and $1,110.0 million of outstanding senior secured notes ($1,090.6
million, net of discount and debt issuance costs), comprised of $53.2 million 2.0% 2021 Notes (defined below), $141.8
million 5.0% 2021 Notes (defined below), $75.0 million 9.50% 2020 Notes (defined below), $440.0 million 10.0% Senior
Secured Notes due 2022 and $400.0 million 10.5% Senior Secured Notes due 2024. As of October 31, 2017, we also had
$368.5 million of outstanding senior notes ($366.3 million net of debt issuance costs), comprised of $132.5 million 7.0%
Senior Notes due 2019 and $236.0 million 8.0% Senior Notes due 2019. In addition, as of October 31, 2017, we had
outstanding $2.1 million 11.0% Senior Amortizing Notes due 2017 (issued as a component of our 6.0% Exchangeable Note
Units) ($2.0 million net of debt issuance costs) and $53.9 million Senior Exchangeable Notes due 2017 (issued as a
component of our 6.0% Exchangeable Note Units) ($53.9 million net of debt issuance costs).
Except for K. Hovnanian, the issuer of the notes, our home mortgage subsidiaries, joint ventures and subsidiaries
holding interests in our joint ventures and certain of our title insurance subsidiaries, we and each of our subsidiaries are
guarantors of the Term Loan Facility and senior secured, senior, senior amortizing and senior exchangeable notes outstanding
at October 31, 2017 (collectively, the “Notes Guarantors”). In addition to the Notes Guarantors, the 5.0% Senior Secured
Notes due 2021 (the “5.0% 2021 Notes”), the 2.0% Senior Secured Notes due 2021 (the “2.0% 2021 Notes” and together
with the 5.0% 2021 Notes, the “2021 Notes”) and the 9.50% Senior Secured Notes due 2020 (the “9.50% 2020 Notes” and
collectively with the 2021 Notes, the “JV Holdings Secured Group 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 “JV
Holdings Secured Group”). Members of the JV Holdings Secured Group do not guarantee K. Hovnanian's other
indebtedness.
The credit agreement governing the Term Loans (defined below) and the indentures governing the notes outstanding
at October 31, 2017 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 nonrecourse indebtedness, certain permitted indebtedness and refinancing indebtedness (under the
Term Loans and the 9.50% 2020 Notes, any new or refinancing indebtedness may not be scheduled to mature earlier than
January 15, 2021 (so long as no member of the JV Holdings Secured Group is an obligor thereon), or February 15, 2021 (if
otherwise), and under the 10.0% Senior Secured Notes due 2022 (the “10.0% 2022 Notes”) and the 10.5% Senior Secured
Notes due 2024 (the “10.5% 2024 Notes”), any refinancing indebtedness of the 7.0% Senior Notes due 2019 (the “7.0%
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Notes”) and 8.0% Senior Notes due 2019 (the “8.0% Notes” and together with the 7.0% Notes, the “2019 Notes”) may not
be scheduled to mature earlier than July 16, 2024)), pay dividends and make distributions on common and preferred stock,
repurchase subordinated indebtedness (with respect to the Term Loans and certain of the senior secured and senior notes) and
common and preferred stock, make other restricted payments, including investments, sell certain assets (including in certain
land banking transactions), incur liens, consolidate, merge, sell or otherwise dispose of all or substantially all assets, enter
into certain transactions with affiliates and make cash repayments of the 2019 Notes (with respect to the 10.0% 2022 Notes
and 10.5% 2024 Notes). The credit agreement governing the Term Loans and the indentures also contain events of default
which would permit the lenders/holders thereof to exercise remedies with respect to the collateral (as applicable), declare the
loans made under the Term Loan facility (the “Term Loans”)/notes to be immediately due and payable if not cured within
applicable grace periods, including the failure to make timely payments on the Term Loans/notes or other material
indebtedness, cross default to other material indebtedness, the failure to comply with agreements and covenants and specified
events of bankruptcy and insolvency, with respect to the Term Loans, material inaccuracy of representations and warranties
and a change of control, and, with respect to the Term Loans and senior secured notes, the failure of the documents granting
security for the Term Loans and 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 Term Loans and senior secured notes to be valid and perfected. As of October 31, 2017,
we believe we were in compliance with the covenants of the Term Loan Facility and the indentures governing our outstanding
notes.
If our consolidated fixed charge coverage ratio, as defined in the agreements governing our debt instruments (other
than the senior exchangeable note units discussed 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 nonrecourse indebtedness. As a result of this ratio restriction, we are currently restricted from paying
dividends, which are not cumulative, on our 7.625% Series A Preferred Stock. We anticipate that we will continue to be
restricted from paying dividends for the foreseeable future. Our inability to pay dividends is in accordance with covenant
restrictions and will not result in a default under our debt instruments or otherwise affect compliance with any of the covenants
contained in our debt instruments.
Under the terms of our debt agreements, we have the right to make certain redemptions and prepayments and,
depending on market conditions and covenant restrictions, may do so from time to time. We also continue to 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.
During the year ended October 31, 2017, we repurchased in open market transactions $17.5 million aggregate
principal amount of 7.0% Notes, $14.0 million aggregate principal amount of 8.0% Notes and 6,925 senior exchangeable
note units representing $6.9 million stated amount of senior exchangeable note units. The aggregate purchase price for these
transactions was $30.8 million, plus accrued and unpaid interest. These transactions resulted in a gain on extinguishment of
debt of $7.8 million, which is included as “Loss on Extinguishment of Debt” on the Consolidated Statement of Operations.
This gain was offset by $0.4 million of costs associated with the 9.50% 2020 Notes issued during the fourth quarter of fiscal
2016 and the debt transactions during the third quarter of fiscal 2017 discussed below.
On July 27, 2017, K. Hovnanian issued $440.0 million aggregate principal amount of 10.0% 2022 Notes and $400.0
million aggregate principal amount of 10.5% 2024 Notes. The net proceeds from these issuances together with available cash
were used to (i) purchase $575,912,000 principal amount of 7.25% Senior Secured First Lien Notes due 2020 (the “7.25%
First Lien Notes”), $87,321,000 principal amount of 9.125% Senior Secured Second Lien Notes due 2020 (the “9.125%
Second Lien Notes” and, together with the 7.25% First Lien Notes, the “2020 Secured Notes”) and all $75,000,000 principal
amount of 10.0% Senior Secured Second Lien Notes due 2018 (the “10.0% Second Lien Notes”) that were tendered and
accepted for purchase pursuant to K. Hovnanian’s offers to purchase for cash (the “Tender Offers”) any and all of the 7.25%
First Lien Notes, the 9.125% Second Lien Notes and the 10.0% Second Lien Notes and to pay related tender premiums and
accrued and unpaid interest thereon to the date of purchase and (ii) satisfy and discharge all obligations (and cause the release
of the liens on the collateral securing such indebtedness) under the indentures under which the 7.25% First Lien Notes, the
9.125% Second Lien Notes and the 10.0% Second Lien Notes were issued and in connection therewith to call for redemption
on October 15, 2017 and on November 15, 2017 all remaining $1,088,000 principal amount of 7.25% First Lien Notes and
all remaining $57,679,000 principal amount of 9.125% Second Lien Notes, respectively, that were not validly tendered and
purchased in the applicable Tender Offer in accordance with the redemption provisions of the indentures governing the 2020
Secured Notes. These transactions resulted in a loss on extinguishment of debt of $42.3 million, which is included as “Loss
on Extinguishment of Debt” on the Consolidated Statement of Operations.
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The 10.0% 2022 Notes have a maturity of July 15, 2022 and bear interest at a rate of 10.0% per annum payable
semi-annually on January 15 and July 15 of each year, commencing January 15, 2018, to holders of record at the close of
business on January 1 and July 1, as the case may be, immediately preceding such interest payment dates. The 10.0% 2022
Notes are redeemable in whole or in part at our option at any time prior to July 15, 2019 at 100.0% of their principal amount
plus an applicable “Make-Whole Amount.” K. Hovnanian may also redeem some or all of the 10.0% 2022 Notes at 105.0%
of principal commencing July 15, 2019, at 102.50% of principal commencing July 15, 2020 and at 100.0% of principal
commencing July 15, 2021. In addition, K. Hovnanian may also redeem up to 35% of the aggregate principal amount of the
10.0% 2022 Notes prior to July 15, 2019 with the net cash proceeds from certain equity offerings at 110.0% of principal.
The 10.5% 2024 Notes have a maturity of July 15, 2024 and bear interest at a rate of 10.5% per annum payable
semi-annually on January 15 and July 15 of each year, commencing January 15, 2018, to holders of record at the close of
business on January 1 and July 1, as the case may be, immediately preceding such interest payment dates. The 10.5% 2024
Notes are redeemable in whole or in part at our option at any time prior to July 15, 2020 at 100.0% of their principal amount
plus an applicable “Make-Whole Amount.” K. Hovnanian may also redeem some or all of the 10.5% 2024 Notes at 105.25%
of principal commencing July 15, 2020, at 102.625% of principal commencing July 15, 2021 and at 100.0% of principal
commencing July 15, 2022. In addition, K. Hovnanian may also redeem up to 35.0% of the aggregate principal amount of
the 10.5% 2024 Notes prior to July 15, 2020 with the net cash proceeds from certain equity offerings at 110.50% of principal.
All of K. Hovnanian’s obligations under the 10.0% 2022 Notes and the 10.5% 2024 Notes are guaranteed by the
Notes Guarantors. In addition to pledges of the equity interests in K. Hovnanian and the subsidiary Notes Guarantors which
secure the 10.0% 2022 Notes and the 10.5% 2024 Notes, the 10.0% 2022 Notes and the 10.5% 2024 Notes and the guarantees
thereof will also be secured in accordance with the terms of the indenture and security documents governing such Notes by
pari passu liens on substantially all of the assets owned by K. Hovnanian and the Notes Guarantors, in each case subject to
permitted liens and certain exceptions (the collateral securing the 10.0% 2022 Notes and the 10.5% 2024 Notes will be the
same as that securing the Term Loans). The liens securing the 10.0% 2022 Notes and the 10.5% 2024 Notes rank junior to
the liens securing the Term Loans and any other future secured obligations that are senior in priority with respect to the assets
securing the 10.0% 2022 Notes and the 10.5% 2024 Notes.
In connection with the issuance of the 10.0% 2022 Notes and the 10.5% 2024 Notes, K. Hovnanian and the Notes
Guarantors entered into security and pledge agreements pursuant to which K. Hovnanian and the Notes Guarantors pledged
substantially all of their assets to secure their obligations under the 10.0% 2022 Notes and the 10.5% 2024 Notes, subject to
permitted liens and certain exceptions as set forth in such agreements. K. Hovnanian and the Notes Guarantors also entered
into applicable intercreditor and collateral agency agreements which set forth agreements with respect to the relative priority
of their various secured obligations.
The indenture governing the 10.0% 2022 Notes and the 10.5% 2024 Notes was entered into on July 27, 2017 among
K. Hovnanian, the Notes Guarantors and Wilmington Trust, National Association, as trustee and collateral agent. The
covenants and events of default in the indenture are described above.
See Note 9 to the Consolidated Financial Statements included elsewhere in this Annual Report on Form 10-K for a
further discussion of K. Hovnanian’s Term Loans, senior secured notes, senior notes and senior exchangeable note units.
Mortgages and Notes Payable
We have nonrecourse mortgage loans for certain communities totaling $64.5 million and $82.1 million (net of debt
issuance costs) at October 31, 2017 and 2016, respectively, which are secured by the related real property, including any
improvements, with an aggregate book value of $157.8 million and $201.8 million, respectively. The weighted-average
interest rate on these obligations was 5.3% and 4.9% at October 31, 2017 and 2016, respectively, and the mortgage loan
payments on each community primarily correspond to home deliveries. We also had nonrecourse mortgage loans on our
corporate headquarters totaling $13.0 million and $14.3 million at October 31, 2017 and 2016, respectively. These loans had
a weighted-average interest rate of 8.9% at October 31, 2017 and 8.8% at October 31, 2016. As of October 31, 2017, these
loans had installment obligations with annual principal maturities in the years ending October 31 of: $1.4 million in 2018,
$1.5 million in 2019, $1.7 million in 2020, $1.8 million in 2021, $2.0 million in 2022 and $4.6 million after 2022. On
November 1, 2017, the non-recourse loans on our corporate headquarters were paid in full, in connection with the sale of
building.
34
In June 2013, K. Hovnanian, as borrower, and we and certain of our subsidiaries, as guarantors, entered into a five-
year, $75.0 million unsecured revolving credit facility (the “Credit Facility”) with Citicorp USA, Inc., as administrative agent
and issuing bank, and Citibank, N.A., as a lender. The Credit Facility is available for both letters of credit and general
corporate purposes. The Credit Facility does not contain any financial maintenance covenants, but does contain certain
restrictive covenants that track those contained in our indenture governing the 8.0% Senior Notes due 2019, which are
described in Note 9 to the Consolidated Financial Statements. The Credit Facility also contains certain customary events of
default which would permit the administrative agent at the request of the required lenders to, among other things, declare all
loans then outstanding to be immediately due and payable if such default is not cured within applicable grace periods,
including the failure to make timely payments of amounts payable under the Credit Facility or other material indebtedness or
the acceleration of other material indebtedness, the failure to comply with agreements and covenants or for representations
or warranties to be correct in all material respects when made, specified events of bankruptcy and insolvency, and the entry
of a material judgment against a loan party. Outstanding borrowings under the Credit Facility accrue interest at an annual
rate equal to either, as selected by K. Hovnanian, (i) the alternate base rate plus the applicable spread determined on the date
of such borrowing or (ii) an adjusted London Interbank Offered Rate (“LIBOR”) rate plus the applicable spread determined
as of the date two business days prior to the first day of the interest period for such borrowing. As of October 31, 2017 there
were $52.0 million of borrowings and $14.6 million of letters of credit outstanding under the Credit Facility. As of October
31, 2016, there were $52.0 million of borrowings and $17.9 million of letters of credit outstanding under the Credit Facility.
As of October 31, 2017, we believe we were in compliance with the covenants under the Credit Facility.
In addition to the Credit Facility which matures in 2018, we have certain stand–alone cash collateralized letter of
credit agreements and facilities under which there were a total of $1.7 million letters of credit outstanding at both October
31, 2017 and 2016, respectively. These agreements and facilities require us to maintain specified amounts of cash as collateral
in segregated accounts to support the letters of credit issued thereunder, which will affect the amount of cash we have
available for other uses. At both October 31, 2017 and October 31, 2016, the amount of cash collateral in these segregated
accounts was $1.7 million, respectively, which is reflected in “Restricted cash and cash equivalents” on the 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. In certain instances, we retain the servicing rights
for a small amount of loans. The loans are secured by the mortgages held for sale and repaid when we sell the underlying
mortgage loans to permanent investors. As of October 31, 2017 and 2016, we had an aggregate of $114.6 million and $145.6
million, respectively, outstanding under several of K. Hovnanian Mortgage’s short-term borrowing facilities.
See Note 8 to the Consolidated Financial Statements for a discussion of these agreements and facilities.
Equity
On July 3, 2001, our Board of Directors authorized a stock repurchase program to purchase up to 4 million shares
of Class A Common Stock. We did not repurchase any shares under this program during fiscal 2017 or 2016. As of October
31, 2017, the maximum number of shares of Class A Common Stock that may yet be purchased under this program is 0.5
million. (See Part II, Item 5 for information on equity purchases).
On July 12, 2005, we issued 5,600 shares of 7.625% Series A Preferred Stock, with a liquidation preference of
$25,000 per share. Dividends on the Series A Preferred Stock are not cumulative and are payable at an annual rate of 7.625%.
The Series A Preferred Stock is not convertible into the Company’s common stock and is redeemable in whole or in part at
our option at the liquidation preference of the shares. The Series A Preferred Stock is traded as depositary shares, with each
depositary share representing 1/1000th of a share of Series A Preferred Stock. The depositary shares are listed on the
NASDAQ Global Market under the symbol “HOVNP.” In fiscal 2017, 2016 and 2015, we did not make any dividend
payments on the Series A Preferred Stock as a result of covenant restrictions in our debt instruments. We anticipate that we
will continue to be restricted from paying dividends, which are not cumulative, for the foreseeable future.
35
Ratings Actions
On November 9, 2015, Moody’s Investors Services (“Moody’s”) took certain rating actions as follows:
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
Corporate Family Rating, downgraded to Caa1;
Probability of Default Rating, downgraded to Caa1;
7.625% Series A Preferred Stock, downgraded to Caa3;
First Lien Notes, downgraded to B1;
Existing Second Lien Notes, downgraded to Caa1; and
Senior unsecured notes, downgraded to Caa2.
On December 9, 2015, Fitch Ratings (“Fitch”) took certain rating actions as follows:
Long-term Issuer Default Rating, downgraded to CCC;
First Lien Notes, downgraded to B;
Existing Second Lien Notes, downgraded to CCC-;
Senior unsecured notes, downgraded to CCC-; and
7.625% Series A Preferred Stock, downgraded to C.
On April 20, 2016, Moody’s took certain rating actions as follows:
Corporate Family Rating, downgraded to Caa2;
Probability of Default Rating, downgraded to Caa2;
7.625% Series A Preferred Stock, downgraded to Ca;
First Lien Notes, downgraded to B2;
Existing Second Lien Notes, downgraded to Caa2; and
Senior unsecured notes, downgraded to Caa3.
On May 3, 2016, S&P Global Ratings took certain rating actions as follows:
Corporate Credit Rating, downgraded to CCC+;
First Lien Notes, downgraded to CCC+;
2021 Notes, downgraded to CCC;
Existing Second Lien Notes, downgraded to CCC-; and
Senior unsecured notes, downgraded to CCC-.
On August 1, 2016, Moody’s took certain rating actions as follows:
First Lien Notes, downgraded to B3;
Existing Second Lien Notes, downgraded to Caa3
Downgrades in our credit ratings do not accelerate the scheduled maturity dates of our debt or affect the interest
rates charged on any of our debt issues or our debt covenant requirements or cause any other operating issue. A potential risk
from negative changes in our credit ratings is that they may make it more difficult or costly for us to access capital.
Inventory Activities
Total inventory, excluding consolidated inventory not owned, decreased $189.4 million during the year ended
October 31, 2017 from October 31, 2016. Total inventory, excluding consolidated inventory not owned, decreased in the
Northeast by $56.4 million, in the Mid-Atlantic by $26.1 million, in the Midwest by $19.1 million, in the Southwest by $49.8
million and in the West by $59.6 million. These decreases were partially offset by an increase in the Southeast of $21.6
million. These inventory fluctuations were primarily attributable to home deliveries and land sales during the period, partially
offset by new land purchases and land development. During the year ended October 31, 2017, we had aggregate impairments
in the amount of $15.1 million. We wrote-off costs in the amount of $2.7 million during the year ended October 31, 2017
related to land options that expired or that we terminated, as the communities’ forecasted profitability was not projected to
36
produce adequate returns on investment commensurate with the risk. In the last few years, we have been able to acquire new
land parcels at prices that we believe will generate reasonable returns under current homebuilding market conditions. There
can be no assurances that this trend will continue in the near term. Substantially all homes under construction or completed
and included in inventory at October 31, 2017 are expected to be closed during the next six to nine months.
Consolidated inventory not owned decreased $83.9 million. Consolidated inventory not owned consists of options
related to land banking and model financing transactions that were added to our Consolidated Balance Sheet in accordance
with US GAAP. The decrease from October 31, 2016 to October 31, 2017 was primarily due to a decrease in land banking
transactions along with a decrease in the sale and leaseback of certain model homes during the period. We have land banking
arrangements, whereby we sell land parcels to the land bankers and they provide us an option to purchase back finished lots
on a predetermined schedule. Because of our options to repurchase these parcels, for accounting purposes in accordance with
ASC 360-20-40-38, these transactions are considered a financing rather than a sale. For purposes of our Consolidated Balance
Sheet, at October 31, 2017, inventory of $66.3 million was recorded to “Consolidated inventory not owned,” with a
corresponding amount of $39.3 million (net of debt issuance costs) recorded to “Liabilities from inventory not owned” for
the amount of net cash received from the transactions. In addition, we sell and lease back certain of our model homes with
the right to participate in the potential profit when each home is sold to a third party at the end of the respective lease. As a
result of our continued involvement, for accounting purposes in accordance with ASC 360-20-40-38, these sale and leaseback
transactions are considered a financing rather than a sale. Therefore, for purposes of our Consolidated Balance Sheet, at
October 31, 2017, inventory of $58.5 million was recorded to “Consolidated inventory not owned,” with a corresponding
amount of $51.8 million (net of debt issuance costs) recorded to “Liabilities from inventory not owned” for the amount of
net cash received from the transactions.
When possible, we option property for development prior to acquisition. By optioning property, we are only subject
to the loss of the cost of the option and predevelopment costs if we choose not to exercise the option (other than with respect
to specific performance options discussed above). As a result, our commitment for major land acquisitions is reduced. The
costs associated with optioned properties are included in “Land and land options held for future development or sale” on the
Consolidated Balance Sheets. Also included in “Land and land options held for future development or sale” are amounts
associated with inventory in mothballed communities. We mothball (or stop development on) certain communities when we
determine the current performance does not justify further investment at the time. That is, we believe we will generate higher
returns if we decide against spending money to improve land today and save the raw land until such time as the markets
improve or we determine to sell the property. As of October 31, 2017, we had mothballed land in 22 communities. The book
value associated with these communities at October 31, 2017 was $36.7 million, which was net of impairment charges
recorded in prior periods of $214.1 million. We continually review communities to determine if mothballing is appropriate.
During fiscal 2017, we did not mothball any additional communities, but we sold five previously mothballed communities and
re-activated two previously mothballed communities.
Inventories held for sale, which are land parcels where we have decided not to build homes, represented $23.6
million and $48.7 million, respectively, of our total inventories at October 31, 2017 and October 31, 2016, and are reported
at the lower of carrying amount or fair value less costs to sell. In determining fair value for land held for sale, management
considers, among other things, prices for land in recent comparable sale transactions, market analysis studies, which include
the estimated price a willing buyer would pay for the land (other than in a forced liquidation sale) and recent bona fide offers
received from outside third parties.
37
The following tables summarize home sites included in our total residential real estate. The decrease in remaining
home sites available at October 31, 2017 compared to October 31, 2016 was primarily attributable to our decreased
community count and our delivering homes without investing in new land at the same rate during the period due to the reasons
discussed above in “-Overview”. As previously discussed, based on our cash position at October 31, 2017, we expect to
continue to actively seek new land investment opportunities in fiscal 2018.
October 31, 2017:
Northeast
Mid-Atlantic
Midwest
Southeast
Southwest
West
Consolidated total
Unconsolidated joint ventures
Owned
Optioned
Construction to permanent financing lots
Consolidated total
Lots controlled by unconsolidated joint ventures
October 31, 2016:
Northeast
Mid-Atlantic
Midwest
Southeast
Southwest
West
Consolidated total
Unconsolidated joint ventures
Owned
Optioned
Construction to permanent financing lots
Consolidated total
Lots controlled by unconsolidated joint ventures
Total
Home
Contracted
Not
Sites
Delivered
Remaining
Home Sites
Available
4,527
4,241
3,392
3,356
5,433
4,600
25,549
5,770
11,422
13,907
220
25,549
5,770
4,862
4,189
4,093
3,484
4,652
5,517
26,797
4,631
13,542
13,108
147
26,797
4,631
98
309
382
285
509
400
1,983
454
1,462
301
220
1,983
454
204
430
374
332
763
295
2,398
251
1,837
414
147
2,398
251
4,429
3,932
3,010
3,071
4,924
4,200
23,566
5,316
9,960
13,606
-
23,566
5,316
4,658
3,759
3,719
3,152
3,889
5,222
24,399
4,380
11,705
12,694
-
24,399
4,380
38
The following table summarizes our started or completed unsold homes and models, excluding unconsolidated joint
ventures, in active and substantially completed communities. The decrease in the total homes from October 31, 2016 to
October 31, 2017 is due to the decrease in community count during the period.
Northeast
Mid-Atlantic
Midwest
Southeast
Southwest
West
Total
Started or completed unsold
homes and models per active
selling communities(1)
October 31, 2017
Unsold
Homes Models
6
11
13
28
15
10
83
11
81
21
118
348
23
602
October 31, 2016
Unsold
Homes Models
11
4
14
20
8
20
77
57
113
33
66
425
33
727
Total
17
92
34
146
363
33
685
Total
68
117
47
86
433
53
804
4.6
0.7
5.3
4.3
0.5
4.8
(1) Active selling communities (which are communities that are open for sale with ten or more home sites available) were
130 and 167 at October 31, 2017 and 2016, respectively. Ratio does not include substantially completed communities,
which are communities with less than ten home sites available.
Other Balance Sheet Activities
Homebuilding – Restricted cash and cash equivalents decreased $1.8 million from October 31, 2016 to $2.1 million
at October 31, 2017. The decrease was primarily due to the release of escrow cash related to our warranty obligations in
certain communities which have been closed for more than a year.
Investments in and advances to unconsolidated joint ventures increased $14.6 million during the fiscal year ended
October 31, 2017 compared to October 31, 2016. The increase was primarily due to additional investments and advances to
existing joint ventures during fiscal 2017, along with an investment in a new joint venture in the second quarter of fiscal
2017. These increases were partially offset by decreases primarily related to partner distributions during the period. As of
both October 31, 2017 and October 31, 2016, we had investments in 10 homebuilding joint ventures and one land
development joint venture. We have no guarantees associated with our unconsolidated joint ventures, other than guarantees
limited only to performance and completion of development, environmental indemnification and standard warranty and
representation against fraud misrepresentation and similar actions, including a voluntary bankruptcy.
Receivables, deposits and notes, net increased $8.4 million from October 31, 2016 to $58.1 million at October 31,
2017. The increase was primarily due to a new receivable related to a land sale in the fourth quarter of fiscal 2017, partially
offset by a decrease in refundable deposits resulting from reimbursements received during the period.
Prepaid expenses and other assets were as follows as of:
(In thousands)
Prepaid insurance
Prepaid project costs
Net rental properties
Other prepaids
Other assets
Total
October 31,
October 31,
$
$
2017
1,893 $
30,360
-
4,245
528
37,026 $
2016 Dollar Change
(1,335)
3,228 $
(7,672)
38,032
(447)
447
(248)
4,493
(34)
562
(9,736)
46,762 $
Prepaid insurance decreased due to the timing of premium payments. These costs are amortized over the life of the
associated insurance policy, which can be one to three years. Prepaid project costs consist of community specific expenditures
that are used over the life of the community. Such prepaids are expensed as homes are delivered and therefore have declined
as our community count has declined.
39
Financial services other assets consist primarily of residential mortgages receivable held for sale of which $131.5
million and $155.0 million at October 31, 2017 and 2016, respectively, were being temporarily warehoused and are awaiting
sale in the secondary mortgage market. The decrease in mortgage loans held for sale from October 31, 2016 was related to a
decrease in the volume of loans originated during the fourth quarter of 2017 compared to the fourth quarter of 2016, along
with a decrease in the average loan value.
Income Taxes Receivable decreased $285.8 million from $283.6 million at October 31, 2016 to a payable of $2.2
million at October 31, 2017. The decrease is due to the increase in the valuation allowance against our deferred tax assets
during the period, as discussed in Note 11 to the Consolidated Financial Statements.
Nonrecourse mortgages decreased to $64.5 million at October 31, 2017, from $82.1 million at October 31, 2016. The
decrease was primarily due to the payment of existing mortgages, including a mortgage on a community which was
transferred to a joint venture, partially offset by new mortgages for communities mainly in the Northeast, Mid-Atlantic and
Southwest obtained during the year ended October 31, 2017.
Accounts payable and other liabilities are as follows as of:
(In thousands)
Accounts payable
Reserves
Accrued expenses
Accrued compensation
Other liabilities
Total
October 31,
October 31,
$
$
2017
128,844 $
134,089
12,900
47,209
12,015
335,057 $
2016 Dollar Change
(32,080)
7,201
(5,013)
2,494
(6,773)
(34,171)
160,924 $
126,888
17,913
44,715
18,788
369,228 $
The decrease in accounts payable was primarily due to the 14.2% decrease in deliveries in the fourth quarter of fiscal
2017 compared to the fourth quarter of fiscal 2016. Reserves increased during fiscal 2017 primarily due to an increase in our
construction defect reserves due to an adjustment for litigation, partially offset by a reduction in our warranty reserves, which
were reduced based on our annual assessment, as discussed in Note 16 to the Consolidated Financial Statements. The decrease
in accrued expenses was primarily due to the amortization of accruals related to abandoned lease space along with the timing
of other accruals. The increase in accrued compensation was primarily due to accrued bonuses payable at the end of fiscal
2017 as compared to the end of fiscal 2016. Other liabilities decreased primarily due to deferred income recorded in fiscal
2016 and recognized in fiscal 2017 from municipality reimbursements for infrastructure costs and development fees related
to work performed under a bond issuance in one of our communities in the West. This decrease was partially offset by an
increase in deferred income related to the delay of home closings associated with the Weyerhaeuser-manufacture I-joist issue,
discussed previously in Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Customers’ deposits decreased $3.7 million to $33.8 million at October 31, 2017. The decrease was primarily related
to the decrease in backlog during the period.
Liabilities from inventory not owned decreased $59.1 million to $91.1 million at October 31, 2017. The decrease
was due a decrease in land banking transactions during the period, along with a decrease in the sale and leaseback of certain
model homes, both of which are accounted for as financing transactions as described above.
Financial services (liabilities) decreased $30.5 million from $172.4 million at October 31, 2016, to $141.9 million
at October 31, 2017. The decrease is primarily due to the decrease in our mortgage warehouse lines of credit, and correlates
to the decrease in the volume of mortgage loans held for sale during the period as discussed above.
Accrued interest increased $9.4 million to $41.8 million at October 31, 2017. The increase was primarily due to a
combination of the timing of interest payments and higher interest rates on our 10.0% 2022 Notes and 10.5% 2024 Notes
issued in July 2017.
40
Results of Operations
Total Revenues
Compared to the prior period, revenues increased (decreased) as follows:
(Dollars in thousands)
Homebuilding:
Sale of homes
Land sales
Other revenues
Financial services
Total change
Total revenues percent change
Homebuilding
$
$
October 31,
2017
Year Ended
October 31,
2016
October 31,
2015
$
(260,757 )
(27,445 )
1,494
(13,874 )
(300,582 )
$
(10.9 )%
512,661 $
75,191
(37 )
15,952
603,767 $
28.1 %
75,116
(4,374)
107
14,251
85,100
4.1%
Sale of homes revenues decreased $260.8 million, or 10.0%, for the year ended October 31, 2017, increased $512.7
million, or 24.6%, for the year ended October 31, 2016 and increased $75.1 million, or 3.7%, for the year ended October 31,
2015 as compared to the same period of the prior year. The decreased revenues in fiscal 2017 were primarily due to the
number of home deliveries decreasing 13.3%, partially offset by the average price per home increasing to $417,714 in fiscal
2017 from $402,350 in fiscal 2016. The decrease in deliveries is primarily the result of a reduction in community count by
22.2%. The increased revenues in fiscal 2016 were primarily due to the 17.4% increase in deliveries, as well as the average
price per home increasing to $402,350 in fiscal 2016 from $379,177 in fiscal 2015. The increased revenues in fiscal 2015
were primarily due to the average price per home increasing to $379,177 in fiscal 2015 from $366,202 in fiscal 2014. For
fiscal 2017, the fluctuations in average prices were primarily the result of the geographic and community mix of our
deliveries, along with our ability to raise home prices in certain communities. For fiscal 2016 and 2015, the fluctuations in
average prices were primarily a result of the geographic and community mix of our deliveries, as opposed to home price
increases (which we increase or decrease in communities depending on the respective community’s performance). For further
detail on changes in segment revenues see “Homebuilding Operations by Segment” below. For further detail on land sales
and other revenue, see the section titled “Land Sales and Other Revenues” below.
41
Information on homes delivered by segment is set forth below:
(Housing Revenue in thousands)
Northeast:
Housing revenues
Homes delivered
Average price
Mid-Atlantic:
Housing revenues
Homes delivered
Average price
Midwest:
Housing revenues
Homes delivered
Average price
Southeast:
Housing revenues
Homes delivered
Average price
Southwest:
Housing revenues
Homes delivered
Average price
West:
Housing revenues
Homes delivered
Average price
Consolidated total:
Housing revenues
Homes delivered
Average price
Unconsolidated joint ventures:(1)
Housing revenues
Homes delivered
Average price
October 31,
Year Ended
October 31,
2017
2016
October 31,
2015
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
166,752 $
351
475,077 $
463,271 $
856
541,205 $
199,009 $
640
310,951 $
257,066 $
614
418,675 $
826,422 $
2,357
350,624 $
427,513 $
784
545,297 $
274,126 $
557
492,147 $
457,906 $
960
476,985 $
287,469 $
921
312,127 $
214,585 $
581
369,339 $
1,024,410 $
2,750
372,512 $
342,294 $
695
492,509 $
189,049
380
497,497
398,132
854
466,197
311,364
958
325,015
207,407
675
307,269
822,371
2,263
363,399
159,806
377
423,889
2,340,033 $
5,602
417,714 $
2,600,790 $
6,464
402,350 $
2,088,129
5,507
379,177
310,573 $
547
567,774 $
140,576 $
248
566,836 $
119,920
269
445,799
(1) Represents housing revenue and home deliveries for our unconsolidated homebuilding joint ventures for the period. We
provide this data as a supplement to our consolidated results as an indicator of the volume managed in our unconsolidated
joint ventures. See Note 20 to the Consolidated Financial Statements for a further discussion of our joint ventures.
The decrease in housing revenues during year ended October 31, 2017, as compared to year ended October 31, 2016,
was primarily attributed to our decreased deliveries, partially offset by an increase in average sales price. Housing revenues
in fiscal 2017 decreased in all of our homebuilding segments combined by 10.0%, while average sales price increased by
3.8%, excluding joint ventures. In our homebuilding segments, homes delivered decreased in fiscal 2017 as compared to
fiscal 2016 by 37.0%, 10.8%, 30.5% and 14.3% in the Northeast, Mid-Atlantic, Midwest and Southwest, respectively, and
increased by 5.7% and 12.8% in the Southeast and West, respectively. Overall in fiscal 2017 as compared to fiscal 2016
homes delivered decreased 13.3% across all our segments, excluding unconsolidated joint ventures.
The increase in housing revenues during year ended October 31, 2016, as compared to year ended October 31, 2015,
was primarily attributed to our increased deliveries, along with an increase in average sales price. Housing revenues and
average sales prices in fiscal 2016 increased in all of our homebuilding segments combined by 24.6% and 6.1%, respectively,
excluding joint ventures. In our homebuilding segments, homes delivered increased in fiscal 2016 as compared to fiscal 2015
by 46.6%, 12.4%, 21.5% and 84.4% in the Northeast, Mid-Atlantic, Southwest and West, respectively, and decreased by
3.9% and 13.9% in the Midwest and Southeast, respectively. Overall in fiscal 2016 as compared to fiscal 2015 homes
delivered increased 17.4% across all our segments, excluding unconsolidated joint ventures.
42
Quarterly housing revenues and net sales contracts by segment, excluding unconsolidated joint ventures, for the
years ended October 31, 2017, 2016 and 2015 are set forth below (Net contracts are defined as new contracts executed during
the period for the purchase of homes, less cancellations of contracts in the same period):
(In thousands)
Housing revenues:
Northeast
Mid-Atlantic
Midwest
Southeast
Southwest
West
Consolidated total
Sales contracts (net of cancellations):
Northeast
Mid-Atlantic
Midwest(1)
Southeast(2)
Southwest
West
Consolidated total
(In thousands)
Housing revenues:
Northeast
Mid-Atlantic
Midwest
Southeast
Southwest
West
Consolidated total
Sales contracts (net of cancellations):
Northeast
Mid-Atlantic
Midwest(1)
Southeast(2)
Southwest
West
Consolidated total
Quarter Ended
October 31,
July 31,
April 30,
2017
2017
2017
January 31,
2017
$
$
$
$
27,913 $
149,881
72,944
78,267
209,223
128,555
666,783 $
24,407 $
77,112
38,139
56,354
142,926
91,048
429,986 $
40,015 $
113,111
40,620
68,408
209,041
103,087
574,282 $
26,648 $
97,017
48,257
73,896
177,285
103,342
526,445 $
45,917 $
100,120
41,794
54,005
224,898
100,819
567,553 $
29,918 $
123,045
61,489
55,577
227,500
142,522
640,051 $
52,907
100,159
43,651
56,386
183,260
95,052
531,415
38,045
102,246
45,566
46,451
170,884
84,423
487,615
Quarter Ended
October 31,
July 31,
April 30,
2016
2016
2016
January 31,
2016
$
$
$
$
81,467 $
162,902
62,193
67,690
298,689
104,531
777,472 $
50,179 $
99,179
38,339
53,372
190,426
102,819
534,314 $
66,308 $
111,579
56,643
56,471
248,228
101,157
640,386 $
61,945 $
97,338
54,318
59,242
225,929
99,284
598,056 $
53,913 $
89,873
76,793
51,230
273,304
81,044
626,157 $
74,727 $
150,369
69,445
84,665
262,344
126,505
768,055 $
72,438
93,552
91,840
39,194
204,189
55,562
556,775
39,784
130,316
67,569
90,259
208,642
92,073
628,643
(1) The Midwest net contracts include $1.9 million, $7.1 million and $18.4 million, respectively, for the quarters ended July
31, 2016, April 30, 2016 and January 31, 2016, from Minneapolis, Minnesota.
(2) The Southeast net contracts include $9.9 million and $21.7 million, respectively, for the quarters ended April 30, 2016
and January 31, 2016, from Raleigh, North Carolina.
43
(In thousands)
Housing revenues:
Northeast
Mid-Atlantic
Midwest
Southeast
Southwest
West
Consolidated total
Sales contracts (net of cancellations):
Northeast
Mid-Atlantic
Midwest(1)
Southeast(2)
Southwest
West
Consolidated total
Quarter Ended
October 31,
July 31,
April 30,
2015
2015
2015
January 31,
2015
$
$
$
$
63,175 $
127,233
91,122
63,074
262,713
66,013
673,330 $
66,846 $
114,191
73,693
58,382
216,371
95,419
624,902 $
36,109 $
113,886
82,618
57,294
203,075
33,174
526,156 $
69,410 $
115,164
70,578
54,776
248,907
60,573
619,408 $
39,123 $
76,102
73,214
49,255
189,974
27,504
455,172 $
69,717 $
116,843
101,807
66,824
290,901
54,648
700,740 $
50,642
80,911
64,410
37,784
166,609
33,115
433,471
56,753
102,109
70,981
52,290
193,584
27,440
503,157
(1) The Midwest net contracts include $23.0 million, $21.8 million, $31.6 million and $21.8 million, respectively, for the
quarters ended October 31, 2015, July 31, 2015, April 30, 2015 and January 31, 2015, from Minneapolis, Minnesota.
(2) The Southeast net contracts include $12.2 million, $7.8 million, $12.5 million and $9.9 million, respectively, for the
quarters ended October 31, 2015, July 31, 2015, April 30, 2015 and January 31, 2015, from Raleigh, North Carolina.
Contracts per average active selling community in fiscal 2017 were 35.1 compared to fiscal 2016 of 31.3. Our
reported level of sales contracts (net of cancellations) has been impacted by an increase in the pace of sales in most of the
Company’s segments during fiscal 2017. Cancellation rates represent the number of cancelled contracts in the quarter divided
by the number of gross sales contracts executed in the quarter. For comparison, the following are historical cancellation rates,
excluding unconsolidated joint ventures:
Quarter
First
Second
Third
Fourth
2017
19%
18%
19%
22%
2016
20%
19%
21%
20%
2015
16 %
16 %
20 %
20 %
2014
18%
17%
22%
22%
2013
16 %
15 %
17 %
23 %
Another common and meaningful way to analyze our cancellation trends is to compare the number of contract
cancellations as a percentage of the beginning backlog. The following table provides this historical comparison, excluding
unconsolidated joint ventures.
Quarter
First
Second
Third
Fourth
2017
12%
16%
13%
12%
2016
13%
14%
12%
11%
2015
11 %
14 %
13 %
12 %
2014
11%
17%
13%
14%
2013
12 %
15 %
12 %
14 %
Most cancellations occur within the legal rescission period, which varies by state but is generally less than two
weeks after the signing of the contract. Cancellations also occur as a result of a buyer's failure to qualify for a mortgage,
which generally occurs during the first few weeks after signing. As shown in the tables above, the contract cancellations over
the past several years have been within what we believe to be a normal range. However, market conditions remain uncertain
and it is difficult to predict what cancellation rates will be in the future.
44
An important indicator of our future results is recently signed contracts and our home contract backlog for future
deliveries. Our consolidated contract backlog, excluding unconsolidated joint ventures, by segment is set forth below:
(Dollars in thousands)
Northeast:
Total contract backlog
Number of homes
Mid-Atlantic:
Total contract backlog
Number of homes
Midwest: (1)(3)
Total contract backlog
Number of homes
Southeast: (2)
Total contract backlog
Number of homes
Southwest:
Total contract backlog
Number of homes
West:
Total contract backlog
Number of homes
Totals:
Total consolidated contract backlog
Number of homes
October 31,
October 31,
2017
2016
October 31,
2015
$
$
$
$
$
$
$
51,778 $
98
99,512 $
204
185,123 $
309
248,974 $
430
98,969 $
382
104,527 $
374
120,382 $
285
145,171 $
332
177,818 $
509
285,644 $
763
173,963 $
400
185,274 $
295
147,004
293
239,099
453
194,290
644
105,935
279
422,711
1,033
106,886
203
808,033 $
1,983
1,069,102 $
2,398
1,215,925
2,905
(1) The Midwest contract backlog as of October 31, 2016 reflects the reduction of 64 homes and $24.1 million related to the
sale of our land portfolio in Minneapolis, Minnesota.
(2) The Southeast contract backlog as of October 31, 2016 reflects the reduction of 67 homes and $33.7 million related to
the sale of our land portfolio in Raleigh, North Carolina.
(3) Contract backlog as of October 31, 2016 excluded 9 homes that were sold to one of our joint ventures at the time of the
joint venture formation.
Contract backlog dollars decreased 24.4% as of October 31, 2017 compared to October 31, 2016, and the number
of homes in backlog decreased 17.3% for the same period. The decrease in backlog was driven by a 14.9% decrease in net
contracts and the decrease in community count for the year ended October 31, 2017 compared to the prior fiscal year. In the
month of November 2017, excluding unconsolidated joint ventures, we signed an additional 350 net contracts amounting to
$131.0 million in contract value.
Total cost of sales on our Consolidated Statements of Operations includes expenses for consolidated housing and
land and lot sales, including inventory impairment loss and land option write-offs (defined as “land charges” in the tables
below). A breakout of such expenses for housing sales and homebuilding gross margin is set forth below.
Homebuilding gross margin before cost of sales interest expense and land charges is a non-GAAP financial measure.
This measure should not be considered as an alternative to homebuilding gross margin determined in accordance with GAAP
as an indicator of operating performance.
Management believes this non-GAAP measure provides investors another way to understand our operating
performance. This measure is also useful internally, helping management evaluate our operating results on a consolidated
basis and relative to other companies in our industry. In particular, the magnitude and volatility of land charges for the
Company, and for other homebuilders, have been significant and, as such, have made financial analysis of our industry more
difficult. Homebuilding metrics excluding land charges, as well as interest amortized to cost of sales, and other similar
presentations prepared by analysts and other companies are frequently used to assist investors in understanding and
comparing the operating characteristics of homebuilding activities by eliminating many of the differences in companies’
respective level of impairments and levels of debt.
45
(Dollars in thousands)
Sale of homes
Cost of sales, excluding interest expense and land charges
Homebuilding gross margin, before cost of sales interest expense
$
and land charges
Cost of sales interest expense, excluding land sales interest expense
Homebuilding gross margin, after cost of sales interest expense,
before land charges
Land charges
Homebuilding gross margin
Gross margin percentage
Gross margin percentage, before cost of sales interest expense and
$
land charges
Gross margin percentage, after cost of sales interest expense, before
land charges
Year Ended
October 31,
October 31,
2017
2,340,033 $
1,937,116
2016
2,600,790 $
2,162,284
October 31,
2015
2,088,129
1,721,336
402,917
76,902
438,506
86,593
366,793
59,574
326,015
17,813
308,202 $
13.2%
351,913
33,353
318,560 $
12.2%
17.2%
16.9%
13.9%
13.5%
307,219
12,044
295,175
14.1%
17.6%
14.7%
Cost of sales expenses as a percentage of consolidated home sales revenues are presented below:
Sale of homes
Cost of sales, excluding interest expense and land charges:
Housing, land and development costs
Commissions
Financing concessions
Overheads
Total cost of sales, before interest expense and land charges
Cost of sales interest
Land charges
Gross margin percentage
Gross margin percentage, before cost of sales interest expense and
land charges
Gross margin percentage, after cost of sales interest expense and
before land charges
Year Ended
October 31,
October 31,
2017
100%
73.1%
3.4%
1.2%
5.1%
82.8%
3.3%
0.7%
13.2%
2016
100 %
73.2 %
3.5 %
1.3 %
5.1 %
83.1 %
3.4 %
1.3 %
12.2 %
17.2%
16.9 %
13.9%
13.5 %
October 31,
2015
100 %
72.0 %
3.6 %
1.4 %
5.4 %
82.4 %
2.9 %
0.6 %
14.1 %
17.6 %
14.7 %
We sell a variety of home types in various communities, each yielding a different gross margin. As a result,
depending on the mix of communities delivering homes, consolidated gross margin may fluctuate up or down. Total
homebuilding gross margin percentage increased to 13.2% for the year ended October 31, 2017 compared to 12.2% for the
same period last year. This increase was primarily attributed to the mix of communities delivering homes and the reduction
of our warranty reserves, as a result of our annual analysis performed in the fourth quarter of each year. Additionally, there
was a decrease in land charges compared to the prior year because of the impairments recorded in the prior year, which
related to the sale of our land portfolio in Minneapolis, Minnesota. Total homebuilding gross margin percentage decreased
to 12.2% for the year ended October 31, 2016 compared to 14.1% for fiscal 2015. We have experienced higher land and
development costs as a percentage of sale of homes revenue in certain of our new communities delivering in fiscal 2016
compared to the same period last year, as well as higher construction costs in many of our markets, which resulted in a
decrease in gross margin percentage for fiscal 2016 compared to fiscal 2015. For the years ended October 31, 2017, 2016
and 2015, gross margin was favorably impacted by the reversal of prior period inventory impairments of $74.4 million, $57.9
million and $35.6 million, respectively, which represented 3.2%, 2.2% and 1.7%, respectively, of “Sale of homes” revenue.
Reflected as inventory impairment loss and land option write-offs in cost of sales (“land charges”), we have written
off or written down certain inventories totaling $17.8 million, $33.4 million and $12.0 million during the years ended October
31, 2017, 2016 and 2015, respectively, to their estimated fair value. See Note 12 to the Consolidated Financial Statements
for an additional discussion. During the years ended October 31, 2017, 2016 and 2015, we wrote off residential land options
and approval and engineering costs totaling $2.7 million, $8.9 million and $4.7 million, respectively, which are included in
the total land charges mentioned above. Option, approval and engineering costs are written off when a community’s pro
46
forma profitability is not projected to produce adequate returns on the investment commensurate with the risk and when we
believe it is probable we will cancel the option, or when a community is redesigned engineering costs related to the initial
design are written off. Such write-offs were located in all segments in fiscal 2017, 2016 and 2015. The inventory impairments
amounted to $15.1 million, $24.5 million and $7.3 million for the years ended October 31, 2017, 2016 and 2015, respectively.
The impairments recorded in fiscal 2017 were related to two communities in the Northeast, one community in the Mid-
Atlantic, two communities in the Midwest, three communities in the Southeast and two communities in the West. The amount
of inventory impairments recorded in fiscal 2016 was higher than the previous several years, primarily due to the land sales
in the Midwest in fiscal 2016 related to our exit of the Minneapolis, Minnesota market, as previously discussed, along with
certain land held for sale in the Northeast. It is difficult to predict impairment levels, and should it become necessary or
desirable to have additional land sales, further lower prices, or should the estimates or expectations used in determining
estimated cash flows or fair value decrease or differ from current estimates in the future, we may need to recognize additional
impairments.
Below is a breakdown of our lot option walk-aways and impairments by segment for fiscal 2017. In fiscal 2017, we
walked away from 22.0% of all the lots we controlled under option contracts. The remaining 78.0% of our option lots are in
communities that we believe remain economically feasible.
The following table represents lot option walk-aways by segment for the year ended October 31, 2017:
(Dollars in millions)
Northeast
Mid-Atlantic
Midwest
Southeast
Southwest
West
Total
Dollar
Amount
of Walk
Number of
Walk-
Away
% of
Walk-
Away
Away
0.5
0.6
0.3
0.8
0.4
0.1
2.7
$
$
Lots
800
951
935
315
611
318
3,930
Lots
20.4%
24.2%
23.8%
8.0%
15.5%
8.1%
100.0%
Walk-
Away
Lots as a
% of Total
Option
Lots
18.0%
29.0%
36.5%
14.3%
13.1%
46.3%
22.0%
Total
Option
Lots(1)
4,434
3,280
2,565
2,197
4,674
687
17,837
(1) Includes lots optioned at October 31, 2017 and lots optioned that the Company walked away from in the year ended
October 31, 2017.
The following table represents impairments by segment for the year ended October 31, 2017:
(In millions)
Northeast
Mid-Atlantic
Midwest
Southeast
Southwest
West
Total
Dollar
Amount of
Impairment
3.3
$
1.5
0.2
8.1
-
2.0
15.1
$
% of
Impairments
Pre-
Impairment
Value(1)
% of Pre-
Impairment
Value
14.9%
17.6%
25.0%
44.3%
0%
64.5%
28.5%
22.2
8.5
0.8
18.3
-
3.1
52.9
21.9% $
9.9%
1.3%
53.7%
0%
13.2%
100.0% $
(1) Represents carrying value, net of prior period impairments, if any, at the time of recording the applicable period’s
impairments.
47
Land Sales and Other Revenues
Land sales and other revenues consist primarily of land and lot sales. A breakout of land and lot sales is set forth
below:
(In thousands)
Land and lot sales
Cost of sales, excluding interest
Land and lot sales gross margin, excluding interest
Land and lot sales interest expense
Land and lot sales gross margin, including interest
Year Ended
October 31,
October 31,
2017
48,596 $
24,688
23,908
11,634
12,274 $
2016
76,041 $
68,173
7,868
5,798
2,070 $
$
$
October 31,
2015
850
702
148
39
109
Land sales are ancillary to our residential homebuilding operations and are expected to continue in the future but
may significantly fluctuate up or down. Although we budget land sales, they are often dependent upon receiving approvals
and entitlements, the timing of which can be uncertain. As a result, projecting the amount and timing of land sales is difficult.
There were ten land sales in the year ended October 31, 2017, compared to 26 in the same period of the prior year, resulting
in a $27.4 million decrease in land sales revenue. This decrease was primarily due to the sale of six land parcels in the
Midwest and ten land parcels in the Southeast in the third quarter of fiscal 2016 in connection with our previously discussed
strategy to exit the Minneapolis, Minnesota and Raleigh, North Carolina markets. As discussed, there were 26 land sales in
the year ended October 31, 2016, compared to only three in the year ended October 31, 2015.
Land sales and other revenues decreased $26.0 million for the year ended October 31, 2017, and increased $75.2
million for the year ended October 31, 2016 compared to the same periods in the prior year. Other revenues include income
from contract cancellations where the deposit has been forfeited due to contract terminations, interest income, cash discounts
and miscellaneous one-time receipts. The decrease from fiscal 2016 to fiscal 2017 and the increase from fiscal 2015 to fiscal
2016 was mainly due to the fluctuations in land sales revenue noted above.
Homebuilding Selling, General and Administrative
Homebuilding selling, general and administrative (“SGA”) expenses increased $3.4 million to $196.3 million for
the year ended October 31, 2017 as compared to the year ended October 31, 2016. The increase was primarily due to a $12.5
million adjustment in the fourth quarter of fiscal 2017 in our construction defect reserves related to litigation. Excluding this
adjustment, SGA expenses decreased $9.1 million to $183.8 million for the year ended October 31, 2017 as compared to the
year ended October 31, 2016. The decrease was mainly due to our decision to exit four markets during 2016, the reduction
of our community count and the increase of joint venture management fees received, which offset general and administrative
expenses, as a result of more joint venture deliveries. SGA increased $4.5 million to $192.9 million for the year ended October
31, 2016 compared to the year ended October 31, 2015. This increase was mainly due to increases in sales and other
compensation related to increased headcount and increased compensation reflective of the competitive homebuilding market,
increased advertising costs related to community count growth that occurred at the end of fiscal 2015 and higher bonus
expense due to higher profits in certain markets. These increases were partially offset by the decrease of $3.7 million from
the impact of our exit from the Minneapolis, Minnesota and Raleigh, North Carolina markets during the third quarter of fiscal
2016 and a decrease in insurance reserves of $9.2 million, as a result of our annual actuarial analysis of estimated construction
defect costs on previously delivered homes, as discussed further in Note 16 to the Consolidated Financial Statements.
48
Homebuilding Operations by Segment
Financial information relating to the Company’s operations was as follows:
Segment Analysis (Dollars in thousands, except average sales price)
Years Ended October 31,
Variance
2017
Compared
Variance
2016
Compared
2017
to 2016
2016
to 2015
2015
209,509 $
2,300 $
351
475,077 $
(68,519) $
6,169 $
(206)
(17,070) $
278,028 $
(3,869) $
557
492,147 $
88,531 $
3,873 $
177
(5,350) $
189,497
(7,742)
380
497,497
464,126 $
17,191 $
856
541,205 $
5,547 $
(285) $
(104)
64,220 $
458,579 $
17,476 $
960
476,985 $
59,079 $
(3,955) $
106
10,788 $
199,770 $ (111,552) $
10,265 $
(281)
(1,176) $
(1,151) $
640
310,951 $
311,322 $
(11,416) $
921
312,127 $
(127) $
(25,428) $
(37)
(12,888) $
260,402 $
(6,199) $
614
418,675 $
(182) $
11,592 $
33
49,336 $
260,584 $
(17,791) $
581
369,339 $
52,922 $
(11,461) $
(94)
62,070 $
827,503 $ (201,026) $ 1,028,529 $ 204,676 $
16,987 $
487
9,113 $
84,424 $
2,750
372,512 $
71,540 $
2,357
350,624 $
(12,884) $
(393)
(21,888) $
430,546 $
19,636 $
784
545,297 $
88,099 $
16,191 $
89
52,788 $
342,447 $ 182,478 $
20,590 $
318
68,620 $
3,445 $
695
492,509 $
399,500
21,431
854
466,197
311,449
14,012
958
325,015
207,662
(6,330)
675
307,269
823,853
67,437
2,263
363,399
159,969
(17,145)
377
423,889
Northeast
Homebuilding revenue
Income (loss) before income taxes
Homes delivered
Average sales price
Mid-Atlantic
Homebuilding revenue
Income before income taxes
Homes delivered
Average sales price
Midwest
Homebuilding revenue
(Loss) income before income taxes
Homes delivered
Average sales price
Southeast
Homebuilding revenue
Loss before income taxes
Homes delivered
Average sales price
Southwest
Homebuilding revenue
Income before income taxes
Homes delivered
Average sales price
West
Homebuilding revenue
Income (loss) before income taxes
Homes delivered
Average sales price
Homebuilding Results by Segment
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
Northeast – Homebuilding revenues decreased 24.6% in fiscal 2017 compared to fiscal 2016 primarily due to a
37.0% decrease in homes delivered and a 3.5% decrease in average selling price. The decrease in average sales price was the
result of new communities delivering lower priced townhomes and single family homes in lower-end submarkets of the
segment in fiscal 2017 compared to some communities that are no longer delivering that had higher priced townhomes and
single family homes in higher-end submarkets of the segment in fiscal 2016.
Loss before income taxes decreased $6.2 million to income of $2.3 million, which was mainly due a $38.9 million
increase in land sales and other revenue, a $7.3 million decrease in inventory impairment loss and land option write-offs and
a $4.5 million decrease in selling, general and administrative costs, partially offset by the decrease in homebuilding revenues
discussed above. Additionally, the gross margin percentage before interest expense was flat for fiscal 2017 compared to fiscal
2016.
49
Homebuilding revenues increased 46.7% in fiscal 2016 compared to fiscal 2015 primarily due to a 46.6% increase
in homes delivered and a $3.5 million increase in land sales and other revenue, partially offset by a 1.1% decrease in average
selling price. The decrease in average sales price was the result of new communities delivering lower priced townhomes and
single family homes in lower-end submarkets of the segment in fiscal 2016 compared to some communities that are no longer
delivering that had higher priced single family homes in higher-end submarkets of the segment in fiscal 2015.
Loss before income taxes decreased $3.9 million to a loss of $3.9 million, which was mainly due to the increase in
homebuilding revenues discussed above and a $4.0 million decrease in selling, general and administrative costs. Additionally,
the gross margin percentage before interest expense was relatively flat for fiscal 2016 compared to fiscal 2015.
Mid-Atlantic – Homebuilding revenues increased 1.2% in fiscal 2017 compared to fiscal 2016 primarily due to a
13.5% increase in average sales price, partially offset by a 10.8% decrease in homes delivered. The increase in average sales
price was the result of new communities delivering higher priced, larger single family homes in higher-end submarkets of
the segment in fiscal 2017 compared to some communities that are no longer delivering that had lower priced, entry-level
single family homes in lower-end submarkets of the segment in fiscal 2016. The increase in average sales price was also
impacted by our ability to raise prices in fiscal 2017 in certain communities that were delivering homes during both periods.
This increase had a minimal impact on our gross margin percentage as it was partially offset by higher construction costs we
experienced during the same period.
Income before income taxes decreased $0.3 million to $17.2 million, due mainly to a $0.8 million increase in selling,
general and administrative costs and a $1.3 million increase in inventory impairment loss and land option write-offs, partially
offset by the increase in homebuilding revenues discussed above and a $1.2 million increase in income from unconsolidated
joint ventures. Additionally, the gross margin percentage before interest expense was flat for fiscal 2017 compared to fiscal
2016.
Homebuilding revenues increased 14.8% in fiscal 2016 compared to fiscal 2015 primarily due to a 12.4% increase
in homes delivered and a 2.3% increase in average sales price. The increase in average sales price was the result of new
communities delivering higher priced, larger single family homes in higher-end submarkets of the segment in fiscal 2016
compared to some communities that are no longer delivering that had lower priced townhomes and single family homes in
lower-end submarkets of the segment in fiscal 2015.
Income before income taxes decreased $4.0 million to $17.4 million, due mainly to a $4.5 million decrease in income
from unconsolidated joint ventures. Additionally, the gross margin percentage before interest expense was relatively flat for
fiscal 2016 compared to fiscal 2015.
Midwest – Homebuilding revenues decreased 35.8% in fiscal 2017 compared to fiscal 2016. There was a 30.5%
decrease in homes delivered and a 0.4% decrease in average sales price. The decrease in average sales price was the result of
less deliveries and home sales revenue for the segment due to our decision to exit the Minneapolis, Minnesota market in
fiscal 2016, which had higher priced, single family homes delivering compared to the lower priced, single family homes
delivering for the remaining markets in the segment. Also impacting the decrease was a $23.1 million decrease in land sales
and other revenue due to the sale of our land portfolio in our Minneapolis, Minnesota division in fiscal 2016.
Loss before income taxes decreased $10.3 million to a loss of $1.2 million. The decrease in loss was primarily due
to a $14.3 million decrease in inventory impairment loss and land option write-offs relating to our land portfolio sold in our
Minneapolis, Minnesota division, a $5.7 million decrease in selling, general and administrative costs and a slight increase in
gross margin percentage before interest expense.
Homebuilding revenues were essentially flat for fiscal 2016 compared to fiscal 2015. There was a 3.9% decrease in
homes delivered and a 4.0% decrease in average sales price. The decrease in average sales price was the result of new
communities delivering lower priced single family homes in lower-end submarkets of the segment in fiscal 2016 compared
to some communities that are no longer delivering that had higher priced single family homes in higher-end submarkets of
the segment in fiscal 2015. These decreases were partially offset by a $23.8 million increase in land sales and other revenue
due primarily to the sale of our land portfolio in our Minneapolis, Minnesota division.
Income before income taxes decreased $25.4 million to a loss of $11.4 million. The decrease in income was primarily
due to a $12.9 million increase in inventory impairment loss and land option write-offs relating to our land portfolio sold in
our Minneapolis, Minnesota division, a $1.2 million decrease in income from unconsolidated joint ventures and a decrease
in gross margin percentage before interest expense.
50
Southeast – Homebuilding revenues decreased 0.1% in fiscal 2017 compared to fiscal 2016. The decrease was
primarily due to a $42.7 million decrease in land sales and other revenue due to the sale of our land portfolio in our Raleigh,
North Carolina division during fiscal 2016, partially offset by 13.4% increase in average sales price and a 5.7% increase in
homes delivered. The increase in average sales price was the result of new communities delivering higher priced, larger single
family homes in higher-end submarkets of the segment in fiscal 2017 compared to some communities that are no longer
delivering that had lower priced, townhomes and single family homes in lower-end and submarkets of the segment in fiscal
2016. The increase in average sales price was also impacted by our ability to raise prices in fiscal 2017 in certain communities
that were delivering homes during both periods. This increase had a minimal impact on our gross margin percentage as it was
partially offset by higher construction costs we experienced during the same period.
Loss before income taxes decreased $11.6 million to a loss of $6.2 million due to a $6.8 million decrease in selling,
general and administrative costs and a $2.6 million increase in income from unconsolidated joint ventures, while gross margin
percentage before interest expense remained flat. This decrease in loss was partially offset by the decrease in land sales and
other revenue noted above and a $5.6 million increase in inventory impairment loss and land option write-offs.
Homebuilding revenues increased 25.5% in fiscal 2016 compared to fiscal 2015. The increase was primarily due to
a 20.2% increase in average sales price, partially offset by a 13.9% decrease in homes delivered. In addition, there was a
$45.7 million increase in land sales and other revenue mainly due to the sale of our land portfolio in our Raleigh, North
Carolina division during the period. The increase in average sales price was the result of new communities delivering higher
priced, larger single family homes in higher-end submarkets of the segment in fiscal 2016 compared to some communities
that are no longer delivering that had lower priced single family homes in lower-end and submarkets of the segment in fiscal
2015.
Loss before income taxes increased $11.5 million to a loss of $17.8 million due to a $3.2 million increase in selling,
general and administrative costs, a $3.0 million decrease in income from unconsolidated joint ventures and a slight decrease
in gross margin percentage before interest expense.
Southwest – Homebuilding revenues decreased 19.5% in fiscal 2017 compared to fiscal 2016 primarily due to a
14.3% decrease in homes delivered, a 5.9% decrease in average sales price and a $3.0 million decrease in land sales and other
revenue. The decrease in average sales price was the result of new communities delivering lower priced, single family homes
in lower-end submarkets of the segment in fiscal 2017 compared to some communities that are no longer delivering that had
higher priced, single family homes in higher-end submarkets of the segment in fiscal 2016. The decrease in average sales
price was partially offset our ability to raise prices in fiscal 2017 in certain communities that were delivering homes during
both periods. This increase had a minimal impact on our gross margin percentage as it was partially offset by higher
construction costs we have been experienced during the same period.
Income before income taxes decreased $12.9 million to $71.5 million in fiscal 2017 mainly due to the decrease in
homebuilding revenues discussed above, partially offset by a $1.5 million decrease in selling, general and administrative
costs and a $2.8 million decrease in inventory impairment loss and land option write-offs. Additionally, the gross margin
percentage before interest expense was flat for fiscal 2017 compared to fiscal 2016.
Homebuilding revenues increased 24.8% in fiscal 2016 compared to fiscal 2015 primarily due to a 21.5% increase
in homes delivered, a 2.5% increase in average sales price and a $2.6 million increase in land sales and other revenue. The
increase in average sales price was the result of new communities delivering higher priced, townhomes and larger single
family homes in higher-end submarkets of the segment in fiscal 2016 compared to some communities that are no longer
delivering that had lower priced, single family homes in lower-end and submarkets of the segment in fiscal 2015.
Income before income taxes increased $17.0 million to $84.4 million in fiscal 2016 mainly due to the increase in
homebuilding revenues discussed above.
West – Homebuilding revenues increased 25.7% in fiscal 2017 compared to fiscal 2016 primarily due to a 12.8%
increase in homes delivered and a 10.7% increase in average sales price. The increase in average sales price was the result of
our ability to raise prices in fiscal 2017 in certain communities that were delivering homes during both periods. In addition,
there was a $2.9 million increase in land sales and other revenue for fiscal 2017 compares to fiscal 2016.
51
Income before income taxes increased $16.2 million to $19.6 million in fiscal 2017 due mainly to the increase in
homebuilding revenues discussed above, a $2.9 million decrease in selling, general and administrative costs and a slight
increase in gross margin percentage before interest expense. This increase in income was partially offset by a $4.4 million
decrease in income from unconsolidated joint ventures and a $1.9 million increase in inventory impairment loss and land
option write-offs.
Homebuilding revenues increased 114.1% in fiscal 2016 compared to fiscal 2015 primarily due to an 84.4% increase
in homes delivered, mainly resulting from increased community count, as well as a 16.2% increase in average sales price.
The increase in average sales price was the result of our ability to raise prices in certain communities that were delivering
homes during both periods.
Loss before income taxes decreased $20.6 million to income of $3.4 million in fiscal 2016 due mainly to the increase
in homebuilding revenues discussed above, a $1.9 million decrease in inventory impairment loss and land option write-offs
and an increase in gross margin percentage before interest expense. This decrease in loss was partially offset by a $3.6 million
increase in selling, general and administrative costs.
Financial Services
Financial services consist primarily of originating mortgages from our home buyers, selling such mortgages in the
secondary market, and title insurance activities. We use mandatory investor commitments and forward sales of MBS to hedge
our mortgage-related interest rate exposure on agency and government loans. These instruments involve, to varying degrees,
elements of credit and interest rate risk. Credit risk associated with MBS forward commitments and loan sales transactions
is managed by limiting our counterparties to investment banks, federally regulated bank affiliates and other investors meeting
our credit standards. Our risk, in the event of default by the purchaser, is the difference between the contract price and fair
value of the MBS forward commitments. For the years ended October 31, 2017, 2016 and 2015, FHA/VA loans represented
25.1%, 25.5%, and 27.1%, respectively, of our total loans. While the origination of FHA/VA loans have decreased over the
last three fiscal years, our conforming conventional loan originations as a percentage of our total loans increased from 69.2%
for fiscal 2015 to 69.6% for fiscal 2016 and decreased slightly to 69.0% for fiscal 2017. The remaining 5.9%, 4.9% and 3.7%
of our loan originations represent USDA and/or jumbo loans. Profits and losses relating to the sale of mortgage loans are
recognized when legal control passes to the buyer of the mortgage and the sales price is collected.
During the years ended October 31, 2017, 2016, and 2015, financial services provided a $26.4 million, $35.5 million
and $24.7 million pretax profit, respectively. In fiscal 2017, financial services pretax profit decreased $9.1 million due to the
decrease in the homebuilding deliveries, along with a decrease in the average price of loans settled. In fiscal 2016, financial
services pretax profit increased $10.8 million compared to fiscal 2015 due to the increase in homebuilding deliveries, along
with an increase in the average price of loans settled. In the market areas served by our wholly owned mortgage banking
subsidiaries, 67.8%, 67.3%, and 73.4% of our noncash home buyers obtained mortgages originated by these subsidiaries
during the years ended October 31, 2017, 2016, and 2015, respectively. Additionally, approximately 77% and 75%, excluding
cash homebuyers and mortgages which we do not originate, obtained mortgages originated by these subsidiaries in fiscal
2016 and 2015. Servicing rights on new mortgages originated by us are sold with the loans.
Corporate General and Administrative
Corporate general and administrative expenses include the operations at our headquarters in Red Bank, New Jersey.
These expenses include payroll, stock compensation, facility and other costs associated with our executive offices,
information services, human resources, corporate accounting, training, treasury, process redesign, internal audit, construction
services and administration of insurance, quality and safety. Corporate general and administrative expenses decreased $0.8
million for the year ended October 31, 2017 compared to the year ended October 31, 2016, and decreased $2.4 million for
the year ended October 31, 2016 compared to the year ended October 31, 2015. The minor decrease in expense for 2017 was
due mainly to the reversal of previously recognized expense for certain performance based stock compensation plans for
which certain requirements are not expected to be satisfied, partially offset by the increase from an adjustment to reserves for
self-insured medical claims that were reduced based on claim estimates that occurred in the prior year and which did not
recur in 2017. The decrease in expense for fiscal 2016 was due mainly to the reversal of previously recognized expense for
certain performance based stock grants for which the performance metrics are no longer expected to be satisfied, along with
a decrease in stock compensation expense resulting from lower fair values on our more recent grants.
52
Other Interest
Other interest increased $6.3 million to $97.3 million for the year ended October 31, 2017 compared to October 31,
2016, but decreased $0.8 million to $91.0 million for the year ended October 31, 2016 compared to October 31, 2015. Our
assets that qualify for interest capitalization (inventory under development) are less than our debt, and therefore a portion of
interest not covered by qualifying assets must be directly expensed. In fiscal 2017, the increase can be attributed to the full
year of interest from our senior secured term loan compared to one month in the prior year, as well as the higher interest rate
on our secured debt that was refinanced in July 2017. In fiscal 2016, the slight decrease was attributed to the reduction in
total notes payable as a result of debt maturities that occurred over the course of the year, offset by the increase in land
banking transactions during the year.
Other Operations
Other operations consist of rent expense for commercial office space and amortization of prepaid bond fees.
Compared to the previous year, other operations decreased $3.4 million to $1.5 million for the year ended October 31, 2017,
and decreased $1.1 million to $4.9 million for the year ended October 31, 2016. The decrease in other operations for the year
ended October 31, 2017 compared to the prior year is due amortizing bond fees to interest expense instead of amortizing
them to other expense as a result of implementing ASU 2015-03 during fiscal 2017. The decrease in other operations for the
year ended October 31, 2016 compared to the prior year was due to decreased prepaid bond fees amortization as a result of
the maturity of our 11.875% Senior Notes due October 2015, 6.25% Senior Notes due January 2016 and 7.5% Senior Notes
due May 2016.
Loss on Extinguishment of Debt
We incurred a $34.9 million loss on extinguishment of debt during the year ended October 31, 2017. This was due
to three items that occurred during fiscal 2017. First, we repurchased in open market transactions $17.5 million aggregate
principal amount of 7.0% Notes, $14.0 million aggregate principal amount of 8.0% Notes and 6,925 senior exchangeable
note units representing $6.9 million stated amount of senior exchangeable note units. The aggregate purchase price for these
transactions was $30.8 million, plus accrued and unpaid interest. These transactions resulted in a gain on extinguishment of
debt of $7.8 million. Second, we incurred $0.4 million of costs associated with the 9.50% 2020 Notes issued during the fourth
quarter of fiscal 2016. Third, we issued $440.0 million aggregate principal amount of 10.0% 2022 Notes and $400.0 million
aggregate principal amount of 10.5% 2024 Notes. The net proceeds from these issuances together with available cash were
used to (i) purchase $575,912,000 principal amount of 7.25% First Lien Notes, $87,321,000 principal amount of 9.125%
Second Lien Notes and all $75,000,000 principal amount of 10.0% Second Lien Notes that were tendered and accepted for
purchase pursuant to the Tender Offers and to pay related tender premiums and accrued and unpaid interest thereon to the
date of purchase and (ii) satisfy and discharge all obligations (and cause the release of the liens on the collateral securing
such indebtedness) under the indentures under which the 7.25% First Lien Notes, the 9.125% Second Lien Notes and the
10.0% Second Lien Notes were issued and in connection therewith to call for redemption on October 15, 2017 and on
November 15, 2017 all remaining $1,088,000 principal amount of 7.25% First Lien Notes and all remaining $57,679,000
principal amount of 9.125% Second Lien Notes, respectively, that were not validly tendered and purchased in the applicable
Tender Offer in accordance with the redemption provisions of the indentures governing the 2020 Secured Notes. These
transactions resulted in a loss on extinguishment of debt of $42.3 million.
We incurred a $3.2 million loss on extinguishment of debt for the year ended October 31, 2016, due to the
redemption of the remaining outstanding principal amount of our 8.625% Senior Notes due 2017 and the exchange of a
portion of our Existing Second Lien Notes for Exchange Notes. These losses were slightly offset by a gain from the purchase
of 20,823 6.0% Exchangeable Note Units due December 2017. We did not incur any loss on the extinguishment of debt for
the year ended October 31, 2015.
(Loss) Income from Unconsolidated Joint Ventures
(Loss) income from unconsolidated joint ventures consists of our share of the earnings or losses of our joint ventures.
Loss from unconsolidated joint ventures increased $2.7 million for the year ended October 31, 2017 from a loss of $4.3
million for the year ended October 31, 2016 to a loss of $7.0 million. The increase in loss is due to the recognition of our
share of losses on our newly formed joint ventures, some of which have not delivered any homes, and the write-off of our
investment on a joint venture that has delivered its last home during fiscal 2017 and we have determined that for which we
will not receive any future distributions. Income from unconsolidated joint ventures decreased $8.5 million for the year ended
October 31, 2016 from income of $4.2 million for the year ended October 31, 2015 to a loss of $4.3 million for the year
53
ended October 31, 2016. The decrease in income to a loss was mainly due to fewer deliveries at certain of our joint ventures
and recognition of our share of losses on our newly formed joint ventures that have not yet begun delivering homes.
Total Taxes
The total income tax expense of $286.9 million for the period ended October 31, 2017 was primarily due to
increasing our valuation allowance to fully reserve against our deferred tax assets (“DTAs”). In addition, this period was also
impacted by state tax expense from income generated in some states, which was not offset by tax benefits in other states that
had losses for which we fully reserve the net operating losses. The total income tax expense of $5.3 million for the period
ended October 31, 2016 was primarily due to current state taxes and permanent differences related to stock compensation,
partially offset by a federal tax benefit related to receiving a specified liability loss refund of taxes paid in fiscal year 2002.
The total income tax benefit of $5.7 million recognized for the year ended October 31, 2015 was primarily due to deferred
taxes resulting from the loss before income taxes plus the reversal of state tax reserves for uncertain state tax positions,
partially offset by state tax expenses.
Deferred federal and state income tax assets primarily represent the deferred tax benefits arising from net operating
loss carryforwards and temporary differences between book and tax income which will be recognized in future years as an
offset against future taxable income. If the combination of future years’ income (or loss) and the reversal of the timing
differences results in a loss, such losses can be carried forward to future years. In accordance with ASC 740, we evaluate our
deferred tax assets quarterly to determine if valuation allowances are required. ASC 740 requires that companies assess
whether valuation allowances should be established based on the consideration of all available evidence using a “more likely
than not” standard.
As of October 31, 2017, we considered all available positive and negative evidence to determine whether, based on
the weight of that evidence, an adjustment to our valuation allowance for our DTAs was necessary in accordance with ASC
740. As listed in Note 11 to the Consolidated Financial Statements, in order of the weighting of each factor, is the available
positive and negative evidence that we considered in determining that it is more likely than not that all of our DTAs will not
be realized. In analyzing these factors, overall the negative evidence, both objective and subjective, outweighed the positive
evidence. Based on this analysis, we increased the valuation allowance against our DTAs such that we have a full valuation
allowance and determined that the current valuation allowance for deferred taxes of $918.2 million as of October 31, 2017 is
appropriate.
Off-Balance Sheet Financing
In the ordinary course of business, we enter into land and lot option purchase contracts in order to procure land or
lots for the construction of homes. Lot option contracts enable us to control significant lot positions with a minimal capital
investment and substantially reduce the risks associated with land ownership and development. At October 31, 2017, we had
$57.1 million in option deposits in cash and letters of credit to purchase land and lots with a total purchase price of $1.0
billion. Our financial exposure is generally limited to forfeiture of the nonrefundable deposits, letters of credit and other
nonrefundable amounts incurred. We have no material third-party guarantees.
54
Contractual Obligations
The following summarizes our aggregate contractual commitments at October 31, 2017.
(In thousands)
Long term debt (2)(3)(4)
Operating leases
Purchase obligations (5)
Total
Payments Due by Period (1)
Less than
Total
1 year
$ 2,279,939 $ 246,840 $
8,139
31,066
-
-
$ 2,311,005 $ 254,979 $
1-3 years
745,391 $
13,236
-
758,627 $
3-5 years
809,181 $
5,349
-
814,530 $
More than
5 years
478,527
4,342
-
482,869
(1) Total contractual obligations exclude our accrual for uncertain tax positions of $1.4 million recorded for financial
reporting purposes as of October 31, 2017 because we were unable to make reasonable estimates as to the period of
cash settlement with the respective taxing authorities.
(2) Represents our revolving credit facility, senior secured term loan, senior secured, senior, senior amortizing and senior
exchangeable notes, and other notes payable and $604.8 million of related interest payments for the life of such debt.
(3) Does not include $64.5 million of nonrecourse mortgages secured by inventory. These mortgages have various maturities
spread over the next two to three years and are paid off as homes are delivered.
(4) Does not include the mortgage warehouse lines of credit made under our Master Repurchase Agreements. See“- Capital
Resources and Liquidity.” Also does not include $14.6 million of letters of credit issued as of October 31, 2017 under
our $75.0 million revolving Credit Facility.
(5) Represents obligations under option contracts with specific performance provisions, net of cash deposits.
We had outstanding letters of credit and performance bonds of $16.3 million and $199.5 million, respectively, at
October 31, 2017, related principally to our obligations to local governments to construct roads and other improvements in
various developments. We do not believe that any such letters of credit or bonds are likely to be drawn upon.
Inflation
Inflation has a long-term effect, because increasing costs of land, materials and labor result in increasing sale prices
of our homes. In general, these price increases have been commensurate with the general rate of inflation in our housing
markets and have not had a significant adverse effect on the sale of our homes. A significant risk faced by the housing industry
generally is that rising house construction costs, including land and interest costs, will substantially outpace increases in the
income of potential purchasers and therefore limit our ability to raise home sale prices, which may result in lower gross
margins.
Inflation has a lesser short-term effect, because we generally negotiate fixed-price contracts with many, but not all,
of our subcontractors and material suppliers for the construction of our homes. These prices usually are applicable for a
specified number of residential buildings or for a time period of between three to twelve months. Construction costs for
residential buildings represent approximately 53% of our homebuilding cost of sales for fiscal 2017.
Safe Harbor Statement
All statements in this Annual Report on Form 10-K that are not historical facts should be considered as “Forward-
Looking Statements” within the meaning of the “Safe Harbor” provisions of the Private Securities Litigation Reform Act of
1995. Such statements involve known and unknown risks, uncertainties and other factors that may cause actual results,
performance or achievements of the Company to be materially different from any future results, performance or achievements
expressed or implied by the forward-looking statements. Such forward-looking statements include but are not limited to
statements related to the Company's goals and expectations with respect to its financial results for future financial periods.
Although we believe that our plans, intentions and expectations reflected in, or suggested by, such forward-looking statements
are reasonable, we can give no assurance that such plans, intentions or expectations will be achieved. By their nature, forward-
looking statements: (i) speak only as of the date they are made, (ii) are not guarantees of future performance or results and
(iii) are subject to risks, uncertainties and assumptions that are difficult to predict or quantify. Therefore, actual results could
55
differ materially and adversely from those forward-looking statements as result of a variety of factors. Such risks,
uncertainties and other factors include, but are not limited to:
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
Changes in general and local economic, industry and business conditions and impacts of a sustained homebuilding
downturn;
Adverse weather and other environmental conditions and natural disasters;
Levels of indebtedness and restrictions on the Company’s operations and activities imposed by the agreements
governing the Company’s outstanding indebtedness;
The Company’s sources of liquidity;
Changes in credit ratings;
Changes in market conditions and seasonality of the Company’s business;
The availability and cost of suitable land and improved lots;
Shortages in, and price fluctuations of, raw materials and labor;
Regional and local economic factors, including dependency on certain sectors of the economy, and employment
levels affecting home prices and sales activity in the markets where the Company builds homes;
Fluctuations in interest rates and the availability of mortgage financing;
Changes in tax laws affecting the after-tax costs of owning a home;
Operations through joint ventures with third parties;
Government regulation, including regulations concerning development of land, the home building, sales and
customer financing processes, tax laws and the environment;
Product liability litigation, warranty claims and claims made by mortgage investors;
Levels of competition;
Availability and terms of financing to the Company;
Successful identification and integration of acquisitions;
Significant influence of the Company’s controlling stockholders;
Availability of net operating loss carryforwards;
Utility shortages and outages or rate fluctuations;
Geopolitical risks, terrorist acts and other acts of war;
Increases in cancellations of agreements of sale;
Loss of key management personnel or failure to attract qualified personnel;
Information technology failures and data security breaches; and
Legal claims brought against us and not resolved in our favor.
Certain risks, uncertainties and other factors are described in detail in Part I, Item 1 “Business” and Part I, Item 1A
“Risk Factors” in this Annual Report on Form 10-K as updated by our subsequent filings with the SEC. Except as otherwise
required by applicable securities laws, we undertake no obligation to publicly update or revise any forward-looking
statements, whether as a result of new information, future events, changed circumstances or any other reason after the date
of this Annual Report on Form 10-K.
56
(Dollars in thousands)
Long term debt(1)(2):
Fixed rate
ITEM 7A
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
A primary market risk facing us is interest rate risk on our long term debt, including debt instruments at variable
interest rates. In connection with our mortgage operations, mortgage loans held for sale and the associated mortgage
warehouse lines of credit under our Master Repurchase Agreements are subject to interest rate risk; however, such obligations
reprice frequently and are short-term in duration. In addition, we hedge the interest rate risk on mortgage loans by obtaining
forward commitments from private investors. Accordingly, the interest rate risk from mortgage loans is not material. We do
not use financial instruments to hedge interest rate risk except with respect to mortgage loans. We are also subject to foreign
currency risk but we do not believe this risk is material. The following tables set forth as of October 31, 2017 and 2016, our
long-term debt obligations, principal cash flows by scheduled maturity, weighted-average interest rates and estimated fair
value (“FV”).
Long-Term Debt Tables
Long-Term Debt as of October 31, 2017 by Fiscal Year of Debt Maturity
2018
2019
2020
2021
2022 Thereafter
Total
FV at
10/31/17
$ 109,414 $ 209,082 $237,634 $ 76,825 $ 636,994 $ 404,572 $ 1,674,521 $ 1,760,337
Weighted-average
interest rate
4.09%
7.46%
8.00%
9.48 %
8.22%
10.49%
8.43%
(1) Does not include the mortgage warehouse lines of credit made under our Master Repurchase Agreements. Also does
not include $14.6 million of letters of credit issued as of October 31, 2017 under our $75.0 million revolving Credit Facility.
(2) Does not include $64.5 million of nonrecourse mortgages secured by inventory. These mortgages have various
maturities spread over the next two to three years and are paid off as homes are delivered.
(Dollars in thousands)
Long term debt(1)(2):
Fixed rate
Long-Term Debt as of October 31, 2016 by Fiscal Year of Debt Maturity
2017
2018
2019
2020
2021 Thereafter
Total
FV at
10/31/16
$ 5,457 $ 188,412 $ 226,536 $828,673 $221,825 $ 201,566 $1,672,469 $1,337,496
Weighted-average
interest rate
10.33%
6.48%
7.26%
7.48%
9.25%
4.34%
7.20%
(1) Does not include the mortgage warehouse lines of credit made under our Master Repurchase Agreements. Also does
not include $17.9 million of letters of credit issued as of October 31, 2016 under our $75.0 million revolving Credit Facility.
(2) Does not include $82.1 million of nonrecourse mortgages secured by inventory. These mortgages have various
maturities spread over the next two to three years and are paid off as homes are delivered.
ITEM 8
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Financial statements of Hovnanian Enterprises, Inc. and its consolidated subsidiaries are set forth herein beginning
on page 72.
ITEM 9
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
57
ITEM 9A
CONTROLS AND PROCEDURES
The Company maintains disclosure controls and procedures that are designed to ensure that information required to
be disclosed in the Company’s reports under the Securities Exchange Act of 1934, as amended, is recorded, processed,
summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is
accumulated and communicated to the Company’s management, including its chief executive officer and chief financial
officer, as appropriate, to allow timely decisions regarding required disclosures. Any controls and procedures, no matter how
well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. The
Company’s management, with the participation of the Company’s chief executive officer and chief financial officer, has
evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of October
31, 2017. Based upon that evaluation and subject to the foregoing, the Company’s chief executive officer and chief financial
officer concluded that the design and operation of the Company’s disclosure controls and procedures are effective to
accomplish their objectives.
Changes in Internal Control Over Financial Reporting
There was no change in the Company’s internal control over financial reporting that occurred during the quarter
ended October 31, 2017 that has materially affected, or is reasonably likely to materially affect, the Company’s internal
control over financial reporting.
Management’s Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting,
as such term is defined in Exchange Act Rule 13a-15(f).
All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems
determined to be effective can provide only reasonable assurance with respect to financial statement preparation and
presentation.
Under the supervision and with the participation of our management, including our principal executive officer and
principal financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting
based on the framework in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission (2013 Framework). Based on our evaluation under the framework in Internal Control -
Integrated Framework, our management concluded that our internal control over financial reporting was effective as of
October 31, 2017.
The effectiveness of the Company’s internal control over financial reporting as of October 31, 2017 has been audited
by Deloitte & Touche LLP, the Company’s independent registered public accounting firm, as stated in their report below.
58
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Hovnanian Enterprises, Inc.
Red Bank, New Jersey
We have audited the internal control over financial reporting of Hovnanian Enterprises, Inc. and subsidiaries (the "Company")
as of October 31, 2017, based on criteria established in Internal Control — Integrated Framework (2013) issued by the
Committee of Sponsoring Organizations of the Treadway Commission. The Company's management is responsible for
maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control
over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting.
Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material respects. Our audit included obtaining an
understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and
evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other
procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our
opinion.
A company's internal control over financial reporting is a process designed by, or under the supervision of, the company's
principal executive and principal financial officers, or persons performing similar functions, and effected by the company's
board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting
principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the
maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets
of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the
company's assets that could have a material effect on the financial statements.
Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or
improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on
a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future
periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of
October 31, 2017, based on the criteria established in Internal Control — Integrated Framework (2013) issued by the
Committee of Sponsoring Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States),
the consolidated financial statements as of and for the year ended October 31, 2017 of the Company and our report dated
December 28, 2017 expressed an unqualified opinion on those financial statements.
/s/ Deloitte & Touche LLP
New York, New York
December 28, 2017
59
ITEM 9B
OTHER INFORMATION
None.
PART III
ITEM 10
DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE
The information called for by Item 10, except as set forth in this Item 10, is incorporated herein by reference to our
definitive proxy statement to be filed pursuant to Regulation 14A in connection with our annual meeting of shareholders to
be held on March 13, 2018, which will involve the election of directors.
Executive Officers of the Registrant
Our executive officers are listed below and brief summaries of their business experience and certain other
information with respect to them are set forth following the table. Each executive officer holds such office for a one-year
term.
Name
Ara K. Hovnanian
Age Position
60 Chairman of the Board, Chief Executive Officer, President and Director of the
Company
Lucian T. Smith, III 57 Chief Operating Officer
J. Larry Sorsby
Brad G. O’Connor
62 Executive Vice President, Chief Financial Officer and Director of the Company
47 Vice President, Chief Accounting Officer and Corporate Controller
Year
Started
With
Company
1979
2007
1988
2004
Mr. Hovnanian has been Chief Executive Officer since July 1997 after being appointed President in 1988 and
Executive Vice President in 1983. Mr. Hovnanian joined the Company in 1979 and has been a Director of the Company since
1981 and was Vice Chairman from 1998 through November 2009. In November 2009, he was elected Chairman of the Board
following the death of Kevork S. Hovnanian, the chairman and founder of the Company and the father of Mr. Hovnanian.
Mr. Smith was appointed Chief Operating Officer, effective November 1, 2016. Mr. Smith joined the Company in
April 2007 as a Region President and was promoted to Group President in January 2010. Most recently Mr. Smith has served
as Executive Vice President of Homebuilding Operations, a position he had held since August 2015.
Mr. Sorsby has been Chief Financial Officer of Hovnanian Enterprises, Inc. since 1996, and Executive Vice
President since November 2000. Mr. Sorsby was also Senior Vice President from March 1991 to November 2000 and was
elected as a Director of the Company in 1997. He is Chairman of the Board of Visitors for Urology at The Children’s Hospital
of Philadelphia (“CHOP”) and also serves on the Foundation Board of Overseers at CHOP.
Mr. O’Connor joined the Company in April 2004 as Vice President and Associate Corporate Controller. In
December 2007, he was promoted to Vice President, Corporate Controller and then in May 2011, he also became Vice
President, Chief Accounting Officer. Prior to joining the Company, Mr. O’Connor was the Corporate Controller for
Amershem Biosciences, and prior to that a Senior Manager in the audit practice of PricewaterhouseCoopers LLP.
Code of Ethics and Corporate Governance Guidelines
In more than 50 years of doing business, we have been committed to enhancing our shareholders’ investment through
conduct that is in accordance with the highest levels of integrity. Our Code of Ethics is a set of guidelines and policies that
govern broad principles of ethical conduct and integrity embraced by our Company. Our Code of Ethics applies to our
principal executive officer, principal financial officer, chief accounting officer, and all other associates of our Company,
including our directors and other officers.
60
We also remain committed to fostering sound corporate governance principles. The Company’s Corporate
Governance Guidelines assist the Board of Directors of the Company (the “Board”) in fulfilling its responsibilities related to
corporate governance conduct. These guidelines serve as a framework, addressing the function, structure, and operations of
the Board, for purposes of promoting consistency of the Board’s role in overseeing the work of management.
We have posted our Code of Ethics on our web site at www.khov.com under “Investor Relations/Corporate
Governance.” We have also posted our Corporate Governance Guidelines on our web site at www.khov.com under “Investor
Relations/Corporate Governance.” A printed copy of the Code of Ethics and Guidelines is also available to the public at no
charge by writing to: Hovnanian Enterprises, Inc., Attn: Human Resources Department, 110 West Front Street, P.O. Box
500, Red Bank, N.J. 07701 or calling corporate headquarters at 732-747-7800. We will post amendments to or waivers from
our Code of Ethics that are required to be disclosed by the rules of either the SEC or the New York Stock Exchange (the
“NYSE”) on our web site at www.khov.com under “Investor Relations/Corporate Governance.”
Audit Committee, Compensation Committee and Corporate Governance and Nominating Committee Charters
We have adopted charters that apply to the Company’s Audit Committee, Compensation Committee and Corporate
Governance and Nominating Committee. We have posted the text of these charters on our web site at www.khov.com under
“Investor Relations/Corporate Governance.” A printed copy of each charter is available at no charge to any shareholder who
requests it by writing to: Hovnanian Enterprises, Inc., Attn: Human Resources Department, 110 West Front Street, P.O. Box
500, Red Bank, N.J. 07701 or calling corporate headquarters at 732-747-7800.
ITEM 11
EXECUTIVE COMPENSATION
The information called for by Item 11 is incorporated herein by reference to our definitive proxy statement to be
filed pursuant to Regulation 14A in connection with our annual meeting of shareholders to be held on March 13, 2018.
61
ITEM 12
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
The information called for by Item 12, except as set forth in this Item 12, is incorporated herein by reference to our
definitive proxy statement to be filed pursuant to Regulation 14A in connection with our annual meeting of shareholders to
be held on March 13, 2018.
The following table provides information as of October 31, 2017, with respect to compensation plans (including
individual compensation arrangements) under which our equity securities are authorized for issuance.
Equity Compensation Plan Information
Number of
Class A
Common Stock
securities to be
issued upon
exercise of
outstanding
options,
warrants and
rights (in
thousands)(1)(4)
(a)
Number of
Class
B Common
Stock
securities to
be
issued upon
exercise of
outstanding
options,
warrants and
rights (in
thousands)(1)
(a)
Weighted-
average
exercise
price of
outstanding
Class A
Common
Stock
options,
warrants
and
rights(2)
(b)
Weighted-
average
exercise
price of
outstanding
Class B
Common
Stock
options,
warrants
and
rights(3)
(b)
Number of
securities
remaining
available for
future
issuance
under equity
compensation
plans
(excluding
securities
reflected in
columns (a))
(in
thousands)(5)
(c)
8,216
7,956 $
3.23 $
3.64
7,154
-
8,216
-
7,956 $
-
3.23 $
-
3.64
-
7,154
Plan Category
Equity compensation plans approved by
security holders:
Equity compensation plans not approved by
security holders:
Total
(1)
(2)
(3)
(4)
(5)
Includes the maximum number of shares that are potentially issuable under the Market Stock Units granted in fiscal
2014, fiscal 2015, fiscal 2016 and fiscal 2017 (“the “MSUs”) under the 2012 Hovnanian Enterprises, Inc. Amended
and Restated Stock Incentive Plan (as further amended and restated from time to time, the “Stock Plan”) and the
actual number of shares for which performance has been met that are issuable under the 2013 Long-Term Incentive
Program under the 2012 Hovnanian Enterprises, Inc. Amended and Restated Stock Incentive Plan (as further
amended and restated from time to time, the “Stock Plan”), subject to vesting. Also includes the maximum number
of shares that are potentially issuable under the 2016 Long-Term Incentive Program under the 2012 Hovnanian
Enterprises, Inc. Amended and Restated Stock Incentive Plan (as further amended and restated from time to time,
the “Stock Plan”), subject to vesting.
Does not take into account 4,074,937 shares that may be issued upon the vesting of restricted stock and performance-
based awards discussed in (1) above, nor 193,623 shares of restricted stock vested and deferred at the associates'
election or 118,796 shares of restricted stock deferred due to mandatory hold requirements, in each case, because
they have no exercise price.
Does not take into account 4,923,834 shares that may be issued upon the vesting of the performance-based awards
discussed in (1) above because they have no exercise price.
These shares include 514,250 shares of Class A Common Stock and 675,000 Class B Common Stock, respectively,
shares that may be issued upon exercise of outstanding options with exercise prices greater than $6.00 per share.
Under the Company’s equity compensation plans, securities may be issued in either Class A Common Stock or Class
B Common Stock.
62
ITEM 13
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
The information called for by Item 13 is incorporated herein by reference to our definitive proxy statement to be
filed pursuant to Regulation 14A in connection with our annual meeting of shareholders to be held on March 13, 2018.
ITEM 14
PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information called for by Item 14 is incorporated herein by reference to our definitive proxy statement to be
filed pursuant to Regulation 14A in connection with our annual meeting of shareholders to be held on March 13, 2018.
PART IV
ITEM 15
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
FINANCIAL STATEMENTS:
Index to Consolidated Financial Statements .............................................................................................................
Report of Independent Registered Public Accounting Firm ......................................................................................
Consolidated Balance Sheets at October 31, 2017 and 2016 ....................................................................................
Consolidated Statements of Operations for the years ended October 31, 2017, 2016 and 2015 ...............................
Consolidated Statements of Equity for the years ended October 31, 2017, 2016 and 2015 ......................................
Consolidated Statements of Cash Flows for the years ended October 31, 2017, 2016 and 2015 ..............................
Notes to Consolidated Financial Statements .............................................................................................................
Page
70
71
72
73
74
75
76
No schedules have been prepared because the required information of such schedules is not present, is not present in amounts
sufficient to require submission of the schedule, or because the required information is included in the financial statements
and notes thereto.
ITEM 16
Form 10-K Summary
None.
63
Exhibits:
3(a)
3(b)
4(a)
4(b)
4(c)
4(d)
4(e)
4(f)
4(g)
4(h)
4(i)
4(j)
4(k)
4(l)
4(m)
4(n)
4(o)
10(a)
10(b)
10(c)
Restated Certificate of Incorporation of the Registrant.(5)
Amended and Restated Bylaws of the Registrant.(23)
Specimen Class A Common Stock Certificate.(13)
Specimen Class B Common Stock Certificate.(13)
Certificate of Designations, Powers, Preferences and Rights of the 7.625% Series A Preferred Stock of Hovnanian
Enterprises, Inc., dated July 12, 2005.(11)
Certificate of Designations of the Series B Junior Preferred Stock of Hovnanian Enterprises, Inc., dated August 14,
2008.(1)
Rights Agreement, dated as of August 14, 2008, between Hovnanian Enterprises, Inc. and National City Bank, as
Rights Agent, which includes the Form of Certificate of Designation as Exhibit A, Form of Right Certificate as
Exhibit B and the Summary of Rights as Exhibit C.(21)
Indenture dated as of July 27, 2017, relating to the 10.0% Senior Secured Notes due 2022 and the 10.5% Senior
Secured Notes due 2024, among K. Hovnanian Enterprises, Inc., Hovnanian Enterprises, Inc., the Subsidiary
Guarantors named therein and Wilmington Trust, National Association, as Trustee and Collateral Agent,
including the forms of 10.0% Senior Secured Note due 2022 and the 10.5% Senior Secured Note due 2024. (18)
Indenture dated as of September 8, 2016, relating to the 9.50% Senior Secured Notes due 2020, among K.
Hovnanian Enterprises, Inc., Hovnanian Enterprises, Inc., and the other guarantors named therein and Wilmington
Trust, National Association, as Trustee and Collateral Agent, including form of 9.50% Senior Secured Notes due
2020.(2)
Indenture, dated as of February 14, 2011, relating to Senior Debt Securities, among K. Hovnanian Enterprises,
Inc., Hovnanian Enterprises, Inc. and Wilmington Trust Company, as Trustee.(12)
Indenture dated as of January 10, 2014, relating to the 7.000% Senior Notes due 2019, among K. Hovnanian
Enterprises, Inc., Hovnanian Enterprises, Inc., the other guarantors named therein and Wilmington Trust, National
Association, as Trustee, including the form of 7.000% Senior Note due 2019.(15)
Indenture, dated as of February 9, 2011, relating to Senior Subordinated Debt Securities, among K. Hovnanian
Enterprises, Inc., Hovnanian Enterprises, Inc. and Wilmington Trust Company, as Trustee.(12)
Secured Notes Indenture dated as of November 1, 2011 relating to the 5.0% Senior Secured Notes due 2021 and
2.0% Senior Secured Notes due 2021, among K. Hovnanian Enterprises, Inc., Hovnanian Enterprises, Inc., the
other guarantors named therein and Wilmington Trust, National Association, as Trustee and Collateral Agent,
including the forms of 5.0% Senior Secured Notes due 2021 and 2.0% Senior Secured Notes due 2021.(4)
Units Agreement, among K. Hovnanian Enterprises, Inc., Hovnanian Enterprises, Inc. and Wilmington Trust
Company, as Units Agent, including form of Unit, component amortizing notes and component exchangeable
notes.(14)
Amortizing Notes Indenture, dated as of October 2, 2012, among K. Hovnanian Enterprises, Inc., Hovnanian
Enterprises, Inc. and the other guarantors named therein and Wilmington Trust Company, as Trustee, including
the form of Amortizing Note.(14)
Exchangeable Notes Indenture, dated as of October 2, 2012, among K. Hovnanian Enterprises, Inc., Hovnanian
Enterprises, Inc. and the other guarantors named therein and Wilmington Trust Company, as Trustee, including
the form of Exchangeable Note.(14)
Indenture, dated as of November 5, 2014, relating to the 8.000% Senior Notes due 2019, among K. Hovnanian
Enterprises, Inc., Hovnanian Enterprises, Inc., the other guarantors party thereto and Wilmington Trust, National
Association, as Trustee, including the form of 8.000% Senior Note due 2019.(10)
Collateral Agency Agreement, dated as of July 27, 2017, among K. Hovnanian Enterprises, Inc., Hovnanian
Enterprises, Inc., the Subsidiary Guarantors named therein, Wilmington Trust, National Association, as Notes
Collateral Agent and Wilmington Trust, National Association, as Collateral Agent. (18)
Security Agreement, dated as of July 27, 2017, among K. Hovnanian Enterprises, Inc., Hovnanian Enterprises,
Inc., the Subsidiary Guarantors named therein and Wilmington Trust, National Association, as Collateral Agent.
(18)
Pledge Agreement, dated as of July 27, 2017, among K. Hovnanian Enterprises, Inc., Hovnanian Enterprises, Inc.,
the Subsidiary Guarantors named therein and Wilmington Trust, National Association, as Collateral Agent. (18)
64
10(d)
10(e)
10(f)
10(g)
10(h)
10(i)
10(j)
10(k)*
10(l)*
10(m)*
10(n)*
10(o)
10(p)
10(q)*
10(r)*
10(s)*
10(t)*
10(u)*
10(v)*
10(w)*
10(x)*
10(y)*
10(z)*
10(aa)*
10(bb)*
10(cc)*
10(dd)*
Joinder to the Amended and Restated Intercreditor Agreement, dated as of July 27, 2017, among K. Hovnanian
Enterprises, Inc., Hovnanian Enterprises, Inc., the Subsidiary Guarantors named therein, Wilmington Trust,
National Association, as Trustee and Notes Collateral Agent, Wilmington Trust, National Association, as
Senior Credit Agreement Administrative Agent, Wilmington Trust, National Association, as Junior Joint
Collateral Agent and Wilmington Trust, National Association, as Mortgage Tax Collateral Agent. (18)
Second Amended and Restated Mortgage Tax Collateral Agency Agreement, dated as of July 27 2017, among K.
Hovnanian Enterprises, Inc., Hovnanian Enterprises, Inc., the Subsidiary Guarantors named therein, Wilmington
Trust, National Association, as Notes Collateral Agent, Wilmington Trust, National Association, as Senior Credit
Agreement Administrative Agent, Wilmington Trust, National Association, as Junior Joint Collateral Agent and
Wilmington Trust, National Association, as Mortgage Tax Collateral Agent. (18)
Trademark Security Agreement, dated as of July 27, 2017, between K. HOV IP II, Inc. and Wilmington Trust,
National Association, as Collateral Agent. (18)
Amended and Restated Intercreditor Agreement, dated September 8, 2016, among Hovnanian Enterprises, Inc.,
K. Hovnanian Enterprises, Inc., the other guarantors party thereto, Wilmington Trust, National Association, in its
capacities as Senior Notes Trustee and Senior Notes Collateral Agent (each as defined therein), Wilmington Trust,
National Association, in its capacity as Administrative Agent (as defined therein), Wilmington Trust, National
Association, in its capacity as Mortgage Tax Collateral Agent (as defined therein), Wilmington Trust, National
Association, in its capacities as 9.125% Junior Trustee and 9.125% Junior Collateral Agent (each as defined
therein), Wilmington Trust, National Association, in its capacities as 10.000% Junior Trustee and 10.000% Junior
Collateral Agent (each as defined therein) and Wilmington Trust, National Association, in its capacity as Junior
Joint Collateral Agent (as defined therein).(2)
Amended and Restated First Lien Pledge Agreement, dated as of September 8, 2016, relating to the 5.0% Senior
Secured Notes due 2021, the 2.0% Senior Secured Notes due 2021 and the 9.50% Senior Secured Notes due
2020.(2)
Amended and Restated First Lien Security Agreement, dated as of September 8, 2016, relating to the 5.0% Senior
Secured Notes due 2021, the 2.0% Senior Secured Notes due 2021 and the 9.50% Senior Secured Notes due
2020.(2)
Credit Agreement, dated as of July 29, 2016, among K. Hovnanian Enterprises, Inc., Hovnanian Enterprises, Inc.,
the other guarantors named therein, Wilmington Trust, National Association, as Administrative Agent, and the
lenders party thereto.(2)
Form of Non-Qualified Stock Option Agreement (2012) for Ara K. Hovnanian. (29)
Form of Nonqualified Stock Option Agreement (Class A shares).(24)
Amended and Restated 2008 Hovnanian Enterprises, Inc. Stock Incentive Plan.(16)
1983 Stock Option Plan (as amended and restated).(17)
Management Agreement dated August 12, 1983, for the management of properties by K. Hovnanian Investment
Properties, Inc.(3)
Management Agreement dated December 15, 1985, for the management of properties by K. Hovnanian
Investment Properties, Inc.(20)
Executive Deferred Compensation Plan as amended and restated on May 24, 2012. (29)
Death and Disability Agreement between the Registrant and Ara K. Hovnanian, dated February 2, 2006. (26)
Form of Hovnanian Deferred Share Policy for Senior Executives.(8)
Form of Hovnanian Deferred Share Policy.(8)
Form of Nonqualified Stock Option Agreement (Class B shares).(8)
Form of Incentive Stock Option Agreement.(8)
Form of Stock Option Agreement for Directors.(8)
Form of Restricted Share Unit Agreement.(8)
Form of Incentive Stock Option Agreement.(25)
Form of Restricted Share Unit Agreement.(25)
Form of Performance Vesting Incentive Stock Option Agreement.(25)
Form of Performance Vesting Nonqualified Stock Option Agreement.(25)
Form of Restricted Share Unit Agreement for Directors.(24)
Form of 2016 Long Term Incentive Program Award Agreement.(22)
65
Form of Change in Control Severance Protection Agreement entered into with Brad G. O’Connor.(27)
Form of Amendment to Outstanding Stock Option Grants.(28)
Form of Amendment to 2011 Restricted Share Unit Agreement for Ara K. Hovnanian and J. Larry Sorsby.(28)
Form of Amendment to 2011 Non-Qualified Stock Option Agreement for Ara K. Hovnanian.(28)
Form of Amendment to 2011 Incentive Stock Option Agreement for J. Larry Sorsby.(28)
Form of Incentive Stock Option Agreement (2012).(29)
Form of Restricted Share Unit Agreement (2012).(29)
Form of Stock Option Agreement (2012) for Directors.(29)
10(ee)*
10(ff)*
10(gg)*
10(hh)*
10(ii)*
10(jj)*
10(kk)*
10(ll)*
10(mm)* Form of Restricted Share Unit Agreement (2012) for Directors.(29)
Form of 2013 Long-Term Incentive Program Award.(30)
10(nn)*
Form of 2013 Incentive Stock Option Agreement – Performance Option Grant (Class A shares).(31)
10(oo)*
Form of 2013 Non-Qualified Stock Option Agreement – Performance Option Grant (Class B shares).(31)
10(pp)*
Form of Market Share Unit Agreement Class A shares (2014 grants and thereafter).(9)
10(qq)*
Form of Market Share Unit Agreement Class B shares (2014 grants and thereafter).(9)
10(rr)*
Form of Market Share Unit Agreement (Performance Vesting) Class A (2014 grants and thereafter).(9)
10(ss)*
Form of Market Share Unit Agreement (Performance Vesting) Class B shares (2014 grants and thereafter) (9)
10(tt)*
Form of Incentive Stock Option Agreement (2014 grants and thereafter).(9)
10(uu)*
10(vv)*
Form of Restricted Share Unit Agreement (2014 grants and thereafter).(9)
10(ww)* Form of Stock Option Agreement for Directors (2014 grants and thereafter).(9)
10(xx)*
10(yy)*
10(zz)* Amended and Restated Hovnanian Enterprises, Inc. Senior Executive Short-Term Incentive Plan.(6)
10(aaa)* Form of Letter Agreement Relating to Change in Control Severance Protection Agreement entered into with Brad
Form of Restricted Share Unit Agreement for Directors (2014 grants and thereafter).(9)
2012 Hovnanian Enterprises, Inc. Amended and Restated Stock Incentive Plan.(7)
G. O’Connor.(19)
10(bbb)* Market Share Unit Agreement Class A (2016 grants and thereafter).(2)
10(ccc)* Market Share Unit Agreement Class B (2016 grants and thereafter).(2)
10(ddd)* Market Share Unit Agreement (Gross Margin Performance Vesting) Class A (2016 grants and thereafter).(2)
10(eee)* Market Share Unit Agreement (Gross Margin Performance Vesting) Class B (2016 grants and thereafter).(2)
10(fff)* Market Share Unit Agreement (Debt Reduction Performance Vesting) Class A (2016 grants and thereafter).(2)
10(ggg)* Market Share Unit Agreement (Debt Reduction Performance Vesting) Class B (2016 grants and thereafter).(2)
10(hhh)* Premium-Priced Incentive Stock Option Agreement Class A (2016 grants and thereafter).(2)
10(iii)*
10(jjj)*
10(kkk)* Restricted Share Unit Agreement Class A (2016 grants and thereafter).(2)
10(lll)* Director Restricted Share Unit Agreement Class A (2016 grants and thereafter).(2)
10(mmm)* Market Share Unit Agreement (Pre-tax Profit performance Vesting) Class A (2017 grants and thereafter) (32)
10(nnn)* Market Share Unit Agreement (Pre-tax Profit performance Vesting) Class B (2017 grants and thereafter) (32)
10(ooo)* Market Share Unit Agreement (Gross Margin Improvement Performance Vesting) Class A (2017 grants and
Premium-Priced Non-qualified Stock Option Agreement Class B (2016 grants and thereafter).(2)
Incentive Stock Option Agreement Class A (2016 grants and thereafter).(2)
thereafter) (32)
10(ppp)* Market Share Unit Agreement (Gross Margin Improvement Performance Vesting) Class B (2017 grants and
thereafter) (32)
10(qqq)* Form of Letter Agreement entered into with Lucian Theon Smith III
10(rrr)
First Lien Intercreditor Agreement, dated September 8, 2016, among Hovnanian Enterprises, Inc., K. Hovnanian
Enterprises, Inc., the other guarantors party thereto, Wilmington Trust, National Association in its capacity as
Super Priority Administrative Agent (as defined therein),Wilmington Trust, National Association, in its capacity
as Mortgage Tax Collateral Agent (as defined therein), and Wilmington Trust, National Association, in its
capacities as First Lien Trustee and First Lien Collateral Agent (each as defined therein).(2)
66
10(sss)
10(ttt)
10(uuu)
10(vvv)
12
21
23(a)
23(b)
23(c)
31(a)
31(b)
32(a)
32(b)
99(a)
99(b)
101
First Lien Collateral Agency Agreement, dated as of September 8, 2016, among Wilmington Trust, National
Association, in its capacity as Existing Collateral Agent (as defined therein), Wilmington Trust, National
Association, in its capacity as 9.50% Collateral Agent (as defined therein), Wilmington Trust, National
Association, in its capacity as Collateral Agent (as defined therein), K. Hovnanian Enterprises, Inc., and the
Grantors (as defined therein).(2)
Security Agreement, dated as of September 8, 2016, relating to the Credit Agreement dated as of July 29, 2016.(2)
Pledge Agreement, dated as of September 8, 2016, relating to the Credit Agreement dated as of July 29, 2016.(2)
First Lien Intellectual Property Agreement, dated as of September 8, 2016, relating to the Credit Agreement dated
as of July 29, 2016.(2)
Statements re Computation of Ratios.
Subsidiaries of the Registrant.
Consent of Deloitte & Touche LLP.
Consent of Deloitte & Touche LLP.
Consent of Deloitte & Touche LLP.
Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer.
Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer.
Section 1350 Certification of Chief Executive Officer.
Section 1350 Certification of Chief Financial Officer.
Financial Statements of GTIS – HOV Holdings, L.L.C.
Financial Statements of GTIS – HOV Holdings V, L.L.C.
The following financial information from our Annual Report on Form 10-K for the year ended October 31, 2017,
formatted in Extensible Business Reporting Language (XBRL): (i) the Consolidated Balance Sheets at October
31, 2017 and October 31, 2016, (ii) the Consolidated Statements of Operations for the years ended October 31,
2017, 2016 and 2015, (iii) the Consolidated Statements of Equity for years ended October 31, 2017, 2016 and
2015 (iv) the Consolidated Statements of Cash Flows for the years ended October 31, 2017, 2016 and 2015, and
(v) the Notes to Consolidated Financial Statements.
*
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
(9)
(10)
(11)
(12)
Management contracts or compensatory plans or arrangements.
Incorporated by reference to Exhibits to Quarterly Report on Form 10-Q for the quarter ended July 31, 2008 (No.
001-08551) of the Registrant.
Incorporated by reference to Exhibits to Quarterly Report on Form 10-Q for the quarter ended July 31, 2016 (No.
001-08551) of the Registrant.
Incorporated by reference to Exhibits to Registration Statement (No. 2-85198) on Form S-1 of the Registrant.
Incorporated by reference to Exhibits to Current Report on Form 8-K (No. 001-08551) of the Registrant filed on
November 7, 2011.
Incorporated by reference to Exhibits to Current Report of the Registrant on Form 8-K (No. 001-08551) filed on
March 15, 2013.
Incorporated by reference to Appendix B to the Registrant’s definitive Proxy Statement on Schedule 14A (No.
001-08551) filed on January 27, 2014.
Incorporated by reference to Appendix A to the Registrant’s definitive Proxy Statement on Schedule 14A (No.
001-08551) filed on February 1, 2016.
Incorporated by reference to Exhibits to Annual Report on Form 10-K for the year ended October 31, 2008 (No.
001-08551) of the Registrant.
Incorporated by reference to Exhibits to Quarterly Report on Form 10-Q for the quarter ended July 31, 2014 (No.
001-08551) of the Registrant.
Incorporated by reference to Exhibits to Current Report on Form 8-K of the Registrant (No. 001-08551) filed
November 5, 2014.
Incorporated by reference to Exhibits to Current Report on Form 8-K (No. 001-08551) of the Registrant filed on
July 13, 2005.
Incorporated by reference to Exhibits to Quarterly Report on Form 10-Q for the quarter ended January 31, 2011
(No. 001-08551) of the Registrant.
67
(13)
(14)
(15)
(16)
(17)
(18)
(19)
(20)
(21)
(22)
(23)
(24)
(25)
(26)
(27)
(28)
(29)
(30)
(31)
(32)
Incorporated by reference to Exhibits to Quarterly Report on Form 10-Q for the quarter ended January 31, 2009
(No. 001-08551) of the Registrant.
Incorporated by reference to Exhibits to Current Report on Form 8-K (No. 001-08551) of the Registrant filed on
October 2, 2012.
Incorporated by reference to Exhibits to Current Report on Form 8-K of the Registrant (No. 001-08551) filed on
January 10, 2014.
Incorporated by reference to Appendix A to the Registrant’s definitive Proxy Statement on Schedule 14A of the
Registrant filed on February 1, 2010.
Incorporated by reference to Appendix C of the definitive Proxy Statement of the Registration on Schedule 14A
filed on February 19, 2008.
Incorporated by reference to Exhibits to Current Report on Form 8-K (001-08551) of the Registrant filed on July
28, 2017.
Incorporated by reference to Exhibits to Quarterly Report on Form 10-Q for the quarter ended January 31, 2015
of the Registrant (No. 001-08551).
Incorporated by reference to Exhibits to Annual Report on Form 10-K for the year ended October 31, 2003 (No.
001-08551), of the Registrant.
Incorporated by reference to Exhibits to the Registration Statement (No. 001-08551) on Form 8-A of the
Registrant filed August 14, 2008
Incorporated by reference to Exhibits to Quarterly Report on Form 10-Q for the quarter ended January 31, 2016
(No. 001-08551), of the Registrant.
Incorporated by reference to Exhibits to Current Report on Form 8-K of the Registrant (No. 001-08551), filed
March 11, 2015
Incorporated by reference to Exhibits to Annual Report on Form 10-K for the year ended October 31, 2009 (No.
001-08551), of the Registrant.
Incorporated by reference to Exhibits to Quarterly Report on Form 10-Q for the quarter ended July 31, 2009 (No.
001-08551), of the Registrant.
Incorporated by reference to Exhibits to Quarterly Report on Form 10-Q for the quarter ended January 31, 2006
(No. 001-08551) of the Registrant.
Incorporated by reference to Exhibits to Quarterly Report on Form 10-Q for the quarter ended January 31, 2012
(No. 001-08551) of the Registrant.
Incorporated by reference to Exhibits to Quarterly Report on Form 10-Q for the quarter ended April 30, 2012
(No. 001-08551) of the Registrant.
Incorporated by reference to Exhibits to Quarterly Report on Form 10-Q for the quarter ended July 31, 2012 (No.
001-08551) of the Registrant.
Incorporated by reference to Exhibits to Quarterly Report on Form 10-Q for the quarter ended April 30, 2013
(No. 001-08551) of the Registrant.
Incorporated by reference to Exhibits to Quarterly Report on Form 10-Q for the quarter ended July 31, 2013 (No.
001-08551) of the Registrant.
Incorporated by reference to Exhibits to Quarterly Report on Form 10-Q for the quarter ended July 31, 2017 (No.
001-08551) of the Registrant.
68
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused
this Annual Report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized.
HOVNANIAN ENTERPRISES, INC.
By: /s/ ARA K. HOVNANIAN
Ara K. Hovnanian
Chairman of the Board, Chief Executive Officer
and President
December 28, 2017
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following
persons on behalf of the registrant on December 28, 2017, and in the capacities indicated.
/s/ ARA K. HOVNANIAN
Ara K. Hovnanian
Chairman of the Board, Chief Executive Officer, President and Director
(Principal Executive Officer)
/s/ J. LARRY SORSBY
J. Larry Sorsby
Executive Vice President, Chief Financial Officer and Director
(Principal Financial Officer)
/s/ BRAD G. O’CONNOR
Brad G. O’Connor
Vice President – Chief Accounting Officer and Corporate Controller
(Principal Accounting Officer)
/s/ EDWARD A. KANGAS
Edward A. Kangas
/s/ STEPHEN D. WEINROTH
Stephen D. Weinroth
Chairman of Audit Committee and Director
Chairman of Compensation Committee and Director
69
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Financial Statements:
Report of Independent Registered Public Accounting Firm ............................................................................................
Consolidated Balance Sheets as of October 31, 2017 and 2016 ......................................................................................
Consolidated Statements of Operations for the Years Ended October 31, 2017, 2016 and 2015 ...................................
Consolidated Statements of Equity for the Years Ended October 31, 2017, 2016 and 2015 ..........................................
Consolidated Statements of Cash Flows for the Years Ended October 31, 2017, 2016 and 2015 ..................................
Notes to Consolidated Financial Statements ...................................................................................................................
Page
71
72
73
74
75
76
No schedules have been prepared because the required information of such schedules is not present, is not present in amounts
sufficient to require submission of the schedule, or because the required information is included in the financial statements
and notes thereto.
70
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Hovnanian Enterprises, Inc.
Red Bank, New Jersey
We have audited the accompanying consolidated balance sheets of Hovnanian Enterprises, Inc. and subsidiaries (the
"Company") as of October 31, 2017 and 2016, and the related consolidated statements of operations, equity, and cash flows
for each of the three years in the period ended October 31, 2017. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of
Hovnanian Enterprises, Inc. and subsidiaries as of October 31, 2017 and 2016, and the results of their operations and their
cash flows for each of the three years in the period ended October 31, 2017, in conformity with accounting principles
generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States),
the Company's internal control over financial reporting as of October 31, 2017, based on the criteria established in Internal
Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission
and our report dated December 28, 2017, expressed an unqualified opinion on the Company's internal control over financial
reporting.
/s/ Deloitte & Touche LLP
New York, New York
December 28, 2017
71
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
ASSETS
Homebuilding:
Cash and cash equivalents
Restricted cash and cash equivalents
Inventories:
Sold and unsold homes and lots under development
Land and land options held for future development or sale
Consolidated inventory not owned
Total inventories
Investments in and advances to unconsolidated joint ventures
Receivables, deposits and notes, net
Property, plant and equipment, net
Prepaid expenses and other assets
Total homebuilding
Financial services cash and cash equivalents
Financial services other assets
Income taxes receivable – including net deferred tax benefits (Note 11)
Total assets
LIABILITIES AND EQUITY
Homebuilding:
Nonrecourse mortgages secured by inventory, net of debt issuance costs
Accounts payable and other liabilities
Customers’ deposits
Nonrecourse mortgages secured by operating properties
Liabilities from inventory not owned, net of debt issuance costs
Revolving credit facility
Notes payable and term loan, net of discount and debt issuance costs
Total homebuilding
Financial services
Income taxes payable
Total liabilities
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 October
31, 2017 and 2016
Common stock, Class A, $0.01 par value - authorized 400,000,000 shares;
issued 144,046,073 shares at October 31, 2017 and 143,806,775 shares at
October 31, 2016
Common stock, Class B, $0.01 par value (convertible to Class A at time of sale)
- authorized 60,000,000 shares; issued 15,999,355 shares at October 31, 2017
and 15,942,809 shares at October 31, 2016
Paid in capital - common stock
Accumulated deficit
Treasury stock - at cost – 11,760,763 shares of Class A common stock and 691,748
shares of Class B common stock at October 31, 2017 and 2016
Total stockholders' equity deficit
Total liabilities and equity
See notes to consolidated financial statements.
72
October 31,
2017
October 31,
2016
$
463,697 $
2,077
339,773
3,914
$
$
744,119
140,924
124,784
1,009,827
115,090
58,149
52,919
37,026
1,738,785
5,623
156,490
-
1,900,898 $
64,512 $
335,057
33,772
13,012
91,101
52,000
1,627,674
2,217,128
141,914
2,227
2,361,269
899,082
175,301
208,701
1,283,084
100,502
49,726
50,332
46,762
1,874,093
6,992
190,238
283,633
2,354,956
82,115
369,228
37,429
14,312
150,179
52,000
1,605,758
2,311,021
172,445
-
2,483,466
135,299
135,299
1,440
1,438
160
706,466
(1,188,376 )
159
706,137
(856,183)
(115,360 )
(460,371 )
1,900,898 $
(115,360)
(128,510)
2,354,956
$
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands except per share data)
Revenues:
Homebuilding:
Sale of homes
Land sales and other revenues
Total homebuilding
Financial services
Total revenues
Expenses:
Homebuilding:
Cost of sales, excluding interest
Cost of sales interest
Inventory impairment loss and land option write-offs
Total cost of sales
Selling, general and administrative
Total homebuilding expenses
Financial services
Corporate general and administrative
Other interest
Other operations
Total expenses
Loss on extinguishment of debt
(Loss) income from unconsolidated joint ventures
(Loss) income before income taxes
State and federal income tax provision (benefit):
State
Federal
Total income taxes
Net loss
Per share data:
Basic:
Loss per common share
Weighted-average number of common shares outstanding
Assuming dilution:
Loss per common share
Weighted-average number of common shares outstanding
See notes to consolidated financial statements.
October 31,
2017
Year Ended
October 31,
2016
October 31,
2015
$
2,340,033 $
52,889
2,392,922
58,743
2,451,665
2,600,790 $
78,840
2,679,630
72,617
2,752,247
2,088,129
3,686
2,091,815
56,665
2,148,480
1,961,804
88,536
17,813
2,068,153
196,320
2,264,473
32,346
59,367
97,304
1,518
2,455,008
(34,854)
(7,047)
(45,244)
11,261
275,688
286,949
(332,193) $
2,230,457
92,391
33,353
2,356,201
192,938
2,549,139
37,144
60,141
90,967
4,874
2,742,265
(3,200 )
(4,346 )
2,436
2,457
2,798
5,255
(2,819 ) $
(2.25) $
147,703
(0.02 ) $
147,451
(2.25) $
147,703
(0.02 ) $
147,451
1,722,038
59,613
12,044
1,793,695
188,403
1,982,098
31,972
62,506
91,835
6,003
2,174,414
-
4,169
(21,765 )
4,293
(9,958 )
(5,665 )
(16,100 )
(0.11 )
146,899
(0.11 )
146,899
$
$
$
73
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EQUITY
A Common Stock
Shares
Issued and
B Common Stock
Shares
Issued and
Preferred Stock
Shares
Issued and
Outstanding Amount
Outstanding Amount
Outstanding Amount
Paid-In
Capital
Accumulated
Treasury
Deficit
Stock
Total
(Dollars In
thousands)
Balance, October
31, 2014
131,075,800 $
1,428 14,805,795 $
155
5,600 $ 135,299 $ 697,943 $
(837,264) $ (115,360) $ (117,799)
Stock options,
amortization
and issuances
Restricted stock
amortization,
issuances and
forfeitures
Conversion of
Class B to
Class A
common stock
Net loss
Balance, October
18,125
723
438,093
5
179,386
2
5,085
723
5,092
100
(100)
(16,100)
-
(16,100)
31, 2015
131,532,118
1,433 14,985,081
157
5,600 135,299 703,751
(853,364) (115,360) (128,084)
Stock options,
amortization
and issuances
Restricted stock
amortization,
issuances and
forfeitures
Conversion of
Class B to
Class A
common stock
Net loss
Balance, October
445,522
4
334,352
3
3,888
(1,502)
68,372
1
(68,372)
(1)
(2,819)
(1,502)
3,895
-
(2,819)
31, 2016
132,046,012
1,438 15,251,061
159
5,600 135,299 706,137
(856,183) (115,360) (128,510)
Stock options,
amortization
and issuances
Restricted stock
amortization,
issuances and
forfeitures
Conversion of
Class B to
Class A
common stock
Net loss
Balance, October
48,250
188,548
2
59,046
1
556
(227)
556
(224)
2,500
(2,500)
(332,193)
-
(332,193)
31, 2017
132,285,310 $
1,440 15,307,607 $
160
5,600 $ 135,299 $ 706,466 $
(1,188,376) $ (115,360) $ (460,371)
See notes to consolidated financial statements.
74
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Cash flows from operating activities:
Net loss
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:
Depreciation
Compensation from stock options and awards
Amortization of bond discounts and deferred financing costs
Gain on sale and retirement of property and assets
Loss (income) from unconsolidated joint ventures
Distributions of earnings from unconsolidated joint ventures
Loss on extinguishment of debt
Inventory impairment and land option write-offs
Deferred income tax provision (benefit)
(Increase) decrease in assets:
Origination of mortgage loans
Sale of mortgage loans
Restricted cash, receivables, prepaids, deposits and other assets
Inventories
(Decrease) increase in liabilities:
State and federal income tax payable
Customers’ deposits
Accounts payable, accrued interest and other accrued liabilities
Net cash provided by (used in) by operating activities
Cash flows from investing activities:
Proceeds from sale of property and assets
Purchase of property, equipment, and other fixed assets and acquisitions
Decrease in restricted cash related to mortgage company
Increase in restricted cash related to letters of credit
Investment in and advances to unconsolidated joint ventures
Distributions of capital from unconsolidated joint ventures
Net cash (used in) provided by investing activities
Cash flows from financing activities:
Proceeds from mortgages and notes
Payments related to mortgages and notes
Proceeds from model sale leaseback financing programs
Payments related to model sale leaseback financing programs
Proceeds from land bank financing programs
Payments related to land bank financing programs
Net (payments) proceeds related to mortgage warehouse lines of credit
Borrowings from revolving credit facility
Proceeds from senior secured term loan facility
Proceeds from senior secured notes
Proceeds from senior notes
Payments related to senior notes, senior exchangeable notes and senior
amortizing notes
Deferred financing costs from land banking financing programs and note
issuances
Net cash (used in) provided by financing activities
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents balance, beginning of year
Cash and cash equivalents balance, end of year
Supplemental disclosures of cash flows:
Cash paid (received) during the period for:
Interest, net of capitalized interest (see Note 3 to the Consolidated
Financial Statements)
Income taxes
See notes to consolidated financial statements.
75
Year Ended
October 31,
October 31,
2017
2016
October 31,
2015
$
(332,193) $
(2,819 ) $
(16,100 )
4,249
557
13,875
(166)
7,047
1,864
34,854
17,813
285,578
3,565
2,921
12,830
(632 )
4,346
1,002
3,200
33,353
6,851
3,388
8,816
11,687
(1,119 )
(4,169 )
8,438
-
12,044
(4,691 )
(1,045,991)
1,078,649
1,224
255,444
(1,274,284 )
1,239,521
23,574
328,141
(1,042,407 )
1,007,425
10,855
(312,312 )
282
(3,657)
(21,876)
297,553
270
(6,478)
2,555
(3)
(36,803)
13,304
(27,155)
199,275
(218,468)
10,270
(28,798)
29,190
(71,757)
(31,023)
-
-
840,000
-
(205 )
(6,789 )
13,090
387,665
764
(8,007 )
2,034
872
(49,905 )
5,264
(48,978 )
211,209
(272,220 )
24,297
(41,435 )
174,211
(108,577 )
36,713
5,000
75,000
71,250
-
(1,045 )
9,249
(10,594 )
(320,535 )
1,573
(2,054 )
1,555
2,993
(18,707 )
17,112
2,472
180,284
(140,901 )
43,181
(20,197 )
16,985
(24,330 )
31,956
47,000
-
-
250,000
(861,976)
(409,646 )
(65,053 )
(14,556)
(147,843)
122,555
346,765
469,320 $
(11,469 )
(245,667 )
93,020
253,745
346,765 $
(9,015 )
309,910
(8,153 )
261,898
253,745
89,836 $
1,089 $
101,796 $
(1,390 ) $
85,719
1,779
$
$
$
HOVNANIAN ENTERPRISES, INC.
Notes to Consolidated Financial Statements
1. Basis of Presentation
Basis of Presentation - The accompanying consolidated financial statements have been prepared in accordance with
generally accepted accounting principles in the United States of America (“US GAAP”) and include our accounts and those
of all wholly owned subsidiaries, after elimination of all intercompany balances and transactions. Our fiscal year ends
October 31.
Reclassifications - In November 2016, we adopted Accounting Standards Update (“ASU”) 2015-03, “Interest -
Imputation of Interest,” which changes the presentation of debt issuance costs in the balance sheet from an asset to a direct
reduction of the carrying amount of the related debt. The adoption of this guidance resulted in the reclassification of applicable
unamortized debt issuance costs from “Prepaid expenses and other assets” of $24.5 million to “Nonrecourse mortgages
secured by inventory” of $1.3 million, “Liabilities from inventory not owned” of $3.0 million and “Notes payable and term
loan” of $20.2 million on our Consolidated Balance Sheets as of October 31, 2016. We applied the new guidance
retrospectively to all prior periods presented in the financial statements to conform to the fiscal 2017 presentation.
Additionally, in November 2016, we adopted ASU 2015-15 “Interest - Imputation of Interest (Subtopic 835-30)” (“ASU
2015-15”), which was issued as a follow-up to ASU 2015-03. ASU 2015-15 allows an entity to defer and present debt
issuance costs for line-of-credit arrangements as an asset and subsequently amortize the deferred debt issuance costs ratably
over the term of the line-of-credit arrangement, regardless of whether there are any outstanding borrowings on the line-of-
credit arrangement. Therefore, there was no change to the presentation of our “Revolving credit facility” on the Consolidated
Balance Sheets for any of the periods presented.
2. Business
Our operations consist of homebuilding, financial services and corporate. Our homebuilding operations are made
up of six reportable segments defined as Northeast, Mid-Atlantic, Midwest, Southeast, Southwest and West. Homebuilding
operations comprise the substantial part of our business, representing approximately 98% of consolidated revenues for the
year ended October 31, 2017 and approximately 97% for the years ended October 31, 2016 and 2015. We are a Delaware
corporation, building and selling homes at October 31, 2017 in 130 consolidated new home communities in Arizona,
California, Delaware, Florida, Georgia, Illinois, Maryland, New Jersey, Ohio, Pennsylvania, South Carolina, Texas, Virginia,
Washington, D.C. and West Virginia. We offer a wide variety of homes that are designed to appeal to first-time buyers, first
and second-time move-up buyers, luxury buyers, active lifestyle buyers and empty nesters. Our financial services operations,
which are a reportable segment, provide mortgage banking and title services to the homebuilding operations’ customers. We
do not typically retain or service the mortgages that we originate but rather sell the mortgages and related servicing rights to
investors. Corporate primarily includes the operations of our corporate office whose primary purpose is to provide executive
services, accounting, information services, human resources, management reporting, training, cash management, internal
audit, risk management, and administration of process redesign, quality, and safety.
During fiscal 2016, we exited the Minneapolis, Minnesota and Raleigh, North Carolina markets and in the third
quarter of fiscal 2016, we completed the sale of our portfolios in those markets. We are in the process of completing a wind
down of our operations in the San Francisco Bay area in Northern California and in Tampa, Florida by building and delivering
homes to sell through our existing land position.
See Note 10 “Operating and Reporting Segments” for further disclosure of our reportable segments.
3. Summary of Significant Accounting Policies
Use of Estimates - The preparation of financial statements in conformity with US 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.
76
Income Recognition from Home and Land Sales - We are primarily engaged in the development, construction,
marketing and sale of residential single-family and multi-family homes where the planned construction cycle is less than
12 months. For these homes, in accordance with Accounting Standards Codification (“ASC”) 360-20, “Property, Plant and
Equipment - Real Estate Sales,” revenue is recognized when title is conveyed to the buyer, adequate initial and continuing
investments have been received and there is no continued involvement. In situations where the buyer’s financing is originated
by our mortgage subsidiary and the buyer has not made an adequate initial investment or continuing investment as prescribed
by ASC 360-20, the profit on such sales is deferred until the sale of the related mortgage loan to a third-party investor has
been completed.
Income Recognition from Mortgage Loans - Our Financial Services segment originates mortgages, primarily for our
homebuilding customers. We use mandatory investor commitments and forward sales of mortgage-backed securities
(“MBS”) to hedge our mortgage-related interest rate exposure on agency and government loans.
We elected the fair value option for our mortgage loans held for sale in accordance with ASC 825, “Financial
Instruments,” which permits us to measure our loans held for sale at fair value. Management believes that the election of the
fair value option for loans held for sale improves financial reporting by mitigating volatility in reported earnings caused by
measuring the fair value of the loans and the derivative instruments used to economically hedge them without having to apply
complex hedge accounting provisions.
Substantially all of the mortgage loans originated are sold within a short period of time in the secondary mortgage
market on a servicing released, nonrecourse basis, although the Company remains liable for certain limited representations,
such as fraud, and warranties related to loan sales. Mortgage investors could seek to have us buy back loans or compensate
them from losses incurred on mortgages we have sold based on claims that we breached our limited representations and
warranties. We have established reserves for probable losses.
Cash and Cash Equivalents - Cash represents cash deposited in checking accounts. Cash equivalents
include certificates of deposit, Treasury bills and government money–market funds with maturities of 90 days or less when
purchased. Our cash balances are held at a few financial institutions and may, at times, exceed insurable amounts. We believe
we help to mitigate this risk by depositing our cash in major financial institutions. At October 31, 2017 and 2016, $13.3
million and $9.4 million, respectively, of the total cash and cash equivalents was in cash equivalents, the book value of which
approximates fair value.
Fair Value of Financial Instruments - The fair value of financial instruments is determined by reference to various
market data and other valuation techniques as appropriate. Our financial instruments consist of cash and cash equivalents,
restricted cash and cash equivalents, receivables, deposits and notes, accounts payable and other liabilities, customer deposits,
mortgage loans held for sale, nonrecourse mortgages, mortgage warehouse lines of credit, revolving credit facility, accrued
interest, senior secured term loan and the senior secured notes, senior notes, senior amortizing notes and senior exchangeable
notes. The fair value of the senior secured notes, senior notes, senior amortizing notes and senior exchangeable notes is
estimated based on the quoted market prices for the same or similar issues or on the current rates offered to us for debt of the
same remaining maturities.
Inventories - Inventories consist of land, land development, home construction costs, capitalized interest,
construction overhead and property taxes. Construction costs are accumulated during the period of construction and charged
to cost of sales under specific identification methods. Land, land development and common facility costs are allocated based
on buildable acres to product types within each community, then charged to cost of sales equally based upon the number of
homes to be constructed in each product type.
We record inventories in our consolidated balance sheets at cost unless the inventory is determined to be impaired,
in which case the inventory is written down to its fair value. Our inventories consist of the following three components: (1)
sold and unsold homes and lots under development, which includes all construction, land, capitalized interest and land
development costs related to started homes and land under development in our active communities; (2) land and land options
held for future development or sale, which includes all costs related to land in our communities in planning or mothballed
communities; and (3) consolidated inventory not owned, which includes all costs related to specific performance options,
variable interest entities, and other options, which consists primarily of model homes financed with an investor and inventory
related to land banking arrangements accounted for as financings.
We decide to mothball (or stop development on) certain communities when we determine that the current
performance does not justify further investment at the time. When we decide to mothball a community, the inventory is
reclassified on our Consolidated Balance Sheets from “Sold and unsold homes and lots under development” to “Land and
77
land options held for future development or sale.” During fiscal 2017, we did not mothball any communities, but we sold five
previously mothballed communities and re-activated two previously mothballed communities. As of October 31, 2017 and
2016, the net book value associated with our 22 and 29 total mothballed communities was $36.7 million and $74.4 million,
respectively, which was net of impairment charges recorded in prior periods of $214.1 million and $296.3 million,
respectively.
From time to time we enter into option agreements that include specific performance requirements, whereby we are
required to purchase a minimum number of lots. Because of our obligation to purchase these lots, for accounting purposes in
accordance with Accounting Standards Codification (“ASC”) 360-20-40-38, we are required to record this inventory on our
Consolidated Balance Sheets. As of October 31, 2017 and 2016, we had no specific performance options.
We sell and lease back certain of our model homes with the right to participate in the potential profit when each
home is sold to a third party at the end of the respective lease. As a result of our continued involvement, for accounting
purposes in accordance with ASC 360-20-40-38, these sale and leaseback transactions are considered a financing rather than
a sale. Therefore, for purposes of our Consolidated Balance Sheets, at October 31, 2017 and 2016, inventory of $58.5 million
and $79.2 million, respectively, was recorded to “Consolidated inventory not owned,” with a corresponding amount of $51.8
million and $69.7 million, respectively, recorded to “Liabilities from inventory not owned” for the amount of net cash
received from the transactions.
We have land banking arrangements, whereby we sell our land parcels to the land banker and they provide us an
option to purchase back finished lots on a predetermined schedule. Because of our options to repurchase these parcels, for
accounting purposes, in accordance with ASC 360-20-40-38, these transactions are considered a financing rather than a sale.
For purposes of our Consolidated Balance Sheets, at October 31, 2017 and 2016, inventory of $66.3 million and $129.5
million, respectively, was recorded to “Consolidated inventory not owned,” with a corresponding amount of $39.3 million
and $80.5 million, respectively, recorded to “Liabilities from inventory not owned” for the amount of net cash received from
the transactions.
The recoverability of inventories and other long-lived assets is assessed in accordance with the provisions of ASC
360-10, “Property, Plant and Equipment – Overall.” ASC 360-10 requires long-lived assets, including inventories, held for
development to be evaluated for impairment based on undiscounted future cash flows of the assets at the lowest level for
which there are identifiable cash flows. As such, we evaluate inventories for impairment at the individual community level,
the lowest level of discrete cash flows that we measure.
We evaluate inventories of communities under development and held for future development for impairment when
indicators of potential impairment are present. Indicators of impairment include, but are not limited to, decreases in local
housing market values, decreases in gross margins or sales absorption rates, decreases in net sales prices (base sales price net
of sales incentives), or actual or projected operating or cash flow losses. The assessment of communities for indication of
impairment is performed quarterly. As part of this process, we prepare detailed budgets for all of our communities at least
semi-annually and identify those communities with a projected operating loss. For those communities with projected losses,
we estimate the remaining undiscounted future cash flows and compare those to the carrying value of the community, to
determine if the carrying value of the asset is recoverable.
The projected operating profits, losses or cash flows of each community can be significantly impacted by our
estimates of the following:
●
●
●
●
future base selling prices;
future home sales incentives;
future home construction and land development costs; and
future sales absorption pace and cancellation rates.
78
These estimates are dependent upon specific market conditions for each community. While we consider available
information to determine what we believe to be our best estimates as of the end of a quarterly reporting period, these estimates
are subject to change in future reporting periods as facts and circumstances change. Local market-specific conditions that
may impact our estimates for a community include:
●
●
●
●
●
●
●
the intensity of competition within a market, including available home sales prices and home sales
incentives offered by our competitors;
the current sales absorption pace for both our communities and competitor communities;
community-specific attributes, such as location, availability of lots in the market, desirability and
uniqueness of our community, and the size and style of homes currently being offered;
potential for alternative product offerings to respond to local market conditions;
changes by management in the sales strategy of the community;
current local market economic and demographic conditions and related trends and forecasts; and
existing home inventory supplies, including foreclosures and short sales.
These and other local market-specific conditions that may be present are considered by management in preparing
projection assumptions for each community. The sales objectives can differ between our communities, even within a given
market. For example, facts and circumstances in a given community may lead us to price our homes with the objective of
yielding a higher sales absorption pace, while facts and circumstances in another community may lead us to price our homes
to minimize deterioration in our gross margins, although it may result in a slower sales absorption pace. In addition, the key
assumptions included in our estimate of future undiscounted cash flows may be interrelated. For example, a decrease in
estimated base sales price or an increase in homes sales incentives may result in a corresponding increase in sales absorption
pace. Additionally, a decrease in the average sales price of homes to be sold and closed in future reporting periods for one
community that has not been generating what management believes to be an adequate sales absorption pace may impact the
estimated cash flow assumptions of a nearby community. Changes in our key assumptions, including estimated construction
and development costs, absorption pace and selling strategies, could materially impact future cash flow and fair value
estimates. Due to the number of possible scenarios that would result from various changes in these factors, we do not believe
it is possible to develop a sensitivity analysis with a level of precision that would be meaningful to an investor.
If the undiscounted cash flows are more than the carrying value of the community, then the carrying amount is
recoverable, and no impairment adjustment is required. However, if the undiscounted cash flows are less than the carrying
amount, then the community is deemed impaired and is written down to its fair value. We determine the estimated fair value
of each community by determining the present value of its estimated future cash flows at a discount rate commensurate with
the risk of the respective community, or in limited circumstances, prices for land in recent comparable sale transactions,
market analysis studies, which include the estimated price a willing buyer would pay for the land (other than in a forced
liquidation sale), and recent bona fide offers received from outside third parties. Our discount rates used for all impairments
recorded from October 31, 2015 to October 31, 2017 ranged from 16.8% to 19.8%. The estimated future cash flow
assumptions are virtually the same for both our recoverability and fair value assessments. Should the estimates or expectations
used in determining estimated cash flows or fair value, including discount rates, decrease or differ from current estimates in
the future, we may be required to recognize additional impairments related to current and future communities. The impairment
of a community is allocated to each lot on a relative fair value basis.
From time to time, we write off deposits and approval, engineering and capitalized interest costs when we determine
that it is no longer probable that we will exercise options to buy land in specific locations or when we redesign communities
and/or abandon certain engineering costs. In deciding not to exercise a land option, we take into consideration changes in
market conditions, the timing of required land takedowns, the willingness of land sellers to modify terms of the land option
contract (including timing of land takedowns), and the availability and best use of our capital, among other factors. The write-
off is recorded in the period it is deemed not probable that the optioned property will be acquired. In certain instances, we
have been able to recover deposits and other pre-acquisition costs that were previously written off. These recoveries have not
been significant in comparison to the total costs written off.
79
Inventories held for sale are land parcels ready for sale in their current condition, where we have decided not to
build homes but are instead actively marketing for sale. These land parcels represented $23.6 million and $48.7 million of
our total inventories at October 31, 2017 and 2016, respectively, and are reported at the lower of carrying amount or fair
value less costs to sell. In determining fair value for land held for sale, management considers, among other things, prices for
land in recent comparable sale transactions, market analysis studies, which include the estimated price a willing buyer would
pay for the land (other than in a forced liquidation sale) and recent bona fide offers received from outside third parties.
Post-Development Completion, Warranty Costs and Insurance Deductible Reserves - In those instances where a
development is substantially completed and sold and we have additional construction work to be incurred, an estimated
liability is provided to cover the cost of such work. 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 2017 and 2016, our deductible under our general liability
insurance is a $20 million aggregate for construction defect and warranty claims. For bodily injury claims, our deductible per
occurrence in fiscal 2017 and 2016 is $0.25 million, up to a $5 million limit. Our aggregate retention in fiscal 2017 and 2016
is $21 million for construction defect, warranty and bodily injury claims. We do not have a deductible on our worker's
compensation insurance. Reserves for estimated losses for construction defects, warranty and bodily injury claims have been
established using the assistance of a third-party actuary. We engage a third-party actuary that uses our historical warranty
and construction defect data to assist our management in estimating our unpaid claims, claim adjustment expenses and
incurred but not reported claims reserves for the risks that we are assuming under the general liability and construction defect
programs. The estimates include provisions for inflation, claims handling and legal fees. These estimates are subject to a high
degree of variability due to uncertainties such as trends in construction defect claims relative to our markets and the types of
products we build, claim settlement patterns, insurance industry practices and legal interpretations, among others. Because
of the high degree of judgment required in determining these estimated liability amounts, actual future costs could differ
significantly from our currently estimated amounts. 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. See Note 16 for additional information
on the amount of warranty costs recognized in cost of goods sold and administrative expenses.
Interest - Interest attributable to properties under development during the land development and home construction
period is capitalized and expensed along with the associated cost of sales as the related inventories are sold. Interest incurred
in excess of interest capitalized, which occurs when assets qualifying for interest capitalization are less than our outstanding
debt balances, is expensed as incurred in “Other interest.”
Interest costs incurred, expensed and capitalized were:
(In thousands)
Interest capitalized at beginning of year
Plus interest incurred(1)
Less cost of sales interest expensed
Less other interest expensed(2)(3)
Less interest contributed to unconsolidated joint venture(4)
Interest capitalized at end of year(5)
Year Ended
October 31,
October 31,
$
$
2017
96,688 $
160,203
88,536
97,304
-
71,051 $
2016
123,898 $
166,824
92,391
90,967
10,676
96,688 $
October 31,
2015
109,158
166,188
59,613
91,835
-
123,898
(1)
(2)
(3)
Data does not include interest incurred by our mortgage and finance subsidiaries.
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 $69.1
million, $50.4 million and $77.6 million for the years ended October 31, 2017, 2016 and 2015, 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 $28.2 million, $40.6 million and $14.2 million for the years ended October 31, 2017, 2016 and 2015.
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:
80
(In thousands)
Other interest expensed
Interest paid by our mortgage and finance subsidiaries
(Increase) decrease in accrued interest
Cash paid for interest, net of capitalized interest
Year Ended
October 31,
October 31,
2017
97,304 $
1,944
(9,412)
89,836 $
2016
90,967 $
2,866
7,963
101,796 $
$
$
October 31,
2015
91,835
2,050
(8,166 )
85,719
(4)
(5)
Represents capitalized interest which was included as part of the assets contributed to the joint venture the Company
entered into in November 2015, as discussed in Note 20. There was no impact to the Consolidated Statement of
Operations as a result of this transaction.
Capitalized interest amounts are shown gross before allocating any portion of impairments, if any, to capitalized
interest.
Land Options - Costs incurred to obtain options to acquire improved or unimproved home sites are capitalized. Such
amounts are either included as part of the purchase price if the land is acquired or charged to “Inventory impairments loss
and land option write-offs” if we determine we will not exercise the option. If the options are with variable interest entities
and we are the primary beneficiary, we record the land under option on the Consolidated Balance Sheets under “Consolidated
inventory not owned” with an offset under “Liabilities from inventory not owned.” If the option includes an obligation to
purchase land under specific performance or has terms that require us to record it as financing, then we record the option on
the Consolidated Balance Sheets under “Consolidated inventory not owned” with an offset under “Liabilities from inventory
not owned.” In accordance with ASC 810-10 “Consolidation – Overall,” we record costs associated with other options on the
Consolidated Balance Sheets under “Land and land options held for future development or sale.”
Unconsolidated Homebuilding and Land Development Joint Ventures - Investments in unconsolidated
homebuilding and land development joint ventures are accounted for under the equity method of accounting. Under the equity
method, we recognize our proportionate share of earnings and losses earned by the joint venture upon the delivery of lots or
homes to third parties. Our ownership interests in the joint ventures vary but our voting interests are generally 50% or less.
In determining whether or not we must consolidate joint ventures where we are the managing member of the joint venture,
we assess whether the other partners have specific rights to overcome the presumption of control by us as the manager of the
joint venture. In most cases, the presumption is overcome because the joint venture agreements require that both partners
agree on establishing the significant operating and capital decisions of the partnership, including budgets, in the ordinary
course of business. The evaluation of whether or not we control a venture can require significant judgment. In accordance
with ASC 323-10, “Investments - Equity Method and Joint Ventures – Overall,” we assess our investments in unconsolidated
joint ventures for recoverability, and if it is determined that a loss in value of the investment below its carrying amount is
other than temporary, we write down the investment to its fair value. We evaluate our equity investments for impairment
based on the joint venture’s projected cash flows. This process requires significant management judgment and estimates.
During fiscal 2017, we wrote down certain joint venture investments by $2.8 million. There were no write-downs in fiscal
2016 or 2015.
Deferred Bond Issuance Costs - Costs associated with borrowings under our revolving credit facility and senior
secured term loan and the issuance of senior secured, senior, senior amortizing and senior exchangeable notes are capitalized
and amortized over the term of each note’s issuance. The capitalization of the costs are recorded as a contra liability within
our debt balances, except for the revolving credit facility costs, which are recorded as a prepaid asset.
Debt Issued At a Discount - Debt issued at a discount to the face amount is accreted up to its face amount utilizing
the effective interest method over the term of the note and recorded as a component of interest on the Consolidated Statements
of Operations.
Advertising Costs - Advertising costs are expensed as incurred. During the years ended October 31, 2017, 2016 and
2015, advertising costs expensed totaled $17.9 million, $21.4 million and $21.0 million, respectively.
Deferred Income Taxes - Deferred income taxes are provided for temporary differences between amounts recorded
for financial reporting and for income tax purposes. If the combination of future years’ income (or loss) combined with the
reversal of the timing differences results in a loss, such losses can be carried back to prior years or carried forward to future
years to recover the deferred tax assets. In accordance with ASC 740-10, “Income Taxes – Overall,” we evaluate our deferred
tax assets quarterly to determine if valuation allowances are required. ASC 740-10 requires that companies assess whether
81
valuation allowances should be established based on the consideration of all available evidence using a “more-likely-than-
not” standard.
In evaluating the exposures associated with our various tax filing positions, we recognize tax liabilities in accordance
with ASC 740-10, for more likely than not exposures. We re-evaluate the exposures associated with our tax positions on a
quarterly basis. This evaluation is based on factors such as changes in facts or circumstances, changes in tax law, new audit
activity by taxing authorities, and effectively settled issues. Determining whether an uncertain tax position is effectively
settled requires judgment. Such a change in recognition or measurement would result in the recognition of a tax benefit or an
additional charge to the tax provision. A number of years may elapse before a particular matter for which we have established
a liability is audited and fully resolved or clarified. We adjust our liability for unrecognized tax benefits and income tax
provision in the period in which an uncertain tax position is effectively settled, or the statute of limitations expires for the
relevant taxing authority to examine the tax position or when more information becomes available. Due to the complexity of
some of these uncertainties, the ultimate resolution may result in a liability that is materially different from our current
estimate. Any such changes will be reflected as increases or decreases to income tax expense in the period in which they are
determined.
Depreciation - Property, plant and equipment are depreciated using the straight-line method over the estimated
useful life of the assets ranging from 3 to 40 years.
Prepaid Expenses - Prepaid expenses which relate to specific housing communities (model setup, architectural fees,
homeowner warranty program fees, etc.) are amortized to cost of sales as the applicable inventories are sold. All other prepaid
expenses are amortized over a specific time period or as used and charged to overhead expense.
Allowance for Doubtful Accounts – We regularly review our receivable balances, which are included in Receivables,
deposits and notes on the Consolidated Balance Sheets, for collectability and record an allowance against a receivable when
it is deemed that collectability is uncertain. These receivables include receivables from our insurance carriers, receivables
from municipalities related to the development of utilities or other infrastructure, and other miscellaneous receivables. The
balance for allowance for doubtful accounts was $7.3 million and $7.6 million at October 31, 2017 and 2016, respectively,
which primarily related to allowances for receivables from municipalities and an allowance for a receivable for a prior year
land sale. During fiscal 2017 and 2016, we recorded $0.2 million and $0.8 million, respectively, in recoveries. In addition,
there were $0.1 million and $0.2 million of write-offs in fiscal 2017 and 2016, respectively. During fiscal 2016, we recorded
$1.0 million of additional reserves.
Stock Options - We account for our stock options under ASC 718-10, “Compensation - Stock Compensation –
Overall,” which requires the fair-value based method of accounting for stock awards granted to employees and measures and
records the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair
value of the award. That cost is recognized over the period during which an employee is required to provide service in
exchange for the award.
Compensation cost arising from nonvested stock granted to employees and from nonemployee stock awards is based
on the fair value of the awards at the grant date recognized as expense using the straight-line method over the vesting period.
Per Share Calculations - Basic earnings per share is computed by dividing net income (loss) (the “numerator”) by
the weighted-average number of common shares outstanding, adjusted for nonvested shares of restricted stock (the
“denominator”) for the period. Computing diluted earnings per share is similar to computing basic earnings per share, except
that the denominator is increased to include the dilutive effects of options and nonvested shares of restricted stock, 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 nonforfeitable rights to dividends or dividend equivalents that
participate in undistributed earnings with common stock are considered participating securities and are included in computing
earnings per share pursuant to the two-class method. The two-class method is an earnings allocation formula that determines
earnings per share for each class of common stock and participating securities according to dividends or dividend equivalents
and participation rights in undistributed earnings in periods where we have net income. The Company’s restricted common
stock (“nonvested shares”) are considered participating securities.
82
Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update (“ASU”)
No. 2014-09, “Revenue from Contracts with Customers” (Topic 606), (“ASU 2014-09”). ASU 2014-09 requires entities to
recognize revenue that represents the transfer of promised goods or services to customers in an amount equivalent to the
consideration to which the entity expects to be entitled to in exchange for those goods or services. The following steps should
be applied to determine this amount: (1) identify the contract(s) with a customer; (2) identify the performance obligations in
the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations in the
contract; and (5) recognize revenue when (or as) the entity satisfies a performance obligation. ASU 2014-09 supersedes the
revenue recognition requirements in ASU 605, “Revenue Recognition,” and most industry-specific guidance in the
Accounting Standards Codification. In August 2015, the FASB issued ASU 2015-14 on this same topic, which defers for one
year the effective date of ASU 2014-09, therefore making the guidance effective for the Company beginning November 1,
2018. Additionally, the FASB also decided to permit entities to early adopt the standard, which allows for either full
retrospective or modified retrospective methods of adoption, for reporting periods beginning after December 15, 2016. We
are currently evaluating the impact of adopting this guidance on our Consolidated Financial Statements, and have been
involved in industry-specific discussions with the FASB on the treatment of certain items. However, due to the nature of our
operations, we expect to identify similar performance obligations in our contracts under ASU 2014-09 compared with the
deliverables and separate units of account we have identified under existing accounting standards. As a result, we expect the
timing of our recognition of revenues to remain generally the same. Nonetheless, we are still evaluating the impact of specific
parts of this ASU, and expect our revenue-related disclosures to change upon its adoption.
In August 2014, the FASB issued ASU 2014-15, “Disclosure of Uncertainties About an Entity’s Ability to Continue
as a Going Concern” (“ASU 2014-15”), which requires management to perform interim and annual assessments on whether
there are conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern within one
year of the date the financial statements are issued and to provide related disclosures, if required. ASU 2014-15 was effective
for the Company as of our fiscal year ending October 31, 2017 and the adoption did not have a material impact on the
Company’s Consolidated Financial Statements.
In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842)” (“ASU 2016-02”), which provides
guidance for accounting for leases. ASU 2016-02 requires lessees to classify leases as either finance or operating leases and
to record a right-of-use asset and a lease liability for all leases with a term greater than 12 months regardless of the lease
classification. The lease classification will determine whether the lease expense is recognized based on an effective interest
rate method or on a straight line basis over the term of the lease. Accounting for lessors remains largely unchanged from
current GAAP. ASU 2016-02 is effective for the Company beginning November 1, 2019. Early adoption is permitted. We
are currently evaluating the impact of adopting this guidance on our Consolidated Financial Statements.
In August 2016, the FASB issued ASU No. 2016-15, “Statement of Cash Flows (Topic 230): Classification of
Certain Cash Receipts and Cash Payments” (“ASU 2016-15”). ASU 2016-15 provides guidance on how certain cash receipts
and cash payments are to be presented and classified in the statement of cash flows. ASU 2016-15 is effective for the
Company’s fiscal year beginning November 1, 2018. Early adoption is permitted. We are currently evaluating the potential
impact of adopting this guidance on our Consolidated Financial Statements.
In October 2016, the FASB issued ASU No. 2016-16, “Income Taxes (Topic 740): Intra-Entity Transfers of Assets
Other Than Inventory” (“ASU 2016-16”). ASU 2016-16 provides improvement for the accounting of income taxes related
to intra-entity transfers of assets other than inventory. ASU 2016-16 is effective for the Company’s fiscal year beginning
November 1, 2018. Early adoption is permitted. We are currently evaluating the potential impact of adopting this guidance
on our Consolidated Financial Statements.
In October 2016, the FASB issued ASU No. 2016-17, “Consolidation (Topic 810): Interests Held through Related
Parties That Are under Common Control” (“ASU 2016-17”). ASU 2016-17 amends the consolidation guidance on how a
reporting entity that is the single decision maker of a variable interest entity (VIE) should treat indirect interests in the entity
held through related parties that are under common control with the reporting entity when determining whether it is a primary
beneficiary of that VIE. ASU 2016-17 is effective for the Company’s fiscal year beginning November 1, 2017. Early adoption
is permitted. We do not anticipate the adoption of ASU 2016-17 to have a material impact on our Consolidated Financial
Statements.
In November 2016, the FASB issued ASU No. 2016-18, “Statement of Cash Flows (Topic 230): Restricted Cash”
(“ASU 2016-18”). ASU 2016-18 amends the classification and presentation of changes in restricted cash or restricted cash
equivalents in the statement of cash flows. ASU 2016-18 is effective for the Company’s fiscal year beginning November 1,
83
2018. Early adoption is permitted. We are currently evaluating the potential impact of adopting this guidance on our
Consolidated Financial Statements.
4. Leases
We lease certain property under non-cancelable leases. Office leases are generally for terms of three to five years
and generally provide renewal options. Model home leases are generally for shorter terms of approximately one to three years
with renewal options on a month-to-month basis. In most cases, we expect that in the normal course of business, leases that
will expire will be renewed or replaced by other leases. The future lease payments required under operating leases that have
initial or remaining non-cancelable terms in excess of one year are as follows:
Years Ending October 31,
2018
2019
2020
2021
2022
Thereafter
Total
(In Thousands)
8,139
7,882
5,354
2,915
2,434
4,342
31,066
$
$
Net rental expense for the three years ended October 31, 2017, 2016 and 2015, was $10.8 million, $12.8 million and
$11.6 million, respectively. These amounts include rent expense for various month-to-month leases on model homes,
furniture and equipment. These amounts also include the amortization of abandoned lease costs for leased space that we have
abandoned due to our reduction in size and consolidation of certain locations. Certain leases contain renewal or purchase
options and generally provide that the Company shall pay for insurance, taxes and maintenance.
5. Property, Plant and Equipment
Homebuilding property, plant, and equipment consists of land, land improvements, buildings, building
improvements, furniture and equipment used to conduct day-to-day business and are recorded at cost less accumulated
depreciation. Included in these amounts are $1.0 million in land, $60.1 million in buildings and $26.4 million in accumulated
depreciation for our current corporate headquarters, for a net book value of $34.7 million, which was held for sale at October
31, 2017 and sold on November 1, 2017 as discussed in Note 24.
Property, plant, and equipment balances as of October 31, 2017 and 2016 were as follows:
(In thousands)
Land and land improvements
Buildings
Building improvements
Furniture
Equipment, including capitalized software
Total
Less accumulated depreciation
Total
6. Restricted Cash and Deposits
$
October 31,
2017
2016
2,625 $
69,279
9,458
5,571
35,328
122,261
69,342
52,919 $
2,398
67,860
8,231
5,788
35,770
120,047
69,715
50,332
Restricted cash and cash equivalents on the Consolidated Balance Sheets totaled to $24.4 million and $22.9 million
as of October 31, 2017 and 2016, respectively, which included cash collateralizing our letter of credit agreements and facilities
as discussed in Note 8. Also included in this balance were (1) homebuilding and financial services customers’ deposits of
$0.4 million and $20.0 million at October 31, 2017, respectively, and $2.2 million and $15.1 million as of October 31, 2016,
respectively, which are restricted from use by us, and (2) $2.3 million at October 31, 2017 and $3.9 million at October 31,
84
2016 of restricted cash under the terms of our mortgage warehouse lines of credit. Financial services restricted cash is
included in Financial services other assets on the Consolidated Balance Sheets.
Total Homebuilding Customers’ deposits are shown as a liability on the Consolidated Balance Sheets. These
liabilities are significantly more than the applicable periods’ restricted cash balances because, in some states, the deposits are
not restricted from use and, in other states, we are able to release the majority of these customer deposits to cash by pledging
letters of credit and surety bonds.
7. Mortgage Loans Held for Sale
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 Consolidated Statements of Operations in “Revenues: Financial services.” We currently use forward sales of mortgage-
backed securities (“MBS”), interest rate commitments from borrowers and mandatory and/or best efforts forward
commitments to sell loans to third-party purchasers to protect us from interest rate fluctuations. These short-term instruments,
which do not require any payments to be made to the counterparty or purchaser in connection with the execution of the
commitments, are recorded at fair value. Gains and losses on changes in the fair value are recognized in the Consolidated
Statements of Operations in “Revenues: Financial services.”
At October 31, 2017 and 2016, $119.6 million and $147.4 million, respectively, of mortgages held for sale were
pledged against our mortgage warehouse lines of credit (see Note 8). 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 Consolidated Balance Sheets. As of October 31, 2017 and
2016, we had reserves specifically for 45 and 130 identified mortgage loans, respectively, as well as reserves for an estimate
for future losses on mortgages sold but not yet identified to us. In fiscal 2017, the adjustment to pre-existing provisions for
losses from changes in estimates is primarily due to the settlement of a dispute for significantly less than the amount
previously reserved.
The activity in our loan origination reserves in fiscal 2017 and 2016 was as follows:
(In thousands)
Year Ended
October 31,
2017
2016
Loan origination reserves, beginning of period
Provisions for losses during the period
Adjustments to pre-existing provisions for losses from changes in estimates
Payments/settlements
Loan origination reserves, end of period
$
$
8,137 $
165
(4,571)
(573)
3,158 $
8,025
261
48
(197)
8,137
8. Mortgages and Notes Payable
We have nonrecourse mortgage loans for certain communities totaling $64.5 million and $82.1 million (net of debt
issuance costs) at October 31, 2017 and 2016, respectively, which are secured by the related real property, including any
improvements, with an aggregate book value of $157.8 million and $201.8 million, respectively. The weighted-average
interest rate on these obligations was 5.3% and 4.9% at October 31, 2017 and 2016, respectively, and the mortgage loan
payments on each community primarily correspond to home deliveries. We also had nonrecourse mortgage loans on our
corporate headquarters totaling $13.0 million and $14.3 million at October 31, 2017 and 2016, respectively. These loans had
a weighted-average interest rate of 8.9% at October 31, 2017 and 8.8% at October 31, 2016. As of October 31, 2017, these
loans had installment obligations with annual principal maturities in the years ending October 31 of: $1.4 million in 2018,
$1.5 million in 2019, $1.7 million in 2020, $1.8 million in 2021, $2.0 million in 2022 and $4.6 million after 2022. On
November 1, 2017, the non-recourse loans on our corporate headquarters were paid in full in connection with the sale of the
building.
85
In June 2013, K. Hovnanian Enterprises, Inc. (“K. Hovnanian”), as borrower, and we and certain of our subsidiaries,
as guarantors, entered into a five-year, $75.0 million unsecured revolving credit facility (the “Credit Facility”) with Citicorp
USA, Inc., as administrative agent and issuing bank, and Citibank, N.A., as a lender. The Credit Facility is available for both
letters of credit and general corporate purposes. The Credit Facility does not contain any financial maintenance covenants,
but does contain certain restrictive covenants that track those contained in our indenture governing the 8.0% Senior Notes
due 2019, which are described in Note 9. The Credit Facility also contains certain customary events of default which would
permit the administrative agent at the request of the required lenders to, among other things, declare all loans then outstanding
to be immediately due and payable if such default is not cured within applicable grace periods, including the failure to make
timely payments of amounts payable under the Credit Facility or other material indebtedness or the acceleration of other
material indebtedness, the failure to comply with agreements and covenants or for representations or warranties to be correct
in all material respects when made, specified events of bankruptcy and insolvency, and the entry of a material judgment
against a loan party. Outstanding borrowings under the Credit Facility accrue interest at an annual rate equal to either, as
selected by K. Hovnanian, (i) the alternate base rate plus the applicable spread determined on the date of such borrowing or
(ii) an adjusted London Interbank Offered Rate (“LIBOR”) rate plus the applicable spread determined as of the date two
business days prior to the first day of the interest period for such borrowing. As of October 31, 2017 there were $52.0 million
of borrowings and $14.6 million of letters of credit outstanding under the Credit Facility. As of October 31, 2016, there were
$52.0 million of borrowings and $17.9 million of letters of credit outstanding under the Credit Facility. As of October 31,
2017, we believe we were in compliance with the covenants under the Credit Facility.
In addition to the Credit Facility, which matures in 2018, we have certain stand–alone cash collateralized letter of
credit agreements and facilities under which there were a total of $1.7 million letters of credit outstanding at both October
31, 2017 and 2016. These agreements and facilities require us to maintain specified amounts of cash as collateral in segregated
accounts to support the letters of credit issued thereunder, which will affect the amount of cash we have available for other
uses. At both October 31, 2017 and October 31, 2016, the amount of cash collateral in these segregated accounts was $1.7
million, which is reflected in “Restricted cash and cash equivalents” on the 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. In certain instances, we retain the servicing rights
for a small amount of loans. Our secured Master Repurchase Agreement with JPMorgan Chase Bank, N.A. (“Chase Master
Repurchase Agreement”), which has a maturity date of July 31, 2018, is a short-term borrowing facility that provides up to
$50.0 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 monthly on outstanding advances at an adjusted LIBOR rate,
which was 1.24% at October 31, 2017, plus the applicable margin of 2.5% or 2.63% based upon type of loan. As of October
31, 2017 and October 31, 2016, the aggregate principal amount of all borrowings outstanding under the Chase Master
Repurchase Agreement was $41.5 million and $44.1 million, respectively.
K. Hovnanian Mortgage has another secured Master Repurchase Agreement with Customers Bank (“Customers
Master Repurchase Agreement”), which is a short-term borrowing facility that provides up to $50.0 million through
its maturity on February 16, 2018. The loan is secured by the mortgages held for sale and is repaid when we sell the underlying
mortgage loans to permanent investors. Interest is payable daily or as loans are sold to permanent investors on outstanding
advances at the current LIBOR rate, plus the applicable margin ranging from 2.5% to 5.25% based on the type of loan and
the number of days outstanding on the warehouse line. As of October 31, 2017 and October 31, 2016, the aggregate principal
amount of all borrowings outstanding under the Customers Master Repurchase Agreement was $40.7 million and $38.8
million, respectively.
K. Hovnanian Mortgage also has a secured Master Repurchase Agreement with Comerica Bank (“Comerica Master
Repurchase Agreement”), which has a maturity date of June 21, 2018. The Comerica Master Repurchase Agreement is a
short-term borrowing facility that provides up to $50.0 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 monthly at the
current LIBOR rate, subject to a floor of 0.25%, plus the applicable margin of 2.5%. As of October 31, 2017 and October 31,
2016, the aggregate principal amount of all borrowings outstanding under the Comerica Master Repurchase Agreement was
$32.4 million and $29.8 million, respectively.
K. Hovnanian Mortgage had a secured Master Repurchase Agreement with Credit Suisse First Boston Mortgage
Capital LLC which was a short-term borrowing facility that provided up to $50.0 million through its maturity on February
21, 2017. The facility was not renewed after maturity, therefore there were no outstanding borrowings thereunder as of
October 31, 2017. As of October 31, 2016, the aggregate principal amount of all borrowings outstanding was $32.9 million.
86
The Chase Master Repurchase Agreement, Customers Master Repurchase Agreement and Comerica Master
Repurchase Agreement (together, the “Master Repurchase Agreements”) require K. Hovnanian Mortgage to satisfy and
maintain specified financial ratios and other financial condition tests. Because of the extremely short period of time mortgages
are held by K. Hovnanian Mortgage before the mortgages are sold to investors (generally a period of a few weeks), the
immateriality to us on a consolidated basis of the size of the Master Repurchase Agreements, the levels required by these
financial covenants, our ability based on our immediately available resources to contribute sufficient capital to cure any
default, were such conditions to occur, and our right to cure any conditions of default based on the terms of the applicable
agreement, we do not consider any of these covenants to be substantive or material. As of October 31, 2017, we believe we
were in compliance with the covenants under the Master Repurchase Agreements.
9. Senior Notes and Term Loan
Senior Notes and Term Loan balances as of October 31, 2017 and October 31, 2016, were as follows:
(In thousands)
Senior Secured Term Loan, net of debt issuance costs
Senior Secured Notes:
7.25% Senior Secured First Lien Notes due October 15, 2020
10.0% Senior Secured Second Lien Notes due October 15, 2018 (net of discount)
9.125% Senior Secured Second Lien Notes due November 15, 2020
9.50% Senior Secured Notes due November 15, 2020
2.0% Senior Secured Notes due November 1, 2021 (net of discount)
5.0% Senior Secured Notes due November 1, 2021 (net of discount)
10.0% Senior Secured Notes due July 15, 2022
10.5% Senior Secured Notes due July 15, 2024
Total Senior Secured Notes, net of debt issuance costs
Senior Notes:
7.0% Senior Notes due January 15, 2019
8.0% Senior Notes due November 1, 2019
Total Senior Notes, net of debt issuance costs
11.0% Senior Amortizing Notes due December 1, 2017, net of debt issuance costs
Senior Exchangeable Notes due December 1, 2017, net of debt issuance costs
October 31,
2017(1)(2)
72,987 $
October 31,
2016(1)(2)
72,646
- $
-
-
74,350
53,058
133,732
434,543
394,953
1,090,636 $
131,957 $
234,293
366,250 $
2,045 $
53,919 $
569,641
68,951
143,337
74,140
53,022
131,998
-
-
1,041,089
148,800
247,348
396,148
6,152
57,298
$
$
$
$
$
$
$
(1) “Notes payable and term loan” on our Consolidated Balance Sheets as of October 31, 2017 and October 31, 2016 consists
of the total senior secured, senior, senior amortizing and senior exchangeable notes and senior secured term loan shown
above, as well as accrued interest of $41.8 million and $32.4 million, respectively.
(2) As discussed in Note 1, we adopted ASU 2015-03 in November 2016. We applied the new guidance retrospectively to all
prior periods presented in the financial statements to conform to the fiscal 2017 presentation. As a result, $20.2 million of
debt issuance costs at October 31, 2016, were reclassified from prepaids and other assets to a reduction in our senior secured
term loan, senior secured, senior, senior amortizing and senior exchangeable notes. Debt issuance costs at October 31, 2017
were $16.1 million.
As of October 31, 2017, future maturities of our borrowings (assuming no exchange of our senior exchangeable
notes), were as follows (in thousands):
Fiscal Year Ended October 31,
2018
2019
2020
2021
2022
Thereafter
Total
87
$
$
56,002
207,546
235,961
75,000
635,000
400,000
1,609,509
General
Except for K. Hovnanian, the issuer of the notes, our home mortgage subsidiaries, joint ventures and subsidiaries
holding interests in our joint ventures and certain of our title insurance subsidiaries, we and each of our subsidiaries are
guarantors of the senior secured term loan and senior secured, senior, senior amortizing and senior exchangeable notes
outstanding at October 31, 2017 (collectively, the “Notes Guarantors”). In addition to the Notes Guarantors, the 5.0% Senior
Secured Notes due 2021 (the “5.0% 2021 Notes”), the 2.0% Senior Secured Notes due 2021 (the “2.0% 2021 Notes” and
together with the 5.0% 2021 Notes, the “2021 Notes”) and the 9.50% 2020 Notes (defined below) collectively with the 2021
Notes, the “JV Holdings Secured Group 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 “JV Holdings Secured Group”).
Members of the JV Holdings Secured Group do not guarantee K. Hovnanian's other indebtedness.
The credit agreement governing the Term Loans (defined below) and the indentures governing the notes outstanding
at October 31, 2017 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 nonrecourse indebtedness, certain permitted indebtedness and refinancing indebtedness (under the
Term Loans and the 9.50% 2020 Notes, any new or refinancing indebtedness may not be scheduled to mature earlier than
January 15, 2021 (so long as no member of the JV Holdings Secured Group is an obligor thereon), or February 15, 2021 (if
otherwise), and under the 10.0% Senior Secured Notes due 2022 (the “10.0% 2022 Notes”) and the 10.5% Senior Secured
Notes due 2024 (the “10.5% 2024 Notes”), any refinancing indebtedness of the 7.0% Senior Notes due 2019 (the “7.0%
Notes”) and 8.0% Senior Notes due 2019 (the “8.0% Notes” and together with the 7.0% Notes, the “2019 Notes”) may not
be scheduled to mature earlier than July 16, 2024)), pay dividends and make distributions on common and preferred stock,
repurchase subordinated indebtedness (with respect to the Term Loans and certain of the senior secured and senior notes) and
common and preferred stock, make other restricted payments, including investments, sell certain assets (including in certain
land banking transactions), incur liens, consolidate, merge, sell or otherwise dispose of all or substantially all assets, enter
into certain transactions with affiliates and make cash repayments of the 2019 Notes (with respect to the 10.0% 2022 Notes
and 10.5% 2024 Notes). The credit agreement governing the Term Loans and the indentures also contain events of default
which would permit the lenders/holders thereof to exercise remedies with respect to the collateral (as applicable), declare the
loans made under the Term Loan Facility (defined below) (the “Term Loans”)/notes to be immediately due and payable if
not cured within applicable grace periods, including the failure to make timely payments on the Term Loans/notes or other
material indebtedness, cross default to other material indebtedness, the failure to comply with agreements and covenants and
specified events of bankruptcy and insolvency, with respect to the Term Loans, material inaccuracy of representations and
warranties and a change of control, and, with respect to the Term Loans and senior secured notes, the failure of the documents
granting security for the Term Loans and 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 Term Loans and senior secured notes to be valid and perfected. As of October
31, 2017, we believe we were in compliance with the covenants of the Term Loan Facility and the indentures governing our
outstanding notes.
If our consolidated fixed charge coverage ratio, as defined in the agreements governing our debt instruments (other
than the senior exchangeable note units discussed 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 nonrecourse indebtedness. As a result of this ratio restriction, we are currently restricted from paying
dividends, which are not cumulative, on our 7.625% Series A Preferred Stock. We anticipate that we will continue to be
restricted from paying dividends for the foreseeable future. Our inability to pay dividends is in accordance with covenant
restrictions and will not result in a default under our debt instruments or otherwise affect compliance with any of the covenants
contained in our debt instruments.
Under the terms of our debt agreements, we have the right to make certain redemptions and prepayments and,
depending on market conditions and covenant restrictions, may do so from time to time. We also continue to 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.
Any liquidity-enhancing transaction will depend on identifying counterparties, negotiation of documentation and
applicable closing conditions and any required approvals. Due to covenant restrictions in our debt instruments, we are
currently limited in the amount of debt we can incur that does not qualify as refinancing indebtedness with certain maturity
requirements as discussed above (a limitation that we expect to continue for the foreseeable future), even if market conditions
would otherwise be favorable, which could also impact our ability to grow our business.
88
Fiscal 2017
During the year ended October 31, 2017, we repurchased in open market transactions $17.5 million aggregate
principal amount of 7.0% Notes, $14.0 million aggregate principal amount of 8.0% Notes and 6,925 senior exchangeable
note units representing $6.9 million stated amount of senior exchangeable note units. The aggregate purchase price for these
transactions was $30.8 million, plus accrued and unpaid interest. These transactions resulted in a gain on extinguishment of
debt of $7.8 million, which is included as “Loss on Extinguishment of Debt” on the Consolidated Statement of Operations.
This gain was offset by $0.4 million of costs associated with the 9.50% Senior Secured Notes due 2020 (the “9.50% 2020
Notes”) issued during the fourth quarter of fiscal 2016 and the debt transactions during the third quarter of fiscal 2017
discussed below.
On July 27, 2017, K. Hovnanian issued $440.0 million aggregate principal amount of 10.0% 2022 Notes and $400.0
million aggregate principal amount of 10.5% 2024 Notes. The net proceeds from these issuances together with available cash
were used to (i) purchase $575,912,000 principal amount of 7.25% Senior Secured First Lien Notes due 2020 (the “7.25%
First Lien Notes”), $87,321,000 principal amount of 9.125% Senior Secured Second Lien Notes due 2020 (the “9.125%
Second Lien Notes” and, together with the 7.25% First Lien Notes, the “ 2020 Secured Notes”) and all $75,000,000 principal
amount of 10.0% Senior Secured Second Lien Notes due 2018 (the “10.0% Second Lien Notes”) that were tendered and
accepted for purchase pursuant to K. Hovnanian’s offers to purchase for cash (the “Tender Offers”) any and all of the 7.25%
First Lien Notes, the 9.125% Second Lien Notes and the 10.0% Second Lien Notes and to pay related tender premiums and
accrued and unpaid interest thereon to the date of purchase and (ii) satisfy and discharge all obligations (and cause the release
of the liens on the collateral securing such indebtedness) under the indentures under which the 7.25% First Lien Notes, the
9.125% Second Lien Notes and the 10.0% Second Lien Notes were issued and in connection therewith to call for redemption
on October 15, 2017 and on November 15, 2017 all remaining $1,088,000 principal amount of 7.25% First Lien Notes and
all remaining $57,679,000 principal amount of 9.125% Second Lien Notes, respectively, that were not validly tendered and
purchased in the applicable Tender Offer in accordance with the redemption provisions of the indentures governing the 2020
Secured Notes. These transactions resulted in a loss on extinguishment of debt of $42.3 million, which is included as “Loss
on Extinguishment of Debt” on the Consolidated Statement of Operations.
The 10.0% 2022 Notes have a maturity of July 15, 2022 and bear interest at a rate of 10.0% per annum payable
semi-annually on January 15 and July 15 of each year, commencing January 15, 2018, to holders of record at the close of
business on January 1 and July 1, as the case may be, immediately preceding such interest payment dates. The 10.0% 2022
Notes are redeemable in whole or in part at our option at any time prior to July 15, 2019 at 100.0% of their principal amount
plus an applicable “Make-Whole Amount.” K. Hovnanian may also redeem some or all of the 10.0% 2022 Notes at 105.0%
of principal commencing July 15, 2019, at 102.50% of principal commencing July 15, 2020 and at 100.0% of principal
commencing July 15, 2021. In addition, K. Hovnanian may also redeem up to 35.0% of the aggregate principal amount of
the 10.0% 2022 Notes prior to July 15, 2019 with the net cash proceeds from certain equity offerings at 110.0% of principal.
The 10.5% 2024 Notes have a maturity of July 15, 2024 and bear interest at a rate of 10.5% per annum payable
semi-annually on January 15 and July 15 of each year, commencing January 15, 2018, to holders of record at the close of
business on January 1 and July 1, as the case may be, immediately preceding such interest payment dates. The 10.5% 2024
Notes are redeemable in whole or in part at our option at any time prior to July 15, 2020 at 100.0% of their principal amount
plus an applicable “Make-Whole Amount.” K. Hovnanian may also redeem some or all of the 10.5% 2024 Notes at 105.25%
of principal commencing July 15, 2020, at 102.625% of principal commencing July 15, 2021 and at 100.0% of principal
commencing July 15, 2022. In addition, K. Hovnanian may also redeem up to 35.0% of the aggregate principal amount of
the 10.5% 2024 Notes prior to July 15, 2020 with the net cash proceeds from certain equity offerings at 110.50% of principal.
All of K. Hovnanian’s obligations under the 10.0% 2022 Notes and the 10.5% 2024 Notes are guaranteed by the
Notes Guarantors. In addition to pledges of the equity interests in K. Hovnanian and the subsidiary Notes Guarantors which
secure the 10.0% 2022 Notes and the 10.5% 2024 Notes, the 10.0% 2022 Notes and the 10.5% 2024 Notes and the guarantees
thereof will also be secured in accordance with the terms of the indenture and security documents governing such Notes by
pari passu liens on substantially all of the assets owned by K. Hovnanian and the Notes Guarantors, in each case subject to
permitted liens and certain exceptions (the collateral securing the 10.0% 2022 Notes and the 10.5% 2024 Notes will be the
same as that securing the Term Loans). The liens securing the 10.0% 2022 Notes and the 10.5% 2024 Notes rank junior to
the liens securing the Term Loans and any other future secured obligations that are senior in priority with respect to the assets
securing the 10.0% 2022 Notes and the 10.5% 2024 Notes.
89
In connection with the issuance of the 10.0% 2022 Notes and the 10.5% 2024 Notes, K. Hovnanian and the Notes
Guarantors entered into security and pledge agreements pursuant to which K. Hovnanian and the Notes Guarantors pledged
substantially all of their assets to secure their obligations under the 10.0% 2022 Notes and the 10.5% 2024 Notes, subject to
permitted liens and certain exceptions as set forth in such agreements. K. Hovnanian and the Notes Guarantors also entered
into applicable intercreditor and collateral agency agreements which set forth agreements with respect to the relative priority
of their various secured obligations.
The indenture governing the 10.0% 2022 Notes and the 10.5% 2024 Notes was entered into on July 27, 2017 among
K. Hovnanian, the Notes Guarantors and Wilmington Trust, National Association, as trustee and collateral agent. The
covenants and events of default in the indenture are described above under “—General”.
Fiscal 2016
On January 15, 2016, $172.7 million principal amount of our 6.25% Senior Notes due 2016 matured and was paid
and on May 15, 2016, $86.5 million principal amount of our 7.5% Senior Notes due 2016 matured and was paid. On October
11, 2016 (the next business day following the redemption date of October 8, 2016), all $121.0 million principal amount of
our 8.625% Senior Notes due 2017 were redeemed for a redemption price of approximately $126.1 million, which included
accrued and unpaid interest.
On September 8, 2016, the Company and K. Hovnanian completed certain financing transactions with certain
investment funds managed by affiliates of H/2 Capital Partners LLC (collectively, the “Investor”) pursuant to which the
Investor (1) funded a $75.0 million senior secured term loan facility (the “Term Loan Facility”), which was borrowed by K.
Hovnanian and guaranteed by the Notes Guarantors, (2) purchased $75.0 million aggregate principal amount of 10.0%
Second Lien Notes issued by K. Hovnanian and guaranteed by the Notes Guarantors (all such notes were subsequently
purchased in the Tender Offers as described above under “-Fiscal 2017”), and (3) exchanged $75.0 million aggregate principal
amount of 9.125% Second Lien Notes held by such Investor for $75.0 million of newly issued 9.50% 2020 Notes issued by
K. Hovnanian and guaranteed by the Notes Guarantors and the members of the JV Holdings Secured Group, for aggregate
cash proceeds of approximately $146.3 million, before expenses.
The Term Loan Facility has a maturity of August 1, 2019 (provided that if any of K. Hovnanian’s 7.0% Senior Notes
due 2019 (the “7.0% Notes”) remain outstanding on October 15, 2018, the maturity date of the Term Loan Facility will be
October 15, 2018, or if any refinancing indebtedness with respect to the 7.0% Notes has a maturity date prior to January 15,
2021, the maturity date of the Term Loan Facility will be October 15, 2018) and bears interest at a rate equal to LIBOR plus
an applicable margin of 7.0% or, at K. Hovnanian’s option, a base rate plus an applicable margin of 6.0%, payable monthly.
At any time from and after September 8, 2018, K. Hovnanian may voluntarily repay outstanding Term Loans, provided that
voluntary prepayments of Eurodollar loans made on a date other than the last day of an interest period applicable thereto are
subject to customary breakage costs and voluntary prepayments made prior to February 1, 2019 are subject to a premium
equal to 1.0% of the aggregate principal amount of the Term Loans so prepaid (any prepayment of the Term Loans made on
or after February 1, 2019 are without any prepayment premium).
The 9.50% 2020 Notes have a maturity of November 15, 2020, and bear interest at a rate of 9.50% per annum,
payable semi-annually on February 15 and August 15 of each year, to holders of record at the close of business on February
1 and August 1, as the case may be, immediately preceding such interest payment dates. The 9.50% 2020 Notes are
redeemable in whole or in part at our option at any time prior to November 15, 2018 at 100% of their principal amount plus
an applicable “Make-Whole Amount.” At any time and from time to time on or after November 15, 2018, K. Hovnanian may
also redeem some or all of the 9.50% 2020 Notes at a redemption price equal to 100% of their principal amount. In addition,
we may also redeem up to 35% of the aggregate principal amount of the 9.50% 2020 Notes prior to November 15, 2018 with
the net cash proceeds from certain equity offerings at 109.50% of principal.
All of K. Hovnanian’s obligations under the Term Loan Facility are guaranteed by the Notes Guarantors. The Term
Loan Facility and the guarantees thereof are secured, subject to permitted liens and other exceptions, on a first lien priority
basis relative to the 10.0% 2022 Notes and the 10.5% 2024 Notes (and on a first lien super priority basis relative to future
first lien indebtedness). The 9.50% 2020 Notes are guaranteed by the Notes Guarantors and the members of the JV Holdings
Secured Group. The Exchange Notes are secured on a pari passu first lien basis with K. Hovnanian’s 2021 Notes, by
substantially all of the assets of the members of the JV Holdings Secured Group, subject to permitted liens and certain
exceptions.
90
At October 31, 2017, the aggregate book value of the real property that constituted collateral securing the Term
Loans was $419.9 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. Cash and cash equivalents collateral that secured the
Term Loans was $381.1 million as of October 31, 2017, which included $1.7 million of restricted cash collateralizing certain
letters of credit. Subsequent to such date, fluctuations as a result of cash uses include general business operations and real
estate and other investments along with cash inflow primarily from deliveries. In addition, collateral securing the Term Loans
includes equity interest in K Hovnanian and the subsidiary Notes Guarantors.
Other Secured Obligations
On November 1, 2011, K. Hovnanian issued $141.8 million aggregate principal amount of 5.0% 2021 Notes and
$53.2 million aggregate principal amount of 2.0% 2021 Notes. The 5.0% 2021 Notes and the 2.0% 2021 Notes were issued
as separate series under an indenture, but have substantially the same terms other than with respect to interest rate and related
redemption provisions, and vote together as a single class. The 2021 Notes are redeemable in whole or in part at our option
at any time, at 100.0% of the principal amount plus the greater of 1% of the principal amount and an applicable “Make-
Whole Amount.”
The guarantees of the JV Holdings Secured Group with respect to the 2021 Notes and the 9.50% 2020 Notes 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 JV Holdings Secured Group. As of October 31, 2017, the collateral securing the guarantees included (1) $84.3 million
of cash and cash equivalents (subsequent to such date, fluctuations as a result of cash uses include general business operations
and real estate and other investments along with cash inflow primarily from deliveries); (2) $128.9 million aggregate book
value of real property of the JV Holdings Secured Group, which does not include the impact of inventory investments, home
deliveries or impairments thereafter and which may differ from the value if it were appraised; and (3) equity interests owned
by guarantors that are members of the JV Holdings Secured Group. Members of the JV Holdings Secured Group also own
equity in joint ventures, either directly or indirectly through ownership of joint venture holding companies, with a book value
of $88.2 million as of October 31, 2017; this equity is not pledged to secure, and is not collateral for, the 2021 Notes. Members
of the JV Holdings Secured Group are “unrestricted subsidiaries” under K. Hovnanian's other senior secured notes and senior
notes and the Term Loan Facility, and thus have not guaranteed such indebtedness.
Senior Notes
K. Hovnanian’s 7.0% Notes are redeemable in whole or in part at our option at any time at 101.75% of principal
commencing January 15, 2017 and 100.0% of principal commencing January 15, 2018.
K. Hovnanian’s 8.0% Notes are redeemable in whole or in part at K. Hovnanian’s option at any time prior to August
1, 2019 at a redemption price equal to 100.0% of their principal amount plus an applicable “Make-Whole Amount.” At any
time and from time to time on or after August 1, 2019, K. Hovnanian may also redeem some or all of the notes at a redemption
price equal to 100.0% of their principal amount.
Units
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 Senior Exchangeable Note, and
that will accrete to $1,000 at maturity and (2) a senior amortizing note due December 1, 2017 (a “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
91
events. If certain corporate events 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. As of October 31, 2017, 18,305 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. In September 2016, K. Hovnanian purchased a total of 20,823 Units for an aggregate
purchase price of $20.6 million, in November 2016, K. Hovnanian purchased a total of 6,925 Units for an aggregate purchase
price of $6.9 million and during the year ended October 31, 2017, K. Hovnanian purchased certain Units as discussed above
under “—Fiscal 2017”.
On each June 1 and December 1 (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 was $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.
10. Operating and Reporting Segments
Our operating segments are components of our business for which discrete financial information is available and
reviewed regularly by the chief operating decision maker, our Chief Executive Officer, to evaluate performance and make
operating decisions. Based on this criteria, each of our communities qualifies as an operating segment, and therefore, it is
impractical to provide segment disclosures for this many segments. As such, we have aggregated the homebuilding operating
segments into six reportable segments.
Our homebuilding operating segments are aggregated into reportable segments based primarily upon geographic
proximity, similar regulatory environments, land acquisition characteristics and similar methods used to construct and sell
homes. Our reportable segments consist of the following six homebuilding segments and a financial services segment noted
below. During fiscal 2016, we decided to exit the Minneapolis, Minnesota and Raleigh, North Carolina markets and in the
third quarter of fiscal 2016, we completed the sale of our portfolios in those markets.
Homebuilding:
(1) Northeast (New Jersey and Pennsylvania)
(2) Mid-Atlantic (Delaware, Maryland, Virginia, Washington D.C. and West Virginia)
(3) Midwest (Illinois and Ohio)
(4) Southeast (Florida, Georgia and South Carolina)
(5) Southwest (Arizona and Texas)
(6) West (California)
Financial Services
Operations of the Company’s Homebuilding segments primarily include the sale and construction of single-family
attached and detached homes, attached townhomes and condominiums, urban infill and active lifestyle homes in planned
residential developments. In addition, from time to time, operations of the homebuilding segments include sales of
land. Operations of the Company’s Financial Services segment include mortgage banking and title services provided to the
homebuilding operations’ customers. We do not typically retain or service mortgages that we originate but rather sell the
mortgages and related servicing rights to investors.
Corporate and unallocated primarily represents operations at our headquarters in Red Bank, New Jersey. This
includes our executive offices, information services, human resources, corporate accounting, training, treasury, process
redesign, internal audit, construction services, and administration of insurance, quality and safety. It also includes interest
income and interest expense resulting from interest incurred that cannot be capitalized in inventory in the Homebuilding
segments, as well as the gains or losses on extinguishment of debt from any debt repurchases or exchanges.
92
Evaluation of segment performance is based primarily on operating earnings from continuing operations before
provision for income taxes (“Income (loss) before income taxes”). Income (loss) before income taxes for the Homebuilding
segments consist of revenues generated from the sales of homes and land, income (loss) from unconsolidated entities,
management fees and other income, less the cost of homes and land sold, selling, general and administrative expenses and
interest expense. Income before income taxes for the Financial Services segment consist of revenues generated from mortgage
financing, title insurance and closing services, less the cost of such services and selling, general and administrative expenses
incurred by the Financial Services segment.
Operational results of each segment are not necessarily indicative of the results that would have occurred had the
segment been an independent stand-alone entity during the periods presented.
Financial information relating to the Company’s segment operations was as follows:
(In thousands)
Revenues:
Northeast
Mid-Atlantic
Midwest
Southeast
Southwest
West
Total homebuilding
Financial services
Corporate and unallocated
Total revenues
(Loss) income before income taxes:
Northeast
Mid-Atlantic
Midwest
Southeast
Southwest
West
Total homebuilding
Financial services
Corporate and unallocated (1)
(Loss) income before income taxes
Year Ended October 31,
2017
2016
2015
$
$
$
$
209,509 $
464,126
199,770
260,402
827,503
430,546
2,391,856
58,743
1,066
2,451,665 $
2,300 $
17,191
(1,151)
(6,199)
71,540
19,636
103,317
26,397
(174,958)
(45,244) $
278,028 $
458,579
311,322
260,584
1,028,529
342,447
2,679,489
72,617
141
2,752,247 $
(3,869 ) $
17,476
(11,416 )
(17,791 )
84,424
3,445
72,269
35,473
(105,306 )
2,436 $
189,497
399,500
311,449
207,662
823,853
159,969
2,091,930
56,665
(115 )
2,148,480
(7,742 )
21,431
14,012
(6,330 )
67,437
(17,145 )
71,663
24,693
(118,121 )
(21,765 )
(1) Corporate and unallocated for the year ended October 31, 2017 included corporate general and administrative costs of
$59.4 million, interest expense of $69.1 million (a component of Other interest on our Consolidated Statements of
Operations), loss on extinguishment of debt of $34.9 million, $12.5 million adjustment for construction defect reserves
(discussed in Note 16) and $0.9 million of other income and expenses primarily related to interest income, rental income,
bond amortization and stock compensation. Corporate and unallocated for the year ended October 31, 2016 included
corporate general and administrative costs of $60.1 million, interest expense of $50.4 million (a component of Other interest
on our Consolidated Statements of Operations), loss on extinguishment of debt of $3.2 million, $(9.2) million adjustment for
construction defect reserves (discussed in Note 16) and $0.8 million of other income and expenses primarily related to bond
amortization, stock compensation and rental income. Corporate and unallocated for the year ended October 31, 2015
included corporate general and administrative costs of $62.5 million, interest expense of $64.5 million (a component of Other
interest on our Consolidated Statements of Operations), $(14.4) million adjustment for construction defect reserves
(discussed in Note 16) and $5.5 million of other income and expenses primarily related to bond amortization, stock
compensation and rental income.
93
(In thousands)
Assets:
Northeast
Mid-Atlantic
Midwest
Southeast
Southwest
West
Total homebuilding
Financial services
Corporate and unallocated (1)
Total assets
October 31,
2017
2016
180,545 $
224,398
84,960
231,644
294,337
175,347
1,191,231
162,113
547,554
1,900,898 $
219,363
292,899
111,596
226,124
341,472
269,400
1,460,854
197,230
696,872
2,354,956
$
$
(1) Includes $283.6 million of income taxes receivable - including deferred tax assets in fiscal 2016.
(In thousands)
Investments in and advances to unconsolidated joint ventures:
Northeast
Mid-Atlantic
Midwest
Southeast
Southwest
West
Total homebuilding
Corporate and unallocated
Total investments in and advances to unconsolidated joint ventures
(In thousands)
Homebuilding interest expense:
Northeast
Mid-Atlantic
Midwest
Southeast
Southwest
West
Total homebuilding
Corporate and unallocated
Financial services interest expense (1)
Total interest expense, net
October 31,
2017
$
$
36,411 $
20,873
4,268
36,320
11,832
4,451
114,155
935
115,090 $
2016
28,115
22,407
5,516
22,876
3,625
17,547
100,086
416
100,502
Year Ended October 31,
2017
2016
2015
$
$
20,308 $
23,886
7,799
13,646
25,278
25,799
116,716
69,124
(630)
185,210 $
19,417 $
23,662
12,275
16,770
37,552
23,295
132,971
50,387
(763 )
182,595 $
14,150
16,268
10,405
9,552
26,147
10,381
86,903
64,545
(1,066 )
150,382
(1) Financial services interest expenses are included in the Financial services lines on the Consolidated Statements of
Operations in the respective revenues and expenses sections.
94
(In thousands)
Depreciation:
Northeast
Mid-Atlantic
Midwest
Southeast
Southwest
West
Total homebuilding
Financial services
Corporate and unallocated
Total depreciation
(In thousands)
Net additions to operating properties and equipment:
Northeast
Mid-Atlantic
Midwest
Southeast
Southwest
West
Total homebuilding
Financial services
Corporate and unallocated
Total net additions to operating properties and equipment
Year Ended October 31,
2017
2016
71 $
50
858
83
78
94
1,234
16
2,999
4,249 $
62 $
56
497
82
104
92
893
41
2,631
3,565 $
Year Ended October 31,
2017
2016
442 $
71
3,773
28
18
80
4,412
-
2,066
6,478 $
78 $
208
3,180
233
199
91
3,989
30
3,988
8,007 $
2015
136
28
361
40
89
79
733
47
2,608
3,388
2015
-
58
637
227
173
88
1,183
-
871
2,054
$
$
$
$
(In thousands)
Equity in (losses) earnings from unconsolidated joint ventures:
Northeast
Mid-Atlantic
Midwest
Southeast
Southwest
West
Total equity in (losses) earnings from unconsolidated joint ventures $
$
Year Ended October 31,
2017
2016
2015
(4,376) $
1,180
(1,424)
837
(306)
(2,958)
(7,047) $
(2,639 ) $
(27 )
(1,304 )
(1,774 )
(64 )
1,462
(4,346 ) $
856
4,502
(105 )
1,213
-
(2,297 )
4,169
11. Income Taxes
Income taxes payable (receivable), including deferred benefits, consists of the following:
(In thousands)
State income taxes:
Current
Deferred
Federal income taxes:
Current
Deferred
Total
Year Ended October 31,
2017
2016
$
$
2,227 $
-
-
-
2,227 $
1,945
(9,890)
-
(275,688)
(283,633)
95
The provision for income taxes is composed of the following charges (benefits):
(In thousands)
Current income tax expense (benefit):
Federal (1)
State (2)
Total current income tax expense (benefit):
Federal
State
Total deferred income tax expense (benefit):
Total
Year Ended October 31,
2017
2016
2015
$
$
- $
1,371
1,371
275,688
9,890
285,578
286,949 $
(2,796 ) $
1,200
(1,596 )
5,594
1,257
6,851
5,255 $
(1,497 )
523
(974 )
(8,461 )
3,770
(4,691 )
(5,665 )
(1)
The current federal income tax did not include the use of federal net operating losses for the year ended October 31,
2017. The current federal income tax benefit is net of the use of federal net operating losses totaling $4.4 million and
$3.7 million for the years ended October 31, 2016 and 2015, respectively.
(2)
The current state income tax expense (benefit) is net of the use of state net operating losses totaling $18.2 million,
$16.4 million and $12.3 million for the years ended October 31, 2017, 2016 and 2015, respectively.
The total income tax expense of $286.9 million for the period ended October 31, 2017 was primarily due to
increasing our valuation allowance to fully reserve against our deferred tax assets (“DTAs”). In addition, the same periods
were also impacted by state tax expense from income generated in some states, which was not offset by tax benefits in other
states that had losses for which we fully reserve the net operating losses. The total income tax expense of $5.3 million for the
period ended October 31, 2016 was primarily due to current state taxes and permanent differences related to stock
compensation, partially offset by a federal tax benefit related to receiving a specified liability loss refund of taxes paid in
fiscal year 2002. The total income tax benefit of $5.7 million recognized for the year ended October 31, 2015 was primarily
due to deferred taxes resulting from the loss before income taxes plus the reversal of state tax reserves for uncertain state tax
positions, partially offset by state tax expenses.
The permanent difference in fiscal 2016 related to stock compensation arose because for tax purposes, the amount
of stock compensation the Company expenses is the amount reported on an associate’s W-2 when the equity award is
exercised or received, whereas for accounting purposes, the amount the Company expenses is based on the fair value of the
equity award on the date of grant. Therefore, the permanent difference due to stock compensation was because of this different
treatment, which does not arise until the time the equity award is exercised or received by the associate and therefore reported
on an associate’s W-2. The amount was significant because of the issuance in fiscal 2016 of stock to Company executives in
respect of awards that had been granted over ten years ago at significantly higher stock prices and thus significantly higher
fair values as compared to the time of issuance to the executive. As a result, at the time the stock awards were issued in fiscal
2016, a significant permanent difference between book and tax was created impacting the effective tax rate for 2016.
The federal specified liability loss refund of taxes in fiscal year 2002 was due to an amendment of a prior year’s tax
return. The Internal Revenue Service issued the refund following the Company’s application therefor during the year ended
October 31, 2016. The refund related to the portion of the fiscal year 2012 NOL attributable to a specified liability loss which,
pursuant to Internal Revenue Code Section 172(b)(1)(C), can be carried back ten years to October 31, 2002. A specified
liability is any amount allowable as a deduction attributable to a product liability or expense incurred in investigation or
settlement of claims because of a product liability. The refund was received in February 2016 and therefore the tax credit was
recorded in the second quarter of fiscal 2016.
Our federal net operating losses of $1.6 billion expire between 2028 and 2037. Our state NOLs of $2.3 billion expire
between 2018 and 2037. Of the total state amount, $247.1 million will expire between 2018 through 2022; $463.1 million
will expire between 2023 through 2027; $1.2 billion will expire between 2028 through 2032; and $348.6 million will expire
between 2033 through 2037.
Deferred federal and state income tax assets primarily represent the deferred tax benefits arising from net operating
loss carryforwards and temporary differences between book and tax income which will be recognized in future years as an
offset against future taxable income. If the combination of future years’ income (or loss) and the reversal of the timing
differences results in a loss, such losses can be carried forward to future years. In accordance with ASC 740, we evaluate our
deferred tax assets quarterly to determine if valuation allowances are required. ASC 740 requires that companies assess
96
whether valuation allowances should be established based on the consideration of all available evidence using a “more likely
than not” standard.
As of October 31, 2017, we considered all available positive and negative evidence to determine whether, based on
the weight of that evidence, an additional valuation allowance for our DTAs was necessary in accordance with ASC 740.
Listed below, in order of the weighting of each factor, is the available positive and negative evidence that we considered in
determining that it is more likely than not that all of our DTAs will not be realized. In analyzing these factors, overall the
negative evidence, both objective and subjective, outweighed the positive evidence. Based on this analysis, we increased the
valuation allowance against our DTAs such that we have a full valuation allowance and determined that the current valuation
allowance for deferred taxes of $918.2 million as of October 31, 2017 is appropriate.
1. Fiscal 2017 financial results, especially the $50.2 million pre-tax loss in the third quarter of 2017 primarily from the
$42.3 million loss on extinguishment of debt during the quarter, that put us in a cumulative three-year loss position
as of July 31, 2017, and we are still in a cumulative three-year loss position as of October 31, 2017. Per ASC 740,
cumulative losses are one of the most objectively verifiable forms of negative evidence. (Negative Objective
Evidence)
In the third quarter of fiscal 2017, we completed a debt refinancing/restructuring transaction which, by extending
our debt maturities, will enable us to allocate cash to invest in new communities and grow our community count to
get back to sustained profitability. (Positive Objective Evidence)
2.
3. Recent financial results of $12.3 pre-tax income in the fourth quarter of 2017. (Positive Objective Evidence)
4. The refinancing discussed above will increase our interest incurred in fiscal 2018 and future years (based on our
longer term modeling) by $23.4 million per year. (Negative Objective Evidence)
5. We incurred pre-tax losses during the housing market decline and the slower than expected housing market recovery.
(Negative Objective Evidence)
6. We exited two geographic markets and are winding down operations in two other markets that have historically had
losses. By exiting these underperforming markets, the Company will be able to redeploy capital to better performing
markets, which over time should improve our profitability. (Positive Subjective Evidence)
7. Evidence of a sustained recovery in the housing markets in which we operate, supported by economic data showing
housing starts, homebuilding volume and prices all increasing and forecasted to continue to increase. (Positive
Subjective Evidence)
8. The historical cyclicality of the U.S. housing market, a more restrictive mortgage lending environment compared to
before the housing downturn, the uncertainty of the overall US economy and government policies and consumer
confidence, all or any of which could continue to hamper a faster, stronger recovery of the housing market. (Negative
Subjective Evidence)
97
The deferred tax assets and liabilities have been recognized in the Consolidated Balance Sheets as follows:
(In thousands)
Deferred tax assets:
Depreciation
Inventory impairment loss
Uniform capitalization of overhead
Warranty and legal reserves
Deferred income
Acquisition intangibles
Restricted stock bonus
Rent on abandoned space
Stock options
Provision for losses
Joint venture loss
Federal net operating losses
State net operating losses
Other
Total deferred tax assets
Deferred tax liabilities:
Debt repurchase income
Total deferred tax liabilities
Valuation allowance
Net deferred income taxes
$
Year Ended October 31,
2017
2016
246 $
122,584
5,766
8,763
2,341
4,420
4,202
101
6,539
38,831
12,028
549,862
172,307
20,678
948,668
1,729
174,489
6,802
13,238
5,061
8,829
4,526
1,006
7,073
34,505
4,171
520,117
170,014
22,862
974,422
30,465
30,465
(918,203 )
- $
60,901
60,901
(627,943)
285,578
$
The effective tax rate varied from the statutory federal income tax rate. The effective tax rate is affected by a number
of factors, the most significant of which has been the valuation allowance related to our deferred tax assets. Due to the effects
of these factors, our effective tax rates for 2017, 2016 and 2015 are not correlated to the amount of our income or loss before
income taxes. The sources of these factors were as follows:
Computed “expected” tax rate
State income taxes, net of federal income tax benefit
Permanent differences, net
Deferred tax asset valuation allowance impact
Tax contingencies
Adjustments to prior years’ tax accruals(1)
Effective tax rate
Year Ended October 31,
2017
35.0%
1.0
(2.4)
(667.8)
-
-
(634.2)%
2016
35.0%
65.4
222.2
-
0.3
(107.2)
215.7%
2015
35.0%
(15.6)
(0.4)
-
3.2
3.8
26.0%
(1)
The adjustments to prior years’ tax accruals includes the impact of a federal specified liability loss refund of taxes
paid in fiscal year 2002 of (114.8%) for the year ended October 31, 2016.
ASC 740-10 provides that a tax benefit from an uncertain tax position may be recognized when it is more likely
than not that the position will be sustained upon examination, including resolutions of any related appeals or litigation
processes, based on the technical merits.
Income tax positions must meet a more-likely-than-not recognition threshold at the effective date to be recognized
upon the adoption of ASC 740-10 and in subsequent periods. This interpretation also provides guidance on measurement,
derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition.
We recognize tax liabilities in accordance with ASC 740-10 and we adjust these liabilities when our judgment
changes as a result of the evaluation of new information not previously available. Due to the complexity of some of these
uncertainties, the ultimate resolution may result in a liability that is materially different from our current estimate of the tax
liabilities. These differences will be reflected as increases or decreases to income tax expense in the period in which they are
determined.
98
We recognize interest and penalties related to unrecognized tax benefits within the income tax expense line in the
accompanying consolidated statement of operations. Accrued interest and penalties are included within the related tax liability
line in the consolidated balance sheet.
The following is a tabular reconciliation of the total amount of unrecognized tax benefits for the year (in millions)
excluding interest and penalties:
Unrecognized tax benefit—November 1,
Gross increases—tax positions in current period
Decrease related to tax positions taken during a prior period
Lapse of statute of limitations
Unrecognized tax benefit—October 31,
Year Ended October 31,
$
$
2017
1.1 $
0.2
-
(0.2)
1.1 $
2016
1.1
0.2
-
(0.2 )
1.1
Related to the unrecognized tax benefits noted above, as of October 31, 2017 and 2016, we have recognized a
liability for interest and penalties of $0.3 million and $0.3 million, respectively. For the years ended October 31, 2017, 2016
and 2015, we recognized $(45) thousand, $(2) thousand and $(91) thousand respectively, of interest and penalties in income
tax benefit.
It is likely that, within the next year, the amount of the Company's unrecognized tax benefits will decrease by $0.2
million, excluding penalties and interest. This reduction is expected primarily due to the expiration of the statutes of
limitation. The portion of unrecognized tax benefits that, if recognized, would affect the Company’s effective tax rate
(excluding any related impact to the valuation allowance) is $1.1 million as of both October 31, 2017 and 2016. The
recognition of unrecognized tax benefits could have an impact on the Company’s deferred tax assets and the valuation
allowance.
The consolidated federal tax returns have been audited through October 31, 2016 and these years are closed. We are
also subject to various income tax examinations in the states in which we do business. The outcome for a particular audit
cannot be determined with certainty prior to the conclusion of the audit, appeal, and in some cases, litigation process. As each
audit is concluded, adjustments, if any, are appropriately recorded in the period determined. To provide for potential
exposures, tax reserves are recorded, if applicable, based on reasonable estimates of potential audit results. However, if the
reserves are insufficient upon completion of an audit, there could be an adverse impact on our financial position and results
of operations. The statute of limitations for our major tax jurisdictions remains open for examination for tax years 2013-
2016.
12. Reduction of Inventory to Fair Value
We record impairment losses on inventories related to communities under development and held for future
development when events and circumstances indicate that they may be impaired and the undiscounted cash flows estimated
to be generated by those assets are less than their related carrying amounts. If the expected undiscounted cash flows are less
than the carrying amount, then the community is written down to its fair value. We estimate the fair value of each impaired
community by determining the present value of the estimated future cash flows at a discount rate commensurate with the risk
of the respective community. For the years ended October 31, 2017, 2016 and 2015, our discount rates used for the
impairments recorded ranged from 18.3% to 19.8%, 16.8% to 18.8% and 17.3% to 19.8%, 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 years ended October 31, 2017 and 2016, we evaluated inventories of all 372 and 413 communities under
development and held for future development or sale, respectively, for impairment indicators through preparation and review
of detailed budgets or other market indicators of impairment. We performed detailed impairment calculations during the
years ended October 31, 2017 and 2016 for 12 and 30 of those communities (i.e., those with a projected operating loss or
other impairment indicators), respectively, with an aggregate carrying value of $98.0 million and $125.4 million, respectively.
As impairment indicators are assessed on a quarterly basis, some of the communities evaluated during the years ended
October 31, 2017 and 2016 were evaluated in more than one quarterly period. Of those communities tested for impairment
during the years ended October 31, 2017 and 2016, two and nine communities with an aggregate carrying value of $45.0
million and $43.5 million, respectively, had undiscounted future cash flows that exceeded the carrying amount by less than
20%. As a result of our impairment analysis, we recorded aggregate impairment losses, which are included in the
99
Consolidated Statement of Operations on the line entitled “Homebuilding: Inventory impairment loss and land option write-
offs” and deducted from inventory, of $15.1 million, $24.5 million and $7.3 million for the years ended October 31, 2017,
2016 and 2015, respectively. Impairments decreased for the year ended October 31, 2017 compared to the prior year as the
impairments recorded for the year ended October 31, 2016 were mainly for land held for sale in the Midwest and Northeast.
The pre-impairment value represents the carrying value, net of prior period impairments, if any, at the time of recording the
impairment.
The following table represents impairments by segment for fiscal 2017, 2016 and 2015:
(Dollars in millions)
Year Ended October 31, 2017
Northeast
Mid-Atlantic
Midwest
Southeast
Southwest
West
Total
Number of
Communities
Dollar
Amount of
Impairment
2 $
1
2
3
-
2
10 $
3.3 $
1.5
0.2
8.1
-
2.0
15.1 $
Pre-
Impairment
Value (1)
22.2
8.5
0.8
18.3
-
3.1
52.9
(Dollars in millions)
Year Ended October 31, 2016
Northeast
Mid-Atlantic
Midwest
Southeast
Southwest
West
Total
Number of
Communities
Dollar
Amount of
Impairment
5 $
-
12
3
-
-
20 $
9.5 $
-
13.5
1.5
-
-
24.5 $
Pre-
Impairment
Value (1)
33.8
-
43.7
10.9
-
-
88.4
(Dollars in millions)
Year Ended October 31, 2015
Northeast
Mid-Atlantic
Midwest
Southeast
Southwest
West
Total
Number of
Communities
Dollar
Amount of
Impairment
2 $
1
4
4
-
1
12 $
0.8 $
0.9
1.3
2.5
-
1.8
7.3 $
Pre-
Impairment
Value (1)
0.9
2.5
8.4
10.1
-
7.5
29.4
(1)
Represents carrying value, net of prior period impairments, if any, at the time of recording the applicable period’s
impairments.
The Consolidated Statements of Operations line entitled “Homebuilding: Inventory impairment loss and land option
write-offs” also includes write-offs of options and approval, engineering and capitalized interest costs that we record when
we redesign communities and/or abandon certain engineering costs and we do not exercise options in various locations
because the communities’ pro forma profitability is not projected to produce adequate returns on investment commensurate
with the risk. The total aggregate write-offs related to these items were $2.7 million, $8.9 million and $4.7 million for the
years ended October 31, 2017, 2016 and 2015, respectively. Occasionally, these write-offs are offset by recovered deposits
(sometimes through legal action) that had been written off in a prior period as walk-away costs. Historically, these recoveries
have not been significant in comparison to the total costs written off.
100
The following table represents write-offs of such costs by segment for fiscal 2017, 2016 and 2015:
(In millions)
Northeast
Mid-Atlantic
Midwest
Southeast
Southwest
West
Total
13. Per Share Calculations
Year Ended October 31,
2017
2016
$
$
0.5 $
0.6
0.3
0.8
0.4
0.1
2.7 $
1.6 $
0.8
1.3
1.8
3.2
0.2
8.9 $
2015
0.9
0.2
0.6
1.3
1.4
0.3
4.7
Basic earnings per share is computed by dividing net income (loss) (the “numerator”) by the weighted-average
number of common shares outstanding, adjusted for nonvested shares of restricted stock (the “denominator”) for the
period. Computing diluted earnings per share is similar to computing basic earnings per share, except that the denominator
is increased to include the dilutive effects of options and nonvested shares of restricted stock, as well as common shares
issuable upon exchange of our Senior Exchangeable Notes issued as part of our 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 nonforfeitable rights to dividends or dividend equivalents that
participate in undistributed earnings with common stock are considered participating securities and are included in computing
earnings per share pursuant to the two-class method. The two-class method is an earnings allocation formula that determines
earnings per share for each class of common stock and participating securities according to dividends or dividend equivalents
and participation rights in undistributed earnings in periods when we have net income. The Company’s restricted common
stock (“nonvested shares”) are considered participating securities.
Incremental shares attributed to nonvested stock and outstanding options to purchase common stock of 2.7 million
and 0.2 million for the years ended October 31, 2017 and 2015 respectively, were excluded from the computation of diluted
earnings per share because we had a net loss for the period, and any incremental shares would not be dilutive. Also, for the
years ended October 31, 2017, 2016 and 2015, 10.0 million, 14.6 million and 15.2 million shares, respectively, of common
stock issuable upon the exchange of our senior exchangeable notes (which were issued in fiscal 2012) were excluded from
the computation of diluted earnings per share because we had a net loss for the period.
In addition, shares related to out-of-the money stock options that could potentially dilute basic earnings per share in
the future that were not included in the computation of diluted earnings per share were 4.6 million, 7.3 million and 3.0 million
for the years ended October 31, 2017, 2016 and 2015, respectively, because to do so would have been anti-dilutive for the
periods presented.
14. Capital Stock
Common Stock - Each share of Class A Common Stock entitles its holder to one vote per share, and each share of
Class B Common Stock generally entitles its holder to ten votes per share. The amount of any regular cash dividend payable
on a share of Class A Common Stock will be an amount equal to 110% of the corresponding regular cash dividend payable
on a share of Class B Common Stock. If a shareholder desires to sell shares of Class B Common Stock, such stock must be
converted into shares of Class A Common Stock at a one to one conversion rate.
On August 4, 2008, our Board of Directors adopted a shareholder rights plan (the “Rights Plan”) designed to preserve
shareholder value and the value of certain tax assets primarily associated with net operating loss (NOL) carryforwards and
built-in losses under Section 382 of the Internal Revenue Code. Our ability to use NOLs and built-in losses would be limited
if there was an “ownership change” under Section 382. This would occur if shareholders owning (or deemed under
Section 382 to own) 5% or more of our stock increase their collective ownership of the aggregate amount of our outstanding
shares by more than 50 percentage points over a defined period of time. The Rights Plan was adopted to reduce the likelihood
of an “ownership change” occurring as defined by Section 382. Under the Rights Plan, one right was distributed for each
share of Class A Common Stock and Class B Common Stock outstanding as of the close of business on August 15, 2008.
101
Effective August 15, 2008, if any person or group acquires 4.9% or more of the outstanding shares of Class A Common Stock
without the approval of the Board of Directors, there would be a triggering event causing significant dilution in the voting
power of such person or group. However, existing stockholders who owned, at the time of the Rights Plan’s adoption, 4.9%
or more of the outstanding shares of Class A Common Stock will trigger a dilutive event only if they acquire additional
shares. The approval of the Board of Directors’ decision to adopt the Rights Plan may be terminated by the Board at any
time, prior to the Rights being triggered. The Rights Plan will continue in effect until August 15, 2018, unless it expires
earlier in accordance with its terms. The approval of the Board of Directors’ decision to adopt the Rights Plan was submitted
to a stockholder vote and approved at a special meeting of stockholders held on December 5, 2008. Also at the Special
Meeting on December 5, 2008, our stockholders approved an amendment to our Certificate of Incorporation to restrict certain
transfers of Class A Common Stock in order to preserve the tax treatment of our NOLs and built-in losses under Section 382
of the Internal Revenue Code. Subject to certain exceptions pertaining to pre-existing 5% stockholders and Class B
stockholders, the transfer restrictions in the amended Certificate of Incorporation generally restrict any direct or indirect
transfer (such as transfers of our stock that result from the transfer of interests in other entities that own our stock) if the effect
would be to (i) increase the direct or indirect ownership of our stock by any person (or public group) from less than 5% to
5% or more of our common stock; (ii) increase the percentage of our common stock owned directly or indirectly by a person
(or public group) owning or deemed to own 5% or more of our common stock; or (iii) create a new public group. Transfers
included under the transfer restrictions include sales to persons (or public groups) whose resulting percentage ownership
(direct or indirect) of common stock would exceed the 5% thresholds discussed above, or to persons whose direct or indirect
ownership of common stock would by attribution cause another person (or public group) to exceed such threshold.
On July 3, 2001, our Board of Directors authorized a stock repurchase program to purchase up to 4 million shares
of Class A Common Stock. There were no shares purchased during the year ended October 31, 2017. As of October 31, 2017,
the maximum number of shares of Class A Common Stock that may yet be purchased under this program is 0.5 million.
Preferred Stock - On July 12, 2005, we issued 5,600 shares of 7.625% Series A Preferred Stock, with a liquidation
preference of $25,000 per share. Dividends on the Series A Preferred Stock are not cumulative and are payable at an annual
rate of 7.625%. The Series A Preferred Stock is not convertible into the Company’s common stock and is redeemable in
whole or in part at our option at the liquidation preference of the shares. The Series A Preferred Stock is traded as depositary
shares, with each depositary share representing 1/1000th of a share of Series A Preferred Stock. The depositary shares are
listed on the NASDAQ Global Market under the symbol “HOVNP.” In fiscal 2017, 2016 and 2015, we did not pay any
dividends on the Series A Preferred Stock due to covenant restrictions in our debt instruments. We anticipate that we will
continue to be restricted from paying dividends, which are not cumulative, for the foreseeable future.
Retirement Plan - We have established a tax-qualified, defined contribution savings and investment retirement plan
(a 401(k) plan). All associates are eligible to participate in the retirement plan, and employer contributions are based on a
percentage of associate contributions and our operating results. Plan costs charged to operations were $6.8 million, $6.6
million and $6.2 million for the years ended October 31, 2017, 2016 and 2015, respectively.
15. Stock Plans
The fair value of option awards is established at the date of grant using a Black-Scholes option pricing model with
the following weighted-average assumptions for the years ended October 31, 2017, 2016 and 2015: risk free interest rate
of 2.05%, 1.38% and 2.03%, respectively; dividend yield of zero; historical volatility factor of the expected market price of
our common stock of 0.53, 0.61 and 0.58, respectively; a weighted-average expected life of the option of 7.64 years, 7.36
years and 7.22 years, respectively; and an estimated forfeiture rate of 9.92%, 10.90% and 8.84%, respectively.
For the years ended October 31, 2017, 2016 and 2015, total stock-based compensation expense was $0.6 million,
$2.9 million ($2.3 million post tax) and $8.8 million ($6.5 million post tax), respectively. Included in this total stock-based
compensation expense was expense from stock options of $0.5 million for year ended October 31, 2017, income for stock
options of $1.5 million for the year ended October 31, 2016, and expense of $2.2 million for the year ended October 31,
2015. The fiscal 2017 expense includes income of $2.0 million from previously recognized expense of certain performance
based restricted stock grants for which the performance metrics are no longer expected to be satisfied. This income was offset
by the vesting of restricted stock of $2.1 million during the year ended October 31, 2017. The fiscal 2016 expense includes
income of $2.1 million from previously recognized expense of certain performance based stock option grants for which the
performance metrics are no longer expected to be satisfied. This income was slightly offset by the vesting of stock options
of $0.5 million, during the year ended October 31, 2016.
102
We have a stock incentive plan for certain officers and key employees and directors. Options are granted by a
committee appointed by the Board of Directors or its delegate in accordance with the stock incentive plan. The exercise price
of all stock options must be at least equal to the fair market value of the underlying shares on the date of the grant. Stock
options granted to officers and associates generally vest in four equal installments on the second, third, fourth and fifth
anniversaries of the date of the grant. All options expire 10 years after the date of the grant. During the year ended October 31,
2017, each of the five non-employee directors of the Company were given the choice to receive stock options or a reduced
number of shares of restricted stock units subject to a two-year post-vesting holding period, or a combination thereof, with
restricted stock units based on the fair market value on the date of grant and stock options based on grant date Black-Scholes
value. All such directors elected to receive restricted stock units. Non-employee directors’ stock options and restricted stock
units vest in three equal installments on the first, second and third anniversaries of the date of the grant. Stock option
transactions are summarized as follows:
October 31,
Weighted-
Average
Exercise
October 31,
Weighted-
Average
Exercise
October 31,
2017
Price
2016
Price
2015
Weighted-
Average
Exercise
Price
7,373,951 $
236,250 $
48,250 $
452,375 $
248,875 $
4.03 6,393,876 $
2.34 1,148,481 $
- $
2.07
51,125 $
5.85
117,281 $
16.68
4.78 6,720,251 $
173,750 $
1.95
18,125 $
-
203,436 $
2.73
278,564 $
25.05
5.23
2.47
2.48
3.78
15.04
Options outstanding at
beginning of period
Granted
Exercised
Forfeited
Expired
Options outstanding at
end of period
6,860,701 $
3.40 7,373,951 $
4.03 6,393,876 $
4.78
Options exercisable at end
of period
5,259,011
5,071,181
4,566,290
The total intrinsic value of options exercised during fiscal 2017 and 2015 was $12 thousand and $15 thousand,
respectively. The intrinsic value of a stock option is the amount by which the market value of the underlying stock exceeds
the exercise price of the option. At October 31, 2016, there were no options exercisable which had an intrinsic value. Exercise
prices for options outstanding at October 31, 2017 ranged from $1.54 to $6.46.
The weighted-average fair value of grants made in fiscal 2017, 2016 and 2015 was $1.33, $1.00 and $1.47 per share,
respectively. Based on the fair value at the time they were granted, the weighted-average fair value of options vested in fiscal
2017, 2016 and 2015 was $2.60, $2.55 and $2.78 per share, respectively.
The following table summarizes the exercise price range and related number of options outstanding at October 31,
2017:
Range of Exercise Prices
$1.54 – $2.41
$2.42 – $4.41
$4.42 – $6.46
Number
Outstanding
2,320,409 $
2,496,542 $
2,043,750 $
6,860,701 $
Weighted-
Average
Exercise Price
2.01
2.84
5.70
3.41
Weighted-
Average
Remaining
Contractual
Life
6.71
3.26
2.57
4.22
103
The following table summarizes the exercise price range and related number of exercisable options at October 31,
2017:
Range of Exercise Prices
$1.54 – $2.41
$2.42 – $4.41
$4.42 – $6.46
Number
Exercisable
1,003,714 $
2,322,797 $
1,932,500 $
5,259,011 $
Weighted-
Average
Exercise Price
2.00
2.77
5.66
3.69
Weighted-
Average
Remaining
Contractual
Life
4.02
2.96
2.40
2.96
Officers and key associates who are eligible to receive equity grants may elect to receive either a stated number of
stock options, or a reduced number of shares of restricted stock units, or a combination thereof. Shares underlying restricted
stock units granted to officers and associates generally vest in four equal installments on the second, third, fourth and fifth
anniversaries of the grant date. Participants aged 60 years or older, or aged 58 with 15 years of service, are eligible to vest in
their equity awards on an accelerated basis on their retirement (which in the case of the restricted stock units only applies to
a retirement that is at least one year after the date of grant). During the years ended October 31, 2017, 2016 and 2015, we
granted 366,513 (including 298,388 units to certain of our non-employee directors), 456,070 (including 356,382 units to
certain of our non-employee directors) and 1,018,558 (including 155,433 units to certain of our non-employee directors)
restricted stock units, respectively, and also issued 101,218, 176,944 and 97,854 units, relating to awards granted in prior
fiscal years, respectively. During the years ended October 31, 2017, 2016 and 2015, 452,500, 33,125 and 5,811 restricted
stock units were forfeited, respectively.
For the years ended October 31, 2017, 2016 and 2015 total compensation cost recognized in the Consolidated
Statement of Operations for the annual restricted stock unit grants, market share unit grants (discussed below), and the stock
portion of the long-term incentive plan (also discussed below) was $21 thousand, $4.3 million and $6.5 million,
respectively. In addition to nonvested share awards summarized in the following table, there were 312,419, 224,326 and
538,892 vested share awards at October 31, 2017, 2016 and 2015, respectively, which were deferred at the participants'
election.
A summary of the Company’s nonvested share awards as of and for the year ended October 31, 2017, is as follows:
Nonvested at beginning of period
Granted
Vested
Forfeited
Nonvested at end of period
Weighted-
Average
Grant Date
Fair Value
2.80
2.56
4.92
2.59
2.36
Shares
7,239,469 $
1,233,700 $
1,216,359 $
1,082,333 $
6,174,477 $
Included in the above table are awards for the share portion of long-term incentive plans (“LTIPs”) for certain
officers and associates, which are performance based plans. This includes 2.4 million target 2016 LTIP shares which were
granted during fiscal 2016 and were reduced from 2.8 million shares during fiscal 2017 due to a forfeiture. The awards
included above for these plans remain at target, although based on our best estimate of the outcome for the performance
criteria, the related expense of $2.0 million was reversed in the fourth quarter of fiscal 2017.
Also included in the table above are 2.7 million target Market Share Units (“MSUs”) of which 850,000 and 780,000
were granted to certain officers in fiscal 2017 and fiscal 2016, respectively. In addition, 700,000 and 400,000 MSUs are
included from the fiscal 2015 and fiscal 2014 MSU Grants, which were adjusted by 25,000 and 200,000, respectively, in
fiscal 2017, as certain performance conditions at the first and second measurement periods were not met and only a portion
of the shares were vested, resulting in the reversal of $1.2 million of expense during the period. Additionally, 34,355 and
48,032 net shares were issued during fiscal 2017. Fifty percent of the MSUs will vest in four equal annual installments,
commencing on the second anniversary of the grant date subject to stock price performance conditions, pursuant to which
the actual number of shares issuable with respect to vested MSUs may range from 0% to 175% of the target number of shares
104
covered by the MSU awards, generally depending on the growth in the 60-day average trading price of the Company’s shares
during the period between the grant date and the relevant vesting dates. The remaining fifty percent of the MSUs are also
subject to financial performance conditions in addition to the stock price performance conditions applicable to all MSUs.
These additional performance-based MSUs vest in four equal installments with the first installment vesting on January 1st ,
three years after the MSU grant date (for example, January 1, 2020 for the 2017 MSU Grant) and the remaining annual
installments commencing on the third anniversary of the Grant date, except that no portion of the award will vest unless the
Committee determines that the Company achieved (1) for the 2017 and 2016 MSU grants, specified gross margin
improvement (as to 25% of the MSU amount) and debt reduction (as to 25% of the MSU amount) goals comparing the fiscal
year of the grant date and the second fiscal year following the grant date (fiscal 2019 compared to fiscal 2017) and (2) for the
2015 MSU grant, specified total revenue growth goals comparing the fiscal year of the grant date and the second fiscal year
following the grant date (for example, fiscal 2017 compared to fiscal 2015 for the 2015 MSU Grant).
The fair value of the MSU grants is determined using the Monte-Carlo simulation model, which simulates a range
of possible future stock prices and estimates the probabilities of the potential payouts. This model uses the average closing
trading price of the Company’s Class A Common Stock on the New York Stock Exchange over the 60 calendar day period
ending on the grant date. This model also incorporates the following ranges of assumptions:
●
●
●
The expected volatility is based on our stock’s historical volatility commensurate with the life 2 years,
2.5 years, 3 years, 4 years and 5 years.
The risk-free interest rate is based on the U.S. Treasury rate assumption ranging from 2-5 years.
The expected dividend yield is not applicable since we do not currently pay dividends.
The following assumptions were used for 2017 MSU Grants: historical volatility factor of the expected market price
of our common stock of 57.93%, 54.61%, 52.66%, 48.85% and 50.78% for the 2 year, 2.6 year, 3 year, 4 year and 5 year
vesting tranches, respectively; risk free interest rates of 1.35%, 1.43%, 1.49%, 1.63% and 1.76% for each vesting tranche,
respectively; and dividend yield of zero for all time periods. The following assumptions were used for 2016 MSU Grants:
historical volatility factor of the expected market price of our common stock of 56.50%, 52.77%, 50.34%, 52.36% and
61.08% for the 2 year, 2.5 year, 3 year, 4 year and 5 year vesting tranches, respectively; risk free interest rates of 0.73%,
0.81%, 0.87%, 1.02% and 1.17% for each vesting tranche, respectively; and dividend yield of zero for all time periods. The
following assumptions were used for 2015 MSU Grants: historical volatility factor of the expected market price of our
common stock of 38.28%, 42.01%, 45.73%, 59.08% and 57.77% for the 2 year, 2.5 year, 3 year, 4 year and 5 year vesting
tranches, respectively; risk free interest rates of 0.74%, 0.95%, 1.12%, 1.44% and 1.75% for each vesting tranche,
respectively; and dividend yield of zero for all time periods.
As of October 31, 2017, we had 7.2 million shares authorized for future issuance under our equity compensation
plans. In addition, as of October 31, 2017, there were $3.5 million of total unrecognized compensation costs related to
nonvested share-based compensation arrangements. That cost is expected to be recognized over a weighted-average period
of 1.44 years.
16. Warranty Costs
General liability insurance for homebuilding companies and their suppliers and subcontractors is very difficult to
obtain. The availability of general liability insurance is limited due to a decreased number of insurance companies willing to
underwrite for the industry. In addition, those few insurers willing to underwrite liability insurance have significantly
increased the premium costs. To date, we have been able to obtain general liability insurance but at higher premium costs
with higher deductibles. Our subcontractors and suppliers have advised us that they have also had difficulty obtaining
insurance that also provides us coverage. As a result, we have an owner controlled insurance program for certain of our
subcontractors whereby the subcontractors pay us an insurance premium (through a reduction of amounts we would otherwise
owe such subcontractors for their work on our homes) based on the risk type of the trade. We absorb the liability associated
with their work on our homes as part of our overall general liability insurance at no additional cost to us because our existing
general liability and construction defect insurance policy and related reserves for amounts under our deductible covers
construction defects regardless of whether we or our subcontractors are responsible for the defect. For the fiscal years ended
October 31, 2017 and 2016, we received $4.1 million and $4.2 million, respectively, from subcontractors related to the owner
controlled insurance program, which we accounted for as a reduction to inventory.
105
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 2017 and 2016, our deductible under our general liability insurance is a $20 million aggregate for
construction defect and warranty claims. For bodily injury claims, our deductible per occurrence in fiscal 2017 and 2016 is
$0.25 million, up to a $5 million limit. Our aggregate retention in fiscal 2017 and 2016 is $21 million for construction defect,
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 fiscal years ended October 31, 2017 and 2016 were as follows:
(In thousands)
Balance, beginning of period
Additions – Selling, general and administrative
Additions – Cost of sales
Charges incurred during the period
Changes to pre-existing reserves
Changes to reserves where corresponding amounts are recorded as receivables
from insurance carriers
Balance, end of period
Year Ended October 31,
2016
2017
$
$
121,144 $
10,870
15,835
(28,019 )
7,872
-
127,702 $
135,053
17,363
17,397
(29,965)
(9,199)
(9,505)
121,144
Warranty accruals are based upon historical experience. We engage a third-party actuary that uses our historical
warranty and construction defect data to assist our management in estimating our unpaid claims, claim adjustment expenses
and incurred but not reported claims reserves for the risks that we are assuming under the general liability and construction
defect programs. The estimates include provisions for inflation, claims handling and legal fees. During the fourth quarter of
fiscal 2017, we recorded a $12.5 million adjustment to increase our construction defect reserves related to litigation. We also
recorded a $4.6 million reduction in our warranty accruals during the fourth quarter of fiscal 2017 and we had minor
reductions in our warranty accruals during the fourth quarter of 2016 based on recent warranty claims history. As a result of
reductions in our construction defect claims in recent years and the impact of those reductions on the actuarial analysis of our
total reserves, we recorded a $9.2 million reduction in our construction defect reserves during the fourth quarter of fiscal
2016. These reductions are reflected in the changes to pre-existing reserves in the table above.
Insurance claims paid by our insurance carriers, excluding insurance deductibles paid, were $0.9 million and $4.0
million for the fiscal years ended October 31, 2017 and 2016, respectively, for prior year deliveries. During fiscal 2016, we
settled two construction defect claims relating to the Northeast segment which made up the majority of the payments.
17. Transactions with Related Parties
During the years ended October 31, 2017, 2016 and 2015, an engineering firm owned by Tavit Najarian, a relative
of Ara K. Hovnanian, our Chairman of the Board and one of our executive officers, provided services to the Company totaling
$0.8 million, $1.0 million and $1.2 million, respectively. Neither the Company nor Mr. Hovnanian has a financial interest in
the relative’s company from whom the services were provided.
Mr. Carson Sorsby, the son of J. Larry Sorsby, one of our directors and executive officers, is employed by the
totaled
Company’s mortgage subsidiary and his
approximately $191,000, $152,000 and $129,000 in fiscal 2017, 2016 and 2015, respectively.
the Company’s mortgage affiliate
total commissions from
Mr. Alexander Hovnanian, the son of Ara K. Hovnanian, our Chairman of the Board and one of our executive
officers, is employed by the Company as an Area Vice President in the Company’s Hudson/North Jersey Area and his total
compensation was approximately $336,000 and $166,000 in fiscal 2017 and 2016, respectively.
106
18. Commitments and Contingent Liabilities
We are involved in litigation arising in the ordinary course of business, none of which is expected to have a material
adverse effect on our financial position, results of operations or cash flows, and we are subject to extensive and complex laws
and regulations that affect the development of land and home building, sales and customer financing processes, including
zoning, density, building standards and mortgage financing. These laws and regulations often provide broad discretion to the
administering governmental authorities. This can delay or increase the cost of development or homebuilding.
We also are subject to a variety of local, state, federal and foreign laws and regulations concerning protection of
health and the environment, including those regulating the emission or discharge of materials into the environment, the
management of storm water runoff at construction sites, the handling, use, storage and disposal of hazardous substances,
impacts to wetlands and other sensitive environments, and the remediation of contamination at properties that we have owned
or developed or currently own or are developing (“environmental laws”). The particular environmental laws that apply to a
site may vary greatly according to the community site, for example, due to the community, the environmental conditions at
or near the site, and the present and former uses of the site. These environmental laws may result in delays, may cause us to
incur substantial compliance, remediation and/or other costs, and can prohibit or severely restrict development and
homebuilding activity. In addition, noncompliance with these laws and regulations could result in fines and penalties,
obligations to remediate, permit revocations or other sanctions; and contamination or other environmental conditions at or in
the vicinity of our developments may result in claims against us for personal injury, property damage or other losses.
We anticipate that increasingly stringent requirements will be imposed on developers and homebuilders in the future.
For example, for a number of years, the EPA and U.S. Army Corps of Engineers have been engaged in rulemakings to clarify
the scope of federally regulated wetlands, which included a June 2015 rule many affected businesses contend impermissibly
expanded the scope of such wetlands that was challenged in court, stayed, and remains in litigation, and a proposal in June
2017 to formally rescind the June 2015 rule and reinstate the rule scheme previously in place while the agencies initiate a
new substantive rulemaking on the issue. It is unclear how these and related developments, including at the state or local
level, ultimately may affect the scope of regulated wetlands where we operate. Although we cannot reliably predict the extent
of any effect these developments regarding wetlands, or any other requirements that may take effect may have on us, they
could result in time-consuming and expensive compliance programs and in substantial expenditures, which could cause
delays and increase our cost of operations. In addition, our ability to obtain or renew permits or approvals and the continued
effectiveness of permits already granted or approvals already obtained is dependent upon many factors, some of which are
beyond our control, such as changes in policies, rules and regulations and their interpretations and application.
In March 2013, we received a letter from the Environmental Protection Agency (“EPA”) requesting information
about our involvement in a housing redevelopment project in Newark, New Jersey that a Company entity undertook during
the 1990s. We understand that the development is in the vicinity of a former lead smelter and that 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 ceased operations many years before the Company entity involved acquired the properties in the area and carried out
the re-development project. We responded to the EPA’s request. In August 2013, we were notified that the EPA considers us
a potentially responsible party (or “PRP”) with respect to the site, that the EPA will clean up the site, and that the EPA is
proposing that we fund and/or contribute towards the cleanup of the contamination at the site. We began preliminary
discussions with the EPA concerning a possible resolution but do not know the scope or extent of the Company’s obligations,
if any, that may arise from the site and therefore cannot provide any assurance that this matter will not have a material impact
on the Company. The EPA requested additional information in April 2014 and again in March 2017 and the Company has
responded to its information requests.
The Grandview at Riverwalk Port Imperial Condominium Association, Inc. (the “Grandview Plaintiff”) filed a
construction defect lawsuit against Hovnanian Enterprises, Inc. and several of its affiliates, including K. Hovnanian at Port
Imperial Urban Renewal II, LLC, K. Hovnanian Construction Management, Inc., K. Hovnanian Companies, LLC, K.
Hovnanian Enterprises, Inc., K. Hovnanian North East, Inc. aka and/or dba K. Hovnanian Companies North East, Inc., K.
Hovnanian Construction II, Inc., K. Hovnanian Cooperative, Inc., K. Hovnanian Developments of New Jersey, Inc., and K.
Hovnanian Holdings NJ, LLC, as well as the project architect, the geotechnical engineers and various construction contractors
for the project alleging various construction defects, design defects and geotechnical issues totaling approximately $41.3
million. The lawsuit included claims against the geotechnical engineers for differential soil settlement under the building,
against the architects for failing to design the correct type of structure allowable under the New Jersey Building Code, and
against the Hovnanian-affiliated developer entity (K. Hovnanian at Port Imperial Urban Renewal II, LLC ) alleging that it:
(1) had knowledge of and failed to disclose the improper building classification to unit purchasers and was therefore liable
for treble damages under the New Jersey Consumer Fraud Act; and (2) breached an express warranty set forth in the Public
Offering Statements that the common elements at the building were fit for their intended purpose. The Grandview Plaintiff
107
further alleged that Hovnanian Enterprises, Inc., K. Hovnanian Holdings NJ, LLC, K. Hovnanian Developments of New
Jersey, Inc., and K. Hovnanian Developments of New Jersey II, Inc. were jointly liable for any damages owed by the
Hovnanian development entity under a veil piercing theory.
The parties reached a settlement on the construction defect issues prior to trial, but attempts to settle the subsidence,
building classification issue and Consumer Fraud Act claims were unsuccessful. The trial commenced on April 17, 2017 in
Hudson County, New Jersey. In the third week of the trial, all of the Hovnanian defendants resolved the geotechnical claims
for an amount immaterial to the Company, but the balance of the case continued to be tried before the jury. On June 1, 2017,
the jury rendered a verdict against K. Hovnanian at Port Imperial Urban Renewal II, LLC on the breach of warranty and New
Jersey Consumer Fraud claims in the total amount of $3 million, which resulted in a total verdict of $9 million against that
entity due to statutory trebling, plus a to-be-determined portion of Grandview Plaintiff’s counsel fees, per the statute. The
jury also found in favor of Grandview Plaintiff on its veil piercing theory. Certain Hovnanian-affiliated defendants filed post-
trial motions on three issues: (1) a motion for a judgment notwithstanding the verdict or a new trial; (2) a motion addressing
whether any of the Hovnanian-affiliated entities could be jointly liable under a veil piercing theory for the damages awarded
against K. Hovnanian at Port Imperial Urban Renewal II, LLC; and (3) a motion for contractual indemnification against the
project architect. On October 27, 2017, the Court addressed a number of post-trial motions. The Court denied the motion for
a judgment notwithstanding the verdict or a new trial, and held that Hovnanian Enterprises, Inc. and its affiliate, K. Hovnanian
Developments of New Jersey, Inc., are jointly liable for the damages awarded against K. Hovnanian at Port Imperial Urban
Renewal II, LLC. On November 18, 2017, the Court awarded approximately $1.8 million in attorney fees and costs to
Grandview Plaintiff out of the approximately $4.8 million it had sought. Certain Hovnanian-affiliated defendants filed a
motion for reconsideration of the Court’s decision on attorney fees and costs, which remains pending.
Once a final judgment is entered, the relevant Hovnanian-affiliated defendants intend to appeal all aspects of the
verdict against them. With respect to this case, depending on the outcome of all appeals, the range of loss is between $0 and
$10.8 million, inclusive of attorneys’ fees and costs. Management believes that a loss is probable and reasonably estimable
and that the Company has reserved for its estimated probable loss amount in its construction defect reserves. However, our
assessment of the probable loss may differ from the ultimate resolution of this matter.
In 2014, the condominium association of the Grandview II at Riverwalk Port Imperial condominium building (the
“Grandview II Plaintiff”) filed a lawsuit in the Superior Court of New Jersey, Law Division, Hudson County (the “Court”)
alleging various construction defects, design defects, and geotechnical issues relating to the building along with a claim for
piercing the corporate veil as to certain defendants. The operative complaint (“Complaint”) brought claims against Hovnanian
Enterprises, Inc. and several of its affiliates, including K. Hovnanian at Port Imperial Urban Renewal III, LLC, PI Investments
I, LLC, K. Hovnanian Investments, LLC, K. Hovnanian Homes (not a legal entity but named as a defendant), K. Hovnanian
Shore Acquisitions, LLC, K. Hovnanian Construction Management, Inc., K. Hovnanian Companies, LLC, K. Hovnanian
Northeast, Inc., K. Hovnanian Enterprises, Inc., K. Hovnanian Construction III, Inc. and K. Hovnanian Cooperative, Inc. The
Complaint also brought claims against various other design professionals and contractors. Grandview II Plaintiff asserted
damages of approximately $69 million to $79 million, which amount was potentially subject to treble damages. On December
7, 2017, the Court issued orders adjudicating various parties’ motions for summary judgment. The Court issued an order that
granted Grandview II Plaintiff’s motion for partial summary judgment on the claim seeking to pierce the corporate veil of K.
Hovnanian at Port Imperial Urban Renewal III, LLC and ordered that Hovnanian Enterprises, Inc. shall be jointly and
severally liable for any damages awarded against K. Hovnanian at Port Imperial Urban Renewal III, LLC, including any
treble damages and attorney’s fees and costs. The Court also issued an order dismissing Grandview II Plaintiff’s claims for
negligence and breach of implied warranties against certain Hovnanian-affiliated defendants. As of December 14, 2017, the
Hovnanian-affiliated defendants reached a settlement with Grandview II Plaintiff that resolved all claims in the case involving
the Hovnanian-affiliated defendants. As of October 31, 2017, the Company had fully reserved for this settlement amount. On
December 15, 2017, the Court issued an order dismissing the action.
On December 21, 2016, the members of the Company’s Board were named as defendants in a derivative and class
action lawsuit filed in the Delaware Court of Chancery by Plaintiff Joseph Hong ("Plaintiff Hong"). Plaintiff Hong had
previously made a demand for inspection of the books and records of the Company pursuant to Delaware law. The Company
had provided certain company documents in response to Plaintiff Hong’s demand. The complaint relates to the Board of
Directors’ decisions to grant Ara K. Hovnanian equity awards in the form of Class B Common Stock, alleging that the
defendants breached their fiduciary duties to the Company and its stockholders; that the equity awards granted in Class B
Common Stock amounted to corporate waste; and that Ara. K Hovnanian was unjustly enriched by equity awards granted to
him in Class B Common Stock. The complaint seeks a declaration that the equity awards granted to Ara K. Hovnanian in
Class B Common Stock between June 13, 2014 and June 10, 2016 were ultra vires, invalidation or rescission of those awards,
injunctive relief, and unspecified damages.
108
On December 18, 2017, the parties finalized a settlement agreement to resolve the litigation. Pursuant to the
settlement agreement, which remains subject to approval by the Chancery Court, the Company will submit for stockholder
approval at the next Annual Meeting of Stockholders a resolution to amend the Company’s Certificate of Incorporation to
affirm that in the event of a merger, consolidation, acquisition, tender offer, recapitalization, reorganization or other business
combination, the same consideration will be provided for shares of Class A Common Stock and Class B Common Stock
unless different treatment of the shares of each such class is approved separately by a majority of each class. The Company
has also agreed to implement certain operational and corporate governance measures regarding the granting of equity awards
in Class B Common Stock and, further, that it will not oppose an application by Plaintiff Hong for attorney’s fees up to
$275,000, the amount of which is subject to approval by the Court.
19. Variable Interest Entities
The Company enters into land and lot option purchase contracts to procure land or lots for the construction of homes.
Under these contracts, the Company will fund a stated deposit in consideration for the right, but not the obligation, to purchase
land or lots at a future point in time with predetermined terms. Under the terms of the option purchase contracts, many of the
option deposits are not refundable at the Company's discretion. Under the requirements of ASC 810, certain option purchase
contracts may result in the creation of a variable interest in the entity (“VIE”) that owns the land parcel under option.
In compliance with ASC 810, the Company analyzes its option purchase contracts to determine whether the
corresponding land sellers are VIEs and, if so, whether the Company is the primary beneficiary. Although the Company does
not have legal title to the underlying land, ASC 810 requires the Company to consolidate a VIE if the Company is determined
to be the primary beneficiary. In determining whether it is the primary beneficiary, the Company considers, among other
things, whether it has the power to direct the activities of the VIE that most significantly impact the VIE’s economic
performance. Such activities would include, among other things, determining or limiting the scope or purpose of the VIE,
selling or transferring property owned or controlled by the VIE, or arranging financing for the VIE. The Company also
considers whether it has the obligation to absorb losses of the VIE or the right to receive benefits from the VIE. As a result
of its analyses, the Company determined that as of October 31, 2017 and 2016, it was not the primary beneficiary of any
VIEs from which it is purchasing land under option purchase contracts.
We will continue to secure land and lots using options, some of which are with VIEs. Including deposits on our
unconsolidated VIEs, at October 31, 2017, we had total cash and letters of credit deposits amounting to $57.1 million to
purchase land and lots with a total purchase price of $1.0 billion. The maximum exposure to loss with respect to our land and
lot options is limited to the deposits plus any pre-development costs invested in the property, although some deposits are
refundable at our request or refundable if certain conditions are not met.
20. Investments in Unconsolidated Homebuilding and Land Development Joint Ventures
We enter into homebuilding and land development joint ventures from time to time as a means of accessing lot
positions, expanding our market opportunities, establishing strategic alliances, managing our risk profile, leveraging our
capital base and enhancing returns on capital. Our homebuilding joint ventures are generally entered into with third-party
investors to develop land and construct homes that are sold directly to third-party home buyers. Our land development joint
ventures include those entered into with developers and other homebuilders as well as financial investors to develop finished
lots for sale to the joint venture’s members or other third parties.
In November 2015, the Company entered into a new joint venture to which the Company contributed a land parcel
that had been mothballed by the Company, but on which construction by the joint venture has now begun. Upon formation
of the joint venture, the Company received $25.7 million of cash proceeds for the contributed land. In addition, during the
third quarter of fiscal 2016, we entered into a new joint venture by contributing eight communities we owned and our option
to buy one community to the joint venture. As a result of the formation of the joint venture, the Company received $29.8
million of cash in return for the land and option contributions. During the first quarter of fiscal 2017, we expanded this joint
venture by transferring one community we owned and our option to buy three communities to the joint venture, resulting in
our receiving $11.2 million of net cash.
109
The tables set forth below summarize the combined financial information related to our unconsolidated
homebuilding and land development joint ventures that are accounted for under the equity method.
(Dollars in thousands)
Assets:
Cash and cash equivalents
Inventories
Other assets
Total assets
Liabilities and equity:
Accounts payable and accrued liabilities
Notes payable
Total liabilities
Equity of:
Hovnanian Enterprises, Inc.
Others
Total equity
Total liabilities and equity
Debt to capitalization ratio
(Dollars in thousands)
Assets:
Cash and cash equivalents
Inventories
Other assets
Total assets
Liabilities and equity:
Accounts payable and accrued liabilities
Notes payable
Total liabilities
Equity of:
Hovnanian Enterprises, Inc.
Others
Total equity
Total liabilities and equity
Debt to capitalization ratio
October 31, 2017
Land
Homebuilding
Development
Total
$
$
$
$
60,580 $
666,017
36,026
762,623 $
121,646 $
330,642
452,288
88,884
221,451
310,335
762,623 $
52%
194 $
9,162
-
9,356 $
429 $
-
429
3,746
5,181
8,927
9,356 $
0%
60,774
675,179
36,026
771,979
122,075
330,642
452,717
92,630
226,632
319,262
771,979
51%
October 31, 2016
Land
Homebuilding
Development
Total
$
$
$
$
48,542 $
516,947
25,865
591,354 $
72,302 $
214,911
287,213
88,379
215,762
304,141
591,354 $
41%
1,478 $
11,010
-
12,488 $
1,812 $
2,261
4,073
3,220
5,195
8,415
12,488 $
21%
50,020
527,957
25,865
603,842
74,114
217,172
291,286
91,599
220,957
312,556
603,842
41%
110
As of October 31, 2017 and 2016, we had advances and a note receivable outstanding of $22.4 million and $8.9
million, respectively, to these unconsolidated joint ventures. These amounts were included in the “Accounts payable and
accrued liabilities” balances in the tables above. On our Consolidated Balance Sheets, our “Investments in and advances to
unconsolidated joint ventures” amounted to $115.1 million and $100.5 million at October 31, 2017 and 2016, respectively.
In some cases our net investment in these joint ventures is less than our proportionate share of the equity reflected in the table
above because of the differences between asset impairments recorded against our joint venture investments and any
impairments recorded in the applicable joint venture. Impairments of joint venture investments are recorded at fair value
while impairments recorded in the joint venture are recorded when undiscounted cash flows trigger the impairment. During
fiscal 2017, we wrote-down certain joint venture investments by $2.8 million based on our determination that the investment
in these joint ventures has sustained an other than temporary impairment.
For The Year Ended October 31, 2017
Land
(Dollars in thousands)
Revenues
Cost of sales and expenses
Joint venture net (loss) income
Our share of net (loss) income
(Dollars in thousands)
Revenues
Cost of sales and expenses
Joint venture net (loss) income
Our share of net (loss) income
(Dollars in thousands)
Revenues
Cost of sales and expenses
Joint venture net (loss) income
Our share of net income
Homebuilding
$
312,164 $
(324,514)
(12,350) $
(7,189) $
Development
Total
5,685 $
(4,633)
1,052 $
526 $
317,849
(329,147)
(11,298)
(6,663)
For The Year Ended October 31, 2016
Land
Development
Total
Homebuilding
$
141,418 $
(159,431)
(18,013) $
(4,424) $
6,299 $
(6,103)
196 $
98 $
147,717
(165,534)
(17,817)
(4,326)
For The Year Ended October 31, 2015
Land
Development
Total
Homebuilding
$
122,192 $
(125,652)
(3,460) $
4,087 $
6,782 $
(6,518)
264 $
132 $
128,974
(132,170)
(3,196)
4,219
$
$
$
$
$
$
“(Loss) income from unconsolidated joint ventures” is reflected as a separate line in the accompanying Consolidated
Statements of Operations and reflects our proportionate share of the income or loss of these unconsolidated homebuilding
and land development joint ventures. The difference between our share of the income or loss from these unconsolidated joint
ventures in the tables above compared to the Consolidated Statements of Operations is due primarily to the reclassification
of the intercompany portion of management fee income from certain joint ventures and the deferral of income for lots
purchased by us from certain joint ventures. To compensate us for the administrative services we provide as the manager of
certain joint ventures we receive a management fee based on a percentage of the applicable joint venture’s revenues. These
management fees, which totaled $11.3 million, $5.8 million and $5.2 million for the years ended October 31, 2017, 2016 and
2015, respectively, are recorded in “Homebuilding: Selling, general and administrative” on the Consolidated Statement of
Operations.
In determining whether or not we must consolidate joint ventures that we manage, we assess whether the other
partners have specific rights to overcome the presumption of control by us as the manager of the joint venture. In most cases,
the presumption is overcome because the joint venture agreements require that both partners agree on establishing the
operations and capital decisions of the partnership, including budgets in the ordinary course of business.
Typically, our unconsolidated joint ventures obtain separate project specific mortgage financing. The amount
of financing is generally targeted to be no more than 50% of the joint venture’s total assets. For some of our joint ventures,
obtaining financing was challenging, therefore, some of our joint ventures are capitalized only with equity. The total debt to
capitalization ratio of all our joint ventures is currently 51%. Any joint venture financing is on a nonrecourse basis, with
guarantees from us limited only to performance and completion of development, environmental warranties and
indemnification, standard indemnification for fraud, misrepresentation and other similar actions, including a voluntary
bankruptcy filing. In some instances, the joint venture entity is considered a VIE under ASC 810-10 “Consolidation –
111
Overall” due to the returns being capped to the equity holders; however, in these instances, we have determined that we are
not the primary beneficiary, and therefore we do not consolidate these entities.
21. Fair Value of Financial Instruments
ASC 820, "Fair Value Measurements and Disclosures," provides a framework for measuring fair value, expands
disclosures about fair-value measurements and establishes a fair-value hierarchy which prioritizes the inputs used in
measuring fair value summarized as follows:
Level 1:
Fair value determined based on quoted prices in active markets for identical assets.
Level 2: Fair value determined using significant other observable inputs.
Level 3:
Fair value determined using significant unobservable inputs.
Our financial instruments measured at fair value on a recurring basis are summarized below:
(In thousands)
Mortgage loans held for sale (1)
Interest rate lock commitments
Forward contracts
Total
Fair Value
Hierarchy
Fair Value at
October 31,
2017
Fair Value at
October 31,
2016
Level 2 $
Level 2
Level 2
$
132,424 $
(14 )
15
132,425 $
165,077
(80)
86
165,083
(1) The aggregate unpaid principal balance was $128.4 million and $149.4 million at October 31, 2017 and 2016,
respectively.
We elected the fair value option for our loans held for sale for mortgage loans originated subsequent to October 31,
2008, in accordance with ASC 825, “Financial Instruments,” which permits us to measure financial instruments at fair value
on a contract-by-contract basis. Management believes that the election of the fair value option for loans held for sale improves
financial reporting by mitigating volatility in reported earnings caused by measuring the fair value of the loans and the
derivative instruments used to economically hedge them without having to apply complex hedge accounting provisions. Fair
value of loans held for sale is based on independent quoted market prices, where available, or the prices for other mortgage
loans with similar characteristics.
The Financial Services segment had a pipeline of loan applications in process of $486.5 million at October 31, 2017.
Loans in process for which interest rates were committed to the borrowers totaled $31.2 million as of October 31, 2017.
Substantially all of these commitments were for periods of 60 days or less. Since a portion of these commitments is expected
to expire without being exercised by the borrowers, the total commitments do not necessarily represent future cash
requirements.
The Financial Services segment uses investor commitments and forward sales of mandatory MBS to hedge its
mortgage-related interest rate exposure. These instruments involve, to varying degrees, elements of credit and interest rate
risk. Credit risk is managed by entering into MBS forward commitments, option contracts with investment banks, federally
regulated bank affiliates and loan sales transactions with permanent investors meeting the segment’s credit standards. The
segment’s risk, in the event of default by the purchaser, is the difference between the contract price and fair value of the
MBS forward commitments and option contracts. At October 31, 2017, the segment had open commitments amounting to
$19.5 million to sell MBS with varying settlement dates through December 13, 2017.
112
The assets accounted for using the fair value option are initially measured at fair value. Gains and losses from initial
measurement and subsequent changes in fair value are recognized in the Financial Services segment’s income. The changes
in fair values that are included in income are shown, by financial instrument and financial statement line item, below:
(In thousands)
Mortgage
Loans Held
for Sale
Year Ended October 31, 2017
Interest Rate
Lock
Commitments
Forward
Contracts
Fair value included in net loss all reflected in financial
services revenues
$
4,256 $
(14) $
15
(In thousands)
Mortgage
Loans Held
for Sale
Year Ended October 31, 2016
Interest Rate
Lock
Commitments
Forward
Contracts
Fair value included in net loss all reflected in financial
services revenues
$
4,711 $
(73) $
(422)
(In thousands)
Mortgage
Loans Held
for Sale
Year Ended October 31, 2015
Interest Rate
Lock
Commitments
Forward
Contracts
Fair value included in net loss all reflected in financial
services revenues
$
(284) $
(22) $
829
The Company's assets measured at fair value on a nonrecurring basis are those assets for which the Company has
recorded valuation adjustments and write-offs during the fiscal years ended October 31, 2017 and 2016. The assets measured
at fair value on a nonrecurring basis are all within the Company's Homebuilding operations and are summarized below:
Nonfinancial Assets
(In thousands)
Sold and unsold homes and lots under
development
Land and land options held for future
development or sale
Nonfinancial Assets
(In thousands)
Sold and unsold homes and lots under
development
Land and land options held for future
development or sale
Year Ended
October 31, 2017
Fair Value
Hierarchy
Pre-Impairment
Amount
Total Losses
Fair Value
Level 3
Level 3
$
$
30,022 $
(11,658) $
18,364
22,850 $
(3,403) $
19,447
Year Ended
October 31, 2016
Fair Value
Hierarchy
Pre-Impairment
Amount
Total Losses
Fair Value
Level 3
Level 3
$
$
61,584 $
(19,006) $
42,578
26,783 $
(5,466) $
21,317
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
113
community by determining the present value of its estimated future cash flows at a discount rate commensurate with the risk
of the respective community. Should the estimates or expectations used in determining cash flows or fair value decrease or
differ from current estimates in the future, we may be required to recognize additional impairments. We recorded inventory
impairments, which are included in the Consolidated Statements of Operations as “Inventory impairment loss and land option
write-offs” and deducted from inventory, of $15.1 million, $24.5 million and $7.3 million for the years ended October 31,
2017, 2016 and 2015, respectively. See Note 12 for further detail of the communities evaluated for impairment.
The fair value of our cash equivalents and restricted cash and cash equivalents approximates their carrying amount,
based on Level 1 inputs.
The fair value of our borrowings under the revolving credit and term loan facilities approximates their carrying
amount based on level 2 inputs. The fair value of each series of the senior unsecured notes (other than the senior exchangeable
notes and the senior amortizing notes) is estimated based on recent trades or quoted market prices for the same issues or
based on recent trades or quoted market prices for our debt of similar security and maturity to achieve comparable yields,
which are Level 2 measurements. The fair value of the senior unsecured notes (all series in the aggregate), other than the
senior exchangeable notes and senior amortizing notes, was estimated at $383.7 million and $251.7 million as of October 31,
2017 and 2016, respectively.
The fair value of each of the senior secured notes (all series in the aggregate), the senior amortizing notes and the
senior exchangeable notes is estimated based on third party broker quotes, a Level 3 measurement. The fair value of the
senior secured notes (all series in the aggregate), the senior amortizing notes and the senior exchangeable notes were estimated
at $1.2 billion, $2.1 million and $54.2 million, respectively, as of October 31, 2017. As of October 31, 2016, the fair value
of the senior secured notes (all series in the aggregate), the senior amortizing notes and the senior exchangeable notes were
estimated at $883.0 million, $6.3 million and $55.2 million, respectively.
22. Financial Information of Subsidiary Issuer and Subsidiary Guarantors
Hovnanian Enterprises, Inc., the parent company (the “Parent”), is the issuer of publicly traded common stock and
preferred stock, which is represented by depository shares. One of its wholly owned subsidiaries, K. Hovnanian
Enterprises, Inc. (the “Subsidiary Issuer”), acts as a finance entity that, as of October 31, 2017, had issued and outstanding
$1,110.0 million of senior secured notes ($1,090.6 million, net of discount and debt issuance costs), $368.5 million senior
notes ($366.3 million net of debt issuance costs) and $2.1 million senior amortizing notes ($2.0 million net of debt issuance
costs) and $53.9 million senior exchangeable notes ($53.9 million net of debt issuance costs) (issued as components of our
Units). The senior secured notes, senior notes, senior amortizing notes and senior exchangeable notes are fully and
unconditionally guaranteed by the Parent.
In addition to the Parent, each of the wholly owned subsidiaries of the Parent other than the Subsidiary Issuer
(collectively, “Notes Guarantors”), with the exception of our home mortgage subsidiaries, certain of our title insurance
subsidiaries, joint ventures and subsidiaries holding interests in our joint ventures (collectively, the “Nonguarantor
Subsidiaries”), have guaranteed fully and unconditionally, on a joint and several basis, the obligations of the Subsidiary Issuer
to pay principal and interest under the senior secured notes (other than the 2021 Notes and the 9.50% 2020 Notes), senior
notes, senior exchangeable notes and senior amortizing notes. The Notes Guarantors are directly or indirectly 100% owned
subsidiaries of the Parent. The 2021 Notes and the 9.50% 2020 Notes are guaranteed by the Notes Guarantors and the
members of the JV Holdings Secured Group (see Note 9).
The senior amortizing notes and senior exchangeable notes have been registered under the Securities Act of 1933,
as amended (the “Securities Act”). The 7.0% Notes, the 8.0% Notes and our senior secured notes (see Note 9) are not,
pursuant to the indentures under which such notes were issued, required to be registered under the Securities Act. The
Consolidating Condensed Financial Statements presented below are in respect of our registered notes only and not the 7.0%
Notes, the 8.0% Notes or the senior secured notes (however, the Notes Guarantors for the 7.0% Notes, the 8.0% Notes, the
10.0% 2022 Notes and the 10.5% 2024 Notes are the same as those represented by the accompanying Consolidating
“Condensed” Financial Statements). In lieu of providing separate financial statements for the Notes Guarantors of our
registered notes, we have included the accompanying Consolidating Financial Statements. Therefore, separate financial
statements and other disclosures concerning such Notes Guarantors are not presented.
The following Consolidating Condensed Financial Statements present the results of operations, financial position
and cash flows of (i) the Parent, (ii) the Subsidiary Issuer, (iii) the Notes Guarantors, (iv) the Nonguarantor Subsidiaries and
(v) the eliminations to arrive at the information for Hovnanian Enterprises, Inc. on a consolidated basis.
114
(In thousands)
Assets:
Homebuilding
Financial services
Intercompany receivable
Investments in and amounts due
from consolidated subsidiaries
Total assets
Liabilities and equity:
Homebuilding, excluding Notes
payable and term loan and
Revolving credit facility
Revolving credit facility
Intercompany payable
Amounts due to consolidated
subsidiaries
Stockholders’ (deficit) equity
Total liabilities and equity
CONSOLIDATING CONDENSED BALANCE SHEET
OCTOBER 31, 2017
Parent
Subsidiary
Issuer
Guarantor
Subsidiaries
Nonguarantor
Subsidiaries Eliminations Consolidated
$
- $ 389,456 $
1,046,796
949,032 $
19,001
400,297 $
143,112
25,580 (1,072,376)
- $ 1,738,785
162,113
-
$
376,964
- $ 1,436,252 $ 1,344,997 $
-
(376,964)
568,989 $ (1,449,340) $ 1,900,898
$
740 $
236 $
Financial services
Income taxes (receivable) payable
Notes payable and term loan and
(2)
1,677,891
148,385
467,613 $
19,160
2,229
1,377
923,994
68,865 $
122,754
- $
406
(1,072,379)
537,454
141,914
2,227
1,679,674
-
311,248
37,175
(460,371) (279,050)
$
(69,376 )
- $ 1,436,252 $ 1,344,997 $
-
(348,423)
376,964
(460,371)
(28,538)
568,989 $ (1,449,340) $ 1,900,898
CONSOLIDATING CONDENSED BALANCE SHEET
OCTOBER 31, 2016
(In thousands)
Assets:
Homebuilding
Financial services
Income taxes receivable
Intercompany receivable
Investments in and amounts due
from consolidated subsidiaries
Total assets
Liabilities and equity:
Homebuilding, excluding Notes
payable and term loan and
Revolving credit facility
Financial services
Notes payable and term loan and
Revolving credit facility
Intercompany payable
Amounts due to consolidated
subsidiaries
Parent
Subsidiary
Issuer
Guarantor
Subsidiaries
Nonguarantor
Subsidiaries Eliminations Consolidated
$
115,940
- $ 271,216 $ 1,194,267 $
13,453
226,258
(58,597)
1,227,334
408,610 $
183,777
32
88,112 (1,315,446)
- $ 1,874,093
197,230
283,633
-
437,628
$ 115,940 $ 1,444,867 $ 1,871,606 $
4,914
-
(442,542)
680,531 $ (1,757,988) $ 2,354,956
$
3,506 $
1,118 $
565,163 $
13,338
83,476 $
159,107
- $
653,263
172,445
1,652,357
5,084
1,157,453
157,993
82,951
317
(1,315,446)
1,657,758
-
-
(82,951)
437,631
(128,510)
(359,591)
680,531 $ (1,757,988) $ 2,354,956
Stockholders’ (deficit) equity
Total liabilities and equity
(128,510) (208,608)
130,568
$ 115,940 $ 1,444,867 $ 1,871,606 $
115
CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS
YEAR ENDED OCTOBER 31, 2017
\
(In thousands)
Revenues:
Homebuilding
Financial services
Intercompany charges
Total revenues
Expenses:
Homebuilding
Financial services
Intercompany charges
Total expenses
Loss on extinguishment of debt
Income (loss) from
unconsolidated joint ventures
(Loss) income before income
taxes
State and federal income tax
(benefit) provision
Equity in (loss) income from
subsidiaries
Net (loss) income
Parent
$
- $
Subsidiary
Issuer
Guarantor
Subsidiaries
Non-
Guarantor
Subsidiaries Eliminations Consolidated
- $ 2,027,485 $
10,910
365,437 $
47,833
88,601
88,601 2,038,395
-
(3,135)
20
(3,115)
140,696 1,946,395
6,975
88,601
140,696 2,041,971
(34,854)
413,270
338,706
25,351
364,057
142
(7,189)
- $ 2,392,922
58,743
-
2,451,665
(88,601)
(88,601)
(88,601)
(88,601)
2,422,662
32,346
-
2,455,008
(34,854)
(7,047)
3,115
(86,949)
(3,434)
42,024
-
(45,244)
107,011
(58,596)
238,502
32
286,949
(228,297)
$ (332,193) $
(42,089)
(70,442) $
41,992
(199,944) $
41,992 $
228,394
228,394 $
-
(332,193)
CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS
YEAR ENDED OCTOBER 31, 2016
(In thousands)
Revenues:
Homebuilding
Financial services
Intercompany charges
Total revenues
Expenses:
Homebuilding
Financial services
Intercompany charges
Total expenses
Loss on extinguishment of debt
Income (loss) from
unconsolidated joint ventures
(Loss) income before income
taxes
State and federal income tax
(benefit) provision
Equity in (loss) income from
subsidiaries
Net (loss) income
Parent
$
- $
Subsidiary
Issuer
Guarantor
Subsidiaries
Non-
Guarantor
Subsidiaries Eliminations Consolidated
- $ 2,232,906 $
11,038
446,724 $
61,579
112,207
112,207 2,243,944
-
1,688
16
1,704
136,796 2,147,123
7,387
112,169
136,796 2,266,679
(3,200)
508,303
419,514
29,741
38
449,293
78
(4,424)
- $ 2,679,630
72,617
-
2,752,247
(112,207)
(112,207)
(112,207)
(112,207)
2,705,121
37,144
-
2,742,265
(3,200)
(4,346)
(1,704)
(27,789)
(22,657)
54,586
-
2,436
(9,333)
(30,615)
45,213
(10)
(10,448)
(2,819) $
$
3,901
6,727 $
54,596
(13,274) $
54,596 $
(48,049)
(48,049) $
5,255
-
(2,819)
116
CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS
YEAR ENDED OCTOBER 31, 2015
$
(In thousands)
Revenues:
Homebuilding
Financial services
Intercompany charges
Total revenues
Expenses:
Homebuilding
Financial services
Intercompany charges
Total expenses
Income from unconsolidated joint
ventures
(Loss) income before income
Parent
- $
Subsidiary
Issuer
Guarantor
Subsidiaries
Non-
Guarantor
Subsidiaries Eliminations Consolidated
- $ 1,778,700 $
8,685
313,115 $
47,980
124,361
124,361 1,787,385
-
5,125
105
5,230
155,773 1,686,726
6,490
124,360
155,773 1,817,576
361,095
294,818
25,377
1
320,196
82
4,087
- $ 2,091,815
56,665
-
2,148,480
(124,361)
(124,361)
(124,361)
(124,361)
2,142,442
31,972
-
2,174,414
4,169
taxes
State and federal income tax
(benefit) provision
Equity in (loss) income from
subsidiaries
Net (loss) income
(5,230)
(31,412)
(30,109)
44,986
-
(21,765)
(10,985)
(30,486)
35,808
(2)
(5,665)
(21,855)
(16,100) $
12,915
11,989 $
44,988
(20,929) $
$
44,988 $
(36,048)
(36,048) $
-
(16,100)
117
CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS
YEAR ENDED OCTOBER 31, 2017
(In thousands)
Subsidiary
Parent
Issuer
Guarantor
Subsidiaries
Non-
Guarantor
Subsidiaries Eliminations Consolidated
$
(332,193) $
(70,442 ) $
(199,944) $
41,992 $
228,394 $
(332,193)
113,504
1,339
796,416
(53,119)
(228,394)
629,746
(218,689)
(69,103 )
596,472
(11,127)
-
297,553
Cash flows from operating
activities:
Net (loss) income
Adjustments to reconcile net
(loss) income to net cash
provided by (used in) operating
activities
Net cash (used in) provided by
operating activities
Cash flows from investing
activities:
Proceeds from sale of property
and assets
Purchase of property, equipment
and other fixed assets and
acquisitions
Increase in restricted cash related
to mortgage company
Decrease in restricted cash
related to letters of credit
Investments in and advances to
unconsolidated joint ventures
Distributions of capital from
unconsolidated joint ventures
Intercompany investing activities
Net cash provided by (used in)
investing activities
Cash flows from financing
activities:
Net payments from mortgages
and notes
Net payments from model sale
leaseback financing programs
Net proceeds from land bank
financing programs
Net proceeds from senior secured
notes
Payments related to senior notes,
senior exchangeable notes and
senior amortizing notes
Net proceeds related to mortgage
warehouse lines of credit
Deferred financing costs from
land bank financing program
and note issuance
Intercompany financing activities
245
25
270
(6,478)
2,555
(3 )
(521 )
(13,407)
(22,875)
222,627
(222,627)
45
13,259
(6,478)
2,555
(3)
(36,803)
13,304
-
-
222,103
(19,595)
(7,036)
(222,627)
(27,155)
(15,907)
(3,286)
(12,973)
(5,555)
(42,652)
85
(31,023)
840,000
(861,976 )
(19,193)
(18,528)
(42,567)
840,000
(861,976)
(31,023)
(12,836 )
(1,462)
(258)
(14,556)
– net
218,689
(503,848)
62,532
222,627
-
Net cash provided by (used in)
financing activities
Net increase in cash
Cash and cash equivalents
218,689
-
(34,812 )
118,188
(576,842)
35
22,495
4,332
222,627
-
(147,843)
122,555
balance, beginning of period
-
261,553
(395)
85,607
-
346,765
Cash and cash equivalents
balance, end of period
$
- $
379,741 $
(360) $
89,939 $
- $
469,320
118
CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS
YEAR ENDED OCTOBER 31, 2016
(In thousands)
Subsidiary
Parent
Issuer
Guarantor
Subsidiaries
Non-
Guarantor
Subsidiaries Eliminations Consolidated
$
(2,819) $
6,727 $
(13,274) $
54,596 $
(48,049) $
(2,819)
15,059
(26,032 )
353,149
259
48,049
390,484
12,240
(19,305 )
339,875
54,855
-
387,665
Cash flows from operating
activities:
Net (loss) income
Adjustments to reconcile net (loss)
income to net cash provided by
(used in) operating activities
Net cash provided by (used in)
operating activities
Cash flows from investing
activities:
Proceeds from sale of property and
assets
Purchase of property, equipment
and other fixed assets and
acquisitions
Decrease in restricted cash related
to mortgage company
Decrease in restricted cash related
to letters of credit
Investments in and advances to
unconsolidated joint ventures
Distributions of capital from
unconsolidated joint ventures
Intercompany investing activities
Net cash (used in) provided by
investing activities
Cash flows from financing
activities:
Net payments from mortgages and
notes
Net payments from model sale
leaseback financing programs
Net proceeds from land bank
financing programs
Borrowings from revolving credit
facility
Proceeds from senior secured term
loan facility
Net proceeds from senior secured
notes
Payments related to senior notes,
senior exchangeable notes and
senior amortizing notes
Net proceeds related to mortgage
warehouse lines of credit
Deferred financing costs from land
bank financing program and note
issuance
Intercompany financing activities –
685
79
(7,977)
(30)
2,034
872
(290 )
(74)
(49,541)
344,479
5,264
(344,479)
764
(8,007)
2,034
872
(49,905)
5,264
-
-
345,061
(7,366)
(42,194)
(344,479)
(48,978)
(60,535)
(476)
(14,004)
(3,134)
53,654
11,980
36,713
5,000
75,000
71,250
(409,646 )
(61,011)
(17,138)
65,634
5,000
75,000
71,250
(409,646)
36,713
(5,125 )
(4,812)
(1,532)
(11,469)
net
(12,240)
(302,407)
(29,832)
344,479
-
Net cash (used in) provided by
financing activities
Net increase in cash
Cash and cash equivalents balance,
beginning of period
Cash and cash equivalents balance,
(12,240)
-
(263,521 )
62,235
(328,104)
4,405
13,719
26,380
344,479
-
(245,667)
93,020
-
199,318
(4,800)
59,227
-
253,745
end of period
$
- $
261,553 $
(395) $
85,607 $
- $
346,765
119
CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS
YEAR ENDED OCTOBER 31, 2015
(In thousands)
Subsidiary
Parent
Issuer
Guarantor
Subsidiaries
Non-
Guarantor
Subsidiaries Eliminations Consolidated
$
(16,100) $
11,989 $
(20,929) $
44,988 $
(36,048) $
(16,100)
122,264
110,820
(456,704)
(116,863)
36,048
(304,435)
106,164
122,809
(477,633)
(71,875)
-
(320,535)
Cash flows from operating
activities:
Net (loss) income
Adjustments to reconcile net (loss)
income to net cash provided by
(used in) operating activities
Net cash (used in) provided by
operating activities
Cash flows from investing
activities:
Proceeds from sale of property and
assets
Purchase of property, equipment
and other fixed assets and
acquisitions
Decrease in restricted cash related
to mortgage company
Decrease in restricted cash related
to letters of credit
Investments in and advances to
unconsolidated joint ventures
Distributions of capital from
unconsolidated joint ventures
Intercompany investing activities
Net cash provided by (used in)
investing activities
Cash flows from financing
activities:
Net proceeds from mortgages and
notes
Net proceeds from model sale
leaseback financing programs
Net payments from land bank
financing programs
Proceeds from senior notes
Payments related to senior notes
and senior amortizing notes
Borrowings from revolving credit
facility
Net proceeds related to mortgage
warehouse lines of credit
Deferred financing costs from land
bank financing programs and note
issuances
Intercompany financing activities
Net cash provided by (used in)
financing activities
Net (decrease) increase in cash
Cash and cash equivalents balance,
beginning of period
Cash and cash equivalents balance,
1,556
17
(2,054)
1,555
2,993
16
(114)
(18,609)
315
(313,174 )
646
16,151
313,174
1,573
(2,054)
1,555
2,993
(18,707)
17,112
-
-
(309,850 )
34
(886)
313,174
2,472
27,881
11,502
17,117
5,867
(6,198)
(1,147)
31,956
250,000
(65,053 )
47,000
39,383
22,984
(7,345)
250,000
(65,053)
47,000
31,956
(106,164)
(5,096 )
(2,732)
441,457
(1,187)
(22,119)
(313,174)
(9,015)
-
(106,164)
-
226,851
39,810
477,525
(74)
24,872
(47,889)
(313,174)
-
309,910
(8,153)
-
159,508
(4,726)
107,116
-
261,898
end of period
$
- $
199,318 $
(4,800) $
59,227 $
- $
253,745
120
23. Unaudited Summarized Consolidated Quarterly Information
Summarized quarterly financial information for the years ended October 31, 2017 and 2016 is as follows:
(In thousands, except per share data)
Revenues
Expenses
Inventory impairment loss and land option write-offs
(Loss) gain on extinguishment of debt
Income (loss) from unconsolidated joint ventures
Income (loss) before income taxes
State and federal income tax provision (benefit)
Net income (loss)
Per share data:
Basic:
Income (loss) per common share
Weighted-average number of common shares outstanding
Assuming dilution:
Income (loss) per common share
Weighted-average number of common shares outstanding
(In thousands, except per share data)
Revenues
Expenses
Inventory impairment loss and land option write-offs
Loss on extinguishment of debt
Income (loss) from unconsolidated joint ventures
Income (loss) before income taxes
State and federal income tax provision (benefit)
Net income (loss)
Per share data:
Basic:
Income (loss) per common share
Weighted-average number of common shares outstanding
Assuming dilution:
Income (loss) per common share
Weighted-average number of common shares outstanding
24. Subsequent events
Three Months Ended
October 31,
July 31,
April 30,
January 31,
$
$
$
$
2017
721,686 $
703,964
8,479
-
3,062
12,305
464
11,841 $
2017
592,035 $
591,872
4,197
(42,258)
(3,881)
(50,173)
287,036
(337,209) $
2017
585,935 $
586,877
1,953
(242)
(4,562)
(7,699)
(1,017)
(6,682) $
2017
552,009
554,482
3,184
7,646
(1,666)
323
466
(143)
0.08 $
147,905
(2.28) $
147,748
(0.05) $
147,558
(0.00)
147,535
0.08 $
160,548
(2.28) $
147,748
(0.05) $
147,558
(0.00)
147,535
Three Months Ended
October 31,
July 31,
April 30,
January 31,
$
$
$
$
2016
805,069 $
760,171
10,438
3,200
881
32,141
9,852
22,289 $
2016
716,850 $
711,791
1,565
-
(2,401)
1,093
1,567
(474) $
2016
654,723 $
661,312
9,669
-
(1,346)
(17,604)
(9,143)
(8,461) $
2016
575,605
575,638
11,681
-
(1,480)
(13,194)
2,979
(16,173)
0.14 $
147,521
(0.00) $
147,412
(0.06) $
147,334
(0.11)
147,139
0.14 $
160,590
(0.00) $
147,412
(0.06) $
147,334
(0.11)
147,139
On November 1, 2017, we sold our corporate headquarters building and land in Red Bank, New Jersey, which had
a net book value of $34.7 million for $42.5 million. We used a portion of the proceeds to pay off our nonrecourse loans on
the building of $13.0 million.
On December 1, 2017 we made our final installment payment of $56.1 million on our senior exchangeable note units,
as described in Note 9.
On December 14, 2017, the Company settled a lawsuit with the condominium association of the Grandview II at
Riverwalk Port Imperial condominium building, for which the company had fully reserved the settlement amount as of
October 31, 2017. Also, on December 18, 2017, the parties finalized a settlement agreement to resolve the litigation of a class
action lawsuit filed against the Company’s Board. See Note 18 for further information on these settlements.
121
(This page has been left blank intentionally.)
Comparison of Five-Year Cumulative Total Return*
Among Hovnanian Enterprises, Inc., the S&P 500 Index and the S&P Homebuilding Index
The following graph compares on a cumulative basis the yearly percentage change over the five-year period ended October
31, 2017 in (1) the total shareholder return on the Company’s Class A Common Stock with (2) the total return of the
Standard & Poor’s (S&P) 500 Index and with (3) the total return on the S&P Homebuilding Index. Such yearly percentage
change has been measured by dividing (1) the sum of (a) the cumulative amount of dividends for the measurement period,
assuming dividend reinvestment, and (b) the price per share at the end of the measurement period less the price per share at
the beginning of the measurement period, by (2) the price per share at the beginning of the measurement period. The price of
each share has been set at $100 on October 31, 2012 for the preparation of the five-year graph.
Note: The stock price performance shown on the following graph is not necessarily indicative of future stock performance.
$250
$200
$150
$100
$50
$0
10/12
10/13
10/14
10/15
10/16
10/17
Hovnanian Enterprises, Inc.
S&P 500
S&P Homebuilding
*$100 invested on 10/31/12 in stock or index, assuming reinvestment of dividends.
Fiscal year ending October 31.
Source: Standard & Poor’s Financial Services, LLC, a division of The McGraw-Hill Companies Inc.
(This page has been left blank intentionally.)
Board of Directors and
Corporate Officers
Corporate Information
INDEPENDENT
REGISTERED PUBLIC
ACCOUNTING FIRM
Deloitte & Touche LLP
30 Rockefeller Plaza
New York, NY 10112-0015
TRANSFER AGENT AND
REGISTRAR
Computershare
Trust Company, N.A.
P.O. Box 30170
College Station, TX 77842-3170
For additional information on the
Direct Registration System please
visit the “IR Contacts” page in the
Investor Relations section of our
website at khov.com
BOARD OF
DIRECTORS
Ara K. Hovnanian
Chairman of the Board,
President, Chief Executive
Officer and Director
Robert B. Coutts
Director
Edward A. Kangas
Director
Joseph A. Marengi
Director
Vincent Pagano Jr.
Director
J. Larry Sorsby
Executive Vice President,
Chief Financial Officer
and Director
Stephen D. Weinroth
Director
CHIEF OPERATING
OFFICER
Lucian T. Smith III
ANNUAL MEETING
March 13, 2018, 10:30 a.m.
Boca Beach Club
900 S. Ocean Blvd,
Boca Raton, FL 33432
VICE PRESIDENTS
David L. Bachstetter
Michael Discafani
Brad G. O’Connor
Marcia Wines
STOCK LISTING
Hovnanian Enterprises, Inc.
Class A common stock is traded on
the New York Stock Exchange
under the symbol HOV.
FORM 10-K
A copy of the Form 10-K, as filed
with the SEC, is included herein.
Additional copies are available
free of charge upon request to
the:
Office of the Controller
Hovnanian Enterprises, Inc.
110 West Front Street
Red Bank, New Jersey 07701
732-383-2200
INVESTOR RELATIONS
CONTACTS
J. Larry Sorsby
Executive Vice President, Chief
Financial Officer
732-383-2200
Jeffrey T. O’Keefe
Vice President, Investor Relations
732-383-2200
E-mail: ir@khov.com
Hovnanian Enterprises, Inc.
110 West Front Street
Red Bank, New Jersey 07701
732-383-2200
For additional information visit our website at khov.com