Hovnanian Enterprises (NYSE: HOV) reported Q4 EPS of $0.08, $0.06 better than the analyst estimate of $0.02. Revenue for the quarter came in at $721.7 million versus the consensus estimate of $608.67 million.

“We focused on enhancing our operating results throughout fiscal 2017 and this is reflected in improvements in our gross margin percentage and our contracts per community, both of which increased during the fourth quarter and the full year,” stated Ara K. Hovnanian, Chairman of the Board, President and Chief Executive Officer. “We ended fiscal 2017 with $464 million of cash, which is $219 million in excess of the high end of our target range and the highest level at a quarter’s end since July 31, 2010. As we move forward, we remain focused on controlling more lots, further operational improvements and returning to consistent profitability. Given our renewed efforts to expand our land position, we believe we should be well positioned for growing our deliveries, revenues and profitability in 2019 and beyond.”

“Although we are taking steps to increase our future community count, our 2017 deliveries and revenues were impacted by a decrease in our community count, which resulted from the decisions we made in fiscal 2016 to exit four underperforming markets, convert a number of wholly owned communities to joint ventures and temporarily reduce land spend, in order to pay off $320 million of maturing debt,” concluded Mr. Hovnanian.

• Total revenues decreased 10.4% to $721.7 million in the fourth quarter of fiscal 2017, compared with $805.1 million in the fourth quarter of fiscal 2016. For the fiscal year ended October 31, 2017, total revenues decreased 10.9% to $2.45 billion compared with $2.75 billion in the prior year.
• Homebuilding revenues for unconsolidated joint ventures increased 52.6% to $98.1 million in the fourth quarter of fiscal 2017, compared with $64.2 million in the fourth quarter of fiscal 2016. For the fiscal year ended October 31, 2017, homebuilding revenues for unconsolidated joint ventures increased 120.7% to $312.2 million compared with $141.4 million in the prior year.
• Total SG&A was $72.9 million, including a $12.5 million adjustment to construction defect reserves related to litigation for two closed communities, or 10.1% of total revenues, for the fourth quarter ended October 31, 2017 compared with $53.7 million, or 6.7% of total revenues, in last year’s fourth quarter. Excluding the $12.5 million adjustment to construction defect reserves, total SG&A would have been $60.4 million, or 8.4% of total revenues, for the fiscal 2017 fourth quarter. For fiscal 2017, total SG&A was $255.7 million, including a $12.5 million adjustment to construction defect reserves in the fiscal 2017 fourth quarter related to litigation for two closed communities, or 10.4% of total revenues, compared with $253.1 million, or 9.2% of total revenues, in the prior fiscal year. Excluding the $12.5 million adjustment to construction defect reserves, total SG&A would have been $243.2 million, or 9.9 % of total revenues, for the fiscal year ended October 31, 2017.
• Interest incurred (some of which was expensed and some of which was capitalized) was $43.3 million for the fourth quarter of fiscal 2017 compared with $40.3 million in the same quarter one year ago. For the fiscal year ended October 31, 2017, interest incurred decreased 4.0% to $160.2 million compared with $166.8 million during last year.
• Total interest expense was $59.3 million in the fourth quarter of fiscal 2017, which includes $8.9 million of land and lot sales interest, compared with $48.2 million in the fourth quarter of fiscal 2016. Total interest expense increased 1.4% to $185.8 million for all of fiscal 2017 compared with $183.4 million in fiscal 2016.
• Homebuilding gross margin percentage, after interest expense and land charges included in cost of sales, was 13.7% for the fourth quarter of fiscal 2017 compared with 13.0% in the prior year’s fourth quarter. During all of fiscal 2017, this homebuilding gross margin percentage was 13.2% compared with 12.2% in the same period of the previous year.
• Homebuilding gross margin percentage, before interest expense and land charges included in cost of sales, was 18.2% for the fourth quarter of fiscal 2017 compared with 17.6% in the prior year’s fourth quarter. During fiscal 2017, this homebuilding gross margin percentage was 17.2% compared with 16.9% in the same period one year ago.
• Income before income taxes for the quarter ended October 31, 2017 was $12.3 million compared to income before income taxes of $32.1 million during the fourth quarter of 2016. For fiscal 2017, the loss before income taxes was $45.2 million, which included a $34.9 million loss on extinguishment of debt, compared to income before income taxes of $2.4 million during fiscal 2016.
• Income before income taxes, excluding land-related charges and loss on extinguishment of debt, for the quarter ended October 31, 2017 was $20.8 million compared to $45.8 million during the fourth quarter of fiscal 2016. For fiscal 2017, income before income taxes, excluding land-related charges, joint venture write-downs and loss on extinguishment of debt, was $10.2 million compared to $39.0 million during fiscal 2016.
• Net income was $11.8 million, or $0.08 per common share, in the fourth quarter of fiscal 2017 compared with net income of $22.3 million, or $0.14 per common share, during the same quarter a year ago. For the fiscal year ended October 31, 2017, the net loss was $332.2 million, or $2.25 per common share, including the $294.0 million increase in the valuation allowance for our deferred tax assets and a $34.9 million loss on extinguishment of debt, compared with a net loss of $2.8 million, or $0.02 per common share, in fiscal 2016.
• Contracts per community, including unconsolidated joint ventures, increased 16.2% to 8.6 contracts per community for the quarter ended October 31, 2017 compared with 7.4 contracts, including unconsolidated joint ventures, per community in last year’s fourth quarter. Consolidated contracts per community increased 10.3% to 8.6 contracts per community for the fourth quarter of fiscal 2017 compared with 7.8 contracts per community in the fourth quarter of fiscal 2016.
• For November 2017, contracts per community, including unconsolidated joint ventures, increased 27.3% to 2.8 contracts per community compared to 2.2 contracts per community for the same month one year ago. During November 2017, the number of contracts, including unconsolidated joint ventures, increased 10.8% to 443 homes from 400 homes in November 2016 and the dollar value of contracts, including unconsolidated joint ventures, increased 5.8% to $183.9 million in November 2017 compared with $173.8 million for November 2016.
• As of the end of the fourth quarter of fiscal 2017, community count, including unconsolidated joint ventures, decreased 16.5% to 157 communities compared with 188 communities at October 31, 2016. Consolidated community count decreased 22.2% to 130 communities as of October 31, 2017 from 167 communities at the end of the prior year’s fourth quarter.
• Despite the significant drop in community count, the number of contracts, including unconsolidated joint ventures, for the fourth quarter ended October 31, 2017, decreased 3.2% to 1,344 homes from 1,389 homes for the same quarter last year. The number of consolidated contracts, during the fourth quarter of fiscal 2017, decreased 14.4% to 1,112 homes compared with 1,299 homes during the fourth quarter of 2016.
• During fiscal 2017, the number of contracts, including unconsolidated joint ventures, was 5,937 homes, a decrease of 6.9% from 6,380 homes during fiscal 2016. The number of consolidated contracts, during the year ended October 31, 2017, decreased 14.9% to 5,196 homes compared with 6,109 homes in the previous year.
• The dollar value of contract backlog, including unconsolidated joint ventures, as of October 31, 2017, was $1.09 billion, a decrease of 10.6% compared with $1.22 billion as of October 31, 2016. The dollar value of consolidated contract backlog, as of October 31, 2017, decreased 24.4% to $808.0 million compared with $1.07 billion as of October 31, 2016.
• For the quarter ended October 31, 2017, deliveries, including unconsolidated joint ventures, decreased 9.4% to 1,787 homes compared with 1,972 homes during the fourth quarter of fiscal 2016. Consolidated deliveries were 1,604 homes for the fourth quarter of fiscal 2017, a 14.2% decrease compared with 1,870 homes during the same quarter a year ago.
• For the year ended October 31, 2017, deliveries, including unconsolidated joint ventures, decreased 8.4% to 6,149, homes compared with 6,712 homes in the prior fiscal year. Consolidated deliveries were 5,602 homes in fiscal 2017, a 13.3% decrease compared with 6,464 homes in fiscal 2016.
• The consolidated contract cancellation rate for the three months ended October 31, 2017 was 22%, compared with 20% in the fourth quarter of the prior year. The contract cancellation rate, including unconsolidated joint ventures, was 22% in the fourth quarter of fiscal 2017 compared with 21% in the fourth quarter of fiscal 2016.
• The valuation allowance was $918.2 million as of October 31, 2017. The valuation allowance is a non-cash reserve against the tax assets for GAAP purposes. For tax purposes, the tax deductions associated with the tax assets may be carried forward for 20 years from the date the deductions were incurred.

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