Hovnanian Enterprises Reports 44% Increase in Fiscal 2005 First Quarte

RED BANK, N.J., March 2 /PRNewswire-FirstCall/ -- Hovnanian Enterprises, Inc. , a leading national homebuilder, reported net income of $81.5 million, or $1.25 per fully diluted share, on $1.1 billion in total revenues for the quarter ended January 31, 2005. Net income in the first quarter of fiscal 2004 was $57.7 million, or $0.87 per fully diluted share, on total revenues of $775.2 million.

The Dollar value of net contracts increased 13% in the first quarter to $1.0 billion on 3,240 homes, including unconsolidated joint ventures, from $916 million on 3,225 homes in last year's first quarter. Consolidated deliveries in the first quarter of 2005 were 3,266 homes with an aggregate sales value of $1.0 billion. This compares to consolidated deliveries of 2,901 homes in the first quarter of 2004 with an aggregate sales value of $757 million. At the end of the first quarter, contract backlog increased to 7,803 homes, including unconsolidated joint ventures, compared to 6,554 homes at the end of last year's first quarter. The sales value of contract backlog at January 31, 2005 was $2.7 billion, an increase of 50% over the prior year.

Consolidated earnings before interest expense, income taxes, depreciation and amortization ("EBITDA") for the first quarter of 2005 rose 38% to $162.4 million from $117.4 million in last year's first quarter. EBITDA covered the amount of interest incurred in the quarter by 7.7 times, compared to 5.4 times during the first quarter of fiscal 2004. After interest expense included in cost of sales, homebuilding gross margin was 24.2%, compared with 24.1% on a comparable basis in last year's first quarter. Total selling, general and administrative expense, including corporate expense, as a percentage of total revenues decreased to 10.8% in the first quarter, compared with 11.1% in the same period last year. Stockholders' equity grew more than 42% to $1.3 billion at January 31, 2005 from $898.9 million at the end of the fiscal 2004 first quarter.

Comments from Management

"Our attractive land position, solid housing markets across most of the country, and sound operating strategies contributed to our record results in the first quarter of 2005," said Ara K. Hovnanian, President and Chief Executive Officer of the Company. "As a result of our strong margins and efficient management of our inventories, we achieved an after-tax return on beginning capital of 22%, an indication that we are creating significant value for our shareholders. We are well-positioned for the remainder of 2005 with a record sales value of contract backlog that increased more than 50% over the prior year and gives us even greater confidence in our projections for further growth in deliveries, revenues and earnings in fiscal 2005."

"We are continuing to grow our existing operations through further product expansion and market share gains, as evidenced by our growth in the first quarter, all of which came from our current markets. However our growth strategy is two-fold: to maintain solid organic growth and to make selective acquisitions. This week, we announced the purchase of Cambridge Homes and the acquisition of the operations of Town & Country Homes, which occurred concurrently with entering into a joint venture to own and develop Town & Country's existing communities. These acquisitions will further enhance our geographic diversification and strengthen our leadership position in several key markets. In these two excellent companies, we are adding powerful homebuilding teams in Chicago, Florida and Minneapolis, from senior levels down to those at the community level, and we are excited about our prospects for further growth and success in these markets," Mr. Hovnanian continued.

"Given the increasingly difficult environment for regulatory approvals, the demand for new housing in many of our markets, fueled by continued household formation and a healthy economy, far outstrips the supply. This environment gives us confidence that the housing demand in the markets where we operate will support our growth strategies, even if mortgage rates increase modestly," said J. Larry Sorsby, Executive Vice President and Chief Financial Officer. "As a result, we are raising our EPS projection for fiscal 2005 to greater than $6.85 per fully diluted share, including the estimated impact of $0.10 per share from the recent acquisitions, and project our second quarter EPS to increase to $1.60 per fully diluted share, up 51% over last year's $1.06 per share."

"While we remain focused on driving growth, we are equally committed to achieving specific returns on our investments right down to the community level. Our debt-to-capital ratio fluctuates on a quarterly basis, but we expect our average ratio of net recourse debt-to-capitalization for fiscal 2005 to be in line with our long term target of 50%, including the effects of the Cambridge and Town & Country acquisitions. Our access to capital provides us with ample liquidity to fund our continued growth," Mr. Sorsby concluded.

In Closing

"We started fiscal 2005 with an excellent quarter and I thank all of our associates who worked hard to achieve this success. Foreseeing a solid and steady housing market for the remainder of 2005, the prospects for our Company, our associates and our shareholders are exciting. We are achieving improved powers of scale and geographic diversity. Our broad product offering continues to capitalize on the demographic trends that are driving housing demand in our markets. As we introduce additional products in each market, we expect to achieve further market share gains. We are solidly positioned to continue our growth in the future. We remain focused on further enhancing our operational efficiencies and we have the personnel in place to execute our growth strategies," Mr. Hovnanian concluded.

Hovnanian Enterprises will webcast its first quarter earnings conference call at 11:00 a.m. E.T. on Thursday, March 3, 2005, hosted by Ara K. Hovnanian, President and Chief Executive Officer of the Company. The webcast can be accessed live through the "Investor Relations" section of Hovnanian Enterprises' Web site at http://www.khov.com/. For those who are not available to listen to the live webcast, an archive of the broadcast will be available under the "Webcast" section of the Investor News page on the Hovnanian Web site at http://www.khov.com/. The archive will be available for 12 months.

The Company's summary projection for the fiscal year ending October 31, 2005 is available on the Company Projection page of the "Investor Relations" section of the Company's website at http://www.khov.com/.

Hovnanian Enterprises, Inc., founded in 1959 by Kevork S. Hovnanian, Chairman, is headquartered in Red Bank, New Jersey. The Company is one of the nation's largest homebuilders with operations in Arizona, California, Delaware, Florida, Illinois, Maryland, Michigan, Minnesota, New Jersey, New York, North Carolina, Ohio, Pennsylvania, South Carolina, Texas, Virginia and West Virginia. The Company's homes are marketed and sold under the trade names K. Hovnanian Homes, Goodman Homes, Matzel & Mumford, Diamond Homes, Westminster Homes, Forecast Homes, Parkside Homes, Brighton Homes, Parkwood Builders, Great Western Homes, Windward Homes, Cambridge Homes and Town & Country Homes. As the developer of K. Hovnanian's Four Seasons communities, the Company is also one of the nation's largest builders of active adult homes.

Additional information on Hovnanian Enterprises, Inc., including a summary investment profile and the Company's 2004 annual report, can be accessed through the Investor Relations page of the Hovnanian website at http://www.khov.com/. To be added to Hovnanian's investor e-mail or fax lists, please send an e-mail to IR@khov.com or sign up at http://www.khov.com/.

Non-GAAP Financial Measures:

EBITDA is not a generally accepted accounting principle (GAAP) financial measure. The most directly comparable GAAP financial measure is net income. The reconciliation of EBITDA to net income is presented in a table attached to this earnings release.

Note: All statements in this Press Release that are not historical facts should be considered as "forward-looking statements" within the meaning 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 risks, uncertainties and other factors include, but are not limited to, (1) changes in general and local economic and business conditions, (2) weather conditions, (3) changes in market conditions, (4) changes in home prices and sales activity in the markets where the Company builds homes, (5) government regulation, including regulations concerning development of land, the homebuilding process and the environment, (6) fluctuations in interest rates and the availability of mortgage financing, (7) shortages in and price fluctuations of raw materials and labor, (8) the availability and cost of suitable land and improved lots, (9) levels of competition, (10) availability of financing to the Company, (11) utility shortages and outages or rate fluctuations, (12) geopolitical risks, terrorist acts and other acts of war and (13) other factors described in detail in the Company's Form 10-K for the year ended October 31, 2004.

(Financial Tables Follow) Hovnanian Enterprises, Inc. January 31, 2005 Statements of Consolidated Income (Dollars in Thousands, Except Per Share) Three Months Ended, January 31, 2005 2004 ----------- ------------ (Unaudited) Total Revenues $1,058,146 $775,215 Costs and Expenses 926,240 682,520 ----------- ------------ Income Before Income Taxes 131,906 92,695 Provision for Taxes 50,424 34,984 ----------- ------------ Net Income $81,482 $57,711 =========== ============ Per Share Data: Basic: Income per common share $1.31 $0.92 Weighted Average Number of Common Shares Outstanding 62,240 62,430 Assuming Dilution: Income per common share $1.25 $0.87 Weighted Average Number of Common Shares Outstanding 65,419 66,470 Hovnanian Enterprises, Inc. January 31, 2005 Gross Margin (Dollars in Thousands) Homebuilding Gross Margin Three Months Ended January 31, ----------------------------- 2005 2004 ------------ ------------ (Unaudited) Sale of Homes $1,015,969 $757,273 Cost of Sales, excluding interest 757,085 562,900 ------------ ------------ Homebuilding Gross Margin, excluding interest $258,884 $194,373 Cost of Sales interest 12,969 11,943 ------------ ------------ Homebuilding Gross Margin, including interest $245,915 $182,430 ============ ============ Gross Margin Percentage, excluding interest 25.5% 25.7% Gross Margin Percentage, including interest 24.2% 24.1% Land Sales Gross Margin Three Months Ended January 31, ---------------------------- 2005 2004 ------------ ------------ (Unaudited) Land and Lot Sales $23,004 $1,139 Cost of Sales 14,171 1,035 ------------ ------------ Land and Lot Gross Margin $8,833 $104 ============ ============ Hovnanian Enterprises, Inc. January 31, 2005 Reconciliation of EBITDA to Net Income (Dollars in Thousands) Three Months Ended January 31, 2005 2004 ------------ ------------ (Unaudited) Net Income $81,482 $57,711 Income Taxes 50,424 34,984 Interest expense 17,922 16,943 ------------ ------------ EBIT (1) $149,828 $109,638 Depreciation 1,620 1,494 Amortization Debt Fees 361 463 Amortization of Intangibles 10,088 4,808 Other Amortization 528 1,042 ------------ ------------ EBITDA(2) $162,425 $117,445 ============ ============ INTEREST INCURRED $21,044 $21,587 EBITDA TO INTEREST INCURRED 7.72 5.44 (1) EBIT is a non-GAAP financial measure. The most directly comparable GAAP financial measure is net income. EBIT represents earnings before interest expense and income taxes. (2) EBITDA is a non-GAAP financial measure. The most directly comparable GAAP financial measure is net income. EBITDA represents earnings before interest expense, income taxes, depreciation and amortization. Hovnanian Enterprises, Inc. January 31, 2005 Interest Incurred, Expensed and Capitalized (Dollars in Thousands) Three Months Ended January 31, 2005 2004 ------------ ------------ (Unaudited) Interest Capitalized at Beginning of Period $37,465 $24,833 Plus Interest Incurred 21,044 21,587 Less Interest Expensed 17,922 16,943 ------------ ------------ Interest Capitalized at End of Period $40,587 $29,477 ============ ============ Hovnanian Enterprises, Inc. January 31, 2005 Summary Financial Projection (Dollars in Millions, except per share or where noted) (Unaudited) Trailing Projection Fiscal Fiscal Fiscal 12 Fiscal Year Year Year Months Year 10/31/2002 10/31/2003 10/31/2004 1/31/2005 10/31/2005* ------------ ------------ ---------- ---------- ------------ Total Revenues ($ Billion) $2.6 $3.2 $4.2 $4.4 > $5.2 Income Before Income Taxes $225.7 $411.5 $549.8 $589.0 > $729.0 Pre-tax Margin 8.8% 12.9% 13.2% 13.3% > 14.0% Net Income $137.7 $257.4 $348.7 $372.5 > $452.0 Earnings Per Share (fully diluted) $2.14 $3.93 $5.35 $5.71 > $6.85 * Fiscal 2005 projections are based on one quarter of actual data and three quarters of projected results. HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (In Thousands) January 31, October 31, ASSETS 2005 2004 ----------- ----------- (unaudited) Homebuilding: Cash and cash equivalents............... $80,152 $65,013 ----------- ----------- Inventories - At the lower of cost or fair value: Sold and unsold homes and lots under development.......................... 1,987,502 1,785,706 ----------- ----------- Land and land options held for future development or sale.................. 349,363 436,184 ----------- ----------- Consolidated Inventory Not Owned: Specific performance options........ 3,162 11,926 Variable interest entities.......... 165,848 201,669 Other options....................... 112,211 31,824 ----------- ----------- Total Consolidated Inventory Not Owned.............. 281,221 245,419 ----------- ----------- Total Inventories................... 2,618,086 2,467,309 ----------- ----------- Receivables, deposits, and notes........ 74,439 56,753 ----------- ----------- Property, plant, and equipment - net.... 56,053 44,137 ----------- ----------- Prepaid expenses and other assets....... 164,383 134,456 ----------- ----------- Goodwill................................ 32,658 32,658 ----------- ----------- Definite life intangibles............... 115,870 125,492 ----------- ----------- Total Homebuilding.................. 3,141,641 2,925,818 ----------- ----------- Financial Services: Cash and cash equivalents............... 13,127 13,011 Mortgage loans held for sale............ 156,565 209,193 Other assets............................ 3,896 8,245 ----------- ----------- Total Financial Services............ 173,588 230,449 ----------- ----------- Total Assets.............................. $3,315,229 $3,156,267 =========== =========== HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (In Thousands) January 31, October 31, LIABILITIES AND STOCKHOLDERS' EQUITY 2005 2004 ----------- ----------- (unaudited) Homebuilding: Nonrecourse land mortgages.............. $24,097 $25,687 Accounts payable and other liabilities.. 271,659 329,621 Customers' deposits..................... 91,638 80,131 Nonrecourse mortgages secured by operating Properties................... 24,802 24,951 Liabilities from inventory not owned.... 139,617 68,160 ----------- ----------- Total Homebuilding.................. 551,813 528,550 ----------- ----------- Financial Services: Accounts payable and other liabilities.. 5,309 6,080 Mortgage warehouse line of credit....... 131,247 188,417 ----------- ----------- Total Financial Services............ 136,556 194,497 ----------- ----------- Notes Payable: Revolving credit agreement.............. 115,000 Senior notes............................ 802,890 602,737 Senior subordinated notes............... 400,000 300,000 Accrued interest........................ 17,062 15,522 ----------- ----------- Total Notes Payable................. 1,219,952 1,033,259 ----------- ----------- Income Taxes Payable...................... 4,181 48,999 ----------- ----------- Total Liabilities................... 1,912,502 1,805,305 ----------- ----------- Minority interest from inventory not owned...................... 122,235 155,096 ----------- ----------- Minority interest from consolidated joint ventures.............. 3,422 3,472 ----------- ----------- Stockholders' Equity: Preferred Stock, $.01 par value-authorized 100,000 shares; none issued............................ Common Stock, Class A,$.01 par value-authorized 200,000,000 shares; issued 57,067,248 shares at January 31, 2005 and 56,797,313 shares at October 31, 2004 (including 10,395,656 shares at January 31, 2005 and October 31, 2004 held in Treasury)..... 571 568 Common Stock, Class B,$.01 par value (convertible to Class A at time of sale) authorized 30,000,000 shares; issued 15,375,228 shares at January 31, 2005 and 15,376,972 shares at October 31, 2004 (including 691,748 shares at January 31, 2005 and October 31, 2004 held in Treasury)...................... 154 154 Paid in Capital......................... 201,243 199,643 Retained Earnings....................... 1,135,345 1,053,863 Deferred Compensation................... (10,193) (11,784) Treasury Stock - at cost................ (50,050) (50,050) ----------- ----------- Total Stockholders' Equity.......... 1,277,070 1,192,394 ----------- ----------- Total Liabilities and Stockholders' Equity..................... $3,315,229 $3,156,267 =========== =========== HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME (In Thousands Except Per Share Data) (Unaudited) Three Months Ended January 31, ------------------------ 2005 2004 ----------- ----------- Revenues: Homebuilding: Sale of homes......................... $1,015,969 $757,273 Land sales and other revenues......... 27,984 3,169 ----------- ----------- Total Homebuilding.................. 1,043,953 760,442 Financial Services...................... 14,193 14,773 ----------- ----------- Total Revenues...................... 1,058,146 775,215 ----------- ----------- Expenses: Homebuilding: Cost of sales, excluding interest..... 771,256 563,935 Cost of sales interest................ 12,969 11,943 ------------ ---------- Total Cost of Sales................. 784,225 575,878 Selling, general and administrative... 98,738 71,793 Inventory impairment loss............. 498 58 ----------- ----------- Total Homebuilding.................. 883,461 647,729 Financial Services...................... 9,920 8,027 Corporate General and Administrative.... 15,878 14,524 Interest................................ 4,953 5,000 Other Operations........................ 1,940 2,432 Intangible Amortization................. 10,088 4,808 ----------- ----------- Total Expenses...................... 926,240 682,520 ----------- ----------- Income Before Income Taxes................ 131,906 92,695 ----------- ----------- State and Federal Income Taxes: State................................... 5,446 6,240 Federal................................. 44,978 28,744 ----------- ----------- Total Taxes........................... 50,424 34,984 ----------- ----------- Net Income................................ $81,482 $57,711 =========== =========== Per Share Data: Basic: Income per common share................. $1.31 $.92 Weighted average number of common shares outstanding..................... 62,240 62,430 Assuming dilution: Income per common share................. $1.25 $.87 Weighted average number of common shares outstanding..................... 65,419 66,470 HOVNANIAN ENTERPRISES, INC. (DOLLARS IN THOUSANDS EXCEPT AVG. PRICE) (UNAUDITED) Communities Under Development Three Months - 1/31/05 Net Contracts (1) Three Months Ended 31-Jan-05 2005 2004 % Change Northeast Region Homes 522 631 (17.3%) Dollars 189,605 203,484 (6.8%) Avg. Price 363,228 322,478 12.6% Southeast Region Homes 849 867 (2.1%) Dollars 284,882 241,067 18.2% Avg. Price 335,550 278,048 20.7% Southwest Region Homes 897 723 24.1% Dollars 165,048 121,177 36.2% Avg. Price 184,000 167,603 9.8% West Region Homes 906 912 (0.7%) Dollars 354,124 299,020 18.4% Avg. Price 390,865 327,873 19.2% Consolidated Total Homes 3,174 3,133 1.3% Dollars 993,659 864,748 14.9% Avg. Price 313,062 276,013 13.4% Unconsolidated Joint Ventures Homes 66 92 (28.3%) Dollars 41,347 50,991 (18.9%) Avg. Price 626,476 554,250 13.0% Total Homes 3,240 3,225 0.5% Dollars 1,035,006 915,739 13.0% Avg. Price 319,446 283,950 12.5% Deliveries Three Months Ended 31-Jan-05 2005 2004 % Change Northeast Region Homes 687 640 7.3% Dollars 238,461 191,908 24.3% Avg. Price 347,105 299,856 15.8% Southeast Region Homes 902 787 14.6% Dollars 263,834 191,062 38.1% Avg. Price 292,499 242,773 20.5% Southwest Region Homes 715 724 (1.2%) Dollars 135,911 127,814 6.3% Avg. Price 190,085 176,539 7.7% West Region Homes 962 750 28.3% Dollars 377,763 246,489 53.3% Avg. Price 392,685 328,652 19.5% Consolidated Total Homes 3,266 2,901 12.6% Dollars 1,015,969 757,273 34.2% Avg. Price 311,074 261,039 19.2% Unconsolidated Joint Ventures Homes 22 10 120.0% Dollars 11,585 2,826 310.0% Avg. Price 526,591 282,555 86.4% Total Homes 3,288 2,911 13.0% Dollars 1,027,554 760,099 35.2% Avg. Price 312,516 261,113 19.7% DELIVERIES INCLUDE EXTRAS Contract Backlog(2) 31-Jan-05 2005 2004 % Change Northeast Region Homes 2,091 2,190 (4.5%) Dollars 720,675 611,901 17.8% Avg. Price 344,655 279,407 23.4% Southeast Region Homes 2,346 2,303 1.9% Dollars 792,979 650,934 21.8% Avg. Price 338,013 282,646 19.6% Southwest Region Homes 1,106 988 11.9% Dollars 197,285 153,397 28.6% Avg. Price 178,377 155,260 14.9% West Region Homes 1,861 955 94.9% Dollars 764,697 326,848 134.0% Avg. Price 410,907 342,250 20.1% Consolidated Total Homes 7,404 6,436 15.0% Dollars 2,475,635 1,743,080 42.0% Avg. Price 334,365 270,833 23.5% Unconsolidated Joint Ventures Homes 399 118 238.1% Dollars 239,851 64,043 274.5% Avg. Price 601,129 542,738 10.8% Total Homes 7,803 6,554 19.1% Dollars 2,715,486 1,807,123 50.3% Avg. Price 348,005 275,728 26.2% Notes:

(1) Net contracts are defined as new contracts signed during the period for the purchase of homes, less cancellations of prior contracts.

(2) During the first quarter 2005, a community in the Northeast Region was contributed to a joint venture. Therefore, the 56 contracts in consolidated backlog at October 31, 2004 were moved to unconsolidated joint ventures backlog.