K. Hovnanian: ‘Disappointed’ with 2006 Results

K. HovnanianHovnanian Enterprises, Inc., a New Jersey-based national homebuilder, reported painful results for the 2006 fiscal year today, with net income available to common stockholders of $138.9 million on $6.1 billion in total revenues for the full year ended October 31, 2006. In fiscal 2005, net income available to common stockholders was $469.1 million on total revenues of $5.3 billion. Homebuilding gross margin, before interest expense included in cost of sales, was 23.1 percent for fiscal 2006, a 330 basis point decline from an all-time record of 26.4 percent in the prior year. After charges related to inventory impairments and land option write-offs, the company reported a loss to common stockholders for the fiscal 2006 fourth quarter of $117.9 million, compared to net income available to common stockholders of $165.4 million for the same period a year ago. “Overall we are disappointed with our results in fiscal 2006,” commented company CEO Ara K. Hovnanian. “Although our deliveries and revenues increased over the record year of 2005, our gross margins fell 330 basis points — as we cut pricing and offered incentives to improve affordability and remain competitive in a period of a slower housing demand. “We did not anticipate the suddenness or magnitude of the fall in pricing that occurred this year in many of our communities. Our profitability and the pace of new home sales in our markets continues to be adversely impacted by high contract cancellation rates, increases in the number of resale listings and increases in the number of new homes available for sale,” Hovnanian said. The company’s contract cancellation rate for the fourth quarter was 35 percent, compared with 25 percent in the fourth quarter of 2005 and a 33 percent rate reported in the third quarter of fiscal 2006. “Conditions in some markets like Texas and North Carolina have been holding up better than those in our other markets. Despite healthy job growth, steadily increasing GDP, strong household formation, and low mortgage rates, most housing markets have been adversely impacted by heightened inventories of both new and existing homes for sale, along with shifting consumer sentiment which has kept many homebuyers on the sidelines waiting for an even better deal on a new home,” Hovnanian added. “Over the past two months, we have started to see a glimmer of hopeful indicators that the markets may be stabilizing, including modest declines in resale inventories, improving consumer confidence, particularly in the University of Michigan survey which specifically tracks consumer attitudes toward buying homes, and healthy levels of buyer traffic at many of our communities. “Thus, as we begin calendar 2007, we are cautiously optimistic that some of our more challenging markets will begin to experience decreasing cancellations and an improved sales pace. However, we may not get a good read on the market until the spring selling season begins in earnest. Until we experience an actual improvement in our pace of net contracts, we are continuing to manage assuming that current conditions remain with us for the foreseeable future.” In providing initial earnings guidance for 2007, CFO J. Larry Sorsby noted that the company expects that the housing slump isn’t over yet. “We believe that the overall U.S. housing market may hit the bottom in the first half of 2007,” Sorsby said. “However, the housing market is likely to bounce along the bottom for several quarters before pricing and sales pace improves.”

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