SecProbe.io

CORRESP
1
filename1.htm

hov20170419_corresp.htm

April 21, 2017

VIA EDGAR

Mr. John Cash
Branch Chief
Office of Manufacturing and Construction
Division of Corporation Finance
Securities and Exchange Commission
100 F Street, N.E.
Washington, D.C. 20549-7010

Re:

Hovnanian Enterprises, Inc.
Form 10-K for the year ended October 31, 2016
Filed December 20, 2016
Form 10-Q for the period ended January 31, 2017
Filed March 8, 2017
Form 8-K filed on March 8, 2017
File No. 1-8551

Dear Mr. Cash:

We have prepared the following in response to your comment letter dated March 27, 2017 with respect to the above captioned filings.

The paragraphs that follow respond to the questions asked under each of the respective headers in your comment letter. For convenience of reference, the text of the comments in your letter has been reproduced in bold italics herein. Any additional disclosures or other revisions to our current disclosure proposed in our responses to your comments will be included in future filings, including our interim filings, if applicable.

We trust that you will find these responses acceptable, however, if you have further questions or comments, please contact me at 732-383-2698.

Sincerely,

/s/ Brad G. O’Connor

Brad G. O’Connor
Vice President, Chief Accounting Officer and Corporate Controller

110 West Front Street, Red Bank, NJ 07701 ∙ (732) 383-2200 ∙ KHOV.COM

2

Form 10-K for the year ended October 31, 2016

Critical Accounting Policies, page 27

Deferred Income Taxes, page 30

1.

Discuss the significant estimates and assumptions used in your analysis of your deferred taxes and how you determined the amount of the valuation allowance to record. Your discussion should address the following points:

●

If the realization of your deferred tax asset is dependent on material improvements over present levels of consolidated pre-tax income, material changes in the present relationship between income reported for financial and tax purposes, or material asset sales or other non-routine transactions, you should provide a description of these assumed future events, quantified to the extent practicable. For example, you should disclose the minimum annualized rate by which taxable income must increase during the tax NOL carryforward periods if realization of the benefit is dependent on taxable income higher than currently reported;

●

Ensure you quantify and discuss the material positive and negative evidence you considered, along with how it was weighed, in determining that it is more likely than not that a portion of your deferred tax assets will be realized;

●

If significant objective negative evidence indicates uncertainty regarding realization of your deferred asset, you should identify the countervailing positive evidence relied upon in your decision not to establish a full allowance against the asset. Specifically address the impact of (i) the decrease in backlog year over year, (ii) your decision to exit certain markets, (iii) the negative rating actions regarding your debt, and (iv) your inability to refinance $260 million of bonds and the resulting impact of shifting your focus from growth and temporarily reducing your land acquisitions on your analysis;

●

Disclose the minimum amount of taxable income you will be required to generate to realize your deferred tax asset and the time period during which you will be required to generate it; and

●

Clarify if your assessment of the realizability of your deferred tax assets is based on your ability to implement tax planning strategies. To the extent that it is, please provide investors with a description of the tax planning strategies that you are able to implement to realize these deferred tax assets.

Refer to the guidance in ASC 740-10-30-16 through 30-25, Item 303(a)(3) of Regulation S-K and Section 501.14 of the Financial Reporting Codification for guidance.

Response

The following is a discussion of the significant estimates and assumptions we used for our analysis of deferred taxes and our determination of the valuation allowance to record.

3

Specifically, in response to the Staff’s inquiries:

●

The realization of our deferred tax asset (“DTA”) is not dependent upon assumed future events or a minimum annualized rate of increase of taxable income. As discussed in Note 11 to our Consolidated Financial Statements for the fiscal year ended October 31, 2016, we projected pretax income based on our recent three years cumulative performance as well as our expectations for fiscal 2017.

As of October 31, 2016, we had cumulative pretax income for three years. Therefore, in accordance with ASC 740-10-30-16 through 30-25, it was appropriate for purposes of determining the valuation allowance at October 31, 2016 to use our projection for fiscal 2017 pretax income, which was based on our contracts in backlog at October 31, 2016, community count and the then current sales paces, sales prices for our communities and expected gains from extinguishment of debt. Conservatively, we assumed the 2017 level of pretax profit (excluding the expected gains on extinguishment of debt in 2017) for the remaining 19 years used in the analysis even though our longer-term projections show growth in pretax profit in these future years. After projecting the pretax income, we then scheduled all temporary and permanent tax differences for all net operating loss (“NOL”) carryforward periods. Realization of deferred tax assets/liabilities was scheduled by year of forecasted realization based on the Internal Revenue Code.

●

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 740-10-30-16 through 30-25.

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 the deferred tax assets that do not have a valuation allowance will be realized:

1.

Recent financial results that put us in a cumulative three-year income position as of October 31, 2016. (Positive Objective Evidence)

2.

Our ability to schedule the use of most DTAs related to temporary differences. (Positive Objective Evidence)

3.

We completed several debt refinancing/restructuring transactions which will significantly reduce our interest incurred in fiscal 2017 and future years (based on our longer-term modeling) by $20 million per year. (Positive Objective Evidence)

4.

We incurred pre-tax losses during the housing market decline and the slower than expected housing market recovery. (Negative Objective Evidence)

5.

We exited two geographic markets and are winding down operations in two other markets that have historically had losses. (Positive Subjective Evidence)

6.

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)

 4

7.

As noted in our Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”), our gross margins have been negatively impacted by pricing of land purchased in 2013 and 2014 during a brief period of market improvement. As we work through that land position, we expect more recent land purchases to have higher gross margins, which will improve our overall gross margin as the mix of new communities exceeds the older communities. We did not include this improvement in our projections, but it provides evidence of potential additional improvement. (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)

In analyzing all the above factors, overall the positive evidence, both objective and subjective, outweighed the negative evidence.

●

As discussed above, the only negative objective evidence utilized in our analysis was our pre-tax loss in prior years. The Staff notes that there were a few indicators of negative evidence during fiscal 2016 – namely a decrease in backlog year over year, negative rating actions regarding our debt and our inability to refinance $260 million of bonds and the resulting impact of shifting our focus from growth and temporarily reducing our land acquisition. We did not consider these items negative objective evidence because despite these factors, the Company had income before income taxes in fiscal 2016 and, as discussed above, we were able to reduce debt in fiscal 2016, which will eliminate a significant amount of interest expense going forward improving our ability to be profitable in future years.

In addition, as discussed in MD&A for the fiscal year ended October 31, 2016, in the fourth quarter of fiscal 2016, we were able to refinance certain of our near term debt maturities and we ended the fiscal year with a cash position that will allow us to actively seek land investment opportunities and thus begin to grow community count again such that by the end of fiscal 2018, we would expect to be back to a similar level of deliveries as 2016. In addition, as a result of reducing debt, our interest expense has been reduced significantly allowing us to maintain or even increase profit on lower delivery levels.

Further, we consider our decision to exit certain markets to be positive subjective evidence rather than negative evidence. By exiting these underperforming markets, the Company will be able to redeploy capital to better performing markets, which over time should improve our profitability.

●

After considering the timing of when existing DTAs will be expensed for tax purposes, we will be required to generate minimum taxable income of approximately $275 million over the next 19 years to support realizing our DTAs that did not, as of October 31, 2016, have a valuation allowance.

5

●

The Company informs the Staff that it has and always will make efforts to find usable tax planning strategies. However, we have not considered any to be prudent at this time, and are not relying on any tax planning strategies to support the realization of our DTAs.

Capital Resources and Liquidity, page 30

Debt Transactions, page 31

2.

Please disclose your actual consolidated fixed charge coverage ratio.

Response

The Company respectfully submits to the Staff that the Company’s actual consolidated fixed charge coverage ratio is not meaningful disclosure; rather, it’s the consequence that is relevant to an understanding of the Company’s capital resources and liquidity. As discussed in Capital Resources and Liquidity, there is no impact to our debt compliance or our preferred stock (dividends are not cumulative) as a result of the fixed charge coverage ratio being less than 2.0 to 1.0. The Company includes the narrative disclosure to inform the reader that due to the ratio being less than 2.0 to 1.0, it is currently prohibited from paying dividends and from incurring certain indebtedness, a restriction which we anticipate will continue for the foreseeable future.

As discussed in correspondence with the Staff in 2009, the calculation of the fixed charge coverage ratio is only required upon the happening of certain transactions (such as the incurrence of debt and the making of restricted payments). Further, the formula specified in the indentures to calculate the ratio is not static but is a pro forma calculation that takes into account activities (such as debt repurchases) during the calculation period and the transaction being considered (such as the amount of debt proposed to be incurred and its purpose) and to compute and disclose an actual numerical coverage ratio would require the Company to make assumptions and, as a result, would be merely hypothetical and would vary depending on the assumptions made. In addition, even if the Company’s consolidated fixed charge coverage ratio was at least 2.0 to 1.0, it may not have “capacity” to make restricted payments, and if the ratio was below 2.0 to 1.0, there may be an available exception to permit the restricted payment in any event. Therefore, the Company believes that providing the consolidated fixed charge coverage ratio in its disclosure could be misleading.

As agreed with the Staff in 2009, the Company will disclose (together with any necessary reconciliation to U.S. GAAP) its actual consolidated fixed charge coverage ratio should such ratio exceed at least 2.0 to 1.0, but there is a reasonably possible chance that as a result of such ratio falling below 2.0 to 1.0, the Company will be restricted under its debt indentures from paying dividends, making distributions on common and preferred stock, making certain investments or repurchasing debt or equity.

Result of Operations, page 40

Homebuilding, page 40

6

3.

Your total housing revenues include unconsolidated joint venture results. Inclusion of your proportionate economic ownership in revenues creates a non-GAAP measure that does not appear to be consistent with the guidance in Question 100.04 of the updated Non-GAAP Compliance and Disclosure Interpretations issued on May 17, 2016. Please advise or revise your disclosures accordingly.

Response

In response to the Staff’s comment, we will revise our disclosures in future filings to eliminate the presentation of total housing revenues including unconsolidated joint ventures. Because joint ventures are an important part of the Company’s strategy, we think it’s also helpful to an understanding of the Company to continue to present data on our unconsolidated joint ventures. The revised disclosure for the table referred to in the Staff’s comment is as follows (a similar presentation will be shown where such tabular information appears elsewhere in the Company’s filings):

Information on homes delivered by segment is set forth below:

Year Ended

(Housing Revenue in thousands)

October 31,

2016

October 31,

2015

October 31,

2014

Northeast:

Housing revenues

$274,126

$189,049

$274,734

Homes delivered

557

380

550

Average price

$492,147

$497,497

$499,516

Mid-Atlantic:

Housing revenues

$457,906

$398,132

$331,759

Homes delivered

960

854

701

Average price

$476,985

$466,197

$473,266

Midwest:

Housing revenues

$287,469

$311,364

$225,958

Homes delivered

921

958

789

Average price

$312,127

$325,015

$286,386

Southeast:

Housing revenues

$214,585

$207,407

$202,620

Homes delivered

581

675

652

Average price

$369,339

$307,269

$310,768

Southwest:

Housing revenues

$1,024,410

$822,371

$747,753

Homes delivered

2,750

2,263

2,389

Average price

$372,512

$363,399

$312,998

West:

Housing revenues

$342,294

$159,806

$230,189

Homes delivered

695

377

416

Average price

$492,509

$423,889

$553,337

Consolidated total:

Housing revenues

$2,600,790

$2,088,129

$2,013,013

Homes delivered

6,464

5,507

5,497

Average price

$402,350

$379,177

$366,202

Unconsolidated joint ventures: (1)

Housing revenues

$140,576

$119,920

$164,082

Homes delivered

248

269

437

Average price

$566,836

$445,799

$375,475

(1)

Represents housing revenues, home deliveries and average prices for our unconsolidated 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. See Note 20 to the Consolidated Financial Statements for a further discussion of our unconsolidated joint ventures.

7

4.

We note your presentation of Gross Margin, before costs of sales interest expense and land charges on pages 44 and 45. This appears to be