Hovnanian Enterprises expects to generate positive cash flow in second half of 2007

By Jennifer Lanning Drey

Portland, Ore., June 1 - Hovnanian Enterprises, Inc. is "on the cusp of becoming cash flow positive," company chief executive officer Ara Hovnanian said Friday during the company's second-quarter earnings conference call.

Hovnanian Enterprises expects to generate between $175 million and $250 million of free cash flow in the second half of 2007 but be cash flow negative for the full year.

By scaling back on making investments in new properties, the company expects to generate positive operating cash flow of $100 million to $400 million for the full-year 2008.

"This ability to manage our balance sheet and forgo additional expenditures on land gives us the confidence in our ability to manage our way through the current downturn and generate positive cash flow even with poor margins and net losses," Hovnanian said.

"We will continue to use this positive cash flow to repay debt and bring our leverage back in line with our goals."

Hovnanian Enterprises ended the quarter with $412 million outstanding on its $1.5 billion unsecured revolving line of credit and a net debt-to-capitalization ratio of 56.9%.

The company's goal for the debt-to-capitalization ratio is 50%.

"We expect to reduce debt further in '08 and to reduce our debt-to-capitalization ratio for the full year," Hovnanian said.

Hovnanian said the company's revolving credit agreement includes a debt service coverage test, but it only applies if the company's leverage ratio is "substantially higher than where it is today."

Hovnanian would not disclose the exact ratio that would trigger the test, but company chief financial officer J. Larry Sorsby said the company does not anticipate allowing its leverage to reach the level.

"We're going to do everything in our power not only to not let the leverage go up, but to actually decrease it to provide even a larger cushion," Hovnanian said.

Hovnanian Enterprises had cash and cash equivalents of $10.14 million at April 30, compared with $43.64 million at Oct. 31, 2006.

"Although this downturn is a little different than what we've experienced in the past, we do know how to handle it. We focus on balance sheet and cash flow, and we make the corrections in the field as we need to, week by week," Hovnanian said.

"We plan to prosper after this correction, as we have after all corrections in the past."

Hovnanian Enterprises is a Red Bank, N.J.-based homebuilder.

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