NVR, Inc. — Q1 2020 Form 10-Q
Business and period: Unaudited results for the three months ended March 31, 2020, compared with Q1 2019. NVR builds and sells homes and provides mortgage banking and title services. Amounts below are in millions unless otherwise noted.
Financial results and key metrics
| Metric | Q1 2020 | Q1 2019 | Change / context |
|---|---|---|---|
| Consolidated revenue | $1,582.5 | $1,687.0 | Down 6% |
| Income before taxes | $161.4 | $218.6 | Down 26% |
| Income tax benefit (expense) | $14.3 benefit | $30.2 expense | 2020 benefit reflected excess tax benefits from stock-option exercises |
| Net income | $175.7 | $188.4 | Down 7% |
| Diluted EPS | $44.96 | $47.64 | Down 6% |
| Homebuilding revenue | $1,555.7 | $1,643.2 | Down 5% |
| Homebuilding gross margin | 16.8% | 18.5% | Down 1.7 percentage points; included $36.4 million of lot-deposit impairment charges |
| Mortgage banking income | $11.5 | $30.2 | Down 62%; mortgage banking fees declined 39% |
| Operating cash flow | $68.4 | $227.9 | Lower chiefly due to inventory investment |
Operating indicators: Home sales settled were 4,230 units, down 6%; average settlement price was $367,800, up 1%. Net new orders were 5,015, down 2%, while average new-order price rose 1% to $372,300. The cancellation rate increased to 20.8% from 14.1%. March 31 backlog was 9,018 homes, broadly flat year over year, with an average price of $381,600.
Cash, liquidity and debt: At March 31, cash and cash equivalents were $1,092.0 million, excluding restricted cash; total cash, restricted cash and equivalents were $1,118.3 million. Cash and equivalents decreased $42.5 million during the quarter. NVR reported $188.6 million of unused revolving-credit capacity and $150 million of unused mortgage-repurchase capacity; neither facility had borrowings outstanding. Senior notes had $600 million principal outstanding, bearing 3.95% and due in 2022. Total liabilities were $1,470.6 million and shareholders’ equity was $2,416.9 million.
Cash was used for $168.4 million of increased inventory and $216.6 million of share repurchases, partly offset by $109.1 million of option-exercise proceeds. The filing does not provide a clear consolidated operating margin or a standalone free-cash-flow measure.
Material changes and management commentary
- COVID-19 adversely affected late-March orders and cancellations; management reported further significant order declines and elevated cancellations during April. Construction was prohibited in Pennsylvania and New York for part of the period. Pennsylvania construction resumed May 1, while New York restrictions continued as of the filing.
- Management attributed the lower homebuilding margin partly to approximately $36.4 million of contract-land-deposit impairments, primarily associated with deteriorating market conditions in certain markets due to COVID-19. The impairment reserve was $63.2 million at quarter-end, versus $27.6 million at year-end 2019.
- Mortgage banking income fell as pandemic-related mortgage-market disruption reduced mortgage-servicing-right values and affected loan-market conditions. Loan closing volume declined 1%; the mortgage capture rate improved to 91% from 88%.
- Reported earnings benefited from a tax benefit related to excess stock-option tax benefits; management cautioned that the effective tax rate may be volatile in future quarters. Lower equity-based compensation expense also reflected a reversal for forfeited options and the vesting of certain older options.
- On May 4, 2020, after quarter-end, NVR issued $600 million of 3.000% senior notes due 2030, with approximately $596.5 million of net proceeds before expenses for general corporate purposes.
Outlook, risks and contingencies
No quantified earnings or sales guidance was provided. Management said it could not predict COVID-19’s duration or full effect on demand, cancellations, construction schedules, customer financing, mortgage markets, cash flows, or land-deposit recoveries. It expected to settle substantially all March 31 backlog within twelve months, subject to cancellations and construction delays. Backlog in Pennsylvania and New York was particularly exposed to delays and potentially higher cancellations. Other cited risks include economic and regional conditions, interest rates, financing availability, land and labor costs, regulation, and competition.
NVR reported ordinary-course litigation that management did not expect to have a material adverse effect on financial position, results or cash flows. The company also had lot-purchase, joint-venture and land-development commitments; under its typical lot agreements, its loss upon nonperformance is generally limited to deposits. Disclosure controls were concluded effective, and no material change in internal control over financial reporting was reported.
Important facts for investors to verify
- Whether post-quarter COVID-19 order trends, cancellations and construction restrictions materially changed backlog conversion and revenue.
- Whether the $63.2 million land-deposit impairment reserve adequately reflects exposure to further market deterioration.
- How mortgage servicing values, loan-sale economics and secondary-market access affect mortgage banking results.
- The use of proceeds from the May 2020 notes issuance and its effect on debt, liquidity and interest expense.
- The sustainability of earnings excluding the quarter’s tax benefit and lower equity-compensation expense, and the company’s continued share repurchases.