NVR, Inc. — Q2 2018 Form 10-Q
Reporting period: Three and six months ended June 30, 2018; comparisons are with the same 2017 periods unless noted. NVR builds and sells homes, primarily on a pre-sold basis, and provides mortgage banking and title services. Dollar amounts below are in millions unless stated otherwise.
Key financial results
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Consolidated revenue | $1,787.3 | $1,544.5 | $3,316.7 | $2,821.6 |
| Income before taxes | $241.6 | $209.0 | $432.6 | $341.1 |
| Net income | $203.2 | $147.9 | $369.2 | $250.8 |
| Diluted EPS | $49.05 | $35.19 | $88.31 | $60.36 |
| Homebuilding gross margin | 19.1% | 19.5% | 18.9% | 18.7% |
- Q2 consolidated revenue increased 16%, while net income rose 37% and diluted EPS rose 39%. For the first half, revenue increased about 18% and net income about 47%.
- Q2 homebuilding revenue was $1,750.5 million. Settlements rose 18% to 4,611 homes, while average settlement price fell 2% to $379,600. Net new orders rose 6% to 4,964; average new-order price was essentially flat at $376,300.
- At June 30, backlog was 10,162 homes, up 15% year over year, with an average price of $380,000. The six-month cancellation rate was 13.3%, compared with 14.2%.
- Mortgage banking income before tax was $18.3 million in Q2 and $40.7 million for the first half. First-half loan-closing volume increased 18% to $2.224 billion; the capture rate was 87%.
Cash, debt and liquidity
- Operating cash flow was $169.5 million for the first half, versus $178.2 million in 2017. Inventory growth used $187.4 million of cash.
- Cash, restricted cash and cash equivalents declined $231.1 million to $458.5 million. The balance sheet separately reports $431.6 million of cash and cash equivalents and $25.8 million of restricted cash.
- Financing activities used $397.4 million, including $483.5 million for treasury-share purchases, partly offset by $86.1 million of option-exercise proceeds. Buybacks totaled approximately 158,000 shares for the first half.
- Senior notes had $600 million principal outstanding, carried at $597.4 million, bear 3.95% interest and mature in 2022. No borrowings were outstanding under the $200 million revolving credit facility or the $150 million mortgage repurchase facility at June 30. Approximately $8.5 million of letters of credit was outstanding under the credit agreement.
- Homebuilding inventory was $1.434 billion, up from $1.246 billion at year-end 2017. Shareholders’ equity was $1.608 billion.
Changes, outlook and risks
- Q2 homebuilding margin declined 42 basis points year over year, principally due to higher lot and certain material costs. Management also cited constrained pricing in a competitive market. First-half margin improved 20 basis points, reflecting modest pricing improvement and operating leverage, partly offset by cost increases.
- Management described housing demand as strong, supported by low unemployment and improved consumer confidence. It expects continued gross-margin pressure from limited pricing power and land and construction costs, and mortgage-banking profit pressure from competitive pricing. It gave no specific earnings or revenue guidance and said market recovery depends on continued economic improvement, job and wage growth, and household formation.
- The effective tax rate fell to 15.9% in Q2 and 14.6% for the first half, from 29.2% and 26.5%. The reduction reflected the lower federal tax rate, a $6.2 million benefit from reinstated energy credits, and tax benefits from stock-option exercises ($26.5 million in Q2; $46.0 million for the first half). Management warned that the rate may be volatile as option-related benefits depend on share price and exercise timing.
- NVR controlled approximately 90,100 lots under third-party lot-purchase agreements, supported by cash deposits of about $377.4 million and letters of credit of $2.7 million. The company’s stated loss exposure under these agreements is generally limited to deposits, but deposit impairments and the availability and cost of suitable lots remain relevant risks.
- Other risks identified include interest-rate changes, mortgage financing availability, competition, labor and material costs, weather, regulation, and the ability to sell mortgage loans in secondary markets. Ordinary-course litigation was not expected by management to materially affect results or cash flows. The warranty reserve was $99.7 million, up from $95.4 million a year earlier.
- Topic 606 adoption added a $2.2 million after-tax cumulative adjustment to retained earnings. Management estimated adoption of the new lease standard in 2019 would add less than $100 million of right-of-use assets and corresponding liabilities.
Important facts for investors to verify
- Whether order growth and the 15% larger backlog convert into settlements without higher cancellations or slower turnover.
- Whether lot, material and construction-cost inflation continues to erode homebuilding margins, especially given flat or lower order prices.
- How much of reported earnings growth reflects the lower tax rate and stock-option tax benefits, and how those benefits vary in subsequent quarters.
- Whether substantial share repurchases can continue while cash balances fall and inventory investment remains elevated.
- Lot-purchase deposit impairment exposure, warranty claims and the effect of interest-rate or mortgage-market changes on home sales and mortgage banking.