NVR, Inc. — Q2 2015 Form 10-Q
Reporting period: Three and six months ended June 30, 2015, compared with the same periods in 2014. NVR builds and sells homes and provides mortgage, title, and closing services. Unless stated otherwise, amounts below are in millions.
Financial performance
- Second-quarter revenue: $1,243.6, up 13% year over year; homebuilding revenue was $1,221.1.
- Second-quarter earnings: Net income was $93.4, up 37%; diluted EPS was $21.91, up 44%. Income before taxes was $148.7.
- First-half results: Revenue was $2,201.4 versus $1,913.4; net income was $132.5 versus $92.0; diluted EPS was $31.17 versus $20.19.
- Homebuilding margins: Q2 gross margin rose to 19.2% from 18.6%; first-half margin was 18.2% versus 18.3%. Q2 SG&A was 7.6% of homebuilding revenue, down from 8.6%.
- Mortgage banking: Q2 income was $11.4 versus $6.2. First-half income was $17.2 versus $7.2; first-half loan closing volume rose 30% to $1,498.0.
- Cash flow and liquidity: First-half operating cash flow was negative $40.4, compared with negative $17.1. Cash and cash equivalents totaled $497.6 at June 30, down from $545.4 at year-end 2014. Inventory increased $213.8, a major operating cash use.
- Debt and equity: Senior notes had $600.0 principal outstanding, carried at $599.2, with a 3.95% coupon and September 2022 maturity. No borrowings were outstanding under the mortgage subsidiary’s $25.0 repurchase facility. Shareholders’ equity was $1,274.9.
Operating trends and changes
- Q2 home settlements increased 8% to 3,175; average settlement price rose 4% to $384,400. New orders increased 11% to 3,796, with average order price up 3% to $378,300.
- At June 30, backlog was 7,488 homes, up 15%, valued at $2,854.6; average backlog price was $381,200. The first-half cancellation rate increased to 13.0% from 12.4%.
- First-half homebuilding revenue grew 15%, primarily from more settlements and higher average settlement prices. Margin was approximately flat as higher revenue was offset by higher lot and construction costs.
- Q2 results benefited from $5.8 of recoveries on contract land deposits previously considered uncollectible, compared with $1.7 in Q2 2014. The quarter also included a $1.3 reversal of estimated remediation costs for a water-infiltration issue.
- NVR repurchased 55,031 shares for $69.3 during the first half; it repurchased 4,705 shares in Q2. Stock-option exercises generated $51.3 of proceeds.
Outlook, risks, and contingencies
- Management reported improving new-home demand, but said home prices remained constrained by more competing communities and mortgage underwriting remained tight. It expects continued margin pressure from higher land and construction costs and competition. No numerical earnings or revenue guidance was provided.
- NVR controlled approximately 65,300 lots under fixed-price purchase agreements and reported total risk of loss on contract land deposits of $307.0, including reserves and contingent obligations. The company generally limits its loss on these agreements to deposits, subject to limited specific-performance obligations.
- The EPA/Department of Justice inquiry into storm-water practices in New York and New Jersey remained unresolved; NVR said it could not predict the outcome or reasonably estimate potential costs.
- Other wage-and-hour claims remained at various pre-trial stages. The lead plaintiff’s individual verdict for NVR was upheld on appeal, and the company had recorded no related liability.
- The warranty reserve was $85.9 at June 30, compared with $97.2 a year earlier. Estimates may be affected by repair costs, subcontractor participation, and litigation outcomes.
- Management cited economic conditions, interest rates, mortgage credit availability, land and labor costs, regulation, weather, and competition as risks. It reported no material changes in risk factors or market risk and stated that disclosure controls were effective.
Most important facts for investors to verify
- Whether orders and backlog convert to settlements as expected, particularly given the higher cancellation rate and potential mortgage-financing constraints.
- How durable margins are after the benefit of deposit recoveries and the warranty-reserve reversal, amid rising land and construction costs.
- Whether negative operating cash flow and inventory growth persist, and how NVR balances investment needs with share repurchases.
- The adequacy of contract-land-deposit and warranty reserves, and any changes in exposure to the EPA/DOJ inquiry or other litigation.
- The sustainability of mortgage-banking gains and capture rates, given the business’s dependence on homebuilding activity and secondary-market loan sales.