NVR, Inc. — Q2 2014 Form 10-Q
Business context and reporting period
For the quarter and six months ended June 30, 2014. NVR builds and sells single-family homes, townhomes and condominiums, primarily on a pre-sold basis, and operates a mortgage banking and title-services business. Its four homebuilding regions are Mid Atlantic, North East, Mid East and South East.
Management reported a flattening in home sales and prices, lower traffic per community and lower sales absorption, amid reduced affordability, tight mortgage underwriting and increased competition. NVR generally buys finished lots under fixed-price agreements with forfeitable deposits rather than developing land itself.
Financial performance and key metrics
- Q2 revenue: Consolidated revenue was $1.102 billion, up 9% year over year. Homebuilding revenue was $1.084 billion; mortgage banking fees were $18.0 million.
- Q2 earnings: Net income was $68.2 million, up 34%; diluted EPS was $15.17, up 50%. Income before taxes was $108.8 million. Share repurchases contributed to the EPS increase by reducing weighted-average shares.
- Q2 homebuilding: Settlements increased 2% to 2,943 homes and average settlement price rose 7% to $368,200. Gross margin improved to 18.6% from 15.9%; SG&A rose to 8.6% of revenue from 8.3%.
- Orders and backlog: Q2 net new orders rose 4% to 3,415, with average order price up 2% to $368,000. June 30 backlog was 6,531 homes, down from 6,617 a year earlier, while average backlog price rose to $374,100 from $358,600. Q2 cancellation rate was 13.2%, versus 13.8%.
- Six-month results: Consolidated revenue was $1.913 billion, up 7%; net income was $92.0 million, up 7%; diluted EPS was $20.19, up 19%. Homebuilding gross margin increased to 18.3% from 16.3%. Net new orders declined 1% to 6,740, despite a 5% increase in average order price.
- Mortgage banking: Q2 pretax income fell to $6.2 million from $8.5 million; six-month pretax income fell to $7.2 million from $19.7 million. Management cited higher administrative costs and weaker loan profitability amid competition. Capture rate declined to 82% for Q2 and 80% for the first half.
- Cash flow and liquidity: Cash and cash equivalents ended June at $553.7 million, down $312.5 million from the start of the year. Six-month operating cash flow was negative $17.1 million, investing cash flow negative $12.2 million and financing cash flow negative $283.3 million. Inventory growth used $212.5 million of cash.
- Debt: NVR had $600 million principal amount of 3.95% senior notes due September 2022, carried at $599.1 million. Consolidated-VIE non-recourse debt was $1.3 million. The $25 million mortgage repurchase facility had no borrowings outstanding; the company reported compliance with its covenants.
Changes, outlook, risks and unusual items
- Homebuilding revenue growth reflected higher average settlement prices and, in Q2, modestly higher settlement volume. Improved margins also reflected prices rising faster than material and lot costs. Management nevertheless noted ongoing pressure from rising land and construction costs.
- Q2 2013 gross margin was reduced by a $15.6 million accrual for water-infiltration remediation at one community. NVR recorded further charges for that issue of $3.0 million in Q2 2014 and $4.0 million in the first half of 2014.
- Management attributed the slower housing recovery to slow economic growth and reduced affordability, and said continued improvement depended on job and wage growth, consumer confidence and household formation. The filing provides no numerical earnings or sales guidance.
- NVR repurchased 317,739 shares for $347.4 million in the first half. It approved a further $300 million repurchase authorization on July 31, 2014.
- Warranty reserves were $97.2 million at June 30, versus $77.3 million a year earlier. Management considers the reserve adequate but cautions that actual costs may differ.
- Contract land deposits, net of reserves, were $253.8 million; total stated risk of loss related to deposits, letters of credit and specific-performance obligations was $261.7 million. NVR controlled approximately 60,900 lots under purchase agreements and had an impairment reserve covering approximately 8,000 lots.
- Contingencies include wage-classification lawsuits, with a jury verdict in NVR’s favor in the lead individual case and an appeal pending, and an unresolved EPA/DOJ inquiry concerning storm-water practices. The company recorded no liability for the wage claims and could not estimate the inquiry’s potential cost.
- Additional risks include mortgage financing availability and regulation, the ability to sell originated loans, competition, land and labor costs, weather and other economic or market conditions. NVR said there were no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Whether new orders, traffic and sales absorption stabilize, and whether backlog converts to settlements without higher cancellations.
- Whether homebuilding margins can withstand higher land and construction costs, and how warranty remediation affects future reserves and cash costs.
- Whether mortgage banking profitability and capture rates recover amid competition, regulation and credit-market conditions.
- How cash balances, inventory investment and substantial share repurchases affect liquidity and the company’s capacity to fund operations.
- Developments in the EPA/DOJ inquiry, wage litigation and the adequacy of contract-land and mortgage-loan loss reserves.