NVR, Inc. — Q2 2012 Form 10-Q
Reporting period: Three and six months ended June 30, 2012; comparisons are with the corresponding 2011 periods. NVR builds and sells homes, primarily on a pre-sold basis, and operates mortgage banking and title services businesses. Unless stated otherwise, financial amounts below are in millions of dollars.
Financial performance and position
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Consolidated revenue | $769.8 | $695.9 | $1,370.3 | $1,210.4 |
| Income before taxes | $64.0 | $63.4 | $94.9 | $88.2 |
| Net income | $46.8 | $38.4 | $67.0 | $53.6 |
| Diluted EPS | $8.97 | $6.48 | $12.90 | $8.98 |
| Homebuilding gross margin | 17.3% | 18.2% | 16.8% | 17.6% |
Q2 homebuilding revenue was $755.3 million; mortgage banking income was $7.0 million. Q2 homebuilding settlements increased 12% to 2,475 units, while average settlement price declined to $305,100 from $309,200. New orders rose 6% to 2,614 units, with average order price up 9% to $330,500. Backlog at quarter-end was 5,048 homes, valued at $1.673 billion, versus 3,946 homes and $1.233 billion a year earlier.
At June 30, total assets were $1.991 billion, liabilities $469.1 million, and shareholders’ equity $1.522 billion. Balance-sheet cash and equivalents totaled $592.7 million. Six-month operating cash flow was $72.4 million, versus cash used of $25.2 million in 2011; investing used $2.3 million and financing provided $42.4 million. Operating cash flow benefited from lower mortgage loans held for sale, while homebuilding inventory increased $164.3 million.
NVR reported no borrowings under its $25 million mortgage repurchase facility at quarter-end; the facility expires July 31, 2013. Non-recourse debt of a consolidated variable-interest entity was $1.05 million. The filing does not indicate material changes in market risk.
Material changes versus prior periods
- Q2 consolidated revenue increased about 11%, while net income rose about 22% and diluted EPS about 38%. Six-month revenue increased about 13% and net income about 25%.
- Net income benefited from a $6.989 million reduction in income tax expense following tax-authority settlements, an audit, and reassessment of certain state tax positions. This helped drive the larger earnings increase relative to pretax income.
- Homebuilding gross margin fell 0.9 percentage points in Q2 and 0.8 points for the six-month period, primarily from prior-period pricing pressure and higher construction costs. Management reported continued margin pressure was expected.
- Q2 order cancellation rate rose to 16.3% from 12.5% a year earlier (13.1% versus 12.4% for six months). Higher settlements were supported by larger beginning backlogs; backlog turnover was slower.
- Mortgage banking income increased to $7.0 million in Q2 from $6.3 million and to $14.9 million for six months from $12.2 million. Six-month loan closing volume rose 13% to $969.1 million.
Outlook, commentary, risks and contingencies
- Management described housing conditions as stabilizing, with improved sales in several markets, supported by low mortgage rates, housing affordability, rising rents, and lower inventory in some areas. It cautioned that tight mortgage lending, uncertain consumer confidence, and an uneven recovery remain challenges.
- Management expected homebuilding gross-margin pressure to continue for at least several quarters and said sales and pricing growth depended on a sustained recovery and improved consumer confidence. It expected the 2012 effective tax rate to be consistent with its recent historical range. No specific full-year earnings or revenue guidance was provided.
- NVR controlled approximately 50,300 lots under purchase agreements, with cash deposits of about $224.9 million and letters of credit of $3.7 million. Approximately 10,900 lots were covered by a $69.0 million impairment reserve. Management’s lot strategy generally limits loss on failed purchases to deposits, subject to limited specific-performance obligations.
- The company had $87.8 million invested in four land joint ventures and directly held four parcels intended to yield about 830 lots. Management reported no impairment indicators for the directly held land or JV land at June 30.
- Risks cited include economic and regional housing conditions, interest rates, mortgage financing availability, land and material costs, labor availability, weather, regulation, competition, and the ability to sell mortgage loans in the secondary market. Management also highlighted potential effects of future Dodd-Frank mortgage rules.
- Pending matters include employee overtime-classification lawsuits, an EPA/DOJ inquiry concerning storm-water practices, and a Department of Labor investigation of wage-and-hour compliance. Outcomes and potential costs could not be estimated; no liability was recorded for the overtime cases. Management said ordinary-course litigation was not expected to have a material adverse effect.
- No common shares were repurchased in Q2. At quarter-end, $319.9 million remained available under outstanding repurchase authorizations. Management stated repurchases may continue subject to market conditions and available excess liquidity.
Important facts for investors to verify
- Whether order growth and the larger backlog convert to settlements without a rise in cancellations; monitor cancellation rates and backlog turnover.
- Whether homebuilding margins stabilize, given management’s warning of continued pricing and construction-cost pressure.
- The recurrence and comparability of earnings: Q2 tax expense included a $6.989 million benefit from updated tax assessments.
- Changes in cash generation, inventory investment, lot deposits and impairment reserves, including the underlying risk in contracted lots.
- Developments in the overtime lawsuits, EPA/DOJ inquiry, and DOL investigation, for which potential financial exposure was not estimable.