NVR, Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2011. Unless otherwise noted, financial amounts are in millions of dollars. NVR builds and sells homes and provides mortgage banking and title services, primarily to its homebuilding customers.
Financial results and liquidity
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Consolidated revenue | $695.9 | $964.5 | $1,210.4 | $1,554.7 |
| Income before taxes | $63.4 | $118.3 | $88.2 | $171.0 |
| Net income | $38.4 | $71.3 | $53.6 | $103.4 |
| Diluted EPS | $6.48 | $11.13 | $8.98 | $16.15 |
| Homebuilding gross margin | 18.2% | 18.5% | 17.6% | 18.5% |
- Q2 revenue fell 28%; net income declined about 46% and diluted EPS about 42%. For the first half, revenue fell 22% and net income about 48%.
- Homebuilding revenue was $682.7 million in Q2 and $1,185.4 million for the first half. Mortgage banking income was $6.3 million and $12.2 million, respectively.
- Cash and cash equivalents were $930.4 million at June 30, 2011, down from $1,193.8 million at the start of the year. Total liabilities were $524.9 million and shareholders’ equity was $1,650.8 million.
- Operating cash flow was negative $25.2 million for the first half, versus negative $66.3 million a year earlier. Investing cash flow was negative $61.4 million; financing cash flow was negative $176.7 million.
- Cash use included a $103.6 million increase in inventory, a $32.5 million increase in contract land deposits, a $61.3 million investment in a joint venture, and $300.9 million of treasury-share purchases. Stock-option exercises provided $104.6 million.
- Mortgage banking had $89.6 million outstanding under its repurchase facility at quarter-end, secured by loans held for sale. That facility expired August 2, 2011 and was replaced by a facility with a reduced $25 million limit. NVR said mortgage operations would rely primarily on internal cash and borrowings from NVR.
Operating changes and business trends
- Homebuilding settlements declined 34% in Q2 and 27% for the first half, partly reflecting unusually high prior-year settlements ahead of the June 2010 federal homebuyer tax-credit deadline. Average settlement prices rose 9% in Q2 and 7% for the first half.
- Net new orders fell 4% in Q2 and 11% for the first half. The first-half cancellation rate increased to 12.4% from 10.5%. New-order average price was down 2% in Q2 but approximately flat year over year for the first half.
- Backlog at June 30 was 3,946 homes, valued at $1,233.3 million, versus 3,766 homes and $1,187.6 million a year earlier. Backlog average price was $312,500.
- Q2 SG&A was $68.0 million, down about 2% in dollars but up to 10.0% of revenue from 7.3%. First-half SG&A rose to $135.2 million from $129.9 million and to 11.4% of revenue from 8.5%, reflecting lower revenue and higher stock-based compensation, partly offset by lower incentive costs.
- Mortgage loan closing volume fell 29% in Q2 and 24% for the first half. Mortgage banking income before tax was $6.3 million in Q2 and $12.2 million for the first half, both below prior-year levels.
- NVR controlled approximately 49,100 lots under purchase agreements and had approximately 6,600 additional lots through joint ventures. It also reported approximately $78.5 million of directly owned land under development, expected to yield about 850 lots.
Outlook, risks and notable items
- Management expected sales and selling-price pressure to continue for at least the next several quarters, citing economic uncertainty, high unemployment, weak buyer confidence, tight mortgage lending, and competition from existing homes. No quantitative earnings or revenue guidance was provided.
- Management said its balance sheet and liquidity positioned NVR to pursue opportunities, while noting potential future inventory, land-development, and contract-deposit impairments if market conditions worsen. It considered the June 30 land-deposit reserve adequate and reported no current impairment indicators for land under development.
- Contract land deposits, net of a $68.1 million loss reserve, were $129.2 million. NVR recorded $4.1 million of net pretax contract-deposit impairment charges in the first half, compared with a $0.9 million recovery in the prior-year period.
- NVR invested $61.25 million for a 50% interest in a joint venture with Morgan Stanley Real Estate Investing. The venture controls approximately 5,600 lots; NVR stated it was not obligated to make additional investments and was not responsible for venture debt.
- Unresolved matters include purported employee class actions alleging improper overtime classification, an EPA inquiry into storm-water practices, and North Carolina lending-regulator findings concerning certain mortgage files. The company had not recorded a liability for the overtime litigation because outcome and damages could not be estimated; it said the North Carolina matter was not expected to materially affect its financial position, results, or liquidity.
- Other stated risks include mortgage-credit availability and regulation, interest rates, land and material availability and cost, labor shortages, weather, and regional economic conditions. Management reported effective disclosure controls and no material change in risk factors from the 2010 Form 10-K.
Important facts for investors to verify
- Whether new orders, cancellation rates, backlog conversion, and selling prices stabilize after the tax-credit comparison effect.
- Whether homebuilding margins and land-deposit reserves remain adequate as market prices and community absorption change.
- The capacity and terms of the replacement $25 million mortgage repurchase facility, and NVR’s ongoing support for mortgage origination.
- Cash deployment, including share repurchases, joint-venture commitments, and the effect on liquidity.
- Developments and potential exposure from the overtime lawsuits, EPA inquiry, and North Carolina mortgage-regulatory matter.