NVR, Inc. — Q1 2011 Form 10-Q
Reporting period: Three months ended March 31, 2011; balance-sheet comparisons are with December 31, 2010. Dollar amounts below are in millions unless otherwise indicated.
Business context
NVR builds and sells single-family homes, townhomes and condominiums, primarily in four U.S. regions, and operates a mortgage banking and title-services business. It generally buys finished lots under fixed-price contracts with forfeitable deposits, limiting direct land-development exposure. Management says constrained developer financing has prompted limited joint ventures and direct land development.
Key financial results
| Metric | Q1 2011 | Q1 2010 | Change |
|---|---|---|---|
| Consolidated revenue | $514.5 | $590.2 | Down 13% |
| Homebuilding revenue | $502.7 | $577.4 | Down 13% |
| Homebuilding gross margin | 16.9% | 18.4% | Down 1.5 percentage points |
| Income before taxes | $24.8 | $52.7 | Down 53% |
| Net income | $15.2 | $32.1 | Down 53% |
| Diluted EPS | $2.52 | $5.01 | Down 50% |
| Operating cash flow | $(9.0) | $(118.2) | Lower cash use |
Mortgage banking income before tax was $6.0 million, down from $7.0 million. Homebuilding operating income was $19.1 million, compared with $47.9 million. The filing does not provide a single consolidated EBITDA figure.
Orders, backlog and segments
- Home settlements fell 15% to 1,634; average settlement price rose 2% to $307,600.
- Net new orders declined 18% to 2,403; average new-order price increased 3% to $295,800. The cancellation rate rose to 12% from 9%.
- Quarter-end backlog fell to 3,685 homes, valued at $1.167 billion, from 4,552 homes and $1.342 billion a year earlier.
- Revenue and segment profit weakened in Mid Atlantic, North East and Mid East. South East segment profit improved modestly despite lower average settlement prices.
Cash, liquidity and debt
- Cash and cash equivalents were approximately $1.220 billion at March 31, 2011, versus approximately $1.193 billion at year-end 2010. Total assets were $2.276 billion and shareholders’ equity was $1.818 billion.
- Total liabilities were $457.5 million. Reported borrowings included $75.3 million under the mortgage repurchase facility, $7.6 million of non-recourse debt at a consolidated variable-interest entity, and $1.7 million of other term debt. The filing says senior notes matured in 2010 and the working-capital credit facility was terminated in Q4 2010.
- The mortgage repurchase facility had a $100 million commitment, with borrowing-base limits leaving approximately $99 million available at quarter-end; it expired August 2, 2011. Management expected it could be renewed on then-current market terms. NVRM was compliant with its facility covenants.
- Operating cash use reflected a $61.4 million inventory increase and a $17.3 million increase in contract land deposits. Financing cash flow included $92.7 million from option exercises and a $63.4 million share repurchase; mortgage-facility borrowings declined by about $15.0 million.
Outlook, risks and unusual items
- Management expected sales and selling-price pressure in all markets for at least several more quarters, with gross-margin pressure and weak new orders likely to persist until economic conditions and job growth stabilize. No numerical earnings or revenue guidance was provided.
- Management attributed housing weakness to a sluggish economy, high unemployment, tight mortgage lending, subdued buyer confidence and competition from lower-priced existing homes. It also cited the expiration of the federal homebuyer tax credit as a factor in the year-over-year order decline.
- Equity-based compensation expense rose substantially, primarily following awards under the 2010 Equity Incentive Plan; this contributed to higher SG&A. Contract-land-deposit impairments were $1.3 million in Q1 2011, compared with a $1.9 million recovery in Q1 2010. Annual impairment testing found no impairment of excess reorganization value.
- Contract land deposits totaled $191.4 million gross, with a $74.6 million reserve; net deposits were $116.8 million. NVR controlled approximately 51,000 lots under contracts, with additional lots through joint ventures and land under development. Management noted potential developer-financing constraints and future impairment risk.
- Contingencies include employee overtime-classification lawsuits, an EPA storm-water information request, and North Carolina mortgage-lending examination findings. Outcomes of the lawsuits and EPA inquiry could not be determined or estimated; the company had recorded no liability for the lawsuits. Management did not expect the North Carolina matter to have a material adverse effect.
- Other stated risks include interest rates, mortgage-credit availability and regulation, land and material costs, labor availability, weather, and regional economic conditions. Management said the strong balance sheet and liquidity positioned NVR to pursue opportunities.
Important facts for investors to verify
- Whether order trends, cancellations and backlog stabilize, and whether lower settlement volume continues to pressure margins.
- Whether the expected mortgage repurchase-facility renewal is completed before its August 2011 expiry and on what terms.
- How the contract-land deposit reserve, developer financing conditions and any land or inventory impairments evolve.
- Whether equity-compensation costs, legal matters, EPA inquiry or mortgage-regulatory findings produce material future expense or cash outflows.
- Cash-flow and cash-balance reconciliation: the filing reports slightly different cash totals across statements, and investors should consult the filed statements and notes for the precise presentation.