NVR, Inc. — Q1 2022 Form 10-Q
Business context and period: NVR builds and sells single-family homes, townhomes and condominiums, primarily on a pre-sold basis, and provides mortgage and title services to homebuilding customers. This summary covers the three months ended March 31, 2022, compared with the same period in 2021. Financial statement amounts are in U.S. dollars; amounts below are converted from thousands to millions unless otherwise noted.
Financial performance and position
| Metric | Q1 2022 | Q1 2021 / comparison |
|---|---|---|
| Consolidated revenue | $2,378.4 million | $2,041.4 million; up 17% |
| Net income | $426.1 million | $248.8 million; up 71% |
| Diluted EPS | $116.56 | $63.21; up 84% |
| Homebuilding revenue | $2,309.2 million | $1,963.7 million; up 18% |
| Homebuilding gross margin | 28.5% | 19.7% |
| Mortgage banking income | $49.1 million | $58.6 million |
| Operating cash flow | $309.3 million | $328.3 million |
- Homebuilding activity: Settlements rose 3% to 5,214 homes, and average settlement price increased 14% to $442,900. Net new orders fell 6% to 5,927; average new-order price rose 13% to $465,700. Backlog increased 5% to 13,443 homes, with an average price of $463,700. The cancellation rate was 10.3%, versus 9.6%.
- Profitability drivers: Management attributed the higher homebuilding margin to higher settlement prices, lower lumber costs in the quarter and improved operating-cost leverage. SG&A increased in dollars but declined to 5.6% of homebuilding revenue from 6.2%.
- Cash, liquidity and debt: At March 31, cash and cash equivalents totaled approximately $2.158 billion, with additional restricted cash. NVR reported approximately $285 million of unused capacity under its $300 million revolving credit facility and $150 million under its mortgage repurchase facility; neither facility had borrowings outstanding. Senior Notes had $1.5 billion aggregate principal outstanding: $600 million due September 2022 and $900 million due May 2030. The company expected to use cash to repay the 2022 notes.
- Cash flows and capital returns: Operating cash flow was $309.3 million. Inventory growth used $246.3 million; financing activities used $714.9 million, mainly reflecting $748.8 million of share repurchases. NVR repurchased 146,054 shares at an average $5,126.79 per share during the quarter.
- Balance sheet: Total assets were $5.726 billion and total shareholders’ equity was $2.726 billion at March 31, 2022. Cash and cash equivalents had declined from $2.573 billion at year-end 2021; total assets declined from $5.834 billion.
Material changes and management outlook
- Homebuilding results strengthened substantially year over year as home prices and settlements increased. All four homebuilding regions reported higher segment profit.
- Mortgage banking income declined 16% to $49.1 million, primarily due to lower secondary-market gains on loan sales. The mortgage capture rate decreased to 86% from 89%.
- Management said new-home demand remained strong despite rising mortgage rates, supported by limited housing supply. It also noted that orders were lower, partly because average active communities fell 9% year over year.
- Supply-chain disruption, longer construction cycles and subcontractor capacity constraints were limiting backlog turnover. Management expected disruptions to continue well into 2022 and said it expected to settle substantially all March 31 backlog within 12 months, subject to cancellations and construction delays. The filing provides no numerical earnings or revenue guidance.
- Management warned that inflation, rising mortgage rates and building-material, labor and land costs could pressure affordability, demand and margins. Higher lumber costs embedded in homes not yet settled were expected to reduce consolidated homebuilding margins as those homes settled in subsequent quarters.
- NVR controlled approximately 126,800 lots, primarily through finished-lot purchase agreements. It reported approximately $520.9 million of net contract land deposits and related contingent letter-of-credit exposure; recovery of deposits and the availability of future lots remain relevant execution considerations.
Risks, contingencies and notable items
- The $600 million Senior Notes due in September 2022 are a near-term cash requirement. Management believed cash, operating cash flow and available facilities would be sufficient for contractual and operating requirements.
- Ordinary-course litigation was not expected by management to have a material adverse effect. The filing reported no material changes to previously disclosed risk factors or market risks.
- Contract-land-deposit impairment reserves were $24.1 million at March 31, 2022. The quarter included a net reversal of approximately $5.9 million of prior deposit impairments as market conditions improved.
- The effective tax rate rose to 24.7% from 20.3%, primarily because of lower excess tax benefits from stock-option exercises. Management expects future quarterly tax rates to vary.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether NVR repaid or refinanced the $600 million notes due September 2022, and the resulting cash and debt levels.
- Whether higher mortgage rates and inflation reduced orders, increased cancellations or weakened home affordability after quarter-end.
- Whether supply-chain and labor constraints eased, and how lumber and other input costs affected margins as backlog homes settled.
- Whether backlog conversion, homebuilding margins and mortgage banking gains sustained or reversed their Q1 trends.
- How cash deployment and remaining share-repurchase authorization affected liquidity, share count and per-share results.