NVR, Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; comparisons are to Q1 2022 unless otherwise noted. NVR builds and sells homes, primarily on a pre-sold basis, and provides mortgage banking and title services. Financial amounts below are in U.S. dollars.
Financial and operating results
| Metric | Q1 2023 | Comparison / context |
|---|---|---|
| Consolidated revenue | $2.178 billion | Down 8% |
| Income before taxes | $433.8 million | Down from $565.9 million |
| Net income | $344.4 million | Down 19% from $426.1 million |
| Diluted EPS | $99.89 | Down 14% from $116.56 |
| Homebuilding gross margin | 24.6% | Down from 28.5% |
| Operating cash flow | $315.5 million | Compared with $309.3 million |
| Cash, cash equivalents and restricted cash | $2.859 billion | Up from $2.575 billion at year-end 2022 |
| Senior notes | $900 million principal | 3.00% coupon; due May 2030 |
Homebuilding revenue was $2.131 billion, down 8%, as settlements fell 11%, partly offset by a 4% increase in average settlement price to $459,400. Homebuilding gross margin contracted mainly due to higher labor and material costs. SG&A rose to $143.6 million, or 6.7% of homebuilding revenue, from $129.5 million, or 5.6%.
Net new orders were 5,888, down 1%, while average new-order price fell 5% to $441,200. The cancellation rate increased to 13.9% from 10.3%. Backlog at quarter-end was 10,411 homes, down 23% year over year, with a value of $4.792 billion. Average backlog price was $460,300.
Mortgage banking income was $28.1 million, down from $49.1 million; loan closing volume declined 17% to $1.237 billion, and the capture rate fell to 83% from 86%. Mortgage banking fees decreased 32%, primarily reflecting lower secondary-market gains on loan sales.
Operating cash flow benefited from earnings and increases in payables/accruals and customer deposits; inventory growth used $77.3 million. Investing activities used $2.9 million. Financing activities used $28.5 million, including $110.0 million of share repurchases, partly offset by $81.9 million in option-exercise proceeds.
At March 31, NVR had no borrowings under its $300 million revolving credit facility or $150 million mortgage repurchase facility. Approximately $287 million of committed credit capacity and $150 million of mortgage-facility capacity were available. Total liabilities were $2.231 billion and shareholders’ equity was $3.845 billion. The filing reports no material changes in market risk.
Material changes and notable items
- Income before taxes and earnings declined amid lower settlements, margin compression, increased SG&A and weaker mortgage banking results. Results varied by region: North East and South East segment profit increased, while Mid Atlantic and Mid East profit declined.
- Q1 homebuilding “other income” was $32.9 million versus $1.3 million a year earlier. The segment reconciliation reports corporate interest income of $29.9 million versus $0.7 million; investors should consider this difference when assessing recurring operating performance.
- The effective tax rate decreased to 20.6% from 24.7%, primarily due to $23.2 million of tax benefits from stock-option exercises, versus $8.4 million in Q1 2022. Management expects tax-rate volatility as exercise timing and stock prices vary.
- NVR repurchased 21,174 shares for $110.0 million during the quarter; approximately $397.6 million remained under Board repurchase authorizations at quarter-end.
- Lot deposits were subject to a $53.5 million impairment reserve. NVR controlled approximately 129,900 lots, primarily through finished-lot purchase agreements, with cash deposits and letters of credit exposed to forfeiture if it fails to perform.
Outlook, risks and contingencies
Management said new-home demand improved in Q1, supported by limited resale supply, but affordability challenges, elevated mortgage rates, inflation, interest-rate volatility and possible economic slowdown continue to weigh on consumer confidence. The company expects ongoing pressure from labor, materials and land costs, alongside pricing pressure and declining home prices. Supply-chain conditions had improved, and management expects that trend to help construction cycle times. NVR provided no quantified earnings or revenue guidance.
Management expects to settle substantially all of the March 31 backlog within the next 12 months, subject to cancellations and potential construction delays; it cautioned that historical cancellation rates may not predict future results. It said current cash, operating cash flow and available facilities should be sufficient for its cash requirements. Material commitments include approximately $327 million of potential LPA deposit payments, mostly expected within three years if milestones are met and lots are acquired, and approximately $199.1 million of future senior-note interest.
Risks cited include economic and regional market conditions, interest rates and mortgage availability, land and material availability and costs, labor shortages, competition, regulation, weather, and the mortgage subsidiary’s ability to sell loans in the secondary market. Ordinary-course litigation was not expected by management to have a material adverse effect. The company reported no material changes to its previously disclosed risk factors; the filing states disclosure controls were effective.
Important facts for investors to verify
- Whether order trends, cancellations and backlog convert to settlements as expected, especially given affordability and mortgage-rate conditions.
- Whether homebuilding margins stabilize as labor, material and land costs and home pricing evolve.
- How much reported income reflects recurring homebuilding and mortgage operations versus interest income, tax benefits and other items.
- Whether mortgage banking volumes, capture rate and loan-sale gains recover, and whether NVRM continues to sell originated loans in the secondary market.
- Potential exposure from lot deposits, LPA commitments, land approvals and the mortgage repurchase facility’s July 2023 expiration.