NVR, Inc. — Q2 2020 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2020. Amounts are in U.S. dollars; financial statement amounts are generally in thousands unless noted. NVR builds and sells homes and operates a mortgage banking and title services business.
Financial performance and liquidity
- Q2 revenue: Consolidated revenue was $1.620 billion, down 10% year over year. Homebuilding revenue was $1.589 billion; mortgage banking fees were $31.6 million.
- Q2 earnings: Net income was $164.1 million, down 22%; diluted EPS was $42.50, down 20%. Income before taxes was $209.8 million.
- Margins: Homebuilding gross margin was 19.2%, up from 18.9% in Q2 2019. For the first six months, it was 18.0%, down from 18.7%, partly reflecting land-deposit impairment charges.
- Six-month results: Consolidated revenue was $3.203 billion, down 8%; net income was $339.8 million, down 15%; diluted EPS was $87.56, down 13%.
- Orders and backlog: Q2 net new orders rose 13% to 5,901 homes, with average order price up 2% to $365,400. Backlog increased 11% year over year to 10,623 homes valued at $4.010 billion. The Q2 cancellation rate increased to 15.7% from 13.1%.
- Cash flow: Operating cash flow for the six months was $370.7 million, versus $302.6 million in 2019. Cash, restricted cash and equivalents increased $867.2 million to $2.028 billion; inventory growth used $255.9 million of cash.
- Debt and liquidity: Senior notes had a carrying value of $1.194 billion at June 30, versus $598.3 million at year-end 2019. NVR issued $600 million of 3.00% senior notes due 2030 in May. No borrowings were outstanding under the $200 million revolving credit facility or $150 million mortgage repurchase facility. Management reported approximately $2.0 billion of cash, $188.8 million of unused revolving credit capacity and $150 million of unused mortgage repurchase capacity.
- Balance sheet: Total assets were $4.730 billion and shareholders’ equity was $2.612 billion at June 30, 2020.
Changes versus the prior comparable period
- COVID-19-related construction restrictions and business disruption reduced Q2 settlements 9% and six-month settlements 7% year over year, weighing on homebuilding revenue. Pennsylvania and New York construction restrictions continued into April.
- Demand improved during May and June as mortgage rates declined, pent-up demand returned and new-home and resale inventory remained low. New orders rose in all four homebuilding regions in Q2, although cancellation rates were higher.
- Mortgage banking income fell to $15.0 million in Q2 from $25.1 million, and to $26.5 million for six months from $55.3 million. The company attributed the declines primarily to lower secondary-market gains on loan sales amid mortgage-market disruption.
- Six-month contract land deposit impairment charges were approximately $37.3 million, primarily related to deteriorating conditions in certain markets associated with the pandemic. The reserve was $63.6 million at June 30, compared with $27.6 million at December 31, 2019.
- Cash and debt rose following the May debt issuance; the company also repurchased $216.6 million of shares during the first quarter and made no repurchases in Q2. Approximately $400.6 million remained available under share repurchase authorizations.
Outlook, risks and notable items
- The filing provides no quantified full-year earnings or revenue guidance. Management said substantially all June 30 backlog was expected to settle within 12 months, subject to cancellations and potential COVID-related construction delays.
- Management described the duration and business impact of COVID-19 as uncertain, including effects on demand, employees and trade partners, construction, customer financing, mortgage-market access and land-deposit recoveries.
- The six-month effective tax rate was 8.5%, compared with 14.0% in 2019, favorably affected by $62.5 million of tax benefits from stock option exercises. Management expects effective tax-rate volatility as the benefits depend on stock prices and exercise timing.
- Mortgage operations use rate-lock commitments and forward sale contracts to manage interest-rate exposure and do not engage in speculative derivative trading. Q2 mortgage results included fair-value gains; those measurements may change with rates, security prices, servicing values and loan volume.
- Management said ordinary-course litigation was not expected to materially affect financial position, results or cash flows. Disclosure controls were assessed as effective; no material change in internal control over financial reporting was reported.
Important facts for investors to verify
- Whether stronger May–June orders and backlog convert into settlements, given elevated cancellations and pandemic-related execution risks.
- The scale and timing of any further land-deposit impairments; review the $63.6 million reserve and the lots associated with it.
- Whether mortgage banking profitability recovers as secondary-market conditions and loan-sale gains change.
- Debt-service implications of the 2030 notes and how management deploys substantial cash, including future share repurchases.
- The sustainability of reported earnings after considering stock-option tax benefits and mortgage fair-value adjustments.