NVR, Inc. — First-Quarter 2017 Form 10-Q
Business context and reporting period. This unaudited report covers the three months ended March 31, 2017, compared with the same period in 2016. NVR builds and sells homes, primarily on a pre-sold basis, and provides mortgage and title services through its mortgage banking business. Its homebuilding operations span Mid Atlantic, North East, Mid East and South East regions.
Financial and operating results
| Metric | Q1 2017 | Q1 2016 / comparison |
|---|---|---|
| Consolidated revenue | $1,277.1 million | $1,144.0 million; up 12% |
| Income before taxes | $132.2 million | $103.3 million |
| Net income | $102.9 million | $65.3 million; up 58% |
| Diluted EPS | $25.12 | $15.79; up 59% |
| Homebuilding gross margin | 17.8% | 17.5% |
| Operating cash flow | $110.4 million | $(40.0) million |
| Cash and cash equivalents | $493.8 million at quarter-end, including consolidated VIE cash | $396.6 million at year-end 2016 |
| Senior notes | $600 million principal; $596.6 million carrying value | 3.95% notes due September 2022 |
- Homebuilding revenue was $1,247.6 million, up 11%. Settlements rose 8% to 3,256 homes; average settlement price rose 4% to $383,100.
- Net new orders increased 7% to 4,424 homes, with average order price of $392,600. Quarter-end backlog was 8,052 homes, up 9%, valued at $3,193.8 million, up 13%. Cancellation rate increased to 15.6% from 15.3%.
- Mortgage banking income was $15.0 million, compared with $9.7 million. Loan closing volume increased 12% to $843.3 million; capture rate was 86%, versus 88%.
- Cash generation reflected earnings and $170.7 million of net mortgage-loan activity proceeds, partly offset by a $140.3 million increase in homebuilding inventory. Investing activities used $3.0 million; financing activities used $10.3 million.
- The company had no borrowings on its $200 million revolving credit facility or mortgage repurchase agreement at March 31. The credit facility matures in July 2021; the $150 million mortgage repurchase agreement expires July 26, 2017.
Material changes versus the prior comparable period
- Profitability improved alongside higher home settlements, prices and orders, and a 31-basis-point increase in homebuilding gross margin. SG&A rose 2% in dollars but declined to 8.0% of homebuilding revenue from 8.7%.
- The effective tax rate fell to 22.1% from 36.8%, mainly because a new stock-compensation accounting rule caused $19.9 million of excess tax benefits to reduce tax expense. Excluding this benefit, management said the 2017 rate would have been 37.2%; the benefit added $4.86 to diluted EPS.
- Operating cash flow improved from an outflow to an inflow. Cash used for inventory growth was lower than in Q1 2016.
- Segment performance varied: Mid Atlantic and North East profit increased substantially; South East profit rose; Mid East profit declined slightly. South East margin fell to 18.2% from 18.9%, with higher construction costs cited.
Outlook, risks and unusual items
- Management reported steady home demand, while noting that competitive conditions constrained new-home prices. It expects continued gross-margin pressure from higher land and construction costs, including lumber, and increased competition. Mortgage banking profit may also face competitive pricing pressure.
- Management said a sustained housing recovery depends on economic improvement, including job and wage growth and household formation. It considers the balance sheet strong, but provided no numerical earnings or revenue guidance.
- Key risks identified include economic and regional conditions, interest rates, financing availability for customers and the company, mortgage loan sale capacity, land and material costs, labor availability, weather, regulation and competition. Management reported no material changes to previously disclosed risk factors or market risks.
- NVR controls approximately 74,300 lots under third-party lot purchase agreements, supported by cash deposits of about $389.9 million and letters of credit of about $2.5 million. The company’s stated loss exposure under these agreements is generally limited to deposits. It also had approximately 8,700 lots under raw-land contracts, some subject to rezoning or other approvals.
- The company remains in settlement discussions with the EPA and DOJ over storm-water practices in New York and New Jersey. A settlement is expected to include injunctive relief and a civil penalty; a liability was recorded in 2015, but its amount is not clear in this filing text. Management said other ordinary-course litigation is not expected to have a material adverse effect.
- NVR repurchased 50,922 shares for $85.5 million during the quarter. The tax benefit from stock-option exercises is likely to make effective tax rates variable in future quarters. Annual impairment testing found no impairment of excess reorganization value or goodwill.
Important facts for investors to verify
- How much of reported earnings and EPS growth reflects the $19.9 million stock-option tax benefit, and how results trend at a more normalized tax rate.
- Whether order growth converts into settlements, and how backlog cancellations, community count and pricing develop.
- Whether rising land, construction and lumber costs or competition erode margins, particularly in weaker-performing regions.
- The outcome and financial terms of the EPA/DOJ matter, including the previously recorded penalty liability.
- Renewal terms for the mortgage repurchase agreement before its July 2017 expiration and the company’s ongoing lot-deposit and land commitments.