NVR, Inc. — Q1 2016 Form 10-Q
Business and period. NVR builds and sells single-family homes, townhomes and condominiums, primarily on a pre-sold basis, and provides mortgage banking and title services. This unaudited report covers the three months ended March 31, 2016; comparisons are with Q1 2015 unless otherwise noted. Dollar figures below are in millions unless stated otherwise.
Financial results and liquidity
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Consolidated revenue | $1,144.0 | $957.7 | +19% |
| Homebuilding revenue | $1,121.5 | $941.5 | +19% |
| Mortgage banking fees | $22.5 | $16.2 | +39% |
| Income before taxes | $103.3 | $62.4 | +66% |
| Net income | $65.3 | $39.1 | +67% |
| Diluted EPS | $15.79 | $9.22 | +71% |
| Homebuilding gross margin | 17.5% | 17.0% | +0.5 percentage points |
| SG&A as a share of homebuilding revenue | 8.7% | 10.4% | Improved |
| Cash used in operating activities | $46.3 | $1.6 | Greater cash use |
Homebuilding operating income was $98.5 million, versus $62.4 million; mortgage banking income was $9.7 million, versus $5.8 million. Homebuilding settlements rose 19% to 3,006 units, while average settlement price declined to $369,500 from $371,000. Net new orders increased 5% to 4,137; average new-order price was essentially flat at $375,700. Ending backlog increased 7% to 7,360 units, with a reported value of $2,818.4 million. The cancellation rate rose to 15.3% from 12.0%.
Cash and cash equivalents on the March 31 balance sheet totaled approximately $318.0 million across the homebuilding and mortgage banking businesses, compared with $424.3 million at December 31, 2015. Cash flow reporting shows $319.0 million at quarter-end; the filing text does not clearly reconcile this difference to the balance-sheet components. Operating cash use chiefly reflected a $254.6 million increase in inventory, including a February land purchase of approximately $150 million and more units under construction. Mortgage loan activity provided net cash of approximately $150.9 million.
Investing activities used $1.4 million. Financing activities used $58.7 million, including $87.1 million to repurchase 56,388 shares, partly offset by $22.3 million of stock-option exercise proceeds. The company reported $596.0 million of senior notes on the balance sheet ($600 million principal), bearing 3.95% interest and due in 2022. NVR Mortgage had no borrowings under its repurchase facility; availability was approximately $145 million at quarter-end, and the facility expires July 27, 2016. Total assets were $2,541.7 million and shareholders’ equity was $1,256.5 million at March 31.
Material changes and operating drivers
- Homebuilding revenue growth was driven by higher settlements, supported by a larger opening backlog and faster backlog turnover. Gross margin increased as settlement volume improved cost leverage.
- Results differed by region: Mid East profit increased substantially, aided by higher settlements and margin expansion; South East profit also rose. North East profit declined despite revenue growth, as construction costs pressured margins. Mid Atlantic profit rose modestly, while its margin fell from 17.9% to 16.9%.
- Mortgage banking segment profit before tax increased to $10.4 million from $6.6 million, with higher loan volumes and secondary-market gains partly offset by increased personnel costs. Loan closing volume rose 18% to $753.8 million; the mortgage capture rate was 88%, versus 87%.
- Inventory increased to $1,261.1 million from $1,006.5 million at year-end, primarily reflecting the land acquisition and construction activity. Contract land deposits, net, were $347.0 million, with a $40.9 million reserve; approximately 6,000 controlled lots were associated with the reserve.
- NVR repurchased shares at an average $1,544.68 per share during January. The company reported two outstanding board authorizations, each originally up to $300 million; approximately $252.1 million remained available under the applicable program at quarter-end.
Outlook, risks and unusual items
Management described new-home demand as steady, but said pricing remained constrained by increased community supply and tight mortgage underwriting. It expects continued gross-margin pressure from higher land and construction costs and competition. Management believes a sustained housing recovery depends on economic improvement, including job and wage growth and household formation, and cited the balance sheet as positioning the company to respond to market volatility. No quantified earnings or revenue guidance is provided.
Key risks identified include economic and regional market conditions, interest rates, customer and company financing access, mortgage regulation and secondary-market loan sales, competition, land and materials availability and cost, labor shortages, weather, building moratoriums, and government regulation. The company relies mainly on finished-lot purchase agreements with forfeitable deposits to limit land-development exposure, but its lot supply and deposits remain subject to execution and market risks.
NVR remained in settlement discussions with the EPA and DOJ regarding storm-water discharge practices at New York and New Jersey projects. Any settlement is expected to include injunctive relief and a civil penalty; a liability for an estimated penalty was recorded, but its amount is not stated in the provided text. Other ordinary-course litigation was not expected by management to have a material adverse effect. The annual impairment assessment found no impairment of excess reorganization value or goodwill. Adoption of the debt issuance cost presentation standard reclassified costs as a deduction from senior notes. Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting.
Investor verification priorities
- Verify the cash-flow and balance-sheet cash presentation and the drivers of the quarter’s cash decline.
- Track backlog conversion, cancellation rates, order trends and regional margin changes, particularly the higher cancellation rate and construction-cost pressure.
- Assess land commitments and exposure: the approximately 69,100 lots under third-party lot agreements, $380.5 million of cash deposits, impairment reserve, and direct land-development investment.
- Confirm renewal terms for the mortgage repurchase facility before its July 2016 expiration and monitor mortgage loan sale and interest-rate exposure.
- Monitor the EPA/DOJ settlement and any resulting civil penalty or injunctive obligations; the recorded liability amount is not specified in the provided filing text.
- Review the effects of repurchases, dilution and the future adoption of accounting standards; management anticipated a potentially material effect from the new stock-compensation standard and a balance-sheet effect from the lease standard.