NVR, Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; unaudited. NVR builds and sells homes and provides related mortgage banking and title services. Comparisons are with Q1 2018 unless stated otherwise. Dollar amounts below are in millions unless indicated.
Financial and operating results
| Metric | Q1 2019 | Prior period / change |
|---|---|---|
| Consolidated revenue | $1,687.0 | $1,529.4; up 10% |
| Net income | $188.4 | $166.0; up 13% |
| Diluted earnings per share | $47.64 | $39.34; up 21% |
| Homebuilding gross margin | 18.5% | 18.7% |
| Operating cash flow | $227.9 | $78.0 |
| Cash, cash equivalents and restricted cash | $840.4 on the balance sheet | $715.9 at December 31, 2018; cash-flow presentation is $840.7 including consolidated JV cash |
| Senior notes | $597.8 carrying value; $600.0 principal | 3.95% notes due September 2022 |
Homebuilding revenue was $1,643.2 million and homebuilding income before tax was $188.4 million. Mortgage banking income was $30.2 million, versus $22.4 million. The effective tax rate was 13.8%, compared with 13.1%.
Home settlements rose 15% to 4,493 units, while average settlement price fell 4% to $365,700. Net new orders declined 1% to 5,139; average new-order price declined 3% to $367,000. Backlog fell 8% to 9,011 homes, valued at $3,395.1 million, down 9%. The cancellation rate increased to 14.1% from 13.6%.
Operating cash flow included cash generated by earnings and net mortgage-loan activity. Investing activities used $1.9 million. Financing activities used $117.5 million, including $216.5 million of share repurchases, partly offset by $99.0 million in option-exercise proceeds. Inventory increased $28.1 million during the quarter.
Changes, outlook and risks
- Management attributed improved demand to lower interest rates during the quarter, low unemployment and strong consumer confidence. It cited affordability, home prices and interest rates as important demand factors.
- Management expects continued homebuilding gross-margin pressure from modest pricing power and land and construction costs, and mortgage banking profit pressure from competitive pricing. No specific numerical earnings or revenue guidance is provided.
- Higher settlements supported revenue growth, but lower average settlement prices and increased material costs contributed to the lower homebuilding gross margin. SG&A rose 10%, largely due to higher equity-based compensation.
- Results varied by region: North East segment profit declined 27%, with weaker margins, fewer orders and a contract-land-deposit charge; Mid Atlantic, Mid East and South East segment profits increased.
- Excess tax benefits from stock-option exercises reduced the tax rate and totaled $28.5 million, versus $19.6 million in Q1 2018. Management expects tax-rate variability as benefits depend on share price and exercise timing.
- NVR adopted the lease accounting standard on January 1, 2019, recognizing operating lease right-of-use assets and liabilities. Adoption did not affect lease expense; balance-sheet comparisons with December 2018 are therefore affected.
- At quarter-end, NVR had $600 million principal amount of senior notes, no borrowings under its $200 million revolving credit facility, and no borrowings under NVR Mortgage’s $150 million repurchase facility. The latter facility expires July 24, 2019.
- NVR controlled approximately 98,300 lots, primarily through finished-lot purchase agreements. Deposits may be forfeited if it does not complete purchases; net contract land deposits were $389.3 million. Management’s strategy is to limit direct land ownership and development.
- Management said ordinary-course litigation was not expected to materially affect financial position, results or cash flows. It reported no material changes to previously disclosed risk factors or market risks. Key risks include economic and regional housing conditions, interest rates, customer financing access, land and material costs, labor availability, regulation and mortgage-loan secondary-market access.
Important facts for investors to verify
- Whether new orders, cancellation rates and backlog stabilize or weaken further, and whether backlog converts to settlements as expected.
- Whether homebuilding margins recover or face further pressure from construction costs, land costs and pricing.
- How much reported earnings growth reflects operating performance versus the $28.5 million excess tax benefit and mortgage-banking fair-value effects.
- Cash generation and capital allocation, particularly continued repurchases, option exercises and inventory investment.
- Lot-purchase deposit exposure, including the impairment reserve, and the renewal or replacement of NVR Mortgage’s repurchase facility before its July 2019 expiry.