NVR, Inc. — Q2 2019 Form 10-Q
Business context and period: NVR builds and sells homes, primarily on a pre-sold basis, and provides mortgage banking and title services to its homebuyers. This unaudited report covers the quarter and six months ended June 30, 2019; comparisons are with the corresponding 2018 periods. Dollar amounts below are in millions unless stated otherwise.
Financial results and key metrics
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Consolidated revenue | $1,800.2 | $1,787.3 | $3,487.2 | $3,316.7 |
| Income before taxes | $244.7 | $241.6 | $463.3 | $432.6 |
| Net income | $210.2 | $203.2 | $398.6 | $369.2 |
| Diluted EPS | $53.09 | $49.05 | $100.61 | $88.31 |
| Homebuilding gross margin | 18.9% | 19.1% | 18.7% | 18.9% |
| Operating cash flow | Not presented quarterly | $302.6 | $169.5 |
Q2 consolidated revenue rose about 1%, net income 3%, and diluted EPS 8% year over year. For the first half, revenue grew about 5%, net income 8%, and diluted EPS 14%. Homebuilding revenue was $1,757.4 million in Q2, essentially flat year over year; first-half homebuilding revenue increased 5% to $3,400.7 million.
Q2 homebuilding settlements rose 2% to 4,720 units, while average settlement price fell 2% to $372,300. Net new orders increased 6% to 5,239, but average new-order price declined 5% to $358,600. At June 30, backlog was 9,530 homes, down 6% year over year, with value down 9% to $3,516.5 million. First-half settlements increased 8% to 9,213 units, while average settlement price decreased 3% to $369,100.
Mortgage banking income before tax was $25.1 million in Q2 versus $18.3 million; first-half income was $55.3 million versus $40.7 million. Management attributed the improvement mainly to higher mortgage fees, increased loan volume and lower administrative costs. Q2 mortgage capture rate was 89%, versus 87% a year earlier.
Liquidity, debt and capital
- Cash, restricted cash and cash equivalents totaled $906.4 million at June 30, 2019, up $174.2 million from year-end. Operating cash flow for the first half was $302.6 million.
- Cash used in investing activities was $2.8 million; cash used in financing activities was $125.7 million. The company repurchased $304.5 million of stock and received $178.8 million from option exercises.
- Senior Notes had $600 million principal outstanding, carried at $598.0 million, bear 3.95% interest and mature in September 2022. No borrowings were outstanding under the $200 million revolving credit facility or the mortgage subsidiary’s $150 million repurchase facility at quarter-end. The revolving facility matures July 2021.
- Total assets were $3,603.2 million and shareholders’ equity $2,119.4 million at June 30, 2019. Operating lease assets and liabilities were recognized following adoption of the new lease standard in January 2019.
Material changes, outlook and risks
- Homebuilding gross margin declined year over year in both the quarter and first half. Management cited higher construction costs, partly offset by lower lumber costs; Q2 SG&A as a share of homebuilding revenue increased to 6.4% from 6.1%.
- Regional performance was mixed. First-half North East segment profit fell 29%, with lower revenue and margin; South East segment profit rose 26%, supported by higher settlements and revenue. Mid Atlantic and Mid East first-half segment profit rose 10% and 9%, respectively.
- Management said low unemployment, consumer confidence and lower interest rates supported improved demand. It expects continued gross-margin pressure from modest pricing power and land and construction costs, and mortgage banking profit pressure from competitive pricing.
- No quantified earnings or revenue guidance is provided. Management expects to settle substantially all June 30 backlog within the next 12 months, excluding cancellations. First-half cancellation rate was 13.6%, compared with 13.3% in 2018; the company cautioned historical rates may not predict future cancellations.
- Demand remains exposed to economic and regional conditions, interest rates, buyer affordability and mortgage availability. Other cited risks include land, materials and labor availability and cost, weather, regulation, competition, and the ability to sell mortgage loans in the secondary market.
- Excess tax benefits from stock-option exercises reduced the effective tax rate to 14.1% in Q2 and 14.0% for the first half, versus 15.9% and 14.6%, respectively, in 2018. Management expects tax-rate volatility as benefits vary with share price and exercise timing.
- The company controls about 101,400 lots, primarily through purchase agreements with forfeitable deposits. Net contract land deposits were $409.8 million, with a $27.9 million loss reserve. Management said ordinary-course litigation is not expected to have a material adverse effect; no material risk-factor changes were reported.
Important facts for investors to verify
- Whether new orders and absorption remain strong enough to offset lower average selling prices and a smaller backlog.
- Whether construction and land costs continue to pressure homebuilding margins, particularly in weaker regions.
- How cancellations, backlog turnover and mortgage capture rates develop, and whether mortgage banking gains are sustainable amid competitive pricing.
- The cash, deposit and potential impairment exposure associated with lot purchase agreements, joint ventures and land development commitments.
- The effects of stock repurchases, option exercises and related tax benefits on per-share results and the effective tax rate.