NVR, Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2017. Financial statements are unaudited; dollar amounts below are in millions unless stated otherwise. NVR builds and sells homes, primarily on a pre-sold basis, and operates a mortgage banking and title services business.
Financial performance
- Second-quarter revenue: $1,544.5, up 11% year over year. Homebuilding revenue was $1,512.7; mortgage banking fees were $31.8.
- Second-quarter earnings: Net income was $147.9, up 61%; diluted EPS was $35.19, up 60%. Income before taxes was $209.0.
- First-half results: Revenue was $2,821.6, up 11%; net income was $250.8, up 60%; diluted EPS was $60.36, up 60%.
- Homebuilding margins: Gross margin was 19.5% in Q2 versus 17.3% a year earlier, and 18.7% for the first half versus 17.4%. Q2 SG&A was 6.6% of homebuilding revenue versus 7.3%.
- Cash flow: First-half operating cash flow was $179.7, compared with $12.6 in 2016. Investing cash outflow was $5.5 and financing cash outflow was $41.5. Cash and cash equivalents on the cash flow statement ended at $529.3, up $132.7 from the start of the period. Inventory growth used $272.9 of cash, largely reflecting more homes under construction.
- Liquidity and debt: June 30 cash and cash equivalents on the balance sheet totaled $528.1 across the homebuilding and mortgage banking businesses. Senior Notes had $600.0 principal outstanding ($596.8 carrying value), bear 3.95% interest and mature in 2022. No borrowings were outstanding under the $200.0 revolving credit facility or the mortgage repurchase agreement; the credit facility expires in 2021. The mortgage repurchase agreement was renewed in July 2017 and expires in July 2018.
- Balance sheet: Total assets were $2,918.1 and shareholders’ equity was $1,535.8 at June 30, 2017, compared with $2,643.9 and $1,304.4, respectively, at December 31, 2016.
Changes and operating trends
- Q2 home settlements increased 9% to 3,917; average settlement price rose 2% to $386,100. Net new orders increased 8% to 4,678, while their average price declined 2% to $377,000, primarily due to a shift toward lower-priced markets.
- Backlog at June 30 increased 9% to 8,813 homes, with an average price of $390,900. The Q2 cancellation rate was 12.9%, versus 12.7%; the first-half rate was 14.2%, versus 14.0%.
- Management attributed improved margins mainly to modest pricing gains, moderating construction costs and better absorption of operating costs. It also noted some higher construction and lot costs in certain regions.
- Mortgage banking pretax income rose to $17.6 in Q2 from $13.2, and to $32.6 for the first half from $22.9. First-half loan closing volume increased 11% to $1,885.0.
- First-half treasury stock purchases totaled $159.5; the company reported repurchasing 83,762 shares during the period. Stock-option exercises generated $118.0 of proceeds.
Outlook, risks and unusual items
- Outlook: The filing gives no specific numerical earnings or revenue guidance. Management described demand as steady, but said new-home pricing remained constrained by competition. It expected continued gross-margin pressure from modest pricing power and higher land and construction costs, and pressure on mortgage banking profit from competitive pricing.
- Tax item: Adoption of ASU 2016-09 led excess tax benefits from stock-option exercises to reduce income tax expense. These benefits were $16.5 in Q2 and $36.4 for the first half, contributing $3.92 and $8.75 per diluted share, respectively. Effective tax rates were 29.2% and 26.5%, versus 36.7% in the comparable 2016 periods. Management warned the tax rate may vary with share price and exercise timing.
- Land exposure: NVR controlled approximately 79,100 lots under third-party purchase agreements, supported by about $380.9 in cash deposits and $2.4 in letters of credit. A $34.1 reserve covered approximately 3,900 lots. The company stated its loss under most such agreements is generally limited to deposits, subject to specified exceptions and commitments.
- Legal matter: NVR entered an EPA/DOJ consent decree concerning storm-water practices in New York and New Jersey. It includes injunctive relief and a civil penalty accrued at June 30, pending court approval. Management did not expect a material adverse financial effect. Other ordinary-course litigation was also reported as not expected to have a material adverse effect.
- Key risks: Economic and regional housing conditions, interest rates and mortgage availability, competition, land and material costs, labor availability, weather, regulation, and the ability to sell mortgage loans in the secondary market. Management said the balance sheet positions the company to respond to market volatility.
- The company adopted the new inventory measurement standard prospectively with no material effect. It expects the new lease standard, effective in 2019, to materially affect balance-sheet assets and liabilities; other listed accounting standards were still being evaluated or were not expected to have a material effect.
Important facts for investors to verify
- How much reported earnings growth persists excluding the unusually large stock-option tax benefits.
- Whether order and backlog growth converts into settlements without increased cancellations or weaker pricing.
- Whether homebuilding margins hold as land, construction and labor costs evolve.
- The adequacy of contract-land deposit reserves and exposure to projects requiring approvals or restructuring.
- Mortgage banking profitability and loan-sale capacity as interest rates and competitive conditions change.
- The final terms and approval of the EPA/DOJ consent decree, and any material developments in other litigation.