NVR, Inc. — Q2 2016 Form 10-Q
Reporting period: Three and six months ended June 30, 2016; comparisons are to the same 2015 periods unless noted. NVR builds and sells homes and provides mortgage, title and closing services. Financial amounts below are rounded to millions unless stated otherwise.
Financial performance
| Metric | Q2 2016 | Q2 2015 | First half 2016 | First half 2015 |
|---|---|---|---|---|
| Consolidated revenue | $1,388.2 | $1,243.6 | $2,532.2 | $2,201.4 |
| Income before taxes | $144.7 | $148.7 | $248.0 | $211.0 |
| Net income | $91.7 | $93.4 | $157.0 | $132.5 |
| Diluted EPS | $22.01 | $21.91 | $37.82 | $31.17 |
| Homebuilding gross margin | 17.3% | 19.2% | 17.4% | 18.2% |
- Q2 consolidated revenue rose 12%, while net income fell 2%; diluted EPS was nearly flat. First-half revenue increased 15%, net income 19%, and diluted EPS 21%.
- Homebuilding revenue increased 12% in Q2 and 15% in the first half, driven mainly by more settlements. Settlements rose 13% and 15%, respectively; average settlement prices declined 2% in Q2 and 1% in the first half.
- Net orders rose 14% in Q2 and 10% in the first half. At June 30, backlog was 8,103 homes, up 8%, with a stated average price of $385,400. Cancellation rates were 12.7% for Q2 and 14.0% for the first half, versus 14.0% and 13.0% a year earlier.
- Q2 mortgage banking income before tax was $13.2 million, up from $11.4 million; first-half income was $22.9 million, up from $17.2 million. First-half loan closing volume increased 13% to $1.696 billion, and capture rate was 88%.
Cash, debt and liquidity
- Cash and cash equivalents totaled $364.5 million at June 30, 2016, compared with $424.3 million at December 31, 2015. Total assets were $2.698 billion and shareholders’ equity was $1.358 billion.
- First-half operating cash flow was $3.9 million, versus cash used of $40.4 million in 2015. Inventory growth used $240.7 million, principally reflecting more homes under construction. Cash declined $60.8 million over the half-year.
- Investing activities used $4.6 million and financing activities used $60.1 million. NVR spent $96.5 million on treasury-stock purchases; option exercises provided $27.9 million.
- Senior notes had $600 million principal, a 3.95% coupon and a September 2022 maturity; carrying value was $596.2 million. No borrowings were outstanding under the mortgage repurchase facility at quarter-end.
- After quarter-end, NVR entered into a $200 million unsecured revolving credit facility, expiring July 2021, and renewed its $150 million mortgage repurchase facility through July 2017. The new credit agreement includes financial covenants and a potential increase of up to $300 million, subject to lender commitments.
Changes, outlook and risks
- Margin pressure was the key operating headwind: management cited higher construction, land and selling costs, lower settlement prices, and more competition from new-home communities. Q2 homebuilding margin also benefited less from land-deposit recoveries than in 2015; the prior-year quarter included a $5.8 million recovery.
- Management described demand as steady and said new orders improved across all four homebuilding regions. It expects continued gross-margin pressure and views sustained housing recovery as dependent on employment and wage growth and household formation. The filing provides no numerical earnings or revenue guidance.
- Management says its lot strategy generally limits exposure to land development: NVR controlled approximately 71,100 lots under third-party lot-purchase agreements, with deposits and letters of credit, and reported approximately 76,300 total lots controlled across its arrangements. Deposits may be forfeited if NVR does not perform; approximately 6,000 lots were covered by a $39.6 million impairment reserve.
- NVR reported an EPA/DOJ matter concerning storm-water practices in New York and New Jersey and was in settlement discussions. Any settlement was expected to include injunctive relief and a civil penalty; a liability for an estimated penalty had been recorded, but the amount is not stated here. Management said other ordinary-course litigation was not expected to have a material adverse effect.
- Management identified risks including economic and regional housing conditions, interest rates and mortgage availability, land and construction costs, labor availability, weather, regulation, competition, and the ability to sell mortgage loans into the secondary market. Disclosure controls were assessed as effective; management reported no material change in risk factors from the 2015 10-K.
- Among future accounting changes, NVR said the lease standard effective in 2019 is expected to materially affect balance-sheet assets and liabilities, and the 2017 stock-compensation standard is likely to materially affect net income and EPS; impacts were still under evaluation.
Investor verification points
- Track whether order and backlog growth converts into settlements, and whether cancellations remain manageable.
- Assess whether homebuilding margins stabilize amid higher construction and land costs, competitive pricing, and reduced land-deposit recoveries.
- Monitor inventory and contract-land-deposit growth, the related impairment reserve, and the cash required to support construction.
- Review the EPA/DOJ settlement outcome and any resulting penalty or injunctive obligations.
- Check the new revolving facility’s covenant headroom and the effect of future accounting-standard adoption.