NVR, Inc. — Q1 2015 Form 10-Q
Business context and reporting period. This unaudited quarterly filing covers the three months ended March 31, 2015, compared with Q1 2014. NVR builds and sells homes across four U.S. regions and also provides mortgage banking and title services. It typically obtains finished lots through fixed-price purchase agreements rather than developing land directly.
Financial and operating performance
| Metric | Q1 2015 | Q1 2014 | Change / context |
|---|---|---|---|
| Consolidated revenues | $957.7 million | $811.3 million | Up 18% |
| Income before taxes | $62.4 million | $49.7 million | Up 25% |
| Net income | $39.1 million | $23.8 million | Up 64% |
| Diluted EPS | $9.22 | $5.16 | Up 79% |
| Homebuilding gross margin | 17.0% | 18.0% | Down about 1 percentage point |
| Cash used in operating activities | $1.6 million | $15.8 million | Lower cash use year over year |
Homebuilding revenue was $941.5 million, up 18%, with settlements up 15% to 2,534 homes and average settlement price up 3% to $371,000. Net orders rose 18% to 3,926; average order price increased 2% to $375,400. Backlog grew 13% to 6,867 homes, with a reported value of $2.64 billion. The cancellation rate was 12.0%, versus 11.5% in Q1 2014.
Homebuilding gross margin declined mainly because of higher lot and construction costs. Selling, general and administrative expense rose 8% to $98.2 million, but declined as a share of homebuilding revenue to 10.4% from 11.3%. Mortgage banking income increased to $5.8 million from $1.0 million; loan closing volume rose 35% to $638.6 million and the capture rate increased to 87% from 78%.
Balance sheet, liquidity and capital
- Cash and cash equivalents on the balance sheet totaled approximately $531.0 million at March 31, 2015, including cash held by mortgage banking; the cash flow statement reports period-end cash of $532.5 million, including consolidated variable-interest-entity cash.
- Total assets were $2.38 billion and shareholders’ equity was $1.17 billion. Inventory was $954.6 million, including $797.7 million of lots and homes under customer sales agreements.
- Senior notes had $600 million principal outstanding, carried at $599.2 million, bearing 3.95% interest and maturing in 2022. No borrowings were outstanding under the mortgage subsidiary’s $25 million repurchase facility, which expires July 29, 2015.
- Operating cash use was primarily associated with an $84.2 million inventory increase; customer deposits increased $19.2 million. NVR repurchased 50,326 shares for $63.1 million and received $43.6 million from stock option exercises.
Changes, outlook and risks
Net income benefited from higher homebuilding activity and improved mortgage banking results. The prior-year quarter included an approximately $6.9 million tax charge from reversal of previously recognized tax deductions, contributing to the year-over-year increase in earnings and EPS.
Management said housing-market recovery depends on sustained economic improvement, including job and wage growth and household formation. It expected continued gross-margin pressure from higher land and construction costs and increased competition as new communities enter its markets. The filing provides no formal numerical earnings or revenue guidance. Management cited the balance sheet’s strength as positioning NVR to pursue opportunities amid market volatility.
NVR controlled approximately 63,900 lots under purchase agreements, with cash deposits of about $347 million and letters of credit of $2.4 million. Net contract land deposits were $295.1 million, after a $55.1 million loss reserve; management’s maximum disclosed total risk of loss, including deposits, letters of credit and specific-performance obligations, was $301.6 million. The warranty reserve was $89.7 million. The company cautioned that estimates and reserves may prove insufficient.
Contingencies include wage-and-hour classification litigation, with an individual plaintiff’s appeal scheduled for May 15, 2015; NVR had recorded no liability for these claims. A Department of Justice/EPA inquiry into storm-water practices remained unresolved, and the company said it could not predict the outcome or reasonably estimate potential costs. Other cited business risks include economic and regional conditions, interest rates, mortgage-credit availability and regulation, land and material costs, labor availability, weather, and competition.
Important facts for investors to verify
- Whether order, backlog and settlement growth continues, and whether cancellations or production constraints affect conversion of backlog to revenue.
- Whether rising lot and construction costs continue to pressure homebuilding gross margins.
- The sustainability of mortgage banking’s improved income and capture rate, and the adequacy of its loan-loss allowance, reported at approximately $10.5 million.
- Cash generation after inventory investment and share repurchases, and the remaining authorization under the company’s repurchase programs.
- Developments in the wage-and-hour appeal and EPA/DOJ inquiry, including any potential financial exposure.