NVR, Inc. — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014. Financial statement amounts are in thousands of dollars unless otherwise stated. NVR builds and sells homes and operates mortgage banking and title services businesses.
Financial results and liquidity
- Revenue: Consolidated revenue was $811.3 million, up 5% from $770.3 million. Homebuilding revenue rose 6% to $799.2 million; mortgage banking fees declined to $12.1 million from $19.4 million.
- Profit: Net income was $23.8 million, down 32%; diluted EPS was $5.16 versus $6.84. Income before tax was $49.7 million versus $55.1 million. Homebuilding income increased to $48.7 million from $43.9 million, while mortgage banking income fell to $1.0 million from $11.2 million.
- Margins and costs: Homebuilding gross margin improved to 18.0% from 16.9%. Homebuilding SG&A increased 16% to $90.6 million and rose to 11.3% of revenue from 10.4%.
- Cash flow: Operating activities used $15.8 million, compared with $78.1 million used in Q1 2013. Investing activities provided $0.005 million, versus $14.0 million used. Financing activities provided $28.9 million. Cash and cash equivalents at period-end were $879.3 million in the cash flow statement; the balance sheet reports $874.1 million in homebuilding cash and $4.5 million in mortgage banking cash.
- Debt and liquidity: Senior notes had $600 million principal outstanding, bear 3.95% interest, and mature in 2022. No borrowings were outstanding under the mortgage repurchase facility, which provides capacity up to $25 million and expires July 30, 2014. Total liabilities were $1.20 billion and shareholders’ equity was $1.33 billion at March 31.
- Capital returns: NVR repurchased 32,377 shares for $32.6 million during the quarter. Stock-option exercises generated $57.1 million in proceeds.
Material changes versus Q1 2013
- Homebuilding settlements declined 3% to 2,211 units, while average settlement price increased 9% to $361,400. New orders fell 5% to 3,325 units, with average order price up 7% to $368,100.
- Backlog declined to 6,059 units from 6,217; backlog value increased to $2.27 billion from $2.18 billion. The cancellation rate improved to 11.5% from 13.2%.
- Mortgage loan closing volume was approximately flat at $472.9 million, but capture rate fell to 78% from 84%. Mortgage banking segment profit declined to $1.8 million from $11.8 million, reflecting lower fees and higher general and administrative costs.
- Homebuilding segment results varied: Mid Atlantic, North East, and South East profit increased; Mid East reported a $0.2 million loss versus $1.8 million profit.
- Inventory increased during the quarter, with $102.7 million of cash used for the increase, primarily as more units were under construction.
Outlook, commentary, and risks
- Management said housing demand remained affected by higher mortgage rates, reduced affordability, buyer uncertainty, and tight mortgage underwriting. Lower traffic and absorption contributed to fewer new orders despite a 10% increase in average active communities.
- Management expects the 2014 full-year effective tax rate to be consistent with its recent historical range, but provided no specific earnings or operating guidance. It said a sustained housing recovery depends on continued economic improvement, including better employment and consumer confidence.
- Homebuilding margins improved year over year, but management cited continuing pressure from rising land and construction costs. Mortgage lending competition and increased regulation also weighed on mortgage banking results.
- A $6.9 million income tax expense resulted from reversing previously recognized tax deductions. This was a material unusual item affecting the quarter.
- Land strategy primarily relies on fixed-price lot purchase agreements with forfeitable deposits. At quarter-end, NVR controlled approximately 59,400 lots under such agreements; net contract land deposits were $246.2 million, with a $57.7 million loss reserve. NVR also had investments of approximately $86.3 million in four joint ventures and $46.1 million of directly owned land under development.
- Warranty reserve was $98.8 million at quarter-end, compared with $63.1 million a year earlier. Management considers the reserve adequate but notes actual costs may differ from estimates.
- Contingencies include an appeal in a sales-representative classification case (a jury found for NVR on the individual claim) and an unresolved EPA/DOJ inquiry concerning storm-water practices. The company cannot predict the inquiry’s outcome or estimate potential costs. No liability was recorded for the wage claims.
- Other disclosed risks include economic and regional housing conditions, interest rates, financing availability, land and labor costs, weather, regulation, competition, and the ability to sell mortgage loans in the secondary market. Management reported no material change in market risk and said disclosure controls were effective.
Important facts for investors to verify
- Whether the decline in new orders, backlog units, and mortgage capture rate persisted after Q1, and how demand and affordability evolved.
- Whether homebuilding margin gains can continue amid rising land, construction, and SG&A costs.
- The sustainability of mortgage banking profitability, including fee trends, competitive conditions, loan-sale execution, and the $8.5 million loan-loss allowance.
- The adequacy of contract land deposit and warranty reserves, and any changes in related impairments or claims.
- Developments in the wage-classification appeal and EPA/DOJ inquiry, including any eventual financial exposure.
- Cash-flow and capital-allocation trends, including inventory investment, share repurchases, and the July 2014 expiration of the mortgage repurchase facility.