NVR, Inc. — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013; comparisons are with Q1 2012 unless noted. Amounts are in millions of dollars unless otherwise stated. NVR builds and sells homes and provides mortgage banking and title services.
Financial performance
- Revenue: $770.3 million, up 28%. Homebuilding revenue was $750.9 million; mortgage banking fees were $19.4 million.
- Profit: Net income was $35.0 million, up 74%; diluted EPS was $6.84, up 75%. Income before taxes was $55.1 million. Homebuilding income was $43.9 million and mortgage banking income was $11.2 million.
- Homebuilding: Gross margin increased to 16.9% from 16.1%. Settlements rose 18% to 2,272 units, and average settlement price increased 8% to $330,400. Net new orders rose 11% to 3,510 units; average new-order price rose 10% to $343,000.
- Backlog: 6,217 homes, up 27% in units; backlog value was $2.18 billion, up 39%. The cancellation rate increased to 13.2% from 10.3%.
- Cash flow and liquidity: Operating cash flow was negative $78.1 million, versus positive $90.8 million a year earlier, primarily reflecting a $159.9 million inventory increase. Cash and cash equivalents totaled $1.09 billion on the balance sheet at March 31. Investing cash use was $14.0 million; financing cash provided was $26.3 million.
- Debt: $600 million principal amount of 3.95% senior notes due 2022, carried at $599.0 million. The mortgage repurchase facility had no borrowings outstanding; its $25 million facility was scheduled to expire July 31, 2013. Consolidated VIE non-recourse debt was $2.5 million.
- Other: Total assets were $2.67 billion and shareholders’ equity was $1.55 billion. NVR repurchased no shares during the quarter and had $392.6 million remaining under its repurchase authorizations.
Changes and drivers
- Revenue and earnings benefited from higher settlements and selling prices, improved order activity, and the December 2012 Heartland Homes acquisition.
- Gross margin improved overall, but Mid East and South East segment margins declined amid higher construction and land costs; Heartland’s acquired backlog also weighed on Mid East margin.
- Mortgage banking income increased to $11.2 million from $8.0 million. Loan closing volume rose 13%, while the capture rate fell to 84% from 89%. Q1 2013 included a $3.1 million fair-value gain, compared with a $0.5 million fair-value expense in Q1 2012.
- Interest expense rose, primarily reflecting the 2022 notes issued in 2012. Equity-based compensation expense was lower year over year because certain 2010 restricted share units fully vested at year-end 2012.
Outlook, risks and contingencies
- Management described improving sales trends and pricing stabilization, supported by low mortgage rates and lower housing inventory, but emphasized continuing economic uncertainty, tight mortgage underwriting and consumer-confidence challenges. No quantified full-year guidance is provided.
- Management expects pressure on homebuilding margins over at least the next several quarters from higher material, labor and land costs.
- NVR controlled approximately 53,700 lots under purchase agreements, with $257.2 million in cash deposits and $2.9 million in letters of credit; about 9,600 lots were associated with an impairment reserve of approximately $64.0 million. Management’s strategy generally limits loss on unperformed lot contracts to deposits, subject to limited specific-performance obligations.
- The company invested an additional $11.0 million in a joint venture and acquired zoned land for approximately $28.5 million, intended to yield about 400 lots. Management said its land-development strategy remains limited and that it expects to obtain substantially all finished lots through purchase agreements.
- Overtime-classification lawsuits remain unresolved; NVR has recorded no liability because it cannot determine the likelihood or amount of an unfavorable outcome. A DOJ/EPA inquiry into storm-water practices also remains unresolved, and potential costs cannot be reasonably estimated.
- Other risks include mortgage regulation and secondary-market access, interest rates, land and labor availability, weather, and regional economic conditions. Management reported effective disclosure controls and no material change in risk factors from its 2012 Form 10-K.
Investor verification priorities
- Whether backlog converts to settlements and whether cancellation rates remain elevated.
- Whether rising construction, labor and land costs erode margins despite pricing gains.
- Cash use associated with inventory growth and whether operating cash flow improves.
- Exposure and recoverability of contract land deposits, direct land development and joint-venture investments.
- Mortgage capture rates, fair-value-sensitive mortgage income, loan-sale execution and the status of the facility expiring in July 2013.
- Developments in the overtime lawsuits and EPA/DOJ inquiry, including any effect on potential liabilities.