NVR, Inc. — Q1 2012 Form 10-Q
Business context and reporting period
Quarter ended March 31, 2012; comparisons are with Q1 2011 unless otherwise noted. NVR builds and sells primarily pre-sold single-family homes and operates mortgage banking and title services businesses. It reported four homebuilding regions and one mortgage banking segment. Dollar amounts below are in millions unless stated otherwise.
Financial and operating highlights
| Metric | Q1 2012 | Q1 2011 / comparison |
|---|---|---|
| Consolidated revenue | $600.5 | $514.5; up 17% |
| Net income | $20.1 | $15.2; up 33% |
| Diluted EPS | $3.90 | $2.52; up 55% |
| Income before taxes | $31.0 | $24.8 |
| Homebuilding gross margin | 16.1% | 16.9%; down 0.8 percentage points |
| Operating cash flow | $90.8 | $(9.0) |
| Cash and cash equivalents | $575.2 at quarter-end | $480.8 at year-end 2011 |
| Total liabilities / shareholders’ equity | $432.7 / $1,418.2 at quarter-end | $404.7 / $1,374.8 at year-end 2011 |
Homebuilding revenue was $586.2 million, up 17%; settlements rose 18% to 1,924 homes. Net new orders increased 31% to 3,157, with average order price up 6% to $313,200. Quarter-end backlog rose 33% to 4,909 homes, valued at $1.564 billion. The cancellation rate declined to 10.3% from 12.3%. Mortgage banking income before tax increased to $8.0 million from $6.0 million; loan closing volume rose 19% to $420.2 million and capture rate increased to 89% from 87%.
Operating cash flow benefited primarily from homebuilding activity and a roughly $138.6 million reduction in mortgage loans held for sale; inventory increased $99.6 million. Investing activities used $0.3 million and financing activities provided $3.8 million. Quarter-end mortgage loans held for sale were $113.7 million. The mortgage subsidiary’s $25 million non-recourse repurchase facility had no borrowings outstanding; the filing reports no other material corporate debt. The $2.3 million of non-recourse debt related to a consolidated variable interest entity is included in liabilities.
Material changes and management commentary
Management cited improving sales activity in several markets, supported by improved consumer confidence, historically low mortgage rates, housing affordability, and lower inventory in some markets. All four homebuilding regions recorded higher new orders. Higher settlements and orders supported revenue and earnings, while lower weighted-average shares also contributed to the larger EPS increase.
Homebuilding gross margin declined primarily because of prior-quarter pricing pressure and higher construction costs. Management expects gross margin pressure to continue for at least the next several quarters. It said continued sales and price growth depends on a sustained economic recovery and stronger consumer confidence, and expressed confidence in NVR’s ability to withstand uncertainty given its balance sheet and liquidity. No specific earnings or revenue guidance was provided.
NVR generally obtains finished lots through fixed-price purchase agreements, limiting land ownership and development exposure but making supply dependent on developers’ ability to finance and deliver lots. At March 31, it controlled about 48,400 lots under such agreements, with approximately $209.4 million in cash deposits and $3.4 million in letters of credit; net contract land deposits were $140.3 million after a $69.1 million reserve. Its disclosed total risk of loss on contract land deposits was $152.6 million. It also had $87.7 million invested in four joint ventures and $70.2 million in four directly owned land parcels intended to produce about 850 lots.
Risks, contingencies, and unusual items
Risks include an uneven economic recovery, mortgage availability and interest rates, construction costs, land and labor availability, weather, regulation, and the ability of mortgage operations to sell loans into the secondary market. NVR noted that tighter investor reviews had lengthened mortgage loan holding periods, though funding times improved in March; management gave no assurance this would continue. The mortgage loan loss allowance was approximately $13.6 million.
Pending matters include purported employee overtime-classification lawsuits, an EPA/DOJ inquiry concerning storm-water practices in New York and New Jersey, and a Department of Labor investigation of wage-and-hour compliance. NVR said it could not predict the outcomes or reasonably estimate potential costs for the inquiry and investigation; it recorded no liability for the overtime lawsuits because outcome and damages could not be determined. The warranty reserve was $60.3 million at quarter-end. Management reported no material change in risk factors or market risks and said disclosure controls were effective.
NVR made no share repurchases in Q1 2012; $319.9 million remained available under repurchase authorizations. It completed its annual impairment assessment of excess reorganization value and found no impairment. Adoption of two accounting updates had no financial statement impact.
Important facts for investors to verify
- Whether improving orders and backlog convert into settlements without higher cancellations or slower turnover.
- Whether pricing and construction-cost trends continue to reduce homebuilding margins, particularly given management’s stated expectation of further pressure.
- The adequacy of the $69.1 million contract-land deposit reserve and $13.6 million mortgage loan loss allowance, and any exposure arising from lot delivery or developer financing problems.
- Developments and potential financial effects of the overtime lawsuits, EPA/DOJ inquiry, and DOL investigation.
- Mortgage loan sale timing, access to investors and funding, and renewal or replacement of the repurchase facility, which expires August 1, 2012.
- Capital allocation and share repurchases: no shares were repurchased during the quarter despite $319.9 million remaining under authorizations.