NVR, Inc. — Q1 2018 Form 10-Q
Business context and reporting period. The unaudited quarter ended March 31, 2018. NVR builds and sells homes, primarily on a pre-sold basis, and provides mortgage banking, title and closing services. Results are compared with the three months ended March 31, 2017. Dollar amounts below are in millions unless otherwise noted.
Financial performance and position
| Metric | Q1 2018 | Q1 2017 / comparison |
|---|---|---|
| Consolidated revenue | $1,529.4 | $1,277.1; up 20% |
| Net income | $166.0 | $102.9; up 61% |
| Diluted EPS | $39.34 | $25.12; up 57% |
| Homebuilding revenue | $1,490.1 | $1,247.6; up 19% |
| Homebuilding gross margin | 18.7% | 17.8% |
| Mortgage banking income | $22.4 | $15.0 |
| Cash provided by operating activities | $78.0 | $108.3 |
Homebuilding settlements rose 20% to 3,896 units; net new orders increased 17% to 5,174. Average new-order price fell 4% to $378,200, while the cancellation rate improved to 13.6% from 15.6%. Backlog increased 22% to 9,809 units, with an average price of $381,700.
At March 31, cash and cash equivalents totaled $425.6 million and restricted cash was $24.0 million. Total assets were $2.846 billion and shareholders’ equity was $1.467 billion. Senior notes had a $597.2 million carrying value ($600 million principal), bear interest at 3.95% and mature in 2022. No borrowings were outstanding under the $200 million revolving credit facility or the mortgage repurchase agreement; approximately $8.5 million of letters of credit was outstanding under the credit facility.
Cash, restricted cash and cash equivalents decreased $238.8 million during the quarter. Operating cash flow was partly offset by a $98.2 million increase in inventory. Financing cash outflow included $357.2 million used to repurchase 116,268 shares, partly offset by $40.8 million of stock-option exercise proceeds.
Material changes and management commentary
- Management described housing demand as improving, citing low unemployment and stronger consumer confidence. New orders rose across all homebuilding regions, while a shift toward lower-priced markets and products reduced average new-order prices.
- Management expects continued pressure on homebuilding gross margins, reflecting modest pricing power and the need to manage land and construction costs. It also expects competitive mortgage pricing to pressure mortgage banking profit. No specific earnings or revenue guidance was provided.
- The effective tax rate declined to 13.1% from 22.1%. The decrease reflected federal tax reform (the statutory rate fell from 35% to 21%), approximately $6.2 million of retroactively reinstated energy tax credits, and excess tax benefits from stock-option exercises. Management cautioned that the rate may fluctuate with stock prices and award exercise timing.
- NVR adopted the new revenue standard using the modified retrospective method and recorded a $2.2 million after-tax cumulative adjustment to retained earnings. It also adopted cash-flow guidance requiring restricted cash to be included in cash-flow totals; this did not materially affect the statements.
- NVR controlled approximately 87,050 lots under third-party lot purchase agreements, with cash deposits of approximately $380.9 million and letters of credit of approximately $2.6 million. The company generally limits its loss for failing to perform to the applicable deposit, but deposits may be forfeited. It also had six joint-venture investments expected to produce approximately 7,200 lots and raw-land contracts expected to yield approximately 9,800 lots, subject to approvals and feasibility.
Risks, contingencies and other items
Key disclosed risks include economic and regional housing conditions, interest rates and mortgage availability, competition, land and material costs, labor shortages, weather, regulation, and the ability to sell mortgage loans in the secondary market. Backlog is subject to cancellations, including when buyers cannot obtain financing or sell an existing home; NVR expects to settle substantially all March 31 backlog within 12 months, excluding cancellations, but gives no assurance that historical cancellation rates will continue. Management said ordinary-course litigation is not expected to materially affect financial position, results or cash flows, and reported no material changes to previously disclosed risk factors or market risks.
The company reported that adoption of the lease standard effective in 2019 is expected to materially affect balance-sheet assets and liabilities; its impact was still under evaluation. Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether order growth and the larger backlog translate into settlements while average selling prices and margins remain under pressure.
- Whether inventory, lot deposits and controlled-lot commitments remain aligned with demand, and whether any deposit impairments or forfeitures increase.
- How much of earnings growth reflects operating performance versus the lower tax rate and tax benefits, including variable stock-option tax benefits.
- Whether mortgage banking profitability holds up amid competitive pricing, interest-rate movements and loan-sale market conditions.
- The effect of substantial share repurchases on liquidity and per-share results, and the eventual balance-sheet impact of the new lease standard.