NVR, Inc. — Q2 2013 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2013. NVR builds and sells homes and provides mortgage and title services. Financial amounts below are in millions unless noted.
Financial performance
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Consolidated revenue | $1,009.9 | $769.8 | $1,780.1 | $1,370.3 |
| Net income | $50.7 | $46.8 | $85.7 | $67.0 |
| Diluted EPS | $10.11 | $8.97 | $16.92 | $12.90 |
| Homebuilding gross margin | 15.9% | 17.3% | 16.3% | 16.8% |
| Operating cash flow | Not provided quarterly | Not provided quarterly | $(90.5) | $72.4 |
- Q2 revenue rose 31%; homebuilding settlements increased 16% to 2,878 units and average settlement price increased 13% to $344,700. New orders rose 25% to 3,278 units; backlog increased 31% by units to 6,617 and 42% by value to $2,372.8.
- Q2 homebuilding operating income was $76.9; mortgage banking income was $8.5. Six-month income before taxes was $135.3.
- At June 30, cash and cash equivalents totaled $777.3 in homebuilding and $4.0 in mortgage banking. Senior notes had a $600.0 principal balance and $599.0 carrying value, bearing 3.95% and due 2022. No borrowings were outstanding under the mortgage repurchase facility, which had a $25.0 limit.
- Total assets were $2,531.2 and shareholders’ equity was $1,320.3 at June 30, compared with $2,604.8 and $1,480.5, respectively, at December 31, 2012.
Changes and drivers
- Six-month revenue grew 30% and net income grew 28% year over year. Q2 net income increased only 8%, partly because Q2 2012 benefited from a $7.0 income-tax provision adjustment.
- Reported Q2 gross margin fell 134 basis points. A $15.6 warranty charge for water-infiltration remediation in one completed community reduced margin by approximately 157 basis points; excluding it, Q2 margin was 17.5%, versus 17.3% a year earlier. Management also cited higher land and construction costs, including lumber and other commodities.
- The December 2012 Heartland Homes acquisition contributed to higher settlements and pricing, particularly in the Mid East segment.
- Operating cash flow swung to a $90.5 outflow, mainly reflecting a $256.5 inventory increase. Investing used $16.7; financing used $267.9, including $295.0 of treasury-stock purchases. Cash decreased $375.1 during the six months.
Outlook, risks and unusual items
- Management described improved sales and pricing trends, supported by affordability and low housing inventory, but noted tight mortgage underwriting and rising mortgage rates. It expects gross-margin pressure over the next several quarters from cost increases; no specific earnings or revenue guidance was provided.
- Management stated that continuation of the housing recovery depends on a sustained economic recovery. Risks cited include interest rates, mortgage availability and regulation, land and materials availability and cost, labor shortages, weather, and regional economic conditions.
- The warranty reserve increased to $77.3 from $62.7 at year-end, including the $15.6 remediation accrual. The estimate is subject to uncertainty.
- NVR controlled approximately 55,500 lots under purchase agreements, with net contract land deposits of $207.7 and total stated risk of loss of $211.6. It also had $90.8 invested in three joint ventures and $87.6 of directly owned land under development.
- Overtime-classification lawsuits remain pending; a related case was set for trial in October 2013. NVR recorded no liability because it could not estimate the likelihood or amount of loss. A separate EPA/DOJ storm-water inquiry had no predictable outcome or estimable cost.
- Management said disclosure controls were effective and reported no material change in risk factors from the 2012 Form 10-K.
Investor verification points
- Assess whether the $15.6 water-infiltration accrual and $77.3 total warranty reserve are adequate, and whether further remediation costs arise.
- Track order growth, cancellations, backlog conversion, and pricing against construction and land-cost inflation.
- Review the causes and sustainability of negative operating cash flow, inventory growth, and the continuing effect of share repurchases on liquidity.
- Monitor lot-deposit recoverability, developer performance, joint-venture exposure, and any future land impairment charges.
- Follow the overtime litigation and EPA/DOJ inquiry for developments that could change the currently unrecorded or unestimated exposures.