NVR, Inc. — Q2 2010 Form 10-Q Summary
Business context and reporting period
For the quarter and six months ended June 30, 2010. NVR builds and sells homes, primarily on a pre-sold basis, and provides mortgage banking and title services. Its four homebuilding regions are Mid Atlantic, North East, Mid East and South East.
Results benefited from a surge in home settlements before the June 30 deadline for the federal homebuyer tax credit. Management cautioned that this likely pulled demand forward and that the market remained challenging.
Key financial metrics
Amounts below are in millions, except per-share data and operating statistics.
| Metric | Q2 2010 | Q2 2009 | Six months 2010 | Six months 2009 |
|---|---|---|---|---|
| Consolidated revenue | $964.5 | $625.4 | $1,554.7 | $1,184.0 |
| Income before taxes | $118.3 | $69.8 | $171.0 | $100.4 |
| Net income | $71.3 | $41.4 | $103.4 | $59.4 |
| Diluted EPS | $11.13 | $6.79 | $16.15 | $9.85 |
| Homebuilding gross margin | 18.5% | 19.3% | 18.5% | 17.6% |
| Homebuilding settlements | 3,345 units | 2,048 units | 5,264 units | 3,821 units |
| New orders | 2,559 units | 2,728 units | 5,499 units | 5,154 units |
Q2 revenue increased 54% and net income increased 72% year over year; six-month revenue rose 31% and net income rose 74%. Q2 diluted EPS increased 64%. Despite higher settlements, Q2 new orders fell 6% year over year. At June 30, backlog was 3,766 homes, down from 4,497 a year earlier, with an average price of $315,300 versus $296,200.
- Cash flow: Operating cash flow was negative $66.3 million for the first half, compared with negative $22.4 million in 2009. Investing activities provided $39.9 million; financing used $132.8 million. Management attributed operating cash use in part to higher mortgage loans held for sale and the tax-benefit presentation of stock-option exercises.
- Liquidity: Cash and cash equivalents totaled $1,090.9 million and marketable securities $175.0 million at June 30; together, approximately $1,266 million. The $300 million working-capital facility had no direct borrowings, with $14.3 million of letters of credit outstanding and no borrowing-base limitations reported.
- Debt: NVR redeemed its $133.4 million of 5% senior notes at maturity on June 15 and had no senior notes outstanding at quarter-end. Mortgage banking had $79.0 million outstanding under its repurchase facility; other term debt was $2.0 million. Total liabilities were $544.0 million and shareholders’ equity was $1,815.5 million.
- Capital allocation: NVR repurchased approximately 262,000 shares for $176.1 million in the first half. It also received $51.5 million from option exercises.
Material changes versus the prior comparable period
- Settlements rose 63% in Q2, helped by the tax-credit settlement deadline and a larger beginning backlog. Average settlement price fell 5% to $283,000.
- Q2 homebuilding gross margin declined to 18.5% from 19.3%; the prior-year quarter included about $4.5 million of contract-land-deposit recoveries. For the first half, margin improved to 18.5% from 17.6%, reflecting cost controls and lower prior-year activity.
- First-half new orders rose 7%, but Q2 orders declined 6% as buyers moved purchases forward ahead of the tax-credit deadline. The six-month cancellation rate was 11%, versus 14% in 2009.
- Mortgage banking income before tax rose to $11.7 million in Q2 from $7.0 million and to $18.6 million in the first half from $11.8 million, mainly on higher loan-closing volume. A change in loan-sale channels and elevated June closings increased mortgage loans held for sale to $244.3 million.
- Adoption of amended consolidation guidance resulted in deconsolidation of previously consolidated variable-interest entities, with no adoption gain or loss. NVR reported $17.0 million of land under development acquired in Q2, expected to yield 155 lots.
Outlook, risks and unusual items
- Management expected pressure on home sales, selling prices and gross margins to continue for at least several quarters, and anticipated lingering negative effects on new orders from expiration of the tax credit. It gave no specific financial guidance.
- Management said cash and available financing should be sufficient for near- and long-term working-capital needs and expected to continue share repurchases subject to market conditions and excess liquidity.
- Risks cited include weak buyer confidence, unemployment, high home inventories and foreclosures, restrictive mortgage availability, interest-rate changes, land-supply and developer-financing constraints, and regional economic conditions. Management noted that constrained developer financing may require limited joint ventures or direct land development, although it expects to continue sourcing most lots through fixed-price purchase agreements.
- Contract land deposits were $152.7 million gross, less an $81.3 million loss reserve, for a net balance of $71.4 million. NVR controlled about 46,300 lots under purchase agreements and reported total related risk of loss of $82.9 million, including letters of credit and limited specific-performance obligations.
- Warranty reserves increased to $70.2 million from $60.9 million at year-end; first-half warranty provisions were $22.7 million versus $7.7 million in 2009.
- Contingencies include purported employee overtime class actions, an EPA request for information on storm-water practices, and a North Carolina mortgage-lending examination. NVR recorded no liability for the overtime cases because outcome and damages could not be estimated; it said the North Carolina matter was not expected to materially affect financial position. Outcomes and potential costs of the EPA inquiry were not estimable.
- The mortgage repurchase facility, scheduled to expire August 3, 2010, was extended by amendment on July 30, 2010 to August 2, 2011. The working-capital facility was due to expire December 6, 2010; the company was evaluating whether to replace it.
Important facts for investors to verify
- Whether order trends and cancellations after the tax-credit deadline confirm that Q2 settlements were primarily pulled forward.
- Whether backlog conversion, average selling prices and homebuilding margins hold up amid the expected market pressure.
- Whether contract-land-deposit and warranty reserves remain adequate, particularly given impaired deposits and rising warranty provisions.
- Current borrowing availability and terms after the mortgage facility extension, and the status of the working-capital facility before its December 2010 expiry.
- Developments and any financial exposure from the overtime litigation, EPA inquiry and North Carolina mortgage examination.