NVR, Inc. — Q3 2018 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2018. Dollar amounts below are in millions unless otherwise stated. NVR builds and sells homes, primarily on a pre-sold basis, and provides mortgage banking and title services.
Financial results
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Consolidated revenue | $1,852.4 | $1,667.9 | $5,169.1 | $4,489.5 |
| Income before taxes | $249.7 | $244.5 | $682.3 | $585.6 |
| Net income | $195.8 | $162.1 | $565.0 | $412.9 |
| Diluted EPS | $48.28 | $38.02 | $136.53 | $98.33 |
- Homebuilding revenue was $1,809.3 million in Q3 and $5,049.9 million for nine months. Homebuilding gross margin was 18.6% and 18.8%, respectively, versus 19.9% and 19.2% in the comparable 2017 periods.
- Q3 net income rose 21% and diluted EPS rose 27%; lower taxes were an important contributor. The effective tax rate was 21.6% in Q3 and 17.2% year to date, compared with 33.7% and 29.5% in 2017.
- Q3 mortgage banking income was $25.5 million, up from $18.4 million. Nine-month income was $66.3 million, up from $51.0 million.
- Operating cash flow for the first nine months was $491.8 million, compared with $335.6 million in 2017. Investing cash outflow was $6.5 million and financing cash outflow was $542.3 million. Cash, cash equivalents and restricted cash ended the period at $632.6 million.
- At September 30, unrestricted cash and cash equivalents totaled $609.9 million; restricted cash totaled $22.3 million. Total assets were $3,089.8 million and shareholders’ equity was $1,682.3 million.
- Senior notes had $600 million principal outstanding, with a $597.5 million carrying value, bearing 3.95% interest and maturing in 2022. No borrowings were outstanding on the $200 million revolving credit facility or the mortgage subsidiary’s $150 million repurchase facility. Approximately $9.6 million of letters of credit was outstanding under the credit agreement.
Changes versus prior comparable periods
- Q3 consolidated revenue increased 11%; nine-month revenue increased 15%. Homebuilding settlements rose 14% in Q3 and 17% year to date, while average settlement prices fell 3% and 2%, respectively.
- Net new orders increased 2% in Q3 and 9% year to date, while average new-order prices declined 2% in both periods. Q3 cancellation rate increased to 15.5% from 13.3%.
- Backlog at quarter end was 9,710 homes, up 10% from 8,855 a year earlier; its average price declined to $377,100 from $386,100. The filing says substantially all non-cancelled September backlog is expected to settle within 12 months.
- Homebuilding gross margin declined, reflecting higher lot and construction-material costs and a $7.4 million impairment charge related to one joint venture. The charge included approximately $0.8 million of capitalized interest.
- Share repurchases used $657.4 million in the first nine months; NVR repurchased approximately 222,000 shares. Equity-based compensation expense rose to $51.7 million from $32.7 million.
Outlook, risks and unusual items
- Management reported decelerating new-home demand, citing affordability concerns, rising interest rates, and increasing new and resale inventory. It expects continued pricing and sales pressure, homebuilding gross-margin pressure, and competitive pricing pressure in mortgage banking. No quantitative earnings or revenue guidance was provided.
- Management cited low unemployment and improved consumer confidence as supportive conditions, and said the balance sheet positions NVR to pursue opportunities amid market volatility. It expects to continue sourcing substantially all finished lots through purchase agreements rather than direct development.
- NVR controlled approximately 92,350 lots through third-party lot purchase agreements, with about $398.8 million of cash deposits and $3.8 million of letters of credit. The filing reports net contract land deposits of $374.4 million and total related risk of loss of $379.7 million. Additional land contracts were expected to yield about 7,800 lots, subject to feasibility and possible approvals.
- The lower tax rate reflected the federal rate reduction under the Tax Cuts and Jobs Act, reinstated energy tax credits, and tax benefits from stock-option exercises. Management warned that the effective tax rate may vary with stock price and the timing of award exercises.
- Warranty reserves were $99.8 million. The company is involved in ordinary-course litigation, which management does not expect to materially affect financial position, results, or cash flows. Management reported no material change to the risk factors in its 2017 Form 10-K.
- Adoption of the new lease standard was expected to add less than $100 million of right-of-use assets and corresponding liabilities, primarily for real estate leases, beginning in 2019.
Important facts for investors to verify
- Whether affordability, interest rates, and inventory growth further affect orders, cancellations, pricing, and backlog conversion.
- Whether homebuilding margins remain under pressure from lot and material costs, including any further JV or land-deposit impairments.
- How sustainable earnings growth is after separating operating performance from the lower effective tax rate and stock-option tax benefits.
- Cash deployment and balance-sheet effects of substantial share repurchases, and remaining authorization capacity.
- Exposure from lot deposits, warranty claims, and mortgage banking loan-sale and interest-rate risks.