NVR, Inc. — Q3 2015 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2015. Unaudited results; amounts below are in U.S. dollars, generally millions unless stated otherwise.
Business context
NVR builds and sells single-family homes, townhomes, and condominiums, primarily on a pre-sold basis, and also provides mortgage banking and title services. Its four homebuilding regions are Mid Atlantic, North East, Mid East, and South East. The company generally obtains finished lots through fixed-price purchase agreements rather than developing land directly.
Key financial results
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Consolidated revenue | $1,402.4 | $1,203.2 | $3,603.7 | $3,116.5 |
| Income before taxes | $185.0 | $143.8 | $396.0 | $302.3 |
| Net income | $116.5 | $90.2 | $248.9 | $182.2 |
| Diluted EPS | $27.11 | $20.70 | $58.32 | $40.59 |
| Homebuilding gross margin | 19.1% | 19.0% | 18.6% | 18.6% |
| Operating cash flow | Not separately stated for the quarter | $15.6 | $(41.9) |
- Q3 revenue increased 17%, net income 29%, and diluted EPS 31% year over year. Nine-month revenue rose 16% and net income 37%.
- Homebuilding revenue was $1,374.5 million in Q3 and $3,537.1 million for the nine months. Settlements rose 11% in both periods; average settlement prices increased 4% in Q3 and 4% year to date.
- Mortgage banking income was $16.1 million in Q3 versus $7.3 million, and $33.3 million for the nine months versus $14.5 million. Nine-month loan closing volume rose 26% to $2,449.9 million; the mortgage capture rate was 88%, up from 83%.
- At September 30, total assets were $2,570.7 million and shareholders’ equity was $1,240.5 million. Cash and cash equivalents reported across the company and consolidated variable-interest entity totaled $387.5 million in the cash flow statement, down $158.0 million from year-end.
- Senior notes had $600 million principal outstanding, bearing 3.95% interest and maturing in 2022; carrying value was $599.2 million. The mortgage subsidiary’s $25 million repurchase facility had no borrowings at quarter-end.
Material changes and operating trends
- New orders increased 11% in Q3 and 13% in the first nine months; average new-order prices rose 1% and 2%, respectively. Backlog grew 15% to 7,139 homes, with a reported value of $2,716.9 million.
- The cancellation rate increased to 16.7% in Q3 from 15.9%, and to 14.1% for the nine months from 13.5%.
- Gross margin was broadly flat overall. Management attributed pressure to higher lot and construction costs, partly offset in some regions by stronger settlement activity and cost leverage. Selling, general and administrative expense increased in dollars, while declining as a share of revenue.
- Operating cash flow improved from a use of $41.9 million to a provision of $15.6 million for the nine months. Higher inventory used $289.8 million of cash; increased payables and accrued expenses and customer deposits partly offset this. Financing activities used $172.9 million, including $263.4 million for treasury-stock purchases.
- Cash and total assets changed partly alongside increased homebuilding inventory and mortgage loans held for sale. Inventory increased to $1,161.5 million from $869.5 million at year-end.
Outlook, risks, and unusual items
- No quantified earnings or revenue guidance is provided. Management said housing demand continued to improve but remained affected by tight mortgage underwriting and competition from more new-home communities. It expects continued gross-margin pressure from higher land and construction costs and competition, and said recovery depends on economic, employment, wage, and household-formation trends.
- NVR controlled approximately 67,200 lots under purchase agreements, with $360.6 million of cash deposits and $2.2 million of letters of credit; approximately 6,700 lots were associated with a $44.5 million impairment reserve. The filing describes potential forfeiture of deposits if NVR does not perform, generally limiting its loss to the deposit, subject to limited specific-performance obligations.
- The company had $63.7 million invested in five unconsolidated joint ventures, with additional funding commitments of $6.8 million. It also directly owned land under development carried at $53.2 million. Management reported no impairment indicators for these development assets at quarter-end.
- An EPA/Department of Justice matter concerning storm-water discharge practices in New York and New Jersey remained in settlement discussions. Any settlement is expected to involve injunctive relief and a civil penalty; the amount was not determinable, so no liability was recorded. Management said other ordinary-course litigation was not expected to have a material adverse effect.
- The warranty reserve was $85.9 million at quarter-end. The mortgage subsidiary held an $11.6 million allowance for losses on previously originated and sold loans; management cautioned that these estimates may prove inadequate.
- After quarter-end, the board approved a further $300 million share repurchase authorization on November 4, 2015. The filing also reports amended executive employment agreements, a restated deferred-compensation plan, and a proxy-access bylaw adopted in November.
- Principal risks include economic and regional housing conditions, interest rates, customer mortgage access, mortgage-market regulation and secondary-market loan sales, competition, land and material availability and cost, labor shortages, weather, and government regulation. Management reported no material changes to previously disclosed risk factors or market risks.
Most important facts for investors to verify
- Whether order growth and the larger backlog convert into settlements without a further increase in cancellations or slower backlog turnover.
- Whether margins withstand higher land and construction costs and increased competition.
- How cash generation develops as inventory and lot commitments rise, alongside continued share repurchases.
- The adequacy of contract-land-deposit, warranty, and mortgage-loan loss reserves, and the eventual outcome and cost of the EPA/DOJ matter.
- Whether mortgage lending standards, rates, and secondary-market conditions affect homebuyer demand and NVR Mortgage’s results.