NVR, Inc. — Q3 2010 Form 10-Q
Reporting period: Three and nine months ended September 30, 2010. Unless otherwise noted, financial amounts are in millions of dollars; the filing presents amounts in thousands.
Business context
NVR builds and sells homes, primarily on a pre-sold basis, and provides mortgage banking and title services to its homebuilding customers. Its homebuilding operations span Mid Atlantic, North East, Mid East, and South East markets. The filing describes a difficult housing market, with demand weakening after the federal homebuyer tax credit deadlines.
Financial performance and liquidity
| Metric | Q3 2010 | Q3 2009 | Nine months 2010 | Nine months 2009 |
|---|---|---|---|---|
| Consolidated revenue | $676.2 | $814.0 | $2,230.9 | $1,998.0 |
| Income before taxes | $64.9 | $113.4 | $235.9 | $213.9 |
| Net income | $43.9 | $72.1 | $147.3 | $131.5 |
| Diluted EPS | $7.31 | $11.59 | $23.49 | $21.57 |
| Homebuilding gross margin | 18.3% | 19.7% | 18.4% | 18.4% |
| Operating cash flow | Not stated for quarter | Not stated for quarter | $(85.6) | $117.9 |
Q3 revenue fell 17% year over year, net income fell about 39%, and diluted EPS fell about 37%. For the nine-month period, revenue rose 12% and net income rose 12%. Homebuilding revenue was $661.9 million in Q3 and $2,186.3 million year to date. Q3 homebuilding settlements declined 20% to 2,127 units; the average settlement price increased 5% to $311,100. New orders decreased 5% to 2,151 units, and the cancellation rate rose to 17.9% from 13.8%. Backlog was 3,790 units, down 7% year over year.
Cash and marketable securities totaled approximately $1.08 billion at September 30. The cash flow statement reports $1,055.8 million of cash and cash equivalents at period-end. Total assets were $2,249.8 million and total liabilities were $563.1 million. NVR redeemed its $133.4 million 5% senior notes at maturity in June; no senior notes remained outstanding at quarter-end. Mortgage Banking had approximately $99 million outstanding under its loan-collateralized repurchase facility, with a $100 million commitment and an August 2011 maturity. Nine-month financing cash outflow was $297.4 million, including $377.3 million of treasury-stock purchases.
Material changes and notable items
- Q3 homebuilding SG&A increased 16% year over year and rose to 10% of revenue from 7%; the company attributed much of the increase to higher stock-based compensation and selling and marketing costs.
- Mortgage banking income fell to $6.5 million in Q3 from $14.8 million, mainly reflecting lower mortgage fees, reduced loan closing volume, and lower unrealized fair-value gains. Nine-month mortgage banking income was $25.1 million versus $26.6 million.
- Operating cash flow shifted to an $85.6 million use from $117.9 million provided in the prior-year period. NVR cited increased inventory, including sold homes under construction and land under development, as a key use of cash.
- NVR repurchased approximately 581,000 shares for $377.3 million in the first nine months, and approximately $201.2 million during Q3. The board authorized an additional $300 million repurchase program in July.
- Effective October 27, after quarter-end, NVR terminated its $300 million working capital facility and said it did not intend to obtain a replacement. It established an uncommitted, collateralized letter-of-credit facility; existing letters of credit were transferred to it.
- Following an accounting-standard change, NVR deconsolidated previously consolidated variable-interest entities. In 2010 it consolidated one joint venture. It also acquired four raw land parcels for approximately $73 million, expected to yield about 840 lots; one parcel, with a stated cost basis of about $51 million, was acquired from an entity controlled by a company director.
Outlook, risks, and contingencies
Management expected continued sales and pricing pressure and homebuilding margin pressure over at least the next several quarters, citing economic uncertainty, high housing inventory, unemployment, weak consumer confidence, tighter mortgage credit, and the expiration of the homebuyer tax credit. It expected new orders to remain pressured until economic stability and job growth improve. NVR said its liquidity and balance sheet positioned it to pursue opportunities and believed internal cash and available financing would meet near- and long-term working-capital needs. It provided no numerical earnings or revenue guidance.
Risks include housing demand and pricing, customer access to mortgages, availability and cost of finished lots, developers’ ability to deliver lots, mortgage-market liquidity and regulation, construction costs, and possible inventory or land-deposit impairments. The company reported approximately 49,600 lots under purchase agreements; deposits and related exposures were subject to loss, with an approximately $80.8 million impairment reserve. It stated total risk of loss on contract land deposits and related contingent obligations of approximately $98.3 million. The mortgage loan loss allowance was approximately $4.0 million.
Pending matters include purported class-action overtime misclassification lawsuits, an EPA information request concerning storm-water discharges, and a North Carolina banking regulator’s findings about certain mortgage files. NVR had not recorded a liability for the overtime litigation because outcome and damages could not be determined; it could not estimate potential EPA costs. Management did not expect the North Carolina matter to materially harm financial position. Warranty reserves were $67.4 million at September 30. Management considered key reserves adequate but cautioned that actual losses could differ from estimates.
Important facts for investors to verify
- Whether orders, cancellations, backlog, and settlement trends improved or deteriorated after the tax-credit-driven demand pull-forward.
- Whether homebuilding gross margins and SG&A stabilize, particularly given Q3 margin decline and higher compensation and marketing costs.
- Whether operating cash flow recovers and inventory, land development, and contract-land-deposit exposures remain manageable.
- How the post-quarter working-capital facility termination affects liquidity, and whether the mortgage repurchase facility remains available on acceptable terms.
- Whether mortgage repurchase/indemnification claims, the overtime lawsuits, EPA inquiry, or North Carolina examination result in material costs or liabilities.
- The scale and timing of continued share repurchases relative to liquidity needs and business investment.