NVR, Inc. — Q3 2019 Form 10-Q
Reporting period: Three and nine months ended September 30, 2019. NVR builds and sells homes, primarily on a presold basis, and provides mortgage and title services through its mortgage banking business. Unless noted otherwise, financial statement amounts below are in millions; the filing reports them in thousands.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Consolidated revenue | $1,911.3 | $1,852.4 | $5,398.5 | $5,169.1 |
| Income before taxes | $267.2 | $249.7 | $730.5 | $682.3 |
| Net income | $223.8 | $195.8 | $622.4 | $565.0 |
| Diluted EPS | $56.11 | $48.28 | $156.61 | $136.53 |
| Homebuilding gross margin | 19.0% | 18.6% | 18.8% | 18.8% |
- Q3 consolidated revenue rose 3%, net income 14%, and diluted EPS 16% year over year. Nine-month revenue increased about 4% and net income about 10%.
- Q3 homebuilding revenue was $1,873.3 million, up 4%; settlements increased 8% to 5,124 units while average settlement price fell 4% to $365,500.
- Net orders increased 11% in Q3 to 4,766 homes; average order price declined 1% to $369,200. September backlog was 9,172 homes, down 6% year over year, with an average price of $371,000. Q3 cancellation rate was 15.7%, versus 15.5%.
- Mortgage banking income was $21.4 million in Q3, down from $25.5 million; for nine months it increased to $76.7 million from $66.3 million.
Cash flow, debt and liquidity
- Nine-month operating cash flow was $509.4 million, versus $491.8 million in 2018. Inventory growth used $243.3 million of cash, reflecting more homes under construction.
- Cash, restricted cash and cash equivalents totaled $1,116.1 million at September 30, 2019, up $383.8 million since year-end. Balance-sheet cash and cash equivalents, excluding restricted cash, totaled approximately $1,094.9 million.
- Senior Notes had $600 million principal outstanding, carry a 3.95% coupon and mature in September 2022; their carrying value was $598.1 million. No borrowings were outstanding under the $200 million unsecured credit facility or the mortgage subsidiary’s $150 million repurchase facility. The credit facility had $9.4 million of letters of credit outstanding.
- NVR repurchased approximately 129,679 shares for $365.5 million during the first nine months, partly offset by $247.4 million in proceeds from option exercises. Shareholders’ equity was $2,371.5 million, up from $1,808.6 million at December 31, 2018.
Changes, outlook and risks
- Management attributed improved demand to low unemployment, consumer confidence and lower mortgage rates. It cited favorable order trends and higher community absorption, particularly in the Mid East and South East.
- Management expects continued gross-margin pressure from modest pricing power and land and construction costs, and pressure on mortgage banking profit from competitive pricing. The filing provides no specific earnings or revenue guidance.
- Average home prices declined amid a shift toward smaller, lower-priced homes and markets. Nine-month homebuilding gross margin was unchanged year over year; higher construction costs were largely offset by lower lumber costs.
- The effective tax rate declined to 16.2% for Q3 and 14.8% for nine months, partly due to tax benefits from stock option exercises. Management expects quarterly tax-rate volatility as these benefits depend on stock price and exercise timing.
- NVR controlled approximately 102,000 lots. Its lot strategy relies primarily on third-party purchase agreements, with deposits potentially forfeited if it does not complete purchases; net contract land deposits were $404.9 million and disclosed total risk of loss was $410.9 million.
- Warranty reserves were $103.7 million. Management said ordinary-course litigation is not expected to materially adversely affect financial position, results or cash flows. It reported no material changes to previously disclosed risk factors.
- Adoption of the lease accounting standard in January 2019 added operating lease right-of-use assets and liabilities; it did not affect lease expense recognition. A prior-year joint-venture impairment of $7.4 million weighed on Q3 2018 homebuilding margin, so the reported margin comparison benefits from that prior-period charge.
Important facts for investors to verify
- Whether order growth and backlog conversion can sustain settlement volumes as backlog units and average prices decline.
- Whether pricing, product mix, land costs and construction costs support homebuilding margins amid management’s stated pressure expectations.
- How mortgage banking profitability responds to competitive pricing, loan-sale timing and fair-value movements.
- The level and potential recoverability of land deposits, commitments and warranty reserves, including exposure to forfeitures or claims.
- Whether reported earnings growth is repeatable without unusually favorable stock-option tax benefits; confirm the effects of share repurchases and option exercises on per-share results.