NVR, Inc. — Q3 2017 Form 10-Q
Business context and reporting period. Unaudited results for the quarter and nine months ended September 30, 2017, compared with the same 2016 periods. NVR builds and sells homes in four U.S. regions and operates mortgage banking and title services. It generally buys finished lots under agreements with forfeitable deposits rather than developing land directly.
Financial and operating highlights
| Metric | Q3 2017 | Q3 2016 | First nine months 2017 | First nine months 2016 |
|---|---|---|---|---|
| Consolidated revenue | $1.668 billion | $1.538 billion | $4.490 billion | $4.070 billion |
| Income before taxes | $244.5 million | $185.0 million | $585.6 million | $433.0 million |
| Net income | $162.1 million | $117.4 million | $412.9 million | $274.4 million |
| Diluted EPS | $38.02 | $28.46 | $98.33 | $66.24 |
| Homebuilding gross margin | 19.9% | 17.6% | 19.2% | 17.4% |
| Operating cash flow | Not separately provided for quarter | Not separately provided for quarter | $340.8 million | $102.4 million |
- Q3 consolidated revenue rose 8%, net income 38%, and diluted EPS 34% year over year. Homebuilding revenue increased 8%, reflecting 6% more settlements and a 2% higher average settlement price.
- Q3 net orders rose 21% to 4,200 homes; average order price fell 3% to $382,800. Backlog at quarter-end increased 16% year over year to 8,855 homes, with an average price of $386,100. The cancellation rate was 13.3% for Q3 versus 17.7% a year earlier.
- For the first nine months, homebuilding revenue increased 10%, settlements rose 8%, and net orders increased 11%. Homebuilding gross margin improved 171 basis points to 19.2%.
- Mortgage banking income was $18.4 million in Q3, up from $17.3 million; for nine months it was $51.0 million, up from $40.2 million. The mortgage capture rate was 88% in Q3 and 87% year to date.
Cash, debt, and liquidity
- At September 30, 2017, balance-sheet cash and cash equivalents totaled approximately $626.9 million across homebuilding and mortgage banking; restricted cash totaled $15.9 million.
- Cash and cash equivalents increased $231.4 million during the first nine months. Operating cash flow was $340.8 million, including cash absorbed by a $284.5 million increase in inventory. Investing cash use was $9.4 million; financing cash use was $100.0 million.
- Senior Notes had $600 million principal outstanding, bearing 3.95% interest and maturing in 2022; carrying value was $596.9 million. No borrowings were outstanding on the $200 million revolving credit facility or the mortgage subsidiary’s $150 million repurchase facility at quarter-end.
- NVR repurchased 110,392 shares for $230.2 million during the first nine months; stock option exercises provided $130.2 million.
Changes, outlook, and risks
- Management cited improving demand, supported by low interest rates, low unemployment, and stronger consumer confidence. It noted that competitive conditions continued to constrain new-home pricing.
- Management expects gross-margin pressure from modest pricing power and land and construction costs, and potential mortgage banking profit pressure from competitive pricing. It stated that results depend on continued economic recovery, job and wage growth, and household formation; no numerical earnings or revenue guidance was provided.
- The 2017 effective tax rate was 33.7% for Q3 and 29.5% year to date, compared with 36.5% and 36.6%. Adoption of stock-compensation accounting rules contributed excess tax benefits of $8.4 million in Q3 and $44.7 million year to date, making EPS favorably affected and future tax rates potentially volatile.
- NVR controlled approximately 79,700 lots under third-party lot purchase agreements, with cash and letter-of-credit deposits of about $385.6 million and $2.1 million. Deposits are generally the limit of loss if NVR declines to perform, but the lot pipeline remains important to operations. The company also reported approximately 4,200 lots associated with an impairment reserve of $32.2 million.
- The EPA/DOJ storm-water matter was resolved through a consent decree approved in September 2017; the civil penalty was paid. Management said the matter was not expected to materially affect financial condition, results, or liquidity. Other ordinary-course litigation was not expected to have a material adverse effect.
- Key risks include economic and regional market conditions, interest rates and mortgage availability, competition, land and material availability and costs, labor shortages, weather, regulation, and NVR Mortgage’s ability to sell originated loans. Management reported no material changes to previously disclosed risk factors or market risks.
Important facts for investors to verify
- How much of the earnings and EPS increase reflects recurring operations versus the $44.7 million year-to-date stock-option tax benefit.
- Whether order growth and the 16% larger backlog convert into settlements without higher cancellations or production-capacity constraints.
- Whether improved homebuilding margins can persist amid management’s stated pricing and construction-cost pressures.
- The adequacy and risk profile of lot deposits, including the impaired-lot reserve and the feasibility of land contracts requiring rezoning or approvals.
- The company’s cash generation, share repurchases, and ability to maintain liquidity while funding inventory growth and servicing its debt obligations.