NVR, Inc. — Q3 2012 Form 10-Q
Reporting period: Three and nine months ended September 30, 2012; comparisons are with the same periods in 2011 unless noted. Dollar amounts below are in millions unless stated otherwise. NVR builds and sells homes, primarily on a pre-sold basis, and provides mortgage and title services.
Financial performance and operating metrics
- Third-quarter revenue: $870.6 million, up 23%; net income was $53.0 million, up 22%. Diluted EPS rose 29% to $10.33.
- Nine-month revenue: $2.241 billion, up 17%; net income was $120.0 million versus $97.0 million. Diluted EPS was $23.22 versus $16.75.
- Homebuilding: Q3 revenue increased 23% to $854.4 million, on 18% more settlements (2,656) and a 4% higher average settlement price ($321,700). Gross margin was 17.8% versus 17.9%. For nine months, margin was 17.2% versus 17.7%.
- Demand and backlog: Q3 net new orders rose 15% to 2,558; average new-order price rose 9% to $334,700. Cancellation rate increased to 16.6% from 15.0%. September backlog was 4,950 homes worth $1.675 billion, versus 3,909 homes and $1.217 billion a year earlier.
- Mortgage banking: Q3 income before tax was $9.5 million versus $4.3 million; nine-month income was $24.4 million versus $16.5 million. Q3 loan closing volume increased 21% to $594.9 million.
- Cash flow: Nine-month operating cash flow was positive $178.5 million versus negative $4.6 million. Investing cash outflow was $5.3 million; financing cash inflow was $424.6 million. Homebuilding inventory increased $162.5 million.
- Liquidity and debt: Cash and cash equivalents totaled $1.079 billion at September 30, 2012, versus $480.3 million at year-end 2011. NVR issued $600 million of 3.95% senior notes due 2022, with approximately $593.8 million net proceeds; carrying value was $599.0 million. The mortgage repurchase facility had a $25 million limit, no outstanding balance, and no borrowing-base limitations at quarter-end.
- Capital and shares: NVR repurchased 276,995 shares for $220.1 million during the first nine months. Shareholders’ equity was $1.379 billion at September 30, versus $1.375 billion at year-end.
Material changes and management commentary
- Management described housing conditions as stabilizing and improving, citing low mortgage rates, affordability and lower inventory in some markets. It also cautioned that tight mortgage lending, consumer-confidence concerns and an uncertain economic recovery remain challenges.
- Management expects homebuilding gross-margin pressure to continue for at least the next several quarters, citing higher construction, lumber and other commodity costs. No quantitative earnings or revenue guidance was provided.
- NVR controlled approximately 50,000 lots under purchase agreements, with cash deposits of approximately $243.2 million and letters of credit of $2.8 million. The net deposit asset was $173.4 million after a $69.8 million reserve. Total disclosed risk of loss on deposits and related obligations was $183.4 million.
- The company had $86.7 million invested in four joint ventures expected to produce approximately 7,500 lots, and directly held three parcels intended to yield approximately 770 lots. Management said these land positions showed no impairment indicators at quarter-end.
- Unallocated corporate overhead rose, primarily due to higher management incentive costs. The company reduced its unrecognized-tax-benefit provision by $7.1 million over nine months following tax-authority settlements and an audit.
Risks, contingencies and unusual items
- Homebuilding demand and results remain exposed to economic and regional conditions, interest rates, mortgage availability, land and material costs, labor shortages, weather and regulation. Backlog is subject to cancellations; the company reported a 14.2% nine-month cancellation rate versus 13.2% in 2011.
- Mortgage banking is exposed to investor funding delays, tighter credit and regulatory changes. A correspondent-lender settlement required a $7.25 million payment and reduced the mortgage loan loss allowance; the company reported a $0.44 million Q3 pre-tax reversal of that allowance. The remaining allowance was approximately $6.1 million.
- Pending matters include employee overtime-classification lawsuits, an EPA/DOJ inquiry concerning storm-water practices, and a Department of Labor investigation. NVR could not predict outcomes or reasonably estimate potential costs for these matters; it recorded no liability for the overtime cases.
- The senior notes are unsecured and have no financial covenants. Their proceeds are intended for general corporate purposes, potentially including share repurchases. Management stated that cash, available facilities and access to capital markets should be sufficient for near- and long-term requirements.
- Management warned that interim results are not necessarily indicative of full-year results. Disclosure controls were concluded to be effective, with no material quarterly change in internal control over financial reporting.
Key facts for investors to verify
- Whether backlog growth converts into settlements, and how cancellations and order pricing trend.
- Whether higher construction and commodity costs continue to pressure homebuilding margins.
- The adequacy of contract-land deposit and mortgage-loan loss reserves, and the exposure to developer or lender issues.
- Use of senior-note proceeds, subsequent share repurchases, and cash levels relative to operating needs.
- Developments and potential financial exposure in the overtime, environmental and DOL matters.