NVR, Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2013. NVR builds and sells primarily pre-sold homes and operates a related mortgage-banking and title-services business. Unless noted otherwise, financial amounts below are in millions; the filing reports most amounts in thousands.
Financial performance
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Consolidated revenue | $1,189.0 | $870.6 | $2,969.1 | $2,240.9 |
| Income before taxes | $131.6 | $84.1 | $266.9 | $179.0 |
| Net income | $82.9 | $53.0 | $168.7 | $120.0 |
| Diluted EPS | $17.67 | $10.33 | $34.13 | $23.22 |
| Homebuilding gross margin | 17.4% | 17.8% | 16.8% | 17.2% |
| Operating cash flow | Not separately presented for the quarter | $88.2 | $178.5 |
Q3 homebuilding revenue was $1,167.6 million; settlements rose 26% to 3,342 homes and average settlement price increased 9% to $349,200. Mortgage-banking income was $11.8 million, versus $9.5 million. For the first nine months, homebuilding settlements increased 20% to 8,492 and average settlement price rose 10% to $342,700.
Liquidity, debt and capital
- At September 30, homebuilding cash and equivalents were $804.6 million; mortgage-banking cash was $7.0 million. Total assets were $2.519 billion and shareholders’ equity was $1.275 billion.
- Senior notes had $600 million principal outstanding, due September 2022, bearing 3.95% interest; carrying value was $599.1 million. No borrowings were outstanding under the mortgage repurchase facility, which had a $25 million limit.
- Nine-month operating cash flow was $88.2 million, down from $178.5 million. Inventory growth used $231.7 million of cash. Investing activities used $18.6 million and financing activities used $408.9 million, including $435.8 million for share repurchases.
- The balance-sheet cash balances declined from December 31, 2012, including homebuilding cash from $1.139 billion to $804.6 million. The cash-flow statement reports ending cash and equivalents of $814.2 million.
Material changes and operating trends
- Q3 consolidated revenue grew 37%, net income 56%, and diluted EPS 71% year over year. Lower weighted-average shares, reflecting repurchases, also contributed to per-share growth.
- Despite higher revenue, homebuilding gross margin declined 39 basis points in Q3, mainly due to construction-cost inflation. Nine-month margin included a $15.6 million warranty accrual for water-infiltration remediation in one completed community. Excluding that charge, nine-month margin was 17.3%, up 15 basis points year over year.
- Q3 net new orders fell 7% to 2,381 homes, while average order price rose 10% to $367,900. The cancellation rate increased to 19.1% from 16.6%.
- Quarter-end backlog was 5,656 homes valued at $2.077 billion, up 14% in units and 24% in value year over year.
- Mortgage loan closing volume rose 17% in Q3, but the mortgage capture rate fell to 79% from 86%, reflecting competition from other lenders.
Outlook, risks and unusual items
- Management said higher mortgage rates reduced affordability and contributed to slower Q3 orders, higher cancellations and lower absorption. It expected sales and pricing pressures and gross-margin pressure to continue over the next several quarters. The filing provides no quantified earnings or revenue guidance.
- Management cited economic and policy uncertainty, mortgage availability and underwriting standards, interest rates, competition, land and construction costs, labor availability, weather and regulation as risks. NVR expects to continue sourcing substantially all finished lots through fixed-price purchase agreements, while retaining limited JV and direct-development activity.
- Warranty reserves reached $81.7 million, up from $61.1 million a year earlier; the nine-month provision included the $15.6 million single-community remediation charge.
- Approximately 56,000 lots were controlled under purchase agreements; related deposits were $279.5 million gross and $218.5 million net of a $61.0 million reserve. NVR reported total deposit-related risk of loss of $223.1 million, including contingent obligations.
- A jury ruled for NVR in October 2013 in an individual overtime-classification case; related claims remain pending, and the company recorded no liability. A DOJ/EPA inquiry concerning storm-water practices in New York and New Jersey remained unresolved, with potential costs not reasonably estimable.
- NVR reported no material change in market risks or risk factors from its prior annual report. Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting.
Key facts for investors to verify
- Whether order trends, cancellations and backlog conversion improved or deteriorated after the quarter, particularly as mortgage rates affect affordability.
- Whether construction-cost increases and pricing pressure further reduce homebuilding margins; assess results separately from the $15.6 million remediation accrual.
- Whether warranty reserves and the $61.0 million contract-land-deposit impairment reserve prove adequate as projects and claims develop.
- Cash deployment and share repurchases: NVR repurchased 454,782 shares for $435.8 million in the first nine months and had two repurchase authorizations in effect during Q3.
- Developments in the overtime litigation and EPA/DOJ inquiry, as well as mortgage capture rates, loan-sale conditions and evolving mortgage regulation.