NVR, Inc. — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020; comparisons are with the corresponding 2019 periods. NVR builds and sells homes and provides mortgage banking and title services. Amounts below are in millions of dollars unless stated otherwise.
Financial performance
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Consolidated revenue | $1,990.0 | $1,911.3 | $5,192.9 | $5,398.5 |
| Income before taxes | $321.5 | $267.2 | $692.7 | $730.5 |
| Net income | $256.5 | $223.8 | $596.2 | $622.4 |
| Diluted EPS | $65.11 | $56.11 | $153.03 | $156.61 |
| Homebuilding gross margin | 20.0% | 19.0% | 18.8% | 18.8% |
| Operating cash flow | Not stated for quarter | Not stated for quarter | $579.3 | $509.4 |
- Q3 homebuilding revenue was $1,920.8 million; operating income was $281.0 million. Q3 mortgage banking income was $51.8 million, versus $21.4 million a year earlier, mainly reflecting higher gains on loan sales.
- For the first nine months, homebuilding revenue was $5,065.2 million and operating income was $641.1 million. Nine-month mortgage banking income was $78.3 million, compared with $76.7 million.
- Nine-month operating cash flow included a $416.5 million increase in inventory. Investing activities used $12.1 million; financing activities provided $864.4 million. Cash, restricted cash and cash equivalents increased $1,431.7 million.
Material changes and operating trends
- Q3 consolidated revenue increased 4% and net income increased 15% year over year; diluted EPS increased 16%. New orders, net of cancellations, rose 40% to 6,681 homes, while the average new-order price increased 4% to $384,200.
- Settlements were 5,180 homes in Q3, up 1%. Backlog at September 30 was 12,124 homes, up 32% year over year, with a stated value of $4,655.5 million. Management expected to settle substantially all of this backlog within 12 months, subject to cancellations and potential construction delays.
- For the nine-month period, consolidated revenue fell 4%, net income fell 4%, and diluted EPS fell 2%. Home settlements declined 4%, primarily reflecting COVID-related disruption in the first half. New orders increased 16% to 17,597 homes. The nine-month cancellation rate was 15.8%, versus 14.3% in 2019; Q3’s rate declined to 11.8% from 15.7%.
- Regional results varied: South East segment profit rose 35% for the first nine months, while Mid Atlantic fell 18% and Mid East fell 18%. COVID-related construction restrictions affected settlements in parts of the Mid East region.
- SG&A expense declined year over year, partly because 2014 equity awards had fully vested in 2019 and stock-option forfeitures were higher in 2020.
Liquidity, debt and capital
- At September 30, cash and cash equivalents were $2,539.5 million in homebuilding and $21.5 million in mortgage banking. Total assets were $5,499.9 million and shareholders’ equity was $2,919.0 million.
- Senior notes had a carrying value of $1,518.0 million: $598.8 million of 3.95% notes due 2022 and $919.2 million of 3.00% notes due 2030. NVR issued $600 million of 2030 notes in May and an additional $300 million in September.
- No borrowings were outstanding under the $200 million revolving credit facility or the $150 million mortgage repurchase facility. The filing reported approximately $188.6 million of unused credit-facility capacity and $150 million of unused mortgage-repurchase capacity.
- NVR repurchased 57,611 shares for $216.6 million during the first quarter and made no repurchases in Q3. At quarter-end, $400.6 million remained available under repurchase authorizations.
Outlook, risks and unusual items
- The filing provides no formal full-year earnings or revenue guidance. Management described strong demand from May through September, supported by historically low mortgage rates and low resale-home inventory, but emphasized uncertainty around the pandemic and its economic effects.
- COVID-19 caused earlier sales cancellations, mortgage-market disruption and construction restrictions in certain markets. Potential ongoing effects include reduced demand, construction or labor constraints, mortgage-market disruption and further losses on land deposits.
- NVR recorded approximately $36.4 million of lot-deposit impairment charges in Q1, primarily related to COVID-19 market deterioration, and reversed approximately $4.8 million in Q3 as conditions improved. Net nine-month pre-tax charges were approximately $32.5 million; the quarter-end impairment reserve was $58.8 million.
- Management warned that higher lumber costs would reduce consolidated homebuilding margins as affected homes in inventory settle in subsequent quarters. Q3 segment reporting included a consolidation adjustment related primarily to the increase in lumber prices.
- The effective tax rate was 20.2% for Q3 and 13.9% for the nine-month period, versus 16.2% and 14.8%, respectively, in 2019. Both years’ rates benefited from tax benefits on stock-option exercises; management expects future quarterly tax-rate volatility.
- Ordinary-course litigation was not expected by management and counsel to materially affect financial position, results or cash flows. The filing identifies no material change in market risks and reports effective disclosure controls.
Investor verification points
- Whether the elevated new-order pace converts into settlements, and whether backlog cancellations or construction delays increase.
- How rising lumber and other input costs affect margins as current inventory is completed and settled.
- Future impairment exposure on the approximately 100,000 lots under purchase agreements and the adequacy of the land-deposit reserve.
- Whether mortgage banking income and gains on loan sales remain strong amid changes in mortgage rates, lending standards and secondary-market conditions.
- Cash deployment, share repurchases and the cost and maturity profile of the expanded senior-note debt.
- The contribution of stock-option tax benefits to reported tax rates and the resulting variability in future EPS.