NVR, Inc. — Q3 2016 Form 10-Q
Business context and reporting period
Quarter ended September 30, 2016; comparisons are with Q3 and the first nine months of 2015. NVR builds and sells homes, primarily on a pre-sold basis, and operates a mortgage banking and title-services business. Unless stated otherwise, financial amounts below are in millions.
Financial performance and liquidity
- Q3: Consolidated revenue was $1,537.6, up 10%; net income was $117.4, up 1%; diluted EPS was $28.46, up 5%. Income before tax was essentially flat at $185.0.
- First nine months: Consolidated revenue was $4,069.8, up 13%; net income was $274.4, up 10%; diluted EPS was $66.24, up 14%.
- Homebuilding: Q3 revenue grew 10% to $1,507.5, while operating income decreased to $173.0 from $174.8. Gross margin fell to 17.6% from 19.1%. For nine months, revenue rose 13% to $3,990.7 and gross margin declined to 17.4% from 18.6%.
- Mortgage banking: Q3 income was $17.3, versus $16.1; nine-month income was $40.2, versus $33.3. Nine-month loan closing volume rose 12% to $2,751.4.
- Orders and backlog: Q3 net new orders increased 7% to 3,477 homes; average order price rose 4% to $392,800. Backlog was 7,658 homes, up 7%, with an average price of $389,400. The nine-month cancellation rate increased to 15.1% from 14.1%.
- Cash flow: Operating cash flow was $91.5 for the first nine months, compared with $15.6 in 2015. Investing used $7.3 and financing used $247.1; cash declined $162.9 to $262.4. Treasury-stock purchases used $291.7.
- Debt and liquidity: Senior notes had $600.0 principal and $596.3 carrying value, bearing 3.95% interest and maturing in 2022. A new $200.0 unsecured revolver, due 2021, had no borrowings; about $8.2 of letters of credit was outstanding. NVR Mortgage’s $150.0 repurchase facility also had no borrowings and expires July 2017.
- Total assets were $2,663.2 and shareholders’ equity was $1,299.1 at September 30, 2016. Homebuilding and mortgage cash balances were reported separately on the balance sheet.
Material changes versus prior periods
- Higher settlements and orders supported revenue growth, but higher construction and lot costs pressured homebuilding margins. Q3 settlements rose 9%; nine-month settlements rose 13%.
- Results varied by region: Mid East nine-month segment profit increased 66%, while Mid Atlantic declined 12% and North East declined 37%. These are segment measures, not consolidated net income.
- Homebuilding inventory increased to $1,316.7 from $1,006.5 at year-end 2015, primarily reflecting more homes under construction. Contract land deposits, net, rose to $377.5 from $343.3.
- During the first nine months, NVR repurchased 178,306 shares for $291.7; the weighted average share count was lower year over year, contributing to EPS growth.
Outlook, commentary, risks and unusual items
- Management described new-home demand as steady, while noting constrained pricing from more competing communities and tight mortgage underwriting. It expects continued gross-margin pressure from higher land and construction costs and competition. No specific earnings or revenue guidance was provided.
- NVR controlled about 72,300 lots through third-party purchase agreements, with roughly $399.7 of cash deposits and $2.0 of letters of credit. Management says the strategy limits land-development exposure, but deposits may be forfeited if NVR does not perform.
- The company is in settlement discussions with the EPA and DOJ regarding storm-water practices in New York and New Jersey. A settlement is expected to include injunctive relief and a civil penalty; an estimated penalty liability is recorded, but its amount is not stated in the supplied filing text. Management does not expect other ordinary-course litigation to materially affect results.
- Management cited economic conditions, interest rates, mortgage financing availability, land and material costs, labor shortages, weather, regulation, competition and mortgage-loan resale access as risks. It reported no material change in previously disclosed risk factors or market risks.
- The July 2016 credit agreement includes customary financial covenants. The filing reports no revolver borrowings at quarter end. Management expects adoption of the new lease standard to materially affect balance-sheet assets and liabilities, and says the stock-compensation standard may materially affect net income and EPS; impacts were still under evaluation.
Key facts for investors to verify
- Whether order growth and backlog convert to settlements, and whether cancellations continue rising.
- Whether construction and lot-cost inflation, competition and regional mix further reduce homebuilding margins.
- Cash usage and capital allocation, especially repurchases relative to operating cash flow and inventory investment.
- The amount and eventual terms of any EPA/DOJ settlement, and the recoverability of land deposits and controlled lots.
- The exact effect and timing of accounting-standard adoptions and the company’s compliance with credit-facility covenants.