NVR, Inc. — Form 10-Q Summary
Reporting period: Third quarter and nine months ended September 30, 2011. Amounts below are in millions of dollars unless noted; financial statements are unaudited.
Business context and reporting period
NVR builds and sells single-family homes, townhomes and condominiums, principally in four U.S. regions, and provides mortgage banking and title services to homebuyers. It generally secures finished lots through purchase agreements with forfeitable deposits rather than owning and developing land. Management reported a sluggish economy, high unemployment, tight mortgage lending and continued home-price uncertainty weighing on housing demand.
Financial and operating performance
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Total consolidated revenue | $707.5 | $676.2 | $1,917.9 | $2,230.9 |
| Income before taxes | $68.9 | $64.9 | $157.1 | $235.9 |
| Net income | $43.4 | $43.9 | $97.0 | $147.3 |
| Diluted EPS | $7.98 | $7.31 | $16.75 | $23.49 |
| Homebuilding gross margin | 17.9% | 18.3% | 17.7% | 18.4% |
Q3 homebuilding revenue rose 5% year over year, with settlements up 6% and average settlement price down 1%. Homebuilding operating income was $65.0 million versus $58.9 million. Mortgage banking income was $4.3 million versus $6.5 million. For the nine months, homebuilding revenue fell 14%, reflecting 18% fewer settlements, partly offset by a 4% higher average settlement price; homebuilding income was $140.6 million versus $210.8 million.
Q3 net income declined about 1%, while diluted EPS increased 9%, primarily because of share repurchases. Nine-month net income fell about 34%. The prior-year comparison was affected by settlement activity ahead of the June 2010 federal homebuyer tax-credit deadline.
Q3 new orders were 2,218 units, up 3%; the cancellation rate was 15.0% versus 17.9%. Nine-month orders were 7,089, down 7%, and the cancellation rate was 13.2% versus 12.7%. Backlog at quarter-end was 3,909 homes valued at $1.217 billion, compared with 3,790 homes valued at $1.184 billion a year earlier.
Cash flow, liquidity and capital
- Cash and cash equivalents totaled $497.1 million at September 30, 2011, down from $1,193.4 million at December 31, 2010. Homebuilding cash was $492.3 million; mortgage banking cash was $4.1 million.
- Nine-month operating cash flow was a use of $4.6 million, versus a use of $85.6 million in 2010. Inventory growth used $148.4 million and contract land deposits increased by $33.6 million.
- Investing cash use was $60.4 million, mainly reflecting a $61.3 million investment in a joint venture. Financing cash use was $631.7 million, including $666.6 million for treasury-share purchases.
- Total liabilities were $453.6 million, versus $519.7 million at year-end 2010; shareholders’ equity was $1.346 billion, versus $1.740 billion. The mortgage repurchase facility had a $25 million limit and no borrowings outstanding at quarter-end. The filing reported $5.7 million of non-recourse consolidated-VIE debt and $1.7 million of other term debt.
- NVR repurchased approximately 979,000 shares for $666.6 million during the first nine months. Management said repurchases may continue, subject to market conditions and excess liquidity.
Changes, outlook, risks and contingencies
Q3 results improved from the prior-year quarter in revenue and operating income, but gross margin narrowed. The nine-month results were materially weaker than 2010. Management attributed margin pressure to lower settlement volume and higher contract-land-deposit impairment charges: $6.8 million for the first nine months of 2011, compared with a $0.7 million recovery in 2010. The company controlled approximately 47,400 lots under purchase agreements and had about $69.8 million of related impairment reserves.
Management expected sales and selling-price pressure to continue for at least several quarters and cited economic uncertainty, limited mortgage availability and competition from existing homes. It provided no specific numerical earnings or revenue guidance. Management considered its liquidity and balance sheet strong enough to pursue opportunities, but noted that future inventory, land-deposit and land-development impairment charges could arise if conditions deteriorate. It reported no current impairment indicators for land under development and judged the contract-deposit and warranty reserves adequate, while cautioning that estimates may prove insufficient.
Contingencies include purported employee class actions alleging misclassification of sales and marketing staff for overtime, an EPA inquiry concerning storm-water discharge practices, and a Department of Labor investigation initiated in August 2011. The company said it could not estimate the potential costs or outcomes of the unresolved matters and recorded no liability for the wage lawsuits. North Carolina’s banking regulator concluded its examination of mortgage origination practices in October 2011 without material impact. NVR also cited risks from economic conditions, interest rates, financing access, regulation, competition, land and material costs, labor availability and weather.
Important facts for investors to verify
- Whether order trends, cancellations and the 3,909-home backlog convert into settlements and revenue amid ongoing housing-market weakness.
- Whether margins and contract-land-deposit reserves remain adequate; monitor future impairments, particularly against the $69.8 million reserve and roughly 9,300 affected lots.
- How continued share repurchases affect cash and liquidity, given the $497.1 million quarter-end cash balance and $666.6 million of nine-month buybacks.
- Whether mortgage banking profitability, loan capture rates and mortgage-related loss allowances hold up as lending conditions and regulation evolve.
- Developments and any financial exposure from the wage litigation, DOL investigation and EPA inquiry; the filing provides no clear estimate of potential costs for these unresolved matters.