NVR, Inc. — Q3 2023 Form 10-Q
Reporting period: Three and nine months ended September 30, 2023. NVR builds and sells homes, primarily on a pre-sold basis, and provides mortgage banking and title services. Comparisons below are with the corresponding 2022 periods; dollar amounts are in millions unless otherwise noted.
Financial and operating performance
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Consolidated revenue | $2,569.0 | $2,776.9 | $7,085.6 | $7,814.3 |
| Income before taxes | $539.3 | $538.5 | $1,444.3 | $1,678.5 |
| Net income | $433.2 | $411.4 | $1,181.5 | $1,270.8 |
| Diluted EPS | $125.26 | $118.51 | $341.97 | $358.61 |
| Homebuilding gross margin | 24.3% | 23.6% | 24.4% | 26.0% |
| Homebuilding settlements | 5,606 units | 5,949 units | 15,330 units | 16,983 units |
| Net new orders | 4,746 units | 4,421 units | 16,539 units | 15,011 units |
Q3 consolidated revenue fell 7%, while net income rose 5% and diluted EPS rose 6%. The lower tax expense helped support quarterly net income: the effective tax rate was 19.7%, versus 23.6% a year earlier, primarily due to tax benefits from stock-option exercises. For the first nine months, revenue declined about 9% and net income about 7% year over year.
Q3 homebuilding revenue declined 8%, mainly because settlements fell 6% and average settlement price fell 3%. Gross margin improved year over year in Q3, as lower lumber costs more than offset higher lot costs, incentives and closing costs. For the nine-month period, margin contracted as higher labor, materials, lot, incentive and closing costs outweighed lower lumber costs. SG&A increased, including higher personnel costs and equity-based compensation.
Q3 net new orders increased 7%; the cancellation rate improved to 13.6% from 15.0%. At quarter-end, backlog was 10,371 homes, down 4% in units and 6% in value to $4.803 billion year over year. Average backlog price was $463,100, compared with $472,800.
Cash, debt and liquidity
- Cash and cash equivalents were $2.909 billion at September 30, 2023; total cash, restricted cash and cash equivalents were $2.970 billion.
- Nine-month operating cash flow was $1.002 billion, compared with $1.053 billion in 2022. Cash increased $395.5 million during the period. Investing activities used $17.4 million and financing activities used $589.5 million.
- Senior notes had $900 million principal outstanding, bear 3.00% interest and mature in May 2030. There were no borrowings under the $300 million revolving credit facility or the $150 million mortgage repurchase facility. The company reported approximately $287.5 million of unused credit-facility capacity after letters of credit.
- Shareholders’ equity was $4.173 billion. NVR repurchased 134,751 shares for $795.4 million during the first nine months; approximately $212.3 million remained under its repurchase authorization at quarter-end.
Outlook, risks and other notable items
Management said housing affordability reached a 35-year low in Q3 as home prices and interest rates rose, slowing new-home sales relative to the first half of 2023. It expects margin pressure as it adjusts products and pricing to market demand and faces higher building-material, labor and land costs. Management also reported improving supply-chain conditions and construction cycle times, and said its balance sheet and disciplined lot strategy position it to pursue opportunities amid market volatility. The filing provides no specific financial guidance.
NVR controlled approximately 133,900 lots at quarter-end, primarily through finished-lot purchase agreements. Net contract land deposits were $530.2 million, with approximately $50.2 million in impairment reserves; Q3 included about $3.8 million of pre-tax deposit impairment charges, while the nine-month period included a net reversal of about $6.2 million. The company also had contracts on raw land expected to yield approximately 23,700 additional lots, subject to feasibility and, in some cases, approvals.
Other items to note: homebuilding other income was substantially higher, reflecting increased corporate interest income; the filing attributes the lower tax rate partly to excess tax benefits from equity awards, which may cause future tax-rate volatility. Mortgage banking fair-value adjustments can also fluctuate with interest rates, loan volumes and servicing-right values. Management said ordinary-course litigation is not expected to have a material adverse effect; risk factors were unchanged from the 2022 Form 10-K.
Important facts for investors to verify
- Whether elevated mortgage rates and weak affordability continue to affect demand, pricing, cancellations and backlog conversion.
- Whether homebuilding margins remain under pressure from lot, labor, material, incentive and closing costs, and how much relief lower lumber costs provide.
- Whether NVR converts its 10,371-home backlog as expected; the company expects to settle substantially all of it within 12 months, excluding cancellations, but provides no assurance that past cancellation rates will continue.
- The risks and cash exposure associated with lot deposits, impairment reserves, land-development approvals and future lot-purchase commitments.
- The sustainability of substantial share repurchases, mortgage-banking earnings and the unusually favorable tax benefits from stock-option exercises.