NVR, Inc. — FY2019 Form 10-K
Business and period: Homebuilder and mortgage/title services provider; fiscal year ended December 31, 2019. NVR primarily builds homes on a pre-sold basis and generally contracts for finished lots rather than developing land itself. The filing also reports unaudited quarterly results, including Q4 2019.
Financial and operating results
| Metric | FY2019 | FY2018 | Change |
|---|---|---|---|
| Consolidated revenue | $7.389 billion | $7.164 billion | +3% |
| Net income | $878.5 million | $797.2 million | +10% |
| Diluted EPS | $221.13 | $194.80 | +14% |
| Homebuilding gross margin | 19.0% | 18.7% | +0.3 percentage points |
| Operating cash flow | $866.5 million | $723.1 million | +20% |
| Cash and cash equivalents | $1.140 billion | $711.9 million | Year-end balances |
Homebuilding revenue was $7.221 billion, with gross profit of $1.371 billion and homebuilding income of $923.9 million. Mortgage banking income was $101.9 million on $167.8 million of fees. NVR settled 19,668 homes (+7%); average settlement price declined 3% to $367,100. New orders rose 7% to 19,536, while average new-order price fell 2% to $368,400. Cancellation rate was 14.6%, versus 14.5% in 2018.
At year-end, backlog was 8,233 homes worth approximately $3.13 billion, down 2% in units and 1% in value year over year. The company expects to settle substantially all of this backlog during 2020, excluding cancellations.
Q4 2019: Homebuilding revenue was $1.947 billion and gross profit was $379.5 million. Net income was $256.1 million and diluted EPS was $64.41, compared with $232.2 million and $58.57 in Q4 2018. Settlements totaled 5,331 homes, versus 5,186 a year earlier.
Balance sheet, liquidity, and capital allocation
- Senior notes had a $600 million face value, a 3.95% coupon, and mature in September 2022; carrying value was $598.3 million. No borrowings were outstanding under the $200 million revolving credit facility or the mortgage subsidiary’s $150 million repurchase facility at year-end.
- Cash, restricted cash, and cash equivalents totaled $1.161 billion. Operating cash flow funded operations and inventory growth; financing cash use included $698.4 million of share repurchases, partly offset by $274.0 million from stock-option exercises.
- Repurchased 220,965 shares for $698.4 million during 2019. NVR has not paid cash dividends and stated no current intention to do so.
- Homebuilding inventory was $1.347 billion. Contract land deposits, net, were $413.9 million; the related reserve was $27.6 million. Total liabilities were $1.469 billion and shareholders’ equity was $2.341 billion.
Changes, outlook, and risks
- Management attributed improved demand to low unemployment, strong consumer confidence, and lower interest rates during 2019. It noted continued expected pressure on gross margins from modest pricing power and land and construction costs, and competitive pressure on mortgage banking profit.
- Growth was uneven across regions: South East segment profit increased 31%, while North East segment profit declined 26%. Washington, D.C. and Baltimore represented approximately 27% and 11% of homebuilding revenue, respectively, creating meaningful geographic concentration.
- The effective tax rate was 14.36%, versus 16.94% in 2018. 2019 included approximately $15.1 million of tax benefit from retroactively reinstated energy credits and $101.5 million of excess tax benefits from equity compensation; management expects future tax-rate volatility from equity plan activity and deferred compensation distributions.
- Adopted lease accounting on January 1, 2019, recognizing lease right-of-use assets and liabilities. The filing states adoption did not affect lease expense recognition.
- Key risks include housing and regional economic cycles, mortgage rates and financing availability, lot supply and developer performance, construction labor/material costs, regulation, weather, and mortgage-loan repurchase or representation-and-warranty claims. Mortgage repurchase reserve was $18.5 million. Management said ordinary-course litigation was not expected to materially affect results.
- KPMG issued unqualified opinions on the financial statements and internal controls. The auditor identified the contract-land-deposit reserve assessment as a critical audit matter; this designation did not modify the audit opinion.
Investor verification priorities
- Assess the $27.6 million land-deposit reserve against controlled lots, forfeiture exposure, and changing community economics.
- Track backlog conversion, cancellations, average selling prices, and whether margin performance holds as costs and pricing evolve.
- Evaluate the geographic concentration in the Washington, D.C. and Baltimore markets and the divergent regional segment trends.
- Review cash deployment and repurchases alongside the $600 million notes due in 2022 and the company’s stated liquidity resources.
- Separate recurring earnings from tax benefits, equity-compensation tax effects, and other unusual or timing-related items.