NVR, Inc. — FY 2011 Form 10-K
Reporting period: Fiscal year ended December 31, 2011. The filing also provides unaudited fourth-quarter results. Unless otherwise noted, financial statement amounts below are in U.S. dollars.
Business context
NVR builds and sells single-family homes, townhomes and condominiums across four U.S. regions, and provides mortgage banking and title services primarily to its homebuyers. It generally controls finished lots through fixed-price purchase agreements with forfeitable deposits rather than owning and developing land. The Washington, D.C. and Baltimore markets represented approximately 46% of 2011 homebuilding revenue.
Financial and operating results
| Metric | FY 2011 | FY 2010 | Change or context |
|---|---|---|---|
| Consolidated revenue | $2.659 billion | $3.042 billion | Down 13% |
| Net income | $129.4 million | $206.0 million | Down 37% |
| Diluted EPS | $23.01 | $33.42 | Down 31% |
| Homebuilding gross margin | 17.1% | 18.2% | Down 1.1 percentage points |
| Operating cash flow | $1.5 million | $55.4 million | Inventory and land-deposit investment absorbed cash |
| Cash and cash equivalents at year-end | $480.8 million | $1.194 billion | Cash declined $713.0 million during 2011 |
| Notes and loans payable | $1.6 million | $92.1 million | Excludes operating commitments and separately reported JV non-recourse debt |
Homebuilding revenue was $2.611 billion, down 12%; settlements fell 15% to 8,487 homes, while the average settlement price rose 4% to $307,500. Net new orders declined 2% to 9,247 units, with average order price essentially flat at $304,100. Year-end backlog increased 26% to 3,676 homes, valued at approximately $1.161 billion. The cancellation rate was 14%, unchanged from 2010.
Mortgage banking closed approximately 7,000 loans totaling $1.868 billion, down 16% in volume. Mortgage banking income before tax was $23.0 million versus $32.9 million; the capture rate declined to 88% from 90%. Year-end mortgage loans held for sale were $252.4 million.
In the fourth quarter, homebuilding revenue was $728.8 million versus $794.5 million a year earlier; homebuilding gross profit was $112.1 million versus $139.5 million. Net income was $32.4 million versus $58.7 million, and diluted EPS was $6.32 versus $9.96.
Material changes and capital position
- Lower settlement volume and weaker margins drove the annual earnings decline. Management attributed margin pressure to pricing pressure and increased construction and sales incentives.
- Cash declined chiefly as NVR repurchased $689.3 million of stock, invested in joint ventures and increased homebuilding inventory and contract land deposits. Financing cash outflow was $652.6 million.
- NVR repurchased 1,017,588 shares in 2011 and had approximately $319.9 million remaining under two board authorizations at year-end. It has not paid cash dividends.
- Homebuilding inventory rose to $533.2 million from $431.3 million. Net contract land deposits were $131.9 million, after a $70.3 million impairment allowance.
- NVR controlled approximately 48,200 lots through purchase agreements and held an aggregate $89.5 million investment in four joint ventures expected to produce approximately 6,700 lots. Direct land under development was $78.0 million.
Outlook, risks and contingencies
Management expected continued sales, pricing and gross-margin pressure over at least the next several quarters amid economic uncertainty, high unemployment, low consumer confidence and restrictive mortgage lending. It cited its balance sheet and liquidity as positioning the company to withstand uncertainty and pursue opportunities, but gave no quantified earnings or sales guidance.
Key risks include housing demand and home prices, mortgage availability and interest rates, lot supply and developer financing, construction costs and labor availability, regulatory changes, and concentration in the Washington, D.C./Baltimore region. In October 2011, Bank of America discontinued its correspondent lending program, reducing loan-sale channels and extending typical loan-sale timing to 30–60 days. The mortgage repurchase facility had a $25 million limit and no outstanding balance at year-end; NVR reported covenant compliance.
Contingencies include purported class-action overtime lawsuits, an EPA/DOJ inquiry concerning storm-water practices in New York and New Jersey, and a Department of Labor investigation. The company said outcomes and potential costs could not be estimated for the inquiry and investigation; it recorded no liability for the overtime cases because outcome and damages could not be determined. Management reported no impairment indicators for land under development, while noting future impairment charges remain possible. KPMG issued unqualified opinions on the financial statements and internal controls.
Investor verification priorities
- Verify the drivers and sustainability of the decline in settlements, earnings and gross margin, particularly pricing and incentives.
- Review cash generation and liquidity after substantial share repurchases, inventory growth and joint-venture investments.
- Assess the adequacy of the $70.3 million contract-land deposit reserve and the recoverability of deposits, inventory and joint-venture investments.
- Track backlog conversion, cancellations, mortgage capture and loan-sale timing following the loss of a correspondent lending channel.
- Check developments and potential exposure relating to the overtime litigation, EPA/DOJ inquiry and DOL investigation.
- Evaluate regional concentration and the developers’ ability to deliver finished lots, including the company’s growing direct-development and joint-venture exposure.