NVR, Inc. — FY 2013 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2013. The filing also reports unaudited fourth-quarter results. Unless stated otherwise, dollar figures below are in millions.
Business context
NVR builds and sells single-family homes, townhomes and condominiums, primarily in 14 states and Washington, D.C. It also provides mortgage banking and title services, mainly to its homebuyers. Its principal homebuilding brands are Ryan Homes, NVHomes, Fox Ridge Homes and Heartland Homes. NVR generally controls lots through fixed-price purchase agreements with forfeitable deposits rather than owning and developing land directly.
Financial and operating results
| Metric | FY 2013 | FY 2012 |
|---|---|---|
| Consolidated revenue | $4,211.3 | $3,184.7 |
| Homebuilding revenue | $4,134.5 | $3,121.2 |
| Homebuilding gross profit / margin | $710.3 / 17.2% | $545.6 / 17.5% |
| Income before taxes | $418.7 | $275.1 |
| Net income | $266.5 | $180.6 |
| Diluted EPS | $54.81 | $35.12 |
| Cash from operating activities | $270.2 | $264.4 |
| Cash and cash equivalents at year-end | $866.3 | $1,153.5 |
| Senior notes, face amount | $600.0 | $600.0 |
- Settlements rose 20% to 11,834 homes; average settlement price increased 10% to about $349,100. New orders rose 8% to 11,800 units, with average order price up 10% to about $360,400.
- Year-end backlog was 4,945 units valued at approximately $1,845.6 million, versus 4,979 units and $1,723.9 million a year earlier. The cancellation rate was 14.9%, compared with 14.5%.
- Homebuilding SG&A was $313.0 million, or 7.6% of homebuilding revenue, versus $301.2 million, or 9.7%, in 2012. Mortgage banking fees were $76.8 million, up from $63.4 million; mortgage banking income before tax was $39.3 million, up from $34.2 million.
- FY 2013 operating cash flow was close to the prior year. Cash declined $287.3 million, largely reflecting $554.5 million of share repurchases, partly offset by operating cash generation and other financing activity. NVR repurchased 581,387 shares during the year.
- The $600 million senior notes bear interest at 3.95% and mature in 2022. The mortgage subsidiary’s $25 million repurchase facility had no borrowings outstanding at year-end. The filing states NVR believes available cash, operating cash flow and access to capital markets will meet near- and long-term requirements.
Fourth-quarter results
Unaudited Q4 homebuilding revenue was $1,223.8 million and gross profit was $222.4 million. Net income was $97.8 million and diluted EPS was $21.15. NVR reported 2,631 net contracts, 3,342 settlements and year-end backlog of 4,945 units. Mortgage loan closings totaled $721.9 million.
Changes, outlook and notable items
- Compared with 2012, consolidated revenue increased 32%, net income increased 48%, and diluted EPS increased 56%. Higher settlement volume and pricing were major drivers; share repurchases also reduced weighted-average shares.
- Management said sales trends were stronger in the first half of 2013 and weakened in the second half amid rising mortgage rates, higher home prices and buyer uncertainty. Tight mortgage underwriting remained a market challenge.
- Reported homebuilding gross margin declined to 17.2% from 17.5%. Two 2013 warranty accrual charges totaled approximately $31.6 million: $15.6 million for water-infiltration remediation in one completed community and $16.0 million for a separate, non-recurring service issue. Excluding these charges, management reported a 17.9% margin, up 46 basis points year over year. Management expected continued gross-margin pressure over the next several quarters from cost and pricing pressures.
- NVR expected to settle substantially all year-end backlog during 2014, subject to cancellations. The filing provides no numerical revenue, earnings or margin guidance.
- At year-end, NVR controlled approximately 64,600 lots through purchase agreements, joint ventures and land under development. Related deposit exposure included a $59.8 million impairment reserve; approximately 9,200 controlled lots were associated with that reserve. NVR also had $92.7 million invested in four joint ventures and $41.3 million in directly owned land under development.
- Key risks include mortgage-rate increases and restricted buyer financing; availability and cost of lots, labor and materials; regional economic weakness; and warranty, construction-defect and mortgage repurchase claims. Washington, D.C. and Baltimore together accounted for about 46% of 2013 homebuilding revenue.
- Legal matters include wage-and-hour cases, for which a 2013 jury verdict favored NVR in the remaining individual Tracy trial, and an EPA/DOJ inquiry into storm-water practices in New York and New Jersey. NVR recorded no liability for the wage claims and said it could not estimate the inquiry’s outcome or potential cost.
Most important facts for investors to verify
- Whether higher mortgage rates, tight underwriting and weaker second-half sales affect new orders, cancellations and conversion of the $1.85 billion backlog.
- Whether construction and land-cost inflation outweighs pricing and operating leverage, particularly after the two unusual warranty charges.
- The adequacy of the $101.5 million year-end warranty reserve and the $59.8 million contract-land-deposit impairment reserve.
- Cash and liquidity after substantial repurchases, alongside the $600 million notes due 2022 and future lot-deposit commitments.
- Developments in the EPA/DOJ inquiry, wage-and-hour litigation and potential mortgage-loan repurchase or indemnification claims.
KPMG issued an unqualified opinion on the consolidated financial statements and on internal control over financial reporting as of December 31, 2013.