NVR, Inc. — FY2020 Form 10-K
Reporting period: Fiscal year ended December 31, 2020. This is an annual report; fourth-quarter figures are noted separately. Unless otherwise stated, amounts are in U.S. dollars.
Business context
NVR builds and sells single-family homes, townhomes and condominiums, primarily on a pre-sold basis, and provides mortgage banking and title services to homebuilding customers. It operates across 33 metropolitan areas in 14 states and Washington, D.C. Its lot strategy relies mainly on finished-lot purchase agreements with forfeitable deposits rather than direct land ownership and development.
Key financial and operating metrics
| Metric | FY2020 | FY2019 |
|---|---|---|
| Consolidated revenue | $7.537 billion | $7.389 billion |
| Net income | $901.2 million | $878.5 million |
| Diluted earnings per share | $230.11 | $221.13 |
| Homebuilding gross margin | 19.0% | 19.0% |
| Homebuilding income | $938.0 million | $923.9 million |
| Mortgage banking income | $140.1 million | $101.9 million |
| Operating cash flow | $925.3 million | $866.5 million |
| Cash, cash equivalents and restricted cash at year-end | $2.810 billion | $1.161 billion |
| Senior notes carrying value at year-end | $1.517 billion | $598.3 million |
Homebuilding revenue was $7.329 billion; mortgage banking fees were $208.0 million. The company reported $1.078 billion of pretax income and a 16.40% effective tax rate. Homebuilding settlements were 19,766 units at an average price of $370,800. New orders, net of cancellations, were 23,082 units at an average price of $380,100.
At December 31, backlog was 11,549 homes valued at approximately $4.576 billion, versus 8,233 homes and $3.130 billion a year earlier. The homebuilding cancellation rate was 14.9%. NVR expected to settle substantially all year-end backlog during 2021, subject to cancellations and possible construction delays.
Fourth quarter: Homebuilding revenue was $2.264 billion and gross profit was $441.6 million; consolidated net income was $305.0 million and diluted EPS was $76.93. New orders were 5,485 units and settlements were 6,060 units.
Changes versus 2019
- Consolidated revenue rose 2%, net income rose 3% and diluted EPS rose 4%.
- New orders increased 18% and average new-order price rose 3%; settlements increased slightly, while average settlement price rose 1%.
- Mortgage banking income increased 37%, primarily due to higher secondary-market gains on loan sales. Loan closing volume rose 3%; the mortgage capture rate was 90%, unchanged.
- Operating cash flow increased to $925.3 million. Inventory rose $362.4 million, mainly reflecting more homes under construction.
- Year-end cash, cash equivalents and restricted cash increased by $1.649 billion. NVR issued $900 million principal amount of 2030 senior notes during 2020; the issuance proceeds, stock-option exercises and operating cash contributed to the increase. The company repurchased $371.1 million of stock, down from $698.4 million in 2019.
- Contract-land-deposit impairment reserves increased to $52.2 million from $27.6 million; the company recorded approximately $25.6 million of net pretax charges related to these deposits in 2020.
Liquidity, debt and capital allocation
Management described liquidity as very strong: approximately $2.8 billion of cash and cash equivalents, $187.2 million of unused committed capacity under the revolving credit facility, and $150 million available under the mortgage repurchase facility at year-end. Neither facility had borrowings outstanding. Senior notes consisted principally of $600 million due 2022 and $900 million principal amount due 2030. The company was in compliance with debt covenants. On February 12, 2021, after year-end, NVR amended and restated its revolving credit agreement, increasing commitments to $300 million and extending maturity to 2026. NVR has not paid cash dividends and reported no current intention to do so.
Outlook, commentary and risks
- Management said demand strengthened from May through December, supported by historically low mortgage rates and low resale-home inventory. It also cited uncertainty about the duration and economic effects of COVID-19.
- NVR expected continued pressure on homebuilding gross margins, depending on its ability to manage land and construction costs while balancing sales pace and pricing. Management also anticipated competitive pricing pressure in mortgage banking.
- Higher lumber and other commodity costs in the second half of 2020 were expected to weigh on consolidated margins as affected homes in inventory were settled in later periods.
- COVID-19-related shutdowns occurred in Pennsylvania and New York into May 2020. Further restrictions could disrupt construction, sales, mortgage operations and backlog delivery.
- Other material risks include interest-rate movements and mortgage availability, labor or material shortages and cost increases, lot availability and developer performance, inventory or deposit impairments, construction defects and warranty claims, regulation, and regional economic concentration. Washington, D.C. and Baltimore together represented approximately 34% of 2020 homebuilding revenue.
- Management stated that ordinary-course litigation was not expected to have a material adverse effect. The auditor identified the contract-land-deposit reserve assessment as a critical audit matter, citing the subjective and uncertain estimates involved; the financial-statement audit opinion was unqualified.
Important facts for investors to verify
- Whether the $4.576 billion year-end backlog converted to settlements in 2021, and the resulting cancellation and delivery rates.
- Whether lumber, labor and other construction-cost inflation pressured realized gross margins beyond the 19.0% FY2020 level.
- The adequacy and subsequent movement of the $52.2 million land-deposit reserve, including risks within NVR’s approximately 105,700 controlled lots.
- Whether cash generation and liquidity remained strong after the 2020 debt issuance, inventory investment and share repurchases.
- Mortgage banking profitability, loan-sale execution and repurchase exposure; the year-end mortgage repurchase reserve was approximately $20.5 million.
- Developments in COVID-19 restrictions, mortgage availability and demand across NVR’s concentrated Mid-Atlantic markets.