NVR, Inc. — 2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017; the filing also provides unaudited fourth-quarter results. Unless otherwise noted, financial amounts below are in millions of dollars.
Business context
NVR builds and sells single-family homes, townhomes and condominiums, primarily on a pre-sold basis, and provides mortgage and title services to homebuilding customers. Operations span 14 states and Washington, D.C. The Washington, D.C. and Baltimore metropolitan areas generated approximately 30% and 11% of 2017 homebuilding revenue, respectively. NVR generally controls lots through purchase agreements with forfeitable deposits rather than owning and developing land directly.
Financial and operating results
| Metric | 2017 | 2016 | Change |
|---|---|---|---|
| Consolidated revenue | $6,305.8 | $5,822.5 | +8% |
| Net income | $537.5 | $425.3 | +26% |
| Diluted EPS | $126.77 | $103.61 | +22% |
| Homebuilding gross margin | 19.2% | 17.5% | +1.7 points |
| Operating cash flow | $568.9 | $398.1 | +$170.8 |
- Homebuilding revenue was $6,175.5 million, up 8%; settlements rose 7% to 15,961 units. Homebuilding income increased to $776.4 million from $601.1 million.
- Net orders increased 13% to 17,608 units, while average order price decreased 1% to $383,200. Year-end backlog rose 24% to 8,531 homes, valued at approximately $3.28 billion; NVR expected to settle substantially all of it during 2018, excluding cancellations.
- Mortgage banking fees increased 15% to $130.3 million; mortgage banking income rose to $70.5 million from $60.6 million. NVR Mortgage closed approximately 13,100 loans totaling $4.23 billion; its customer capture rate was 88%.
- Operating cash flow of $568.9 million principally reflected earnings and mortgage-loan activity, partly offset by a $154.1 million increase in homebuilding inventory. Cash and cash equivalents were $667.9 million at year-end on the cash flow statement.
- Year-end total assets were $2,989.3 million and shareholders’ equity was $1,605.5 million. Senior notes had a $597.1 million carrying value and mature in 2022 at 3.95%. No borrowings were outstanding on the $200 million revolving credit facility or the mortgage repurchase facility; NVR reported compliance with their covenants.
Fourth-quarter results and material changes
- Fourth-quarter 2017 homebuilding revenue was $1,781.5 million versus $1,718.5 million a year earlier; gross profit was $343.2 million versus $305.1 million.
- Fourth-quarter net income was $124.6 million and diluted EPS was $28.88, compared with $150.9 million and $37.80 in fourth-quarter 2016. The fourth quarter included a $62.7 million income tax charge from remeasuring deferred tax assets after enactment of the Tax Cuts and Jobs Act.
- For the full year, the reported effective tax rate was 36.53%. Excluding the deferred-tax remeasurement charge, NVR said the rate would have been 29.13%; the $58.7 million excess tax benefit from stock-option exercises also reduced 2017 tax expense. Management expected the federal rate reduction from 35% to 21% to benefit the 2018 effective tax rate, excluding future stock-option tax benefits.
- Homebuilding gross margin recovered from 17.5% in 2016, when higher construction and selling costs weighed on results, to 19.2% in 2017. Management cited modest pricing improvement, moderating construction costs and better absorption of operating costs.
- NVR repurchased 166,520 shares for $422.2 million in 2017 and had $361.7 million remaining under repurchase authorizations at year-end. It paid no cash dividend.
Outlook, risks and unusual items
- Management described demand as improving amid low mortgage rates, low unemployment and stronger consumer confidence, but noted competitive constraints on new-home pricing. It said continued recovery depends on sustained economic growth, job and wage gains, and household formation.
- NVR expected continued homebuilding gross-margin pressure, dependent on limited pricing power and control of land and construction costs, and pressure on mortgage banking profit from competitive pricing. No numerical earnings or revenue guidance was provided.
- Key exposures include housing-market and interest-rate cycles, mortgage availability, labor and material costs, lot supply and developer performance, regulation, weather, and construction-defect claims. Mortgage operations depend heavily on NVR homebuyers and on continued access to secondary mortgage markets.
- Land strategy limits purchase-contract losses generally to deposits, but deposits may be forfeited. NVR controlled approximately 88,700 lots through purchase agreements, joint ventures and land under development; its stated aggregate contractual purchase price was approximately $8.4 billion. The company reported a $30.0 million allowance for potential losses on contract land deposits.
- Mortgage-loan representations and warranties create possible repurchase or indemnity exposure. The mortgage repurchase reserve was approximately $14.0 million at year-end. Warranty reserve was $94.5 million; management considered both reserves adequate but cautioned that estimates may prove insufficient.
- Management said ordinary-course litigation was not expected to have a material adverse effect. It also disclosed $35.8 million of unrecognized tax benefits that could affect the effective tax rate if recognized; state tax audits were ongoing.
- For upcoming accounting changes, NVR expected revenue-standard adoption in 2018 to have no material effect, but anticipated that lease-standard adoption in 2019 would materially increase reported assets and liabilities.
Important facts for investors to verify
- Whether backlog converts to 2018 settlements as expected, and whether cancellations or slower production alter that outlook.
- Whether home prices, construction costs and lot availability support margins, particularly given the company’s exposure to the Washington, D.C. and Baltimore markets.
- How the lower federal tax rate affects normalized earnings after the one-time deferred-tax charge and stock-option tax benefits.
- Whether contract-land, warranty and mortgage repurchase reserves adequately reflect potential losses, and how land commitments and buybacks affect liquidity.