NVR, Inc. — FY 2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016. The filing also reports unaudited fourth-quarter results. Unless otherwise noted, dollar figures below are in millions.
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 its homebuyers. It operates across four U.S. regions, with significant revenue concentration in the Washington, D.C. and Baltimore metropolitan areas. Its principal homebuilding brands are Ryan Homes, NVHomes and Heartland Homes. NVR generally controls finished lots through third-party purchase agreements with forfeitable deposits rather than owning and developing land directly.
Financial and operating results
| Metric | FY 2016 | FY 2015 | Change |
|---|---|---|---|
| Consolidated revenue | $5,822.5 | $5,159.0 | +13% |
| Net income | $425.3 | $382.9 | +11% |
| Diluted EPS | $103.61 | $89.99 | +15% |
| Homebuilding revenue | $5,709.2 | $5,065.2 | +13% |
| Homebuilding gross profit | $1,001.4 | $946.4 | +6% |
| Homebuilding gross margin | 17.5% | 18.7% | Down 1.2 pts |
| Mortgage banking profit before tax | $60.6 | $47.9 | +27% |
| Operating cash flow | $384.5 | $203.4 | +$181.1 |
- Home settlements rose 12% to 14,928 units; average settlement price increased to $381,200 from $379,900. Net new orders rose 11% to 15,583 units, at an average price of $386,400.
- Year-end backlog grew 11% to 6,884 homes, valued at approximately $2.70 billion, up 14%. NVR expected to settle substantially all of this backlog during 2017, excluding cancellations.
- Fourth-quarter 2016 homebuilding revenue was $1,718.5 million and gross profit was $305.1 million; net income was $150.9 million and diluted EPS was $37.80. Fourth-quarter 2015 net income was $134.0 million and diluted EPS was $31.92.
- Cash and cash equivalents at year-end were $396.6 million; restricted cash was reported separately. Total assets were $2.64 billion and shareholders’ equity was $1.30 billion.
- Senior Notes had a carrying value of $596.5 million and bear interest at 3.95%, due September 2022. No borrowings were outstanding under the $200 million revolving credit facility or the mortgage repurchase facility at year-end. NVR reported compliance with the applicable covenants.
- NVR repurchased 280,288 shares for $455.4 million during 2016. It paid no cash dividends and stated no current intention to do so.
Changes versus prior period
- Revenue and earnings increased, reflecting more homes settled, higher order volume and improved mortgage banking results. Share repurchases also benefited diluted EPS.
- Homebuilding gross margin fell to 17.5%, principally because of higher construction and selling-related costs. Management also cited pricing constraints in a competitive market and expected further margin pressure over the next several quarters.
- Operating cash flow increased substantially year over year. Cash use included higher homebuilding inventory and contract land deposits; financing cash outflows were driven mainly by share repurchases.
- Segment performance varied: Mid East and South East profit increased, while Mid Atlantic and North East profit declined. North East margin fell to 14.9% from 18.4%, with higher construction and service costs and land-deposit impairments cited as factors.
- The new-order cancellation rate increased to 15.5% from 14.5%; the filing’s broader cancellation measure was approximately 16% in 2016 versus 15% in 2015.
Outlook, risks and unusual items
- Management described 2016 housing demand as steady, while noting tight mortgage underwriting, rising mortgage rates late in the year, competitive pricing and higher land and construction costs. It linked sustained recovery to job and wage growth and household formation. No specific full-year 2017 revenue or earnings guidance is provided in the filing.
- Key risks include economic or housing-market downturns, rising interest rates, reduced mortgage availability, concentrated exposure to the Washington, D.C. and Baltimore markets, lot supply and developer performance, construction cost or labor shortages, weather, regulation, and warranty, construction-defect and mortgage repurchase claims.
- NVR controlled approximately 78,000 lots through purchase agreements, joint ventures and land under development, involving about $493 million of deposits paid or committed in cash and letters of credit. The company reported a $31.3 million impairment allowance against contract land deposits and described its loss under most lot agreements as generally limited to forfeitable deposits, subject to certain commitments.
- The company remained in settlement discussions with the EPA and Department of Justice over Clean Water Act storm-water matters. It recorded an estimated civil-penalty liability in 2015; any settlement was expected to include injunctive relief and a civil penalty.
- Management expected increased effective-tax-rate volatility in 2017 from adoption of the new share-based compensation accounting standard. The filing also identified a potentially material balance-sheet effect from future lease accounting adoption.
- KPMG issued unqualified opinions on the financial statements and internal control over financial reporting. Management also concluded disclosure controls and internal control over financial reporting were effective at year-end.
Most important facts for investors to verify
- Whether backlog converts to settlements as expected, and how cancellations and mortgage qualification trends develop.
- Whether margin pressure from construction, land and selling costs persists, especially in Mid Atlantic and North East operations.
- Cash generation after inventory and lot-deposit investment, and the effect of continued large share repurchases on liquidity and per-share results.
- The sufficiency of contract land deposit, warranty and mortgage loan loss reserves, and the final outcome and cost of the EPA/DOJ matter.
- Actual exposure to mortgage-rate movements, mortgage-market liquidity and the company’s concentrated regional markets.