NVR, Inc. — FY 2010 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2010. NVR builds and sells homes across 14 states and operates a mortgage banking and title-services business. The Washington, D.C. and Baltimore markets represented 47% of 2010 homebuilding revenue.
Financial and operating performance
| Metric | FY 2010 | FY 2009 |
|---|---|---|
| Consolidated revenue | $3.042 billion | $2.744 billion |
| Net income | $206.0 million | $192.2 million |
| Diluted EPS | $33.42 | $31.26 |
| Homebuilding revenue | $2.981 billion | $2.683 billion |
| Homebuilding gross profit margin | 18.2% | 18.5% |
| Operating cash flow | $55.4 million | $241.6 million |
| Cash and cash equivalents at year-end | $1.194 billion | $1.250 billion |
| Total notes and loans payable | $92.1 million | $147.9 million |
- Home settlements rose 11% to 10,030 units; average settlement price was $297,100, nearly unchanged from 2009.
- Net new orders were essentially flat at 9,415 units; average new-order price increased 4% to $304,000. The cancellation rate was 14% in both years.
- Year-end backlog fell 17% to 2,916 homes, valued at approximately $958 million, from $1.076 billion.
- Mortgage banking income before tax was $32.9 million versus $35.3 million. Mortgage loan closings totaled $2.220 billion, up 8%; the mortgage capture rate was 90%.
- Fourth-quarter 2010 net income was $58.7 million and diluted EPS was $9.96. Homebuilding revenue was $794.5 million and gross profit was $139.5 million.
Material changes and capital position
- Consolidated revenue increased 11% and net income and diluted EPS each increased 7% year over year. Higher settlements, partly reflecting the federal homebuyer tax credit, drove the revenue increase.
- Homebuilding gross margin eased from 18.5% to 18.2%; management cited a $4.3 million contract-land-deposit impairment charge in 2010, versus a $6.5 million recovery in 2009.
- Operating cash flow declined to $55.4 million, partly reflecting $53.9 million of increased contract land deposits. Cash decreased $56.4 million during the year.
- NVR repurchased 644,562 shares for approximately $417.1 million and redeemed the remaining $133.4 million of 5% senior notes at maturity. No senior notes remained at year-end; most reported debt was mortgage warehouse financing.
- The company terminated its $300 million unsecured working-capital revolver and stated that it did not intend to replace it. Its mortgage subsidiary had $90.3 million outstanding on a $100 million repurchase facility, expiring August 2011; NVR reported compliance with its covenants.
- Year-end homebuilding inventory was $431.3 million. NVR controlled approximately 50,400 lots under purchase agreements, with $174.3 million in cash deposits and $6.6 million in letters of credit; a $73.5 million impairment reserve covered deposits associated with approximately 10,300 lots.
Outlook, risks, and unusual items
- Management reported that new-home demand weakened after the federal tax credit expired on April 30, 2010. High unemployment, low consumer confidence, elevated housing inventory, and restrictive mortgage lending continued to pressure sales.
- Management saw some pricing stabilization in several markets entering 2011 but expected continued sales and pricing pressure, with gross-margin pressure over at least the next several quarters. No numerical earnings or revenue guidance was provided.
- Key risks include housing-market and mortgage-financing conditions, interest rates, lot availability and developer financing, construction costs and labor, regional concentration, regulatory changes, and potential inventory or deposit impairments.
- NVR acquired four zoned raw-land parcels in 2010, carrying approximately $78 million in development costs and expected to yield about 890 lots. One parcel was acquired from an entity controlled by a director; the filing also reports related-party lot-purchase agreements with that entity.
- Pending matters include purported employee class actions alleging improper overtime classification, an EPA information request regarding stormwater practices, and a North Carolina mortgage-lending examination. No liability was recorded for the wage cases because outcome and damages could not be estimated; EPA costs also could not be estimated. Management did not expect the North Carolina matter to materially affect financial position.
- Management said current cash, operating cash generation, mortgage-facility borrowing capacity, and access to public debt and equity markets were expected to meet near- and long-term requirements. This is management’s assessment, not a guarantee of future liquidity.
Most important facts for investors to verify
- Whether orders, cancellation rates, backlog, and settlements improved or weakened after the tax-credit-driven first-half activity.
- Whether the $73.5 million contract-land-deposit reserve and homebuilding inventory remain adequate as market conditions and lot values change.
- Whether mortgage repurchase and indemnification claims exceed the $8.2 million loan-loss allowance, which increased from $3.2 million in 2009.
- Liquidity and refinancing exposure around the mortgage repurchase facility’s August 2011 expiry, alongside the decision to end the unsecured revolver.
- Developments in the wage, EPA, and North Carolina lending matters, and the terms and governance of director-related land transactions.