NVR, Inc. — 2018 Form 10-K Summary
Business context and reporting period. Fiscal year ended December 31, 2018, with fourth-quarter results included. NVR builds homes primarily on a pre-sold basis under Ryan Homes, NVHomes and Heartland Homes, and provides mortgage banking and title services mainly to its homebuyers. It operates across 14 states and Washington, D.C. The Washington, D.C. and Baltimore markets generated about 40% of 2018 homebuilding revenue combined.
Financial and operating performance
| Metric | 2018 | 2017 | Change or context |
|---|---|---|---|
| Consolidated revenue | $7.164 billion | $6.306 billion | Up 14% |
| Net income | $797.2 million | $537.5 million | Up 48% |
| Diluted earnings per share | $194.80 | $126.77 | Up 54% |
| Homebuilding revenue | $7.004 billion | $6.176 billion | Up 13% |
| Homebuilding gross margin | 18.7% | 19.2% | Down 0.5 percentage point |
| Mortgage banking income | $88.6 million | $70.5 million | Up 26% |
| Operating cash flow | $723.1 million | $570.4 million | Cash increased $42.7 million after financing and investing activity |
Home settlements increased 16% to 18,447 units, while average settlement price fell 2% to $379,700. Net new orders rose 4% to 18,281, but average new-order price decreased 2% to $376,300. Year-end backlog declined 2% to 8,365 homes, valued at $3.153 billion; management expected to settle substantially all of it during 2019, subject to cancellations.
Fourth-quarter homebuilding revenue was $1.954 billion, up from $1.781 billion a year earlier; homebuilding gross profit was $363.7 million. Net income was $232.2 million versus $124.6 million, and diluted EPS was $58.57 versus $28.88. New orders fell 11% year over year to 3,841 units, while settlements rose to 5,186 from 4,630.
At year-end, cash and cash equivalents were $711.9 million; total cash, restricted cash and cash equivalents in the cash-flow statement were $732.2 million. Notes payable were $597.7 million carrying value, representing $600 million principal of 3.95% senior notes due in 2022. The $200 million corporate revolving facility and $150 million mortgage repurchase facility had no borrowings outstanding; NVR reported compliance with their covenants. Shareholders’ equity was $1.809 billion.
Material changes and unusual items
- Annual net income growth substantially exceeded revenue growth, aided by a lower effective tax rate: 16.94% in 2018 versus 36.53% in 2017. The 2017 rate included a $62.7 million deferred-tax remeasurement charge following the Tax Cuts and Jobs Act. 2018 also benefited from $77.5 million of excess tax benefits from equity compensation.
- Homebuilding margin decreased, primarily due to higher lot and certain material costs. Management reported softer demand in the second half of 2018, citing affordability pressures, rising mortgage rates and market uncertainty.
- Equity-based compensation expense increased to $75.7 million from $44.6 million, primarily following second-quarter 2018 equity grants.
- NVR repurchased 300,815 shares for $846.1 million during 2018, compared with $422.2 million in 2017. It does not pay a cash dividend.
- The company recognized an approximately $7.4 million impairment related to one joint venture and $5.1 million in net contract-land-deposit impairment charges.
Outlook, risks and contingencies
Management expects continued homebuilding gross-margin pressure, reflecting modest pricing power and the ability to manage land and construction costs. It also expects mortgage banking profit pressure from competitive pricing. Management said demand depends on continued economic growth, favorable employment, wage growth and household formation, and believes its balance sheet positions it to pursue opportunities amid market volatility. The filing does not provide numerical earnings or revenue guidance.
Key risks include higher interest rates and reduced mortgage affordability, economic or regional housing-market weakness, competition and rising new-home inventory, construction labor and material costs, availability and timely delivery of finished lots, and customer cancellations. NVR’s lot-contract strategy limits its typical loss on nonperformance to forfeitable deposits, but deposits and land-development investments can be impaired. Mortgage operations face secondary-market, regulatory, interest-rate and loan-repurchase risks; the year-end mortgage repurchase reserve was approximately $15.6 million. Warranty reserve was $103.7 million. Management said ordinary-course litigation was not expected to materially affect results or cash flows.
Other items to note: NVR expected adoption of the lease accounting standard in 2019 to add less than $100 million of right-of-use assets and corresponding liabilities. The company also disclosed $34.3 million of uncertain tax positions that would affect the effective tax rate if recognized, and approximately $37.6 million of contingent obligations under bonds and letters of credit.
Important facts for investors to verify
- Whether weaker second-half demand, higher rates and affordability constraints persist, and how they affect new orders, prices and cancellations.
- Whether backlog converts to settlements as expected; year-end backlog was down year over year and cancellations can reduce conversion.
- Whether lot, material and construction cost pressure further reduces homebuilding margins; 2018 margin fell to 18.7%.
- How much of 2018 earnings growth is repeatable, given the lower tax rate and substantial equity-compensation tax benefits.
- Whether land-deposit and joint-venture exposures, warranty obligations and mortgage-loan repurchase reserves remain adequate as market conditions change.
- The concentration of revenue in Washington, D.C. and Baltimore, and the effect of any regional downturn on consolidated results.