NVR, Inc. — 2015 Form 10-K
Reporting period: Fiscal year ended December 31, 2015. This is an annual filing; selected fourth-quarter results are shown separately below. Amounts are in U.S. dollars unless stated otherwise.
Business context and reporting period
NVR builds and sells single-family homes, townhomes and condominiums, primarily on a pre-sold basis, and provides mortgage banking and title services. It operates in 14 states and Washington, D.C. The Mid-Atlantic generated about 59% of 2015 homebuilding revenue; Washington, D.C. and Baltimore together accounted for about 44%.
NVR generally controls finished lots through purchase agreements with forfeitable deposits rather than owning and developing land. At year-end it controlled approximately 74,500 lots through agreements, joint ventures and limited land development.
Financial and operating performance
| Metric | 2015 | 2014 | Change |
|---|---|---|---|
| Consolidated revenue | $5.159 billion | $4.445 billion | +16% |
| Net income | $382.9 million | $281.6 million | +36% |
| Diluted EPS | $89.99 | $63.50 | +42% |
| Homebuilding revenue | $5.065 billion | $4.375 billion | +16% |
| Homebuilding gross margin | 18.7% | 18.4% | +0.3 percentage points |
| Homebuilding settlements | 13,326 units | 11,859 units | +12% |
| Net new orders | 14,080 units | 12,389 units | +14% |
| Year-end backlog | 6,229 units; $2.375 billion | 5,475 units; $2.106 billion | +14% units; +13% value |
| Mortgage banking income before tax | $47.9 million | $25.7 million | +87% |
Average settlement price rose 3% to approximately $379,900. Management attributed growth to higher settlements and orders, stronger market absorption, and improved mortgage capture. The 2015 homebuilding gross margin included an approximately $11.1 million recovery of previously impaired land deposits; excluding that recovery, margin was flat, as higher revenue was offset by higher lot and construction costs. Diluted EPS growth also benefited from share repurchases.
Fourth quarter 2015: Homebuilding revenue was $1.528 billion, homebuilding gross profit was $289.5 million, net income was $134.0 million, and diluted EPS was $31.92. In Q4 2014, those figures were $1.307 billion, $236.0 million, $99.5 million and $23.24, respectively.
Cash flow, debt and liquidity
- Operating cash flow was $203.4 million, versus $184.5 million in 2014. Cash and cash equivalents decreased by $120.1 million to $425.3 million, including $397.5 million in homebuilding and $26.8 million in mortgage banking cash.
- Cash use included $134.8 million for increased homebuilding inventory and $37.6 million for increased contract land deposits.
- Financing activities used $322.5 million, including $431.4 million to repurchase 289,687 shares. NVR reported approximately $339.2 million remaining under share repurchase authorizations at year-end.
- Senior Notes had $600 million principal, a 3.95% coupon and a September 2022 maturity; balance-sheet carrying value was $599.3 million. No borrowing was outstanding under the mortgage repurchase facility at year-end.
- In January 2016, the mortgage facility commitment was increased from $25 million to $150 million, with an option to request up to an additional $50 million. Management stated that cash, operating cash flows and access to debt and equity markets should meet near- and long-term cash needs.
Changes, outlook and risks
- Management said housing demand improved during 2015, but new-home pricing remained constrained by more competing communities and tight mortgage underwriting. It expected continued pressure on margins and pricing from higher land and construction costs and competition, and linked continued housing recovery to employment and wage growth and household formation. No specific earnings or revenue guidance was provided.
- Homebuilding cancellation rates remained about 15% in 2015, 2014 and 2013. NVR expected to settle substantially all year-end 2015 backlog during 2016, excluding cancellations; this is not a guarantee.
- Key risks include housing and regional economic downturns, interest-rate increases, mortgage availability and secondary-market access, lot supply and developer performance, material and labor costs, regulation, construction defects and warranty claims, and concentration in the Washington, D.C. and Baltimore markets.
- NVR had approximately $42.2 million of contract-land-deposit impairment reserves, covering about 6,100 lots. It recorded net deposit recoveries of approximately $11.1 million in 2015. Management reported no impairment indicators for land under development or JV land at year-end.
- NVR was in settlement discussions with the EPA and Department of Justice concerning storm-water practices in New York and New Jersey. A settlement was expected to include injunctive relief and a civil penalty; NVR recorded an estimated penalty liability and expense in 2015. Management said other ordinary-course litigation was not expected to have a material adverse effect.
- Other notable items: the 2014 effective tax rate included approximately $7 million of expense from reversing previously recognized tax deductions; warranty reserves were $87.4 million at year-end; and NVR acquired land expected to yield about 1,000 lots for approximately $150 million in February 2016.
Important facts for investors to verify
- Whether backlog converts to settlements as expected, and whether cancellations or financing constraints increase.
- Whether pricing, lot costs and construction costs put further pressure on homebuilding margins, particularly given the 2015 deposit recovery.
- Cash generation and liquidity after inventory and land-deposit investment, share repurchases and the February 2016 land acquisition.
- The adequacy of land-deposit, warranty and mortgage-loan loss reserves, and the outcome and cost of the EPA matter.
- Exposure to the Washington, D.C. and Baltimore markets, and the terms, capacity and covenant compliance of the amended mortgage facility.