NVR, Inc. — 2014 Form 10-K Summary
Business context and reporting period
Annual report for the fiscal year ended December 31, 2014. NVR builds and sells primarily pre-sold homes across 14 states and Washington, D.C., and provides mortgage and title services through NVR Mortgage Finance. Washington, D.C. and Baltimore together generated approximately 46% of 2014 homebuilding revenue.
Financial and operating results
| Metric | FY 2014 | FY 2013 | Change / context |
|---|---|---|---|
| Homebuilding revenue | $4.375 billion | $4.134 billion | Up 6% |
| Consolidated revenue, including mortgage banking fees | $4.445 billion | $4.211 billion | Up approximately 6% |
| Homebuilding gross profit | $806.5 million | $710.3 million | Up 14% |
| Homebuilding gross margin | 18.4% | 17.2% | 2013 included $31.6 million in service-related accruals |
| Net income | $281.6 million | $266.5 million | Up 6% |
| Diluted EPS | $63.50 | $54.81 | Up 16%; benefited from lower share count following repurchases |
| Home settlements | 11,859 units | 11,834 units | Nearly flat; average settlement price rose 6% to $368,500 |
| Net new orders | 12,389 units | 11,800 units | Up 5%; average order price up 4% to $373,700 |
| Year-end backlog | 5,475 units; $2.106 billion | 4,945 units; $1.846 billion | Units up 11%; dollars up 14% |
| Mortgage banking income before tax | $25.7 million | $39.3 million | Down; lower mortgage fees and higher expenses |
FY 2014 operating cash flow was $184.5 million, versus $270.2 million in 2013. Cash and cash equivalents decreased by $320.8 million to $545.4 million at year-end, reflecting principally $567.5 million of share repurchases and higher inventory and land deposits. Capital expenditures were $31.7 million. Shareholders’ equity was $1.124 billion.
Debt consisted primarily of $600 million principal amount of 3.95% senior notes due 2022, carried at $599.2 million. NVR reported no borrowings under its mortgage subsidiary’s $25 million repurchase facility at year-end. Management said existing cash, operating cash generation, and access to debt and equity markets should meet near- and long-term working-capital and debt-service needs.
Material changes versus the prior comparable period
- Revenue and earnings increased, while settlements were essentially unchanged; higher average selling prices and a higher year-end backlog supported growth.
- Homebuilding gross margin improved to 18.4%. The comparison is affected by $31.6 million of 2013 service-related accruals; excluding those charges, management reported 2013 margin of 17.9%.
- SG&A rose 15% to $358.9 million and increased to 8.2% of homebuilding revenue from 7.6%, primarily from higher equity compensation and sales and marketing costs.
- Mortgage banking fees declined to $69.5 million from $76.8 million, and mortgage banking pre-tax income fell to $25.7 million from $39.3 million, despite a 12% increase in loan-closing volume.
- NVR repurchased 507,648 shares for $567.5 million during 2014. The weighted-average diluted share count declined to 4.435 million from 4.862 million.
- Cash from operations fell as inventory increased by $127.7 million and contract land deposits increased by $57.6 million.
Outlook, risks, contingencies and unusual items
- Management expected a challenging 2015 market, citing weaker new-home pricing and increased competition as more communities opened in its markets. It anticipated continued gross-margin pressure over the next several quarters.
- Management viewed further housing recovery as dependent on employment, wage growth, consumer confidence, household formation and mortgage availability. It noted 2014 weakness associated with higher existing-home inventory, reduced affordability and tighter mortgage underwriting.
- Customer cancellations were approximately 15% of gross new orders in 2014, broadly similar to 2013 and 2012. NVR expected to settle substantially all year-end backlog during 2015, subject to cancellations.
- Lot supply and market-value risk remain significant. NVR controlled approximately 68,700 lots through purchase agreements, joint ventures and land under development; approximately $56.1 million of contract land deposits was reserved for impairment. The company’s typical purchase agreements limit its loss on nonperformance to deposits, but some commitments and joint-venture investments remain exposed.
- Other principal risks include mortgage-credit availability and loan-sale liquidity, interest rates, construction labor and material costs, regulatory changes, warranty and construction-defect claims, and concentration in the Washington, D.C. and Baltimore markets. Mortgage loan-loss allowance was approximately $10.0 million at year-end.
- Warranty reserve was $94.1 million at year-end, down from $101.5 million. NVR cautioned estimates may prove insufficient if repair costs, claims or legal outcomes worsen.
- Several wage-and-hour cases involving sales representatives remain pending; an individual test case resulted in a jury verdict for NVR, and an appeal was pending. No liability was recorded. An EPA/Department of Justice inquiry concerning storm-water practices remained unresolved, and potential costs could not be reasonably estimated.
- The effective tax rate increased to 37.90% from 36.36%; 2014 included approximately $7 million of tax expense from reversal of previously recognized deductions.
Important facts for investors to verify
- Whether the 2015 pricing and competition outlook translates into lower settlement prices, margin compression or slower order growth.
- Conversion of the $2.106 billion backlog into settlements, including subsequent cancellations and mortgage-financing availability.
- Cash generation relative to continued investment in inventory and land deposits, and the pace and price of future share repurchases.
- Adequacy of warranty and mortgage-loan loss reserves, and developments in the storm-water inquiry and wage-and-hour litigation.
- Performance and impairment exposure across controlled lots, joint ventures and deposits, particularly in the company’s concentrated Mid-Atlantic markets.