NVR, Inc. — FY2012 Form 10-K
Reporting period: Fiscal year ended December 31, 2012. The filing is an annual report, not a standalone Q4 filing; fourth-quarter results are noted separately below. Unless stated otherwise, dollar amounts are in millions.
Business context and reporting period
NVR builds and sells primarily pre-sold single-family homes, townhomes and condominiums across 15 states and Washington, D.C., and provides mortgage banking and title services. The Washington, D.C. and Baltimore markets represented approximately 47% of 2012 homebuilding revenue. NVR generally controls lots through fixed-price purchase agreements with forfeitable deposits rather than owning and developing land.
Key financial and operating metrics
| Metric | FY2012 | FY2011 | Change |
|---|---|---|---|
| Consolidated revenue | $3,184.7 | $2,659.1 | +20% |
| Net income | $180.6 | $129.4 | +40% |
| Diluted EPS | $35.12 | $23.01 | +53% |
| Homebuilding gross margin | 17.5% | 17.1% | +0.4 percentage points |
| Homebuilding SG&A as % of revenue | 9.7% | 10.1% | −0.4 percentage points |
| Operating cash flow | $264.4 | $1.5 | Higher |
Homebuilding revenue was $3,121.2; settlements rose 16% to 9,843 homes, and average settlement price increased 3% to $317,100. Net orders rose 18% to 10,954 units, with average new-order price up 8% to $328,800. Year-end backlog increased 35% to 4,979 units and 49% to $1,723.9. The cancellation rate was 14.5%, versus 13.6% in 2011.
Q4 2012: Homebuilding revenue was $925.4, net income was $60.6, and diluted EPS was $11.98. Compared with Q4 2011, when homebuilding revenue was $728.8, net income $32.4 and diluted EPS $6.32, these represent approximate increases of 27%, 87% and 90%, respectively.
Mortgage banking fees were $63.4, up from $48.0. NVRM closed approximately 8,000 loans with $2.2 billion aggregate principal, compared with approximately 7,000 loans and $1.9 billion in 2011; its capture rate was 87%, versus 88%.
At year-end, cash and cash equivalents were $1,153.5, homebuilding inventory $678.1, total assets $2,604.8 and shareholders’ equity $1,480.5. NVR issued $600.0 of 3.95% senior notes due 2022; their carrying value was $599.0. The mortgage repurchase facility had a $25.0 limit and no borrowings outstanding. Cash increased $672.7 during the year, including approximately $593.9 in net note proceeds. NVR repurchased 285,495 shares for approximately $227.3 and paid no dividends.
Material changes versus the prior comparable period
- Improved homebuilding demand and higher prices drove growth in orders, settlements, revenue and earnings; all four homebuilding regions reported higher 2012 segment profit than in 2011.
- Homebuilding gross margin improved from 17.1% to 17.5%, aided in part by a $2.0 recovery of previously impaired lot deposits, compared with an $11.2 impairment charge in 2011. Higher construction and commodity costs partly offset the improvement.
- Operating cash flow rose to $264.4 from $1.5. Cash generation reflected homebuilding operations, a $63.4 decrease in mortgage loans held for sale and higher payables, accrued expenses and customer deposits; inventory and contract land deposits also used cash.
- NVR completed its acquisition of substantially all assets and certain liabilities of Pittsburgh-area builder Heartland Homes on December 31, 2012, for $17.0 in cash, including $2.0 deferred. The acquisition added about 200 homes and $81.6 to year-end backlog but did not affect 2012 sales or settlements.
- Debt increased substantially from 2011 following the senior-note issuance. NVR ended 2011 with only $1.6 in notes and loans payable, compared with approximately $599.7 in 2012.
Outlook, risks, contingencies and unusual items
Management described housing conditions as improving, supported by low mortgage rates, better affordability, rising rents and lower inventory in some markets. It cautioned that continued sales and price growth depended on a sustained economic recovery and stronger consumer confidence; economic uncertainty could pressure sales, pricing and gross margins. The filing provides no quantified earnings or revenue guidance.
- Key risks include tight mortgage availability, interest-rate changes, unemployment and consumer confidence, regional market concentration, lot availability and developer financing, construction and commodity costs, labor supply, regulation, weather and competition.
- Approximately 53,200 lots were controlled under purchase agreements; deposits included $256.6 in cash and $3.3 in letters of credit. A $65.0 impairment reserve covered approximately 10,200 lots. NVR also had $82.9 invested in four joint ventures and $68.3 of directly owned land under development.
- Pending overtime-classification lawsuits remain unresolved; management recorded no related liability because outcome and damages could not be estimated. An EPA/DOJ inquiry into storm-water practices also remained unresolved, with potential costs not reasonably estimable. The DOL reported no violations in the operations it investigated, but had not formally closed its investigation.
- NVRM paid $7.25 to a correspondent lender in a settlement covering pending and future repayment requests for loans delivered to that lender. The mortgage loan-loss allowance was approximately $6.55 at year-end; management considered it adequate but gave no assurance it would cover future losses.
- The 2012 effective tax rate was 34.35%, reduced in part by a $9.2 decrease in the provision for unrecognized tax benefits following tax-authority settlements and audit activity.
Important facts for investors to verify
- Whether order growth and the $1.7 billion backlog convert into settlements, and how cancellations and backlog turnover develop.
- Whether homebuilding margins hold up as construction and commodity costs change, and how much future performance depends on deposit recoveries or impairments.
- The quality and liquidity of controlled lots, including developer delivery and financing risks, joint-venture exposure and the $65.0 deposit reserve.
- Cash generation and use of the $600.0 note proceeds, alongside share repurchases and the 2022 debt maturity.
- Progress and financial effects, if any, from the employee lawsuits, EPA/DOJ inquiry and mortgage-loan repurchase or indemnification exposure.
- Heartland’s subsequent operating contribution and the final purchase-price allocation, which was preliminary at filing.