NVR(NVR) - 2019 Q4 - Annual Report

Part I Business NVR is a major US homebuilder that minimizes risk through a pre-sold construction model and a conservative lot acquisition strategy - NVR's primary business is the construction and sale of single-family homes, townhomes, and condominiums, which are mainly built on a pre-sold basis[13] - The company operates under three main trade names: Ryan Homes, NVHomes, and Heartland Homes[14] - A key business strategy is to avoid direct land development by acquiring finished lots through Lot Purchase Agreements, which require forfeitable deposits, thereby minimizing financial risk[15][16] - NVR operates a mortgage banking subsidiary, NVRM, which originates loans almost exclusively for its homebuilding customers and sells all closed loans into the secondary market[18][31] Homebuilding Segments and Geographic Regions | Segment | Geographic Regions | | :--- | :--- | | Mid Atlantic | Maryland, Virginia, West Virginia, Delaware and Washington, D.C. | | North East | New Jersey and Eastern Pennsylvania | | Mid East | New York, Ohio, Western Pennsylvania, Indiana and Illinois | | South East | North Carolina, South Carolina, Florida and Tennessee | Backlog and Cancellation Rates (2017-2019) | Metric | 2019 | 2018 | 2017 | | :--- | :--- | :--- | :--- | | Backlog (Units) | 8,233 | 8,365 | 8,531 | | Backlog (Value) | ~$3.1 billion | ~$3.2 billion | N/A | | Cancellation Rate | 14.6% | 14.5% | 14.0% | Risk Factors The company faces risks from economic downturns, interest rate changes, mortgage market disruptions, and supply chain issues - The business is highly sensitive to economic conditions such as employment levels, consumer confidence, and interest rates, which can significantly impact demand for new homes[42][43] - A significant portion of revenue is concentrated in the Washington, D.C. and Baltimore, MD metropolitan areas, accounting for approximately 27% and 11% of 2019 homebuilding revenues, respectively[48] - The mortgage banking business depends on selling originated loans into the secondary market; disruptions could impair this ability[50][51] - The company's lot acquisition strategy involves forfeitable deposits, and adverse market changes could lead to financial losses[52] - The homebuilding and mortgage industries are highly competitive and subject to extensive government regulations that can increase costs[59][62][64] Unresolved Staff Comments The company reports no unresolved staff comments - None[76] Properties NVR leases its corporate office and most production facilities, with plant utilization at 49% of capacity in 2019 - Corporate offices are leased in Reston, Virginia, with the current lease expiring in April 2026[77] - The company operates seven leased production facilities and owns one facility; total plant utilization was 49% in 2019, down from 52% in 2018[78] Legal Proceedings Ongoing litigation is not expected to materially impact the company's financial condition - Management does not expect ongoing litigation to have a material adverse effect on the company's financial condition[80] Mine Safety Disclosures This item is not applicable to the company - Not applicable[81] Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities NVR's stock trades on the NYSE, the company does not pay dividends, and it actively repurchased shares in Q4 2019 - The company's common stock trades on the NYSE under the symbol "NVR"[83] - NVR has never paid a cash dividend and does not intend to in the future[84] Common Stock Repurchases (Q4 2019) | Period | Total Shares Purchased | Average Price Paid per Share | Approximate Dollar Value of Shares Remaining for Purchase | | :--- | :--- | :--- | :--- | | Oct 1-31, 2019 | 17,432 | $3,625.92 | $286,809,000 | | Nov 1-30, 2019 | 42,088 | $3,556.51 | $437,122,000 | | Dec 1-31, 2019 | 31,766 | $3,777.03 | $317,141,000 | | Total Q4 | 91,286 | $3,646.51 | N/A | Comparison of 5-Year Cumulative Total Return | Index | 2014 | 2015 | 2016 | 2017 | 2018 | 2019 | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | NVR, Inc. | $100 | $129 | $131 | $275 | $191 | $299 | | S&P 500 | $100 | $101 | $114 | $138 | $132 | $174 | | Dow Jones US Home Construction | $100 | $110 | $103 | $181 | $124 | $183 | Selected Financial Data The company demonstrates consistent five-year growth in revenues, net income, and earnings per share Selected Consolidated Financial Data (2015-2019, in thousands except per share data) | Metric | 2019 | 2018 | 2017 | 2016 | 2015 | | :--- | :--- | :--- | :--- | :--- | :--- | | Homebuilding Revenues | $7,220,844 | $7,004,304 | $6,175,521 | $5,709,223 | $5,065,200 | | Net Income | $878,539 | $797,197 | $537,521 | $425,262 | $382,927 | | Diluted EPS | $221.13 | $194.80 | $126.77 | $103.61 | $89.99 | | Total Assets | $3,809,815 | $3,165,933 | $2,989,279 | $2,643,943 | $2,511,718 | | Shareholders' Equity | $2,341,244 | $1,808,562 | $1,605,492 | $1,304,441 | $1,239,165 | Management's Discussion and Analysis of Financial Condition and Results of Operations In 2019, revenue and net income grew due to favorable market conditions, increased unit settlements, and improved mortgage banking profits - As of December 31, 2019, the company controlled approximately 101,300 lots under Lot Purchase Agreements, with total deposits of about $445 million[96] Key Financial Results (2019 vs. 2018, $ in thousands) | Metric | 2019 | 2018 | % Change | | :--- | :--- | :--- | :--- | | Consolidated Revenues | $7,388,664 | $7,163,674 | 3% | | Net Income | $878,539 | $797,197 | 10% | | Diluted EPS | $221.13 | $194.80 | 14% | | Homebuilding Gross Profit Margin | 19.0% | 18.7% | +0.3 p.p. | | New Orders (Units) | 19,536 | 18,281 | 7% | Results of Operations Revenue growth was driven by a 7% increase in settled units, while a lower effective tax rate also contributed to higher net income - The consolidated effective tax rate was 14.36% in 2019, down from 16.94% in 2018, primarily due to the retroactive reinstatement of certain energy tax credits[139] Consolidated Homebuilding Operations (2019 vs. 2018, $ in thousands) | Metric | 2019 | 2018 | | :--- | :--- | :--- | | Revenues | $7,220,844 | $7,004,304 | | Gross Profit Margin % | 19.0% | 18.7% | | New Orders (units) | 19,536 | 18,281 | | Average New Order Price | $368,400 | $376,300 | | Settlements (units) | 19,668 | 18,447 | | Average Settlement Price | $367,100 | $379,700 | Mortgage Banking Operations (2019 vs. 2018, $ in thousands) | Metric | 2019 | 2018 | | :--- | :--- | :--- | | Total Principal (Loan Closing Volume) | $5,164,725 | $4,829,406 | | Segment Profit | $105,292 | $93,462 | | Capture Rate | 90% | 88% | Liquidity and Capital Resources The company maintains a strong liquidity position through cash flow and debt facilities, funding significant share repurchases in 2019 - NVR has $600 million in 3.95% Senior Notes due 2022 and a $200 million unsecured revolving credit facility, under which no borrowings were outstanding at year-end[143][147] - The mortgage banking subsidiary (NVRM) has a $150 million revolving mortgage repurchase facility, which had no outstanding balance at year-end 2019[148][149] - In 2019, the company repurchased 220,965 shares of its common stock for an aggregate price of $698.4 million[150] - Net cash provided by operating activities was $866.5 million in 2019, while net cash used in financing activities was $424.7 million, primarily for stock repurchases[151] Off-Balance Sheet Arrangements The company's primary off-balance sheet arrangements involve lot purchase agreements and mortgage rate lock commitments - The company controlled approximately 104,900 lots with an aggregate purchase price of ~$10 billion, with its risk of loss limited to deposits and commitments of ~$656.5 million[157] - As of December 31, 2019, NVRM had contractual commitments to extend credit to borrowers aggregating $581.1 million and open forward delivery contracts to hedge this risk aggregating $986.0 million[160][161] Critical Accounting Policies Management's critical accounting policies require significant estimates for inventory valuation, impairment, and various liability accruals - Key estimates include inventory valuation, impairment of contract land deposits, warranty reserves, equity-based compensation expense, and the mortgage repurchase reserve[164] - Contract land deposits are evaluated for impairment quarterly on a community-by-community basis, considering sales pace, profitability, and developer performance[168][170] - Equity-based compensation expense is calculated using the Black-Scholes model, which requires management judgment for inputs like expected term and volatility[177][179] Quantitative and Qualitative Disclosure About Market Risk The company's primary market risk is interest rate sensitivity, which is managed through fixed-rate debt and hedging activities - The company's main market risk is interest rate risk, affecting both its homebuilding debt obligations and its mortgage banking lending activities[184] - The mortgage banking segment uses forward delivery contracts to mitigate interest rate risk on its loan portfolio and rate lock commitments[187] Financial Instruments Maturities and Fair Value (as of Dec 31, 2019, in thousands) | Instrument | 2020 | 2021 | 2022 | Total | Fair Value | | :--- | :--- | :--- | :--- | :--- | :--- | | Mortgage loans held for sale | $485,106 | — | — | $485,106 | $492,125 | | Interest-bearing deposits | $1,043,205 | — | — | $1,043,205 | $1,043,205 | | Fixed rate obligations (Senior Notes) | $— | — | $600,000 | $600,000 | $626,520 | Financial Statements and Supplementary Data This section incorporates the company's consolidated financial statements and supplementary data by reference - The financial statements listed in Item 15 are filed as part of this report[191] Changes in and Disagreements with Accountants on Accounting and Financial Disclosure The company reports no changes in or disagreements with its accountants - None[192] Controls and Procedures Management concluded that the company's disclosure controls and internal control over financial reporting were effective - Management concluded that disclosure controls and procedures were effective as of December 31, 2019[194] - Management concluded that internal control over financial reporting was effective as of December 31, 2019[195] - KPMG LLP issued an unqualified opinion on the effectiveness of the company's internal control over financial reporting[196] Other Information The company reports no other information - None[197] Part III Directors, Executive Officers, and Corporate Governance This section identifies the executive officers, with other required information incorporated by reference from the Proxy Statement - Additional information required by this item is incorporated by reference from the company's Proxy Statement[204] Executive Officers of the Registrant | Name | Age | Position | | :--- | :--- | :--- | | Paul C. Saville | 64 | President and Chief Executive Officer | | Daniel D. Malzahn | 50 | Senior Vice President, Chief Financial Officer and Treasurer | | Jeffrey D. Martchek | 54 | President of Homebuilding Operations | | Paul W. Praylo | 48 | Senior Vice President and Chief Operating Officer | | Eugene J. Bredow | 50 | President of NVRM | Executive Compensation Information regarding executive compensation is incorporated by reference from the company's Proxy Statement - Information is incorporated by reference from the Proxy Statement[205] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters This section provides details on equity compensation plans and incorporates other ownership information by reference - Other information required by this item is incorporated by reference from the Proxy Statement[206] Equity Compensation Plan Information (as of Dec 31, 2019) | Plan Category | Securities to be Issued Upon Exercise | Weighted-Average Exercise Price | Securities Remaining for Future Issuance | | :--- | :--- | :--- | :--- | | Approved by Security Holders | 753,796 | $2,007.52 | 287,291 | | Not Approved by Security Holders | 10,504 | $703.00 | — | | Total | 764,300 | $1,989.60 | 287,291 | Certain Relationships and Related Transactions, and Director Independence Information on related transactions and director independence is incorporated by reference from the Proxy Statement - Information is incorporated by reference from the Proxy Statement[208] Principal Accountant Fees and Services Information regarding principal accountant fees and services is incorporated by reference from the Proxy Statement - Information is incorporated by reference from the Proxy Statement[209] Part IV Exhibits and Financial Statement Schedules This section lists all documents, including financial statements and various exhibits, filed as part of the report - This section provides a comprehensive list of all financial statements, schedules, and exhibits filed with the Form 10-K[211]