e10vq
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2007
OR
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o |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number: 1-12378
NVR, Inc.
(Exact name of registrant as specified in its charter)
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Virginia
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54-1394360 |
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(State or other jurisdiction of
incorporation or organization)
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(I.R.S. Employer Identification No.) |
11700 Plaza America Drive, Suite 500
Reston, Virginia 20190
(703) 956-4000
(Address, including zip code, and telephone number, including
area code, of registrants principal executive offices)
(Not Applicable)
(Former name, former address, and former fiscal year if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, or a non-accelerated filer (as defined in Exchange Act Rule 12b-2).
Large accelerated filer þ Accelerated filer o Non-accelerated filer o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes o No þ
As of October 30, 2007 there were 5,135,640 total shares of common stock outstanding.
NVR, Inc.
Form 10-Q
INDEX
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Page |
PART
I
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FINANCIAL INFORMATION |
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Item 1.
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NVR, Inc. Condensed Consolidated
Financial Statements |
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Condensed Consolidated Balance Sheets at September 30, 2007
(unaudited) and December 31, 2006
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3 |
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Condensed Consolidated Statements of Income for the
Three Months Ended September 30, 2007 (unaudited)
and September 30, 2006 (unaudited) and the Nine Months
Ended September 30, 2007 (unaudited) and September 30, 2006
(unaudited)
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5 |
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Condensed Consolidated Statements of Cash Flows for
the Nine Months Ended September 30, 2007 (unaudited) and
September 30, 2006 (unaudited)
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6 |
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Notes to Condensed Consolidated Financial Statements
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7 |
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Item 2.
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Managements Discussion and Analysis of Financial
Condition and Results of Operations
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17 |
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Item 3.
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Quantitative and Qualitative Disclosures About Market Risk
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32 |
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Item 4.
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Controls and Procedures
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33 |
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PART
II
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OTHER INFORMATION |
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Item 1.
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Legal Proceedings
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33 |
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Item 1A.
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Risk Factors
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34 |
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Item 2.
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Unregistered Sales of Equity Securities and Use of Proceeds
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37 |
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Item 6.
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Exhibits
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38 |
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Signature
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39 |
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Exhibit Index
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40 |
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2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
NVR, Inc.
Condensed Consolidated Balance Sheets
(in thousands, except share and per share data)
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September 30, 2007 |
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December 31, 2006 |
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(unaudited) |
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ASSETS |
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Homebuilding: |
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Cash and cash equivalents |
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$ |
314,364 |
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$ |
551,738 |
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Receivables |
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17,666 |
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12,213 |
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Inventory: |
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Lots and housing units, covered under
sales agreements with customers |
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878,541 |
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667,100 |
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Unsold lots and housing units |
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93,940 |
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58,248 |
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Manufacturing materials and other |
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6,916 |
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8,268 |
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979,397 |
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733,616 |
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Contract land deposits, net |
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237,868 |
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402,170 |
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Assets not owned, consolidated
per FIN 46R |
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203,782 |
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276,419 |
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Property, plant and equipment, net |
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34,582 |
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40,430 |
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Reorganization value in excess of amounts
allocable to identifiable assets, net |
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41,580 |
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41,580 |
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Goodwill and indefinite life intangibles, net |
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11,686 |
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11,686 |
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Definite life intangibles, net |
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130 |
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250 |
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Other assets |
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252,617 |
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207,468 |
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2,093,672 |
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2,277,570 |
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Mortgage Banking: |
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Cash and cash equivalents |
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2,827 |
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4,381 |
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Mortgage loans held for sale, net |
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137,749 |
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178,444 |
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Property and equipment, net |
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941 |
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1,168 |
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Reorganization value in excess of amounts
allocable to identifiable assets, net |
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7,347 |
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7,347 |
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Other assets |
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4,138 |
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4,898 |
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153,002 |
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196,238 |
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Total assets |
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$ |
2,246,674 |
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$ |
2,473,808 |
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See notes to condensed consolidated financial statements.
(Continued)
3
NVR, Inc.
Condensed Consolidated Balance Sheets (Continued)
(in thousands, except share and per share data)
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September 30, 2007 |
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December 31, 2006 |
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(unaudited) |
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LIABILITIES AND SHAREHOLDERS
EQUITY |
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Homebuilding: |
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Accounts payable |
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$ |
266,362 |
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$ |
273,936 |
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Accrued expenses and other liabilities |
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217,932 |
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225,178 |
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Liabilities related to assets not owned,
consolidated per FIN 46R |
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179,487 |
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244,805 |
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Obligations under incentive plans |
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26,602 |
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40,045 |
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Customer deposits |
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174,324 |
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165,354 |
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Other term debt |
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2,888 |
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3,080 |
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Senior notes |
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200,000 |
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200,000 |
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1,067,595 |
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1,152,398 |
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Mortgage Banking: |
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Accounts payable and other liabilities |
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15,354 |
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15,784 |
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Note payable |
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111,647 |
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153,552 |
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127,001 |
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169,336 |
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Total liabilities |
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1,194,596 |
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1,321,734 |
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Commitments and contingencies |
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Shareholders equity: |
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Common stock, $0.01 par value; 60,000,000
shares authorized; 20,592,640 shares
issued as of both September 30, 2007 and
December 31, 2006 |
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206 |
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206 |
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Additional paid-in-capital |
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653,996 |
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585,438 |
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Deferred compensation trust 516,044 and
547,911 shares of NVR, Inc. common
stock as of September 30, 2007 and
December 31, 2006, respectively |
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(75,616 |
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(80,491 |
) |
Deferred compensation liability |
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75,616 |
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80,491 |
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Retained earnings |
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3,462,721 |
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3,196,040 |
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Less treasury stock at cost 15,457,040 and
15,075,113 shares at September 30, 2007
and December 31, 2006, respectively |
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(3,064,845 |
) |
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(2,629,610 |
) |
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Total shareholders equity |
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1,052,078 |
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1,152,074 |
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Total liabilities and shareholders equity |
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$ |
2,246,674 |
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$ |
2,473,808 |
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See notes to condensed consolidated financial statements.
4
NVR, Inc.
Condensed Consolidated Statements of Income
(in thousands, except per share data)
(unaudited)
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Three Months Ended September 30, |
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Nine Months Ended September 30, |
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2007 |
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2006 |
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2007 |
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2006 |
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Homebuilding: |
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Revenues |
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$ |
1,270,471 |
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$ |
1,528,964 |
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$ |
3,642,721 |
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$ |
4,435,503 |
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Other income |
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4,209 |
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3,238 |
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16,425 |
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8,248 |
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Cost of sales |
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(1,087,399 |
) |
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(1,238,671 |
) |
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(3,002,746 |
) |
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(3,403,893 |
) |
Selling, general and administrative |
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(54,906 |
) |
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(95,574 |
) |
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(253,510 |
) |
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(329,131 |
) |
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Operating income |
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132,375 |
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197,957 |
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402,890 |
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710,727 |
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Interest expense |
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(3,375 |
) |
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(3,141 |
) |
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(9,995 |
) |
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(14,773 |
) |
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Homebuilding income |
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129,000 |
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194,816 |
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392,895 |
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695,954 |
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Mortgage Banking: |
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Mortgage banking fees |
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21,617 |
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24,447 |
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59,224 |
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71,491 |
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Interest income |
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1,078 |
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1,986 |
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3,415 |
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|
5,236 |
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Other income |
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320 |
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403 |
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780 |
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|
1,017 |
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General and administrative |
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(6,001 |
) |
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(8,847 |
) |
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(24,278 |
) |
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(27,867 |
) |
Interest expense |
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(200 |
) |
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(698 |
) |
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(513 |
) |
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(2,619 |
) |
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Mortgage banking income |
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16,814 |
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17,291 |
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38,628 |
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47,258 |
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Income before taxes |
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145,814 |
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212,107 |
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431,523 |
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743,212 |
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Income tax expense |
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(54,701 |
) |
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(82,774 |
) |
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(164,842 |
) |
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(290,967 |
) |
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Net income |
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$ |
91,113 |
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$ |
129,333 |
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$ |
266,681 |
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$ |
452,245 |
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Basic earnings per share |
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$ |
17.25 |
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$ |
22.59 |
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$ |
48.35 |
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$ |
79.60 |
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Diluted earnings per share |
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$ |
15.26 |
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$ |
19.63 |
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$ |
42.25 |
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$ |
67.23 |
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Basic average shares outstanding |
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|
5,283 |
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|
|
5,725 |
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|
5,516 |
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|
5,682 |
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Diluted average shares outstanding |
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|
5,969 |
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|
|
6,588 |
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|
|
6,312 |
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|
|
6,727 |
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|
|
|
|
|
|
|
|
|
|
|
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|
See notes to condensed consolidated financial statements.
5
NVR, Inc.
Condensed Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
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|
|
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|
|
|
|
Nine Months Ended September 30, |
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2007 |
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2006 |
|
Cash flows from operating activities: |
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|
Net income |
|
$ |
266,681 |
|
|
$ |
452,245 |
|
Adjustments to reconcile net income to
net cash provided by operating activities: |
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|
|
Depreciation and amortization |
|
|
12,896 |
|
|
|
10,089 |
|
Contract land deposit impairments and write-offs |
|
|
163,776 |
|
|
|
113,759 |
|
Stock option compensation expense |
|
|
5,575 |
|
|
|
41,010 |
|
Excess income tax benefit from exercise of stock options |
|
|
(68,322 |
) |
|
|
(82,809 |
) |
Mortgage loans closed |
|
|
(1,691,663 |
) |
|
|
(1,925,389 |
) |
Proceeds from sales of mortgage loans |
|
|
1,769,746 |
|
|
|
1,955,567 |
|
Principal payments on mortgage loans held for sale |
|
|
6,472 |
|
|
|
12,751 |
|
Gain on sale of loans |
|
|
(43,874 |
) |
|
|
(52,891 |
) |
(Gain) loss on sale of fixed assets |
|
|
(397 |
) |
|
|
6 |
|
Net change in assets and liabilities: |
|
|
|
|
|
|
|
|
Increase in inventories |
|
|
(245,781 |
) |
|
|
(217,164 |
) |
(Increase) decrease in receivables |
|
|
(3,654 |
) |
|
|
24,192 |
|
Decrease (increase) in contract land deposits |
|
|
8,227 |
|
|
|
(29,605 |
) |
Increase in accounts payable, customer deposits and accrued expenses |
|
|
59,282 |
|
|
|
29,901 |
|
Decrease in obligations under incentive plans |
|
|
(13,443 |
) |
|
|
(20,886 |
) |
Other, net |
|
|
(44,654 |
) |
|
|
(58,378 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
180,867 |
|
|
|
252,398 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
Purchase of property, plant and equipment |
|
|
(6,988 |
) |
|
|
(16,040 |
) |
Other, net |
|
|
1,542 |
|
|
|
560 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(5,446 |
) |
|
|
(15,480 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
Net repayments under notes payable and
other term debt |
|
|
(42,097 |
) |
|
|
(91,938 |
) |
Purchase of treasury stock |
|
|
(507,472 |
) |
|
|
(183,286 |
) |
Excess income tax benefit from exercise of stock options |
|
|
68,322 |
|
|
|
82,809 |
|
Proceeds from exercise of stock options |
|
|
66,898 |
|
|
|
16,576 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used by financing activities |
|
|
(414,349 |
) |
|
|
(175,839 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (decrease) increase in cash and cash equivalents |
|
|
(238,928 |
) |
|
|
61,079 |
|
Cash and cash equivalents, beginning of the period |
|
|
556,119 |
|
|
|
177,526 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period |
|
$ |
317,191 |
|
|
$ |
238,605 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of cash flow information: |
|
|
|
|
|
|
|
|
Interest paid during the period |
|
$ |
7,186 |
|
|
$ |
17,352 |
|
|
|
|
|
|
|
|
Income taxes paid, net of refunds |
|
$ |
111,571 |
|
|
$ |
303,834 |
|
|
|
|
|
|
|
|
Supplemental disclosures of non-cash activities: |
|
|
|
|
|
|
|
|
Net assets not owned, consolidated per FIN 46R |
|
$ |
(7,319 |
) |
|
$ |
(5,067 |
) |
|
|
|
|
|
|
|
See notes to condensed consolidated financial statements.
6
NVR, Inc.
Notes to Condensed Consolidated Financial Statements
(dollars in thousands except per share data)
1. Basis of Presentation
The accompanying unaudited, condensed consolidated financial statements include the accounts
of NVR, Inc. (NVR or the Company) and its subsidiaries and certain other entities in which the
Company is deemed to be the primary beneficiary (see note 2 to the accompanying financial
statements). Intercompany accounts and transactions have been eliminated in consolidation. The
statements have been prepared in conformity with accounting principles generally accepted in the
United States of America for interim financial information and with the instructions to Form 10-Q
and Regulation S-X. Accordingly, they do not include all of the information and footnotes required
by accounting principles generally accepted in the United States of America for complete financial
statements. Because the accompanying condensed consolidated financial statements do not include
all of the information and footnotes required by accounting principles generally accepted in the
United States of America, they should be read in conjunction with the financial statements and
notes thereto included in the Companys 2006 Annual Report on Form 10-K. In the opinion of
management, all adjustments (consisting only of normal recurring accruals except as otherwise noted
herein) considered necessary for a fair presentation have been included. Operating results for the
nine-month period ended September 30, 2007 are not necessarily indicative of the results that may
be expected for the year ending December 31, 2007.
The preparation of financial statements in conformity with accounting principles generally
accepted in the United States of America requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes. Actual results
could differ from those estimates.
For the three and nine-month periods ended September 30, 2007 and 2006, comprehensive income
equaled net income; therefore, a separate statement of comprehensive income is not included in the
accompanying financial statements.
2. Consolidation of Variable Interest Entities
Revised Financial Accounting Standards Board (FASB) Interpretation No. 46 (FIN 46R),
Consolidation of Variable Interest Entities, requires the primary beneficiary of a variable
interest entity to consolidate that entity on its financial statements. The primary beneficiary of
a variable interest entity is the party that absorbs a majority of the variable interest entitys
expected losses, receives a majority of the entitys expected residual returns, or both, as a
result of ownership, contractual, or other financial interests in the entity. Expected losses are
the expected negative variability in the fair value of an entitys net assets, exclusive of its
variable interests, and expected residual returns are the expected positive variability in the fair
value of an entitys net assets, exclusive of its variable interests. As discussed below, NVR
evaluates the provisions of FIN 46R as it relates to NVRs finished lot acquisition strategy.
NVR does not engage in the land development business. Instead, the Company typically
acquires finished building lots at market prices from various development entities under fixed
price purchase agreements. The purchase agreements require deposits that may be forfeited if NVR
fails to perform under the agreement. The deposits required under the purchase agreements are in
the form of cash or letters of credit in varying amounts, and typically range up to 10% of the
aggregate purchase price of the finished lots. As of September 30, 2007, the Company controlled
approximately 79,000 lots with deposits in cash and letters of credit totaling approximately
$407,000 and $9,000, respectively.
The Company believes that this lot acquisition strategy reduces the financial requirements and
risks associated with direct land ownership and land development. NVR may, at its option, choose
for any reason and at any time not to perform under these purchase agreements by delivering notice
of its intent not to acquire the finished lots under contract. NVRs sole legal obligation and
economic loss for failure to perform under these purchase agreements is limited to the amount of
the deposit pursuant to the liquidated damage provisions
7
NVR, Inc.
Notes to Condensed Consolidated Financial Statements
(dollars in thousands except per share data)
contained within the purchase agreements. In other words, if NVR does not perform under a purchase
agreement, NVR loses only its deposit. NVR does not have any financial or specific performance
guarantees, or completion obligations, under these purchase agreements. None of the creditors of
any of the development entities with which NVR enters fixed price purchase agreements have recourse
to the general credit of NVR. Except as described below, NVR also does not share in an allocation
of either the profit earned or loss incurred by any of these entities with which NVR enters fixed
price purchase agreements.
On a very limited basis, NVR also obtains finished lots using joint venture limited liability
corporations (LLCs). All LLCs are structured such that NVR is a non-controlling member and is
at risk only for the amount invested by the Company. NVR is not a borrower, guarantor or obligor
on any of the LLCs debt. NVR enters into a standard fixed price purchase agreement to purchase
lots from the LLCs.
At September 30, 2007, NVR had an aggregate investment in twelve separate LLCs totaling
approximately $13,000, which controlled approximately 700 lots. NVR recognizes its share of the
earnings of the LLCs as an adjustment of the cost basis of the lots at the time that the lot and
related home is settled with an external customer. During the nine months ended September 30, 2007
and 2006, NVR adjusted cost of sales by approximately $530 and $260, respectively, which
represented NVRs share of the earnings of the LLCs.
Forward contracts, such as the fixed price purchase agreements utilized by NVR to acquire
finished lot inventory, are deemed to be variable interests under FIN 46R. Therefore, the
development entities with which NVR enters fixed price purchase agreements, including the LLCs,
are examined under FIN 46R for possible consolidation by NVR of such development entities on NVRs
financial statements. NVR has developed a methodology to determine whether it, or conversely, the
owner(s) of the applicable development entity is the primary beneficiary of a development entity.
The methodology used to evaluate NVRs primary beneficiary status requires substantial management
judgment and estimation. These judgments and estimates involve assigning probabilities to various
estimated cash flow possibilities relative to the development entitys expected profits and losses
and the cash flows associated with changes in the fair value of finished lots under contract.
Although management believes that its accounting policy with respect to these development entities
is designed to properly assess NVRs primary beneficiary status relative to its involvement with
the development entities from which NVR acquires finished lots, changes to the probabilities and
the cash flow possibilities used in NVRs evaluation could produce widely different conclusions
regarding whether NVR is or is not a development entitys primary beneficiary.
The Company has evaluated all of its fixed price purchase agreements and LLC arrangements and
has determined that it is the primary beneficiary of thirty-four of those development entities with
which the agreements and arrangements are held. As a result, at September 30, 2007, NVR has
consolidated these thirty-four development entities in the accompanying condensed consolidated
balance sheet. Where NVR deemed itself to be the primary beneficiary of a development entity
created after December 31, 2003 and the development entity refused to provide financial statements
to NVR, NVR utilized estimation techniques to perform the consolidation. The effect of the
consolidation under FIN 46R at September 30, 2007 was the inclusion on the balance sheet of
$203,782 as Assets not owned, consolidated per FIN 46R, with a corresponding inclusion of $179,487
as Liabilities related to assets not owned, consolidated per FIN 46R, after elimination of
intercompany items. Inclusive in these totals were assets of approximately $61,000 and liabilities
of approximately $55,000 estimated for twelve development entities created after December 31, 2003
that did not provide financial statements.
8
NVR, Inc.
Notes to Condensed Consolidated Financial Statements
(dollars in thousands except per share data)
Following is the consolidating schedule at September 30, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NVR, Inc. |
|
|
|
|
|
|
|
|
|
|
|
|
|
and |
|
|
FIN 46R |
|
|
|
|
|
|
Consolidated |
|
|
|
Subsidiaries |
|
|
Entities |
|
|
Eliminations |
|
|
Total |
|
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Homebuilding: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
314,364 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
314,364 |
|
Receivables |
|
|
17,666 |
|
|
|
|
|
|
|
|
|
|
|
17,666 |
|
Homebuilding inventory |
|
|
979,397 |
|
|
|
|
|
|
|
|
|
|
|
979,397 |
|
Property, plant and equipment, net |
|
|
34,582 |
|
|
|
|
|
|
|
|
|
|
|
34,582 |
|
Reorganization value in excess of amount
allocable to identifiable assets, net |
|
|
41,580 |
|
|
|
|
|
|
|
|
|
|
|
41,580 |
|
Goodwill and intangibles, net |
|
|
11,816 |
|
|
|
|
|
|
|
|
|
|
|
11,816 |
|
Contract land deposits, net |
|
|
252,789 |
|
|
|
|
|
|
|
(14,921 |
) |
|
|
237,868 |
|
Other assets |
|
|
261,991 |
|
|
|
|
|
|
|
(9,374 |
) |
|
|
252,617 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,914,185 |
|
|
|
|
|
|
|
(24,295 |
) |
|
|
1,889,890 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage banking assets: |
|
|
153,002 |
|
|
|
|
|
|
|
|
|
|
|
153,002 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FIN 46R Entities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Land under development |
|
|
|
|
|
|
199,639 |
|
|
|
|
|
|
|
199,639 |
|
Other assets |
|
|
|
|
|
|
4,143 |
|
|
|
|
|
|
|
4,143 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
203,782 |
|
|
|
|
|
|
|
203,782 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
2,067,187 |
|
|
$ |
203,782 |
|
|
$ |
(24,295 |
) |
|
$ |
2,246,674 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Homebuilding: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable, accrued expenses
and other liabilities |
|
$ |
510,896 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
510,896 |
|
Customer deposits |
|
|
174,324 |
|
|
|
|
|
|
|
|
|
|
|
174,324 |
|
Other term debt |
|
|
2,888 |
|
|
|
|
|
|
|
|
|
|
|
2,888 |
|
Senior notes |
|
|
200,000 |
|
|
|
|
|
|
|
|
|
|
|
200,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
888,108 |
|
|
|
|
|
|
|
|
|
|
|
888,108 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage banking liabilities: |
|
|
127,001 |
|
|
|
|
|
|
|
|
|
|
|
127,001 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FIN 46R Entities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable, accrued expenses
and other liabilities |
|
|
|
|
|
|
17,948 |
|
|
|
|
|
|
|
17,948 |
|
Debt |
|
|
|
|
|
|
94,796 |
|
|
|
|
|
|
|
94,796 |
|
Contract land deposits |
|
|
|
|
|
|
24,650 |
|
|
|
(24,650 |
) |
|
|
|
|
Advances from NVR, Inc. |
|
|
|
|
|
|
7,949 |
|
|
|
(7,949 |
) |
|
|
|
|
Minority interest |
|
|
|
|
|
|
|
|
|
|
66,743 |
|
|
|
66,743 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
145,343 |
|
|
|
34,144 |
|
|
|
179,487 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity |
|
|
1,052,078 |
|
|
|
58,439 |
|
|
|
(58,439 |
) |
|
|
1,052,078 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders
equity |
|
$ |
2,067,187 |
|
|
$ |
203,782 |
|
|
$ |
(24,295 |
) |
|
$ |
2,246,674 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9
NVR, Inc.
Notes to Condensed Consolidated Financial Statements
(dollars in thousands except per share data)
Under FIN 46R, an enterprise with an interest in a variable interest entity or potential
variable interest entity created before December 31, 2003, is not required to apply FIN 46R to that
entity if the enterprise, after making an exhaustive effort, is unable to obtain the information
necessary to perform the accounting required to consolidate the variable interest entity for which
it is determined to be the primary beneficiary. At September 30, 2007, NVR has been unable to
obtain the information necessary to perform the accounting required to consolidate six separate
development entities created before December 31, 2003 for which NVR determined it was the primary
beneficiary. NVR has made, or has committed to make, aggregate deposits, totaling approximately
$8,800 to these six separate development entities, with a total aggregate purchase price for the
finished lots of approximately $73,000. The aggregate deposit made or committed to being made is
NVRs maximum exposure to loss. As noted above, because NVR does not have any contractual or
ownership interests in the development entities with which it contracts to buy finished lots (other
than the limited use of the LLCs as discussed above), NVR does not have the ability to compel
these development entities to provide financial or other data to NVR. Because NVR has no ownership
rights in any of these six development entities, the consolidation of such entities has no impact
on NVRs net income or earnings per share for the three and nine months ended September 30, 2007.
Aggregate activity with respect to the six development entities is included in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
|
Nine Months Ended September 30, |
|
|
2007 |
|
2006 |
|
2007 |
|
2006 |
Finished lots purchased dollars |
|
$ |
4,759 |
|
|
$ |
4,111 |
|
|
$ |
13,745 |
|
|
$ |
9,250 |
|
Finished lots purchased units |
|
|
17 |
|
|
|
16 |
|
|
|
62 |
|
|
|
54 |
|
3. Contract Land Deposits
During the three and nine-month periods ended September 30, 2007, the Company incurred pre-tax
impairment charges on contract land deposits of approximately $96,500 and $163,800, respectively.
During the three and nine-month periods ended September 30, 2006, the Company incurred pre-tax
impairment charges on contract land deposits of approximately $80,800 and $113,800, respectively.
These charges are due to the deteriorating market conditions in the homebuilding industry, and are
recorded in cost of sales in the accompanying condensed, consolidated statements of income. The
contract land deposit asset is shown net of an approximate $153,700 and $59,600 impairment
valuation allowance at September 30, 2007 and December 31, 2006, respectively.
4. Earnings per Share
The following weighted average shares and share equivalents are used to calculate basic and
diluted earnings per share for the three and nine months ended September 30, 2007 and 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
|
Nine Months Ended September 30, |
|
|
2007 |
|
2006 |
|
2007 |
|
2006 |
Basic weighted average number of
shares outstanding |
|
|
5,283,000 |
|
|
|
5,725,000 |
|
|
|
5,516,000 |
|
|
|
5,682,000 |
|
Shares issuable upon exercise
of dilutive options |
|
|
686,000 |
|
|
|
863,000 |
|
|
|
796,000 |
|
|
|
1,045,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted average number of
shares outstanding |
|
|
5,969,000 |
|
|
|
6,588,000 |
|
|
|
6,312,000 |
|
|
|
6,727,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The assumed proceeds used in the treasury method for calculating NVRs diluted earnings per
share includes the amount the employee must pay upon exercise, the amount of compensation cost
attributed to
10
NVR, Inc.
Notes to Condensed Consolidated Financial Statements
(dollars in thousands except per share data)
future services and not yet recognized, and the amount of tax benefits that would be credited to
additional paid-in capital assuming exercise of the option. The assumed amount credited to
additional paid-in capital equals the tax benefit from assumed exercise after consideration of the
intrinsic value upon assumed exercise less the actual stock-based compensation expense to be
recognized in the income statement from 2006 and future periods.
Options to purchase 55,738 and 49,176 shares of common stock during the three and nine months
ended September 30, 2007, and options to purchase 237,146 and 120,852 shares of common stock during
the three and nine months ended September 30, 2006, were not included in the computation of diluted
earnings per share because the effect would have been anti-dilutive. In addition, 410,557 and
426,638 performance-based options were outstanding during the period ended September 30, 2007 and
2006, respectively, and have been excluded from the computation of diluted earnings per share
because the performance target had not been achieved, pursuant to the requirements of Statement of
Financial Accounting Standards (SFAS) No. 128, Earnings Per Share (see note 5 to the accompanying
financial statements for additional information).
5. Stock Option Compensation Expense
Due to the continued earnings decline resulting from the deterioration in market conditions
and NVRs expectation that market conditions will not improve in the near term (see Managements
Discussion and Analysis of Financial Condition and Results of Operations), the Company determined
that it is improbable that it will achieve the performance metric related to 410,557 outstanding
stock options. Based on the Companys assessment that the performance metric (aggregate diluted
earnings per share for the years ended December 31, 2005 through 2008 in excess of $339.00 per
fully diluted share) will not be met, it is expected that none of the contingently issuable options
will vest. As a result, the Company reversed approximately $31,500 of pre-tax stock-based
compensation costs recognized prior to the 2007 third quarter. The reversal of the stock-based
compensation is included in the accompanying condensed, consolidated income statement, as follows:
$28,450 is included in homebuilding selling, general and administrative expenses, $900 is included
in homebuilding cost of sales, and $2,150 is included in mortgage banking general and
administrative costs. It is improbable that any future stock-based compensation will be recognized
for these options.
6. Excess Reorganization Value, Goodwill and Other Intangibles
SFAS No. 142, Goodwill and Other Intangible Assets, requires goodwill and reorganization value
in excess of amounts allocable to identifiable assets (excess reorganization value) to be tested
for impairment on an annual basis subsequent to the year of adoption. As of September 30, 2007,
the Company believes that goodwill, indefinite life intangibles, and excess reorganization value
were not impaired.
7. Uncertainty in Income Taxes
In June 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in Income
Taxes (FIN 48). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in
accordance with SFAS No. 109, Accounting for Income Taxes, and prescribes a recognition threshold
and measurement attribute for the financial statement recognition and measurement of tax positions
taken or expected to be taken in a tax return.
The Companys adoption of FIN 48 on January 1, 2007 did not require a cumulative adjustment to
retained earnings to comply with the recognition provisions of FIN 48. As of January 1, 2007, the
Company has approximately $34,200 of unrecognized tax benefits, all of which would decrease income
tax expense if recognized. The Company recognizes accrued interest related to unrecognized tax
benefits as a component of income tax expense. As of January 1, 2007, the Company has accrued
approximately $7,600 of interest expense. In accordance with the Companys accounting policy, tax
penalties are not accrued unless the position does not meet the minimum statutory requirements.
However, if such penalties are accrued, they
11
NVR, Inc.
Notes to Condensed Consolidated Financial Statements
(dollars in thousands except per share data)
would be recorded as a component of income tax expense. The Companys federal income tax
returns for 2003 through 2006 are open tax years. The Company files in various state and local
jurisdictions, with varying statutes of limitation.
8. Shareholders Equity
A summary of changes in shareholders equity is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional |
|
|
|
|
|
|
|
|
|
|
Deferred |
|
|
Deferred |
|
|
|
|
|
|
Common |
|
|
Paid-In |
|
|
Retained |
|
|
Treasury |
|
|
Comp. |
|
|
Comp. |
|
|
|
|
|
|
Stock |
|
|
Capital |
|
|
Earnings |
|
|
Stock |
|
|
Trust |
|
|
Liability |
|
|
Total |
|
Balance, December 31, 2006 |
|
$ |
206 |
|
|
$ |
585,438 |
|
|
$ |
3,196,040 |
|
|
$ |
(2,629,610 |
) |
|
$ |
(80,491 |
) |
|
$ |
80,491 |
|
|
$ |
1,152,074 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
266,681 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
266,681 |
|
Deferred compensation activity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,875 |
|
|
|
(4,875 |
) |
|
|
|
|
Purchase of common stock
for treasury |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(507,472 |
) |
|
|
|
|
|
|
|
|
|
|
(507,472 |
) |
Stock-based compensation |
|
|
|
|
|
|
5,575 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,575 |
|
Stock option activity |
|
|
|
|
|
|
66,898 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
66,898 |
|
Tax benefit from stock-based
compensation activity |
|
|
|
|
|
|
68,322 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
68,322 |
|
Treasury shares issued
upon option exercise |
|
|
|
|
|
|
(72,237 |
) |
|
|
|
|
|
|
72,237 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, September 30, 2007 |
|
$ |
206 |
|
|
$ |
653,996 |
|
|
$ |
3,462,721 |
|
|
$ |
(3,064,845 |
) |
|
$ |
(75,616 |
) |
|
$ |
75,616 |
|
|
$ |
1,052,078 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company repurchased approximately 785,000 shares of its common stock during the nine
months ended September 30, 2007. The Company settles option exercises by issuing shares of
treasury stock to option holders. Shares are relieved from the treasury account based on the
weighted average cost basis of treasury shares acquired. During the three and nine month periods
ended September 30, 2007, approximately 6,260 and 402,861 options to purchase shares of the
Companys common stock were exercised, respectively.
9. Product Warranties
The Company establishes warranty and product liability reserves to provide for estimated
future expenses as a result of construction and product defects, product recalls and litigation
incidental to NVRs homebuilding business. Liability estimates are determined based on
managements judgment, considering such factors as historical experience, the likely current cost
of corrective action, manufacturers and subcontractors participation in sharing the cost of
corrective action, consultations with third party experts such as engineers, and discussions with
our general counsel and outside counsel retained to handle specific product liability cases. The
following table reflects the changes in the Companys warranty reserve during the three and
nine-months ended September 30, 2007 and 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
Warranty reserve, beginning of period |
|
$ |
66,774 |
|
|
$ |
65,265 |
|
|
$ |
70,175 |
|
|
$ |
60,112 |
|
Provision |
|
|
10,328 |
|
|
|
13,802 |
|
|
|
28,868 |
|
|
|
39,127 |
|
Payments |
|
|
(12,217 |
) |
|
|
(12,425 |
) |
|
|
(34,158 |
) |
|
|
(32,597 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Warranty reserve, end of period |
|
$ |
64,885 |
|
|
$ |
66,642 |
|
|
$ |
64,885 |
|
|
$ |
66,642 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12
NVR, Inc.
Notes to Condensed Consolidated Financial Statements
(dollars in thousands except per share data)
10. Segment Disclosures
Consistent with the principles and objectives of SFAS No. 131, Disclosure about Segments
of an Enterprise and Related Information, the following disclosure includes four homebuilding
reportable segments that aggregate geographically the Companys homebuilding operating
segments, and the mortgage banking operations presented as a single reportable segment. The
homebuilding reportable segments are comprised of operating divisions in the following
geographic areas:
Homebuilding Mid Atlantic - Virginia, West Virginia, Maryland, and Delaware
Homebuilding North East - New Jersey and eastern Pennsylvania
Homebuilding Mid East - Kentucky, Michigan, New York, Ohio, and western Pennsylvania
Homebuilding South East - North Carolina, South Carolina and Tennessee
Homebuilding profit before tax includes all revenues and income generated from the sale of
homes, less the cost of homes sold, selling, general and administrative expenses, and a corporate
capital allocation charge determined at the corporate headquarters. The corporate capital
allocation charge eliminates in consolidation, is based on the segments average net assets
employed, and is charged using a consistent methodology in the periods presented. The corporate
capital allocation charged to the operating segment allows the Chief Operating Decision Maker (as
defined in SFAS No. 131) to determine whether the operating segments results are providing the
desired rate of return after covering the Companys cost of capital. The Company records charges
on contract land deposits when it determines that it is probable that recovery of the deposit is
impaired. For segment reporting purposes, impairments on contract land deposits are charged to the
operating segment upon the determination to terminate a fixed price purchase agreement with the
developer or when NVR forfeits some or all of the deposit upon restructuring a fixed price purchase
agreement. Mortgage banking profit before tax consists of revenues generated from mortgage
financing, title insurance and closing services, less the costs of such services and general and
administrative costs. Mortgage banking operations are not charged a capital allocation.
In addition to the corporate capital allocation and contract land deposit impairments
discussed above, the other reconciling items between homebuilding segment profit and
homebuilding consolidated profit before tax include unallocated corporate overhead,
consolidation adjustments, stock option compensation expense, and external corporate interest.
NVRs overhead functions, such as accounting, treasury, human resources, land acquisition,
etc., are centrally performed and the costs of which are not allocated to the Companys
operating segments. Consolidation adjustments consist of such items to convert the reportable
segments results, which are predominantly maintained on a cash basis, to a full accrual basis
for external financial statement presentation purposes, and are not allocated to the Companys
operating segments. Likewise, stock option compensation expenses are also not charged to the
operating segments. External corporate interest expense is primarily comprised of interest
charges on the Companys outstanding Senior Notes and working capital line borrowings, and are
not charged to the operating segments because the charges are included in the corporate
capital allocation discussed above.
Following are tables presenting revenues, segment profit and segment assets for each
reportable segment, with reconciliations to the amounts reported for the consolidated
enterprise, where applicable:
13
NVR, Inc.
Notes to Condensed Consolidated Financial Statements
(dollars in thousands except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Homebuilding Mid Atlantic |
|
$ |
761,591 |
|
|
$ |
931,526 |
|
|
$ |
2,240,252 |
|
|
$ |
2,825,914 |
|
Homebuilding North East |
|
|
118,242 |
|
|
|
174,051 |
|
|
|
321,570 |
|
|
|
466,592 |
|
Homebuilding Mid East |
|
|
237,078 |
|
|
|
258,097 |
|
|
|
616,695 |
|
|
|
702,406 |
|
Homebuilding South East |
|
|
153,560 |
|
|
|
165,290 |
|
|
|
464,204 |
|
|
|
440,591 |
|
Mortgage Banking |
|
|
21,617 |
|
|
|
24,447 |
|
|
|
59,224 |
|
|
|
71,491 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated revenues |
|
$ |
1,292,088 |
|
|
$ |
1,553,411 |
|
|
$ |
3,701,945 |
|
|
$ |
4,506,994 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
Profit: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Homebuilding Mid Atlantic |
|
$ |
75,477 |
|
|
$ |
162,824 |
|
|
$ |
294,137 |
|
|
$ |
610,308 |
|
Homebuilding North East |
|
|
4,934 |
|
|
|
20,318 |
|
|
|
12,942 |
|
|
|
51,708 |
|
Homebuilding Mid East |
|
|
19,648 |
|
|
|
22,137 |
|
|
|
55,522 |
|
|
|
52,233 |
|
Homebuilding South East |
|
|
21,975 |
|
|
|
24,181 |
|
|
|
70,139 |
|
|
|
62,525 |
|
Mortgage Banking |
|
|
15,179 |
|
|
|
18,157 |
|
|
|
38,763 |
|
|
|
49,850 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment profit |
|
|
137,213 |
|
|
|
247,617 |
|
|
|
471,503 |
|
|
|
826,624 |
|
Contract land deposit impairments |
|
|
(51,468 |
) |
|
|
(48,559 |
) |
|
|
(99,073 |
) |
|
|
(77,808 |
) |
Stock option expense (1) |
|
|
22,934 |
|
|
|
(13,854 |
) |
|
|
(5,575 |
) |
|
|
(41,010 |
) |
Corporate capital allocation |
|
|
40,809 |
|
|
|
49,116 |
|
|
|
115,038 |
|
|
|
139,344 |
|
Unallocated corporate overhead |
|
|
(11,381 |
) |
|
|
(11,758 |
) |
|
|
(57,652 |
) |
|
|
(73,527 |
) |
Consolidation adjustments and other |
|
|
10,945 |
|
|
|
(7,638 |
) |
|
|
16,782 |
|
|
|
(16,320 |
) |
Corporate interest expense |
|
|
(3,238 |
) |
|
|
(2,817 |
) |
|
|
(9,500 |
) |
|
|
(14,091 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciling items sub-total |
|
|
8,601 |
|
|
|
(35,510 |
) |
|
|
(39,980 |
) |
|
|
(83,412 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated income before
taxes |
|
$ |
145,814 |
|
|
$ |
212,107 |
|
|
$ |
431,523 |
|
|
$ |
743,212 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
|
2007 |
|
|
2006 |
|
Assets: |
|
|
|
|
|
|
|
|
Homebuilding Mid Atlantic |
|
$ |
968,858 |
|
|
$ |
1,157,135 |
|
Homebuilding North East |
|
|
120,310 |
|
|
|
177,952 |
|
Homebuilding Mid East |
|
|
165,897 |
|
|
|
200,222 |
|
Homebuilding South East |
|
|
151,093 |
|
|
|
121,642 |
|
Mortgage Banking |
|
|
145,655 |
|
|
|
209,974 |
|
|
|
|
|
|
|
|
Segment assets |
|
|
1,551,813 |
|
|
|
1,866,925 |
|
Assets not owned, consolidated per Fin 46R |
|
|
203,782 |
|
|
|
262,534 |
|
Cash |
|
|
314,364 |
|
|
|
229,000 |
|
Deferred taxes |
|
|
199,765 |
|
|
|
156,400 |
|
Intangible assets |
|
|
60,743 |
|
|
|
60,894 |
|
Land reserve |
|
|
(153,735 |
) |
|
|
(110,000 |
) |
Consolidation adjustments and other (2) |
|
|
69,942 |
|
|
|
6,992 |
|
|
|
|
|
|
|
|
Reconciling items sub-total |
|
|
694,861 |
|
|
|
605,820 |
|
|
|
|
|
|
|
|
Consolidated assets |
|
$ |
2,246,674 |
|
|
$ |
2,472,745 |
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
This change reflects the reversal of stock-based compensation costs of
approximately $31,500 in the third quarter. Refer to Note 5 for further information. |
|
(2) |
|
The amount for September 30, 2007 includes the bulk purchase of approximately
$36,700 for lots that have not yet been allocated to the reportable segments. |
14
NVR, Inc.
Notes to Condensed Consolidated Financial Statements
(dollars in thousands except per share data)
11. Commitments and Contingencies
On July 18, 2007, former employees filed lawsuits against the Company in the Court of Common
Pleas in Allegheny County, Pennsylvania and Hamilton County, Ohio, in Superior Court in Durham
County, North Carolina, and in the Circuit Court in Montgomery County, Maryland, and on July 19,
2007 in the Superior Court in New Jersey, alleging that the Company incorrectly classified its
sales and marketing representatives as being exempt from overtime wages. These lawsuits are
similar in nature to another lawsuit filed on October 29, 2004 by another former employee in the
United States District Court for the Western District of New York. The complaints seek injunctive
relief, an award of unpaid wages, including fringe benefits, liquidated damages equal to the
overtime wages allegedly due and not paid, attorney and other fees and interest. The suits were
filed as purported class actions. The class of individuals that any of the lawsuits purport to
represent has not been certified. The Company intends to vigorously defend these actions, as the
Company believes that its compensation practices in regard to sales and marketing representatives
are entirely lawful. NVRs position is strongly supported by two letter rulings that the United
States Department of Labor issued in January 2007, in accordance with the DOLs mandate to
interpret federal wage and hour laws. The two courts to most recently consider similar claims
against other homebuilders have adopted the DOLs position that sales and marketing representatives
were properly classified as exempt from overtime wages. Because the company is unable to determine
the likelihood of an unfavorable outcome of this case, or the amount of damages, if any, the
Company has not recorded any associated liabilities in the accompanying condensed, consolidated
balance sheet.
On April 16, 2007, a lawsuit was filed by one of NVRs customers against the Company in the
United States District Court, Western District of Pennsylvania. The plaintiffs allege that the
Company violated Section 8 of the Real Estate Settlement and Protection Act. The complaint seeks
treble damages, interest, injunctive and declaratory relief, attorney fees and other expenses. The
lawsuit was filed as a purported class action. The court has not certified the class of
individuals that the lawsuit purports to represent. Similar lawsuits have been filed against at
least two other homebuilders operating in Pennsylvania. The Company intends to vigorously defend
this action. However, at this time, the Company is unable to express an opinion as to the
likelihood of an unfavorable outcome, or the amount of damages, if any. Accordingly, the Company
has not recorded any associated liabilities in the accompanying condensed, consolidated balance
sheet.
The Company is involved in various other claims and litigation arising in the ordinary
course of business. The Company believes that the disposition of these matters will not have
a material adverse effect on the Companys financial condition or results of operations.
12. Recent Accounting Pronouncements
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. SFAS No. 157
provides guidance for using fair value to measure assets and liabilities and expands disclosures
about fair value measurements. SFAS No. 157 will be effective for the Companys fiscal year
beginning January 1, 2008. The Company is currently reviewing the effect, if any, SFAS No. 157
will have on its financial statements upon adoption.
In March 2006, the FASB issued SFAS No. 156, Accounting for Servicing of Financial Assets,
which provides an approach to simplify efforts to obtain hedge-like (offset) accounting by allowing
the Company the option to carry mortgage servicing rights at fair value. This new Statement amends
SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilitiesa replacement of FASB SFAS No. 125, with respect to the accounting for separately
recognized servicing assets and servicing liabilities. SFAS No. 156 became effective for all
separately recognized servicing assets and liabilities as of the beginning of the current fiscal
year. Because the Company does not retain the servicing rights when it sells its
15
NVR, Inc.
Notes to Condensed Consolidated Financial Statements
(dollars in thousands except per share data)
mortgage loans held for sale, the adoption of SFAS No. 156 did not have a material impact on
the Companys consolidated financial position, results of operations or cash flows.
On November 29, 2006, the FASB ratified Emerging Issue Task Force (EITF) Issue
No. 06-8, Applicability of the Assessment of a Buyers Continuing Investment Under FASB
Statement No. 66, Accounting for Sales of Real Estate, for Sales of Condominiums. EITF No.
06-8 states that the adequacy of the buyers continuing investment under SFAS No. 66 should be
assessed in determining whether to recognize profit under the percentage-of-completion method
on the sale of individual units in a condominium project. This consensus could require that
additional deposits be collected by developers of condominium projects that want to recognize
profit during the construction period under the percentage-of-completion method. EITF No. 06-8
is effective for the Company beginning on January 1, 2008. The Company does not expect that
the adoption of EITF No. 06-8 will have a material impact on its consolidated financial
position, results of operations or cash flows.
16
|
|
|
Item 2. |
|
Managements Discussion and Analysis of Financial Condition and
Results of Operations
(dollars in thousands) |
Forward-Looking Statements
Some of the statements in this Form 10-Q, as well as statements made by NVR in periodic press
releases and other public communications, constitute forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act
of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934. Certain, but not
necessarily all, of such forward-looking statements can be identified by the use of
forward-looking terminology, such as believes, expects, may, will, should, or
anticipates or the negative thereof or other variations thereof or comparable terminology, or by
discussion of strategies, each of which involves risks and uncertainties. All statements other
than those of historical facts included herein, including those regarding market trends, NVRs
financial position, business strategy, the outcome of pending litigation, projected plans and
objectives of management for future operations, are forward-looking statements. Such
forward-looking statements involve known and unknown risks, uncertainties and other factors that
may cause the actual results or performance of NVR to be materially different from any future
results, performance or achievements expressed or implied by the forward-looking statements. Such
risks, uncertainties and other factors include, but are not limited to, general economic and
business conditions (on both a national and regional level), interest rate changes, access to
suitable financing by NVR and by NVRs customers, competition, the availability and cost of land
and other raw materials used by NVR in its homebuilding operations, shortages of labor, weather
related slow downs, building moratoria, governmental regulation, the ability of NVR to integrate
any acquired business, fluctuation and volatility of stock and other financial markets, mortgage
financing availability and other factors over which NVR has little or no control. NVR undertakes
no obligation to update such forward-looking statements. For additional information regarding
risk factors, see Part II, Item 1(A) of this Report.
Unless the context otherwise requires, references to NVR, we, us or our include NVR
and its subsidiaries.
Results of Operations for the Three and Nine Months Ended September 30, 2007 and 2006
Overview
Our Business
Our primary business is the construction and sale of single-family detached homes,
townhomes and condominium buildings. To more fully serve our homebuilding customers, we also
operate a mortgage banking and title services business. Our homebuilding reportable segments
consist of the following markets:
Mid Atlantic: Maryland, Virginia, West Virginia and Delaware
North East: New Jersey and eastern Pennsylvania
Mid East: Kentucky, Michigan, New York, Ohio and western Pennsylvania
South East: North Carolina, South Carolina, and Tennessee
We believe that we operate our business with a conservative operating strategy. We do not
engage in land development and primarily construct homes on a pre-sold basis. This strategy
allows us to maximize inventory turnover, which we believe enables us to minimize market risk
and to operate with less capital, thereby enhancing rates of return on equity and total capital.
In addition, we focus on obtaining and maintaining a leading market position in each market we
serve. This strategy allows us to gain valuable efficiencies and competitive advantages in our
markets which management believes contributes to minimizing the adverse effects of regional
economic cycles and provides growth opportunities within these markets.
17
Because we are not active in the land development business, our continued success is
contingent upon, among other things, our ability to control an adequate supply of finished lots
at current market prices on which to build, and on our developers ability to timely deliver
finished lots to meet the sales demands of our customers. We acquire finished lots from various
development entities under fixed price purchase agreements (purchase agreements). These
purchase agreements require deposits in the form of cash or letters of credit that may be
forfeited if we fail to perform under the purchase agreement. However, we believe this lot
acquisition strategy reduces the financial requirements and risks associated with direct land
ownership and development. As of September 30, 2007, we controlled approximately 79,000 lots
with deposits in cash and letters of credit totaling approximately $407,000 and $9,000,
respectively, and approximately 700 additional lots through joint venture limited liability
corporations. Included in the number of controlled lots are approximately 20,000 lots for which
we have recorded a contract land deposit impairment reserve of approximately $153,700 as of
September 30, 2007 (see note 3 to the accompanying financial statements for further discussion
of contract land deposits).
Overview of the Current Business Environment
The current home sales environment continues to remain challenging, characterized by high
levels of existing and new homes available for sale, declining homebuyer confidence and
affordability issues, and a more restrictive mortgage lending environment, affecting the
secondary mortgage markets related to sub-prime mortgage programs and the jumbo mortgage market.
Market conditions have continued to deteriorate from prior quarters, exerting downward pressure
on both new orders and on selling prices. Additionally, home prices in many of our markets
continue to decline as many homebuilders have reduced prices in an effort to reduce new home
inventories. Inventory levels for new and existing homes continue to increase as sales slow due
to declining homebuyer confidence and tighter credit markets. We do not expect market
conditions to improve in the near term. In response to these challenging market conditions, we
continue to offer incentives to homebuyers and to reduce prices in many of our markets. The new
order increase of 12% quarter over quarter that we experienced was due to a weak 2006 third
quarter comparison rather than an indication that markets are improving. Sales activity slowed
noticeably as the quarter progressed. Additionally, new orders within our largest region, the
Mid-Atlantic region, were down 6% quarter over quarter. Our cancellation rate for the third
quarter of 2007 was 27%, which was flat with the cancellation rate during the same period in
2006, but higher than the 16% experienced in the second quarter of 2007. The cancellation rate
was highest in our Washington D.C. sub-market at approximately 44%, which increased from 39% in
the third quarter of 2006 and 21% in the second quarter of 2007. Average selling prices for the
quarter ended September 30, 2007 decreased by 9% from the same period in 2006 and for the year
were down approximately 6% from the year to date period ended September 30, 2006. Average sales
prices were down in each of our market segments during both the quarter and year to date periods
as compared to the same periods in 2006, except for the South East region where average sales
prices were up 8% and 13% for the quarter and year to date periods, respectively.
As market conditions have continued to deteriorate through the third quarter, we have
continued to work with our developers in certain communities to reduce lot prices to current
market values and/or to defer scheduled lot purchases to coincide with our slower than expected
sales pace. In communities where we are unsuccessful in negotiating necessary adjustments to
the contracts to meet current market prices, we may exit the community and forfeit our deposit.
During the quarter ended September 30, 2007, we recorded contract land deposit impairment
charges of approximately $96,500 as compared to approximately $80,800 in the third quarter of
2006. Our year to date contract land deposit impairment charges for 2007 and 2006 were
approximately $163,800 and $113,800, respectively. As noted above, as of September 30, 2007 we
had a reserve of approximately $153,700 on outstanding contract land deposits related to
approximately 20,000 lots. These lots are included in the total number of lots controlled
mentioned above. The total number of lots under control is down 19% as compared to the same
period in 2006 and down 6% from the second quarter of 2007. As a result of the termination of
certain purchase agreements and a reduced pace of entering into new lot option contracts due to
uncertainties surrounding the market value of land, we have experienced a 17% reduction in the
average number of active communities in which we are selling to 506 communities in the third
quarter of 2007 from 609 communities in the same period of 2006.
18
For the quarter ended September 30, 2007, consolidated revenues decreased approximately 17%
from the same period in 2006. Additionally, net income and diluted earnings per share in the
current quarter decreased 30% and 22%, respectively, as compared to the third quarter of 2006.
Gross profit margins within our homebuilding business declined to 14.4% in the third quarter of
2007 as compared to 19.0% in the third quarter of 2006. Gross profit margins have been
negatively impacted by the pricing pressures created by market conditions which began to erode
in the second half of 2005 and continue to be challenging. Additionally, gross profit margins
have been negatively impacted by the contract land deposit impairment charges discussed above.
Year to date consolidated revenues, net income and diluted earnings per share declined 18%, 41%
and 37%, respectively. As a result of the current market conditions and our expectations that
the market will remain challenging into 2008, we determined that is was improbable that we would
achieve the performance metric related to approximately 410,557 outstanding stock options. The
performance metric requires aggregate diluted earnings per share for the years ended December
31, 2005 through December 31, 2008 to exceed $339.00 per share. This determination resulted in
the reversal of approximately $31,500 of pre-tax stock-based compensation expense in the third
quarter of 2007, which had been recognized in prior reporting periods, as follows: $28,450 in
homebuilding general and administrative costs, $900 in homebuilding cost of sales and $2,150 in
mortgage banking general and administrative costs. It is expected that none of the outstanding
stock options that are subject to the performance metric will vest, and it is improbable that
future stock-based compensation will be recognized for these options.
Based on the current uncertainty in both the homebuilding and mortgage markets, we expect
to continue to see downward pricing pressures and in turn, continued pressure on gross profit
margins in future periods. To offset these declining selling prices and customer affordability
issues, we are aggressively working with our vendors to reduce material and labor costs incurred
in the construction process. Additionally, in certain of our markets, we are providing house
types at lower sales price points by reducing the square footage of the products offered and by
providing fewer upgraded options as standard options. This provides homebuyers with a more
affordable product and the option to upgrade only those features important to each particular
buyer. In addition, we made staffing reductions in 2006 to size our organization to meet sales
activity levels expected for 2007. We continue to assess and adjust our staffing levels and
organizational structure as conditions warrant.
Homebuilding Operations
The following table summarizes the results of operations and other data for the consolidated
homebuilding operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Nine Months Ended |
|
|
September 30, |
|
September 30, |
|
|
2007 |
|
2006 |
|
2007 |
|
2006 |
Revenues |
|
$ |
1,270,471 |
|
|
$ |
1,528,964 |
|
|
$ |
3,642,721 |
|
|
$ |
4,435,503 |
|
Cost of Sales |
|
$ |
1,087,399 |
|
|
$ |
1,238,671 |
|
|
$ |
3,002,746 |
|
|
$ |
3,403,893 |
|
Gross profit margin percentage |
|
|
14.4 |
% |
|
|
19.0 |
% |
|
|
17.6 |
% |
|
|
23.3 |
% |
Selling, general and administrative |
|
$ |
54,906 |
|
|
$ |
95,574 |
|
|
$ |
253,510 |
|
|
$ |
329,131 |
|
Settlements (units) |
|
|
3,476 |
|
|
|
3,854 |
|
|
|
9,639 |
|
|
|
11,137 |
|
Average settlement price |
|
$ |
365.1 |
|
|
$ |
396.3 |
|
|
$ |
377.5 |
|
|
$ |
397.7 |
|
New orders (units) |
|
|
2,660 |
|
|
|
2,378 |
|
|
|
10,322 |
|
|
|
10,215 |
|
Average new order price |
|
$ |
330.1 |
|
|
$ |
362.5 |
|
|
$ |
358.4 |
|
|
$ |
380.6 |
|
Backlog (units) |
|
|
|
|
|
|
|
|
|
|
7,071 |
|
|
|
7,388 |
|
Average backlog price |
|
|
|
|
|
|
|
|
|
$ |
381.2 |
|
|
$ |
424.0 |
|
19
Consolidated Homebuilding Three Months Ended September 30, 2007 and 2006
Homebuilding revenues decreased 17% for the third quarter of 2007 compared to the same period
in 2006 as a result of a 10% decrease in the number of units settled and an 8% decrease in the
average settlement price quarter over quarter. The decrease in the number of units settled is
primarily attributable to our beginning backlog units being approximately 11% lower at the start of
the third quarter of 2007 as compared to the same period of 2006. Average settlement prices were
primarily impacted by a 9% lower average price of homes in backlog entering the third quarter of
2007 as compared to the same period in 2006.
Gross profit margins in the quarter ended September 30, 2007 declined 460 basis points as
compared to the third quarter of 2006 primarily as a result of the increased pressure on selling
prices and higher contract land deposit impairment charges of approximately $96,500 as compared to
approximately $80,800 in the third quarter of 2006. These impairment charges reduced gross profit
margins by 760 basis points and 529 basis points in the third quarters of 2007 and 2006,
respectively. We expect continued gross profit margin pressure over at least the next several
quarters due to the current market conditions discussed above.
New order units increased in the third quarter of 2007 by 12% as compared to the third quarter
of 2006, primarily as a result of strong sales in the South East and Mid East regions. The
increase in sales in the Mid East region was due primarily to a weak third quarter 2006 comparison.
Despite this favorable quarter over quarter increase, we experienced a significant market-wide
slowdown in sales activity in August and September of the current quarter as a result of the
tightening credit markets. Additionally, new orders within our largest region, the Mid-Atlantic
region, were down 6% quarter over quarter. Our cancellation rate for the third quarter of 2007 was
27%, which was flat with the cancellation rate during the same period in 2006, but higher than the
16% experienced in the second quarter of 2007. The cancellation rate was highest in our Washington
D.C. sub-market at approximately 44%, which increased from 39% in the third quarter of 2006 and 21%
in the second quarter of 2007. Average selling prices for the quarter ended September 30, 2007
decreased by 9% from the same period in 2006. Average sales prices were down in each of our market
segments during the quarter as compared to the same periods in 2006, except for the South East
region where average sales prices were up 8% in the quarter as compared to the third quarter of
2006. We expect new orders to be negatively impacted in each of our markets in future quarters as
the market continues to be challenging. Affordability issues continue to impact many of our
markets, which may be further impacted by the deterioration of the credit markets.
Selling, general and administrative (SG&A) expenses for the third quarter decreased by
$40,668, or 43%, and as a percentage of revenue decreased to 4.3% from 6.3% in the third quarter of
2006. The decrease in SG&A expenses is primarily attributable to the previously mentioned reversal
of $28,450, or 2.2% of revenue, in stock-based compensation costs related to outstanding stock
options which are subject to a performance metric, which we have determined is improbable that we
will achieve (see footnote 5 to the condensed consolidated financial statements for further
discussion). In addition, SG&A costs were favorably impacted by approximately $6,300 due to a
decrease in personnel costs as staffing levels have been reduced from the prior year comparative
quarter to meet current and expected levels of sales activity.
Consolidated Homebuilding Nine Months Ended September 30, 2007 and 2006
Homebuilding revenues decreased 18% for the nine months ended September 30, 2007 compared to
the same period in 2006 due to a 14% decrease in the number of units settled and a 5% decrease in
the average settlement price. The decrease in the number of units settled is attributable to a 23%
lower number of homes in backlog entering 2007 as compared to the same period in 2006, offset
partially by a higher backlog turnover rate year over year. The decrease in average settlement
prices is attributable to a 7% lower average price of homes in the beginning backlog year over
year.
Gross profit margins in the first nine months of 2007 declined compared to the first nine
months of 2006 primarily as a result of the downward pressure on selling prices experienced during
2006 and 2007. Gross profit margins were also negatively impacted by an increase in contract land
deposit impairment charges
20
period over period. For the first nine months of 2007, we incurred contract land deposit
impairment charges of approximately $163,800 as compared to approximately $113,800 for the same
period in 2006.
New orders for the nine months ended September 30, 2007 increased 1% as compared to the same
period in 2006. The average sales price of new orders decreased 6% in the nine-month period ended
September 30, 2007 compared to the same period in 2006. Average sales prices are down in each
market segment except the South East market where average sales prices have increased approximately
13% in 2007 as compared to 2006 as a result of a shift in the product mix year over year.
SG&A expenses for the nine-month period ended September 30, 2007 decreased $75,621, or 23%,
compared to the same period in 2006, and as a percentage of revenue decreased to 7.0% in 2007
compared to 7.4% for the 2006 period. The decrease in SG&A expenses is primarily attributable to
an approximately $33,600 decrease in personnel costs as staffing levels were reduced to meet
current and expected levels of sales activity and incentive compensation costs are approximately
$11,100 below prior year levels. In addition, SG&A costs were favorably impacted in the current
quarter as a result of the previously mentioned reversal of $28,450 in stock-based compensation
costs.
Backlog units and dollars were 7,071 and $2,695,591, respectively, as of September 30, 2007
compared to 7,388 and $3,132,419 as of September 30, 2006. The decrease in backlog units is
primarily attributable to our beginning backlog units being approximately 23% lower at the
beginning of 2007 as compared to the beginning of 2006. Backlog dollars were negatively impacted
by the decrease in backlog units coupled with a 10% decrease in the average price of homes in
ending backlog, resulting primarily from a 7% decrease in the average selling price for new orders
over the six-month period ended September 30, 2007 compared to the same period in 2006. As
discussed above, average selling prices have been negatively impacted by deteriorating market
conditions in each of our markets.
Reportable Segments
Homebuilding profit before tax includes all revenues and income generated from the sale
of homes, less the cost of homes sold, SG&A expenses, and a corporate capital allocation
charge determined at the corporate headquarters. The corporate capital allocation charge
eliminates in consolidation, is based on the segments average net assets employed, and is
charged using a consistent methodology in the periods presented. The corporate capital
allocation charged to the operating segment allows the Chief Operating Decision Maker (as
defined in Statement of Financial Accounting Standards (SFAS) No. 131, Disclosure about
Segments of an Enterprise and Related Information) to determine whether the operating
segments results are providing the desired rate of return after covering our cost of capital.
We record charges on contract land deposits when we determine that it is probable that
recovery of the deposit is impaired. For segment reporting purposes, impairments on contract
land deposits are charged to the operating segment upon the determination to terminate a lot
purchase agreement with the developer, or when we forfeit some or all of the deposit upon
restructuring a lot purchase agreement. The following table summarizes certain homebuilding
operating activity by segment for the three and nine months ended September 30, 2007 and 2006:
21
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Nine Months Ended |
|
|
September 30, |
|
September 30, |
|
|
2007 |
|
2006 |
|
2007 |
|
2006 |
Mid Atlantic: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
761,591 |
|
|
$ |
931,526 |
|
|
$ |
2,240,252 |
|
|
$ |
2,825,914 |
|
Settlements (units) |
|
|
1,656 |
|
|
|
1,791 |
|
|
|
4,728 |
|
|
|
5,511 |
|
Average settlement price |
|
$ |
459.7 |
|
|
$ |
519.9 |
|
|
$ |
473.6 |
|
|
$ |
512.4 |
|
New orders (units) |
|
|
1,061 |
|
|
|
1,128 |
|
|
|
4,785 |
|
|
|
4,740 |
|
Average new order price |
|
$ |
408.1 |
|
|
$ |
438.0 |
|
|
$ |
448.9 |
|
|
$ |
488.8 |
|
Backlog (units) |
|
|
|
|
|
|
|
|
|
|
3,722 |
|
|
|
4,203 |
|
Average backlog price |
|
|
|
|
|
|
|
|
|
$ |
467.5 |
|
|
$ |
519.5 |
|
Gross profit margin |
|
$ |
139,904 |
|
|
$ |
235,817 |
|
|
$ |
481,474 |
|
|
$ |
828,946 |
|
Gross profit margin percentage |
|
|
18.37 |
% |
|
|
25.32 |
% |
|
|
21.49 |
% |
|
|
29.33 |
% |
Segment profit |
|
$ |
75,477 |
|
|
$ |
162,824 |
|
|
$ |
294,137 |
|
|
$ |
610,308 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North East: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
118,242 |
|
|
$ |
174,051 |
|
|
$ |
321,570 |
|
|
$ |
466,592 |
|
Settlements (units) |
|
|
345 |
|
|
|
441 |
|
|
|
918 |
|
|
|
1,197 |
|
Average settlement price |
|
$ |
342.7 |
|
|
$ |
394.6 |
|
|
$ |
350.2 |
|
|
$ |
389.8 |
|
New orders (units) |
|
|
260 |
|
|
|
264 |
|
|
|
1,022 |
|
|
|
1,119 |
|
Average new order price |
|
$ |
330.9 |
|
|
$ |
385.3 |
|
|
$ |
339.4 |
|
|
$ |
375.3 |
|
Backlog (units) |
|
|
|
|
|
|
|
|
|
|
644 |
|
|
|
706 |
|
Average backlog price |
|
|
|
|
|
|
|
|
|
$ |
341.2 |
|
|
$ |
383.3 |
|
Gross profit margin |
|
$ |
15,947 |
|
|
$ |
34,475 |
|
|
$ |
46,993 |
|
|
$ |
93,992 |
|
Gross profit margin percentage |
|
|
13.49 |
% |
|
|
19.81 |
% |
|
|
14.61 |
% |
|
|
20.14 |
% |
Segment profit |
|
$ |
4,934 |
|
|
$ |
20,318 |
|
|
$ |
12,942 |
|
|
$ |
51,708 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mid East: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
237,078 |
|
|
$ |
258,097 |
|
|
$ |
616,695 |
|
|
$ |
702,406 |
|
Settlements (units) |
|
|
936 |
|
|
|
966 |
|
|
|
2,347 |
|
|
|
2,606 |
|
Average settlement price |
|
$ |
252.1 |
|
|
$ |
265.8 |
|
|
$ |
261.3 |
|
|
$ |
268.0 |
|
New orders (units) |
|
|
667 |
|
|
|
482 |
|
|
|
2,620 |
|
|
|
2,489 |
|
Average new order price |
|
$ |
240.5 |
|
|
$ |
266.2 |
|
|
$ |
248.6 |
|
|
$ |
268.4 |
|
Backlog (units) |
|
|
|
|
|
|
|
|
|
|
1,547 |
|
|
|
1,484 |
|
Average backlog price |
|
|
|
|
|
|
|
|
|
$ |
247.5 |
|
|
$ |
273.4 |
|
Gross profit margin |
|
$ |
39,296 |
|
|
$ |
45,203 |
|
|
$ |
111,467 |
|
|
$ |
120,327 |
|
Gross profit margin percentage |
|
|
16.58 |
% |
|
|
17.51 |
% |
|
|
18.07 |
% |
|
|
17.13 |
% |
Segment profit |
|
$ |
19,648 |
|
|
$ |
22,137 |
|
|
$ |
55,522 |
|
|
$ |
52,233 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
South East: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
153,560 |
|
|
$ |
165,290 |
|
|
$ |
464,204 |
|
|
$ |
440,591 |
|
Settlements (units) |
|
|
539 |
|
|
|
656 |
|
|
|
1,646 |
|
|
|
1,823 |
|
Average settlement price |
|
$ |
284.9 |
|
|
$ |
252.0 |
|
|
$ |
282.0 |
|
|
$ |
241.7 |
|
New orders (units) |
|
|
672 |
|
|
|
504 |
|
|
|
1,895 |
|
|
|
1,867 |
|
Average new order price |
|
$ |
295.7 |
|
|
$ |
273.5 |
|
|
$ |
291.8 |
|
|
$ |
258.4 |
|
Backlog (units) |
|
|
|
|
|
|
|
|
|
|
1,158 |
|
|
|
995 |
|
Average backlog price |
|
|
|
|
|
|
|
|
|
$ |
304.7 |
|
|
$ |
274.0 |
|
Gross profit margin |
|
$ |
36,173 |
|
|
$ |
36,917 |
|
|
$ |
109,396 |
|
|
$ |
97,948 |
|
Gross profit margin percentage |
|
|
23.56 |
% |
|
|
22.33 |
% |
|
|
23.57 |
% |
|
|
22.23 |
% |
Segment profit |
|
$ |
21,975 |
|
|
$ |
24,181 |
|
|
$ |
70,139 |
|
|
$ |
62,525 |
|
22
Mid Atlantic
Three Months Ended September 30, 2007 and 2006
The Mid Atlantic segment had an approximate $87,300 reduction in segment profit in the three
months ended September 30, 2007 compared to the same period in 2006. Revenues decreased 18% for
the three months ended September 30, 2007 from the prior year quarter due primarily to a 12%
decrease in the average price of homes settled and an 8% decrease in the number of units settled.
The decreases in the average settlement price and number of units settled is attributable to an 11%
lower average backlog settlement price and an 11% lower backlog unit balance entering the third
quarter of 2007 compared to the same period in 2006. The Mid Atlantic segments gross profit
margin percentage for the quarter decreased to 18.4% from 25.3% in the same period in 2006. Gross
margins were negatively impacted by the lower average settlement prices and also by higher contract
land deposit impairment charges of approximately $34,500 in the third quarter of 2007 compared to
approximately $29,400 in the third quarter of 2006.
New orders for the third quarter of 2007 decreased 6% from the same period in 2006. In
addition, sales activity slowed noticeably as the quarter progressed. We expect that the markets
within this segment will continue to be negatively impacted by high levels of new and existing home
inventory for sale, affordability issues, and a tougher lending environment resulting from the
sub-prime mortgage market deterioration and tightened credit conditions in the jumbo mortgage
market as discussed above. The segments overall average sales price of new orders decreased 7% in
the quarter compared to the third quarter of 2006.
Nine Months Ended September 30, 2007 and 2006
The Mid Atlantic segment had an approximate $316,200 decrease in segment profit in the nine
months ended September 30, 2007 compared to the same period in 2006. Revenues decreased 21% for
the nine months ended September 30, 2007 from the prior year period on a 14% decrease in the number
of units settled and an 8% decrease in the average settlement price. The decrease in units settled
is attributable to a 26% lower backlog unit balance at the beginning of the period, offset
partially by a higher backlog turnover rate period over period. The decrease in the average
settlement price is primarily attributable to an 8% lower average price of homes in the beginning
backlog period over period. The segments gross profit margin percentage fell to 21.5% in 2007
from 29.3% in 2006. Gross profit margins were adversely affected by the downward pressure on
selling prices and higher contract land deposit impairment charges of approximately $49,200 in 2007
compared to approximately $32,900 in 2006.
New orders for the nine-month period ended September 30, 2007 increased 1% from the same
period in 2006. Despite this increase in new orders, we have experienced a noticeable slowdown in
market conditions in the Mid Atlantic as the year has progressed. This slowdown continued into the
third quarter of 2007 and resulted in a 6% decrease in new orders in the Mid Atlantic segment in
the third quarter of 2007 as compared to the third quarter of 2006 as discussed above. We expect
market conditions in the Mid Atlantic to remain challenging into future quarters and continue to
exert downward pressure on new orders, pricing and gross profit margins. Backlog units and dollars
decreased approximately 11% and 20%, respectively. The decrease in backlog units is attributable
to the beginning backlog units being approximately 26% lower at the beginning of 2007 as compared
to the beginning of 2006. Backlog dollars were negatively impacted by the decrease in backlog
units coupled with a 10% decrease in the average price of homes in ending backlog, resulting
primarily from a 7% decrease in the average selling price for new orders over the six-month period
ended September 30, 2007 compared to the same period in 2006.
23
North East
Three Months Ended September 30, 2007 and 2006
The North East segment had an approximate $15,400 decrease in segment profit in the three
months ended September 30, 2007 compared to the same period in 2006. Revenues decreased
approximately 32% as a result of a 22% decrease in the number of units settled and a 13% decline in
the average settlement price. The decreases in the number of units settled and the average
settlement price is attributable to a 17% lower backlog unit balance and an 11% lower average
backlog settlement price entering the third quarter of 2007 compared to the same period in 2006.
Gross profit margins decreased to 13.5% in 2007 from 19.8% in 2006 as a result of the lower average
settlement prices in 2007. In addition, gross profit margins were negatively impacted by higher
contract land deposit impairment charges of approximately $4,200 in the third quarter of 2007
compared to approximately $300 in the third quarter of 2006.
New orders and the average new order sales price for the third quarter of 2007 decreased 2%
and 14%, respectively, from the same period in 2006, as a result of the competitive sales
environment within each of our markets in the North East segment which has continued to put
downward pressure on sales prices.
Nine Months Ended September 30, 2007 and 2006
The North East segment had an approximate $38,800 decrease in segment profit in the nine
months ended September 30, 2007 compared to the same period in 2006. Revenues decreased 31% for
the nine months ended September 30, 2007 from the same prior year period due to a 23% decrease in
the number of units settled and a 10% decrease in the average settlement price. The decrease in
the number of units settled is primarily attributable to a 31% lower beginning backlog period over
period partially offset by a higher backlog turnover rate in 2007 as compared to 2006. Average
settlement prices are down as a result of an 11% lower average sales price in beginning backlog
period over period. Gross profit margins decreased to 14.6% in the first nine months of 2007 from
20.1% in the same period in 2006, primarily as a result of the increased pressure on selling
prices, resulting in 10% lower average settlement prices period over period. In addition, gross
profit margins were negatively impacted by higher contract land deposit impairment charges of
approximately $5,600 in 2007 compared to approximately $400 in 2006.
New orders for the nine-month period ended September 30, 2007 decreased 9% from the same
period in 2006. New orders were negatively impacted by a 22% reduction in the average number of
active communities within the North East segment to 52 communities in the third quarter of 2007
from 66 communities in the same period in 2006. Backlog units and dollars were 9% and 19% lower,
respectively, in the first nine months of 2007 compared to the same period in 2006, due primarily
to the 31% lower backlog unit balance and entering 2007 compared to the same period in 2006
partially offset by a higher backlog turnover rate in 2007. In addition, backlog dollars have been
negatively impacted by a 13% lower average sales price over the six-month period ended September
30, 2007 compared to the same period in 2006.
Mid East
Three Months Ended September 30, 2007 and 2006
The Mid East segment had an approximate $2,500 decrease in segment profit in the three months
ended September 30, 2007 compared to the same period in 2006. Revenues decreased 8% due to a 3%
decrease in the number of units settled and a 5% decrease in the average settlement price. The
decrease in the settlements and average settlement price is primarily attributable to a 8% lower
backlog unit balance and a 7% lower average backlog sales price entering the third quarter of 2007
compared to the same period in 2006. Gross profit margins decreased to 16.6% in the third quarter
of 2007 from 17.5% in the same period of 2006 as a result of the previously mentioned 5% decrease
in average settlement prices and also by higher contract land
24
deposit impairment charges of approximately $6,300 in the third quarter of 2007 compared to
approximately $2,500 in the third quarter of 2006.
New orders for the third quarter of 2007 increased 38% from the same period in 2006, while the
average price for new orders declined 10% quarter over quarter. The increase in new orders was
attributable in part to a weak 2006 third quarter comparison, as well as to a decrease in the
segments cancellation rate to 20% in the third quarter of 2007 from 28% in the third quarter of
2006. However, we expect that selling prices and gross profit margins in the markets within this
segment will be negatively impacted in future quarters by affordability issues and a tougher
lending environment resulting from the sub-prime mortgage market deterioration.
Nine Months Ended September 30, 2007 and 2006
The Mid East segment had an approximate $3,300 increase in segment profit in the nine months
ended September 30, 2007 compared to the same period in 2006, despite a decrease of approximately
12% in revenues for the nine months ended September 30, 2007 from the prior year period. The
decrease in revenues is due primarily to a 10% decrease in the number of units settled in the first
nine months of 2007 as compared to the same period in 2006. The decrease in the number of units
settled is attributable to a 20% lower beginning backlog period over period partially offset by a
higher backlog turnover rate in 2007 as compared to 2006. Gross profit margins increased to 18.1%
in the first nine months of 2007 from 17.1% in the same period in 2006 as a result of increased
efforts to control operating costs, including personnel and material costs.
New orders for the nine-month period ended September 30, 2007 increased 5% from the same
period in 2006, primarily due to a weak 2006 third quarter comparison. Backlog units were higher
by 4%, while backlog dollars were 6% lower than the 2006 period. The decrease in backlog dollars
is attributable to a decrease of 10% in the average selling price of new orders for the six-month
period ended September 30, 2007 as compared to the same period in 2006.
South East
Three Months Ended September 30, 2007 and 2006
The South East segment had an approximate $2,200 decrease in segment profit in the three
months ended September 30, 2007 compared to the same period in 2006. Revenues decreased 7% for the
three months ended September 30, 2007 from the prior year quarter due to a 18% decrease in the
number of units settled, offset partially by a 13% increase in the average settlement price. The
decrease in the number of units settled during the current quarter is attributable to an 11% lower
beginning backlog period over period and to a lower backlog turnover rate quarter over quarter.
The increase in the average settlement price is attributable to the average price of homes in
backlog at the beginning of the third quarter of 2007 being 15% higher than at the same period in
2006. These higher backlog values resulted from the favorable market conditions experienced in the
South East segment in prior quarters, allowing us to increase sales prices, as well as a general
shift in sales within the region to a larger, higher priced product. Gross profit margins
increased to 23.6% in the third quarter of 2007 from 22.3% in the same period of 2006 due to the
higher average settlement prices experienced in the current quarter.
New orders during the third quarter of 2007 were 33% higher than the third quarter of 2006 and
the average new order price was 8% higher during the same respective periods. The increase in new
orders is attributable to an 18% increase in the average number of active communities within the
South East segment to 77 communities in the third quarter of 2007 from 65 communities in the same
period in 2006. In addition, average sales absorption within these communities has increased
approximately 13% in the third quarter of 2007 as compared to the same period in 2006. We expect
market conditions to become more challenging in future quarters within the South East segment as
credit markets continue to tighten, resulting in fewer qualified buyers and affordability issues
and, in turn, increased pricing pressures on new orders.
25
Nine Months Ended September 30, 2007 and 2006
The South East segment had an approximate $7,600 increase in segment profit in the nine months
ended September 30, 2007 compared to the same period in 2006. Revenues increased 5% for the nine
months ended September 30, 2007 from the prior year period due to a 17% increase in the average
settlement price, offset partially by a 10% decrease in the number of units settled. The increase
in the average settlement price is attributable to the average price of homes in backlog at the
beginning of 2007 being 20% higher than at the same period in 2006 due to favorable market
conditions allowing us to increase selling prices in prior quarters and the aforementioned shift
into more upscale communities. Gross profit margins increased to 23.6% in the first nine months of
2007 from 22.2% in the same period of 2006 as a result of the increase in the average settlement
prices in 2007 to date.
New orders during the nine-month period ended September 30, 2007 increased 2% from the same
period in 2006 and the average new order price increased 13% over the same respective periods. The
increase in new orders is primarily attributable to the aforementioned 33% increase in new orders
in the third quarter of 2007 as compared to the third quarter of 2006. The increase in the average
new order price is attributable to favorable market conditions experienced in the South East
segment through the first half of 2007, allowing us to increase sales prices. In addition, there
has been a general shift in sales within the region to a larger, higher priced product. Backlog
units and dollars were 16% and 29% higher than the 2006 period. Backlog units were higher due to a
lower backlog turnover rate year over year and an 8% increase in the number of new orders for the
six-month period ended September 30, 2007 as compared to the same period in 2006. Backlog dollars
are higher as a result of the increase in the number of backlog units coupled with a 10% higher
average selling price for the six-month period ended September 30, 2007 as compared to the same
period in 2006. Although the South East segment has not been as severely impacted by the adverse
economic conditions within the homebuilding industry as our other reporting segments, the markets
in this segment are showing similar signs of the overall slowdown being experienced in our other
reporting segments. As a result, we expect that selling prices and gross profit margins in the
markets within this segment will be negatively impacted in future quarters.
Homebuilding Segment Reconciliations to Consolidated Homebuilding Operations
In addition to the corporate capital allocation and contract land deposit impairments
discussed above, the other reconciling items between homebuilding segment profit and
homebuilding consolidated profit before tax include unallocated corporate overhead,
consolidation adjustments, stock option compensation expenses, and external corporate
interest. NVRs overhead functions, such as accounting, treasury, human resources, land
acquisition, etc., are centrally performed and the costs are not allocated to the Companys
operating segments. Consolidation adjustments consist of such items to convert the reportable
segments results, which are predominantly maintained on a cash basis, to a full accrual basis
for external financial statement presentation purposes, and are not allocated to the Companys
operating segments. Likewise, stock option compensation expenses are not charged to the
operating segments. External corporate interest expense is primarily comprised of interest
charges on the Companys outstanding Senior Notes and working capital line borrowings, and are
not charged to the operating segments because the charges are included in the corporate
capital allocation discussed above.
26
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
Homebuilding Consolidated Gross
Profit: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Homebuilding Mid Atlantic |
|
$ |
139,904 |
|
|
$ |
235,817 |
|
|
$ |
481,474 |
|
|
$ |
828,946 |
|
Homebuilding North East |
|
|
15,947 |
|
|
|
34,475 |
|
|
|
46,993 |
|
|
|
93,992 |
|
Homebuilding Mid East |
|
|
39,296 |
|
|
|
45,203 |
|
|
|
111,467 |
|
|
|
120,327 |
|
Homebuilding South East |
|
|
36,173 |
|
|
|
36,917 |
|
|
|
109,396 |
|
|
|
97,948 |
|
Consolidation adjustments and
other |
|
|
(48,248 |
) |
|
|
(62,119 |
) |
|
|
(109,355 |
) |
|
|
(109,603 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment gross profit |
|
$ |
183,072 |
|
|
$ |
290,293 |
|
|
$ |
639,975 |
|
|
$ |
1,031,610 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
Homebuilding Consolidated Profit
Before Tax: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Homebuilding Mid Atlantic |
|
$ |
75,477 |
|
|
$ |
162,824 |
|
|
$ |
294,137 |
|
|
$ |
610,308 |
|
Homebuilding North East |
|
|
4,934 |
|
|
|
20,318 |
|
|
|
12,942 |
|
|
|
51,708 |
|
Homebuilding Mid East |
|
|
19,648 |
|
|
|
22,137 |
|
|
|
55,522 |
|
|
|
52,233 |
|
Homebuilding South East |
|
|
21,975 |
|
|
|
24,181 |
|
|
|
70,139 |
|
|
|
62,525 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment profit before tax |
|
|
122,034 |
|
|
|
229,460 |
|
|
|
432,740 |
|
|
|
776,774 |
|
Reconciling items: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contract land deposit impairments |
|
|
(51,468 |
) |
|
|
(48,559 |
) |
|
|
(99,073 |
) |
|
|
(77,808 |
) |
Stock option expense (1) |
|
|
21,299 |
|
|
|
(12,988 |
) |
|
|
(5,440 |
) |
|
|
(38,418 |
) |
Corporate capital allocation (2) |
|
|
40,809 |
|
|
|
49,116 |
|
|
|
115,038 |
|
|
|
139,344 |
|
Unallocated corporate overhead (3) |
|
|
(11,381 |
) |
|
|
(11,758 |
) |
|
|
(57,652 |
) |
|
|
(73,527 |
) |
Consolidation adjustments and
other (4) |
|
|
10,945 |
|
|
|
(7,638 |
) |
|
|
16,782 |
|
|
|
(16,320 |
) |
Corporate interest expense |
|
|
(3,238 |
) |
|
|
(2,817 |
) |
|
|
(9,500 |
) |
|
|
(14,091 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciling items sub-total |
|
|
6,966 |
|
|
|
(34,644 |
) |
|
|
(39,845 |
) |
|
|
(80,820 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Homebuilding consolidated
profit before taxes |
|
$ |
129,000 |
|
|
$ |
194,816 |
|
|
$ |
392,895 |
|
|
$ |
695,954 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The change in 2007 compared to 2006 for both the three and nine-month periods is due to
the reversal of stock-based compensation costs of $29,350 during the third quarter of
2007 (see note 5 to the accompanying financial statements). |
|
(2) |
|
This item represents the elimination of the corporate capital allocation charge included
in the respective homebuilding reportable segments. The decreases in the corporate
capital allocation charge are due to the lower segment asset balances during the
respective periods due to the decreases in operating activity period over period. The
corporate capital allocation charge is based on the segments monthly average asset
balance, and is as follows for the periods presented: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
Homebuilding Mid Atlantic |
|
$ |
28,635 |
|
|
$ |
34,845 |
|
|
$ |
80,137 |
|
|
$ |
99,635 |
|
Homebuilding North East |
|
|
3,745 |
|
|
|
5,118 |
|
|
|
11,348 |
|
|
|
14,437 |
|
Homebuilding Mid East |
|
|
4,752 |
|
|
|
5,721 |
|
|
|
13,262 |
|
|
|
16,103 |
|
Homebuilding South East |
|
|
3,677 |
|
|
|
3,432 |
|
|
|
10,291 |
|
|
|
9,169 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
40,809 |
|
|
$ |
49,116 |
|
|
$ |
115,038 |
|
|
$ |
139,344 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3) |
|
For the nine month comparison, the change is driven primarily by a reduction in
management incentive costs of approximately $11,000 and reduced personnel and other
overhead costs as part of our focus to size our organization to meet current activity
levels. |
|
(4) |
|
The favorable variance in 2007 compared to 2006 for both the three and nine-month
periods is primarily due to increased interest income due to higher average cash balances
and decreased operating activity. |
27
Mortgage Banking Segment
Three and Nine Months Ended September 30, 2007 and 2006
We conduct our mortgage banking activity through NVR Mortgage Finance, Inc. (NVRM), a wholly
owned subsidiary. NVRM focuses exclusively on serving the homebuilding segments customer base.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
Loan closing volume: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total principal |
|
$ |
793,749 |
|
|
$ |
986,677 |
|
|
$ |
2,358,218 |
|
|
$ |
2,846,920 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan volume mix: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustable rate mortgages |
|
|
15 |
% |
|
|
38 |
% |
|
|
21 |
% |
|
|
38 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed-rate mortgages |
|
|
85 |
% |
|
|
62 |
% |
|
|
79 |
% |
|
|
62 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating profit: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment profit |
|
$ |
15,179 |
|
|
$ |
18,157 |
|
|
$ |
38,763 |
|
|
$ |
49,850 |
|
Stock option expense |
|
|
1,635 |
|
|
|
(866 |
) |
|
|
(135 |
) |
|
|
(2,592 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage banking income
before tax |
|
$ |
16,814 |
|
|
$ |
17,291 |
|
|
$ |
38,628 |
|
|
$ |
47,258 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage banking fees: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net gain on sale of loans |
|
$ |
16,472 |
|
|
$ |
18,090 |
|
|
$ |
43,874 |
|
|
$ |
52,891 |
|
Title services |
|
|
5,046 |
|
|
|
6,084 |
|
|
|
14,959 |
|
|
|
17,796 |
|
Servicing |
|
|
99 |
|
|
|
273 |
|
|
|
391 |
|
|
|
804 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
21,617 |
|
|
$ |
24,447 |
|
|
$ |
59,224 |
|
|
$ |
71,491 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan closing volume for the three months ended September 30, 2007 decreased 20% from the same
period in 2006. The 2007 decrease is primarily attributable to a 13% decrease in the number of
units closed and a 7% decrease in the average loan amount. Loan closing volume for the nine months
ended September 30, 2007 decreased 17% from the same period in 2006. This decrease is primarily
attributable to a 15% decrease in the number of units closed and a 3% decrease in the average loan
amount. The unit decreases for the three and nine months ended September 30, 2007 reflect
decreases in the unit activity of the homebuilding segment from the 2006 respective periods, as
noted above. The decrease in the average loan amount for the three-month period reflects the
aforementioned decrease in the homebuilding segments average settlement prices. The number of
loans closed for NVRs homebuyers who obtain a mortgage to purchase the home (Capture Rate) was
84% and 86% for the quarters ended September 30, 2007 and 2006, respectively, and 85% and 86% for
the nine-month periods ending September 30, 2007 and 2006, respectively.
Segment profit for the three months ended September 30, 2007 decreased approximately $3,000
from the same period for 2006. The decrease is primarily due to a net decrease in mortgage banking
fees attributable to the aforementioned decrease in closed loan volume. Segment profit for the nine
months ended September 30, 2007 decreased approximately $11,100 from the same period for 2006. The
decrease is primarily due to a decrease in mortgage banking fees attributable to the aforementioned
closed loan volume decrease. The decrease in mortgage banking fees was partially offset by an
approximately $4,000 favorable decrease in contractual repayments of loan sale income to investors
for loans that were paid in full by the borrower within a set number of days following the sale of
the loan and an increase in the percentage of fixed rate loans in the product mix.
28
As noted above, due to continued earnings decline resulting from the deterioration in market
conditions and our expectation that market conditions will not improve in the near term, the third
quarter 2007 NVRM results were also impacted by the determination that it is improbable that that
we will achieve the performance metric related to certain outstanding stock options. This
determination resulted in the reversal of approximately $2,150 of pre-tax stock-based compensation
costs recognized prior to the 2007 third quarter.
NVRM is dependent on our homebuilding segments customers for business. As sales and selling
prices of the homebuilding segment decline, NVRMs operations will also be adversely affected. In
many cases, NVRM is reducing the fees charged to its borrowers in an effort to assist our selling
efforts, and is likely to continue doing so in the foreseeable future which will adversely impact
the mortgage segments future results. In addition, the mortgage companys operating results may
be adversely affected in future periods due to the tightening credit markets. Specifically,
secondary markets for non-conforming loans and loans where buyers put little or no money down on
the home have experienced a substantial reduction in the number of investors willing to purchase
such products. The decrease of secondary marketing liquidity for these products has reduced the
number of potential homebuyers, and thus the number of potential borrowers for the mortgage
segment.
Liquidity and Capital Resources
We fund our operations with cash flows provided by our operating activities, a short-term
credit facility and the public debt and equity markets. For the nine months ended September 30,
2007, our operating activities provided cash of $180,867. Operating cash was primarily provided
by our homebuilding operations and by an approximate $41,000 decrease in mortgage loans held for
sale. Cash of approximately $246,000 was used to fund the increase in homebuilding inventory.
Sold units under construction increased at September 30, 2007 compared to December 31, 2006 and
unsold inventory increased approximately $36,000 primarily due to the bulk purchase of finished
lots from another homebuilder. The presentation of operating cash flows was also reduced by
$68,322, which is the amount of the excess tax benefit realized from the exercise of stock
options during the period and credited directly to additional paid in capital.
Net cash used for investing activities was $5,446 for the period ended September 30, 2007,
and was used primarily for property and equipment purchases throughout the period.
Net cash used for financing activities was $414,349 for the period ended September 30,
2007. During the nine months ended September 30, 2007, we repurchased approximately 785,000
shares of our common stock at an aggregate purchase price of $507,472 under our ongoing common
stock repurchase program, discussed below. We also reduced net borrowings under the mortgage
warehouse facility by approximately $42,000. Cash was provided by the receipt of $66,898 in
proceeds from employee stock option exercises and by the realization of $68,322 in excess income
tax benefits from the exercise of stock options, which pursuant to SFAS 123R, must be reported
as a financing cash inflow.
In addition to our homebuilding operating activities, we also utilize a short-term
unsecured working capital revolving credit facility ( Homebuilding Credit Facility) to provide
for working capital cash requirements. The Homebuilding Credit Facility provides for borrowings
of up to $600,000, subject to certain borrowing base limitations. The Homebuilding Credit
Facility expires in December 2010 and outstanding amounts bear interest at either (i) the prime
rate or (ii) the London Interbank Offering Rate (LIBOR) plus applicable margin as defined
within the Homebuilding Credit Facility. Up to $150,000 of the Homebuilding Credit Facility is
currently available for issuance in the form of letters of credit, of which $17,461 was
outstanding at September 30, 2007. There were no direct borrowings outstanding under the
Homebuilding Credit Facility as of September 30, 2007. At September 30, 2007, there were no
borrowing base limitations reducing the amount available to us for borrowings.
Our mortgage banking segment provides for its mortgage origination and other operating
activities using cash generated from operations as well as a short-term credit facility. The
mortgage banking segment utilizes an annually renewable mortgage warehouse facility (Mortgage
Banking Credit Facility) with an
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aggregate available borrowing limit of $125,000 to fund its mortgage origination
activities. The interest rate under the Mortgage Banking Credit Facility is either: (i) LIBOR
plus 1.0%, or (ii) 1.125% to the extent that NVRM provides compensating balances. The Mortgage
Banking Credit Facility expires in August 2008. There was $111,647 outstanding under the
Mortgage Banking Credit Facility at September 30, 2007. At September 30, 2007, there were no
borrowing base limitations reducing the amount available to us for borrowings.
In addition to funding growth in our homebuilding and mortgage operations, we
historically have used a substantial portion of our excess liquidity to repurchase outstanding
shares of our common stock in the open market and in privately negotiated transactions. This
ongoing repurchase activity is conducted pursuant to publicly announced Board authorizations,
and is typically executed in accordance with the safe harbor provisions of Rule 10b-18 under
the Securities Exchange Act of 1934, as amended. In addition, the Board resolutions
authorizing us to repurchase shares of our common stock specifically prohibit us from
purchasing shares from our officers, directors, Profit Sharing/401K Plan Trust or Employee
Stock Ownership Plan Trust. We believe the repurchase program assists us in accomplishing our
primary objective, increasing shareholder value. See Part II, Item 2 of this Form 10-Q for
disclosure of amounts repurchased during the third quarter of 2007. We expect to continue to
repurchase shares of our common stock from time to time subject to market conditions and
available excess liquidity.
We believe that internally generated cash and borrowings available under credit facilities
and the public debt and equity markets will be sufficient to satisfy near and long term cash
requirements for working capital in both our homebuilding and mortgage banking operations.
Critical Accounting Policies
General
The preparation of financial statements in conformity with accounting principles generally
accepted in the United States of America requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities, the disclosure of contingent assets
and liabilities at the date of the financial statements, and the reported amounts of revenues
and expenses during the reporting periods. We continually evaluate the estimates we use to
prepare the consolidated financial statements, and update those estimates as necessary. In
general, managements estimates are based on historical experience, on information from third
party professionals, and other various assumptions that management believes to be reasonable
under the facts and circumstances. Actual results could differ materially from those estimates
made by management.
Variable Interest Entities
Revised Financial Interpretation No. 46 (FIN 46R), Consolidation of Variable Interest
Entities, which was effective for us as of March 31, 2004, requires the primary beneficiary of a
variable interest entity to consolidate that entity in its financial statements. The primary
beneficiary of a variable interest entity is the party that absorbs a majority of the variable
interest entitys expected losses, receives a majority of the entitys expected residual
returns, or both, as a result of ownership, contractual, or other financial interests in the
entity. Expected losses are the expected negative variability in the fair value of an entitys
net assets exclusive of its variable interests, and expected residual returns are the expected
positive variability in the fair value of an entitys net assets, exclusive of its variable
interests.
Forward contracts, such as the fixed price purchase agreements utilized by us to acquire
finished lot inventory, are deemed to be variable interests under FIN 46R. Therefore, the
development entities with which we enter fixed price purchase agreements are examined under FIN 46R
for possible consolidation by us, including certain joint venture limited liability corporations
(LLCs) utilized by us to acquire finished lots on a limited basis. We have developed a
methodology to determine whether we, or, conversely, the owner(s) of the applicable development
entity, are the primary beneficiary of a development entity. The methodology used
30
to evaluate our primary beneficiary status requires substantial management judgment and
estimates. These judgments and estimates involve assigning probabilities to various estimated cash
flow possibilities relative to the development entitys expected profits and losses and the cash
flows associated with changes in the fair value of finished lots under contract. Although we
believe that our accounting policy is designed to properly assess our primary beneficiary status
relative to our involvement with the development entities from which we acquire finished lots,
changes to the probabilities and the cash flow possibilities used in our evaluation could produce
widely different conclusions regarding whether we are or are not a development entitys primary
beneficiary, possibly resulting in additional, or fewer, development entities being consolidated on
our financial statements. See note 2 to the accompanying financial statements for further
information.
Homebuilding Inventory
The carrying value of inventory is stated at the lower of cost or market value. Cost of lots
and completed and uncompleted housing units represent the accumulated actual cost thereof. Field
construction supervisors salaries and related direct overhead expenses are included in inventory
costs. Interest costs are not capitalized into inventory. Upon settlement, the cost of the units
is expensed on a specific identification basis. Cost of manufacturing materials is determined on a
first-in, first-out basis. Recoverability and impairment, if any, is primarily evaluated by
analyzing sales of comparable assets. We believe that our accounting policy is designed to
properly assess the carrying value of our homebuilding inventory.
Contract Land Deposits
We purchase finished lots under fixed price purchase agreements that require deposits that may
be forfeited if we fail to perform under the contract. The deposits are in the form of cash or
letters of credit in varying amounts and represent a percentage of the aggregate purchase price of
the finished lots. We maintain an allowance for losses on contract land deposits that we believe
is sufficient to provide for losses in our existing contract land deposit portfolio. The allowance
reflects managements judgment of the present loss exposure at the end of the reporting period,
considering market and economic conditions, sales absorption and profitability within specific
communities and terms of the various contracts. Although we consider the allowance for losses on
contract land deposits reflected on the September 30, 2007 balance sheet to be adequate, there can
be no assurance that this allowance will prove to be adequate over time to cover losses due to
unanticipated adverse changes in the economy or other events adversely affecting specific markets
or the homebuilding industry.
Intangible Assets
Reorganization value in excess of identifiable assets (excess reorganization value),
goodwill and indefinite life intangible assets are not subject to amortization upon the adoption of
Statement of Financial Accounting Standards (SFAS) No. 142, Goodwill and Other Intangible Assets.
Rather, excess reorganization value, goodwill and other intangible assets are subject to at least
an annual assessment for impairment by applying a fair-value based test. We periodically evaluate
whether events and circumstances have occurred that indicate that the remaining value of excess
reorganization value, goodwill and other intangible assets may not be recoverable. As of September
30, 2007, we believe that excess reorganization value, goodwill and other intangible assets were
not impaired. This conclusion is based on our judgment, considering such factors as our history of
operating success, our well recognized brand names and the significant positions held in the
markets in which we operate. However, changes in strategy or adverse changes in market conditions
could impact this judgment and require an impairment loss to be recognized for the amount that the
carrying value of excess reorganization value, goodwill and/or other intangible assets exceeds
their fair value.
Warranty/Product Liability Accruals
Warranty and product liability accruals are established to provide for estimated future
expenses as a result of construction and product defects, product recalls and litigation incidental
to our business. Liability
31
estimates are determined based on managements judgment, considering such factors as historical
experience, the likely current cost of corrective action, manufacturers and subcontractors
participation in sharing the cost of corrective action, consultations with third party experts such
as engineers, and discussions with our general counsel and outside counsel retained to handle
specific product liability cases. Although we consider the warranty and product liability accrual
reflected on the September 30, 2007 balance sheet (see note 9 to the accompanying financial
statements) to be adequate, there can be no assurance that this accrual will prove to be adequate
over time to cover losses due to increased costs for material and labor, the inability or refusal
of manufacturers or subcontractors to financially participate in corrective action, unanticipated
adverse legal settlements, or other unanticipated changes to the assumptions used to estimate the
warranty and product liability accrual.
Stock Option Expense
SFAS No. 123R, Share-Based Payment, requires us to recognize within our income statement
compensation costs related to our stock based compensation plans. The costs recognized are based
on the grant date fair value. Compensation cost for service-only option grants is recognized on
a straight-line basis over the requisite service period for the entire award (from the date of
grant through the period of the last separately vesting portion of the grant). Compensation cost
for performance condition option grants is recognized on a straight-line basis over the requisite
service period for each separately vesting portion of the award as if the award was, in substance,
multiple awards (graded vesting attribution method), and if the performance condition is expected
to be met.
We calculate the fair value of our non-publicly traded, employee stock options using the
Black-Scholes option-pricing model. While the Black-Scholes model is a widely accepted method to
calculate the fair value of options, its results are dependent on input variables, two of which,
expected term and expected volatility, are significantly dependent on managements judgment. We
have concluded that our historical exercise experience is the best estimate of future exercise
patterns to determine an options expected term. To estimate expected volatility, we analyze the
historical volatility of our common stock. Changes in managements judgment of the expected term
and the expected volatility could have a material effect on the grant-date fair value calculated
and expensed within the income statement. In addition, we are required to estimate future option
forfeitures when considering the amount of stock-based compensation costs to record. We have
concluded that our historical forfeiture rate is the best measure to estimate future forfeitures of
granted stock options. However, there can be no assurance that our future forfeiture rate will not
be materially higher or lower than our historical forfeiture rate, which would affect the aggregate
cumulative compensation expense recognized.
In addition, when recognizing stock based compensation cost related to performance condition
option grants, we are required to make a determination as to whether the performance conditions
will be met prior to the completion of the actual performance period. While we currently believe
that the performance condition will not be satisfied, our future expected activity levels could
cause us to make a different determination, resulting in the recognition of all compensation cost
related to performance condition option grants that would otherwise have been recognized to date.
Although we believe that the compensation costs recognized during the nine months ended September
30, 2007 are representative of the cumulative ratable amortization of the grant-date fair value of
unvested options outstanding and expected to be exercised, changes to the estimated input values
such as expected term and expected volatility and changes to the determination of whether
performance condition grants will vest, could produce widely different fair values.
Item 3. Quantitative and Qualitative Disclosure About Market Risk
There have been no material changes in our market risks during the nine months ended
September 30, 2007. For additional information regarding market risk, see our Annual Report on
Form 10-K for the year ended December 31, 2006.
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Item 4. Controls and Procedures
As of the end of the period covered by this report, an evaluation was performed under the
supervision and with the participation of our management, including our Chief Executive Officer
and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure
controls and procedures pursuant to Exchange Act Rule 13a-15. Based on that evaluation, our
Chief Executive Officer and Chief Financial Officer concluded that the design and operation of
these disclosure controls and procedures were effective. There have been no changes in our
internal controls over financial reporting identified in connection with the evaluation referred
to above that have materially affected, or are reasonably likely to materially affect, our
internal controls over financial reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
On July 18, 2007, former employees filed lawsuits against us in the Court of Common Pleas
in Allegheny County, Pennsylvania and Hamilton County, Ohio, in the Superior Court in Durham
County, North Carolina, and in the Circuit Court in Montgomery County, Maryland, and on July
19, 2007 in the Superior Court in New Jersey, alleging that we incorrectly classified our
sales and marketing representatives as being exempt from overtime wages. These lawsuits are
similar in nature to another lawsuit filed on October 29, 2004 by another former employee in
the United States District Court for the Western District of New York. The complaints seek
injunctive relief, an award of unpaid wages, including fringe benefits, liquidated damages
equal to the overtime wages allegedly due and not paid, attorney and other fees and interest.
The suits were filed as purported class action. The class of individuals that any of the
lawsuits purport to represent has not been certified. We intend to vigorously defend these
actions, as we believe that our compensation practices in regard to sales and marketing
representatives are entirely lawful. Our position is strongly supported by two letter rulings
that the United States Department of Labor issued in January 2007, in accordance with the
DOLs mandate to interpret federal wage and hour laws. The two courts to most recently
consider similar claims against other homebuilders have adopted the DOLs position that sales
and marketing representatives were properly classified as exempt from overtime wages. Because
we are unable to determine the likelihood of an unfavorable outcome of this case, or the
amount of damages, if any, we have not recorded any associated liabilities in the accompanying
condensed, consolidated balance sheet.
On April 16, 2007, a lawsuit was filed by one of our customers against us in the United States
District Court for the Western District of Pennsylvania. The plaintiffs allege that we violated
Section 8 of the Real Estate Settlement and Protection Act. The complaint seeks treble damages,
interest, injunctive and declaratory relief, attorney fees and other expenses. The lawsuit was
filed as a purported class action. The court has not certified the class of individuals that the
lawsuit purports to represent. Similar lawsuits have been filed against at least two other
homebuilders operating in Pennsylvania. We intend to defend this action vigorously. However, at
this time, we are unable to express an opinion as to the likelihood of an unfavorable outcome, or
the amount of damages, if any. Accordingly, we have not recorded any associated liabilities in the
accompanying condensed, consolidated balance sheet.
We are involved in various other claims and litigation arising in the ordinary course of
business. We believe that the disposition of these matters will not have a material adverse
effect on our financial condition or results of operations.
33
Item 1A. Risk Factors
Our business is affected by the risks generally incident to the residential construction
business, including, but not limited to:
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actual and expected direction of interest rates, which affect our costs, the
availability of construction financing, and long-term financing for potential
purchasers of homes; |
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the availability of adequate land in desirable locations on favorable terms; |
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unexpected changes in customer preferences; and |
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changes in the national economy and in the local economies of the markets in which
we have operations. |
Interest rate movements, inflation and other economic factors can negatively impact our business.
High rates of inflation generally affect the homebuilding industry adversely because of their
adverse impact on interest rates. High interest rates not only increase the cost of borrowed funds
to homebuilders but also have a significant effect on housing demand and on the affordability of
permanent mortgage financing to prospective purchasers. We are also subject to potential
volatility in the price of commodities that impact costs of materials used in our homebuilding
business. Increases in prevailing interest rates could have a material adverse effect on our
sales, profitability, stock performance and ability to service our debt obligations.
Our financial results also are affected by the risks generally incident to our mortgage
banking business, including interest rate levels, the impact of government regulation on mortgage
loan originations and servicing and the need to issue forward commitments to fund and sell mortgage
loans. Our homebuilding customers accounted for almost all of our mortgage banking business in
2006. The volume of our continuing homebuilding operations therefore affects our mortgage banking
business.
Our operations may also be adversely affected by other economic factors within our markets
such as negative changes in employment levels, job growth, consumer confidence and availability of
mortgage financing, one or all of which could result in reduced demand or price depression from
current levels. Such negative trends could have a material adverse effect on homebuilding
operations.
Our mortgage banking business also is affected by interest rate fluctuations. We also may
experience marketing losses resulting from daily increases in interest rates to the extent we are
unable to match interest rates and amounts on loans we have committed to originate with forward
commitments from third parties to purchase such loans. Increases in interest rates may have a
material adverse effect on our mortgage banking revenue, profitability, stock performance and
ability to service our debt obligations.
These factors and thus, the homebuilding business, have at times in the past been cyclical in
nature. Any downturn in the national economy or the local economies of the markets in which we
operate could have a material adverse effect on our sales, profitability, stock performance and
ability to service our debt obligations. In particular, approximately 37% of our home settlements
during 2006 occurred in the Washington, D.C. and Baltimore, MD metropolitan areas, which accounted
for 52% of our 2006 homebuilding revenues. Thus, we are dependent to a significant extent on the
economy and demand for housing in those areas.
Our inability to secure and control an adequate inventory of lots could adversely impact our
operations.
The results of our homebuilding operations are dependent upon our continuing ability to
control an adequate number of homebuilding lots in desirable locations. There can be no assurance
that an adequate supply of building lots will continue to be available to us on terms similar to
those available in the past, or that we will not be required to devote a greater amount of capital
to controlling building lots than we have historically. An insufficient supply of building lots in
one or more of our markets, an inability of our developers to deliver finished lots in a timely
fashion, or our inability to purchase or finance building lots on
34
reasonable terms could have a material adverse effect on our sales, profitability, stock
performance and ability to service our debt obligations.
If the market value of our inventory or controlled lot position declines, our profit could
decrease.
Inventory risk can be substantial for homebuilders. The market value of building lots and
housing inventories can fluctuate significantly as a result of changing market conditions. In
addition, inventory carrying costs can be significant and can result in losses in a poorly
performing project or market. We must, in the ordinary course of our business, continuously seek
and make acquisitions of lots for expansion into new markets as well as for replacement and
expansion within our current markets, which is accomplished by us entering fixed price purchase
agreements and paying forfeitable deposits under the purchase agreement to developers for the
contractual right to acquire the lots. In the event of significant changes in economic or market
conditions, we may cease further building activities in communities or restructure existing
purchase agreements, resulting in forfeiture of some or all of any remaining land contract deposit
paid to the developer. We may also dispose of certain subdivision inventories on a bulk or other
basis. Either action may result in a loss which could have a material adverse effect on our
profitability, stock performance and ability to service our debt obligations.
Because almost all of our customers require mortgage financing, the availability of suitable
mortgage financing could impair the affordability of our homes, lower demand for our products, and
limit our ability to fully deliver our backlog.
Our business and earnings depend on the ability of our potential customers to obtain mortgages
for the purchase of our homes. In addition, many of our potential customers must sell their
existing homes in order to buy a home from us. The tightening of credit standards and the
availability of suitable mortgage financing could prevent customers from buying our homes and could
prevent buyers of our customers homes from obtaining mortgages they need to complete that
purchase, both of which could result in our potential customers inability to buy a home from us.
If our potential customers or the buyers of our customers current homes are not able to obtain
suitable financing, the result could have a material adverse effect on our sales, profitability,
stock performance, ability to service our debt obligations and future cash flows.
If our ability to sell mortgages to investors is impaired, we may be required to fund these
commitments ourselves, or not be able to originate loans at all.
Our mortgage segment sells all of the loans it originates into the secondary market usually
within 30 days from the date of closing, and has up to $125 million available in an annually
renewable warehouse credit facility to fund mortgage closings. In the event that disruptions to the
secondary markets occur that tighten or eliminate the available liquidity within the secondary
markets for mortgage loans, or the underwriting requirements by our secondary market investors
become more stringent, our ability to sell future mortgages could decline and we could be required,
among other things, to fund our commitments to our buyers with our own financial resources, which
is limited, or require our home buyers to find another source of financing. The result of such
secondary market disruption could have a material adverse effect on our sales, profitability, stock
performance, ability to service our debt obligations and future cash flows.
Our current indebtedness may impact our future operations and our ability to access necessary
financing.
Our homebuilding operations are dependent in part on the availability and cost of working
capital financing, and may be adversely affected by a shortage or an increase in the cost of such
financing. If we require working capital greater than that provided by our operations and our
credit facility, we may be required to seek to increase the amount available under the facility or
to obtain alternative financing. No assurance can be given that additional or replacement
financing will be available on terms that are favorable or acceptable. If we are at any time
unsuccessful in obtaining sufficient capital to fund our planned homebuilding expenditures, we may
experience a substantial delay in the completion of any homes then under construction. Any delay
35
could result in cost increases and could have a material adverse effect on our sales,
profitability, stock performance, ability to service our debt obligations and future cash flows.
Our existing indebtedness contains financial and other restrictive covenants and any future
indebtedness may also contain covenants. These covenants include limitations on our ability, and
the ability of our subsidiaries, to incur additional indebtedness, pay cash dividends and make
distributions, make loans and investments, enter into transactions with affiliates, effect certain
asset sales, incur certain liens, merge or consolidate with any other person, or transfer all or
substantially all of our properties and assets. Substantial losses by us or other action or
inaction by us or our subsidiaries could result in the violation of one or more of these covenants
which could result in decreased liquidity or a default on our indebtedness, thereby having a
material adverse effect on our sales, profitability, stock performance and ability to service our
debt obligations.
Our mortgage banking operations are dependent on the availability, cost and other terms of
mortgage warehouse financing, and may be adversely affected by any shortage or increased cost of
such financing. No assurance can be given that any additional or replacement financing will be
available on terms that are favorable or acceptable. Our mortgage banking operations are also
dependent upon the securitization market for mortgage-backed securities, and could be materially
adversely affected by any fluctuation or downturn in such market.
Government regulations and environmental matters could negatively affect our operations.
We are subject to various local, state and federal statutes, ordinances, rules and regulations
concerning zoning, building design, construction and similar matters, including local regulations
that impose restrictive zoning and density requirements in order to limit the number of homes that
can eventually be built within the boundaries of a particular area. We have from time to time been
subject to, and may also be subject in the future to, periodic delays in our homebuilding projects
due to building moratoriums in the areas in which we operate. Changes in regulations that restrict
homebuilding activities in one or more of our principal markets could have a material adverse
effect on our sales, profitability, stock performance and ability to service our debt obligations.
We are also subject to a variety of local, state and federal statutes, ordinances, rules and
regulations concerning the protection of health and the environment. We are subject to a variety
of environmental conditions that can affect our business and our homebuilding projects. The
particular environmental laws that apply to any given homebuilding site vary greatly according to
the location and environmental condition of the site and the present and former uses of the site
and adjoining properties. Environmental laws and conditions may result in delays, cause us to
incur substantial compliance and other costs, or prohibit or severely restrict homebuilding
activity in certain environmentally sensitive regions or areas, thereby adversely affecting our
sales, profitability, stock performance and ability to service our debt obligations.
We are an approved seller/servicer of FNMA, GNMA, FHLMC, FHA and VA mortgage loans, and are
subject to all of those agencies rules and regulations. Any significant impairment of our
eligibility to sell/service these loans could have a material adverse impact on our mortgage
operations. In addition, we are subject to regulation at the state and federal level with respect
to specific origination, selling and servicing practices. Adverse changes in governmental
regulation may have a negative impact on our mortgage loan origination business.
We face competition in our housing and mortgage banking operations.
The homebuilding industry is highly competitive. We compete with numerous homebuilders of
varying size, ranging from local to national in scope, some of whom have greater financial
resources than we do. We face competition:
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for suitable and desirable lots at acceptable prices; |
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from selling incentives offered by competing builders within and across
developments; and |
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from the existing home resale market. |
Our homebuilding operations compete primarily on the basis of price, location, design,
quality, service and reputation. Historically we have been one of the leading homebuilders in each
of the markets where we operate.
The mortgage banking industry is also competitive. Our main competition comes from national,
regional and local mortgage bankers, thrifts, banks and mortgage brokers in each of these markets.
Our mortgage banking operations compete primarily on the basis of customer service, variety of
products offered, interest rates offered, prices of ancillary services and relative financing
availability and costs.
There can be no assurance that we will continue to compete successfully in our homebuilding or
mortgage banking operations. An inability to effectively compete may have an adverse impact on our
sales, profitability, stock performance and ability to service our debt obligations.
A shortage of building materials or labor may adversely impact our operations.
The homebuilding business has from time to time experienced building material and labor
shortages, including shortages in insulation, drywall, certain carpentry work and concrete, as well
as fluctuating lumber prices and supply. In addition, high employment levels and strong
construction market conditions could restrict the labor force available to our subcontractors and
us in one or more of our markets. Significant increases in costs resulting from these shortages,
or delays in construction of homes, could have a material adverse effect upon our sales,
profitability, stock performance and ability to service our debt obligations.
Product liability litigation and warranty claims may adversely impact our operations.
Construction defect and home warranty claims are common and can represent a substantial risk
for the homebuilding industry. The cost of insuring against construction defect and product
liability claims, as well as the claims themselves, can be high. In addition, insurance companies
limit coverage offered to protect against these claims. Further restrictions on coverage
available, or significant increases in premium costs or claims could have a material adverse effect
on our financial results.
Changes in tax laws or the interpretation of tax laws may negatively affect our operating results.
We believe that our recorded tax balances are adequate. However, it is not possible to
predict the effects of possible changes in the tax laws or changes in their interpretation and
whether they could have a material negative impact on our operating results.
Weather-related and other events beyond our control may adversely impact our operations.
Extreme weather or other events, such as hurricanes, tornadoes, earthquakes, forest
fires, floods, terrorist attacks or war, may affect our markets, our operations and our
profitability. These events may impact our physical facilities or those of our suppliers or
subcontractors, causing us material increases in costs, or delays in construction of homes,
which could have a material adverse effect upon our sales, profitability, stock performance
and ability to service our debt obligations.
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Item 2. |
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Unregistered Sales of Equity Securities and Use of Proceeds
(Dollars in thousands, except per share data) |
We had two repurchase authorizations outstanding during the quarter ended September 30,
2007. On April 4, 2007 (the April Authorization) and July 31, 2007 (the July
Authorization), we publicly
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announced the Board of Directors approval to repurchase up to an aggregate of $300,000 of our
common stock in one or more open market and/or privately negotiated transactions under each
authorization. Neither the April Authorization nor the July Authorization has an expiration
date. The Board resolutions authorizing us to repurchase shares of our common stock
specifically prohibit us from purchasing shares from our officers, directors, Profit
Sharing/401K Plan Trust or Employee Stock Ownership Plan Trust. During the quarter ended
September 30, 2007, we completed the utilization of the April Authorization. We repurchased the
following shares of our common stock during the third quarter of 2007:
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Maximum Number |
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(or Approximate |
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Dollar Value) of |
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Average |
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Total Number of Shares |
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Shares that May |
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Total Number |
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Price |
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Purchased as Part of |
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Yet Be Purchased |
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of Shares |
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Paid per |
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Publicly Announced |
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Under the Plans or |
Period |
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Purchased |
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Share |
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Plans or Programs |
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Programs |
July 1-31, 2007 (1) |
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244,439 |
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$ |
640.95 |
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244,439 |
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$ |
367,467 |
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August 1-31, 2007 (2) |
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234,649 |
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|
$ |
601.69 |
|
|
|
234,649 |
|
|
$ |
226,280 |
|
September 1-30, 2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
226,280 |
|
Total |
|
|
479,088 |
|
|
$ |
621.72 |
|
|
|
479,088 |
|
|
$ |
226,280 |
|
|
|
|
(1) |
|
All shares were purchased under the April Authorization. |
|
(2) |
|
112,389 shares were purchased under the April Authorization. These shares purchased
during the period, when added to the shares purchased in prior periods, fully utilized the
April Authorization. The remaining 122,260 shares were purchased under the July
Authorization. The aggregate $226,280 of our common stock that remains available for
repurchase relates solely to the July Authorization. |
Item 6. Exhibits
(a) Exhibits:
|
10.1 |
|
Restated Articles of Incorporation of NVR, Inc. Filed as Exhibit
99.1 to NVRs Form 8-K filed May 4, 2007 and incorporated herein by reference. |
|
|
10.2 |
|
NVR, Inc. Bylaws. Filed as Exhibit 99.2 to NVRs Form 8-K filed
May 4, 2007 and incorporated herein by reference. |
|
|
10.3 |
|
The Sixteenth Amendment to Loan Agreement and Amendment to Pledge
and Security Agreement dated as of August 23, 2007, with U.S. Bank National
Association, as agent, and Comerica Bank, National City Bank, Washington Mutual
Bank, F.A. and U.S. Bank National Association, each as a Lender, filed as
exhibit 10.1 to NVRs Form 8-K filed August 23, 2007 and incorporated by
reference. |
|
|
31.1 |
|
Certification of NVRs Chief Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002. |
|
|
31.2 |
|
Certification of NVRs Chief Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002. |
|
|
32 |
|
Certification of NVRs Chief Executive Officer and Chief
Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
38
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
|
|
|
|
|
|
November 1, 2007 |
|
NVR, Inc. |
|
|
|
|
|
|
|
|
|
|
|
By:
|
|
/s/ Dennis M. Seremet
|
|
|
|
|
Dennis M. Seremet |
|
|
|
|
Vice President, Chief Financial Officer
and Treasurer |
|
|
39
Exhibit Index
|
|
|
|
|
|
|
Exhibit |
|
|
|
|
Number |
|
Description |
|
Page |
|
10.1
|
|
Restated Articles of Incorporation of NVR, Inc. Filed as
Exhibit 99.1 to NVRs Form 8-K filed May 4, 2007 and
incorporated herein by reference. |
|
|
|
|
|
|
|
|
|
|
|
10.2
|
|
NVR, Inc. Bylaws. Filed as Exhibit 99.2 to NVRs Form 8-K
filed May 4, 2007 and incorporated herein by reference. |
|
|
|
|
|
|
|
|
|
|
|
10.3
|
|
The Sixteenth Amendment to Loan Agreement and Amendment to
Pledge and Security Agreement dated as of August 23, 2007,
with U.S. Bank National Association, as agent, and Comerica
Bank, National City Bank, Washington Mutual Bank, F.A. and
U.S. Bank National Association, each as a Lender, filed as
exhibit 10.1 to NVRs Form 8-K filed August 23, 2007 and
incorporated by reference. |
|
|
|
|
|
|
|
|
|
|
|
31.1
|
|
Certification of NVRs Chief Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
|
|
|
41 |
|
|
|
|
|
|
|
|
31.2
|
|
Certification of NVRs Chief Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
|
|
|
42 |
|
|
|
|
|
|
|
|
32
|
|
Certification of NVRs Chief Executive Officer and Chief
Financial Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
|
|
|
43 |
|
40