e10vq
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
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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 March 31, 2008
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
(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,
a non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in
Rule 12b-2 of the Exchange Act. (Check one):
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Large accelerated filer þ
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Accelerated filer o
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Non-accelerated filer o
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Smaller reporting company o |
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(Do not check if a smaller reporting company) |
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 April 23, 2008 there were 5,288,936 total shares of common stock outstanding.
NVR, Inc.
Form 10-Q
INDEX
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Page |
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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 March 31, 2008
(unaudited) and December 31, 2007
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3 |
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Condensed Consolidated Statements of Income for the
Three Months Ended March 31, 2008 (unaudited)
and March 31, 2007 (unaudited)
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5 |
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Condensed Consolidated Statements of Cash Flows for
the Three Months Ended March 31, 2008 (unaudited) and
March 31, 2007 (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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20 |
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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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32 |
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PART II
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OTHER INFORMATION |
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Item 1A.
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Risk Factors
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33 |
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Item 2.
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Unregistered Sales of Equity Securities and Use of Proceeds
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33 |
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Item 5.
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Other Information
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33 |
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Item 6.
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Exhibits
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33 |
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Signature
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34 |
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Exhibit Index
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35 |
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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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March 31, 2008 |
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December 31, 2007 |
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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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$ |
766,597 |
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$ |
660,709 |
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Receivables |
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8,622 |
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10,855 |
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Inventory: |
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Lots and housing units, covered under
sales agreements with customers |
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556,195 |
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573,895 |
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Unsold lots and housing units |
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69,760 |
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105,838 |
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Manufacturing materials and other |
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5,122 |
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9,121 |
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631,077 |
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688,854 |
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Assets not owned, consolidated
per FIN 46R |
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162,371 |
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180,206 |
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Property, plant and equipment, net |
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31,170 |
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32,911 |
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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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62 |
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96 |
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Contract land deposits, net |
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175,106 |
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188,528 |
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Other assets |
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267,590 |
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252,461 |
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2,095,861 |
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2,067,886 |
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Mortgage Banking: |
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Cash and cash equivalents |
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1,061 |
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3,500 |
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Mortgage loans held for sale, net |
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92,115 |
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107,338 |
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Property and equipment, net |
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800 |
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881 |
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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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12,392 |
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7,464 |
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113,715 |
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126,530 |
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Total assets |
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$ |
2,209,576 |
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$ |
2,194,416 |
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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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March 31, 2008 |
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December 31, 2007 |
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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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$ |
175,107 |
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$ |
219,048 |
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Accrued expenses and other liabilities |
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254,140 |
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251,475 |
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Liabilities related to assets not owned,
consolidated per FIN 46R |
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150,325 |
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164,369 |
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Customer deposits |
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116,993 |
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125,315 |
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Other term debt |
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2,774 |
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2,820 |
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Senior notes |
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200,000 |
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200,000 |
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899,339 |
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963,027 |
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Mortgage Banking: |
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Accounts payable and other liabilities |
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17,631 |
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18,551 |
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Notes payable |
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68,228 |
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83,463 |
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85,859 |
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102,014 |
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Total liabilities |
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985,198 |
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1,065,041 |
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Commitments and contingencies |
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Shareholders equity: |
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Common stock, $0.01 par value; 60,000,000
shares authorized; 20,592,640 shares
issued as of both March 31, 2008 and
December 31, 2007 |
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206 |
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206 |
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Additional paid-in-capital |
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687,913 |
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663,631 |
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Deferred compensation trust 516,106 and
516,085 shares as of March 31, 2008
and December 31, 2007, respectively, of
NVR, Inc. common stock |
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(75,638 |
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(75,636 |
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Deferred compensation liability |
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75,638 |
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75,636 |
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Retained earnings |
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3,573,461 |
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3,529,995 |
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Less treasury stock at cost 15,318,151 and
15,455,086 shares at March 31, 2008
and December 31, 2007, respectively |
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(3,037,202 |
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(3,064,457 |
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Total shareholders equity |
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1,224,378 |
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1,129,375 |
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Total liabilities and shareholders
equity |
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$ |
2,209,576 |
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$ |
2,194,416 |
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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 March 31, |
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2008 |
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2007 |
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Homebuilding: |
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Revenues |
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$ |
869,869 |
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$ |
1,075,110 |
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Other income |
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6,399 |
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6,965 |
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Cost of sales |
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(726,931 |
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(853,410 |
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Selling, general and administrative |
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(84,166 |
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(97,406 |
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Operating income |
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65,171 |
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131,259 |
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Interest expense |
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(3,239 |
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(3,322 |
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Homebuilding income |
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61,932 |
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127,937 |
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Mortgage Banking: |
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Mortgage banking fees |
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18,062 |
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18,079 |
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Interest income |
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810 |
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1,307 |
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Other income |
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159 |
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184 |
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General and administrative |
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(7,654 |
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(9,323 |
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Interest expense |
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(134 |
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(152 |
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Mortgage banking income |
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11,243 |
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10,095 |
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Income before taxes |
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73,175 |
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138,032 |
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Income tax expense |
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(29,709 |
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(53,211 |
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Net income |
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$ |
43,466 |
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$ |
84,821 |
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Basic earnings per share |
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$ |
8.32 |
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$ |
14.98 |
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Diluted earnings per share |
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$ |
7.42 |
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$ |
12.96 |
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Basic average shares outstanding |
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5,224 |
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5,663 |
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Diluted average shares outstanding |
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5,859 |
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6,545 |
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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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Three Months Ended March 31, |
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2008 |
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2007 |
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Cash flows from operating activities: |
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Net income |
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$ |
43,466 |
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$ |
84,821 |
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Adjustments to reconcile net income to
net cash provided by operating activities: |
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Depreciation and amortization |
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3,837 |
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4,337 |
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Stock option compensation expense |
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6,333 |
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14,323 |
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Excess income tax benefit from exercise of stock options |
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(18,183 |
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(40,423 |
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Contract land deposit impairments |
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6,592 |
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12,251 |
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Mortgage loans closed |
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(444,459 |
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(474,003 |
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Proceeds from sales of mortgage loans |
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474,197 |
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560,693 |
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Principal payments on mortgage loans held for sale |
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66 |
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3,555 |
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Gain on sale of loans |
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(14,371 |
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(13,360 |
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Net change in assets and liabilities: |
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Decrease (increase) in inventories |
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57,777 |
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(68,744 |
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Decrease in receivables |
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3,143 |
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1,877 |
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Decrease in contract land deposits |
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8,229 |
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6,635 |
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(Decrease) increase in accounts payable, customer deposits
and accrued expenses |
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(33,301 |
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17,234 |
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Other, net |
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(18,285 |
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(36,632 |
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Net cash provided by operating activities |
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75,041 |
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72,564 |
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Cash flows from investing activities: |
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Purchase of property, plant and equipment |
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(1,964 |
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(1,597 |
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Other, net |
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449 |
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798 |
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Net cash used in investing activities |
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(1,515 |
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(799 |
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Cash flows from financing activities: |
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Net repayments under notes payable and other term debt |
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(15,281 |
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(74,552 |
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Purchase of treasury stock |
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(86,351 |
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Excess income tax benefit from exercise of stock options |
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18,183 |
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40,423 |
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Proceeds from exercise of stock options |
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27,021 |
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49,838 |
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Net cash provided (used) by financing activities |
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29,923 |
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(70,642 |
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Net increase in cash and cash equivalents |
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103,449 |
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1,123 |
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Cash and cash equivalents, beginning of the period |
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664,209 |
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556,119 |
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Cash and cash equivalents, end of period |
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$ |
767,658 |
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$ |
557,242 |
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Supplemental disclosures of cash flow information: |
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Interest paid during the period |
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$ |
876 |
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$ |
736 |
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Income taxes paid, net of refunds |
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$ |
1,733 |
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$ |
6,857 |
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Supplemental disclosures of non-cash activities: |
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Change in net assets not owned, consolidated per FIN 46 |
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$ |
(3,791 |
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$ |
(4,387 |
) |
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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 2007 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
three-month period ended March 31, 2008 are not necessarily indicative of the results that may be
expected for the year ending December 31, 2008.
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-month periods ended March 31, 2008 and 2007, 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 March 31, 2008, the Company controlled
approximately 64,000 lots with deposits in cash and letters of credit totaling approximately
$314,000 and $8,200, respectively.
NVR believes 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 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.
7
NVR, Inc.
Notes to Condensed Consolidated Financial Statements
(dollars in thousands except per share data)
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 March 31, 2008, NVR had an aggregate investment in twelve separate LLCs totaling
approximately $13,300, which controlled approximately 400 lots. NVR recognizes its share of the
earnings of the LLCs as a reduction of the cost basis of the lots at the time that the lot and
related home is settled with an external customer. During the three months ended March 31, 2008
and 2007, NVR adjusted cost of sales by approximately $11 and $223, respectively, which represented
NVRs share of the earnings of the LLCs. As of March 31, 2008, NVRs investment in the LLCs has
been partially offset by an approximate $9,000 contract land deposit valuation reserve.
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. 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 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 twenty-eight of those development entities
with which the agreements and arrangements are held. As a result, at March 31, 2008, NVR has
consolidated such development entities in the accompanying 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, NVR utilized estimation
techniques to perform the consolidation. The effect of the consolidation under FIN 46R at March
31, 2008 was the inclusion on the balance sheet of $162,371 as Assets not owned, consolidated per
FIN 46R, with a corresponding inclusion of $150,325 as Liabilities related to assets not owned,
consolidated per FIN 46R, after elimination of intercompany items. Inclusive in these totals were
assets of approximately $51,000 and liabilities of approximately $46,000 estimated for eleven
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 March 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NVR, Inc. |
|
|
|
|
|
|
|
|
|
|
|
|
|
and |
|
|
FIN 46R |
|
|
|
|
|
|
Consolidated |
|
|
|
Subsidiaries |
|
|
Entities |
|
|
Eliminations |
|
|
Total |
|
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Homebuilding: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
766,597 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
766,597 |
|
Receivables |
|
|
8,622 |
|
|
|
|
|
|
|
|
|
|
|
8,622 |
|
Homebuilding inventory |
|
|
631,077 |
|
|
|
|
|
|
|
|
|
|
|
631,077 |
|
Property, plant and equipment, net |
|
|
31,170 |
|
|
|
|
|
|
|
|
|
|
|
31,170 |
|
Reorganization value in excess of amount
allocable to identifiable assets, net |
|
|
41,580 |
|
|
|
|
|
|
|
|
|
|
|
41,580 |
|
Goodwill and intangibles, net |
|
|
11,748 |
|
|
|
|
|
|
|
|
|
|
|
11,748 |
|
Contract land deposits, net |
|
|
180,104 |
|
|
|
|
|
|
|
(4,998 |
) |
|
|
175,106 |
|
Other assets |
|
|
274,638 |
|
|
|
|
|
|
|
(7,048 |
) |
|
|
267,590 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,945,536 |
|
|
|
|
|
|
|
(12,046 |
) |
|
|
1,933,490 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage banking assets: |
|
|
113,715 |
|
|
|
|
|
|
|
|
|
|
|
113,715 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FIN 46R Entities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Land under development |
|
|
|
|
|
|
161,355 |
|
|
|
|
|
|
|
161,355 |
|
Other assets |
|
|
|
|
|
|
1,016 |
|
|
|
|
|
|
|
1,016 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
162,371 |
|
|
|
|
|
|
|
162,371 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
2,059,251 |
|
|
$ |
162,371 |
|
|
$ |
(12,046 |
) |
|
$ |
2,209,576 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Homebuilding: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable, accrued expenses
and other liabilities |
|
$ |
429,247 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
429,247 |
|
Customer deposits |
|
|
116,993 |
|
|
|
|
|
|
|
|
|
|
|
116,993 |
|
Other term debt |
|
|
2,774 |
|
|
|
|
|
|
|
|
|
|
|
2,774 |
|
Senior notes |
|
|
200,000 |
|
|
|
|
|
|
|
|
|
|
|
200,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
749,014 |
|
|
|
|
|
|
|
|
|
|
|
749,014 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage banking liabilities: |
|
|
85,859 |
|
|
|
|
|
|
|
|
|
|
|
85,859 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FIN 46R Entities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable, accrued expenses
and other liabilities |
|
|
|
|
|
|
28,195 |
|
|
|
|
|
|
|
28,195 |
|
Debt |
|
|
|
|
|
|
55,828 |
|
|
|
|
|
|
|
55,828 |
|
Contract land deposits |
|
|
|
|
|
|
20,350 |
|
|
|
(20,350 |
) |
|
|
|
|
Advances from NVR, Inc. |
|
|
|
|
|
|
5,501 |
|
|
|
(5,501 |
) |
|
|
|
|
Minority interest |
|
|
|
|
|
|
|
|
|
|
66,302 |
|
|
|
66,302 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
109,874 |
|
|
|
40,451 |
|
|
|
150,325 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity |
|
|
1,224,378 |
|
|
|
52,497 |
|
|
|
(52,497 |
) |
|
|
1,224,378 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders
equity |
|
$ |
2,059,251 |
|
|
$ |
162,371 |
|
|
$ |
(12,046 |
) |
|
$ |
2,209,576 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 March 31, 2008, NVR has been unable to obtain
the information necessary to perform the accounting required to consolidate five 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
$7,800 to these five separate development entities, with a total aggregate purchase price for the
finished lots of approximately $67,900. 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. Because NVR has no ownership rights
in any of these five development entities, the consolidation of such entities has no impact on
NVRs net income or earnings per share for the three months ended March 31, 2008. Aggregate
activity with respect to the five development entities is included in the following table:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
2008 |
|
2007 |
Finished lots purchased dollars |
|
$ |
368 |
|
|
$ |
3,686 |
|
Finished lots purchased units |
|
|
1 |
|
|
|
19 |
|
3. Contract Land Deposits
During the three month periods ended March 31, 2008 and 2007, the Company incurred pre-tax
charges of approximately $6,600 and $12,300, respectively, related to the impairment of contract
land deposits due to deteriorating market conditions in the homebuilding industry. These
impairment charges were recorded in cost of sales on the accompanying condensed, consolidated
statements of income. The contract land deposit asset is shown net of
a $134,301 and $133,664
impairment valuation allowance at March 31, 2008 and December 31, 2007, 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 months ended March 31, 2008 and 2007:
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
Basic weighted average number of
shares outstanding |
|
|
5,224,000 |
|
|
|
5,663,000 |
|
Shares issuable upon exercise
of dilutive options |
|
|
635,000 |
|
|
|
882,000 |
|
|
|
|
|
|
|
|
Diluted average number of
shares outstanding |
|
|
5,859,000 |
|
|
|
6,545,000 |
|
|
|
|
|
|
|
|
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 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.
10
NVR, Inc.
Notes to Condensed Consolidated Financial Statements
(dollars in thousands except per share data)
Options to purchase 316,642 and 53,739 shares of common stock were outstanding during the
quarters ended March 31, 2008 and 2007, respectively, but were not included in the computation of
diluted earnings per share because the effect would have been anti-dilutive. In addition, 388,564
and 412,096 performance-based options were outstanding at quarter end March 31, 2008 and 2007,
respectively, and accordingly, 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. NVR does not expect
to achieve the performance target and accordingly does not expect these options to vest. See note 5
for further discussion of the performance-based options.
5. Stock Option Compensation Expense
During the first quarter of 2008, the Company issued 254,650 non-qualified stock options
(Management Options) under the 2000 Broadly-Based Stock Option Plan. The exercise price of the
Management Options granted was equal to the closing price of the Companys common stock on the day
immediately preceding the date of grant. Each Management Option was granted for a term of ten (10)
years from the date of grant. These Management Options will vest 100% on December 31, 2010,
subject to continued employment. The Company also issued 11,718 non-qualified stock options
(Director Options) under the 1998 Directors Long Term Stock Option Plan during the first quarter
of 2008. The exercise price of the Director Options granted was equal to the closing price of the
Companys common stock on the day immediately preceding the date of grant. Each Director Option
was granted for a term of ten (10) years from the date of grant. These Director Options will vest
in 33 1/3% annual increments beginning December 31, 2010, subject to continued Board service.
To estimate the grant-date fair value of its stock options, the Company uses the
Black-Scholes option-pricing model. The Black-Scholes model estimates the per share fair value
of an option on its date of grant based on the following factors: the options exercise price;
the price of the underlying stock on the date of grant; the estimated dividend yield; a
risk-free interest rate; the estimated option term; and the expected volatility. For the
risk-free interest rate, the Company uses a U.S. Treasury Strip due in a number of years
equal to the options expected term. NVR has concluded that its historical exercise experience
is the best estimate of future exercise patterns to determine an options expected term. To
estimate expected volatility, NVR analyzed the historic volatility of its common stock. The
fair values of the Director Options and Management Options granted during the first quarter of
2008 were estimated on the grant date using the Black-Scholes option-pricing model based on the
following assumptions:
|
|
|
|
|
|
|
|
|
|
|
Management |
|
Director |
|
|
Options |
|
Options |
Estimated option life |
|
3.90 years |
|
4.90 years |
Risk free interest rate (range) |
|
|
2.67 |
% |
|
|
2.67% - 3.43 |
% |
Expected volatility (range) |
|
|
33.89 |
% |
|
|
30.84% - 33.89 |
% |
Expected dividend rate |
|
|
0.00 |
% |
|
|
0.00 |
% |
Grant-date fair value per
share of options granted |
|
$ |
155.43 |
|
|
$ |
171.33 |
|
Compensation cost for options which vest solely based on continued employment over a
long-term vesting schedule (service-only option) 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 is recognized within the
income statement in the same expense line as the cash compensation paid to the respective
employees. SFAS No. 123R also requires the Company to estimate forfeitures in calculating the
expense related to stock-based compensation and requires that the compensation costs of
stock-based awards be recognized net of estimated forfeitures.
11
NVR, Inc.
Notes to Condensed Consolidated Financial Statements
(dollars in thousands except per share data)
As of March 31, 2008, the total unrecognized compensation cost for outstanding unvested
service-only stock option awards equals approximately $102,000, net of estimated forfeitures,
and the weighted-average period over which the unrecognized compensation will be recorded is
equal to approximately 2.08 years.
The following table provides additional information relative to NVRs stock option plans
for the period ended March 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
|
Exercise |
|
|
|
Options |
|
|
Price |
|
Stock Options |
|
|
|
|
|
|
|
|
Outstanding at beginning of period |
|
|
2,050,453 |
|
|
$ |
325.13 |
|
Granted |
|
|
266,368 |
|
|
|
515.05 |
|
Exercised |
|
|
(136,935 |
) |
|
|
197.33 |
|
Forfeited or expired |
|
|
(48,730 |
) |
|
|
407.30 |
|
|
|
|
|
|
|
|
Outstanding at end of period |
|
|
2,131,156 |
|
|
$ |
355.2 |
|
|
|
|
|
|
|
|
Exercisable at end of period |
|
|
591,169 |
|
|
$ |
188.69 |
|
|
|
|
|
|
|
|
As noted above, SFAS No. 123R, Share-Based Payment, requires the Company to recognize
compensation expense related to stock based compensation plans net of estimated forfeitures. In
addition, the Company is required to adjust stock based compensation expense if the Companys
actual forfeiture experience differs from estimates made. During the first quarter of 2008, the
Company adjusted its expected forfeiture rate and consequently recorded a one-time adjustment
reversing approximately $4,800 of stock-based compensation expense as a result.
The Company determined in the third quarter of 2007 that it was improbable that it would
achieve the performance metric related to 388,564 outstanding stock options. Based on the
Companys continued 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 currently is not recognizing any stock-based compensation expense related to
these options and it is improbable that any such expense will be recognized in the future.
The company recognized stock based compensation expense of $6,333 and $14,323 during the
quarters ended March 31, 2008 and 2007, respectively.
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. The Company completed the
annual assessment of impairment during the first quarter of 2008 and determined that there was no
impairment of either goodwill or excess reorganization value.
7. Uncertainty in Income Taxes
As of January 1, 2008, the Company has approximately $36,383 (on a net basis) of unrecognized
tax benefits, which would decrease income tax expense if recognized. The Company recognizes
interest related to unrecognized tax benefits in the income tax expense line. As of January 1,
2008, the Company had a total of $16,969 of accrued interest for unrecognized tax benefits on its
balance sheet. Based on its historical experience in dealing with various taxing authorities, the
Company has found that it is the administrative practice of these authorities to not seek penalties
from the Company for the tax positions it has taken on its returns, related to its unrecognized tax
benefits. Therefore, the Company does not accrue penalties for the positions in which it has an
unrecognized tax benefit. However, if such penalties were to be accrued, they would be recorded as
a component of income tax expense. With few exceptions, the Company is no longer subject to income
tax examinations for years prior to 2004.
12
NVR, Inc.
Notes to Condensed Consolidated Financial Statements
(dollars in thousands except per share data)
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, 2007 |
|
$ |
206 |
|
|
$ |
663,631 |
|
|
$ |
3,529,995 |
|
|
$ |
(3,064,457 |
) |
|
$ |
(75,636 |
) |
|
$ |
75,636 |
|
|
$ |
1,129,375 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
43,466 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
43,466 |
|
Deferred compensation activity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2 |
) |
|
|
2 |
|
|
|
|
|
Stock-based compensation |
|
|
|
|
|
|
6,333 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,333 |
|
Stock option activity |
|
|
|
|
|
|
27,021 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27,021 |
|
Tax benefit from stock-based
compensation activity |
|
|
|
|
|
|
18,183 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18,183 |
|
Treasury shares issued
upon option exercise |
|
|
|
|
|
|
(27,255 |
) |
|
|
|
|
|
|
27,255 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, March 31, 2008 |
|
$ |
206 |
|
|
$ |
687,913 |
|
|
$ |
3,573,461 |
|
|
$ |
(3,037,202 |
) |
|
$ |
(75,638 |
) |
|
$ |
75,638 |
|
|
$ |
1,224,378 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company did not repurchase any shares of its common stock during the three months ended
March 31, 2008. 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. Approximately 137,000 options to purchase shares of the Companys common
stock were exercised during the three months ended March 31, 2008.
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 months
ended March 31, 2008 and 2007:
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
Warranty reserve, beginning of period |
|
$ |
70,284 |
|
|
$ |
70,175 |
|
Provision |
|
|
9,791 |
|
|
|
8,240 |
|
Payments |
|
|
(7,803 |
) |
|
|
(10,087 |
) |
|
|
|
|
|
|
|
Warranty reserve, end of period |
|
$ |
72,272 |
|
|
$ |
68,328 |
|
|
|
|
|
|
|
|
13
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, 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. 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 years presented. The corporate capital allocation charged to the operating
segment allows the Chief Operating Decision Maker 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 is determined 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
finished lot purchase agreement with the developer, or to restructure a lot purchase agreement
resulting in the forfeiture of the deposit. 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 charge.
In addition to the corporate capital allocation and contract land deposit impairments
discussed above, the other reconciling items between segment profit and consolidated profit
before tax include unallocated corporate overhead (including all management incentive
compensation), stock option compensation expense, consolidation adjustments and external
corporate interest expense. 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 necessary 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 expense is
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.
14
NVR, Inc.
Notes to Condensed Consolidated Financial Statements
(dollars in thousands except per share data)
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:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
2008 |
|
|
2007 |
|
Revenues: |
|
|
|
|
|
|
|
|
Homebuilding Mid Atlantic |
|
$ |
526,392 |
|
|
$ |
688,784 |
|
Homebuilding North East |
|
|
85,968 |
|
|
|
88,623 |
|
Homebuilding Mid East |
|
|
150,160 |
|
|
|
155,128 |
|
Homebuilding South East |
|
|
107,349 |
|
|
|
142,575 |
|
Mortgage Banking |
|
|
18,062 |
|
|
|
18,079 |
|
|
|
|
|
|
|
|
Consolidated revenues |
|
$ |
887,931 |
|
|
$ |
1,093,189 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
2008 |
|
|
2007 |
|
Profit: |
|
|
|
|
|
|
|
|
Homebuilding Mid Atlantic |
|
$ |
43,480 |
|
|
$ |
103,369 |
|
Homebuilding North East |
|
|
7,151 |
|
|
|
3,425 |
|
Homebuilding Mid East |
|
|
10,847 |
|
|
|
14,012 |
|
Homebuilding South East |
|
|
9,060 |
|
|
|
22,727 |
|
Mortgage Banking |
|
|
11,660 |
|
|
|
10,980 |
|
|
|
|
|
|
|
|
Segment profit |
|
|
82,198 |
|
|
|
154,513 |
|
|
|
|
|
|
|
|
Contract land deposit impairments |
|
|
(637 |
) |
|
|
(10,940 |
) |
Stock option expense (1) |
|
|
(6,333 |
) |
|
|
(14,323 |
) |
Corporate capital allocation (2) |
|
|
27,967 |
|
|
|
35,463 |
|
Unallocated corporate overhead |
|
|
(26,565 |
) |
|
|
(25,983 |
) |
Consolidation adjustments and other |
|
|
(340 |
) |
|
|
2,437 |
|
Corporate interest expense |
|
|
(3,115 |
) |
|
|
(3,135 |
) |
|
|
|
|
|
|
|
Reconciling items sub-total |
|
|
(9,023 |
) |
|
|
(16,481 |
) |
|
|
|
|
|
|
|
Consolidated income before
taxes |
|
$ |
73,175 |
|
|
$ |
138,032 |
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The stock option expense in 2007 includes expense of approximately $5,700 related to
contingently issuable shares. The Company determined that it was improbable that it would
achieve the performance metric related to 388,564 outstanding stock options. Based on the
Companys continued 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 currently is not recognizing any stock-based
compensation expense related to these options and it is improbable that any such expense
will be recognized in the future. In addition, during the first quarter of 2008 the
Company adjusted the estimated forfeiture rate used in the calculation of stock option
expense. This resulted in the one-time reversal of approximately $4,800 of stock option
expense in the current period. See Note 5 for further discussion. |
|
(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 March 31, |
|
|
|
2008 |
|
|
2007 |
|
Homebuilding Mid Atlantic |
|
$ |
18,754 |
|
|
$ |
25,044 |
|
Homebuilding North East |
|
|
2,783 |
|
|
|
3,539 |
|
Homebuilding Mid East |
|
|
3,301 |
|
|
|
3,828 |
|
Homebuilding South East |
|
|
3,129 |
|
|
|
3,052 |
|
|
|
|
|
|
|
|
Total |
|
$ |
27,967 |
|
|
$ |
35,463 |
|
|
|
|
|
|
|
|
15
NVR, Inc.
Notes to Condensed Consolidated Financial Statements
(dollars in thousands except per share data)
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
|
2008 |
|
|
2007 |
|
Assets: |
|
|
|
|
|
|
|
|
Homebuilding Mid Atlantic |
|
$ |
651,163 |
|
|
$ |
901,233 |
|
Homebuilding North East |
|
|
92,230 |
|
|
|
134,228 |
|
Homebuilding Mid East |
|
|
111,070 |
|
|
|
157,388 |
|
Homebuilding South East |
|
|
109,609 |
|
|
|
125,983 |
|
Mortgage Banking |
|
|
106,368 |
|
|
|
110,237 |
|
|
|
|
|
|
|
|
Segment assets |
|
|
1,070,440 |
|
|
|
1,429,069 |
|
|
|
|
|
|
|
|
Assets not owned, consolidated per Fin 46R |
|
|
162,371 |
|
|
|
279,736 |
|
Cash |
|
|
766,597 |
|
|
|
555,317 |
|
Deferred taxes |
|
|
220,813 |
|
|
|
174,131 |
|
Intangible assets |
|
|
60,675 |
|
|
|
60,832 |
|
Land reserve |
|
|
(134,301 |
) |
|
|
(70,577 |
) |
Consolidation adjustments and other (3) |
|
|
62,981 |
|
|
|
39,439 |
|
|
|
|
|
|
|
|
Reconciling items sub-total |
|
|
1,139,136 |
|
|
|
1,038,878 |
|
|
|
|
|
|
|
|
Consolidated assets |
|
$ |
2,209,576 |
|
|
$ |
2,467,947 |
|
|
|
|
|
|
|
|
|
|
|
(3) |
|
The 2008 balance includes the bulk purchase of finished building lots made during the
3rd quarter of 2007, of which approximately $20,000 have not yet been allocated to the
reportable segments. |
11. Fair Value of Derivative Instruments
In the normal course of business, NVRs mortgage banking segment enters into contractual
commitments to extend credit to buyers of single-family homes with fixed expiration dates. The
commitments become effective when the borrowers lock-in a specified interest rate within time
frames established by NVR. All mortgagors are evaluated for credit worthiness prior to the
extension of the commitment. Market risk arises if interest rates move adversely between the time
of the lock-in of rates by the borrower and the sale date of the loan to a broker/dealer. To
mitigate the effect of the interest rate risk inherent in providing rate lock commitments to
borrowers, the Company enters into optional or mandatory delivery forward sale contracts to sell
whole loans and mortgage-backed securities to broker/dealers. The forward sale contracts lock in
an interest rate and price for the sale of loans similar to the specific rate lock commitments.
NVR does not engage in speculative or trading derivative activities. Both the rate lock
commitments to borrowers and the forward sale contracts to broker/dealers are undesignated
derivatives pursuant to the requirements of SFAS No. 133, Accounting For Derivative Instruments and
Hedging Activities, and, accordingly, are marked to fair value through earnings. Fair value is
determined pursuant to SFAS No. 157, Fair Value Measurements, and Staff Accounting Bulletin 109,
Written Loan Commitments Recorded at Fair Value Through Earnings, both of which the Company adopted
on a prospective basis as of the beginning of 2008. Fair value measurements are included in
earnings as a component of mortgage banking fees on the accompanying statement of income.
SFAS No. 157 assigns a fair value hierarchy to the inputs used to measure fair value under the
rule. Level 1 inputs are quoted prices in active markets for identical assets and liabilities.
Level 2 inputs are inputs other than quoted market prices that are observable for the asset or
liability, either directly or indirectly. Level 3 inputs are unobservable inputs. The fair value
of the Companys rate lock commitments to borrowers and the related input levels includes, as
applicable:
|
i) |
|
the assumed gain/loss of the expected resultant loan sale (level 2); |
|
|
ii) |
|
the effects of interest rate movements between the date of the rate lock and
the balance sheet date (level 2); and |
|
|
iii) |
|
the value of the servicing rights associated with the loan (level 2). |
16
NVR, Inc.
Notes to Condensed Consolidated Financial Statements
(dollars in thousands except per share data)
The assumed gain/loss considers the
amount that the Company has discounted the price to the borrower
from par for competitive reasons and the excess servicing to be received or buydown fees to be paid
upon securitization of the loan. The excess servicing and buydown fees are calculated pursuant to
contractual terms with investors. To calculate the effects of interest rate movements, the Company
utilizes applicable published mortgage-backed security prices, and multiplies the price movement
between the rate lock date and the balance sheet date by the notional loan commitment amount. The
Company sells all of its loans on a servicing released basis, and receives a servicing release
premium upon sale. Thus, the value of the servicing rights included in the fair value measurement
is based upon contractual terms with investors, and range from 52.5 basis points to 282.5 basis
points of the loan amount, depending on the loan type. The Company assumes an approximate 18%
fallout rate when measuring the fair value of rate lock commitments. Fallout is defined as locked
loan commitments for which the Company does not close a mortgage loan and is based on historical
experience.
The fair value of the Companys forward sales contracts to broker/dealers solely considers the
market price movement of the same type of security between the trade date and the balance sheet
date (level 2). The market price changes are multiplied by the notional amount of the forward
sales contracts to measure the fair value.
Mortgage loans held for sale are closed at cost, which includes all fair value measurement in
accordance with SFAS No. 133, and thereafter are carried at the lower of cost or fair value until
sale.
The effect of fair value measurements on earnings in the quarter ended March 31, 2008 is as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assumed |
|
|
Interest |
|
|
|
|
|
|
|
|
|
|
|
|
Notional or |
|
|
Gain (Loss) |
|
|
Rate |
|
|
Servicing |
|
|
Security |
|
|
Total Fair |
|
|
|
Principal |
|
|
From Loan |
|
|
Movement |
|
|
Rights |
|
|
Price |
|
|
Value |
|
|
|
Amount |
|
|
Sale |
|
|
Effect |
|
|
Value |
|
|
Change |
|
|
Adjustment |
|
Rate lock commitments |
|
$ |
393,660 |
|
|
$ |
(644 |
) |
|
$ |
2,181 |
|
|
$ |
6,033 |
|
|
$ |
|
|
|
$ |
7,570 |
|
Forward sales contracts |
|
|
462,557 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,719 |
) |
|
|
(2,719 |
) |
Mortgages held for sale |
|
|
88,051 |
|
|
|
(599 |
) |
|
|
346 |
|
|
|
1,484 |
|
|
|
|
|
|
|
1,231 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
$ |
(1,243 |
) |
|
$ |
2,527 |
|
|
$ |
7,517 |
|
|
$ |
(2,719 |
) |
|
$ |
6,082 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prior to the adoption of SAB No. 109 and SFAS No. 157, the fair value calculation for
locked loan commitments and closed loans held for sale only considered the effects of interest
rate movements between the date of the rate lock and either the loan closing date or the
balance sheet date. The Company recognized a net SFAS 133 unrealized loss of $128 (pre-tax)
in the first quarter of 2007. The resulting unrealized $6,100 gain in the first quarter of
2008 from the fair value calculation was primarily attributable to the inclusion of the value
of the servicing rights in the calculation as required by SAB No. 109. The increase in
unrealized income from the adoption of SAB No. 109 and SFAS No. 157 was further increased due
to the principal volume of our locked loan pipeline increasing by 176% from March 31, 2007 to
March 31, 2008 as a result of a 180 day extended lock program offered to homebuyers that was
instituted during the quarter ending March 31, 2008. The aforementioned fair value measurement
change for the first quarter of 2008 is a one-time net increase in mortgage banking fees and
will be impacted in the future by the change in volume and product mix of our locked loan
commitments.
17
NVR, Inc.
Notes to Condensed Consolidated Financial Statements
(dollars in thousands except per share data)
12. Debt
NVR Mortgage Finance, Inc., a wholly owned subsidiary of NVR, Inc., increased its
borrowing capacity under its existing warehouse credit facility to $149,250 from $125,000 by
executing a Lender Addition Agreement dated as of April 22, 2008, with U.S. Bank National
Association, as agent, Comerica Bank, National City Bank, Washington Mutual Bank, F.A., Bank
of America N.A. and U.S. Bank National Association, each as a Lender (the Agreement). There
were no changes made to any other terms of the existing revolving credit agreement.
13. 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.
The Company is involved in various other 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 position or results of operations.
14. Recent Accounting Pronouncements
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 became effective for
the Company beginning on January 1, 2008. The adoption of EITF No. 06-8 did not have a material
impact on the Companys financial statements.
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets
and Financial Liabilities Including an amendment of FASB Statement No. 115. The statement
permits entities to choose to measure certain financial assets and liabilities at fair value.
Unrealized gains and losses on items for which the fair value option has been elected are
reported in earnings. SFAS No. 159 became effective for the Company on January 1, 2008. The
Company did not elect to measure any financial assets or liabilities at fair value except those
required to be reported at fair value by SFAS No. 157 as discussed in note 11 above.
In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated
Financial Statements an amendment of ARB No. 51. SFAS No. 160 establishes new accounting and
reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation
of a subsidiary. Specifically, this statement requires the recognition of a noncontrolling
interest as equity in the consolidated financial statements and separate from the parents
equity. The amount of net income attributable to the noncontrolling interest will be included in
consolidated net income on the face of the income statement. SFAS No. 160 clarifies that changes
in a parents ownership interest in a subsidiary that do not result in deconsolidation are equity
transactions if the parent retains its controlling financial interest. In addition, this
statement requires that a parent recognize a gain or loss in net income when a subsidiary is
deconsolidated. Such gain or loss will be measured using the fair value of the noncontrolling
equity investment on the deconsolidation date. SFAS No. 160 also includes expanded disclosure
requirements regarding the interests of the parent and its non controlling interests. SFAS No.
160 is effective for the Company beginning January 1, 2009. The Company is currently evaluating
the impact of the adoption of SFAS No. 160.
18
NVR, Inc.
Notes to Condensed Consolidated Financial Statements
(dollars in thousands except per share data)
In December 2007, the FASB issued SFAS No. 141 (R), Business Combinations. SFAS No.
141(R) expands on the guidance of SFAS No. 141, extending its applicability to all transactions
and other events in which an entity obtains control over one or more other businesses. It
broadens the fair value measurement and recognition of assets acquired, liabilities assumed and
interests transferred as a result of business combinations. SFAS No. 141(R) expands on required
disclosures to improve the statement users abilities to evaluate the nature and financial
effects of business combinations. SFAS No. 141(R) is effective for any acquisitions made on or
after January 1, 2009.
In February 2008, the FASB issued FASB Staff Position No. FAS 157-2 (FSP No. 157-2),
Effective Date of FASB Statement No. 157 which delays the effective date of SFAS No. 157 for
nonfinancial assets and nonfinancial liabilities to fiscal years beginning after November 15, 2008.
The Company does not expect that the adoption of FSP No. 157-2
will have a material impact on its financial
statements.
In March 2008, the FASB issued SFAS No. 161, Disclosures About Derivative Instruments and
Hedging Activities an amendment of FASB Statement No. 133. SFAS No. 161 enhances the disclosure
requirements of SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities,
regarding an entitys derivative instruments and hedging activities. SFAS No. 161 is effective for
the Companys fiscal year beginning January 1, 2009. The Company does not expect the adoption of
SFAS No. 161 to have a material effect on its consolidated financial statements.
19
|
|
|
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 us in periodic press
releases or 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 comparable terminology. All statements other than
of historical facts are forward looking statements. Forward looking statements contained in this
document include those regarding market trends, NVRs financial position, business strategy, the
outcome of pending litigation, projected plans and objectives of management for future operations.
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 future
results, performance or achievements expressed or implied by the forward-looking statements. Such
risk factors include, but are not limited to the following: general economic and business
conditions (on both a national and regional level); interest rate changes; access to suitable
financing by NVR and 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 moratoriums; 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 Months Ended March 31, 2008 and 2007
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, 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.
20
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 lot 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 March 31, 2008, we controlled approximately 64,000 lots with deposits in cash and letters of
credit totaling approximately $314,000 and $8,200, respectively. Included in the number of
controlled lots are approximately 18,500 lots for which we have recorded a contract land deposit
impairment reserve of $134,301 as of March 31, 2008. See note 3 to the condensed
consolidated financial statements included herein for additional information regarding contract
land deposits.
Overview of the Current Business Environment
The current home sales environment remains challenging, still characterized by relatively
higher levels of existing and new homes available for sale, low homebuyer confidence driven by
concerns regarding an economic recession and job stability, and a more restrictive mortgage
lending environment. The mortgage market changed significantly during 2007 due to the turmoil
in the credit markets. These changes within the mortgage markets continued to make it difficult
for our customers to obtain mortgage financing in the first quarter of 2008. The challenging
market conditions continue to negatively impact new orders and selling prices in each of our
market segments, and in response, we continue to offer incentives to homebuyers and to reduce
prices in many of our markets. Overall, new orders decreased 30% in the quarter ended March 31,
2008 as compared to the same period in 2007 and selling prices decreased 14% in these respective
periods. Our cancellation rate for the first quarter of 2008 was 22% as compared to 16% during
the same period in 2007 and 32% in the fourth quarter of 2007.
Reflecting the challenging market conditions discussed above, for the quarter ended March
31, 2008, consolidated revenues decreased approximately 19% from the same period in 2007.
Additionally, net income and diluted earnings per share in the current quarter decreased 49% and
43%, respectively, as compared to the first quarter of 2007. Gross profit margins within our
homebuilding business declined to 16.4% in the first quarter of 2008 as compared to 20.6% in the
first quarter of 2007. Gross profit margins have been negatively impacted by market conditions.
Based on the current uncertainty in both the homebuilding and mortgage markets, we expect
to see continued 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, in addition to our focus on reducing lot costs. We continue to work with
our developers in certain of our 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 conditions, we may exit the community and forfeit our deposit. During
the quarter ended March 31, 2008, we recorded a contract land deposit impairment charge of
approximately $6,600 as compared to $12,000 in the first quarter of 2007. Additionally, in
response to continuing pricing pressures and customer affordability issues, we are also
providing house types at lower sales price points by reducing the square footage of the products
offered and by providing fewer upgraded features as standard options. This provides homebuyers
with greater affordability and the option to upgrade only those features important to each
particular buyer. We also continue to assess and adjust our staffing levels and organizational
structure as market conditions warrant.
21
Homebuilding Operations
The following table summarizes the results of operations and other data for the consolidated
homebuilding operations:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31, |
|
|
|
2008 |
|
|
2007 |
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
869,869 |
|
|
$ |
1,075,110 |
|
Cost of sales |
|
$ |
726,931 |
|
|
$ |
853,410 |
|
Gross profit margin percentage |
|
|
16.4 |
% |
|
|
20.6 |
% |
Selling, general and administrative |
|
$ |
84,166 |
|
|
$ |
97,406 |
|
Settlements (units) |
|
|
2,465 |
|
|
|
2,700 |
|
Average settlement price |
|
$ |
352.6 |
|
|
$ |
397.6 |
|
New Orders (units) |
|
|
2,731 |
|
|
|
3,917 |
|
Average new order price |
|
$ |
320.0 |
|
|
$ |
372.3 |
|
Backlog (units) |
|
|
5,411 |
|
|
|
7,605 |
|
Average backlog price |
|
$ |
354.0 |
|
|
$ |
397.0 |
|
Consolidated Homebuilding Three Months Ended March 31, 2008 and 2007
Homebuilding revenues decreased 19% for the first quarter of 2008 from the same period in 2007
as a result of a 9% decrease in the number of units settled and an 11% 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 19% lower at the start of the first
quarter of 2008 as compared to the beginning of 2007, offset partially by a higher backlog turnover
rate quarter over quarter. Average settlement prices were impacted primarily by a 10% lower
average price of homes in our beginning backlog balance entering the first quarter of 2008 compared
to the same period in 2007.
Gross profit margins in the first quarter of 2008 declined as compared to the first quarter of
2007 primarily as a result of the continued pricing pressures resulting from the aforementioned
challenging market conditions. We expect continued gross profit margin pressure over at least the
next several quarters.
The number of new orders and the average selling price for new orders for the first quarter of
2008 decreased by 30% and 14%, respectively, as compared to the first quarter of 2007. New orders
were negatively impacted by a continuing decline in consumer confidence driven by concerns
regarding an economic recession and job stability, as well as by concerns regarding the stability
in home values. In addition, net new orders have been negatively impacted by higher cancellation
rates in the first quarter of 2008, which increased to 22% from 16% in the same period of 2007.
Cancellation rates have been impacted by tighter mortgage underwriting standards and financing
availability, negatively impacting both our customers ability to secure financing for their new
home purchase and our customers ability to sell their current homes. New orders were also
negatively impacted by a reduction in our average number of active communities in the first quarter
of 2008 to 442 from 527 in the same period of 2007. The decrease in the average number of active
communities is a result of the termination of certain purchase agreements and a reduced pace of
entering into new purchase agreements.
Selling, general and administrative (SG&A) expenses for the first quarter of 2008 decreased
by approximately $13,200, and as a percentage of revenue increased to 9.7% from 9.1% in the first
quarter of 2007. The decrease in SG&A expenses is primarily attributable to an approximate $7,200
decrease in stock based compensation expense quarter over quarter. Approximately $5,300 of
performance based stock compensation was recognized in the first quarter of 2007, with no
corresponding charge in the first quarter of 2008 due to our determination that the performance
metric is improbable of being met. Further, in the first quarter of 2008, we reversed
approximately $4,500 of previously expensed stock based compensation due to a change in our
estimated stock option forfeiture rate. These decreases in stock based compensation expense were
partially offset by additional expense in 2008 related to 2008 stock option grants. See note 5 to
the accompanying condensed consolidated financial statements for additional discussion of stock
option compensation expense. In addition, selling and marketing costs were lower by approximately
$3,800 due primarily to a reduction in the average number of active communities to 442 in the first
quarter of 2008 from 527 in the first quarter of 2007.
22
Backlog units and dollars were 5,411 and $1,915,519, respectively, at March 31, 2008 compared
to 7,605 and $3,018,921, respectively, at March 31, 2007. The decrease in backlog units is
primarily attributable to our beginning backlog units being approximately 19% lower at the start of
the first quarter of 2008 as compared to the beginning of 2007, coupled with net new order and
settlement activity, as discussed above, for the first quarter of 2008 as compared to the same period in 2007. Backlog dollars were
negatively impacted by the decrease in backlog units coupled with an 11% decrease in the average
price of homes in ending backlog, resulting from a 14% decrease in the average selling price for
new orders over the six month period ended March 31, 2008 as compared to the same period in 2007.
Reportable Segments
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 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 finished lot purchase agreement with the developer or to
restructure a lot purchase agreement resulting in the forfeiture of the deposit. The
following table summarizes certain homebuilding operating activity by segment for the three
months ended March 31, 2008 and 2007:
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
2007 |
Mid Atlantic: |
|
|
|
|
|
|
|
|
Revenues |
|
$ |
526,392 |
|
|
$ |
688,784 |
|
Settlements (units) |
|
|
1,241 |
|
|
|
1,352 |
|
Average settlement price |
|
$ |
424.0 |
|
|
$ |
509.2 |
|
New orders (units) |
|
|
1,292 |
|
|
|
1,921 |
|
Average new order price |
|
$ |
383.2 |
|
|
$ |
464.4 |
|
Backlog (units) |
|
|
2,777 |
|
|
|
4,234 |
|
Average backlog price |
|
$ |
427.9 |
|
|
$ |
480.7 |
|
Gross margin |
|
$ |
90,136 |
|
|
$ |
162,033 |
|
Gross profit margin percentage |
|
|
17.1 |
% |
|
|
23.5 |
% |
Segment profit |
|
$ |
43,480 |
|
|
$ |
103,369 |
|
|
|
|
|
|
|
|
|
|
North East: |
|
|
|
|
|
|
|
|
Revenues |
|
$ |
85,968 |
|
|
$ |
88,623 |
|
Settlements (units) |
|
|
245 |
|
|
|
249 |
|
Average settlement price |
|
$ |
350.9 |
|
|
$ |
355.9 |
|
New orders (units) |
|
|
280 |
|
|
|
417 |
|
Average new order price |
|
$ |
307.5 |
|
|
$ |
340.2 |
|
Backlog (units) |
|
|
540 |
|
|
|
708 |
|
Average backlog price |
|
$ |
317.0 |
|
|
$ |
349.3 |
|
Gross margin |
|
$ |
15,232 |
|
|
$ |
14,252 |
|
Gross profit margin percentage |
|
|
17.7 |
% |
|
|
16.1 |
% |
Segment profit |
|
$ |
7,151 |
|
|
$ |
3,425 |
|
23
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
2007 |
Mid East: |
|
|
|
|
|
|
|
|
Revenues |
|
$ |
150,160 |
|
|
$ |
155,128 |
|
Settlements (units) |
|
|
617 |
|
|
|
572 |
|
Average settlement price |
|
$ |
242.7 |
|
|
$ |
269.1 |
|
New orders (units) |
|
|
717 |
|
|
|
1,030 |
|
Average new order price |
|
$ |
240.1 |
|
|
$ |
256.9 |
|
Backlog (units) |
|
|
1,213 |
|
|
|
1,732 |
|
Average backlog price |
|
$ |
243.6 |
|
|
$ |
262.9 |
|
Gross margin |
|
$ |
25,767 |
|
|
$ |
30,601 |
|
Gross profit margin percentage |
|
|
17.2 |
% |
|
|
19.7 |
% |
Segment profit |
|
$ |
10,847 |
|
|
$ |
14,012 |
|
|
|
|
|
|
|
|
|
|
South East: |
|
|
|
|
|
|
|
|
Revenues |
|
$ |
107,349 |
|
|
$ |
142,575 |
|
Settlements (units) |
|
|
362 |
|
|
|
527 |
|
Average settlement price |
|
$ |
296.5 |
|
|
$ |
270.5 |
|
New orders (units) |
|
|
442 |
|
|
|
549 |
|
Average new order price |
|
$ |
273.1 |
|
|
$ |
290.8 |
|
Backlog (units) |
|
|
881 |
|
|
|
931 |
|
Average backlog price |
|
$ |
295.8 |
|
|
$ |
301.9 |
|
Gross margin |
|
$ |
21,059 |
|
|
$ |
34,124 |
|
Gross profit margin percentage |
|
|
19.6 |
% |
|
|
23.9 |
% |
Segment profit |
|
$ |
9,060 |
|
|
$ |
22,727 |
|
Mid Atlantic
Three Months Ended March 31, 2008 and 2007
The Mid Atlantic segment had an approximate $59,900 reduction in segment profit quarter over
quarter. Revenues decreased approximately $162,400, or 24%, for the three months ended March 31,
2008 from the prior year quarter due primarily to a 17% decrease in the average settlement price
and an 8% decrease in the number of units settled. Average settlement prices were down primarily
as a result of selling price pressures in prior quarters, which resulted in an 11% lower average
price of homes in backlog at the beginning of the first quarter of 2008 as compared to the same
period in 2007. The decrease in units settled is attributable to a 26% lower backlog unit balance
entering the first quarter of 2008 compared to the same period in 2007, offset partially by a
higher backlog turnover rate quarter over quarter. The Mid Atlantic segments gross profit margin
percentage decreased to 17.1% in 2008 from 23.5% in 2007. Gross profit margins were negatively
impacted primarily by the 17% decrease in average settlement prices quarter over quarter.
Segment new orders and the average selling price during the first quarter of 2008 decreased
33% and 18%, respectively, from the same period in 2007. The market continues to be negatively
impacted by affordability issues, a tougher lending environment and higher levels of new and
existing home inventory for sale. These challenging market conditions have contributed to higher
levels of cancellations. Cancellation rates for the Mid Atlantic segment increased to 25% in the
first quarter of 2008 from 18% in the same period of 2007.
North East
Three Months Ended March 31, 2008 and 2007
The North East segment had an approximate $3,700 increase in segment profit quarter over
quarter, despite a decrease in revenues of approximately $2,700, or 3%. Gross profit margins
increased to 17.7% in 2008 from 16.1% in 2007 primarily as a result of continuing efforts to
control operating, personnel and material costs. New orders and the average selling price during
the first quarter of 2008 decreased 33% and 10%, respectively, from the same period in 2007, as a
result of challenging market conditions which have continued to deteriorate. In addition, new
orders were negatively impacted by an 18% decrease in the average number of active communities to
42 communities in the first quarter of 2008 from 51 communities in the same
period in 2007. New orders in the North East segment have also been negatively impacted by an
increase in the cancellation rate to 17% in the first quarter of 2008 from 15% in the first quarter
of 2007.
24
Mid East
Three Months Ended March 31, 2008 and 2007
The Mid East segment had an approximate $3,200 decrease in segment profit quarter over
quarter. Revenues decreased approximately $5,000, or 3%, due to a 10% decrease in the average
settlement price, offset partially by an 8% increase in the number of units settled. The decrease
in the average settlement price is primarily attributable to a 9% lower average price of units in
backlog entering the first quarter of 2008 compared to the same period in 2007. The increase in
settlements was driven by a higher backlog turnover rate in the first quarter of 2008 as compared
to the same period in 2007. Gross profit margins decreased to 17.2% in the first quarter of 2008
from 19.7% in the same period of 2007 primarily as a result of the 10% decrease in the average
settlement price quarter over quarter. New orders and the average selling price during the first
quarter of 2008 decreased 30% and 7%, respectively, from the same period in 2007. The decrease in
new orders was attributable to a continuing deterioration in each of the markets within the Mid
East segment quarter over quarter. These challenging market conditions led to an increase in the
segment cancellation rate to 15% in the first quarter of 2008 from 10% in the first quarter of
2007. In addition, new orders were negatively impacted by a 24% decrease in the average number of
active communities to 117 communities in the first quarter of 2008 from 154 communities in the same
period in 2007.
South East
Three Months Ended March 31, 2008 and 2007
The South East segment had an approximate $13,700 decrease in segment profit quarter over
quarter. Revenues decreased approximately $35,200, or 25%, due to a 31% decrease in the number of
homes settled, offset partially by a 10% increase in the average settlement price. The decrease in
units settled is attributable to a 12% lower backlog unit balance entering the first quarter of
2008 compared to the same period in 2007, coupled with a slower backlog turnover rate quarter over
quarter. The increase in the average settlement price is primarily attributable to a 6% higher
average price of units in backlog entering the first quarter of 2008 compared to the same period in
2007. Gross profit margins decreased to 19.6% in the first quarter of 2008 from 23.9% in the same
period in 2007. Gross profit margins were negatively impacted by higher average lot and operating
costs per settled unit. Segment new orders and the average selling price during the first quarter
of 2008 decreased 20% and 6%, respectively, from the same period in 2007. The decrease in new
orders is primarily attributable to lower sales absorption on a flat average number of active
communities quarter over quarter as market conditions have become more challenging in the markets
within the South East segment.
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 expense 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.
25
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
2008 |
|
|
2007 |
|
Homebuilding Consolidated Gross Profit: |
|
|
|
|
|
|
|
|
Homebuilding Mid Atlantic |
|
$ |
90,136 |
|
|
$ |
162,033 |
|
Homebuilding North East |
|
|
15,232 |
|
|
|
14,252 |
|
Homebuilding Mid East |
|
|
25,767 |
|
|
|
30,601 |
|
Homebuilding South East |
|
|
21,059 |
|
|
|
34,124 |
|
Consolidation adjustments and other (1) |
|
|
(9,256 |
) |
|
|
(19,310 |
) |
|
|
|
|
|
|
|
Segment gross profit |
|
$ |
142,938 |
|
|
$ |
221,700 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Homebuilding Consolidated Income |
|
|
|
|
|
|
|
|
Before Tax: |
|
|
|
|
|
|
|
|
Homebuilding Mid Atlantic |
|
$ |
43,480 |
|
|
$ |
103,369 |
|
Homebuilding North East |
|
|
7,151 |
|
|
|
3,425 |
|
Homebuilding Mid East |
|
|
10,847 |
|
|
|
14,012 |
|
Homebuilding South East |
|
|
9,060 |
|
|
|
22,727 |
|
Reconciling items: |
|
|
|
|
|
|
|
|
Contract land deposit impairments |
|
|
(637 |
) |
|
|
(10,940 |
) |
Stock option expense (2) |
|
|
(5,916 |
) |
|
|
(13,438 |
) |
Corporate capital allocation (3) |
|
|
27,967 |
|
|
|
35,463 |
|
Unallocated corporate overhead |
|
|
(26,565 |
) |
|
|
(25,983 |
) |
Consolidation adjustments and other |
|
|
(340 |
) |
|
|
2,437 |
|
Corporate interest expense |
|
|
(3,115 |
) |
|
|
(3,135 |
) |
|
|
|
|
|
|
|
Reconciling items sub-total |
|
|
(8,606 |
) |
|
|
(15,596 |
) |
|
|
|
|
|
|
|
Homebuilding consolidated
profit before taxes |
|
$ |
61,932 |
|
|
$ |
127,937 |
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
This decrease is due to unallocated contract land deposit impairments and other
activity-driven consolidation adjustments. |
|
(2) |
|
The stock option expense recognized in the homebuilding operations in 2007 includes
expense of approximately $5,300 related to contingently issuable shares. We determined that
it was improbable that we would achieve the performance metric related to 388,564 outstanding
stock options. Based on our continued 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, we currently are not recognizing any stock-based
compensation expense related to these options and it is improbable that any such expense will
be recognized in the future. In addition, during the first quarter of 2008 we adjusted the
estimated forfeiture rate used in the calculation of stock option expense. This resulted in
the one-time reversal of approximately $4,500 of stock option expense in the homebuilding
operations in the current period. See Note 5 for further discussion. |
|
(3) |
|
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 March 31, |
|
|
|
2008 |
|
|
2007 |
|
Homebuilding Mid Atlantic |
|
$ |
18,754 |
|
|
$ |
25,044 |
|
Homebuilding North East |
|
|
2,783 |
|
|
|
3,539 |
|
Homebuilding Mid East |
|
|
3,301 |
|
|
|
3,828 |
|
Homebuilding South East |
|
|
3,129 |
|
|
|
3,052 |
|
|
|
|
|
|
|
|
Total |
|
$ |
27,967 |
|
|
$ |
35,463 |
|
|
|
|
|
|
|
|
26
Mortgage Banking Segment
Three Months Ended March 31, 2008 and 2007
We conduct our mortgage banking activity through NVR Mortgage Finance, Inc. (NVRM), a
wholly owned subsidiary. NVRM focuses almost exclusively on serving the homebuilding
segments customer base.
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
2008 |
|
|
2007 |
|
Loan closing volume: |
|
|
|
|
|
|
|
|
Total principal |
|
$ |
523,538 |
|
|
$ |
715,039 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan volume mix: |
|
|
|
|
|
|
|
|
Adjustable rate mortgages |
|
|
6 |
% |
|
|
27 |
% |
|
|
|
|
|
|
|
Fixed-rate mortgages |
|
|
94 |
% |
|
|
73 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating profit: |
|
|
|
|
|
|
|
|
Segment profit |
|
$ |
11,660 |
|
|
$ |
10,980 |
|
Stock option expense |
|
|
(417 |
) |
|
|
(885 |
) |
|
|
|
|
|
|
|
Mortgage income before tax |
|
$ |
11,243 |
|
|
$ |
10,095 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage banking fees: |
|
|
|
|
|
|
|
|
Net gain on sale of loans |
|
$ |
14,371 |
|
|
$ |
13,360 |
|
Title services |
|
|
3,444 |
|
|
|
4,545 |
|
Servicing |
|
|
247 |
|
|
|
174 |
|
|
|
|
|
|
|
|
|
|
$ |
18,062 |
|
|
$ |
18,079 |
|
|
|
|
|
|
|
|
Loan closing volume for the three months ended March 31, 2008 decreased 27% over the same
period for 2007. The 2008 decrease is primarily attributable to a 13% decrease in the number of
units closed and a 16% decrease in the average loan amount. The unit decrease reflects a
decrease in the number of homes that we settled in the first quarter of 2008. The unit decrease
also reflects a four percentage point decrease in the number of loans closed by NVRM for our
homebuyers who obtain a mortgage to purchase the home (Capture Rate), which decreased to 82%,
compared to 86% for the first quarter of 2007. The decrease in the average loan amount is
primarily attributable to the aforementioned homebuilding
segments lower average selling price.
Segment profit for the three months ended March 31, 2008 increased by approximately $700
from the same period for 2007. This is primarily the result of an approximate $6,100 increase
in unrealized income from the fair value measurements of our locked loan commitments, forward
mortgage-backed securities sales, and closed loans held for sale, which is included in mortgage
banking fees (see details below). Excluding the above increase in mortgage banking fees from
the fair value measurement, mortgage banking fees decreased by approximately $6,100 as the
result of the decrease in closing volume, a reduction in fees charged to borrowers in an effort
to assist our selling efforts and more aggressive mortgage pricing to the homebuyer. This
decrease in mortgage banking fees received was partially offset by a 25 basis point increase in
fees received for servicing released premiums as a result of the product mix shift towards fixed
rate mortgages.
Segment profit was also favorably impacted by a decrease in general and administrative
expenses as the result of an 11% reduction in salary and other personnel costs due to a 12%
reduction in staffing from the same period for 2007. General and administrative expenses also
decreased due to an approximate $1,000 reduction in loan loss charges from the same period for
2007.
27
The $6,100 increase in unrealized income from the fair value measurement was the result of
the adoption of Staff Accounting Bulletin 109, Written Loan commitments recorded at Fair Value
through Earnings (SAB No. 109) and FASB Statement of Financial Accounting Standards (SFAS) No.
157, Fair Value Measurement, both of which the Company adopted on a prospective basis as of
January 1, 2008. As a result of the adoption of SAB No. 109 and SFAS No. 157, the fair value
calculation for locked loan commitments and closed loans held for sale now includes the assumed
gain/loss on the expected resultant
loan sale and the value of the servicing rights associated with the loan. This is in
addition to the prior fair value calculation, which only considered the effects of interest rate
movements between the date of the rate lock and either the loan closing date or the balance
sheet date. We recognized a net SFAS 133 unrealized loss of $128 (pre-tax) in the first quarter
of 2007. Each of the aforementioned fair value calculations are classified as Level 2
observable inputs as defined in SFAS No. 157. The resulting unrealized $6,100 gain from the
fair value calculation was primarily attributable to the inclusion of the value of the servicing
rights in the calculation as required by SAB No. 109. The increase in unrealized income from the
adoption of SAB No. 109 and SFAS No. 157 was further increased due to the principal volume of
our locked loan pipeline increasing by 176% from March 31, 2007 to March 31, 2008 as a result of
a 180 day extended lock program offered to homebuyers that was instituted during the quarter
ending March 31, 2008. The aforementioned fair value measurement change is a one-time net
increase in mortgage banking fees and will be impacted in the future by the change in volume and
product mix of our locked loan commitments.
NVRM is dependent on our homebuilding segments customers for business. As sales and
selling prices of the homebuilding segment decline, NVRMs operations will also continue to be
adversely impacted. As mentioned above, NVRM is reducing the fees charged to its borrowers and
offering more aggressive mortgage pricing 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 continued tightening and volatility of the
credit markets.
Liquidity and Capital Resources
We fund our operations from cash flows provided by our operating activities, a short-term
credit facility and the public debt and equity markets. In the first quarter of 2008, our
operating activities provided cash of $75,041. Cash was provided primarily by homebuilding
operations and a reduction in our homebuilding inventories of approximately $58,000. The
presentation of operating cash flows was reduced by $18,183, which is the amount of the excess
tax benefit realized from the exercise of stock options during the quarter and credited
directly to additional paid in capital.
Net cash used for investing activities was $1,515 for the period ended March 31, 2008,
which primarily resulted from property and equipment purchases throughout the period.
Net cash provided by financing activities was $29,923 for the period ended March 31, 2008.
Stock option exercise activity during the 2008 quarter provided approximately $27,000 in
exercise proceeds, and we realized an excess income tax benefit of $18,183, which pursuant to
SFAS No. 123R, must be reported as a financing cash inflow. We also reduced borrowings under
the mortgage warehouse facility by approximately $15,000 based on current borrowing needs.
In addition to our homebuilding operating activities, we also utilize a short-term
unsecured working capital revolving credit facility (the Facility) to provide for working
capital cash requirements. The Facility provides for borrowings up to $600,000, subject to
certain borrowing base limitations. The 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 Facility. Up to $150,000 of the Facility
is currently available for issuance in the form of letters of credit, of which $15,285 was
outstanding at March 31, 2008. There were no direct borrowings outstanding under the Facility
as of March 31, 2008. At March 31, 2008, there were no borrowing base limitations reducing the
amount available to us for borrowings.
28
Our mortgage banking segment provides for its mortgage origination and other operating
activities using cash generated from operations as well as various short-term credit facilities.
NVRM has available an annually renewable mortgage warehouse facility (the Revolving Credit
Agreement) with an aggregate borrowing limit of $149,250. The Revolving Credit Agreement is used
to fund NVRMs mortgage origination activities, under which $68,228 was outstanding at March 31,
2008. As of March 31, 2008, the borrowing base limitation reduced the amount available to us for
borrowing to approximately $87,000. The Revolving Credit Agreement expires in August 2008. The
interest rate under the Revolving Credit Agreement is either:
(i) LIBOR plus 1.0%, or (ii) 1.125%, depending on whether NVRM provides compensating balances.
NVRMs mortgage warehouse facility limits the ability of NVRM to transfer funds to NVR in the form
of dividends, loans or advances. In addition, NVRM is required to maintain a minimum net worth of
$14,000.
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 first quarter of 2008. 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 us 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, our
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, 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.
29
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 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 condensed, consolidated
financial statements contained within 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 of the
units. 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 unit 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 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 the existing contract land deposit portfolio. The allowance
reflects our 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 March 31, 2008 balance sheet to be adequate (see note 3 to the condensed
consolidated financial statements), 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
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 continually 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. We completed the annual assessment of impairment during
the first quarter of 2008, and as of March 31, 2008, we believe that excess reorganization value,
goodwill and other intangible assets were not impaired. This conclusion is based on managements
judgment, considering such factors as our history of operating success, our well-recognized brand
names, the significant positions held in the markets in which we operate and our expected future
cash flows. 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.
30
Warranty/Product Liability Accruals
Warranty and product liability accruals are established to provide for estimated future costs
as a result of construction and product defects, product recalls and litigation incidental to our
business. Liability estimates are determined based on our 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 evaluations by 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 March 31, 2008 balance sheet (see note 9 to the condensed
consolidated 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. The
performance metric requires our aggregate diluted earnings per share for the years ended
December 31, 2005 through December 31, 2008 to exceed $339.00 per share. While we currently
believe that this 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
period ended March 31, 2008 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, changes to our
forfeiture rate experience and changes to the determination of whether performance condition
grants will vest, could produce widely different fair values. See Note 5 to the condensed
consolidated financial statements for additional information.
31
Item 3. Quantitative and Qualitative Disclosure About Market Risk
There have been no material changes in our market risks during the three months ended March
31, 2008. For additional information regarding market risk, see our Annual Report on Form 10-K
for the year ended December 31, 2007.
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.
32
PART II. OTHER INFORMATION
Item 1A. Risk Factors
There has been no material change in our risk factors as previously disclosed in our Form 10-K
for the fiscal year ended December 31, 2007 in response to Item 1A. to Part 1 of such Form 10-K.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
We had one repurchase authorization outstanding during the quarter ended March 31, 2008.
On July 31, 2007 (July Authorization), we publicly announced the board of directors approval
for us to repurchase up to an aggregate of $300 million of our common stock in one or more open
market and/or privately negotiated transactions. The July Authorization does not have an
expiration date. We did not repurchase any shares of our common stock during the first quarter
of 2008. We have $226.3 million available under the July Authorization as of March 31, 2008.
Item 5. Other Information
NVR Mortgage Finance, Inc. (the Borrower), a wholly owned subsidiary of NVR, Inc., increased
its borrowing capacity under its existing warehouse credit facility to $149,250,000 from
$125,000,000 by executing a Lender Addition Agreement dated as of April 22, 2008, with U.S. Bank
National Association, as agent, Comerica Bank, National City Bank, Washington Mutual Bank, F.A.,
Bank of America N.A. and U.S. Bank National Association, each as a Lender (the Agreement).
The Agreement is filed herewith as Exhibit 10.1 and is incorporated by reference into this Item
5.
Item 6. Exhibits
(a) Exhibits:
|
10.1 |
|
Lender Addition Agreement dated, as of April 22, 2008, with U.S.
Bank National Association, as agent, and Comerica Bank, National City Bank,
Washington Mutual Bank, F.A., Bank of America N.A. and U.S. Bank National
Association, each as a Lender. |
|
|
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. |
33
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.
|
|
|
|
|
April 25, 2008 |
NVR, Inc.
|
|
|
By: |
/s/ Dennis M. Seremet
|
|
|
|
Dennis M. Seremet |
|
|
|
Senior Vice President, Chief Financial Officer
and Treasurer |
|
34
Exhibit Index
|
|
|
|
|
|
|
Exhibit |
|
|
|
|
Number |
|
Description |
|
Page |
|
|
|
|
|
|
|
10.1
|
|
Lender Addition Agreement dated, as of April 22, 2008,
with U.S. Bank National Association, as agent, and Comerica
Bank, National City Bank, Washington Mutual Bank, F.A.,
Bank of America N.A. and U.S. Bank National Association,
each as a Lender.
|
|
|
36 |
|
|
|
|
|
|
|
|
31.1
|
|
Certification of NVRs Chief Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
|
|
|
42 |
|
|
|
|
|
|
|
|
31.2
|
|
Certification of NVRs Chief Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
|
|
|
43 |
|
|
|
|
|
|
|
|
32
|
|
Certification of NVRs Chief Executive Officer and Chief
Financial Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
|
|
|
44 |
|
35
exv10w1
EXHIBIT 10.1
LENDER ADDITION AGREEMENT
THIS LENDER ADDITION AGREEMENT (the Agreement"), dated as of April 22, 2008 is made and
entered into among NVR MORTGAGE FINANCE, INC., a Virginia corporation (Borrower"), U.S. BANK
NATIONAL ASSOCIATION, as agent (Agent"), and BANK OF AMERICA, N.A. (Additional Lender").
RECITALS:
A. Borrower, Agent and the Lenders that are parties thereto (the Existing Lenders) are
parties to that certain Loan Agreement dated as of September 7, 1999 (as modified and amended to
date, the Loan Agreement").
B. Borrower, Agent, the Existing Lenders and the Additional Lender now desire to amend the
Loan Agreement to add the Additional Lender as a Lender party thereto.
AGREEMENT:
In consideration of the premises herein contained and other good and valuable consideration,
the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows:
Section 1. Definitions
1.1 Incorporated Definitions. Capitalized terms used and not otherwise defined in
this agreement have the meanings specified in the Loan Agreement.
1.2 Other Defined Terms. As used in this agreement, the following terms have the
meanings specified:
Additional Lender has the meaning specified in the preamble of this agreement.
Adjustment Factor means the fraction the numerator of which is equal to the number
of days from the Execution Date to the Termination Date and the denominator of which is
equal to 360.
Execution Date means the date on which this agreement is actually executed and
delivered by Borrower, Agent, the Existing Lenders and the Additional Lender, as set forth
on the counterpart signature page of Agent.
Existing Advances means, with respect to any Existing Lender, Advances by such
Lender outstanding as of the beginning of business on the Execution Date.
Existing Lenders has the meaning specified in Recital A of this agreement.
Loan Agreement has the meaning specified in Recital A of this agreement.
Section 2 Fees and Getting to Pro-rata
2.1 Payments to the Additional Lender. Borrower agrees to pay Agent for the account
of the Additional Lender a facility fee on the Commitment Amount of the Additional Lender in an
aggregate amount equal to the product of the Adjustment Factor and 0.125% of such Commitment
Amount. Said fee shall be payable as set forth in Section 2.4(a) of the Loan Agreement. Borrower
also agrees to pay to Agent for the account of the Additional Lender the monthly Non-usage Fee
described in Section 2.4(f) of the Loan Agreement (i) in the amount of 0.185% per annum on the
average unused amount of the aggregate Commitments during such month when usage is less than 35% of
the aggregate Commitments and (ii) in the amount of 0.125% per annum on the average unused amount
of the aggregate Commitments during such month when usage equals or is greater than 35% but not
exceeding 50% of the aggregate Commitments. The Non-usage Fee shall be payable as described in
such Section 2.4(f) of the Loan Agreement.
2.2 Getting to Pro-rata. Notwithstanding the provisions of Sections 2.1, 2.7 and 2.9
of the Loan Agreement or any other provision of the Loan Documents to the contrary, until such time
as the Additional Lender and the Existing Lenders have Advances outstanding in amounts
proportionate to their respective Commitments, (a) all repayments of outstanding Advances shall be
applied pro-rata to the outstanding Advances of the Existing Lenders in accordance with the amounts
thereof and (b) all new Advances shall be funded solely by the Additional Lender.
Section 3 Concerning the Additional Lender
3.1 Commitment. The Commitment of the Additional Lender shall be THIRTY MILLION AND
NO/100 DOLLARS ($30,000,000.00) (including the amount assigned by U.S. Bank to the Additional
Lender). Schedule 1.1(a) of the Loan Agreement is hereby amended to read as set forth on Schedule
1.1(a) attached hereto which is substituted as Schedule 1.1(a) to the Loan Agreement.
3.2 Status as a Lender. Effective upon the Execution Date, the Additional Lender
shall be a Lender under the Loan Agreement and shall have all of the rights, privileges and
benefits of a Lender under the Loan Agreement and the Loan Documents and shall have all of the
duties of a Lender thereunder, in each case as if the Additional Lender had been a Lender initially
a party of the Loan Agreement.
3.3 Condition Precedent. The inclusion of the Additional Lender as a Lender and the
obligation of the Additional Lender to make its initial Advance shall be subject to the following
conditions precedent:
(a) Delivery to Agent of the following documents in a quantity sufficient that Agent,
Borrower, each Existing Lender and the Additional Lender may each have a fully executed
original of each of such documents other than the Additional Lenders Note:
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i. |
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this agreement duly executed by Borrower, Agent and the
Additional Lender; |
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ii. |
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the Additional Lenders Note in the principal amount of its
Commitment Amount duly executed by Borrower; |
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iii. |
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a certificate of the Secretary or Assistant Secretary of
Borrower setting forth (i) resolutions of Borrowers board of directors
authorizing the execution, delivery and performance of this agreement and the
Additional Lenders Note and identifying the officers of Borrower authorized
to sign such instruments, and (ii) specimen signatures of the officers so
authorized; and |
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iv. |
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such other documents, including opinions of counsel, as Agent
or the Additional Lender may reasonably request; |
(b) payment by Borrower to Agent of any fee then due Agent in connection with the
Additional Lender under Section 2.4(b) of the Loan Agreement.
2
3.4 Additional Lender Credit Decision. The Additional Lender acknowledges that it
has, independently and without reliance upon Agent or any Existing Lender and based on the
financial statements referred to in Sections 5.7 and 6.1 of the Loan Agreement and such other
documents and information as it has deemed appropriate, made its own credit analysis and decision
to enter into this agreement. The Additional Lender also agrees that it will, independently and
without reliance upon Agent or any other Lender and based on such documents and information as it
shall deem appropriate at the time, continue to make its own credit decisions in taking or not
taking action under the Loan Agreement.
Section 4 Miscellaneous
4.1 Ratifications. The terms and provisions set forth in this agreement shall modify
and supersede all inconsistent terms and provisions set forth in the Loan Agreement and the other
Loan Documents and except as expressly modified and superseded by this agreement, the terms and
provisions of the Loan Agreement and each other Loan Document are ratified and confirmed and shall
continue in full force and effect.
4.2 Borrower Representations and Warranties. Borrower hereby represents and warrants
that the representations and warranties set forth in Section 5 of the Loan Agreement are true and
correct in all material respects with the same force and effect on and as of the date hereof as
though made as of the date hereof except to the extent such representations and warranties by their
terms are made as of a specific date and except for changes that are permitted by the terms of the
Loan Agreement.
4.3 Additional Lender Representations and Warranties. The Additional Lender hereby
represents and warrants that the representations and warranties set forth in Section 11.12 of the
Loan Agreement are true and correct as applied to the Additional Lender.
4.4 Survival. The representations and warranties made by Borrower in this agreement
shall survive the execution and delivery of this agreement, and the funding of the Additional
Lenders initial Advance.
4.5 Reference to Loan Agreement. Each of the Loan Documents, including the Loan
Agreement and any and all other agreements, documents, or instruments now or hereafter executed and
delivered pursuant to the terms hereof or pursuant to the terms of the Loan Agreement as amended
hereby, are hereby amended so that any reference in such Loan Documents to the Loan Agreement shall
mean a reference to the Loan Agreement as modified hereby.
4.6 Applicable Law. This Agreement shall be governed by and construed in accordance
with the laws of the State of Minnesota.
4.7 Successors and Assigns. This Agreement is binding upon and shall inure to the
benefit of Agent, the Existing Lenders, the Additional Lender, Borrower and their respective
successors and assigns, except that Borrower may not assign or transfer any of its rights or
obligations hereunder without the prior written consent of each of the Lenders.
4.8 Counterparts. This Agreement may be executed in one or more counterparts, each of
which when so executed shall be deemed to be an original, but all of which when taken together
shall constitute one and the same instrument.
4.9 Headings. The headings, captions, and arrangements used in this agreement are for
convenience only and shall not affect the interpretation of this agreement.
4.10 ENTIRE AGREEMENT. THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS REPRESENT THE
FINAL AGREEMENT AMONG THE PARTIES HERETO AND THERETO, AND MAY NOT BE CONTRADICTED BY EVIDENCE OF
PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES HERETO. THERE ARE NO UNWRITTEN
ORAL AGREEMENTS AMONG THE PARTIES.
3
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BORROWER: |
EXECUTION DATE: |
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April 22, 2008
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NVR MORTGAGE FINANCE, INC. |
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By: |
/s/ William J. Inman
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Name: |
William J. Inman |
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Title: |
President, NVR Mortgage Finance, Inc. |
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ADDITIONAL LENDER:
BANK OF AMERICA, N.A.
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By: |
/s/ Stefanie Brown
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Name: |
Stefanie Brown |
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Title: |
Vice President |
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AGENT and an EXISTING LENDER :
U.S. BANK NATIONAL ASSOCIATION
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By: |
/s/ William Umscheid
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Name: |
William Umscheid |
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Title: |
Vice President |
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4
Schedule 1.1(a)
Commitment Schedule as of the April 22, 2008
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Commitment |
Lender |
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Amount |
U.S. Bank National Association
Mortgage Banking Services
U.S. Bank Place
800 Nicollet Mall
Mail Station BC-MN-H03B
Minneapolis, Minnesota 55402
Attention: William Umscheid
Telephone: 612-303-3575
Telecopy: 612-303-2253
|
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$ |
50,000,000 |
|
|
|
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Comerica Bank
Comerica Tower at Detroit Center
500 Woodward Avenue
Detroit, MI 48226
Attention: Heather D. Slapak
Telephone: 313-222-5740
Telecopy: 313-222-9295
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$ |
30,000,000 |
|
|
|
|
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National City Bank
101 South 5th Street
Louisville, KY 40202
Attention: Mary Jo Reiss
Telephone: 502-581-4197
Telecopy: 502-581-4154
|
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$ |
25,000,000 |
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|
|
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Washington Mutual Bank FA
20 North Wacker Drive, Suite 3410
Chicago, IL 60606
Attn: Rodney Davis
Telecopy: 312-782-3731
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$ |
14,250,000 |
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Bank of America, N.A.
901 Main Street
TX1-492-64-01
Dallas, TX 75202
Attention: Paula Laesch
Telephone: 214-209-9011
Telecopy: 214-209-0604
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$ |
30,000,000 |
|
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TOTAL
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$ |
149,250,000 |
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5
exv31w1
Exhibit 31.1
SARBANES-OXLEY ACT SECTION 302 CERTIFICATIONS
I, Paul C. Saville, certify that:
1. |
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I have reviewed this report on Form 10-Q of NVR, Inc.; |
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2. |
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Based on my knowledge, this report does not contain any untrue statement of a material fact
or omit to state a material fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not misleading with respect to the period
covered by this report; |
|
3. |
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Based on my knowledge, the financial statements, and other financial information included in
this report, fairly present in all material respects the financial condition, results of
operations and cash flows of the registrant as of, and for, the periods presented in this
report; |
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4. |
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The registrants other certifying officer and I are responsible for establishing and
maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and
15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f)) for the registrant and have: |
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a) |
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Designed such disclosure controls and procedures, or caused such disclosure controls
and procedures to be designed under our supervision, to ensure that material information
relating to the registrant, including its consolidated subsidiaries, is made known to us by
others within those entities, particularly during the period in which this report is being
prepared; |
|
|
b) |
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Designed such internal control over financial reporting, or caused such internal
control over financial reporting to be designed under our supervision, to provide
reasonable assurance regarding the reliability of financial reporting and the preparation
of financial statements for external purposes in accordance with generally accepted
accounting principles; |
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c) |
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Evaluated the effectiveness of the registrants disclosure controls and procedures and
presented in this report our conclusions about the effectiveness of the disclosure controls
and procedures, as of the end of the period covered by this report based on such
evaluation; and |
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d) |
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Disclosed in this report any change in the registrants internal control over financial
reporting that occurred during the registrants most recent fiscal quarter (the
registrants fourth fiscal quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the registrants internal control
over financial reporting; and |
5. |
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The registrants other certifying officer and I have disclosed, based on our most recent
evaluation of internal control over financial reporting, to the registrants auditors and the
audit committee of the registrants board of directors (or persons performing the equivalent
functions): |
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a) |
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All significant deficiencies and material weaknesses in the design or operation of
internal control over financial reporting which are reasonably likely to adversely affect
the registrants ability to record, process, summarize and report financial information;
and |
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b) |
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Any fraud, whether or not material, that involves management or other employees who
have a significant role in the registrants internal control over financial reporting. |
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Date: April 25, 2008 |
By: |
/s/ Paul C. Saville
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Paul C. Saville |
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President and Chief Executive Officer |
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exv31w2
Exhibit 31.2
SARBANES-OXLEY ACT SECTION 302 CERTIFICATIONS
I, Dennis M. Seremet, certify that:
1. |
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I have reviewed this report on Form 10-Q of NVR, Inc.; |
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2. |
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Based on my knowledge, this report does not contain any untrue statement of a material fact
or omit to state a material fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not misleading with respect to the period
covered by this report; |
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3. |
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Based on my knowledge, the financial statements, and other financial information included in
this report, fairly present in all material respects the financial condition, results of
operations and cash flows of the registrant as of, and for, the periods presented in this
report; |
|
4. |
|
The registrants other certifying officer and I are responsible for establishing and
maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and
15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f)) for the registrant and have: |
|
a) |
|
Designed such disclosure controls and procedures, or caused such disclosure controls
and procedures to be designed under our supervision, to ensure that material information
relating to the registrant, including its consolidated subsidiaries, is made known to us by
others within those entities, particularly during the period in which this report is being
prepared; |
|
|
b) |
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Designed such internal control over financial reporting, or caused such internal
control over financial reporting to be designed under our supervision, to provide
reasonable assurance regarding the reliability of financial reporting and the preparation
of financial statements for external purposes in accordance with generally accepted
accounting principles; |
|
|
c) |
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Evaluated the effectiveness of the registrants disclosure controls and procedures and
presented in this report our conclusions about the effectiveness of the disclosure controls
and procedures, as of the end of the period covered by this report based on such
evaluation; and |
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|
d) |
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Disclosed in this report any change in the registrants internal control over financial
reporting that occurred during the registrants most recent fiscal quarter (the
registrants fourth fiscal quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the registrants internal control
over financial reporting; and |
5. |
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The registrants other certifying officer and I have disclosed, based on our most recent
evaluation of internal control over financial reporting, to the registrants auditors and the
audit committee of the registrants board of directors (or persons performing the equivalent
functions): |
|
a) |
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All significant deficiencies and material weaknesses in the design or operation of
internal control over financial reporting which are reasonably likely to adversely affect
the registrants ability to record, process, summarize and report financial information;
and |
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b) |
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Any fraud, whether or not material, that involves management or other employees who
have a significant role in the registrants internal control over financial reporting. |
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Date: April 25, 2008 |
By: |
/s/ Dennis M. Seremet
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Dennis M. Seremet |
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Senior Vice President, Chief Financial Officer
and Treasurer |
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exv32
Exhibit 32
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report on Form 10-Q of NVR, Inc. for the period ended March 31,
2008 as filed with the Securities and Exchange Commission on the date hereof (the Report), each
of the undersigned officers of NVR, Inc., hereby certifies pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
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1. |
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The Report fully complies with the requirements of Section 13(a) or 15(d) of
the Securities Exchange Act of 1934; and |
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2. |
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The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of NVR, Inc. |
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Date: April 25, 2008 |
By: |
/s/ Paul C. Saville
|
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Paul C. Saville |
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President and Chief Executive Officer |
|
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|
|
|
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By: |
/s/ Dennis M. Seremet
|
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Dennis M. Seremet |
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Senior Vice President, Chief Financial Officer
and Treasurer |
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