e10vq
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 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
NVR, Inc.
(Exact
name of registrant as specified in its charter)
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Virginia
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54-1394360 |
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(State or other jurisdiction of
incorporation or organization)
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(I.R.S. Employer Identification No.) |
11700 Plaza America Drive, Suite 500
Reston, Virginia 20190
(703) 956-4000
(Address, including zip code, and telephone number, including
area code, of registrants principal executive offices)
(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
(Do not check if a smaller reporting company) |
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Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act).
Yes o No þ
As of October 27, 2008 there were 5,453,515 total shares of common stock outstanding.
NVR, Inc.
Form 10-Q
INDEX
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
NVR, Inc.
Condensed Consolidated Balance Sheets
(in thousands, except share and per share data)
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September 30, 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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$ |
963,313 |
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$ |
660,709 |
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Receivables |
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10,444 |
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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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536,895 |
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573,895 |
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Unsold lots and housing units |
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67,570 |
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105,838 |
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Manufacturing materials and other |
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6,555 |
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9,121 |
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611,020 |
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688,854 |
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Assets not owned, consolidated
per FIN 46R |
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127,074 |
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180,206 |
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Property, plant and equipment, net |
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26,834 |
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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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21 |
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96 |
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Contract land deposits, net |
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130,575 |
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188,528 |
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Other assets |
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253,785 |
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252,461 |
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2,176,332 |
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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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1,728 |
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3,500 |
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Mortgage loans held for sale, net |
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113,839 |
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107,338 |
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Property and equipment, net |
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903 |
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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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8,003 |
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7,464 |
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131,820 |
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126,530 |
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Total assets |
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$ |
2,308,152 |
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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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September 30, 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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$ |
181,403 |
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$ |
219,048 |
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Accrued expenses and other liabilities |
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235,564 |
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251,475 |
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Liabilities related to assets not owned,
consolidated per FIN 46R |
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118,323 |
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164,369 |
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Customer deposits |
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93,117 |
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125,315 |
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Other term debt |
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2,630 |
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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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831,037 |
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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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13,858 |
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18,551 |
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Notes payable and repurchase agreement |
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90,782 |
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83,463 |
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104,640 |
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102,014 |
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Total liabilities |
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935,677 |
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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, $0.01 par value; 60,000,000
shares authorized; 20,561,187 and 20,592,640
shares issued as of September 30, 2008 and
December 31, 2007, respectively |
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206 |
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206 |
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Additional paid-in-capital |
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706,560 |
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663,631 |
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Deferred compensation trust 515,950 and
516,085 shares of NVR, Inc. common
stock as of September 30, 2008 and
December 31, 2007, respectively |
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(75,495 |
) |
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(75,636 |
) |
Deferred compensation liability |
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75,495 |
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75,636 |
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Retained earnings |
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3,661,344 |
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3,529,995 |
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Less treasury stock at cost 15,108,940 and
15,455,086 shares at September 30, 2008
and December 31, 2007, respectively |
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(2,995,635 |
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(3,064,457 |
) |
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Total shareholders equity |
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1,372,475 |
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1,129,375 |
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Total liabilities and shareholders equity |
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$ |
2,308,152 |
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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 September 30, |
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Nine Months Ended September 30, |
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2008 |
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2007 |
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2008 |
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2007 |
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Homebuilding: |
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Revenues |
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$ |
928,265 |
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$ |
1,270,471 |
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$ |
2,739,167 |
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$ |
3,642,721 |
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Other income |
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4,256 |
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4,209 |
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14,356 |
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16,425 |
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Cost of sales |
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(805,931 |
) |
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(1,087,399 |
) |
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(2,305,231 |
) |
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(3,002,746 |
) |
Selling, general and administrative |
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(66,796 |
) |
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(54,906 |
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(240,833 |
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(253,510 |
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Operating income |
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59,794 |
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132,375 |
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207,459 |
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402,890 |
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Interest expense |
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(3,259 |
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(3,375 |
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(9,730 |
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(9,995 |
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Homebuilding income |
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56,535 |
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129,000 |
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197,729 |
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392,895 |
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Mortgage Banking: |
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Mortgage banking fees |
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10,946 |
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21,617 |
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43,698 |
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59,224 |
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Interest income |
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929 |
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1,078 |
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2,608 |
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3,415 |
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Other income |
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188 |
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320 |
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531 |
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780 |
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General and administrative |
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(7,761 |
) |
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(6,001 |
) |
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(23,823 |
) |
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(24,278 |
) |
Interest expense |
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(230 |
) |
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(200 |
) |
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(544 |
) |
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(513 |
) |
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Mortgage banking income |
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4,072 |
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16,814 |
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22,470 |
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38,628 |
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Income before taxes |
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60,607 |
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145,814 |
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220,199 |
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431,523 |
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Income tax expense |
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(24,056 |
) |
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(54,701 |
) |
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(88,850 |
) |
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(164,842 |
) |
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Net income |
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$ |
36,551 |
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$ |
91,113 |
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$ |
131,349 |
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$ |
266,681 |
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Basic earnings per share |
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$ |
6.72 |
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$ |
17.25 |
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$ |
24.60 |
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$ |
48.35 |
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Diluted earnings per share |
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$ |
6.12 |
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$ |
15.26 |
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$ |
22.21 |
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$ |
42.25 |
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Basic average shares outstanding |
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5,438 |
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5,283 |
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5,340 |
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5,516 |
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Diluted average shares outstanding |
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5,968 |
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5,969 |
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5,915 |
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6,312 |
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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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Nine Months Ended September 30, |
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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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$ |
131,349 |
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$ |
266,681 |
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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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10,712 |
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12,896 |
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Stock option compensation expense |
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29,716 |
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|
5,575 |
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Excess income tax benefit from exercise of stock options |
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(37,927 |
) |
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(68,322 |
) |
Contract land deposit impairments |
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55,248 |
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|
163,776 |
|
Deferred tax benefit |
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(1,584 |
) |
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(29,733 |
) |
Mortgage loans closed |
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(1,496,365 |
) |
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(1,691,663 |
) |
Proceeds from sales of mortgage loans |
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1,516,144 |
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|
1,769,746 |
|
Principal payments on mortgage loans held for sale |
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3,591 |
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|
6,472 |
|
Gain on sale of loans |
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(28,352 |
) |
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(43,874 |
) |
Loss (gain) on sale of fixed assets |
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168 |
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(397 |
) |
Net change in assets and liabilities: |
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Decrease (increase) in inventories |
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|
77,834 |
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(245,781 |
) |
Decrease (increase) in receivables |
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|
699 |
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(3,654 |
) |
Decrease in contract land deposits |
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|
5,423 |
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|
8,227 |
|
(Decrease) increase in accounts payable, customer
deposits and accrued expenses |
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(54,013 |
) |
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|
45,839 |
|
Other, net |
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|
2,917 |
|
|
|
(14,921 |
) |
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|
Net cash provided by operating activities |
|
|
215,560 |
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|
180,867 |
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Cash flows from investing activities: |
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Purchase of property, plant and equipment |
|
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(5,080 |
) |
|
|
(6,988 |
) |
Other, net |
|
|
1,188 |
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|
1,542 |
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Net cash used in investing activities |
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(3,892 |
) |
|
|
(5,446 |
) |
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Cash flows from financing activities: |
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|
Net borrowings (repayments) under notes payable,
repurchase agreement and other term debt |
|
|
7,129 |
|
|
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(42,097 |
) |
Purchase of treasury stock |
|
|
|
|
|
|
(507,472 |
) |
Excess income tax benefit from exercise of stock options |
|
|
37,927 |
|
|
|
68,322 |
|
Proceeds from exercise of stock options |
|
|
44,108 |
|
|
|
66,898 |
|
|
|
|
|
|
|
|
Net cash provided (used) by financing activities |
|
|
89,164 |
|
|
|
(414,349 |
) |
|
|
|
|
|
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|
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|
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|
Net increase (decrease) in cash and cash equivalents |
|
|
300,832 |
|
|
|
(238,928 |
) |
Cash and cash equivalents, beginning of the period |
|
|
664,209 |
|
|
|
556,119 |
|
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Cash and cash equivalents, end of period |
|
$ |
965,041 |
|
|
$ |
317,191 |
|
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Supplemental disclosures of cash flow information: |
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Interest paid during the period |
|
$ |
6,937 |
|
|
$ |
7,186 |
|
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|
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|
Income taxes paid, net of refunds |
|
$ |
56,029 |
|
|
$ |
111,571 |
|
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|
Supplemental disclosures of non-cash activities: |
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|
Net assets not owned, consolidated per FIN 46R |
|
$ |
(7,086 |
) |
|
$ |
(7,319 |
) |
|
|
|
|
|
|
|
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
financial statements have been prepared in conformity with accounting principles generally accepted
in the United States of America (GAAP) 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 GAAP for complete financial statements. Because the
accompanying condensed consolidated financial statements do not include all of the information and
footnotes required by GAAP, they should be read in conjunction with the consolidated 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 and nine-month periods ended September 30, 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 GAAP requires management to make
estimates and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
For the three and nine-month periods ended September 30, 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 September 30, 2008, the Company controlled
approximately 58,300 lots with deposits in cash and letters of credit totaling approximately
$280,000 and $6,600, 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.
7
NVR, Inc.
Notes to Condensed Consolidated Financial Statements
(dollars in thousands except per share data)
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.
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
of any of the LLCs debt. NVR enters into a standard fixed price purchase agreement to purchase
lots from the LLCs.
At September 30, 2008, NVR had an aggregate investment in nine separate LLCs totaling
approximately $9,300, which controlled approximately 380 lots. NVR recognizes its share of the
earnings of the LLCs as an adjustment of the cost basis of the lots at the time that the lot and
related home is settled with an external customer. During the nine months ended September 30, 2008
and 2007, NVR adjusted cost of sales by approximately $330 and $530, respectively, which
represented NVRs share of the earnings of the LLCs. As of September 30, 2008, NVRs investment
in the LLCs had been partially offset by a contract land deposit valuation reserve of
approximately $7,212.
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 September 30, 2008, NVR has
consolidated these development entities on the accompanying condensed consolidated balance sheet.
Where NVR deemed itself to be the primary beneficiary of a development entity created after
December 31, 2003 and the development entity refused to provide financial statements, NVR utilized
estimation techniques to perform the consolidation. The effect of the consolidation under FIN 46R
at September 30, 2008 was the inclusion on the balance sheet of $127,074 as Assets not owned,
consolidated per FIN 46R, with a corresponding inclusion of $118,323 as Liabilities related to
assets not owned, consolidated per FIN 46R, after elimination of intercompany items. Inclusive in
these totals were assets of approximately $52,000 and liabilities of approximately $48,000
estimated for fourteen development entities created after December 31, 2003 that would not provide
financial statements.
8
NVR, Inc.
Notes to Condensed Consolidated Financial Statements
(dollars in thousands except per share data)
Following is the consolidating schedule at September 30, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NVR, Inc. |
|
|
|
|
|
|
|
|
|
|
|
|
|
and |
|
|
FIN 46R |
|
|
|
|
|
|
Consolidated |
|
|
|
Subsidiaries |
|
|
Entities |
|
|
Eliminations |
|
|
Total |
|
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Homebuilding: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
963,313 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
963,313 |
|
Receivables |
|
|
10,444 |
|
|
|
|
|
|
|
|
|
|
|
10,444 |
|
Homebuilding inventory |
|
|
611,020 |
|
|
|
|
|
|
|
|
|
|
|
611,020 |
|
Property, plant and equipment, net |
|
|
26,834 |
|
|
|
|
|
|
|
|
|
|
|
26,834 |
|
Reorganization value in excess of amount allocable to identifiable assets, net |
|
|
41,580 |
|
|
|
|
|
|
|
|
|
|
|
41,580 |
|
Goodwill and intangibles, net |
|
|
11,707 |
|
|
|
|
|
|
|
|
|
|
|
11,707 |
|
Contract land deposits, net |
|
|
134,254 |
|
|
|
|
|
|
|
(3,679 |
) |
|
|
130,575 |
|
Other assets |
|
|
258,857 |
|
|
|
|
|
|
|
(5,072 |
) |
|
|
253,785 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,058,009 |
|
|
|
|
|
|
|
(8,751 |
) |
|
|
2,049,258 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage banking assets: |
|
|
131,820 |
|
|
|
|
|
|
|
|
|
|
|
131,820 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FIN 46R Entities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Land under development |
|
|
|
|
|
|
126,290 |
|
|
|
|
|
|
|
126,290 |
|
Other assets |
|
|
|
|
|
|
784 |
|
|
|
|
|
|
|
784 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
127,074 |
|
|
|
|
|
|
|
127,074 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
2,189,829 |
|
|
$ |
127,074 |
|
|
$ |
(8,751 |
) |
|
$ |
2,308,152 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Homebuilding: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable, accrued expenses
and other liabilities |
|
$ |
416,967 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
416,967 |
|
Customer deposits |
|
|
93,117 |
|
|
|
|
|
|
|
|
|
|
|
93,117 |
|
Other term debt |
|
|
2,630 |
|
|
|
|
|
|
|
|
|
|
|
2,630 |
|
Senior notes |
|
|
200,000 |
|
|
|
|
|
|
|
|
|
|
|
200,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
712,714 |
|
|
|
|
|
|
|
|
|
|
|
712,714 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage banking liabilities: |
|
|
104,640 |
|
|
|
|
|
|
|
|
|
|
|
104,640 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FIN 46R Entities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable, accrued expenses
and other liabilities |
|
|
|
|
|
|
15,284 |
|
|
|
|
|
|
|
15,284 |
|
Debt |
|
|
|
|
|
|
43,885 |
|
|
|
|
|
|
|
43,885 |
|
Contract land deposits |
|
|
|
|
|
|
14,142 |
|
|
|
(14,142 |
) |
|
|
|
|
Advances from NVR, Inc. |
|
|
|
|
|
|
4,501 |
|
|
|
(4,501 |
) |
|
|
|
|
Minority interest |
|
|
|
|
|
|
|
|
|
|
59,154 |
|
|
|
59,154 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
77,812 |
|
|
|
40,511 |
|
|
|
118,323 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders equity |
|
|
1,372,475 |
|
|
|
49,262 |
|
|
|
(49,262 |
) |
|
|
1,372,475 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity |
|
$ |
2,189,829 |
|
|
$ |
127,074 |
|
|
$ |
(8,751 |
) |
|
$ |
2,308,152 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9
NVR, Inc.
Notes to Condensed Consolidated Financial Statements
(dollars in thousands except per share data)
Under FIN 46R, an enterprise with an interest in a variable interest entity or potential
variable interest entity created before December 31, 2003, is not required to apply FIN 46R to that
entity if the enterprise, after making an exhaustive effort, is unable to obtain the information
necessary to perform the accounting required to consolidate the variable interest entity for which
it is determined to be the primary beneficiary. At September 30, 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 is 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 $64,700. 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 and nine months ended September 30, 2008.
Aggregate activity with respect to the five development entities is included in the following
table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
|
Nine Months Ended September 30, |
|
|
2008 |
|
2007 |
|
2008 |
|
2007 |
Finished lots purchased dollars |
|
$ |
5,483 |
|
|
$ |
1,539 |
|
|
$ |
10,039 |
|
|
$ |
7,535 |
|
Finished lots purchased units |
|
|
19 |
|
|
|
3 |
|
|
|
30 |
|
|
|
35 |
|
|
3. Contract Land Deposits |
|
During the three and nine-month periods ended September 30, 2008, the Company incurred pre-tax
impairment charges on contract land deposits of approximately $42,800, and $55,200, respectively.
During the three and nine-month periods ended September 30, 2007, the Company incurred pre-tax
impairment charges on contract land deposits of approximately $96,500 and $163,800, respectively.
These charges are related to the continued deterioration of market conditions in the homebuilding
industry. These impairment charges were recorded in cost of sales in the accompanying condensed
consolidated statements of income. The contract land deposit asset is shown net of a $145,294 and
$133,664 impairment valuation allowance at September 30, 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 and nine months ended September 30, 2008 and 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
|
Nine Months Ended September 30, |
|
|
2008 |
|
2007 |
|
2008 |
|
2007 |
Basic weighted average number of
shares outstanding |
|
|
5,438,000 |
|
|
|
5,283,000 |
|
|
|
5,340,000 |
|
|
|
5,516,000 |
|
Shares issuable upon exercise
of dilutive options |
|
|
530,000 |
|
|
|
686,000 |
|
|
|
575,000 |
|
|
|
796,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted average number of
shares outstanding |
|
|
5,968,000 |
|
|
|
5,969,000 |
|
|
|
5,915,000 |
|
|
|
6,312,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10
NVR, Inc.
Notes to Condensed Consolidated Financial Statements
(dollars in thousands except per share data)
The assumed proceeds used in the treasury stock method for calculating the dilutive impact of
employee stock options 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.
Options to purchase 319,617 shares of common stock during both the three and nine months ended
September 30, 2008, and options to purchase 55,738 and 49,176 shares of common stock during the
three and nine months ended September 30, 2007, were not included in the computation of diluted
earnings per share because the effect would have been anti-dilutive. In addition, 377,386 and
410,557 performance-based options were outstanding as of September 30, 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 the performance
target will be achieved 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 nine months ended September 30, 2008, the Company issued non-qualified stock
options to purchase 267,246 shares of its common stock (Management Options) under the 2000
Broadly-Based Stock Option Plan. The exercise price of each Management Option 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 fully on December 31, 2010, subject to the grantees continued
employment. The Company also issued non-qualified stock options to purchase 12,765 shares of its
common stock (Director Options) under the 1998 Directors Long Term Stock Option Plan during the
nine months ended September 30, 2008. The exercise price of each Director Option 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 three equal annual installments beginning December 31, 2010,
subject to the directors 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 over a
period equal to the options expected term. The fair values of the Director Options and
Management Options granted during the nine months ended September 30, 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 |
|
3.88 years |
|
4.87 years |
Risk free interest rate (range) |
|
|
2.54% - 3.23% |
|
|
|
2.83% - 3.71% |
|
Expected volatility (range) |
|
|
31.60% - 39.28% |
|
|
|
30.84% - 36.73% |
|
Expected dividend rate |
|
|
0.00% |
|
|
|
0.00% |
|
Grant-date fair value per
share of options granted |
|
|
$156.24 |
|
|
|
$174.07 |
|
11
NVR, Inc.
Notes to Condensed Consolidated Financial Statements
(dollars in thousands except per share data)
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). As required by SFAS No. 123R,
Share-Based Payment, 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.
As of September 30, 2008, the total unrecognized compensation cost for outstanding
unvested service-only stock option awards equals approximately $80,400, net of estimated
forfeitures, and the weighted-average period over which the unrecognized compensation will be
recorded is equal to approximately 1.70 years.
The following table provides additional information relative to NVRs stock option plans
for the nine-month period ended September 30, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average |
|
|
Options |
|
Exercise Price |
Stock Options |
|
|
|
|
|
|
|
|
Outstanding at beginning of period |
|
|
2,050,453 |
|
|
$ |
325.13 |
|
Granted |
|
|
280,011 |
|
|
$ |
517.41 |
|
Exercised |
|
|
(346,146 |
) |
|
$ |
182.02 |
|
Forfeited or expired |
|
|
(79,174 |
) |
|
$ |
439.80 |
|
|
|
|
|
|
|
|
|
|
Outstanding at end of period |
|
|
1,905,144 |
|
|
$ |
374.62 |
|
|
|
|
|
|
|
|
|
|
Exercisable at end of period |
|
|
389,750 |
|
|
$ |
197.25 |
|
|
|
|
|
|
|
|
|
|
As noted above, SFAS No. 123R 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 an 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 outstanding stock options to purchase 410,557 shares of
the Companys common stock. 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, the Company expects 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 the Company believes it is improbable
that any such expense will be recognized in the future.
The Company recognized pre-tax stock based compensation expense of approximately $11,300 and
$(22,900) during the three months ended September 30, 2008 and 2007, respectively, and
approximately $29,700 and $5,600 during the nine months ended September 30, 2008 and 2007,
respectively. The increase in stock based compensation expense recorded period over period is due
to the reversal of approximately $31,500 in pre-tax expense in the third quarter of 2007 when, as
mentioned above, the Company determined that it was improbable that it would achieve the
performance related to the performance-based stock options outstanding.
12
NVR, Inc.
Notes to Condensed Consolidated Financial Statements
(dollars in thousands except per share data)
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, or sooner if an event occurs
or circumstances change that would more likely than not reduce the fair value of a reporting unit
below its carrying value. The Company completed the annual assessment of impairment during the
first quarter of 2008, and as of September 30, 2008, management believes 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 as a component of income tax expense. As of January
1, 2008, the Company had a total of $16,969 of accrued interest for unrecognized tax benefits on
its condensed consolidated balance sheet, which would decrease income tax expense if recognized.
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.
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 |
|
|
|
|
|
|
|
|
|
|
131,349 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
131,349 |
|
Deferred compensation activity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
141 |
|
|
|
(141 |
) |
|
|
|
|
Stock-based compensation |
|
|
|
|
|
|
29,716 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
29,716 |
|
Stock option activity |
|
|
|
|
|
|
44,108 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
44,108 |
|
Tax benefit from stock-based
compensation activity |
|
|
|
|
|
|
37,927 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
37,927 |
|
Treasury shares issued
upon option exercise |
|
|
|
|
|
|
(68,822 |
) |
|
|
|
|
|
|
68,822 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, September 30, 2008 |
|
$ |
206 |
|
|
$ |
706,560 |
|
|
$ |
3,661,344 |
|
|
$ |
(2,995,635 |
) |
|
$ |
(75,495 |
) |
|
$ |
75,495 |
|
|
$ |
1,372,475 |
|
|
|
|
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 346,000 options to purchase shares of the Companys common stock
were exercised during the nine months ended September 30, 2008.
13
NVR, Inc.
Notes to Condensed Consolidated Financial Statements
(dollars in thousands except per share data)
9. Product Warranties
The Company establishes warranty and product liability reserves to provide for estimated
future expenses as a result of construction and product defects, product recalls and litigation
incidental to NVRs homebuilding business. Liability estimates are determined based on
managements judgment, considering such factors as historical experience, the likely current cost
of corrective action, manufacturers and subcontractors participation in sharing the cost of
corrective action, consultations with third party experts such as engineers, and discussions with
our general counsel and outside counsel retained to handle specific product liability cases. The
following table reflects the changes in the Companys warranty reserve during the three and nine
months ended September 30, 2008 and 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
Warranty reserve, beginning of period |
|
$ |
69,750 |
|
|
$ |
66,774 |
|
|
$ |
70,284 |
|
|
$ |
70,175 |
|
Provision |
|
|
9,827 |
|
|
|
10,328 |
|
|
|
26,816 |
|
|
|
28,868 |
|
Payments |
|
|
(11,048 |
) |
|
|
(12,217 |
) |
|
|
(28,571 |
) |
|
|
(34,158 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Warranty reserve, end of period |
|
$ |
68,529 |
|
|
$ |
64,885 |
|
|
$ |
68,529 |
|
|
$ |
64,885 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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, which 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 generally 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.
14
NVR, Inc.
Notes to Condensed Consolidated Financial Statements
(dollars in thousands except per share data)
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.
Following are tables presenting revenues, segment profit and segment assets for each
reportable segment, with reconciliations to the amounts reported for the consolidated Company,
where applicable:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Homebuilding Mid Atlantic |
|
$ |
531,451 |
|
|
$ |
761,591 |
|
|
$ |
1,617,708 |
|
|
$ |
2,240,252 |
|
Homebuilding North East |
|
|
80,695 |
|
|
|
118,242 |
|
|
|
265,474 |
|
|
|
321,570 |
|
Homebuilding Mid East |
|
|
182,324 |
|
|
|
237,078 |
|
|
|
487,253 |
|
|
|
616,695 |
|
Homebuilding South East |
|
|
133,795 |
|
|
|
153,560 |
|
|
|
368,732 |
|
|
|
464,204 |
|
Mortgage Banking |
|
|
10,946 |
|
|
|
21,617 |
|
|
|
43,698 |
|
|
|
59,224 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated revenues |
|
$ |
939,211 |
|
|
$ |
1,292,088 |
|
|
$ |
2,782,865 |
|
|
$ |
3,701,945 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
Profit: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Homebuilding Mid Atlantic |
|
$ |
46,753 |
|
|
$ |
75,477 |
|
|
$ |
135,993 |
|
|
$ |
294,137 |
|
Homebuilding North East |
|
|
5,540 |
|
|
|
4,934 |
|
|
|
18,250 |
|
|
|
12,942 |
|
Homebuilding Mid East |
|
|
18,314 |
|
|
|
19,648 |
|
|
|
39,000 |
|
|
|
55,522 |
|
Homebuilding South East |
|
|
10,912 |
|
|
|
21,975 |
|
|
|
28,262 |
|
|
|
70,139 |
|
Mortgage Banking |
|
|
4,774 |
|
|
|
15,179 |
|
|
|
24,291 |
|
|
|
38,763 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment profit |
|
|
86,293 |
|
|
|
137,213 |
|
|
|
245,796 |
|
|
|
471,503 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contract land deposit impairments (1) |
|
|
(40,014 |
) |
|
|
(51,468 |
) |
|
|
(24,575 |
) |
|
|
(99,073 |
) |
Stock option expense (2) |
|
|
(11,284 |
) |
|
|
22,934 |
|
|
|
(29,716 |
) |
|
|
(5,575 |
) |
Corporate capital allocation (3) |
|
|
27,395 |
|
|
|
40,809 |
|
|
|
83,599 |
|
|
|
115,038 |
|
Unallocated corporate overhead |
|
|
(7,925 |
) |
|
|
(11,381 |
) |
|
|
(59,384 |
) |
|
|
(57,652 |
) |
Consolidation adjustments and other |
|
|
9,260 |
|
|
|
10,945 |
|
|
|
13,827 |
|
|
|
16,782 |
|
Corporate interest expense |
|
|
(3,118 |
) |
|
|
(3,238 |
) |
|
|
(9,348 |
) |
|
|
(9,500 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciling items sub-total |
|
|
(25,686 |
) |
|
|
8,601 |
|
|
|
(25,597 |
) |
|
|
(39,980 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated income before tax |
|
$ |
60,607 |
|
|
$ |
145,814 |
|
|
$ |
220,199 |
|
|
$ |
431,523 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
This item represents contract land deposit reserves which have not yet been charged to
the operating segments. |
|
(2) |
|
Stock option expense in the three and nine-month periods in 2007 includes the reversal
of approximately $31,500 related to contingently issuable shares. During the first quarter
of 2008 the Company adjusted the estimated forfeiture rate used in the calculation of stock
option expense. This resulted in a reversal of approximately $4,800 of stock option
expense in the first quarter of 2008. 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: |
15
NVR, Inc.
Notes to Condensed Consolidated Financial Statements
(dollars in thousands except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
Homebuilding Mid Atlantic |
|
$ |
18,334 |
|
|
$ |
28,635 |
|
|
$ |
56,044 |
|
|
$ |
80,137 |
|
Homebuilding North East |
|
|
2,346 |
|
|
|
3,745 |
|
|
|
7,795 |
|
|
|
11,348 |
|
Homebuilding Mid East |
|
|
3,339 |
|
|
|
4,752 |
|
|
|
9,897 |
|
|
|
13,262 |
|
Homebuilding South East |
|
|
3,376 |
|
|
|
3,677 |
|
|
|
9,863 |
|
|
|
10,291 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
27,395 |
|
|
$ |
40,809 |
|
|
$ |
83,599 |
|
|
$ |
115,038 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
|
2008 |
|
|
2007 |
|
Assets: |
|
|
|
|
|
|
|
|
Homebuilding Mid Atlantic |
|
$ |
602,473 |
|
|
$ |
968,858 |
|
Homebuilding North East |
|
|
79,328 |
|
|
|
120,310 |
|
Homebuilding Mid East |
|
|
117,467 |
|
|
|
165,897 |
|
Homebuilding South East |
|
|
100,727 |
|
|
|
151,093 |
|
Mortgage Banking |
|
|
124,473 |
|
|
|
145,655 |
|
|
|
|
|
|
|
|
Segment assets |
|
|
1,024,468 |
|
|
|
1,551,813 |
|
|
|
|
|
|
|
|
Assets not owned, consolidated
per FIN 46R |
|
|
127,074 |
|
|
|
203,782 |
|
Cash |
|
|
963,313 |
|
|
|
314,364 |
|
Deferred taxes |
|
|
214,456 |
|
|
|
199,765 |
|
Intangible assets |
|
|
60,634 |
|
|
|
60,743 |
|
Land reserve |
|
|
(145,294 |
) |
|
|
(153,735 |
) |
Consolidation adjustments and other |
|
|
63,501 |
|
|
|
69,942 |
|
|
|
|
|
|
|
|
Reconciling items sub-total |
|
|
1,283,684 |
|
|
|
694,861 |
|
|
|
|
|
|
|
|
Consolidated assets |
|
$ |
2,308,152 |
|
|
$ |
2,246,674 |
|
|
|
|
|
|
|
|
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 in the accompanying statements of income.
16
NVR, Inc.
Notes to Condensed Consolidated Financial Statements
(dollars in thousands except per share data)
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). |
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 approximately 53 basis
points to 283 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 nine months ended September 30, 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 |
|
$ |
204,264 |
|
|
$ |
(736 |
) |
|
$ |
353 |
|
|
$ |
3,378 |
|
|
$ |
|
|
|
$ |
2,995 |
|
Forward sales contracts |
|
|
373,267 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(527 |
) |
|
|
(527 |
) |
Mortgages held for sale |
|
|
111,241 |
|
|
|
(664 |
) |
|
|
(9 |
) |
|
|
2,095 |
|
|
|
|
|
|
|
1,422 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
$ |
(1,400 |
) |
|
$ |
344 |
|
|
$ |
5,473 |
|
|
$ |
(527 |
) |
|
$ |
3,890 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The resulting unrealized $3,890 gain in the nine-month period ended September 30, 2008
from the fair value measurement was primarily attributable to the inclusion of the value of
the servicing rights in the measurement 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 the Companys locked and closed loan pipeline increasing by 20% from
September 30, 2007 to September 30, 2008 as a result of a 180 day extended lock program
offered to homebuyers that was instituted during 2008.
17
NVR, Inc.
Notes to Condensed Consolidated Financial Statements
(dollars in thousands except per share data)
The fair value measurement will be impacted in the future by the change in volume and product mix
of the Companys locked loan commitments.
Prior to the adoption of SAB No. 109 and SFAS No. 157, the fair value measurement 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 No. 133 unrealized loss of $395 (pre-tax) in the
nine-month period ended September 30, 2007.
12. Debt
On August 5, 2008, NVR Mortgage Finance, Inc. (NVRM), a wholly owned subsidiary of NVR,
Inc., entered into a Master Repurchase Agreement with U.S. Bank National Association, as Agent and
representative of itself as a Buyer, and the other Buyers (the Repurchase Agreement). The
purpose of the Repurchase Agreement is to finance the origination of mortgage loans by NVRM. The
Repurchase Agreement provides for loan purchases up to $110 million, subject to certain sublimits.
In addition, the Repurchase Agreement provides for an accordion feature under which NVRM may
request that the aggregate commitments under the Repurchase Agreement be increased to an amount up
to $150 million. The Repurchase Agreement expires on August 4, 2009. The Repurchase Agreement
replaced NVRMs warehouse credit facility which was set to expire on August 21, 2008.
13. Commitments and Contingencies
On July 18, 2007, former and current 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, and where
available, multiple damages. The suits were filed as purported class actions. However, none of
the groups of employees that the lawsuits purport to represent have been certified as a class. The
lawsuits filed in Ohio, Pennsylvania, Maryland and New Jersey have been stayed pending further
developments in the New York action.
The Company believes that its compensation practices in regard to sales and marketing
representatives are entirely lawful and in compliance with two letter rulings from the United
States Department of Labor (DOL) issued in January 2007. The two courts to most recently
consider similar claims against other homebuilders have acknowledged the DOLs position that sales
and marketing representatives were properly classified as exempt from overtime wages and the only
court to have directly addressed the exempt status of such employees concluded that the DOLs
position was valid. Accordingly, the Company has vigorously defended and intends to continue to
vigorously defend these lawsuits. 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.
18
NVR, Inc.
Notes to Condensed Consolidated Financial Statements
(dollars in thousands except per share data)
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 as available
under the fair value option of SFAS No. 159.
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.
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 the adoption of FSP No. 157-2 to have a material impact on its
financial statements.
19
NVR, Inc.
Notes to Condensed Consolidated Financial Statements
(dollars in thousands except per share data)
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 will conform its disclosures to
the requirements of SFAS No. 161 upon adoption.
20
|
|
|
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 Form 10-Q.
Unless the context otherwise requires, references to NVR, we, us or our include NVR
and its subsidiaries.
Results of Operations for the Three and Nine Months Ended September 30, 2008 and 2007
Overview
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.
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.
21
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 September 30, 2008, we
controlled approximately 58,300 lots with deposits in cash and letters of credit totaling
approximately $280,000 and $6,600, respectively. Included in the number of controlled lots are
approximately 22,800 lots for which we have recorded a contract land deposit impairment reserve
of $145,300 as of September 30, 2008. See note 3 to the condensed consolidated financial
statements included herein for additional information regarding contract land deposits.
Current Overview of the Business Environment
The current home sales environment remains challenging, still characterized by relatively
higher levels of existing and new homes available for sale, driven by slowed demand and record
foreclosure rates. In addition, homebuyer confidence continues to be negatively impacted by
concerns regarding an economic recession, job stability and declining home prices in many of our
markets. The home sales environment also continues to be adversely impacted by a more
restrictive mortgage lending environment. The mortgage market changed significantly during 2007
and continues to change in 2008, due to the unprecedented turmoil in the credit markets. These
changes within the mortgage markets continue to make it difficult for our customers to obtain
mortgage financing. In response to these challenging market conditions, which continue to
negatively impact new orders and selling prices in each of our market segments, we continue to
offer incentives to homebuyers and to reduce prices in many of our markets. Overall, new orders
decreased 25% in the quarter ended September 30, 2008 compared to the same period in 2007 and
selling prices decreased 8% in these same respective periods. Our cancellation rate for the
third quarter of 2008 declined to 24% from 27% during the same period in 2007, but increased
from 19% in the second quarter of 2008.
Reflecting the challenging market conditions discussed above, for the quarter ended
September 30, 2008, consolidated revenues decreased approximately 27% from the same period in
2007. Additionally, net income and diluted earnings per share in the current quarter decreased
60%, respectively, compared to the third quarter of 2007. Gross profit margins within our
homebuilding business declined to 13.2% in the third quarter of 2008 compared to 14.4% in the
third quarter of 2007. Gross profit margins were negatively impacted by contract land deposit
impairment charges of approximately $42,800, or 461 basis points, in the third quarter of 2008,
and approximately $96,500, or 760 basis points, in the same period in 2007. Gross profit
margins excluding these impairments were 17.8% in the third quarter of 2008 compared to 22.0%
for the same period in 2007. This decline in gross profit margins excluding contract land
deposit impairment charges was due to continued pricing pressure in many of our markets.
Based on the current uncertainty in both the homebuilding and mortgage markets, we expect
to see continued pressure on new orders and selling prices, and in turn, continued pressure on
gross profit margins in future periods. To offset these declining selling prices and customer
affordability issues, we continue to work with our vendors to reduce material and labor costs
incurred in the construction process. In addition, we continue to focus on reducing lot costs
by working with our developers in many 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.
As mentioned above, we recorded a contract land deposit impairment charge of approximately
$42,800 during the third quarter of 2008, compared to approximately $96,500 in the third quarter
of 2007. Additionally, in response to continuing pricing pressures and customer affordability
issues, we are also providing homes 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.
22
Homebuilding Operations
The following table summarizes the results of operations and other data for the consolidated
homebuilding operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Nine Months Ended |
|
|
September 30, |
|
September 30, |
|
|
2008 |
|
2007 |
|
2008 |
|
2007 |
Revenues |
|
$ |
928,265 |
|
|
$ |
1,270,471 |
|
|
$ |
2,739,167 |
|
|
$ |
3,642,721 |
|
Cost of Sales |
|
$ |
805,931 |
|
|
$ |
1,087,399 |
|
|
$ |
2,305,231 |
|
|
$ |
3,002,746 |
|
Gross profit margin percentage |
|
|
13.2 |
% |
|
|
14.4 |
% |
|
|
15.8 |
% |
|
|
17.6 |
% |
Selling, general and administrative |
|
$ |
66,796 |
|
|
$ |
54,906 |
|
|
$ |
240,833 |
|
|
$ |
253,510 |
|
Settlements (units) |
|
|
2,750 |
|
|
|
3,476 |
|
|
|
7,965 |
|
|
|
9,639 |
|
Average settlement price |
|
$ |
337.1 |
|
|
$ |
365.1 |
|
|
$ |
343.5 |
|
|
$ |
377.5 |
|
New orders (units) |
|
|
2,002 |
|
|
|
2,660 |
|
|
|
7,403 |
|
|
|
10,322 |
|
Average new order price |
|
$ |
302.9 |
|
|
$ |
330.1 |
|
|
$ |
314.1 |
|
|
$ |
358.4 |
|
Backlog (units) |
|
|
|
|
|
|
|
|
|
|
4,583 |
|
|
|
7,071 |
|
Average backlog price |
|
|
|
|
|
|
|
|
|
$ |
327.3 |
|
|
$ |
381.2 |
|
Consolidated Homebuilding Three Months Ended September 30, 2008 and 2007
Homebuilding revenues decreased 27% for the third quarter of 2008 compared to the same period
in 2007 as a result of a 21% decrease in the number of units settled and a 8% decrease in the
average settlement price quarter over quarter. The decrease in the number of units settled is
primarily attributable to our beginning backlog units being approximately 32% lower at the start of
the third quarter of 2008 compared to the same period of 2007, offset partially by a higher backlog
turnover rate period over period. Average settlement prices were primarily impacted by a 13% lower
average price of homes in backlog entering the third quarter of 2008 compared to the same period in
2007.
Gross profit margins in the quarter ended September 30, 2008 declined compared to the third
quarter of 2007 despite lower contract land deposit impairment charges of approximately $42,800, or
461 basis points, in the third quarter of 2008 compared to approximately $96,500, or 760 basis
points, in the third quarter of 2007. The decline in gross profit margins was primarily driven by
continued pressure on selling prices. We expect continued gross profit margin pressure over at
least the next several quarters due to the current market conditions discussed above.
The number of new orders and the average selling price for new orders for the third quarter of
2008 decreased by 25% and 8%, respectively, compared to the third quarter of 2007. New orders were
negatively impacted by market conditions which remain challenging, as discussed in the Overview
above. New orders were also negatively impacted by a 16% reduction in our average number of
active communities in the third quarter of 2008 to 426 from 506 in the same period of 2007. The
decrease in the average number of active communities is a result of the termination of certain lot
purchase agreements and a reduced pace of entering into lot purchase agreements for new communities.
Selling, general and administrative (SG&A) expenses for the third quarter increased by
approximately $11,900, and as a percentage of revenue increased to 7.2% from 4.3% in the third
quarter of 2007. The increase in SG&A expenses is attributable to the reversal of $28,450 in
stock-based compensation costs in the third quarter of 2007. This reversal in the prior year third
quarter resulted from us determining in that period that it was improbable that the performance
metric to which certain of our outstanding stock options are subject would be achieved (see note 5
to the accompanying condensed consolidated financial
statements for additional discussion of stock option compensation expense). As a result,
stock-based compensation in the third quarter of 2008 was approximately $31,000 higher than during
the same period in 2007. This increase was partially offset by an approximate $10,800 decrease in
personnel costs due to lower staffing levels and an approximate $7,600 decrease in selling and
marketing costs period over period due to the previously mentioned 16% decrease in the average
number of active communities.
23
Consolidated Homebuilding Nine Months Ended September 30, 2008 and 2007
Homebuilding revenues decreased 25% for the nine months ended September 30, 2008 compared to
the same period in 2007 due to a 17% decrease in the number of units settled and a 9% decrease in
the average settlement price. The decrease in the number of units settled is primarily
attributable to our beginning backlog units being approximately 19% lower entering 2008 compared to
the backlog unit balance entering 2007. Average settlement prices were impacted primarily by a 10%
lower average price of homes in the beginning backlog entering 2008 compared to the same period in
2007.
Gross profit margins in the first nine months of 2008 declined compared to the first nine
months of 2007 despite lower contract land deposit impairment charges of approximately $55,200, or
202 basis points, in the 2008 period compared to approximately $163,800, or 450 basis points, in
the same period in 2007. The decline in gross profit margins was primarily driven by continued
pressure on selling prices as a result of the aforementioned challenging market conditions.
New orders for the nine months ended September 30, 2008 decreased by 28% compared to the same
period in 2007 and the average sales price of new orders decreased 12% over the same respective
periods. New order units and prices have been negatively impacted by the aforementioned
challenging market conditions. In addition, new order units have been negatively impacted by a 15%
reduction in the average number of active communities period over period to 437 in 2008 from 517 in
2007. We expect to continue to experience downward pressure on sales and selling prices over at
least the next several quarters in all of our market segments as the market remains challenging.
SG&A expenses for the nine-month period ended September 30, 2008 decreased approximately
$12,700 compared to the same period in 2007, and as a percentage of revenue increased to 8.8% in
2008 compared to 7.0% for the 2007 period. The decrease in SG&A expenses is primarily attributable
to a $20,000 decrease in selling and marketing costs in 2008 compared to the same period in 2007
due to previously mentioned 15% decrease in the average number of active communities year over
year. In addition, personnel costs were down approximately $11,200 as a result of lower staffing
levels period over period. These decreases were partially offset by an increase of approximately
$22,000 in stock based compensation expense in 2008 compared to 2007. This increase is
attributable to the previously mentioned reversal of $28,450 in stock-based compensation costs in
the third quarter of 2007. See note 5 to the accompanying condensed consolidated financial
statements for additional discussion of stock option compensation expense.
Backlog units and dollars were 4,583 and $1,499,830, respectively, as of September 30, 2008
compared to 7,071 and $2,695,591 as of September 30, 2007. The decrease in backlog units is
primarily attributable to our beginning backlog units being approximately 19% lower entering 2008
compared to the same period in 2007. In addition, backlog units have been negatively impacted by
the aforementioned decline in new orders in 2008 compared to 2007. Backlog dollars were negatively
impacted by the decrease in backlog units coupled with a 14% decrease in the average price of homes
in ending backlog, resulting primarily from a 11% decrease in the average selling price for new
orders over the six-month period ended September 30, 2008 compared to the same period in 2007.
24
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 generally 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 and nine months ended September 30, 2008 and 2007:
25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Nine Months Ended |
|
|
September 30, |
|
September 30, |
|
|
2008 |
|
2007 |
|
2008 |
|
2007 |
Mid Atlantic: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
531,450 |
|
|
$ |
761,591 |
|
|
$ |
1,617,708 |
|
|
$ |
2,240,252 |
|
Settlements (units) |
|
|
1,266 |
|
|
|
1,656 |
|
|
|
3,851 |
|
|
|
4,728 |
|
Average settlement price |
|
$ |
419.7 |
|
|
$ |
459.7 |
|
|
$ |
420.0 |
|
|
$ |
473.6 |
|
New orders (units) |
|
|
965 |
|
|
|
1,061 |
|
|
|
3,598 |
|
|
|
4,785 |
|
Average new order price |
|
$ |
364.2 |
|
|
$ |
408.1 |
|
|
$ |
376.2 |
|
|
$ |
448.9 |
|
Backlog (units) |
|
|
|
|
|
|
|
|
|
|
2,473 |
|
|
|
3,722 |
|
Average backlog price |
|
|
|
|
|
|
|
|
|
$ |
386.4 |
|
|
$ |
467.5 |
|
Gross profit margin |
|
$ |
90,973 |
|
|
$ |
139,904 |
|
|
$ |
274,226 |
|
|
$ |
481,474 |
|
Gross profit margin percentage |
|
|
17.1 |
% |
|
|
18.4 |
% |
|
|
17.0 |
% |
|
|
21.5 |
% |
Segment profit |
|
$ |
46,754 |
|
|
$ |
75,477 |
|
|
$ |
135,991 |
|
|
$ |
294,137 |
|
North East: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
80,696 |
|
|
$ |
118,242 |
|
|
$ |
265,474 |
|
|
$ |
321,570 |
|
Settlements (units) |
|
|
264 |
|
|
|
345 |
|
|
|
813 |
|
|
|
918 |
|
Average settlement price |
|
$ |
305.7 |
|
|
$ |
342.7 |
|
|
$ |
326.5 |
|
|
$ |
350.2 |
|
New orders (units) |
|
|
205 |
|
|
|
260 |
|
|
|
725 |
|
|
|
1,022 |
|
Average new order price |
|
$ |
301.6 |
|
|
$ |
330.9 |
|
|
$ |
302.7 |
|
|
$ |
339.4 |
|
Backlog (units) |
|
|
|
|
|
|
|
|
|
|
417 |
|
|
|
644 |
|
Average backlog price |
|
|
|
|
|
|
|
|
|
$ |
299.8 |
|
|
$ |
341.2 |
|
Gross profit margin |
|
$ |
13,171 |
|
|
$ |
15,947 |
|
|
$ |
42,129 |
|
|
$ |
46,993 |
|
Gross profit margin percentage |
|
|
16.3 |
% |
|
|
13.5 |
% |
|
|
15.9 |
% |
|
|
14.6 |
% |
Segment profit |
|
$ |
5,540 |
|
|
$ |
4,934 |
|
|
$ |
18,251 |
|
|
$ |
12,942 |
|
Mid East: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
182,323 |
|
|
$ |
237,078 |
|
|
$ |
487,253 |
|
|
$ |
616,695 |
|
Settlements (units) |
|
|
756 |
|
|
|
936 |
|
|
|
2,012 |
|
|
|
2,347 |
|
Average settlement price |
|
$ |
239.6 |
|
|
$ |
252.1 |
|
|
$ |
240.8 |
|
|
$ |
261.3 |
|
New orders (units) |
|
|
577 |
|
|
|
667 |
|
|
|
2,020 |
|
|
|
2,620 |
|
Average new order price |
|
$ |
223.5 |
|
|
$ |
240.5 |
|
|
$ |
232.1 |
|
|
$ |
248.6 |
|
Backlog (units) |
|
|
|
|
|
|
|
|
|
|
1,121 |
|
|
|
1,547 |
|
Average backlog price |
|
|
|
|
|
|
|
|
|
$ |
229.8 |
|
|
$ |
247.5 |
|
Gross profit margin |
|
$ |
33,712 |
|
|
$ |
39,296 |
|
|
$ |
85,239 |
|
|
$ |
111,467 |
|
Gross profit margin percentage |
|
|
18.5 |
% |
|
|
16.6 |
% |
|
|
17.5 |
% |
|
|
18.1 |
% |
Segment profit |
|
$ |
18,313 |
|
|
$ |
19,648 |
|
|
$ |
39,000 |
|
|
$ |
55,522 |
|
South East: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
133,796 |
|
|
$ |
153,560 |
|
|
$ |
368,732 |
|
|
$ |
464,204 |
|
Settlements (units) |
|
|
464 |
|
|
|
539 |
|
|
|
1,289 |
|
|
|
1,646 |
|
Average settlement price |
|
$ |
288.4 |
|
|
$ |
284.9 |
|
|
$ |
286.1 |
|
|
$ |
282.0 |
|
New orders (units) |
|
|
255 |
|
|
|
672 |
|
|
|
1,060 |
|
|
|
1,895 |
|
Average new order price |
|
$ |
251.9 |
|
|
$ |
295.7 |
|
|
$ |
267.1 |
|
|
$ |
291.8 |
|
Backlog (units) |
|
|
|
|
|
|
|
|
|
|
572 |
|
|
|
1,158 |
|
Average backlog price |
|
|
|
|
|
|
|
|
|
$ |
282.7 |
|
|
$ |
304.7 |
|
Gross profit margin |
|
$ |
22,691 |
|
|
$ |
36,173 |
|
|
$ |
65,138 |
|
|
$ |
109,396 |
|
Gross profit margin percentage |
|
|
17.0 |
% |
|
|
23.6 |
% |
|
|
17.7 |
% |
|
|
23.6 |
% |
Segment profit |
|
$ |
10,912 |
|
|
$ |
21,975 |
|
|
$ |
28,263 |
|
|
$ |
70,139 |
|
26
Mid Atlantic
Three Months Ended September 30, 2008 and 2007
The Mid Atlantic segment had an approximate $28,700 reduction in segment profit in the three
months ended September 30, 2008 compared to the same period in 2007. Revenues decreased
approximately $230,100, or 30%, for the three months ended September 30, 2008 from the same period
in the prior year due primarily to a 24% decrease in the number of units settled and a 9% decrease
in the average settlement price. The decrease in units settled is attributable to a 36% lower
backlog unit balance entering the third quarter of 2008 compared to the same period in 2007, offset
partially by a higher backlog turnover rate period over period. The Mid Atlantic segments gross
profit margin percentage for the third quarter of 2008 decreased to 17.1% from 18.4% in the same
period in 2007 despite lower land impairment charges of approximately $10,700, or 203 basis points,
in the third quarter of 2008 compared to approximately $34,500, or 453 basis points, for same
comparative period of 2007. Gross profit margins were negatively impacted by the increased
pressure on selling prices resulting in the aforementioned lower average settlement price in the
third quarter of 2008 compared to the third quarter of 2007.
Segment new orders for the third quarter of 2008 decreased 9% from the same period in 2007.
The segments average new order sales price decreased 11% in the third quarter of 2008 compared to
the same period of 2007. New orders and the average selling price for new orders have been
negatively impacted by market conditions which remain challenging, as discussed in the Overview
above. In addition, new orders were down in the third quarter of 2008 from the same period in 2007
as a result of a 14% decrease in the average number of active communities in the third quarter of
2008 compared to the same period in 2007.
Nine Months Ended September 30, 2008 and 2007
The Mid Atlantic segment had an approximate $158,100 decrease in segment profit in the nine
months ended September 30, 2008 compared to the same period in 2007. Revenues decreased
approximately $622,500, or 28%, for the nine months ended September 30, 2008 from the prior year
period on a 19% decrease in the number of units settled and a 11% decrease in the average
settlement price. The decrease in units settled is attributable to a 26% lower backlog unit
balance at the beginning of 2008 compared to the same period in 2007 and to a decline in new orders
year over year. The decrease in the average settlement price is primarily attributable to an 11%
lower average price of homes in the beginning backlog period over period. The segments gross
profit margin percentage fell to 17.0% in 2008 from 21.5% in 2007. Gross profit margins were
adversely affected by the downward pressure on selling prices which resulted in the aforementioned
11% decrease in the average settlement price. Gross profit margins were also negatively impacted
in each respective period by contract land deposit impairment charges of approximately $29,100, or
180 basis points, in 2008 compared to approximately $49,200, or 220 basis points, in 2007.
Segment new orders for the nine-month period ended September 30, 2008 decreased 25% from the
same period in 2007 and the segments average new order sales price decreased 16% period over
period. New orders and the average selling price for new orders have been negatively impacted by
market conditions which remain challenging, as discussed in the Overview above. Backlog units and
dollars decreased approximately 34% and 45%, respectively, year over year. The decrease in backlog
units is attributable to the beginning backlog units being approximately 26% lower entering 2008
compared to the same period in 2007. In addition, backlog units have been negatively impacted by
the aforementioned decline in new orders in 2008 compared to 2007. Backlog dollars were negatively
impacted by the decrease in backlog units and a 17% decrease in the average price of homes in
ending backlog, due primarily to a 15% decrease in the average selling price for new orders over
the six-month period ended September 30, 2008 compared to the same period in 2007.
27
North East
Three Months Ended September 30, 2008 and 2007
The North East segment had an approximate $600 increase in segment profit in the three months
ended September 30, 2008 compared to the same period in 2007, despite a decrease in revenues of
approximately $37,500, or 32%. Revenues declined as a result of a 24% decrease in the number of
units settled and an 11% decrease in the average settlement price. The decrease in units settled
is attributable to a 35% lower backlog unit balance entering the third quarter of 2008 compared to
the same period in 2007, offset partially by a higher backlog turnover rate quarter over quarter.
Average settlement prices were primarily impacted by a 12% lower average price of homes in backlog
entering the third quarter of 2008 compared to the same period in 2007. Gross profit margins
increased to 16.3% in 2008 from 13.5% in 2007 primarily as a result of lower contract land deposit
impairment charges of approximately $70, or 8 basis points, in the third quarter of 2008 compared
to approximately $4,200, or 358 basis points, in 2007.
Segment new orders and the average new order sales price for the third quarter of 2008
decreased 21% and 9%, respectively, from the same period in 2007, as a result of the aforementioned
challenging market conditions and continued pricing pressures in each market within this segment.
In addition, new orders were negatively impacted by a 30% reduction in the average number of active
communities within the North East segment in the third quarter of 2008 compared to the same period
in 2007.
Nine Months Ended September 30, 2008 and 2007
The North East segment had an approximate $5,300 increase in segment profit in the nine-month
period ended September 30, 2008 compared to the same period in 2007, despite a decrease in revenues
of approximately $56,100, or 17%, for the nine-month period ended September 30, 2008 from the prior
year period. Revenues declined due to an 11% decrease in the number of units settled and a 7%
decrease in the average settlement price period over period. The decrease in the number of units
settled and the average settlement price is primarily attributable to a 7% lower beginning backlog
balance and 6% lower average price of homes in beginning backlog period over period. In addition,
the number of units settled has been negatively impacted by a decline in new orders year over year.
Gross profit margins increased to 15.9% in the first nine months of 2008 from 14.6% in the same
period 2007 partially as a result of lower contract land deposit impairment charges of
approximately $3,400, or 128 basis points, in 2008 compared to approximately $5,600, or 175 basis
points, in 2007. The increase in segment profit is primarily attributable to the decrease in
contract land deposit impairment charges, cost control measures and reduced sales and marketing
costs due to a 23% reduction in the average number of active communities during 2008 compared to
the same period in 2007.
Segment new orders and the average new order sales price for the nine-month period ended
September 30, 2008, decreased 29% and 11%, respectively, from the same period in 2007 as a result
of market conditions which remain challenging, as discussed in the Overview above. In addition,
new orders were negatively impacted by the aforementioned decrease in the average number of active
communities within the North East segment. Backlog units and dollars decreased approximately 35%
and 43%, respectively, year over year. The decrease in backlog units is attributable to the
aforementioned decline in new orders in 2008 compared to 2007, in addition to a 7% lower beginning
backlog unit balance entering 2008 compared to the same period in 2007. Backlog dollars decreased
43% year over year due to the decrease in backlog units and to a 12% decrease in the average
selling price for new orders for the six-month period ended September 30, 2008 compared to the same
period in 2007.
Mid East
Three Months Ended September 30, 2008 and 2007
The Mid East segment had an approximate $1,300 decrease in segment profit quarter over
quarter. Revenues decreased approximately $54,800, or 23%, due to a 19% decrease in the number of
units settled and a 5% decrease in the average settlement price.
28
The decrease in units settled is attributable
to a 28% lower backlog unit balance entering the third quarter of 2008 compared to the same period
in 2007, offset partially by a higher backlog turnover rate period over period. The decrease in
the average settlement price is primarily attributable to a 6% lower average price of homes in
beginning backlog quarter over quarter. Gross profit margins increased to 18.5% in 2008 from 16.6%
in 2007 primarily as a result of lower contract land deposit impairment charges of approximately
$300, or 16 basis points, in the third quarter of 2008 compared to approximately $6,300, or 264
basis points, in 2007.
Segment new orders and the average new order sales price during the third quarter of 2008
decreased 14% and 7%, respectively, from the same period in 2007. The decrease in new orders was
attributable to market conditions which remain challenging, as discussed in the Overview above. In
addition, new orders were negatively impacted by a 12% decrease in the average number of active
communities in the third quarter of 2008 compared to the same period in 2007.
Nine Months Ended September 30, 2008 and 2007
The Mid East segment had an approximate $16,500 decrease in segment profit in the nine-month
period ended September 30, 2008 compared to the same period in 2007. Revenues decreased
approximately $129,400, or 21%, for the nine months ended September 30, 2008 from the same period
in 2007 due to a 14% decrease in the number of units settled and an 8% decrease in the average
settlement price period over period. The decrease in the number of units settled and the average
settlement price is primarily attributable to a 13% lower beginning backlog balance and 9% lower
average price of homes in beginning backlog period over period. In addition, the number of units
settled has been negatively impacted by a decline in new orders year over year. Gross profit
margins decreased to 17.5% in the first nine months of 2008 from 18.1% in the same period in 2007,
despite a decrease in contract land deposit impairment charges to $2,400, or 50 basis points, in
2008 from $9,700, or 158 basis points, in 2007. The decline in gross profit margins was primarily
driven by continued pressure on selling prices as a result of the aforementioned challenging market
conditions which resulted in an 8% decrease in the average settlement price year over year.
Segment new orders and the average new order sales price for the nine-month period ended
September 30, 2008, decreased 23% and 7%, respectively, from the same period in 2007. New orders
were negatively impacted by market conditions which remain challenging, as discussed in the
Overview above. In addition, new orders were negatively impacted by a 19% decrease in the average
number of active communities within the Mid East segment and by an increase in the cancellation
rate in the segment to 16% in 2008 from 14% in 2007. Backlog units and dollars decreased
approximately 28% and 33%, respectively, year over year. The decrease in backlog units is
attributable to the beginning backlog units being approximately 13% lower entering 2008
compared to the same period in 2007. In addition, backlog units have been negatively impacted by the
aforementioned decline in new orders in 2008 compared to 2007. The decrease in backlog dollars is
attributable to the decrease in backlog units and to a 6% decrease in the average selling price for
new orders for the six-month period ended September 30, 2008 compared to the same period in 2007.
South East
Three Months Ended September 30, 2008 and 2007
The South East segment had an approximate $11,100 decrease in segment profit quarter over
quarter. Revenues decreased approximately $19,800, or 13%, due to a 14% decrease in the number of
homes settled. The decrease in units settled is attributable to a 24% lower unit backlog entering
the third quarter of 2008 compared to the same period in 2007, offset partially by a higher backlog
turnover rate quarter over quarter. Gross profit margins decreased to 17.0% in the third quarter
of 2008 from 23.6% in the same period in 2007. Gross profit margins were negatively impacted by
the use of increased sales incentives and by higher average lot and operating costs per settled
unit.
29
Segment new orders and the average new order sales price for the third quarter of 2008 decreased
62% and 15%, respectively, from the same period in 2007. The decrease in new orders is
attributable to lower sales absorption on 11% lower average number of active communities quarter
over quarter. In addition, sales were negatively impacted by an increase in the cancellation rate
to 32% in the third quarter of 2008 from 19% in the same period of 2007. We expect further selling
and pricing pressures in the markets we serve in the South East segment as market conditions have
become increasingly more challenging and demand is falling.
Nine Months Ended September 30, 2008 and 2007
The South East segment had an approximate $41,900 decrease in segment profit in the nine-month
period ended September 30, 2008 compared to the same period in 2007. Revenues decreased
approximately $95,500, or 21%, for the nine months ended September 30, 2008 from the prior year
period due primarily to a 22% decrease in the number of units settled period over period. The
decrease in units settled is attributable to a 12% lower beginning backlog unit balance entering
2008 compared to the same period in 2007, and to a decline in new orders year over year. Gross
profit margins decreased to 17.7% in the first nine months of 2008 from 23.6% in the same period of
2007 as a result of the use of increased sales incentives and higher average lot and operating
costs per settled unit. In addition, gross profit margins were negatively impacted by higher
contract land deposit write-offs of approximately $4,700, or 127 basis points, in 2008 compared to
approximately $130, or 3 basis points, in 2007.
Segment new orders and the average new order sales price decreased 44% and 9%, respectively,
during the nine-month period ended September 30, 2008 compared to the same period in 2007. Market
conditions within the South East segment have continued to deteriorate throughout 2008. These
worsening market conditions have resulted in lower sales absorption rates within our active
communities and higher cancellation rates year over year. Cancellation rates in the overall
segment increased to 28% in 2008 from 17% in 2007. The 44% decrease in new orders for the first
nine months of 2008, coupled with a 12% lower beginning backlog balance entering 2008 compared to
2007, resulted in a 51% decrease in backlog units at September 30, 2008 compared to September 30,
2007. The decrease in backlog units has resulted in a 54% decline in backlog dollars year over
year.
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.
30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
Homebuilding Consolidated Gross Profit: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Homebuilding Mid Atlantic |
|
$ |
90,973 |
|
|
$ |
139,904 |
|
|
$ |
274,226 |
|
|
$ |
481,474 |
|
Homebuilding North East |
|
|
13,171 |
|
|
|
15,947 |
|
|
|
42,129 |
|
|
|
46,993 |
|
Homebuilding Mid East |
|
|
33,712 |
|
|
|
39,296 |
|
|
|
85,239 |
|
|
|
111,467 |
|
Homebuilding South East |
|
|
22,691 |
|
|
|
36,173 |
|
|
|
65,138 |
|
|
|
109,396 |
|
Consolidation adjustments and other (1) |
|
|
(38,213 |
) |
|
|
(48,248 |
) |
|
|
(32,796 |
) |
|
|
(109,355 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment gross profit |
|
$ |
122,334 |
|
|
$ |
183,072 |
|
|
$ |
433,936 |
|
|
$ |
639,975 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
Homebuilding Consolidated Profit
Before Tax: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Homebuilding Mid Atlantic |
|
$ |
46,753 |
|
|
$ |
75,477 |
|
|
$ |
135,993 |
|
|
$ |
294,137 |
|
Homebuilding North East |
|
|
5,540 |
|
|
|
4,934 |
|
|
|
18,250 |
|
|
|
12,942 |
|
Homebuilding Mid East |
|
|
18,314 |
|
|
|
19,648 |
|
|
|
39,000 |
|
|
|
55,522 |
|
Homebuilding South East |
|
|
10,912 |
|
|
|
21,975 |
|
|
|
28,262 |
|
|
|
70,139 |
|
Reconciling items: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contract land deposit impairments (1) |
|
|
(40,014 |
) |
|
|
(51,468 |
) |
|
|
(24,575 |
) |
|
|
(99,073 |
) |
Stock option expense (2) |
|
|
(10,582 |
) |
|
|
21,299 |
|
|
|
(27,895 |
) |
|
|
(5,440 |
) |
Corporate capital allocation (3) |
|
|
27,395 |
|
|
|
40,809 |
|
|
|
83,599 |
|
|
|
115,038 |
|
Unallocated corporate overhead |
|
|
(7,925 |
) |
|
|
(11,381 |
) |
|
|
(59,384 |
) |
|
|
(57,652 |
) |
Consolidation adjustments and other |
|
|
9,260 |
|
|
|
10,945 |
|
|
|
13,827 |
|
|
|
16,782 |
|
Corporate interest expense |
|
|
(3,118 |
) |
|
|
(3,238 |
) |
|
|
(9,348 |
) |
|
|
(9,500 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciling items sub-total |
|
|
(24,984 |
) |
|
|
6,966 |
|
|
|
(23,776 |
) |
|
|
(39,845 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Homebuilding consolidated
profit before taxes |
|
$ |
56,535 |
|
|
$ |
129,000 |
|
|
$ |
197,729 |
|
|
$ |
392,895 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
This line item includes contract land deposit reserves which have not yet been charged to
the operating segments. |
|
(2) |
|
Stock option expense in the three and nine-month periods in 2007 includes the reversal of
approximately $29,350 related to contingently issuable shares. In the third quarter of 2007, we
determined that it was improbable that we would achieve the performance metric related the
outstanding contingently issuable stock options, and as a result, we reversed all stock option
compensation expense recorded prior to the third quarter of 2007 related to contingently issued
shares. 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, we expect 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 we believe 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 a reversal of approximately $4,500 of stock
option expense in the first quarter of 2008. 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: |
31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
Homebuilding Mid Atlantic |
|
$ |
18,334 |
|
|
$ |
28,635 |
|
|
$ |
56,044 |
|
|
$ |
80,137 |
|
Homebuilding North East |
|
|
2,346 |
|
|
|
3,745 |
|
|
|
7,795 |
|
|
|
11,348 |
|
Homebuilding Mid East |
|
|
3,339 |
|
|
|
4,752 |
|
|
|
9,897 |
|
|
|
13,262 |
|
Homebuilding South East |
|
|
3,376 |
|
|
|
3,677 |
|
|
|
9,863 |
|
|
|
10,291 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
27,395 |
|
|
$ |
40,809 |
|
|
$ |
83,599 |
|
|
$ |
115,038 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage Banking Segment
Three and Nine Months Ended September 30, 2008 and 2007
We conduct our mortgage banking activity through NVR Mortgage Finance, Inc. (NVRM), a wholly
owned subsidiary. NVRM focuses exclusively on serving the homebuilding segments customer base.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
Loan closing volume: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total principal |
|
$ |
610,313 |
|
|
$ |
793,749 |
|
|
$ |
1,727,718 |
|
|
$ |
2,358,218 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustable rate mortgages |
|
|
8 |
% |
|
|
15 |
% |
|
|
5 |
% |
|
|
21 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed-rate mortgages |
|
|
92 |
% |
|
|
85 |
% |
|
|
95 |
% |
|
|
79 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Capture Rate |
|
|
86 |
% |
|
|
84 |
% |
|
|
84 |
% |
|
|
85 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating profit: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment profit |
|
$ |
4,774 |
|
|
$ |
15,179 |
|
|
$ |
24,291 |
|
|
$ |
38,763 |
|
Stock option expense |
|
|
(702 |
) |
|
|
1,635 |
|
|
|
(1,821 |
) |
|
|
(135 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage banking income
before tax |
|
$ |
4,072 |
|
|
$ |
16,814 |
|
|
$ |
22,470 |
|
|
$ |
38,628 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage banking fees: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net gain on sale of loans |
|
$ |
7,067 |
|
|
$ |
16,472 |
|
|
$ |
32,242 |
|
|
$ |
43,874 |
|
Title services |
|
|
3,781 |
|
|
|
5,046 |
|
|
|
10,997 |
|
|
|
14,959 |
|
Servicing |
|
|
98 |
|
|
|
99 |
|
|
|
459 |
|
|
|
391 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
10,946 |
|
|
$ |
21,617 |
|
|
$ |
43,698 |
|
|
$ |
59,224 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan closing volume for the three months ended September 30, 2008 decreased 23% from the same
period in 2007. The 2008 decrease is primarily attributable to a 17% decrease in the number of
units closed and an 8% decrease in the average loan amount. Loan closing volume for the nine
months ended September 30, 2008 decreased 27% from the same period in 2007. This decrease is
primarily attributable to an 18% decrease in the number of units closed and an 11% decrease in the
average loan amount. The unit decreases for the three and nine-month periods ended September 30,
2008 primarily reflect the aforementioned decreases in the number of homes that our homebuilding
segments settled compared to the same periods in 2007. The unit volume decrease for the three
months ended September 30, 2008 was slightly offset by the increase in the number of loans closed
by NVRM for our homebuyers who obtain a mortgage to purchase the home (Capture Rate). The
decrease in the average loan amount for the three and nine months ended September 30, 2008 reflects
the aforementioned decrease in the homebuilding segments average settlement prices.
32
Segment profit for the three months ended September 30, 2008 decreased approximately $10,400
from the same period for 2007. The decrease is primarily due to a net decrease in mortgage banking
fees attributable to the aforementioned decrease in closed loan volume, a reduction in fees charged
to borrowers to assist our selling efforts, and an approximate $4,100 decrease 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). The decrease in mortgage banking fees was partially offset by a 31 basis point increase in
fees received for servicing released premiums as a result of the product mix shift towards fixed
rate mortgages, partly driven by an increase in FHA fixed rate loan closings, which generally carry
a higher servicing release premium than other non-FHA loan products, and an increase in secondary
marketing fees.
Segment profit for the nine months ended September 30, 2008 decreased approximately $14,500
from the same period for 2007. The decrease is primarily due to a reduction in mortgage banking
fees caused
by the decrease in closing volume and a reduction in fees charged to borrowers to assist our
selling efforts. The decrease in mortgage banking fees was partially offset by a 32 basis point
increase in fees received for servicing released premiums as a result of the product mix shift
towards fixed rate and FHA mortgages, as noted above, and an approximate $3,900 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). Segment profit for the nine months ended September 30, 2008 was
favorably impacted by an approximate $2,100 decrease in general and administrative expenses. This
decrease was partially attributable to an approximate $2,400 decrease in salary and other personnel
costs due to a 19% reduction in staffing from the same period for 2007 and an approximate $900
decrease in loan loss charges for the same period in 2007.
The aforementioned fair value measurement unrealized loss of $4,100 for the three month period
ended September 30, 2008 and the $3,900 year to date unrealized gain from the fair value
measurement was the result of the implementation of Staff Accounting Bulleting 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 measurement 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 measurement, 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. In compliance with SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities, we recognized a net unrealized loss of $284
(pre-tax) during the three months ended September 30, 2007 and a net SFAS No. 133 unrealized loss
of $395 (pre-tax) during the nine months ended September 30, 2007. Each of the aforementioned fair
value calculations are classified as Level 2 observable inputs as defined in SFAS No. 157. The
resulting $3,900 unrealized gain for the nine month period ended September 30, 2008 from the fair
value measurement is primarily attributable to the inclusion of the value of the servicing rights
in the fair value measurement 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 and closed loan pipeline increasing by 20% at September 30, 2008 compared to September
30, 2007 as a result of a 180 day extended lock program offered to homebuyers that was instituted
during the first quarter of 2008. The $4,100 unrealized loss for the three month period ending
September 30, 2008 was the result of the principal volume of our locked and closed loan pipeline
decreasing by approximately 39% from June 30, 2008. The pipeline decrease was the result of the
phase out of the 180 day extended lock program for new sales contracts during the third quarter and
the majority of the existing locked loans under the 180 day extended lock program being closed and
sold during the three month period ending September 30, 2008. The aforementioned fair value
measurement will be impacted in the future by changes in volume and product mix of our locked loan
commitments.
For the three and nine-month periods ending September 30, 2008, stock option expense increased
by approximately $2,300 and $1,700, respectively. As noted above, this was due to a third quarter
2007 reversal of approximately $2,150 of pre-tax stock based compensation costs. This adjustment
was due to the determination that it was improbable that we would achieve the performance metric
related to certain outstanding stock options. There have been no additional adjustments for the
three and nine-month periods ending September 30, 2008.
33
NVRM is dependent on our homebuilding segments customers for business. As sales and selling
prices of the homebuilding segment decline, NVRMs operations will also be adversely affected. As
mentioned above, NVRM is reducing the fees charged to its borrowers 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 segments 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 with cash flows provided by our operating activities, short-term
credit facilities and the public debt and equity markets. For the nine months ended September
30, 2008, our operating activities provided cash of $215,560. Operating cash was primarily
provided by our homebuilding operations and a reduction in our homebuilding inventory of
$77,834. Operating cashflows for the year were reduced by the decrease in our customer deposits
of $32,198. The presentation of operating cash flows was also reduced by $37,927, which is the
amount of the excess tax benefit realized from the exercise of stock options during the period
and credited directly to additional paid in capital.
Net cash used in investing activities was $3,892 for the period ended September 30, 2008,
primarily for property and equipment purchases throughout the period.
Net cash provided by financing activities was $89,164 for the period ended September 30,
2008. Cash was provided by the receipt of $44,108 in proceeds from employee stock option
exercises and by the realization of $37,927 in excess income tax benefits from the exercise of
stock options, which pursuant to SFAS 123R, must be reported as a financing cash inflow. In
addition, during the nine months ended September 30, 2008, we increased net borrowings under the
mortgage warehouse facility, as replaced by the master repurchase agreement, by $7,129.
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 $14,689 was
outstanding at September 30, 2008. There were no direct borrowings outstanding under the
Facility as of September 30, 2008. At September 30, 2008, we were in compliance with all
covenants under the Facility and there were no borrowing base limitations reducing the amount
available to us for borrowings.
Our mortgage banking segment provides for its mortgage origination and other operating
activities using cash generated from operations as well as a revolving mortgage repurchase
facility. On August 5, 2008, NVRM entered into a Master Repurchase Agreement with U.S. Bank
National Association, as Agent and representative of itself as a Buyer, and the other Buyers (the
Repurchase Agreement). The Repurchase Agreement replaced NVRMs warehouse credit facility which
was set to expire on August 21, 2008. The Repurchase Agreement provides for loan purchases up to
$110 million, subject to certain sublimits. In addition, the Repurchase Agreement provides for an
accordion feature under which NVRM may request that the aggregate commitments under the Repurchase
Agreement be increased to an amount up to $150 million. The Repurchase Agreement is used to fund
NVRMs mortgage origination activities, under which $90,782 was outstanding at September 30, 2008.
As of September 30, 2008, there were no borrowing base limitations. The Repurchase Agreement
expires on August 4, 2009. Advances under the Repurchase Agreement carry a Pricing Rate based on
the Libor Rate plus the Libor Margin, as defined in the Repurchase Agreement, or at NVRMs option,
the Balance Funded Rate, as defined in the Repurchase Agreement. The Pricing Rate on outstanding
balances at September 30, 2008 was 5.5%. The Repurchase Agreement contains various affirmative and
negative covenants. The negative covenants include among others, certain limitations on
transactions involving acquisitions, mergers, the incurrence of debt, sale of assets and creation
of liens upon any of its Mortgage Notes.
34
Additional covenants include (i) a tangible net worth
requirement, (ii) a minimum tangible net worth ratio, (iii) a minimum net income requirement, and
(iv) a minimum liquidity requirement, all of which we were compliant with at September 30, 2008.
On September 8, 2008, NVR filed a shelf registration statement with the Securities and
Exchange Commission (SEC) to register for future offer and sale, an unlimited amount of debt
securities, common shares, preferred shares, depositary shares representing preferred shares
and warrants. This discussion of NVRs shelf registration capacity does not constitute an
offer of any securities for sale.
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. To date we have not repurchased any shares
of our common stock during 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
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.
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.
35
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 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 evaluated primarily 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 September 30, 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 September 30, 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.
36
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 September 30, 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.
Although we believe that the compensation costs recognized during the period ended
September 30, 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.
Item 3. Quantitative and Qualitative Disclosure About Market Risk
There have been no material changes in our market risks during the nine months ended
September 30, 2008. For additional information regarding market risk, see our Annual Report on
Form 10-K for the year ended December 31, 2007.
37
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 in the last fiscal quarter that have materially
affected, or are reasonably likely to materially affect, our internal controls over financial
reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
On July 18, 2007, former and current employees filed lawsuits against us 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 we incorrectly classified our sales and
marketing representatives as being exempt from overtime wages. These lawsuits are similar in
nature to another lawsuit filed on October 29, 2004 by another former employee in the United States
District Court for the Western District of New York. The complaints seek injunctive relief, an
award of unpaid wages, including fringe benefits, liquidated damages equal to the overtime wages
allegedly due and not paid, attorney and other fees and interest, and where available, multiple
damages. The suits were filed as purported class actions. However, none of the groups of
employees that the lawsuits purport to represent have been certified as a class. The lawsuits
filed in Ohio, Pennsylvania, Maryland and New Jersey have been stayed pending further developments
in the New York action.
We believe that our compensation practices in regard to sales and marketing representatives
are entirely lawful and in compliance with two letter rulings from the United States Department of
Labor (DOL) issued in January 2007. The two courts to most recently consider similar claims
against other homebuilders have acknowledged the DOLs position that sales and marketing
representatives were properly classified as exempt from overtime wages and the only court to have
directly addressed the exempt status of such employees concluded that the DOLs position was valid.
Accordingly, we have vigorously defended and intend to continue to vigorously defend these
lawsuits. Because we are unable to determine the likelihood of an unfavorable outcome of this
case, or the amount of damages, if any, we have not recorded any associated liabilities in the
accompanying condensed, consolidated balance sheet.
We are involved in various claims and litigation arising principally in the ordinary
course of business. At this time, we are not involved in any legal proceedings that we
believe are likely to have a material adverse effect on our financial condition or results of
operations.
Item 1A. Risk Factors
Our business is affected by the risks generally incident to the residential construction
business, including, but not limited to:
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actual and expected direction of interest rates, which affect our costs, the
availability of construction financing, and long-term financing for potential
purchasers of homes; |
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the availability of adequate land in desirable locations on favorable terms; |
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unexpected changes in customer preferences; and |
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changes in the national economy and in the local economies of the markets in which
we have operations. |
38
All of these risks are discussed in detail below.
The homebuilding industry is experiencing a significant downturn. The continuation of this
downturn could adversely affect our business and our results of operations.
The homebuilding industry has continued to experience a significant downturn as a result
of declining consumer confidence driven by economic recession fears, affordability issues and
uncertainty as to the stability of home prices. As a result, we have experienced reduced
demand for new homes. These market factors have also resulted in pricing pressures and in turn
lower gross profit margins in most of our markets. A continued downturn in the homebuilding
industry could result in a material adverse effect on our sales, profitability, stock
performance, ability to service our debt obligations and future cash flows.
If the market value of our inventory or controlled lot position declines, our profit could decrease
and we may incur losses.
Inventory risk can be substantial for homebuilders. The market value of building lots and
housing inventories can fluctuate significantly as a result of changing market conditions. In
addition, inventory carrying costs can be significant and can result in losses in a poorly
performing project or market. We must, in the ordinary course of our business, continuously
seek and make acquisitions of lots for expansion into new markets as well as for replacement
and expansion within our current markets, which is accomplished by us entering fixed price
purchase agreements and paying forfeitable deposits under the purchase agreement to developers
for the contractual right to acquire the lots. In the event of significant changes in economic
or market conditions, we may cease further building activities in communities or restructure
existing purchase agreements, resulting in forfeiture of some or all of any remaining land
contract deposit paid to the developer. We may also dispose of certain subdivision inventories
on a bulk or other basis. Either action may result in a loss which could have a material
adverse effect on our profitability, stock performance, ability to service our debt obligations
and future cash flows.
Because almost all of our customers require mortgage financing, the availability of suitable
mortgage financing could impair the affordability of our homes, lower demand for our products, and
limit our ability to fully deliver our backlog.
Our business and earnings depend on the ability of our potential customers to obtain
mortgages for the purchase of our homes. In addition, many of our potential customers must
sell their existing homes in order to buy a home from us. The tightening of credit standards
and the availability of suitable mortgage financing could prevent customers from buying our
homes and could prevent buyers of our customers homes from obtaining mortgages they need to
complete that purchase, both of which could result in our potential customers inability to buy
a home from us. If our potential customers or the buyers of our customers current homes are
not able to obtain suitable financing, the result could have a material adverse effect on our
sales, profitability, stock performance, ability to service our debt obligations and future
cash flows.
If our ability to sell mortgages to investors is impaired, we may be required to fund these
commitments ourselves, or may not be able to originate loans at all.
Our mortgage segment sells all of the loans it originates into the secondary market
usually within 30 days from the date of closing, and has up to approximately $110 million
available in an annually renewable warehouse repurchase facility to fund mortgage closings. In
the event that disruptions to the secondary markets similar to those which occurred during 2007
and 2008 continue to tighten or eliminate the available liquidity within the secondary markets
for mortgage loans, or the underwriting requirements by our secondary market investors continue
to become more stringent, our ability to sell future mortgages could decline and we could be
required, among other things, to fund our commitments to our buyers with our own financial
resources, which is limited, or require our home buyers to find another source of
financing.
39
In addition, government-sponsored enterprises, principally FNMA and FHLMC, play a
significant role in buying home mortgages and creating investment securities that they either
sell to investors or hold in their portfolios. These organizations provide liquidity to the
secondary mortgage market. The effects of the government takeover of FNMA and FHLMC are not yet
certain and may restrict or curtail their activities and further disrupt the secondary markets.
The result of such secondary market disruption could have a material adverse effect on our
sales, profitability, stock performance, ability to service our debt obligations and future
cash flows.
Interest rate movements, inflation and other economic factors can negatively impact our business.
High rates of inflation generally affect the homebuilding industry adversely because of
their adverse impact on interest rates. High interest rates not only increase the cost of
borrowed funds to homebuilders but also have a significant effect on housing demand and on the
affordability of permanent mortgage financing to prospective purchasers. We are also subject
to potential volatility in the price of commodities that impact costs of materials used in our
homebuilding business. Increases in prevailing interest rates could have a material adverse
effect on our sales, profitability, stock performance, ability to service our debt obligations
and future cash flows.
Our financial results also are affected by the risks generally incident to our mortgage
banking business, including interest rate levels, the impact of government regulation on
mortgage loan originations and servicing and the need to issue forward commitments to fund and
sell mortgage loans. Our homebuilding customers account for almost all of our mortgage banking
business. The volume of our continuing homebuilding operations therefore affects our mortgage
banking business.
Our mortgage banking business also is affected by interest rate fluctuations. We also may
experience marketing losses resulting from daily increases in interest rates to the extent we
are unable to match interest rates and amounts on loans we have committed to originate with
forward commitments from third parties to purchase such loans. Increases in interest rates may
have a material adverse effect on our mortgage banking revenue, profitability, stock
performance, ability to service our debt obligations and future cash flows.
Our operations may also be adversely affected by other economic factors within our markets
such as negative changes in employment levels, job growth, and consumer confidence and availability
of mortgage financing, one or all of which could result in reduced demand or price depression from
current levels. Such negative trends could have a material adverse effect on homebuilding
operations.
These factors and thus, the homebuilding business, have at times in the past been cyclical
in nature. Any downturn in the national economy or the local economies of the markets in which
we operate could have a material adverse effect on our sales, profitability, stock performance
and ability to service our debt obligations. In particular, approximately 34% of our home
settlements during 2008 occurred in the Washington, D.C. and Baltimore, MD metropolitan areas,
which accounted for 45% of our homebuilding revenues in 2008. Thus, we are dependent to a
significant extent on the economy and demand for housing in those areas.
Our inability to secure and control an adequate inventory of lots could adversely impact our
operations.
The results of our homebuilding operations are dependent upon our continuing ability to
control an adequate number of homebuilding lots in desirable locations. There can be no
assurance that an adequate supply of building lots will continue to be available to us on terms
similar to those available in the past, or that we will not be required to devote a greater
amount of capital to controlling building lots than we have historically. An insufficient
supply of building lots in one or more of our markets, an inability of our developers to
deliver finished lots in a timely fashion, or our inability to purchase or finance building
lots on reasonable terms could have a material adverse effect on our sales, profitability,
stock performance, ability to service our debt obligations and future cash flows.
40
Volatility in the credit and capital markets may impact our ability to access necessary
financing.
Our homebuilding operations are dependent in part on the availability and cost of working
capital financing, and may be adversely affected by a shortage or an increase in the cost of
such financing. If we require working capital greater than that provided by our operations and
our credit facility, we may be required to seek to increase the amount available under the
facility or to obtain alternative financing. No assurance can be given that additional or
replacement financing will be available on terms that are favorable or acceptable. Moreover,
issues involving liquidity and capital adequacy affecting our lenders could in turn affect our
ability to fully access our available credit. In addition, the credit and capital markets are
experiencing significant volatility that is difficult to predict. If we are required to seek
alternative financing to fund our working capital requirements, continued volatility in these
markets may restrict our flexibility to access financing. If we are at any time unsuccessful
in obtaining sufficient capital to fund our planned homebuilding expenditures, we may
experience a substantial delay in the completion of any homes then under construction. Any
delay could result in cost increases and could have a material adverse effect on our sales,
profitability, stock performance, ability to service our debt obligations and future cash
flows.
Our mortgage banking operations are dependent on the availability, cost and other terms of
mortgage financing facilities, and may be adversely affected by any shortage or increased cost
of such financing. No assurance can be given that any additional or replacement financing will
be available on terms that are favorable or acceptable. Our mortgage banking operations are
also dependent upon the securitization market for mortgage-backed securities, and could be
materially adversely affected by any fluctuation or downturn in such market.
Our current indebtedness may impact our future operations.
Our existing indebtedness contains financial and other restrictive covenants and any
future indebtedness may also contain covenants. These covenants include limitations on our
ability, and the ability of our subsidiaries, to incur additional indebtedness, pay cash
dividends and make distributions, make loans and investments, enter into transactions with
affiliates, effect certain asset sales, incur certain liens, merge or consolidate with any
other person, or transfer all or substantially all of our properties and assets. Substantial
losses by us or other action or inaction by us or our subsidiaries could result in the
violation of one or more of these covenants which could result in decreased liquidity or a
default on our indebtedness, thereby having a material adverse effect on our sales,
profitability, stock performance, ability to service our debt obligations and future cash
flows.
Government regulations and environmental matters could negatively affect our operations.
We are subject to various local, state and federal statutes, ordinances, rules and
regulations concerning zoning, building design, construction and similar matters, including
local regulations that impose restrictive zoning and density requirements in order to limit the
number of homes that can eventually be built within the boundaries of a particular area. We
have from time to time been subject to, and may also be subject in the future to, periodic
delays in our homebuilding projects due to building moratoriums in the areas in which we
operate. Changes in regulations that restrict homebuilding activities in one or more of our
principal markets could have a material adverse effect on our sales, profitability, stock
performance, ability to service our debt obligations and future cash flows.
We are also subject to a variety of local, state and federal statutes, ordinances, rules
and regulations concerning the protection of health and the environment. We are subject to a
variety of environmental conditions that can affect our business and our homebuilding projects.
The particular environmental laws that apply to any given homebuilding site vary greatly
according to the location and environmental condition of the site and the present and former
uses of the site and adjoining properties. Environmental laws and conditions may result in
delays, cause us to incur substantial compliance and other costs, or prohibit or severely
restrict homebuilding activity in certain environmentally sensitive regions or areas,
thereby adversely affecting our sales, profitability, stock performance, ability to service our
debt obligations and future cash flows.
41
We are an approved seller/servicer of FNMA, GNMA, FHLMC, FHA and VA mortgage loans, and
are subject to all of those agencies rules and regulations. Any significant impairment of our
eligibility to sell/service these loans could have a material adverse impact on our mortgage
operations. In addition, we are subject to regulation at the state and federal level with
respect to specific origination, selling and servicing practices. Adverse changes in
governmental regulation may have a negative impact on our mortgage loan origination business.
We face competition in our housing and mortgage banking operations.
The homebuilding industry is highly competitive. We compete with numerous homebuilders of
varying size, ranging from local to national in scope, some of whom have greater financial
resources than we do. We face competition:
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for suitable and desirable lots at acceptable prices; |
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from selling incentives offered by competing builders within and across
developments; and |
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from the existing home resale market. |
Our homebuilding operations compete primarily on the basis of price, location, design,
quality, service and reputation.
The mortgage banking industry is also competitive. Our main competition comes from
national, regional and local mortgage bankers, thrifts, banks and mortgage brokers in each of
these markets. Our mortgage banking operations compete primarily on the basis of customer
service, variety of products offered, interest rates offered, prices of ancillary services and
relative financing availability and costs.
There can be no assurance that we will continue to compete successfully in our homebuilding or
mortgage banking operations. An inability to effectively compete may have an adverse impact on our
sales, profitability, stock performance, ability to service our debt obligations and future cash
flows.
A shortage of building materials or labor, or increases in materials or labor costs may adversely
impact our operations.
The homebuilding business has from time to time experienced building material and labor
shortages, including shortages in insulation, drywall, certain carpentry work and concrete, as
well as fluctuating lumber prices and supply. In addition, high employment levels and strong
construction market conditions could restrict the labor force available to our subcontractors
and us in one or more of our markets. Significant increases in costs resulting from these
shortages, or delays in construction of homes, could have a material adverse effect upon our
sales, profitability, stock performance, ability to service our debt obligations and future
cash flows.
Product liability litigation and warranty claims may adversely impact our operations.
Construction defect and home warranty claims are common and can represent a substantial
risk for the homebuilding industry. The cost of insuring against construction defect and
product liability claims, as well as the claims themselves, can be high. In addition,
insurance companies limit coverage offered to protect against these claims. Further
restrictions on coverage available, or significant increases in premium costs or claims, could
have a material adverse effect on our financial results.
42
We are subject to litigation proceedings that could harm our business if an unfavorable ruling were
to occur.
From time to time, we may become involved in litigation and other legal proceedings relating
to claims arising from our operations in the normal course of business. In addition, as described
in Part II, Item 1, Legal Proceedings of this 10-Q, we are currently subject to certain legal
proceedings. Litigation is subject to inherent uncertainties, and unfavorable rulings may occur.
We cannot assure you that these or other litigation or legal proceedings will not materially affect
our ability to conduct our business in the manner that we expect or otherwise adversely affect us
should an unfavorable ruling occur.
Changes in tax laws or the interpretation of tax laws may negatively affect our operating results.
The effects of possible changes in the tax laws or changes in their interpretation could
have a material negative impact on our operating results.
Weather-related and other events beyond our control may adversely impact our operations.
Extreme weather or other events, such as hurricanes, tornadoes, earthquakes, forest
fires, floods, terrorist attacks or war, may affect our markets, our operations and our
profitability. These events may impact our physical facilities or those of our suppliers or
subcontractors, causing us material increases in costs, or delays in construction of homes,
which could have a material adverse effect upon our sales, profitability, stock performance,
ability to service our debt obligations and future cash flows.
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Item 2. |
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Unregistered Sales of Equity Securities and Use of Proceeds
(Dollars in thousands, except per share data) |
We had one repurchase authorization outstanding during the quarter ended September 30,
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 third
quarter of 2008. We have $226.3 million available under the July Authorization as of September
30, 2008.
Item 6. Exhibits
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(a) |
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Exhibits: |
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10.1 |
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Master Repurchase Agreement dated August 5, 2008 among U.S. Bank
National Association, as Agent and a Buyer, the other Buyers party hereto and
NVR Mortgage Finance, Inc., as Seller. Filed as Exhibit 10.1 to NVRs Form 8-K
filed August 8, 2008 and incorporated herein by reference. |
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31.1 |
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Certification of NVRs Chief Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002. |
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31.2 |
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Certification of NVRs Chief Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002. |
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32 |
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Certification of NVRs Chief Executive Officer and Chief
Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
43
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.
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November 3, 2008 |
NVR, Inc.
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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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44
Exhibit Index
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Exhibit |
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Number |
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Description |
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Page |
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10.1 |
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Master Repurchase Agreement dated August 5, 2008 among
U.S. Bank National Association, as Agent and a Buyer, the other Buyers party hereto and NVR Mortgage Finance, Inc.,
as Seller. Filed as Exhibit 10.1 to NVRs Form 8-K filed August 8, 2008 and incorporated herein by reference. |
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31.1 |
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Certification of NVRs Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
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46 |
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31.2 |
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Certification of NVRs Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
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47 |
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32 |
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Certification of NVRs Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002. |
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48 |
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45