NVR INC
10-Qs and 10-Ks
PROXIES
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
| þ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2009
OR
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED) |
For the transition period from
to
Commission file number 1-12378
NVR, Inc.
(Exact name of registrant as specified in its charter)
| Virginia | 54-1394360 | |
| (State or other jurisdiction of incorporation or organization) | (IRS employer identification number) |
|
11700 Plaza America Drive, Suite 500
Reston, Virginia |
20190 | |
| (Address of principal executive offices) | (Zip Code) |
Registrant’s telephone number, including area code: (703) 956-4000
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Name of each exchange on which registered | |
|
Common stock, par value $0.01 per share
5% Senior Notes due 2010 |
New York Stock Exchange
New York Stock Exchange |
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule
405 of the Securities Act. Yes
þ
No
o
Indicate by check mark if the registrant is not required to file reports pursuant to Section
13 or Section 15(d) of the Exchange Act. Yes
o
No
þ
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 has submitted electronically and posted on its
corporate Website, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (232.405 of this chapter) during the preceding 12
months (or for such shorter period that the registrant was required to submit and post such
files). Yes
o
No
o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation
S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge,
in definitive proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K.
þ
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 12-2 of the
Exchange Act. (Check One):
| Large accelerated filer þ | Accelerated filer o | Non-accelerated filer o (Do not check if a Smaller Reporting Company) | Smaller Reporting Company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Act). Yes
o
No
þ
The aggregate market value of the voting stock held by non-affiliates of NVR, Inc. on June 30,
2009, the last business day of NVR, Inc.’s most recently completed second fiscal quarter, was
approximately $2,752,200,000.
As of
February 24, 2010 there were 6,115,348 total shares of common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement of NVR, Inc. to be filed with the Securities and Exchange
Commission pursuant to Regulation 14A of the Securities Exchange Act of 1934 on or prior to
April 30, 2010 are incorporated by reference into Part III of this report.
INDEX
| Page | ||||||||
| PART I |
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|
|
||||||||
| Item 1. |
Business
|
2 | ||||||
| Item 1A. |
Risk Factors
|
6 | ||||||
| Item 1B. |
Unresolved Staff Comments
|
12 | ||||||
| Item 2. |
Properties
|
12 | ||||||
| Item 3. |
Legal Proceedings
|
12 | ||||||
| Item 4. |
Submission of Matters to a Vote of Security Holders
|
13 | ||||||
|
Executive Officers of the Registrant
|
13 | |||||||
|
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| PART II |
|
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| Item 5. |
Market for Registrants’ Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities
|
14 | ||||||
| Item 6. |
Selected Financial Data
|
15 | ||||||
| Item 7. |
Management’s Discussion and Analysis of Financial Condition and
Results of Operations
|
16 | ||||||
| Item 7A. |
Quantitative and Qualitative Disclosure About Market Risk
|
39 | ||||||
| Item 8. |
Financial Statements and Supplementary Data
|
41 | ||||||
| Item 9. |
Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
|
41 | ||||||
| Item 9A. |
Controls and Procedures
|
41 | ||||||
| Item 9B. |
Other Information
|
41 | ||||||
|
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| PART III |
|
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| Item 10. |
Directors, Executive Officers, and Corporate Governance
|
42 | ||||||
| Item 11. |
Executive Compensation
|
42 | ||||||
| Item 12. |
Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters
|
42 | ||||||
| Item 13. |
Certain Relationships and Related Transactions, and Director
Independence
|
43 | ||||||
| Item 14. |
Principal Accountant Fees and Services
|
43 | ||||||
|
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| PART IV |
|
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| Item 15. |
Exhibits and Financial Statement Schedules
|
43 | ||||||
| EX-10.28 | ||||||||
| EX-21 | ||||||||
| EX-23 | ||||||||
| EX-31.1 | ||||||||
| EX-31.2 | ||||||||
| EX-32 | ||||||||
1
Table of Contents
PART I
Item 1.
Business.
General
NVR, Inc. (“NVR”) was formed in 1980 as NVHomes, Inc. Our primary business is the
construction and sale of single-family detached homes, townhomes and condominium buildings. To
more fully serve customers of our homebuilding operations, we also operate a mortgage banking
and title services business. We conduct our homebuilding activities directly. Our mortgage
banking operations are operated primarily through a wholly owned subsidiary, NVR Mortgage
Finance, Inc. (“NVRM”). Unless the context otherwise requires, references to “NVR”, “we”, “us”
or “our” include NVR and its consolidated subsidiaries.
We are one of the largest homebuilders in the United States. While we operate in multiple
locations in fourteen states, primarily in the eastern part of the United States, approximately
38% of our home settlements in 2009 occurred in the Washington, D.C. and Baltimore, MD
metropolitan areas, which accounted for 48% of our 2009 homebuilding revenues. Our
homebuilding operations include the construction and sale of single-family detached homes,
townhomes and condominium buildings under four trade names: Ryan Homes, NVHomes, Fox Ridge
Homes and Rymarc Homes. The Ryan Homes, Fox Ridge Homes, and Rymarc Homes products are
marketed primarily to first-time homeowners and first-time move-up buyers. The Ryan Homes
product is currently sold in twenty-five metropolitan areas located in Maryland, Virginia, West
Virginia, Pennsylvania, New York, North Carolina, South Carolina, Ohio, New Jersey, Delaware,
Kentucky, Indiana and Florida. The Fox Ridge Homes product is sold solely in the Nashville, TN
metropolitan area and the Rymarc Homes product is sold solely in the Columbia, SC metropolitan
area. The NVHomes product is marketed primarily to move-up and upscale buyers and is sold in
the Washington, D.C., Baltimore, MD, Philadelphia, PA and the Maryland Eastern Shore
metropolitan areas. In 2009, our average price of a settled unit was approximately $296,000.
We do not engage in land development. Instead, we typically acquire finished building
lots at market prices from various development entities under fixed price purchase agreements
(“purchase agreements”) that require deposits that may be forfeited if we fail to perform under
the purchase agreement. The deposits required under the purchase agreements are in the form of
cash or letters of credit in varying amounts and represent a percentage, typically ranging up
to 10%, of the aggregate purchase price of the finished lots.
We believe that our lot acquisition strategy avoids the financial requirements and risks
associated with direct land ownership and land development. We may, at our option, choose for
any reason and at any time not to perform under these purchase agreements by delivering notice
of our intent not to acquire the finished lots under contract. Our 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 liquidating damage provision contained within the purchase
agreements. We do not have any financial guarantees or completion obligations and we typically
do not guarantee lot purchases on a specific performance basis under these purchase agreements.
We generally seek to maintain control over a supply of lots believed to be suitable to meet
our five-year business plan.
On a limited basis, we also obtain finished lots using joint venture limited liability
corporations (“LLCs”). All LLCs are typically structured such that we are a non-controlling member and
are at risk only for the amount we have invested. We are not a borrower, guarantor or obligor
on any of the LLCs debt. We enter into a standard fixed price purchase agreement to purchase
lots from these LLCs. At December 31, 2009, we had an aggregate investment totaling
approximately $25 million in ten separate LLCs. As of December 31, 2009, eight of these LLCs
were non-performing and as a result, we had recorded an impairment reserve equal to our total
investment of approximately $3 million in these LLCs due to our determination that our
investment was not recoverable. We do not expect to obtain any lots from these eight LLCs in
future periods. In the two performing LLCs, our aggregate investment totaled $22 million and
we controlled approximately 760 lots. At December 31, 2009, we had additional funding
commitments totaling $4 million to one of the two performing LLCs.
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In addition to building and selling homes, we provide a number of mortgage-related
services through our mortgage banking operations. Through operations in each of our
homebuilding markets, NVRM originates mortgage loans almost exclusively for our homebuyers.
NVRM generates revenues primarily from origination fees, gains on sales of loans and title
fees. NVRM sells all of the mortgage loans it closes into the secondary markets on a servicing
released basis.
Segment information for our homebuilding and mortgage banking businesses is included in
Note 2 in the accompanying consolidated financial statements.
Current Business Environment
During 2009, the homebuilding environment in certain markets began to exhibit some
stabilization after several years of declining sales and selling prices. Despite this
stabilization, the homebuilding market remains challenging and many market uncertainties remain
due to the continuing economic recession. Homebuyer confidence continues to be negatively
impacted by concerns regarding job stability driven by historically high unemployment rates.
Slowed demand and high foreclosure rates have contributed to high levels of existing and new
homes available for sale. The sales of new and existing homes also continue to be adversely
impacted by a tighter mortgage lending environment that has made it more difficult for our
customers to obtain mortgage financing. In addition, significant future uncertainties remain
as to certain of the government’s stimulus programs, which we believe helped to stabilize home
prices, as the federal tax credit for first time and move-up buyers and the Federal
Reserve’s purchases of mortgage-backed securities are expected to end in 2010. The termination
of those programs may lead to a decline in demand and higher mortgage interest rates. For
additional information and analysis of recent trends in our operations and financial condition,
see “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in
Item 7 of this Form 10-K.
Homebuilding
Products
We offer single-family detached homes, townhomes and condominium buildings with many
different basic home designs. These home designs have a variety of elevations and numerous
other options. Our homes combine traditional or colonial exterior designs with contemporary
interior designs and amenities, generally include two to four bedrooms and range from
approximately 1,000 to 7,300 square feet. During 2009, the prices at which we settled homes
ranged from approximately $56,000 to $2,000,000 and averaged approximately $296,000. During
2008, our average price was approximately $338,000.
Markets
Our four reportable homebuilding segments operate in the following geographic regions:
| Mid Atlantic: |
Maryland, Virginia, West Virginia and Delaware
|
|
| North East: |
New Jersey and eastern Pennsylvania
|
|
| Mid East: |
Kentucky, New York, Ohio, western Pennsylvania and Indiana
|
|
| South East: |
North Carolina, South Carolina, Florida and Tennessee
|
Further discussion of settlements, new orders and backlog activity by homebuilding
reportable segment for each of the last three years can be found in “Management’s Discussion
and Analysis of Financial Condition and Results of Operations” in Item 7 of this Form 10-K.
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Table of Contents
Backlog
Backlog totaled 3,531 units and approximately $1.1 billion at December 31, 2009 compared
to backlog of 3,164 units and approximately $1.0 billion at December 31, 2008. Backlog, which
represents homes sold but not yet settled with the customer, may be impacted by customer
cancellations for various reasons that are beyond our control, such as failure to obtain
mortgage financing, inability to sell an existing home, job loss, or a variety of other
reasons. In any period, a portion of the cancellations that we experience are related to new
sales that occurred during the same period, and a portion are related to sales that occurred in
prior periods and therefore appeared in the opening backlog for the current period. Expressed
as the total of all cancellations during the period as a percentage of gross sales during the
period, our cancellation rate was approximately 14%, 23% and 21% in 2009, 2008 and 2007,
respectively. During 2009 and 2008, approximately 7% and 10% of a reporting quarter’s opening
backlog cancelled during the fiscal quarter, respectively. We can provide no assurance that
our historical cancellation rates are indicative of the actual cancellation rate that may occur
in 2010. See “Risk Factors” in Item 1A.
Construction
We utilize independent subcontractors under fixed price contracts to perform construction
work on our homes. The subcontractors’ work is performed under the supervision of our
employees who monitor quality control. We use several independent subcontractors in our
various markets and we are not dependent on any single subcontractor or on a small number of
subcontractors.
Land Development
We do not engage in land development. Instead, we typically purchase finished lots from
various land developers under fixed price purchase agreements that require deposits that may be
forfeited if we fail 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 represent a
percentage, typically ranging up to 10%, of the aggregate purchase price of the finished lots.
We are not dependent on any single developer or on a small number of developers.
Sales and Marketing
Our preferred marketing method is for customers to visit a furnished model home featuring
many built-in options and a landscaped lot. The garages of these model homes are usually
converted into temporary sales centers where alternative facades and floor plans are displayed
and designs for other models are available for review. Sales representatives are compensated
predominantly on a commission basis.
Regulation
We and our subcontractors must comply with various federal, state and local zoning,
building, environmental, advertising and consumer credit statutes, rules and regulations, as
well as other regulations and requirements in connection with our construction and sales
activities. All of these regulations have increased the cost to produce and market our
products, and in some instances, have delayed our developers’ abilities to deliver us finished
lots. Counties and cities in which we build homes have at times declared moratoriums on the
issuance of building permits and imposed other restrictions in the areas in which sewage
treatment facilities and other public facilities do not reach minimum standards. To date,
restrictive zoning laws and the imposition of moratoriums have not had a material adverse
effect on our construction activities. However, in certain markets in which we operate, we
believe that our growth has been hampered by the longer time periods necessary for our
developers to obtain the necessary governmental approvals.
Competition and Market Factors
The housing industry is highly competitive. We compete with numerous homebuilders of
varying size, ranging from local to national in scope, some of which have greater financial
resources than we do. We
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Table of Contents
also face competition from the home resale market. Our homebuilding
operations compete primarily on the
basis of price, location, design, quality, service and reputation. Historically we have been
one of the market leaders in each of the markets where we build homes.
The housing industry is cyclical and is affected by consumer confidence levels,
prevailing economic conditions and interest rates. Other factors that affect the housing
industry and the demand for new homes include the availability and the cost of land, labor and
materials; changes in consumer preferences; demographic trends; and the availability of
mortgage finance programs. See “Risk Factors” in Item 1A.
We are dependent upon building material suppliers for a continuous flow of raw materials.
Whenever possible, we utilize standard products available from multiple sources. In the past,
such raw materials have been generally available to us in adequate supply.
Mortgage Banking
We provide a number of mortgage related services to our homebuilding customers through our
mortgage banking operations. Our mortgage banking operations also include separate
subsidiaries that broker title insurance and perform title searches in connection with mortgage
loan closings for which they receive commissions and fees. Because NVRM originates mortgage
loans almost exclusively for our homebuilding customers, NVRM is dependent on our homebuilding
segment. In 2009, NVRM closed approximately 8,000 loans with an aggregate principal amount of
approximately $2.1 billion as compared to 8,600 loans with an aggregate principal amount of
approximately $2.4 billion in 2008.
NVRM sells all of the mortgage loans it closes to investors in the secondary markets on a
servicing released basis, typically within 30 days from the loan closing. NVRM is an approved
seller/servicer for FNMA, GNMA, FHLMC, VA and FHA mortgage loans.
Competition and Market Factors
NVRM’s main competition comes from national, regional, and local mortgage bankers,
mortgage brokers, thrifts and banks in each of these markets. NVRM competes primarily on the
basis of customer service, variety of products offered, interest rates offered, prices of
ancillary services and relative financing availability and costs.
Regulation
NVRM is an approved seller/servicer of FNMA, GNMA, FHLMC, FHA and VA mortgage loans, and
is subject to all of those agencies’ rules and regulations. These rules and regulations
restrict certain activities of NVRM. NVRM is currently eligible and expects to remain
eligible to participate in such programs. In addition, NVRM is subject to regulation at the
state and federal level with respect to specific origination, selling and servicing practices.
Pipeline
NVRM’s mortgage loans in process that have not closed (“Pipeline”) at December 31, 2009
and 2008, had an aggregate principal balance of $770 million and $730 million, respectively.
Our cancellation rate was approximately 35% in 2009. During 2008 and 2007, NVRM’s loan
cancellation rates were approximately 49% and 45%, respectively. We can provide no assurance
that our historical loan cancellation rates are indicative of the actual loan cancellation
rate that may occur in 2010. See “Risk Factors” in Item 1A.
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Employees
At December 31, 2009, we employed 2,688 full-time persons, of whom 981 were officers and
management personnel, 170 were technical and construction personnel, 556 were sales personnel,
462 were administrative personnel and 519 were engaged in various other service and labor
activities. None of our
employees are subject to a collective bargaining agreement and we have never experienced a
work stoppage. We believe that our employee relations are good.
Available Information
We file annual, quarterly and current reports, proxy statements and other information
with the Securities and Exchange Commission (the “SEC”). These filings are available to the
public over the Internet at the SEC’s website at
http://www.sec.gov
. You may also read and
copy any document we file at the SEC’s public reference room located at 100 F Street, NE,
Washington, DC 20549. Please call the SEC at 1-800-SEC-0330 for further information on the
public reference room.
Our principal Internet website can be found at
http://www.nvrinc.com.
We make available
free of charge on or through our website, access to our annual report on Form 10-K, quarterly
reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports as soon as
reasonably practicable after such material is electronically filed, or furnished, to the SEC.
Our website also includes a corporate governance section which contains our Corporate
Governance Guidelines (which includes our Directors’ Independence Standards), Code of Ethics,
Board of Directors’ Committee Charters for the Audit, Compensation, Corporate Governance,
Nominating and Qualified Legal Compliance Committees, Policies and Procedures for the
Consideration of Board of Director Candidates, Policies and Procedures on Security Holder
Communications with the Board of Directors and the method by which interested parties may
contact our independent lead director or the non-management or independent directors as a
group. Additionally, amendments to and waivers from a provision of the Code of Ethics that
apply to our principal executive officer, principal financial officer, principal accounting
officer or persons performing similar functions will be disclosed on our website.
Item 1A.
Risk Factors.
Forward-Looking Statements
Some of the statements in this Form 10-K, 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, NVR’s 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 NVR’s 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; 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.
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Table of Contents
RISK FACTORS
Our business is affected by the risks generally incident to the residential construction
business, including, but not limited to:
| • | the availability of mortgage financing; | ||
| • | 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; | ||
| • | the availability of adequate land in desirable locations on favorable terms; | ||
| • | unexpected changes in customer preferences; and | ||
| • | changes in the national economy and in the local economies of the markets in which we have operations. |
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 an economic recession, affordability issues and
uncertainty as to the stability of home prices. Additionally, the tightening credit markets
have made it more difficult for customers to obtain financing to purchase homes. As a result,
we have experienced reduced demand for new homes. Our cancellation rate was approximately 14%,
23% and 21% during 2009, 2008 and 2007, respectively. These ongoing 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 (fewer gross sales and/or higher cancellation rates), 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 further adverse 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. 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.
If the tax credit available to first time homebuyers expires on July 1, 2010 and is not
renewed, it may negatively impact our future sales.
As part of the Federal government’s economic stimulus efforts, first time homebuyers may
receive an $8,000 tax credit and current homeowners purchasing a replacement primary residence
may receive a $6,500 tax credit when filing their Federal income tax return if they purchase
the primary residence by April 30, 2010 and settle on the home prior to July 1, 2010, which is
the date that the homebuyer tax credit program expires. It is unclear at this time if the
Federal government is going to extend or expand that program past July 1, 2010. This program
and the prior first time homebuyer tax credit program may have stimulated our sales over the
recent quarters to levels that would not have been achieved without the program being in
effect. Further, there is a possibility that the availability of the program to homebuyers
pulled sales forward from future
7
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quarters which could lead to reduced demand in the immediate
future. The expiration of the first time
homebuyer tax credit could result in a material adverse effect on our sales, 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 $100 million
available in a repurchase agreement 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. 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, as well as the Federal Reserve’s program to purchase
mortgage-backed securities, 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. In addition, the Federal Reserve is
expected to discontinue purchasing mortgage-backed securities in 2010. 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.
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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 38% of our home
settlements during 2009 occurred in the Washington, D.C. and Baltimore, MD metropolitan areas,
which accounted for 48% of our homebuilding revenues in 2009. 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 due to their inability to secure financing to fund
development activities or for other reasons, 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.
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 facilities. 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, or we may be unable to control or purchase finished building lots. 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.
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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. These
regulations may further increase the cost to produce and market our products. In addition, 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.
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 including the Real Estate
Settlement and Protection Act. 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:
| • | for suitable and desirable lots at acceptable prices; | ||
| • | from selling incentives offered by competing builders within and across developments; and | ||
| • | from the existing home resale market. |
Our homebuilding operations compete primarily on the basis of price, location, design,
quality, service and reputation.
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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 availability, or significant increases in premium costs or claims,
could have a material adverse effect on our financial results.
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. As described in, but not
limited to, Part I, Item 3, “Legal Proceedings” of this 10-K, 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 financial results.
Certain of our net deferred tax assets could be substantially limited if we experience an ownership
change as defined in the Internal Revenue Code.
Certain of our net deferred tax assets give rise to built-in losses (“BILs”). Our ability to
utilize BILs and to offset our future taxable income and/or to recover previously paid taxes would
be limited if we were to undergo an “ownership change” within the meaning of Section 382 of the
Internal Revenue Code, which we refer to as the Code. In general, an “ownership change” occurs
whenever the percentage of the stock of a corporation owned by “5-percent shareholders” (within the
meaning of Section 382 of the Code) increases by more than 50 percentage points over the lowest
percentage of the stock of such corporation owned by such “5-percent shareholders” at any time over
the preceding three years.
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An ownership change under Section 382 of the Code would establish an annual limitation on the
amount of BILs we could utilize to offset our taxable income in any single taxable year to an
amount equal to (i) the product of a specified rate, which is published by the U.S. Treasury, and
the aggregate value of our outstanding
stock plus (ii) the amount of unutilized limitation from prior years. The application of these
limitations might prevent full utilization of the deferred tax assets attributable to our BILs. We
do not believe we have experienced an ownership change as defined by Section 382 and, therefore, we
do not believe the BILs are subject to any Section 382 limitation. However, whether a change in
ownership occurs in the future is largely outside of our control, and there can be no assurance
that such a change will not occur.
|
Weather-related and other events beyond our control may adversely impact our operations.
|
Extreme weather or other events, such as significant snowfalls, 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.
Item 1B.
Unresolved Staff Comments.
None.
Item 2.
Properties.
Our corporate offices are located in Reston, Virginia, where we currently lease
approximately 61,000 square feet of office space, of which approximately 9,800 square feet we
have subleased to a third party. The current corporate office lease expires in April 2015.
In connection with the operation of the homebuilding segment, we lease manufacturing
facilities in the following six locations: Thurmont, Maryland; Burlington County, New Jersey;
Farmington, New York; Kings Mountain, North Carolina; Darlington, Pennsylvania; and Portland,
Tennessee. These facilities range in size from approximately 40,000 square feet to 400,000
square feet and combined total approximately 1,000,000 square feet of manufacturing space.
Each of these leases contains various options for extensions of the lease and for the purchase
of the facility. The Portland, Thurmont and Farmington leases expire in 2014, and the Kings
Mountain and Burlington County leases expire in 2023 and 2024, respectively. The Darlington
lease expires in 2025. Due to the economic downturn and the related decline in our
homebuilding activity, our current plant utilization has dropped to approximately 40% of total
capacity.
We also, in connection with both our homebuilding and mortgage banking businesses, lease
office space in multiple locations for homebuilding divisional offices and mortgage banking
and title services branches under leases expiring at various times through 2017, none of which
are individually material to our business. We anticipate that, upon expiration of existing
leases, we will be able to renew them or obtain comparable facilities on acceptable terms.
Item 3.
Legal Proceedings.
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, while a number of individuals have filed consents to join
and assert
12
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federal claims in the New York action, 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, New Jersey and North Carolina 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 DOL’s 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 DOL’s 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 consolidated balance
sheets.
NVR and its subsidiaries are also involved in various other litigation arising in the
ordinary course of business. In the opinion of management, and based on advice of legal
counsel, this litigation is not expected to have a material adverse effect on the financial
position or results of operations of NVR.
Item 4.
Submission of Matters to a Vote of Security Holders.
No matters were submitted to a vote of security holders during the quarter ended December
31, 2009.
Executive Officers of the Registrant
| Name | Age | Positions | ||
|
Dwight C. Schar
|
68 | Chairman of the Board of NVR | ||
|
Paul C. Saville
|
54 | President and Chief Executive Officer of NVR | ||
|
William J. Inman
|
62 | President of NVRM | ||
|
Dennis M. Seremet
|
54 | Senior Vice President, Chief Financial Officer and Treasurer of NVR | ||
|
Robert W. Henley
|
43 | Vice President and Controller of NVR |
Dwight C. Schar
relinquished the title of Executive Officer effective February 4, 2009,
but will continue to serve as Chairman of the Board. Mr. Schar’s revised role continues the
leadership transition that separated the roles of Chairman and CEO to strengthen the
operating and governance structure of the Company. Mr. Schar has been Chairman of the Board
since September 30, 1993. Mr. Schar also served as our President and Chief Executive
Officer from September 30, 1993 through June 30, 2005.
Paul C. Saville
was named President and Chief Executive Officer of NVR, effective July
1, 2005. Prior to July 1, 2005, Mr. Saville had served as Senior Vice President
Finance, Chief Financial Officer and Treasurer of NVR since September 30, 1993 and
Executive Vice President from January 1, 2002 through June 30, 2005.
William J. Inman
has been President of NVRM since January 1992. In January 2010, Mr.
Inman has announced his intention to retire after a period of transition to a
successor. This transition should be completed in the first quarter of 2010.
Dennis M. Seremet
was named Vice President, Chief Financial Officer and Treasurer of
NVR, effective July 1, 2005 and Senior Vice President effective December 14, 2007.
Prior to July 1, 2005, Mr. Seremet had been Vice President and Controller of NVR since
April 1, 1995.
Robert W. Henley
was named Vice President and Controller of NVR effective July 1, 2005.
From May 2000 to June 30, 2005, Mr. Henley was the Assistant Controller.
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PART II
| Item 5. | Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities. |
Our shares of common stock are listed and principally traded on the New York Stock
Exchange. The following table sets forth the high and low prices per share for our common
stock for each fiscal quarter during the years ended December 31, 2009 and 2008:
| HIGH | LOW | |||||||
|
Prices per Share:
|
||||||||
|
|
||||||||
|
2009
|
||||||||
|
Fourth Quarter
|
$ | 742.00 | $ | 607.00 | ||||
|
Third Quarter
|
$ | 698.28 | $ | 477.41 | ||||
|
Second Quarter
|
$ | 533.89 | $ | 416.24 | ||||
|
First Quarter
|
$ | 500.05 | $ | 310.69 | ||||
|
|
||||||||
|
2008
|
||||||||
|
Fourth Quarter
|
$ | 600.00 | $ | 316.82 | ||||
|
Third Quarter
|
$ | 639.80 | $ | 452.00 | ||||
|
Second Quarter
|
$ | 679.37 | $ | 498.00 | ||||
|
First Quarter
|
$ | 661.00 | $ | 436.20 | ||||
As
of the close of business on February 24, 2010, there were 383 shareholders of
record.
We have never paid a cash dividend on our shares of common stock. Our bank indebtedness
contains certain restrictive covenants, which limit our ability to pay cash dividends on our
common stock. For additional information, see the discussion of the restrictive covenants in
the Liquidity and Capital Resources discussion of Management’s Discussion and Analysis of
Financial Condition and Results of Operations, in Part II, Item 7 of the Form 10-K.
We had one repurchase authorization outstanding during the quarter ended December 31,
2009. 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 fourth
quarter of 2009. We have $226.3 million available under the July Authorization as of December
31, 2009.
Stock Performance Graph
COMPARISON OF CUMULATIVE TOTAL EQUITYHOLDER RETURN ON EQUITY
The following chart graphs our performance in the form of cumulative total return to
holders of our Common Stock since December 31, 2004 in comparison to the Dow/Home Construction
Index and the Dow Jones Industrial Index for that same period. The Dow/Home Construction Index
is comprised of NVR, Inc., Pulte Homes, Inc., DR Horton, Inc., Lennar Corp., Toll Brothers,
Inc., MDC Holdings, Inc., KB Home, Ryland Group, Inc., Meritage Homes Corp., Standard Pacific
Corp., Skyline Corp. and M/I Homes, Inc.
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Table of Contents
Assumes that $100 was invested in NVR stock and the indices on December 31, 2004.
| Item 6. | Selected Financial Data. |
(dollars in thousands, except per share amounts)
The following tables set forth selected consolidated financial data. The selected income
statement and balance sheet data have been derived from our consolidated financial statements
for each of the periods presented and is not necessarily indicative of results of future
operations. The selected financial data should be read in conjunction with, and is qualified
in its entirety by, the consolidated financial statements and related notes included elsewhere
in this report.
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| Year Ended December 31, | ||||||||||||||||||||
| 2009 | 2008 | 2007 | 2006 | 2005 | ||||||||||||||||
|
Consolidated Income Statement Data:
|
||||||||||||||||||||
|
Homebuilding data:
|
||||||||||||||||||||
|
Revenues
|
$ | 2,683,467 | $ | 3,638,702 | $ | 5,048,187 | $ | 6,036,236 | $ | 5,177,743 | ||||||||||
|
Gross profit
|
497,734 | 457,692 | 821,128 | 1,334,971 | 1,439,713 | |||||||||||||||
|
|
||||||||||||||||||||
|
Mortgage Banking data
:
|
||||||||||||||||||||
|
Mortgage banking fees
|
60,381 | 54,337 | 81,155 | 97,888 | 84,604 | |||||||||||||||
|
Interest income
|
2,979 | 3,955 | 4,900 | 7,704 | 5,014 | |||||||||||||||
|
Interest expense
|
1,184 | 754 | 681 | 2,805 | 1,759 | |||||||||||||||
|
|
||||||||||||||||||||
|
Consolidated data:
|
||||||||||||||||||||
|
Income from
continuing
operations (1)
|
$ | 192,180 | $ | 100,892 | $ | 333,955 | $ | 587,412 | $ | 697,559 | ||||||||||
|
Income from
continuing
operations per
diluted share (2)
|
$ | 31.26 | $ | 17.04 | $ | 54.14 | $ | 88.05 | $ | 89.61 | ||||||||||
| December 31, | ||||||||||||||||||||
| 2009 | 2008 | 2007 | 2006 | 2005 | ||||||||||||||||
|
Consolidated Balance Sheet Data:
|
||||||||||||||||||||
|
Homebuilding inventory
|
$ | 418,718 | $ | 400,570 | $ | 688,854 | $ | 733,616 | $ | 793,975 | ||||||||||
|
Contract land deposits, net
|
49,906 | 29,073 | 188,528 | 402,170 | 517,241 | |||||||||||||||
|
Total assets
|
2,395,770 | 2,103,236 | 2,194,416 | 2,473,808 | 2,237,669 | |||||||||||||||
|
Notes and loans payable
|
147,880 | 210,389 | 286,283 | 356,632 | 463,141 | |||||||||||||||
|
Shareholders’ equity
|
1,757,262 | 1,373,789 | 1,129,375 | 1,152,074 | 677,162 | |||||||||||||||
|
Cash dividends per share
|
— | — | — | — | — | |||||||||||||||
| (1) | Effective January 1, 2006, we adopted Statement of Financial Accounting Standards No. 123(R), Share-Based Payment, as codified in Accounting Standards Codification “ASC” 718, Compensation —Stock Compensation , pursuant to which we recognized $29,944, $31,560, $11,669 and $37,982 of stock-based compensation costs, net of tax, during 2009, 2008, 2007 and 2006, respectively. The 2007 stock-based compensation amount is net of approximately $19,200 of stock-based compensation expense, net of tax, that we reversed based on our determination that the performance metric related to certain outstanding stock options would not be met. As of December 31, 2008 the performance target was not met and all 348,490 outstanding options subject to the performance target expired unexercisable. The year ended December 31, 2005 does not include any stock-based compensation expense. | |
| (2) | For the years ended December 31, 2009, 2008, 2007, 2006 and 2005, income from continuing operations per diluted share was computed based on 6,148,769; 5,920,285; 6,167,795; 6,671,571; and 7,784,382 shares, respectively, which represents the weighted average number of shares and share equivalents outstanding for each year. |
| Item 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operations. |
(dollars in thousands, except per share data)
Results of Operations for the Years Ended December 31, 2009, 2008, and 2007
Overview
Business
Our primary business is the construction and sale of single-family detached homes, townhomes
and condominium buildings. To fully serve customers of our homebuilding operations, we also
operate a mortgage banking and title services business. We primarily conduct our operations in
mature markets. Additionally, we generally grow our business through market share gains in our
existing markets and by expanding into markets contiguous to our current active markets. Our
four homebuilding reportable segments consist of the following regions:
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|
|
Mid Atlantic: | Maryland, Virginia, West Virginia and Delaware | ||
|
|
North East: | New Jersey and eastern Pennsylvania | ||
|
|
Mid East: | Kentucky, New York, Ohio, Indiana and western Pennsylvania | ||
|
|
South East: | North Carolina, South Carolina, Tennessee and Florida |
We believe 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 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 we
believe contributes to minimizing the adverse effects of regional economic cycles and provides
growth opportunities within these markets.
Because we do not develop land, our continued success is contingent upon our ability to
control an adequate supply of finished lots on which to build, and on our developers’ ability to
timely deliver finished lots to meet the sales demands of our customers. We acquire finished
building lots at market prices from various land developers under purchase agreements. These
purchase agreements require deposits, typically ranging up to 10% of the aggregate purchase
price of the finished lots, 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 that this lot acquisition
strategy avoids the financial requirements and risks associated with direct land ownership and
development. As of December 31, 2009, we controlled approximately 46,300 lots with deposits in
cash and letters of credit totaling approximately $140,700 and $4,900, respectively. Included
in the number of controlled lots are approximately 10,800 lots for which we have recorded a
contract land deposit impairment reserve of approximately $89,500 as of December 31, 2009. See
Note 1 in the accompanying consolidated financial statements included herein for additional
information regarding contract land deposits.
Overview of Current Business Environment
During 2009, the homebuilding environment began to exhibit some stabilization after
several years of declining sales and selling prices. Despite this stabilization, the
homebuilding market remains challenging and many market uncertainties remain due to the
continuing economic recession. Homebuyer confidence continues to be negatively impacted by
concerns regarding job stability driven by historically high unemployment rates. Reduced
demand and high foreclosure rates have contributed to high levels of existing and new homes
available for sale. The sales of new and existing homes also continue to be adversely impacted
by a tighter mortgage lending environment that has made it more difficult for our customers to
obtain mortgage financing, as well as making it difficult to sell their current homes. In
addition, tighter lending requirements requiring higher downpayments have negatively impacted
affordability. Despite current market conditions and a decrease in the average number of
active communities year over year, new orders, net of cancellations (“new orders”) for 2009
increased 7% from the prior year. The increase in new orders was in part attributable to a 47%
increase in new orders in the fourth quarter of 2009 compared to the same period in 2008, a
period in which we experienced a significant drop-off in new orders due to a sharp decline in
overall economic conditions. In addition, we believe new orders during the current year were
also favorably impacted by the federal tax credit for first time homebuyers, as we experienced
an increase in the percentage of first time homebuyers, year over year. New orders were also
favorably impacted in 2009 by higher absorption rates in each of our market segments and by a
decline in our cancellation rate to 14% from 23% in 2008. New order selling prices continued
to be negatively impacted in most of our markets by the challenging market conditions leading
to a 6% decline in the average new order selling price in 2009 compared to 2008.
Consolidated revenues for 2009 decreased 26% to $2,743,848 from $3,693,039 in 2008. Net
income for 2009 was $192,180, $31.26 per diluted share, compared to net income of $100,892,
$17.04 per diluted share in 2008, a 90% increase in net income and an 83% increase in diluted
earnings per share. Gross profit margins within our homebuilding business increased to 18.5% in
2009 from 12.6% in 2008, as prior year gross profit margins were negatively impacted by a
$165,000 contract land deposit impairment charge.
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Over the last several years, due to the significant decline in new orders and selling
prices, we worked with our developers 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 were unsuccessful in negotiating necessary adjustments to the purchase
agreements to meet current market prices, we exited the community and forfeited our deposit
under the applicable purchase agreement. In addition, we also forfeited our deposits in
certain communities we did not exit in order to restructure the purchase agreement to current
market prices. During 2008, we incurred contract land deposit impairment charges of
approximately $165,000 from actual or expected terminations, or from restructured purchase
agreements where we forfeited, or determined we would forfeit, the deposit. In 2009, as the
result of market stabilization in several of our markets, we recognized a net recovery of
approximately $6,500 of contract land deposits previously considered to be uncollectible. As
noted above, as of December 31, 2009 we had a reserve of approximately $89,500 on outstanding
contract land deposits related to approximately 10,800 lots. These lots are included in the
total number of lots controlled mentioned above. In addition to controlling lot costs, we also
have worked aggressively with our subcontractors and suppliers to gain efficiencies and reduce
material and labor costs incurred in the construction process. We also continue to evaluate
and alter our product offerings where necessary to provide competitively priced homes.
We expect to continue to experience pressure on sales and selling prices over at least the
next several quarters in all of our market segments due to significant uncertainties in the
homebuilding market. Certain of the government’s stimulus programs which we believe helped to
stabilize home prices, such as the federal tax credit for first time and move-up buyers and the
Federal Reserve’s purchases of mortgage-backed securities, are expected to end in 2010, the
result of which may lead to a decline in demand and higher mortgage interest rates. Despite
these uncertainties, we believe that we are well positioned to take advantage of opportunities
that may arise due to the strength of our balance sheet and liquidity. As of December 31, 2009,
our cash and cash equivalents and marketable securities balances totaled approximately
$1,468,000. During 2009 we repurchased $29,950 of our senior notes, reducing the principal
amount of senior notes to $133,370. All of our outstanding senior notes are due in June of 2010.
Homebuilding Operations
The following table summarizes the results of our consolidated homebuilding operations and
certain operating activity for each of the last three years:
| Year Ended December 31, | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
|
Revenues
|
$ | 2,683,467 | $ | 3,638,702 | $ | 5,048,187 | ||||||
|
Cost of sales
|
$ | 2,185,733 | $ | 3,181,010 | $ | 4,227,059 | ||||||
|
Gross profit margin percentage
|
18.5 | % | 12.6 | % | 16.3 | % | ||||||
|
Selling, general and administrative expenses
|
$ | 233,152 | $ | 308,739 | $ | 343,520 | ||||||
|
Settlements (units)
|
9,042 | 10,741 | 13,513 | |||||||||
|
Average settlement price
|
$ | 296.4 | $ | 338.4 | $ | 373.2 | ||||||
|
New orders (units)
|
9,409 | 8,760 | 12,270 | |||||||||
|
Average new order price
|
$ | 292.7 | $ | 311.3 | $ | 352.0 | ||||||
|
Backlog (units)
|
3,531 | 3,164 | 5,145 | |||||||||
|
Average backlog price
|
$ | 304.9 | $ | 316.9 | $ | 371.3 | ||||||
Consolidated Homebuilding Revenues
Homebuilding revenues for 2009 decreased 26% from 2008, as a result of a 16%, or 1,699 unit,
decrease in the number of homes settled and a 12% decrease in the average settlement price. The
decrease in the number of units settled was primarily attributable to our beginning backlog units
being approximately 39%, or 1,981
18
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units, lower entering 2009 compared to the backlog unit balance entering 2008, offset partially by a higher backlog turnover rate period over period. Average
settlement prices were impacted primarily by a 15% lower average price of homes in the beginning
backlog entering 2009 compared to the same period in 2008, coupled with a 9% decline in the average
sales price of new orders for the first six months of 2009 as compared to the same period in 2008.
Homebuilding revenues for 2008 decreased 28% from 2007, primarily as a result of a 21%
decrease in the number of homes settled and a 9% decrease in the average settlement price.
The decrease in the number of units settled was primarily attributable to our beginning
backlog units being approximately 19% lower entering 2008 compared to the beginning backlog
units entering 2007 and lower new orders year over year. 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 and also by lower average sales prices for new orders
in 2008 compared to 2007.
Consolidated Homebuilding New Orders
New orders in 2009 increased by 7% compared to 2008, while the average sales price of new
orders decreased 6% year over year. As mentioned above in the Overview section, the increase in
new orders in the current year was in part attributable to a 47% increase in new orders in the
fourth quarter of 2009 compared to the same period in 2008, a period in which we experienced a
significant drop-off in new orders due to a sharp decline in overall economic conditions. In
addition, new orders in 2009 were favorably impacted by higher absorption rates, offsetting the 17%
decrease in the average number of active communities year over year. We believe new orders in the
current year were also favorably impacted by the federal tax credit for first-time homebuyers as
well as by a decrease in the cancellation rate to 14% in 2009 from 23% in 2008. To meet
affordability issues in many of our markets, we have altered our product offerings to provide
smaller, lower priced products.
New orders and the average sales price of new orders decreased 29% and 12%, respectively
in 2008 compared to 2007. Both the number of new orders and the average selling prices were
negatively impacted by the continued deterioration in market conditions in 2008 from the prior
year. New orders were also negatively impacted by a 16% decrease in the average number of
active communities year over year to 427 in 2008 from 505 in 2007 and a reduction in traffic
per community, year over year.
Consolidated Homebuilding Gross Profit
Gross profit margins in 2009 improved to 18.5% compared to 12.6% in 2008 primarily due to a
favorable variance in contract land deposit impairment charges year over year. In 2009 we
recognized the recovery of approximately $6,500, or 24 basis points, of contract land deposits
previously determined to be uncollectible. In 2008 we recognized a contract land deposit
impairment charge of approximately $165,000, or 454 basis points. Gross profit margins in 2009
were also favorably impacted as a result of us exiting a significant number of poor performing
communities in 2008 which were producing lower gross profit margins. In addition, gross profit
margins in 2009 were favorably impacted by lower lumber and certain other commodity costs as well
as by cost control measures implemented to reduce subcontractor and material costs in prior
periods. We expect to experience continued fluctuations in gross profit margins due to the
aforementioned economic uncertainties still prevalent in the market.
Gross profit margins in 2008 declined to 12.6% compared to 16.3% in 2007 despite lower
contract land deposit impairment charges in 2008 of approximately $165,000, or 454 basis
points, compared to approximately $261,800, or 519 basis points in 2007. The decline in gross
profit margins was primarily driven by continued pressure on selling prices as a result of
challenging market conditions including a decline in demand due to low consumer confidence
levels and deteriorating credit markets.
19
Table of Contents
Consolidated Homebuilding Selling, General and Administrative (“SG&A”)
SG&A expenses in 2009 decreased approximately $75,600 compared to 2008, but increased slightly
as a percentage of revenue to 8.7% in 2009 from 8.5% in 2008. The decrease in SG&A expenses was
primarily attributable to a $36,300 decrease in selling and marketing costs in 2009 compared to
2008 due to a 17% decrease in the average number of active communities year over year to 355 in
2009 from 427 in 2008. In addition, personnel costs were down approximately $26,900 due primarily
to 24% decrease in average staffing levels year over year.
SG&A expenses in 2008 decreased approximately $34,800, or 10%, from 2007, but increased
as a percentage of revenue to 8.5% in 2008 from 6.8% in 2007. The decrease in SG&A expenses
was attributable to a decrease in selling and marketing costs of approximately $31,000 related
to the previously mentioned 16% reduction in the average number of active communities in 2008
compared to 2007. In addition, personnel costs decreased approximately $20,000 as a result of
lower staffing levels and lower management incentive costs year over year. These declines
were offset partially by an increase of approximately $24,600 in stock-based compensation
expense in 2008 compared to 2007. This increase was attributable to the reversal of
approximately $28,450 in SG&A classified stock-based compensation costs in the third quarter
of 2007 related to approximately 400,000 outstanding stock options which were subject to a
performance metric which we determined in 2007 would not be achieved.
Consolidated Homebuilding Backlog
Backlog units and dollars were 3,531 and $1,076,437, respectively, as of December 31, 2009
compared to 3,164 and $1,002,795 as of December 31, 2008. Net new order and settlement
activity during 2009 resulted in the increase in backlog units year over year. The 7% increase
in backlog dollars was primarily attributable to the 12% increase in backlog units offset
partially by a 4% decrease in the average price of homes in ending backlog.
Backlog, which represents homes sold but not yet settled with the customer, may be
impacted by customer cancellations for various reasons that are beyond our control, such as
failure to obtain mortgage financing, inability to sell an existing home, job loss, or a
variety of other reasons. In any period, a portion of the cancellations that we experience are
related to new sales that occurred during the same period, and a portion are related to sales
that occurred in prior periods and therefore appeared in the opening backlog for the current
period. Expressed as the total of all cancellations during the period as a percentage of gross
sales during the period, our cancellation rate was approximately 14%, 23% and 21% in 2009, 2008
and 2007, respectively. During 2009 and 2008, approximately 7% and 10% of a reporting
quarter’s opening backlog cancelled during the fiscal quarter, respectively. We can provide no
assurance that our historical cancellation rates are indicative of the actual cancellation rate
that may occur in 2010. See “Risk Factors” in Item 1A of this Report.
Backlog units and dollars were 3,164 and $1,002,795, respectively, as of December 31, 2008
compared to 5,145 and $1,910,504 as of December 31, 2007. The 39% decrease in backlog units
was attributable to our beginning backlog units being approximately 19% lower entering 2008
compared to the same period in 2007. In addition, backlog units were negatively impacted by
the aforementioned 29% decline in new orders year over year. Backlog dollars were negatively
impacted by the decrease in backlog units coupled with a 15% decrease in the average price of
homes in ending backlog, resulting primarily from an 8% decrease in the average selling price
for new orders over the six-month period ended December 31, 2008 compared to the same period in
2007.
Consolidated Homebuilding — Other Charges
We reassessed our goodwill and intangible asset balances for impairment in the fourth quarter
of 2008, as a result of the continuing declines in new orders and backlog as discussed above and
the continuing deterioration of the homebuilding environment in each of our markets spurred further
in 2008 by the credit crisis in the latter part of 2008. As a result of this assessment, it was
determined that the goodwill and intangible assets related to our Rymarc Homes and Fox Ridge Homes
operations were fully impaired and we wrote-off a total of $11,686 related to such assets in 2008. We completed the annual assessment of the intangible asset
balance in 2009 and
20
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determined that there was no impairment. See Note 1 in the accompanying consolidated financial statements included herein for further discussion of intangible assets.
Reportable Homebuilding Segments
Homebuilding profit before tax includes all revenues and income generated from the sale
of homes, less the cost of homes sold, SG&A expenses, and a corporate capital allocation
charge determined at the corporate headquarters. The corporate capital allocation charge
eliminates in consolidation, is based on the segment’s 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 segment’s 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. We evaluate
our entire net contract land deposit portfolio for impairment each quarter. For additional
information regarding our contract land deposit impairment analysis, see the
Critical
Accounting Policies
section within this Management Discussion and Analysis. For presentation
purposes below, the contract land deposit reserve at December 31, 2009, 2008 and 2007,
respectively, has been allocated to the reportable segments to show contract land deposits on
a net basis. The net contract land deposit balances below also includes $4,900, $5,400 and
$9,000 at December 31, 2009, 2008 and 2007, respectively, of letters of credit issued as
deposits in lieu of cash. The following tables summarize certain homebuilding operating
activity by reportable segment for each of the last three years:
21
Table of Contents
| Year Ended December 31, | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
|
Mid Atlantic:
|
||||||||||||
|
Revenues
|
$ | 1,661,244 | $ | 2,161,764 | $ | 3,099,053 | ||||||
|
Settlements (units)
|
4,722 | 5,240 | 6,634 | |||||||||
|
Average settlement price
|
$ | 351.8 | $ | 412.5 | $ | 467.0 | ||||||
|
New Orders (units)
|
4,809 | 4,290 | 5,695 | |||||||||
|
Average new order price
|
$ | 347.4 | $ | 373.4 | $ | 436.5 | ||||||
|
Backlog (units)
|
1,863 | 1,776 | 2,726 | |||||||||
|
Average backlog price
|
$ | 359.0 | $ | 371.3 | $ | 447.2 | ||||||
|
Gross profit margin
|
$ | 307,525 | $ | 294,699 | $ | 547,753 | ||||||
|
Gross profit margin percentage
|
18.51 | % | 13.63 | % | 17.67 | % | ||||||
|
Segment profit
|
$ | 185,861 | $ | 103,690 | $ | 291,012 | ||||||
|
New order cancellation rate
|
14.40 | % | 24.40 | % | 25.20 | % | ||||||
|
Inventory:
|
||||||||||||
|
Sold inventory
|
$ | 219,885 | $ | 215,587 | $ | 369,025 | ||||||
|
Unsold lots and housing units
|
$ | 47,120 | $ | 30,370 | $ | 81,752 | ||||||
|
Unsold inventory impairments
|
$ | 1,286 | $ | 1,163 | $ | 2,143 | ||||||
|
Contract land deposits, net
|
$ | 36,643 | $ | 14,808 | $ | 91,290 | ||||||
|
Total lots controlled
|
26,938 | 23,711 | 36,102 | |||||||||
|
Total lots reserved
|
6,575 | 7,565 | 8,970 | |||||||||
|
Contract land deposit impairments
|
$ | 18,425 | $ | 81,834 | $ | 153,601 | ||||||
|
Average active communities
|
168 | 205 | 242 | |||||||||
|
|
||||||||||||
|
North East:
|
||||||||||||
|
Revenues
|
$ | 254,654 | $ | 347,142 | $ | 433,631 | ||||||
|
Settlements (units)
|
882 | 1,086 | 1,247 | |||||||||
|
Average settlement price
|
$ | 288.7 | $ | 319.7 | $ | 347.7 | ||||||
|
New Orders (units)
|
904 | 884 | 1,212 | |||||||||
|
Average new order price
|
$ | 293.5 | $ | 298.5 | $ | 338.7 | ||||||
|
Backlog (units)
|
325 | 303 | 505 | |||||||||
|
Average backlog price
|
$ | 302.8 | $ | 288.8 | $ | 338.8 | ||||||
|
Gross profit margin
|
$ | 42,282 | $ | 46,607 | $ | 57,860 | ||||||
|
Gross profit margin percentage
|
16.60 | % | 13.43 | % | 13.34 | % | ||||||
|
Segment profit
|
$ | 19,572 | $ | 13,182 | $ | 11,176 | ||||||
|
New order cancellation rate
|
14.50 | % | 19.70 | % | 19.00 | % | ||||||
|
Inventory:
|
||||||||||||
|
Sold inventory
|
$ | 36,315 | $ | 31,321 | $ | 55,441 | ||||||
|
Unsold lots and housing units
|
$ | 4,152 | $ | 4,195 | $ | 5,011 | ||||||
|
Unsold inventory impairments
|
$ | 598 | $ | 573 | $ | 268 | ||||||
|
Contract land deposits, net
|
$ | 2,646 | $ | 1,233 | $ | 8,426 | ||||||
|
Total lots controlled
|
3,898 | 3,619 | 6,176 | |||||||||
|
Total lots reserved
|
846 | 1,879 | 2,336 | |||||||||
|
Contract land deposit impairments
|
$ | 2,489 | $ | 11,190 | $ | 13,553 | ||||||
|
Average active communities
|
37 | 39 | 50 | |||||||||
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| Year Ended December 31, | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
|
Mid East:
|
||||||||||||
|
Revenues
|
$ | 505,431 | $ | 659,649 | $ | 860,139 | ||||||
|
Settlements (units)
|
2,323 | 2,762 | 3,321 | |||||||||
|
Average settlement price
|
$ | 216.3 | $ | 237.4 | $ | 257.7 | ||||||
|
New Orders (units)
|
2,552 | 2,380 | 3,160 | |||||||||
|
Average new order price
|
$ | 217.3 | $ | 229.5 | $ | 248.2 | ||||||
|
Backlog (units)
|
960 | 731 | 1,113 | |||||||||
|
Average backlog price
|
$ | 224.7 | $ | 223.9 | $ | 245.4 | ||||||
|
Gross profit margin
|
$ | 85,931 | $ | 104,761 | $ | 155,736 | ||||||
|
Gross profit margin percentage
|
17.00 | % | 15.88 | % | 18.11 | % | ||||||
|
Segment profit
|
$ | 38,012 | $ | 39,643 | $ | 78,547 | ||||||
|
New order cancellation rate
|
13.90 | % | 17.70 | % | 14.90 | % | ||||||
|
Inventory:
|
||||||||||||
|
Sold inventory
|
$ | 60,107 | $ | 41,751 | $ | 74,455 | ||||||
|
Unsold lots and housing units
|
$ | 16,353 | $ | 14,549 | $ | 5,534 | ||||||
|
Unsold inventory impairments
|
$ | 592 | $ | 69 | $ | 367 | ||||||
|
Contract land deposits, net
|
$ | 4,182 | $ | 5,578 | $ | 17,828 | ||||||
|
Total lots controlled
|
10,163 | 11,027 | 14,191 | |||||||||
|
Total lots reserved
|
2,022 | 3,553 | 3,053 | |||||||||
|
Contract land deposit impairments
|
$ | 7,244 | $ | 10,393 | $ | 10,838 | ||||||
|
Average active communities
|
100 | 118 | 140 | |||||||||
|
|
||||||||||||
|
South East:
|
||||||||||||
|
Revenues
|
$ | 262,138 | $ | 470,147 | $ | 655,364 | ||||||
|
Settlements (units)
|
1,115 | 1,653 | 2,311 | |||||||||
|
Average settlement price
|
$ | 235.1 | $ | 284.4 | $ | 283.6 | ||||||
|
New Orders (units)
|
1,144 | 1,206 | 2,203 | |||||||||
|
Average new order price
|
$ | 230.2 | $ | 261.2 | $ | 290.0 | ||||||
|
Backlog (units)
|
383 | 354 | 801 | |||||||||
|
Average backlog price
|
$ | 244.1 | $ | 260.5 | $ | 308.6 | ||||||
|
Gross profit margin
|
$ | 36,490 | $ | 60,173 | $ | 144,253 | ||||||
|
Gross profit margin percentage
|
13.92 | % | 12.80 | % | 22.01 | % | ||||||
|
Segment profit
|
$ | 7,384 | $ | 7,904 | $ | 87,701 | ||||||
|
New order cancellation rate
|
14.80 | % | 28.90 | % | 20.30 | % | ||||||
|
Inventory:
|
||||||||||||
|
Sold inventory
|
$ | 21,521 | $ | 29,781 | $ | 55,658 | ||||||
|
Unsold lots and housing units
|
$ | 4,783 | $ | 5,878 | $ | 8,271 | ||||||
|
Unsold inventory impairments
|
$ | 268 | $ | 129 | $ | — | ||||||
|
Contract land deposits, net
|
$ | 2,272 | $ | 302 | $ | 24,103 | ||||||
|
Total lots controlled
|
5,338 | 6,626 | 11,089 | |||||||||
|
Total lots reserved
|
1,363 | 3,738 | 2,641 | |||||||||
|
Contract land deposit impairments
|
$ | 5,236 | $ | 20,081 | $ | 4,766 | ||||||
|
Average active communities
|
50 | 65 | 73 | |||||||||
23
Table of Contents
Mid Atlantic
2009 versus 2008
The Mid Atlantic segment had an approximate $82,200, or 79%, increase in segment profit in
2009 compared to 2008. Revenues for the Mid Atlantic segment, which represents approximately 62%
of total homebuilding revenues for the year, decreased approximately $500,500, or 23%, in 2009
compared to 2008. Revenues declined due to a 10%, or 518 unit, decrease in units settled and a 15%
decrease in the average settlement price of homes in 2009 compared to 2008. The decrease in units
settled is attributable to a 35%, or 950 unit, lower backlog balance at the beginning of 2009
compared to the same period in 2008, offset partially by a higher backlog turnover rate year over
year. The decrease in the average settlement price is primarily attributable to a 17% lower
average price of homes in the beginning backlog year over year, coupled with a 9% decline in the
average sales price of new orders for the first six months of 2009 as compared to the same period
in 2008. The segment’s gross profit margin percentage increased to 18.5% in 2009 from 13.6% in
2008. Gross profit margins were favorably impacted by lower contract land deposit impairment
charges in 2009 of $18,425, or 111 basis points, compared to $81,834, or 379 basis points, in 2008.
Gross profit margins in 2009 were also favorably impacted as a result of us exiting poor
performing communities in 2008 which were producing lower gross profit margins. In addition, 2009
gross profit margins as well as segment profit were favorably impacted by lower lumber and certain
other commodity costs as well as by cost control measures taken in prior quarters, reducing
material and personnel costs.
Segment new orders in 2009 increased 12% from 2008, while the segment’s average sales price of
new orders decreased 7% year over year. New orders increased despite an 18% decrease in the
average number of active communities in 2009 compared to 2008. New orders were favorably impacted
in part by a 43% increase in the number of new orders in the fourth quarter of 2009 compared to the
same period in 2008, as a result of the significant impact of the fourth quarter 2008 credit crisis
on the homebuilding market. New orders were also favorably impacted in the current year
by a decrease in the cancellation rate in
2009 to 14% from 24% during 2008. In addition we believe that the federal tax credit for
first-time homebuyers had a favorable impact on new orders in the current year, as first-time
homebuyers made up a higher percentage of our total sales in the segment year over year.
Net new order and settlement activity in 2009 resulted in a 5% increase in backlog units,
while backlog dollars remained relatively flat year over year. The increase in backlog units is
primarily attributable to the aforementioned increase in new orders in the fourth quarter of 2009
compared to the same period in 2008. Backlog dollars were impacted by the increase in backlog
units, offset partially by a 3% decrease in the average price of homes in ending backlog.
2008 versus 2007
The Mid Atlantic segment had an approximate $187,300, or 64%, decrease in segment profit in
2008 compared to 2007. Revenues for the Mid Atlantic segment, which represent approximately 59% of
total homebuilding revenues for the year, decreased approximately $937,300, or 30%, for the year
from the prior year period. This decrease was attributable to a 21% decrease in the number of
units settled and a 12% decrease in the average settlement price. The decrease in units settled
was attributable to a 26% lower backlog unit balance at the beginning of 2008 compared to the same
period in 2007 and to a 25% decline in new orders year over year. The decrease in the average
settlement price was primarily attributable to an 11% lower average price of homes in the beginning
backlog period over period and was also impacted by lower average selling prices of new orders in
2008 compared to 2007. The segment’s gross profit margin percentage fell to 13.6% in 2008 from
17.7% in 2007. Gross profit margins were adversely affected by the downward pressure on selling
prices which resulted in the aforementioned 12% decrease in the average settlement price. Gross
profit margins were also negatively impacted in each respective period by contract land deposit
impairment charges of $81,834, or 379 basis points, in 2008 compared to $153,601, or 496 basis
points, in 2007.
24
Table of Contents
New orders in the Mid Atlantic segment for 2008 decreased 25% from 2007 and the segment’s
average new order sales price decreased 15% year over year. New orders and the average selling
price for new orders were down in each of our markets within the Mid Atlantic segment and were
negatively impacted by challenging market conditions. In addition, new orders were negatively
impacted by a 15% decrease in the average number of active communities to 205 in 2008 from 242 in
2007 within the segment. Backlog units and dollars decreased approximately 35% and 46%,
respectively, year over year. The decrease in backlog units was attributable to the beginning
backlog units being approximately 26% lower entering 2008 compared to the same period in 2007. In
addition, backlog units were 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.
North East
2009 versus 2008
The North East segment had an approximate $6,400, or 49%, increase in segment profit in 2009
compared to 2008, despite a decrease in revenues of approximately $92,500, or 27%, year over year.
The decline in revenues was due to a 19%, or 204 unit, decrease in the number of units settled and
a 10% decrease in the average settlement price year over year. The decrease in the number of units
settled and the average settlement price is primarily attributable to a 40%, or 202 unit, lower
beginning backlog balance entering 2009 compared to 2008 and 15% lower average price of homes in
beginning backlog year over year. Gross profit margins increased to 16.6% in 2009 from 13.4% in
2008. The increase in gross margins was attributable primarily to lower contract land deposit
impairment charges in 2009 of $2,489, or 98 basis points, compared to 2008 of $11,190, or 322 basis
points. In addition, 2009 gross profit margins as well as segment profit were favorably impacted
by lower lumber and certain other commodity costs as well as by cost control measures taken in
prior quarters, reducing material and personnel costs.
Segment new orders in 2009 increased 2% from 2008, while the segment’s average sales price for
new orders decreased 2% year over year. New orders were favorably impacted in part by a 26%
increase in the number of new orders in the fourth quarter of 2009 compared to the same period in
2008, as a result of the significant impact of the fourth quarter 2008 credit crisis on the
homebuilding market. We believe new orders were also favorably impacted in the current year by the
federal tax credit for first-time homebuyers and by a decrease in the cancellation rate to 15% in
2009 from 20% in 2008.
Net new order and settlement activity in 2009 resulted in an increase in backlog units and
dollars of approximately 7% and 13%, respectively. The increase in backlog units is primarily
attributable to the aforementioned increase in new orders in the fourth quarter of 2009 compared to
the fourth quarter of 2008. Backlog dollars were impacted by the increase in backlog units coupled
with a 5% increase in the average selling price for new orders for the six-month period ended
December 31, 2009 compared to the same period in 2008.
2008 versus 2007
The North East segment had an approximate $2,000, or 18%, increase in segment profit in 2008
compared to 2007, despite a decrease in revenues of approximately $86,500, or 20%, year over year.
Revenues declined due to a 13% decrease in the number of units settled and an 8% decrease in the
average settlement price year over year. The decrease in the number of units settled and the
average settlement price was primarily attributable to a 7% lower beginning backlog balance and 6%
lower average price of homes in beginning backlog entering 2008 compared to 2007. In addition, the
number of units settled was negatively impacted by a decline in new orders year over year. Gross
profit margins in the North East segment in 2008 were relatively flat with the prior year at 13.4%
compared to 13.3% in 2007. Contract land deposit impairment charges for the segment decreased to
approximately $11,190, or 322 basis points, in 2008 compared to approximately $13,553, or 313 basis
points, in 2007. The increase in segment profit was primarily attributable to the decrease in
contract land deposit impairment charges, cost control measures and reduced sales and marketing
costs due to a 22% reduction in the average number of active communities during 2008 compared to
2007.
25
Table of Contents
Segment new orders and the average new order sales price for 2008 decreased 27% and 12%,
respectively, from 2007 due to challenging market conditions. In addition, new orders were
negatively impacted by a decrease in the average number of active communities within the North East
segment. Backlog units and dollars decreased approximately 40% and 49%, respectively, year over
year. The decrease in backlog units was attributable to the 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. The decrease in backlog dollars was due to the decrease in backlog units and
to the 12% decrease in the average selling price for new orders for the six-month period ended
December 31, 2008 compared to the same period in 2007.
Mid East
2009 versus 2008
The Mid East segment had an approximate $1,600, or 4%, decrease in segment profit and an
approximate $154,200, or 23%, decrease in revenues in 2009 compared to 2008. Revenues decreased
due to a 16%, or 439 unit, decrease in the number of units settled and a 9% decrease in the average
settlement price period over period. The decreases in the number of units settled and the average
settlement price were primarily attributable to a 34%, or 382 unit, lower beginning backlog balance
and 9% lower average price of homes in beginning backlog year over year, respectively. In
addition, average settlement prices were negatively impacted by a 10% decline in the average sales
price of new orders for the first six months of 2009 as compared to the same period in 2008. Gross
profit margins increased year over year, as cost reduction measures initiated in prior periods
offset the decrease in the average settlement price in 2009 compared to 2008. Gross profit margins
in 2009 were also favorably impacted as a result of us exiting poor performing communities in 2008
which were producing lower gross profit margins.
Segment new orders in 2009 increased 7% from 2008, while the segment’s average sales price for
new orders decreased 5% year over year. New orders were favorably impacted in part by a 51%
increase in the number of new orders in the fourth quarter of 2009 compared to the same period in
2008, as a result of the significant impact of the fourth quarter 2008 credit crisis on the
homebuilding market. We believe new orders in the current year were also favorably impacted by the
federal tax credit for first-time homebuyers, and a decrease in the cancellation rate to 14% in
2009 from 18% in 2008, despite a reduction in the average number of active communities year over
year. New order average sale prices continue to be negatively impacted by market conditions, which
have required us to alter our product offerings and reduce prices in each market within this
segment.
Net new order and settlement activity in 2009 resulted in an increase in backlog units and
dollars of approximately 31% and 32%, respectively. The increase in backlog units is primarily
attributable to the aforementioned increase in new orders in the fourth quarter of 2009 compared to
the fourth quarter of 2008. Backlog dollars were impacted by the increase in backlog units.
2008 versus 2007
The Mid East segment had an approximate $38,900, or 50%, decrease in segment profit in 2008
compared to 2007. Revenues decreased approximately $200,500, or 23%, in 2008 from 2007 due to a
17% 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
was 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 was
negatively impacted by a decline in new orders year over year. Gross profit margins decreased to
15.9% in 2008 from 18.1% in 2007. Contract land deposit impairment charges in the segment were
approximately $10,393, or 158 basis points, in 2008 compared to $10,838, or 126 basis points, in
2007. The decline in gross profit margins was primarily driven by continued pressure on selling
prices due to challenging market conditions which resulted in an 8% decrease in the average
settlement price year over year.
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Segment new orders and the average new order sales price in 2008, decreased 25% and 8%,
respectively, from 2007. New orders were negatively impacted by market conditions which remained
challenging. In addition, new orders were negatively impacted by a 16% decrease in the average number of
active communities within the Mid East segment year over year and by an increase in the
cancellation rate in the segment to 18% in 2008 from 15% in 2007. Backlog units and dollars
decreased approximately 34% and 40%, respectively, year over year. The decrease in backlog units
was attributable to the beginning backlog units being approximately 13% lower entering 2008
compared to the same period in 2007. In addition, backlog units were negatively impacted by the
decline in new orders in 2008 compared to 2007. The decrease in backlog dollars was attributable
to the decrease in backlog units and to a 9% decrease in the average selling price for new orders
for the six-month period ended December 31, 2008 compared to the same period in 2007.
South East
2009 versus 2008
The South East segment had an approximate $500, or 7% decrease in segment profit and an
approximate $208,000, or 44%, decrease in revenues in 2009 compared to 2008. Revenues decreased
primarily due to a 33%, or 538 unit, decrease in the number of units settled and a 17% decrease in
the average settlement price year over year. The decrease in units settled was attributable to a
56%, or 447 unit, lower beginning backlog balance entering 2009 compared to the same period in 2008
coupled with a 25%, or 203 unit, decrease in new orders during the first six months of 2009 as
compared to the first six months of 2008. The decrease in the average settlement price was
primarily attributable to a 16% lower average price of units in backlog entering 2009 compared to
the same period in 2008, coupled with a 16% decline in the average sales price of new orders for
the first six months of 2009 as compared to the same period in 2008. Gross profit margins
increased to 13.9% in 2009 from 12.8% in 2008. Gross profit margins were favorably impacted by
lower contract land deposit impairment charges in 2009 of $5,236, or 200 basis points, compared to
$20,081, or 427 basis points, in 2008. This favorable impact on gross profit margins year over
year was partially offset by a 12% decline in average new order sales prices in 2009 from 2008, as
the South East segment market conditions remain more challenging than those seen in our other
market segments.
Segment new orders and the average new order sales price decreased 5% and 12%, respectively,
in 2009 compared to 2008. New orders have been negatively impacted by a 23% decrease in the
average number of active communities year over year. In addition, as mentioned above, the
challenging market conditions in the South East segment have continued to negatively impact both
new orders and new order sales prices. We believe new orders were favorably impacted in the
current year by the federal tax credit for first-time homebuyers and by a decrease in cancellation
rates to 15% in 2009 from 29% in 2008.
Net new order and settlement activity in 2009 resulted in an 8%, or 29 unit, increase in
backlog, while backlog dollars remained relatively flat year over year. The increase in backlog
units is primarily attributable to an 84%, or 122 unit, increase in the number of new orders in the
fourth quarter of 2009 compared to the fourth quarter of 2008, as a result of the significant
impact of the fourth quarter 2008 credit crisis on the homebuilding market. Backlog dollars were
impacted by the increase in backlog units, offset partially by a 6% decrease in the average price
of homes in ending backlog due to a decrease in the average selling price for new orders for the
six-month period ended December 31, 2009 compared to the same period in 2008.
2008 versus 2007
The South East segment had an approximate $79,800, or 91%, decrease in segment profit in 2008
compared to 2007. Revenues decreased approximately $185,200, or 28%, in 2008 from 2007 due to a
29% decrease in the number of units settled period over period. The decrease in units settled was
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
12.8% in 2008 from 22.0% in 2007. Gross profit margins were negatively impacted in 2008 by
increased contract land deposit impairment charges of approximately $20,081, or 427 basis points,
in 2008 compared to approximately $4,766, or 73 basis points, in
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2007. Gross profit margins were also negatively impacted by the use of increased sales incentives, and by higher average lot and
operating costs per settled unit.
Segment new orders and the average new order sales price decreased 45% and 10%, respectively,
during 2008 compared to 2007. Market conditions within the South East segment continued to
deteriorate throughout 2008. These worsening market conditions resulted in lower sales absorption
rates within our active communities and higher cancellation rates year over year. New orders were
negatively impacted by a 10% decrease in the average number of active communities to 65 in 2008
from 73 in 2007 within the segment. Cancellation rates in the overall segment increased to 29% in
2008 from 20% in 2007. The 45% decrease in new orders for 2008, coupled with a 12% lower beginning
backlog balance entering 2008 compared to 2007, resulted in a 56% decrease in backlog units as of
December 31, 2008 compared to December 31, 2007. The decrease in backlog units coupled with a
decline of 16% in the average backlog price, resulted in a 63% 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 (which
includes all management incentive compensation), stock option compensation expense, goodwill
and intangible asset impairment charges, consolidation adjustments and external corporate
interest expense. Our overhead functions, such as accounting, treasury, human resources,
etc., are centrally performed and the costs are not allocated to our 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 our operating segments.
Likewise, stock option compensation expense and goodwill and intangible asset impairment
charges are not charged to the operating segments. External corporate interest expense is
primarily comprised of interest charges on our outstanding senior notes and working capital
line borrowings, and is not charged to the operating segments because the charges are included
in the corporate capital allocation discussed above.
| Year Ended December 31, | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
|
Homebuilding Consolidated Gross Profit:
|
||||||||||||
|
Homebuilding Mid Atlantic
|
$ | 307,525 | $ | 294,699 | $ | 547,753 | ||||||
|
Homebuilding North East
|
42,282 | 46,607 | 57,860 | |||||||||
|
Homebuilding Mid East
|
85,931 | 104,761 | 155,736 | |||||||||
|
Homebuilding South East
|
36,490 | 60,173 | 144,253 | |||||||||
|
Consolidation adjustments and other (1)
|
25,506 | (48,548 | ) | (84,474 | ) | |||||||
|
|
||||||||||||
|
Consolidated homebuilding gross profit
|
$ | 497,734 | $ | 457,692 | $ | 821,128 | ||||||
|
|
||||||||||||
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| Year Ended December 31, | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
|
Homebuilding Consolidated Profit Before Tax:
|
||||||||||||
|
Homebuilding Mid Atlantic
|
$ | 185,861 | $ | 103,690 | $ | 291,012 | ||||||
|
Homebuilding North East
|
19,572 | 13,182 | 11,176 | |||||||||
|
Homebuilding Mid East
|
38,012 | 39,643 | 78,547 | |||||||||
|
Homebuilding South East
|
7,384 | 7,904 | 87,701 | |||||||||
|
Reconciling items:
|
||||||||||||
|
Contract land deposit recoveries
(impairments) (1)
|
42,939 | (41,134 | ) | (79,002 | ) | |||||||
|
Stock option expense (2)
|
(43,495 | ) | (38,681 | ) | (13,542 | ) | ||||||
|
Corporate capital allocation (3)
|
61,753 | 108,509 | 152,363 | |||||||||
|
Unallocated corporate overhead (4)
|
(44,103 | ) | (52,696 | ) | (58,990 | ) | ||||||
|
Consolidation adjustments and other (5)
|
4,970 | 24,437 | 28,846 | |||||||||
|
Impairment of goodwill and intangible
assets (6)
|
— | (11,686 | ) | — | ||||||||
|
Corporate interest expense
|
(9,810 | ) | (12,417 | ) | (12,535 | ) | ||||||
|
|
||||||||||||
|
Reconciling items sub-total
|
12,254 | (23,668 | ) | 17,140 | ||||||||
|
|
||||||||||||
|
Homebuilding consolidated profit
before taxes
|
$ | 263,083 | $ | 140,751 | $ | 485,576 | ||||||
|
|
||||||||||||
| (1) | This item primarily represents changes to the contract land deposit impairment reserve, which is not allocated to the reportable segments. During both 2009 and 2008, unallocated reserves decreased from the respective prior year as a result of charging previously reserved land impairments to the operating segments, and to certain recoveries of deposits previously determined in prior periods to be impaired. | |
| (2) | The increase in stock option expense in 2009 and 2008 compared to 2007 is due to the reversal of stock-based compensation costs of $29,350 during the third quarter of 2007 related to certain stock options subject to a performance metric. During 2007, we determined that it was improbable that we would meet the performance metric and accordingly reversed all performance-based option expense recorded through that period. | |
| (3) | This item represents the elimination of the corporate capital allocation charge included in the respective homebuilding reportable segments. The decrease in the corporate capital allocation charge from 2007 to 2008 and from 2008 to 2009 is due to decreases in segment asset balances in each of the respective years, due to the decrease in operating activity year over year. The corporate capital allocation charge is based on the segment’s monthly average asset balance, and is as follows for the years presented: |
| Year Ended December 31, | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
|
Homebuilding Mid Atlantic
|
$ | 40,765 | $ | 73,042 | $ | 106,032 | ||||||
|
Homebuilding North East
|
6,473 | 10,081 | 14,669 | |||||||||
|
Homebuilding Mid East
|
8,863 | 12,902 | 17,381 | |||||||||
|
Homebuilding South East
|
5,652 | 12,484 | 14,281 | |||||||||
|
|
||||||||||||
|
Total
|
$ | 61,753 | $ | 108,509 | $ | 152,363 | ||||||
|
|
||||||||||||
| (4) | The decreases in unallocated corporate overhead year over year are primarily driven by a reduction in personnel and other overhead costs as part of our focus to size our organization to meet current year activity levels. | |
| (5) | The decrease in 2009 from 2008 is attributable primarily to changes in the corporate consolidation entries based on production volumes year over year, as well as to a decrease in interest income earned related to lower interest rates in 2009 as compared to 2008. | |
| (6) | The 2008 impairment charge relates to the write-off of goodwill and indefinite life intangible assets related to our 2005 acquisition of Rymarc Homes and the goodwill related to our 1997 acquisition of Fox Ridge Homes. |
29
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Mortgage Banking Segment
We conduct our mortgage banking activity through NVR Mortgage Finance, Inc. (“NVRM”), a
wholly owned subsidiary. NVRM focuses almost exclusively on serving the homebuilding segment’s
customer base. Following is a table of financial and statistical data for the years ended
December 31, 2009, 2008 and 2007:
| 2009 | 2008 | 2007 | ||||||||||
|
Loan closing volume:
|
||||||||||||
|
Total principal
|
$ | 2,060,376 | $ | 2,351,341 | $ | 3,225,324 | ||||||
|
|
||||||||||||
|
|
||||||||||||
|
Loan volume mix:
|
||||||||||||
|
Adjustable rate mortgages
|
1 | % | 5 | % | 17 | % | ||||||
|
|
||||||||||||
|
Fixed-rate mortgages
|
99 | % | 95 | % | 83 | % | ||||||
|
|
||||||||||||
|
|
||||||||||||
|
Operating Profit:
|
||||||||||||
|
Segment Profit
|
$ | 38,138 | $ | 29,227 | $ | 54,576 | ||||||
|
Stock option expense
|
(2,807 | ) | (2,523 | ) | (647 | ) | ||||||
|
|
||||||||||||
|
Mortgage banking
income before tax
|
$ | 35,331 | $ | 26,704 | $ | 53,929 | ||||||
|
|
||||||||||||
|
|
||||||||||||
|
Capture rate:
|
91 | % | 85 | % | 85 | % | ||||||
|
|
||||||||||||
|
|
||||||||||||
|
Mortgage Banking Fees:
|
||||||||||||
|
Net gain on sale of loans
|
$ | 46,960 | $ | 38,921 | $ | 60,128 | ||||||
|
Title services
|
12,787 | 14,581 | 20,304 | |||||||||
|
Servicing fees
|
634 | 835 | 723 | |||||||||
|
|
||||||||||||
|
|
$ | 60,381 | $ | 54,337 | $ | 81,155 | ||||||
|
|
||||||||||||
2009 versus 2008
Loan closing volume for the year ended December 31, 2009 decreased 12% from 2008. The
2009 decrease was primarily attributable to a 7% decrease in the number of units closed and a
6% decrease in the average loan amount year over year. These decreases are attributable to the
aforementioned decrease in the homebuilding segment’s number of units settled and the decrease
in the average settlement prices in 2009 as compared to 2008. The aforementioned decrease in
builder settlements in 2009 compared to 2008, was partially offset by a 6 percentage point
increase in the number of loans closed by NVRM for our homebuyers who obtain a mortgage to
purchase the home (“Capture Rate”), which increased to 91% for the period ended December 31,
2009, compared to 85% for the same period in 2008.
Segment profit for the year ended December 31, 2009 increased approximately $8,900 from
2008. The increase was partially attributable to an approximate $6,000 increase in mortgage
banking fees, which was primarily the result of a decrease in incentives. The increase was
partially offset by a decrease in fees attributable to the aforementioned decrease in closed
loan volume. The increase in mortgage banking fees for the year ended December 31, 2009 was
also partially attributable to an approximate $440 increase in unrealized income from the fair
value measurement of our locked loan commitments, forward mortgage-backed securities sales, and
closed loans held for sale, which is included in mortgage banking fees. The fair value
calculations are classified as Level 2 observable inputs as defined by GAAP (refer to Note 11,
in the accompanying consolidated financial statements for additional information). The
aforementioned fair value measurements will be impacted in the future by changes in volume and
product mix of our closed loans and locked loan commitments.
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The increase in segment profit for the year ended December 31, 2009 was also partially
attributable to an approximate $4,400 decrease in general and administrative expenses compared
to the same period for 2008. The decrease in general and administrative expenses was primarily
the result of a decrease in salary and other personnel costs primarily as the result of an
approximate 24% decrease in staffing compared to the same period for 2008.
2008 versus 2007
Loan closing volume for the year ended December 31, 2008 decreased 27% from 2007. The
2008 decrease was primarily attributable to a 19% decrease in the number of units closed and a
10% decrease in the average loan amount year over year. These decreases are attributable to
the aforementioned decrease in the homebuilding segment’s number of units settled and average
settlement prices in 2008 as compared to 2007.
Segment profit for the year ended December 31, 2008 decreased approximately $25,300 from
2007. The decrease was primarily due to a decrease in mortgage banking fees attributable to
the aforementioned decrease in closed loan volume and a reduction in fees charged to customers
to assist our selling efforts in the homebuilding segment. The decrease to mortgage banking
fees was partially offset by 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 the use of FHA fixed rate loan products, which generally carry a higher servicing
released premium than other non-FHA loan products.
The decrease to mortgage banking fees for the year ended December 31, 2008 was also
partially offset by an approximate $900 increase in unrealized income from the fair value
measurement of our locked loan commitments, forward mortgage-backed securities sales, and
closed loans held for sale, which is included in mortgage banking fees. The fair value
measurement was the result of changes to the GAAP fair value measurement, which the Company
adopted on a prospective basis as of January 1, 2008. As a result of the adoption of the GAAP
fair value measurement changes, the fair value measurement for locked loan commitments and
closed loans held for sale 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.
The fair value calculations are classified as Level 2 observable inputs as defined in GAAP
(refer to Note 11 in the accompanying consolidated financial statements for additional
information). The fair value measurement will be impacted in the future by the change in
volume and product mix of our closed and locked loan commitments.
Mortgage Banking — Other
NVRM is dependent on our homebuilding segment’s customers for business. As sales and
selling prices of the homebuilding segment decline, NVRM’s operations are likewise adversely
affected. In addition, NVRM’s operating results may be adversely affected in future periods
due to the continued tightening and volatility of the credit markets.
Seasonality
Overall, we do not experience material seasonal fluctuations in sales, settlements or
loan closings.
Effective Tax Rate
Our consolidated effective tax rate in 2009, 2008 and 2007 was 35.6%, 39.75% and 38.1%,
respectively. The lower effective tax rate in 2009 was due to the expiration of certain tax
reserves previously established, the amendment of certain prior year federal and state income
tax returns that we believe will result in tax refunds and recent IRS guidance allowing us to
take a larger benefit under Internal Revenue Code Section 199, domestic manufacturing
deduction. In addition, due to Mr. Schar relinquishing his Executive Officer role with us in
2009, a tax benefit was generated related to compensation expense recorded for certain
outstanding option grants held by Mr. Schar that were previously considered to be a
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Table of Contents
permanent non-deductible tax difference. The higher effective tax rate in 2008 was primarily due to the
reduction in tax exempt interest income and lower pre-tax income in 2008 compared to
2007. We expect our effective tax rate in 2010 to be in-line with our effective tax rates in
2008 and 2007.
Recent Accounting Pronouncements Pending Adoption
In June 2009, the FASB issued SFAS No. 166,
Accounting for Transfers of Financial Assets
,
as codified in ASC 860,
Transfers and Servicing
, which changes the conditions for reporting a
transfer of a portion of a financial asset as a sale and requires additional year-end and
interim disclosures. These amendments are effective for fiscal years beginning after November
15, 2009, the implementation of which are not expected to have a material impact on the
Company’s financial statements.
In June 2009, the FASB issued SFAS No. 167,
Amendments to FASB Interpretation No. 46(R),
as codified in ASC 810,
Consolidation
, through Accounting Standards Update 2009-17. This
statement amends FASB Interpretation 46R related to the consolidation of variable interest
entities (“VIEs”) and revises the approach to determining the primary beneficiary of a VIE to
be more qualitative in nature and requires companies to more frequently reassess whether they
must consolidate a VIE. The amendment to ASC 810 is effective for fiscal years beginning
after November 15, 2009. We are evaluating the impact of the amendment and currently believe
that upon adoption, the majority of development entities associated with our fixed price
purchase agreements would no longer be required to be consolidated.
Liquidity and Capital Resources
Lines of Credit and Notes Payable
Our homebuilding segment generally provides for its working capital cash requirements
using cash generated from operations, a short-term unsecured working capital revolving credit
facility (the “Facility”) and the public debt and equity markets. On August 4, 2009, NVR
entered into an amendment to its $600,000 Facility to reduce the total available borrowings
under the Facility to $300,000. In addition, the amended Facility eliminates the accordion
feature and amended or eliminated certain non-financial covenants. Borrowings under the
Facility are subject to certain borrowing base limitations. The Facility expires on December
6, 2010 and outstanding amounts bear interest at either (i) the prime rate or (ii) 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 $13,218 was outstanding at December 31, 2009. The Facility contains various
affirmative and negative covenants. The negative covenants include among others, certain
limitations on transactions involving the creation of guarantees, sale of assets, acquisitions,
mergers, investments and unsold inventory levels. Additional covenants include (i) a minimum
adjusted consolidated tangible net worth requirement, (ii) a maximum leverage ratio
requirement, and (iii) an interest coverage ratio requirement. These covenants restrict the
amount that we would be able to pay in dividends each year. We are also subject to borrowing
base restrictions if our senior debt rating falls below investment grade. At December 31,
2009, we were in compliance with all covenants under the Facility and we have maintained our
investment grade rating on our senior debt. Additionally, at December 31, 2009, there were no
borrowing base limitations reducing the amount available to us for borrowings, and we had no
direct borrowings outstanding under the Facility.
NVR’s 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, 2009, NVRM renewed and amended its Master Repurchase Agreement dated
August 5, 2008 with U.S. Bank National Association, as Agent and representative of itself as a
Buyer, and the other Buyers (the “Amended Repurchase Agreement”). The Amended Repurchase
Agreement provides for loan purchases up to $100,000, subject to certain sub-limits. In
addition, the Amended Repurchase Agreement provides for an accordion feature under which NVRM
may request that the aggregate commitments under the Amended Repurchase Agreement be increased
to an amount up to $125,000. The Amended Repurchase Agreement expires on August 3, 2010.
Advances under the Amended Repurchase Agreement carry a Pricing Rate, based on the
32
Table of Contents
Libor Rate plus the Libor Margin, or at NVRM’s option, the Balance Funded Rate, as these terms are defined
in the Amended Repurchase Agreement. The Amended 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. Additional covenants include (i) a tangible
net worth requirement, (ii) a minimum liquidity requirement, (iii) a minimum tangible net worth
ratio, (iv) a minimum net income requirement, and (v) a maximum leverage ratio requirement, all
of which we were compliant with at December 31, 2009. As of December 31, 2009, there was
$12,344 outstanding under the Amended Repurchase Agreement, and borrowing base limitations
reduced the amount available to us for borrowing to approximately $38,900. The
weighted-average Pricing Rate for amounts outstanding under the Amended Repurchase Agreement
was 2.6% during 2009. The average Pricing Rate for amounts outstanding at December 31, 2009
was 4.1%.
On June 17, 2003, we completed an offering, at par, for $200,000 of 5% Senior Notes due
2010 (the “Notes”) under a shelf registration statement filed in 1998 with the Securities and
Exchange Commission (the “SEC”). The Notes mature on June 15, 2010 and bear interest at 5%,
payable semi-annually in arrears on June 15 and December 15. The Notes are general unsecured
obligations and rank equally in right of payment with all of our existing and future unsecured
senior indebtedness and indebtedness under our working capital credit facility. The Notes are
senior in right of payment to any future subordinated indebtedness that we may incur. We may
redeem the Notes, in whole or in part, at any time upon not less than 30 nor more than 60 days
notice at a redemption price equal to the greater of (a) 100% of the principal amount of the
Notes to be redeemed, or (b) the discounted present value of the remaining scheduled payments
of the Notes to be redeemed, plus, in each case, accrued and unpaid interest. The indenture
governing the Notes contains certain covenants which, among other items, restricts our ability
to (i) create, incur, assume or guarantee any secured debt, (ii) enter into sale and leaseback
transactions, and (iii) merge with or into other companies or sell all or substantially all of
our assets. At December 31, 2009 we were in compliance with all covenants under the Notes.
In December 2008, we repurchased $36,680 of the Notes on the open market at 99.25% of par,
resulting in a pre-tax gain of approximately $251. In April 2009 and August 2009, we
repurchased $27,950 and $2,000 of the Notes, respectively, on the open market at par. The
outstanding balance of the Notes at December 31, 2009 was $133,370.
On September 8, 2008, we filed a shelf registration statement (the “2008 Shelf
Registration”) with the 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. We expect to use the proceeds received from future offerings, if any, issued
under the 2008 Shelf Registration for general corporate purposes. This discussion of NVR’s
shelf registration capacity does not constitute an offer of any securities for sale.
Equity Repurchases
In addition to funding growth in our homebuilding and mortgage banking operations, we
historically have used a substantial portion of our excess liquidity to repurchase outstanding
shares of our common stock in open market and 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 promulgated
under the Securities and 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. The repurchase program assists us in accomplishing our primary
objective, creating increases in shareholder value. On July 31, 2007, 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 (“July
Authorization”). The July Authorization does not have an expiration date. We did not
repurchase any shares of our common stock during 2009. We have $226,300 available under the
July Authorization as of December 31, 2009.
33
Table of Contents
Cash Flows
For the year ended December 31, 2009, our operating activities provided cash of $241,642.
Cash was provided primarily by homebuilding operations and by an approximate $32,400 decrease
in mortgage loans held for sale. The presentation of operating cash flows was reduced by
approximately $66,400, which is the amount of the excess tax benefit realized from the
exercise of stock options during the period and credited directly to additional paid in
capital.
Net cash used for investing activities during 2009 was $221,617 for the year ended
December 31, 2009, which primarily resulted from the net purchase of marketable securities
during 2009. The marketable securities, which are debt securities issued by the U.S. Treasury
and other U.S. government corporations and agencies, are classified as held-to-maturity
securities and mature within one year.
Net cash provided by financing activities during 2009 was $82,482 for the year ended
December 31, 2009. Financing cash flow was favorably impacted by approximately $78,500 of
proceeds from the exercise of stock options and the realization of approximately $66,400 in
excess income tax benefits from the exercise of stock options. Cash was used by financing
activities to reduce net borrowings under the mortgage warehouse facility by approximately
$32,200 and we repurchased $29,950 of our 5% Senior Notes due 2010, at par during 2009.
In 2008, cash and cash equivalents increased by approximately $483,000. Operating
activities provided cash of $462,361. Cash was provided primarily by homebuilding operations
and a reduction in our homebuilding inventories of approximately $288,000 due to a reduction
in the number of homes under construction at the end of 2008 as compared to the same period in
2007. Operating cash flow was reduced by a decrease in our customer deposits of approximately
$66,000. The presentation of operating cash flows was also reduced by approximately $50,000,
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. Cash used for
investing activities of $5,498 in 2008, was used primarily for property and equipment
purchases. Financing activities in 2008 provided $26,571 due primarily to proceeds from the
exercise of stock options of approximately $52,000 and the realization of approximately
$50,000 in excess income tax benefits from the exercise of stock options. Cash was used in
financing activities to reduce net borrowings under the mortgage warehouse facility by
approximately $39,000 and to repurchase $36,680 of our 5% Senior Notes due 2010 at a cost of
approximately $36,400.
In 2007, cash and cash equivalents increased by approximately $108,090. Operating
activities provided cash of $558,766. Cash was provided primarily by homebuilding operations
and an approximate $71,000 decrease in mortgage loans held for sale. The presentation of
operating cash flows was reduced by approximately $69,000, related to the amount of the excess
tax benefit realized from the exercise of stock options during the year. Cash provided by
operating activities were partially offset by cash used for financing activities of $441,361,
due to our repurchase of approximately $507,500 of our common stock.
At December 31, 2009, 2008 and 2007, the homebuilding segment had restricted cash of
approximately $4,600, $4,500 and $6,200, respectively, which relates to customer deposits on
certain home sales.
We believe that our current cash holdings, cash generated from operations and borrowings
available under our credit facilities will be sufficient to satisfy near and long term cash
requirements for working capital and debt service in both our homebuilding and mortgage
banking operations.
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Table of Contents
Off Balance Sheet Arrangements
Lot Acquisition Strategy
We do not engage in land development. Instead, we typically acquire finished building lots
at market prices from various land developers under fixed price purchase agreements that require
deposits that may be forfeited if we fail 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 represent a
percentage, typically ranging up to 10%, of the aggregate purchase price of the finished lots.
We believe that our lot acquisition strategy reduces the financial requirements and risks
associated with direct land ownership and land development. We may, at our option, choose for
any reason and at any time not to perform under these purchase agreements by delivering notice
of our intent not to acquire the finished lots under contract. Our 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 liquidating damage provision contained within the purchase
agreements. We do not have any financial guarantees or completion obligations and we typically
do not guarantee lot purchases on a specific performance basis under these purchase agreements.
At December 31, 2009, we controlled approximately 46,300 lots with an aggregate purchase
price of approximately $3,900,000, by making or committing to make deposits of approximately
$167,100 in the form of cash and letters of credit. Our entire risk of loss pertaining to the
aggregate purchase price contractual commitment resulting from our non-performance under the
contracts is limited to the $167,100 deposit. Of the $167,100 deposit total, approximately
$140,700 is in cash and approximately $4,900 is in letters of credit which have been issued as
of December 31, 2009. Subsequent to December 31, 2009, we will pay approximately $21,500 in
additional deposits assuming that contractual development milestones are met by the developers
(see Contractual Obligations section below). As of December 31, 2009, we had recorded an
impairment valuation allowance of approximately $89,500 related to the cash deposits currently
outstanding. Please refer to Note 1 in the accompanying consolidated financial statements for
a further discussion of the contract land deposits and Note 3 in the accompanying consolidated
financial statements for a description of our lot acquisition strategy in relation to our
accounting related to the consolidation of variable interest entities
.
Bonds and Letters of Credit
We enter into bond or letter of credit arrangements with local municipalities, government
agencies, or land developers to collateralize our obligations under various contracts. We had
approximately $36,900 of contingent obligations under such agreements as of December 31, 2009
(inclusive of the $4,900 of lot acquisition deposits in the form of letters of credit discussed
above). We believe we will fulfill our obligations under the related contracts and do not
anticipate any material losses under these bonds or letters of credit.
Mortgage Commitments and Forward Sales
In the normal course of business, our 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, we enter 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, and, accordingly, are marked to fair value through earnings. At
December 31, 2009, there were contractual commitments to extend credit to borrowers aggregating
approximately $130,100, and open forward delivery sale contracts aggregating approximately
$141,800. Please refer to Note 11 in the accompanying consolidated financial statements for a
description of our fair value accounting.
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Contractual Obligations
Our fixed, non-cancelable obligations as of December 31, 2009, were as follows:
| Payments due by period | ||||||||||||||||||||
| Less than | 1-3 | 3-5 | More than | |||||||||||||||||
| Total | 1 year | years | years | 5 years | ||||||||||||||||
|
Debt (a)
|
$ | 148,770 | $ | 148,770 | $ | — | $ | — | $ | — | ||||||||||
|
Capital leases (b)
|
$ | 3,066 | 408 | 1,289 | 1,313 | 56 | ||||||||||||||
|
Operating leases (c)
|
$ | 70,551 | 19,678 | 22,742 | 13,227 | 14,904 | ||||||||||||||
|
Purchase obligations (d)
|
21,534 | * | * | * | * | |||||||||||||||
|
Executive officer
employment
contracts (e)
|
$ | 1,705 | 1,705 | — | — | — | ||||||||||||||
|
Other long-term
liabilities (f)
|
$ | 23,926 | 23,480 | 446 | — | — | ||||||||||||||
|
|
||||||||||||||||||||
|
Total
|
$ | 269,552 | $ | 194,041 | $ | 24,477 | $ | 14,540 | $ | 14,960 | ||||||||||
|
|
||||||||||||||||||||
| (a) | Payments include interest payments due on the 5% Senior Notes due 2010. See Note 6 in the accompanying consolidated financial statements for additional information regarding debt and related matters. | |
| (b) | The present value of these obligations is included on the Consolidated Balance Sheets. See Note 6 in the accompanying consolidated financial statements for additional information regarding capital lease obligations. | |
| (c) | See Note 10 in the accompanying consolidated financial statements for additional information regarding operating leases. | |
| (d)(*) | Amounts represent required payments of forfeitable deposits with land developers under existing, fixed price purchase agreements, assuming that contractual development milestones are met by the developers. We expect to make all payments of these deposits within the next three years, but due to the nature of the contractual development milestones that must be met, we are unable to accurately estimate the portion of the deposit obligation that will be made within one year and that portion that will be made within one to three years. | |
| (e) | We have entered into employment agreements with three of our executive officers. Each of the agreements expires on January 1, 2011 and provides for payment of a minimum base salary, which may be increased at the discretion of the Compensation Committee of NVR’s Board of Directors (the “Compensation Committee”), and annual incentive compensation of up to 100% of base salary upon achievement of annual performance objectives established by the Compensation Committee. The agreements also provide for payment of severance benefits upon termination of employment, in amounts ranging from $0 to two times the executive officer’s then annual base salary, depending on the reason for termination, plus up to $60 in outplacement assistance. Accordingly, total payments under these agreements will vary based on length of service, any future increases to base salaries, annual incentive payments earned, and the reason for termination. The agreements have been reflected in the above table assuming the continued employment of the executive officers for the full term of the respective agreements, and at the executive officers’ current base salaries. The above balances do not include any potential annual incentive compensation. The actual amounts paid could differ from that presented. | |
| (f) | Amounts represent payments due under incentive compensation plans and are included on the Consolidated Balance Sheet, $2,100 of which is recorded in the Mortgage Banking accounts payable and other liabilities line item. |
Critical Accounting Policies
General
The preparation of financial statements in conformity with accounting principles generally
accepted in the United States of America (“GAAP”) 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
36
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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 are believed to be reasonable under the facts
and circumstances. Actual results could differ materially from those estimates made by
management.
Variable Interest Entities
GAAP 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 entity’s expected losses, receives a
majority of the entity’s 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 entity’s net assets exclusive of its variable
interests, and expected residual returns are the expected positive variability in the fair
value of an entity’s 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. Therefore, the development entities
with which we enter fixed price purchase agreements are examined for possible consolidation by
us, including certain joint venture limited liability corporations (“LLCs”) utilized by us to
acquire finished lots on a limited basis. We have developed a methodology to determine whether
we, or, conversely, the owner(s) of the applicable development entity, are the primary
beneficiary of a development entity. The methodology used to evaluate our primary beneficiary
status requires substantial management judgment and estimates. These judgments and estimates
involve assigning probabilities to various estimated cash flow possibilities relative to the
development entity’s 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 entity’s primary beneficiary, possibly
resulting in additional, or fewer, development entities being consolidated on our financial
statements. See Note 3 to the accompanying 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.
Sold inventory is evaluated for impairment based on the contractual selling price compared
to the total estimated cost to construct. Unsold inventory is evaluated for impairment by
analyzing recent comparable sales prices within the applicable community compared to the costs
incurred to date plus the expected costs to complete. Any calculated impairments are recorded
immediately.
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 reflects our judgment of
the present loss exposure in the existing contract land deposit portfolio at the end of the
reporting period. To analyze contract land deposit impairments, we utilize a loss contingency
analysis that is conducted each quarter. In
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addition to considering market and economic conditions, we assess contract land deposit impairments on a community-by-community basis pursuant
to the purchase contract terms, analyzing, as applicable, current sales absorption levels, recent
sales’ gross profit, the dollar differential between the contractual purchase price and the current
market price for lots, a developer’s financial stability, a developer’s financial ability or
willingness to reduce lot prices to current market prices, and the contract’s default status by
either us or the developer along with an analysis of the expected outcome of any such default.
Our analysis is focused on whether we can sell houses profitably in a particular community in
the current market with which we are faced. Because we don’t own the finished lots on which we had
placed a contract land deposit, if the above analysis leads to a determination that we can’t sell
homes profitably at the current contractual lot price, we then determine whether we will elect to
default under the contract, forfeit our deposit and terminate the contract, or whether we will
attempt to restructure the lot purchase contract, which may require us to forfeit the deposit to
obtain contract concessions from a developer. We also assess whether an impairment is present due
to collectibility issues resulting from a developer’s non-performance because of financial or other
conditions.
Although we consider the allowance for losses on contract land deposits reflected on the
December 31, 2009 balance sheet to be adequate (see Note 1 in the accompanying 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”) is an
indefinite life intangible asset that was created upon our emergence from bankruptcy on September
30, 1993. Based on the allocation of our reorganization value, the portion of our reorganization
value which was not attributed to specific tangible or intangible assets has been reported as
excess reorganization value, which is treated similarly to goodwill. Excess reorganization value
is not subject to amortization. Rather, excess reorganization value is subject to an impairment
assessment on an annual basis or more frequently if changes in events or circumstances indicate
that impairment may have occurred. Because excess reorganization value was based on the
reorganization value of our entire enterprise upon bankruptcy emergence, the impairment assessment
is conducted on an enterprise basis based on the comparison of our total equity compared to the
market value of our outstanding publicly-traded common stock. We do not believe that excess
reorganization value is impaired at this time. However, changes in strategy or continued adverse
changes in market conditions could impact this judgment and require an impairment loss to be
recognized if our book value, including excess reorganization value, exceeds the fair value.
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 December 31, 2009 balance sheet (see Note 10 in the
accompanying 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.
38
Table of Contents
Stock Option Expense
Compensation costs related to our stock based compensation plans are recognized within our
income statement. The costs recognized are based on the grant date fair value. Compensation
cost for 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).
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 management’s
judgment. We have concluded that our historical exercise experience is the best estimate of
future exercise patterns to determine an option’s expected term. To estimate expected
volatility, we analyze the historical volatility of our common stock. Changes in management’s
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.
Impact of Inflation, Changing Prices and Economic Conditions
See Risk Factors included in Item 1A herein. See also the discussion above under Overview of
Current Business Environment.
Item 7A.
Quantitative and Qualitative Disclosure About Market Risk.
Market risk is the risk of loss arising from adverse changes in market prices and interest
rates. Our market risk arises from interest rate risk inherent in our financial instruments.
Interest rate risk results from the possibility that changes in interest rates will cause
unfavorable changes in net income or in the value of interest rate-sensitive assets,
liabilities and commitments. Lower interest rates tend to increase demand for mortgage loans
for home purchasers, while higher interest rates make it more difficult for potential borrowers
to purchase residential properties and to qualify for mortgage loans. We have no market rate
sensitive instruments held for speculative or trading purposes.
Our mortgage banking segment is exposed to interest rate risk as it relates to its lending
activities. The mortgage banking segment originates mortgage loans, which are sold through
either optional or mandatory forward delivery contracts into the secondary markets. All of the
mortgage banking segment’s loan portfolio is held for sale and subject to forward sale
commitments. NVRM also sells all of its mortgage servicing rights on a servicing released
basis.
Our homebuilding segment generates operating liquidity and acquires capital assets through
fixed-rate and variable-rate debt. The homebuilding segment’s primary debt is a variable-rate
working capital revolving credit facility that currently provides for unsecured borrowings up
to $300,000, 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) LIBOR plus
applicable margin as defined within the Facility. There were no borrowings under the Facility
during 2009.
NVRM generates operating liquidity primarily through the mortgage Repurchase Agreement,
which provides for loan repurchases up to $100,000. The Repurchase Agreement is used to fund
NVRM’s mortgage origination activities. Advances under the Repurchase Agreement carry a
Pricing Rate based on the Libor Rate plus the Libor Margin, or at NVRM’s option, the Balance
Funded Rate, as these terms are defined in the Repurchase Agreement. The weighted-average Pricing Rate for amounts outstanding under the
Repurchase Agreement was 2.6% during 2009. The average Pricing Rate for amounts outstanding at
December 31, 2009 was 4.1%.
The following table represents the contractual balances of our on-balance sheet financial
instruments at the expected maturity dates, as well as the fair values of those on-balance
sheet financial instruments at December 31, 2009. The expected maturity categories take into
consideration the actual and anticipated amortization of principal and do not take into
consideration the reinvestment of cash or the refinancing of existing indebtedness. Because we
sell all of the mortgage loans we originate into the secondary markets, we have made the
assumption that the portfolio of mortgage loans held for sale will mature in the first year.
Consequently, outstanding warehouse borrowings are also assumed to mature in the first year.
39
Table of Contents
Maturities (000’s)
| Fair | ||||||||||||||||||||||||||||||||
| 2010 | 2011 | 2012 | 2013 | 2014 | Thereafter | Total | Value | |||||||||||||||||||||||||
|
Mortgage banking segment
|
||||||||||||||||||||||||||||||||
|
Interest rate sensitive assets:
|
||||||||||||||||||||||||||||||||
|
Mortgage loans held for sale
|
$ | 40,492 | — | — | — | — | — | $ | 40,492 | $ | 40,097 | |||||||||||||||||||||
|
Average interest rate
|
4.9 | % | — | — | — | — | — | 4.9 | % | |||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
|
Interest rate sensitive liabilities:
|
||||||||||||||||||||||||||||||||
|
Variable rate repurchase agreement
|
$ | 12,344 | — | — | — | — | — | $ | 12,344 | $ | 12,344 | |||||||||||||||||||||
|
Average interest rate (a)
|
4.1 | % | — | — | — | — | — | 4.1 | % | |||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
|
Other:
|
||||||||||||||||||||||||||||||||
|
Forward trades of mortgage-backed
securities (b)
|
$ | 2,445 | — | — | — | — | — | $ | 2,445 | $ | 2,445 | |||||||||||||||||||||
|
Forward loan commitments (b)
|
(707 | ) | — | — | — | — | — | (707 | ) | (707 | ) | |||||||||||||||||||||
|
Homebuilding segment
|
||||||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
|
Interest rate sensitive assets:
|
||||||||||||||||||||||||||||||||
|
Interest-bearing deposits
|
$ | 1,458,077 | — | — | — | — | — | $ | 1,458,077 | $ | 1,458,077 | |||||||||||||||||||||
|
Average interest rate
|
0.4 | % | — | — | — | — | — | 0.4 | % | |||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
|
Interest rate sensitive liabilities:
|
||||||||||||||||||||||||||||||||
|
Fixed rate obligations (c)
|
$ | 133,486 | $ | 402 | $ | 456 | $ | 520 | $ | 617 | $ | 55 | $ | 135,536 | $ | 136,995 | ||||||||||||||||
|
Average interest rate
|
5.3 | % | 13.1 | % | 13.2 | % | 13.3 | % | 13.9 | % | 14.1 | % | 5.8 | % | ||||||||||||||||||
| (a) | Average interest rate is net of credits received for compensating cash balances. | |
| (b) | Represents the fair value recorded pursuant to ASC 815, Derivatives and Hedging . | |
| (c) | The $133,486 maturing in 2010 includes $133,370 for NVR’s 5% Senior Notes due June 2010. |
40
Table of Contents
Item 8.
Financial Statements and Supplementary Data.
The financial statements listed in Item 15 are filed as part of this report and are
incorporated herein by reference.
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
Item 9A.
Controls and Procedures.
Evaluation of Disclosure 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 the principal executive
officer and principal financial officer, of the effectiveness of the design and operation of
our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the
Securities Exchange Act of 1934.
Based on that evaluation, the principal executive officer and principal financial officer
concluded that the design and operation of these disclosure controls and procedures as of
December 31, 2009 were effective to provide reasonable assurance that information required to
be disclosed in our reports under the Securities and Exchange Act of 1934 is recorded,
processed, summarized and reported within the time periods specified in the Securities and
Exchange Commission’s rules and forms and that such information is accumulated and
communicated to our management, including our principal executive officer and principal
financial officer, as appropriate, to allow timely decisions regarding required disclosure.
There have been no changes in our internal controls over financial reporting identified
in connection with the evaluation referred to above that have materially affected, or are
reasonably likely to materially affect, our internal controls over financial reporting.
Management’s Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control
over financial reporting, as such term is defined in Rule 13a-15(f) under the Securities and
Exchange Act of 1934. Under the supervision and with the participation of our management,
including our principal executive officer and principal financial officer, we conducted an
evaluation of the effectiveness of our internal control over financial reporting based on the
framework in
Internal Control — Integrated Framework
issued by the Committee of Sponsoring
Organizations of the Treadway Commission. Based on our evaluation under the framework in
Internal Control — Integrated Framework
, our management concluded that our internal control
over financial reporting was effective as of December 31, 2009. Our internal control over
financial reporting as of December 31, 2009 has been audited by KPMG LLP, an independent
registered public accounting firm, as stated in their attestation report which is included
herein.
Item 9B.
Other Information.
None.
41
Table of Contents
PART III
Item 10.
Directors, Executive Officers, and Corporate Governance.
Item 10 is hereby incorporated by reference to our Proxy Statement expected to be filed
with the Securities and Exchange Commission on or prior to April 30, 2010. Reference is also
made regarding our executive officers to “Executive Officers of the Registrant” following Item
4 of Part I of this report.
Item 11.
Executive Compensation.
Item 11 is hereby incorporated by reference to our Proxy Statement expected to be filed
with the Securities and Exchange Commission on or prior to April 30, 2010.
| Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters. | |
Security ownership of certain beneficial owners and management is hereby incorporated by
reference to our Proxy Statement expected to be filed with the Securities and Exchange
Commission on or prior to April 30, 2010.
Equity Compensation Plan Information
The table below sets forth information as of the end of our 2009 fiscal year for (i) all
equity compensation plans approved by our shareholders and (ii) all equity compensation plans
not approved by our shareholders:
| Number of securities | ||||||||||||
| remaining available for | ||||||||||||
| Number of securities | future issuance under | |||||||||||
| to be issued upon | Weighted-average | equity compensation | ||||||||||
| exercise of | exercise price of | plans (excluding | ||||||||||
| outstanding options, | outstanding options, | securities reflected in | ||||||||||
| Plan category | warrants and rights | warrants and rights | the first column) | |||||||||
|
Equity compensation
plans
approved by security
holders
|
119,913 | $ | 490.92 | — | ||||||||
|
|
||||||||||||
|
Equity compensation
plans
not approved by security
holders
|
879,229 | $ | 321.78 | 134,022 | ||||||||
|
|
||||||||||||
|
Total
|
999,142 | $ | 342.08 | 134,022 | ||||||||
Equity compensation plans approved by our shareholders include the NVR, Inc.
Management Long-Term Stock Option Plan; the NVR, Inc. 1998 Management Long-Term Stock Option
Plan; and the 1998 Directors’ Long-Term Stock Option Plan. The only equity compensation plan
that was not approved by our shareholders is the NVR, Inc. 2000 Broadly-Based Stock Option
Plan. See Note 9 in the accompanying consolidated financial statements for a description of
each of our equity compensation plans.
42
Table of Contents
Item 13.
Certain Relationships and Related Transactions, and Director
Independence.
Item 13 is hereby incorporated by reference to our Proxy Statement expected to be filed
with the Securities and Exchange Commission on or prior to April 30, 2010.
Item 14.
Principal Accountant Fees and Services.
Item 14 is hereby incorporated by reference to our Proxy Statement expected to be filed
with the Securities and Exchange Commission on or prior to April 30, 2010.
PART IV
Item 15.
Exhibits and Financial Statement Schedules.
The following documents are filed as part of this report:
| 1. |
Financial Statements
NVR, Inc. — Consolidated Financial Statements Reports of Independent Registered Public Accounting Firm Consolidated Balance Sheets Consolidated Statements of Income Consolidated Statements of Shareholders’ Equity Consolidated Statements of Cash Flows Notes to Consolidated Financial Statements |
2. Exhibits
| Exhibit | |||
| Number | Description | ||
| 3.1 | Restated Articles of Incorporation of NVR, Inc. (“NVR”). Filed as Exhibit 99.1 to NVR’s Form 8-K filed May 4, 2007 and incorporated herein by reference. | ||
| 3.2 | Bylaws, as amended, of NVR, Inc. Filed as Exhibit 99.2 to Form 8-K filed on May 4, 2007 and incorporated herein by reference. | ||
| 4.1 | Indenture dated as of April 14, 1998 between NVR, as issuer and the Bank of New York as trustee. Filed as Exhibit 4.3 to NVR’s Current Report on Form 8-K filed April 23, 1998 and incorporated herein by reference. | ||
| 4.2 | Form of Note (included in Indenture filed as Exhibit 4.1). | ||
| 4.3 | Fourth Supplemental Indenture, dated June 17, 2003, between NVR and U.S. Bank Trust National Association, as successor to The Bank of New York, as trustee. Filed as Exhibit 4.1 to NVR’s Current Report on Form 8-K filed June 17, 2003 and incorporated herein by reference. | ||
| 4.4 | Form of Note (included in Indenture filed as Exhibit 4.3). | ||
| 10.1* | Employment Agreement between NVR, Inc. and Dwight C. Schar dated July 1, 2005. Filed as Exhibit 10.1 to NVR’s Form 8-K filed on June 29, 2005 and incorporated herein by reference. | ||
| 10.2* | Employment Agreement between NVR, Inc. and Paul C. Saville dated July 1, 2005. Filed as Exhibit 10.2 to NVR’s Form 8-K filed on June 29, 2005 and incorporated herein by reference. | ||
43
Table of Contents
| 10.3* | Employment Agreement between NVR, Inc. and Dennis M. Seremet dated July 1, 2005. Filed as Exhibit 10.3 to NVR’s Form 8-K filed on June 29, 2005 and incorporated herein by reference. | ||
| 10.4* | Employment Agreement between NVR, Inc. and William J. Inman dated July 1, 2005. Filed as Exhibit 10.4 to NVR’s Form 8-K filed on June 29, 2005 and incorporated herein by reference. | ||
| 10.5* | Profit Sharing Plan of NVR, Inc. and Affiliated Companies. Filed as Exhibit 4.1 to NVR’s Registration Statement on Form S-8 (No. 333-29241) filed June 13, 1997 and incorporated herein by reference. | ||
| 10.6* | Employee Stock Ownership Plan of NVR, Inc. Incorporated by reference to NVR’s Annual Report on Form 10-K/A for the year ended December 31, 1994. | ||
| 10.7* | NVR, Inc. 1998 Management Long-Term Stock Option Plan. Filed as Exhibit 4 to NVR’s Registration Statement on Form S-8 (No. 333-79951) filed June 4, 1999 and incorporated herein by reference. | ||
| 10.8* | NVR, Inc. 1998 Directors’ Long-Term Stock Option Plan. Filed as Exhibit 4 to NVR’s Registration Statement on Form S-8 (No. 333-79949) filed June 4, 1999 and incorporated herein by reference. | ||
| 10.09* | NVR, Inc. Management Long-Term Stock Option Plan. Filed as Exhibit 99.3 to NVR’s Registration Statement on Form S-8 (No. 333-04975) filed May 31, 1996 and incorporated herein by reference. | ||
| 10.10* | NVR, Inc. 2000 Broadly-Based Stock Option Plan. Filed as Exhibit 99.1 to NVR’s Registration Statement on Form S-8 (No. 333-56732) filed March 8, 2001 and incorporated herein by reference. | ||
| 10.11* | NVR, Inc. Nonqualified Deferred Compensation Plan. Filed as Exhibit 10.1 to NVR’s Form 8-K filed on December 16, 2005 and incorporated herein by reference. | ||
| 10.12 | Credit Agreement dated as of December 7, 2005 among NVR, Inc. and the lenders party hereto, JPMorgan Chase Bank, N.A., as Administrative Agent, U.S. Bank, National Association, as Syndication Agent, SunTrust Bank and Wachovia Bank, National Association, as Documentation Agents, AmSouth Bank, Comerica Bank, Calyon New York Branch and Mizuho Corporate Bank, Ltd., as Managing Agents, and J.P. Morgan Securities Inc., as Lead Arranger and Sole Book Runner. Filed as Exhibit 10.1 to NVR’s Form 8-K filed December 12, 2005 and incorporated herein by reference. | ||
| 10.13* | Description of the Board of Directors’ compensation arrangement. Filed as Exhibit 10.27 to NVR’s Annual Report on Form 10-K for the period ended December 31, 2004 and incorporated herein by reference. | ||
| 10.14* | Amendment No. 1 to Employment Agreement between NVR, Inc. and Dwight C. Schar dated December 21, 2006. Filed as Exhibit 10.1 to NVR’s Form 8-K filed December 22, 2006 and incorporated herein by reference. | ||
| 10.15 | Fifteenth Amendment to Loan Agreement dated as of August 24, 2006 between NVR Mortgage Finance, Inc. and U.S. Bank National Association, JPMorgan Chase Bank, Guaranty Bank, Comerica Bank, National City Bank and Washington Mutual Bank, F.A. Filed as Exhibit 10.1 to NVR’s Form 8-K filed August 24, 2006 and incorporated herein by reference. | ||
| 10.16 | Commitment and Acceptance dated March 27, 2006 increasing the commitment under NVR, Inc.’s existing revolving credit agreement with JPMorgan Chase Bank, as Administrative Agent, and the Lenders that are parties thereto, dated December 7, 2005 by $45 million to an aggregate commitment of $445 million. Filed as Exhibit 10.1 to NVR’s Form 8-K filed March 30, 2006 and incorporated herein by reference. |
44
Table of Contents
| 10.17 | Commitment and Acceptance dated August 16, 2006 increasing the commitment under NVR, Inc.’s existing revolving credit agreement with JPMorgan Chase Bank, as Administrative Agent, and the Lenders that are parties thereto, dated December 7, 2005 by $155 million to an aggregate commitment of $600 million. Filed as Exhibit 10.1 to NVR’s Form 8-K filed August 17, 2006 and incorporated herein by reference. | ||
| 10.18* | Amendment No. 2 to Employment Agreement between NVR, Inc. and Dwight C. Schar dated November 6, 2007. Filed as Exhibit 10.1 to NVR’s Form 8-K filed November 7, 2007 and incorporated herein by reference. | ||
| 10.19* | The Form of Non-Qualified Stock Option Agreement under the NVR, Inc. 2000 Broadly Based Stock Option Plan. Filed as Exhibit 10.1 to NVR’s Form 8-K filed January 3, 2008 and incorporated herein by reference. | ||
| 10.20* | The Form of Non-Qualified Stock Option Agreement under the 1998 Directors’ Long-Term Stock Option Plan. Filed as Exhibit 10.34 to NVR’s Annual Report on Form 10-K for the period ended December 31, 2007 and incorporated herein by reference. | ||
| 10.21 | Repurchase Agreement dated August 5, 2008 among NVR Finance and U.S. Bank National Association, as Agent, and other lenders party thereto. Filed as Exhibit 10.1 to NVR’s Form 8-K filed on August 8, 2008 and incorporated herein by reference. | ||
| 10.22* | Amendment No. 3 to Employment Agreement between NVR, Inc. and Dwight C. Schar dated November 6, 2008. Filed as Exhibit 10.1 to NVR’s Form 8-K filed November 6, 2008 and incorporated herein by reference. | ||
| 10.23* | Amendment No. 4 to Employment Agreement between NVR, Inc. and Dwight C. Schar dated January 1, 2009. Filed as Exhibit 10.24 to NVR’s Annual Report on form 10-K for the period ended December 31, 2008 and incorporated herein by reference. | ||
| 10.24* | Amendment No. 1 to Employment Agreement between NVR, Inc. and Paul C. Saville dated January 1, 2009. Filed as Exhibit 10.25 to NVR’s Annual Report on form 10-K for the period ended December 31, 2008 and incorporated herein by reference. | ||
| 10.25* | Amendment No. 1 to Employment Agreement between NVR, Inc. and William J. Inman dated January 1, 2009. Filed as Exhibit 10.26 to NVR’s Annual Report on form 10-K for the period ended December 31, 2008 and incorporated herein by reference. | ||
| 10.26* | Amendment No. 1 to Employment Agreement between NVR, Inc. and Dennis M. Seremet dated July 30, 2008. Filed as Exhibit 10.27 to NVR’s Annual Report on form 10-K for the period ended December 31, 2008 and incorporated herein by reference. | ||
| 10.27* | Amendment No. 2 to Employment Agreement between NVR, Inc. and Dennis M. Seremet dated January 1, 2009. Filed as Exhibit 10.28 to NVR’s Annual Report on form 10-K for the period ended December 31, 2008 and incorporated herein by reference. | ||
| 10.28* | Summary of 2010 Named Executive Officer annual incentive compensation plan. Filed herewith. | ||
| 10.29 | First Amendment to Repurchase Agreement dated August 5, 2008 among NVR Finance and U.S. Bank National Association, as agent and a Buyer, and the other Buyers. Filed as Exhibit 10.1 to NVR’s Form 8-K filed August 7, 2009 and incorporated herein by reference. | ||
| 10.30 | First Amendment to Credit Agreement dated as of December 7, 2005 among NVR, Inc. and the lenders party hereto, JPMorgan Chase Bank, N.A., as Administrative Agent, U.S. Bank, National Association, as Syndication Agent, SunTrust Bank and Wachovia Bank, National Association, as Documentation Agents, AmSouth Bank, Comerica Bank, Calyon New York Branch and Mizuho Corporate Bank, Ltd., as Managing Agents, and J.P. Morgan Securities Inc., as Lead Arranger and Sole Book Runner. Filed as Exhibit 10.2 to NVR’s Form 8-K filed August 7, 2009 and incorporated herein by reference. |
45
Table of Contents
| 21 | NVR, Inc. Subsidiaries. Filed herewith. | ||
| 23 | Consent of KPMG LLP (Independent Registered Public Accounting Firm). Filed herewith. | ||
| 31.1 | Certification of NVR’s Chief Executive Officer pursuant to Rule 13a-14(a). Filed herewith. | ||
| 31.2 | Certification of NVR’s Chief Financial Officer pursuant to Rule 13a-14(a). Filed herewith. | ||
| 32 | Certification of NVR’s Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. Filed herewith. |
| * | Exhibit is a management contract or compensatory plan or arrangement. |
46
Table of Contents
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
|
NVR, Inc.
|
||||
| By: | /s/ Paul C. Saville | |||
| Paul C. Saville | ||||
| President and Chief Executive Officer | ||||
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been
signed by the following persons on behalf of the registrant and in the capacities and on the
dates indicated.
| Signature | Title | Date | ||
|
/s/ Dwight C. Schar
|
Chairman | |||
|
Dwight C. Schar
|
February 26, 2010 | |||
|
|
||||
|
/s/ C. E. Andrews
|
Director | |||
|
C. E. Andrews
|
February 26, 2010 | |||
|
|
||||
|
/s/ Robert C. Butler
|
Director | |||
|
|
||||
|
Robert C. Butler
|
February 26, 2010 | |||
|
|
||||
|
/s/ Timothy M. Donahue
|
Director | |||
|
|
||||
|
Timothy M. Donahue
|
February 26, 2010 | |||
|
|
||||
|
/s/ Alfred E. Festa
|
Director | |||
|
|
||||
|
Alfred E. Festa
|
February 26, 2010 | |||
|
|
||||
|
/s/ Manuel H. Johnson
|
Director | |||
|
|
||||
|
Manuel H. Johnson
|
February 26, 2010 | |||
|
|
||||
|
/s/ William A. Moran
|
Director | |||
|
|
||||
|
William A. Moran
|
February 26, 2010 | |||
|
|
||||
|
/s/ David A. Preiser
|
Director | |||
|
|
||||
|
David A. Preiser
|
February 26, 2010 | |||
|
|
||||
|
/s/ W. Grady Rosier
|
Director | |||
|
|
||||
|
W. Grady Rosier
|
February 26, 2010 | |||
|
|
||||
|
/s/ John M. Toups
|
Director | |||
|
John M. Toups
|
February 26, 2010 | |||
|
|
||||
|
/s/ Paul W. Whetsell
|
Director | |||
|
Paul W. Whetsell
|
February 26, 2010 | |||
|
|
||||
|
/s/ Paul C. Saville
|
Principal Executive Officer | |||
|
Paul C. Saville
|
February 26, 2010 | |||
|
|
||||
|
/s/ Dennis M. Seremet
|
Principal Financial Officer | |||
|
Dennis M. Seremet
|
February 26, 2010 |
47
Table of Contents
|
/s/ Robert W. Henley
|
Principal Accounting Officer | |||
|
Robert W. Henley
|
February 26, 2010 |
48
Table of Contents
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders
NVR, Inc.:
NVR, Inc.:
We have audited the accompanying consolidated balance sheets of NVR, Inc. and subsidiaries as of
December 31, 2009 and 2008, and the related consolidated statements of income, shareholders’ equity
and cash flows for each of the years in the three-year period ended December 31, 2009. These
consolidated financial statements are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of NVR, Inc. as of December 31, 2009 and 2008, and the
results of their operations and their cash flows for each of the years in the three-year period
ended December 31, 2009, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), NVR, Inc.’s internal control over financial reporting as of December 31,
2009, based on criteria established in
Internal Control — Integrated Framework
issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated
February 26, 2010 expressed an unqualified opinion on the effectiveness of the Company’s internal
control over financial reporting
.
KPMG LLP
McLean, Virginia
February 26, 2010
February 26, 2010
49
Table of Contents
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders
NVR, Inc.:
NVR, Inc.:
We have audited NVR, Inc.’s internal control over financial reporting as of December 31, 2009,
based on criteria established in
Internal Control — Integrated Framework
issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO). NVR, Inc.’s management is responsible
for maintaining effective internal control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting, included in the accompanying
Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express
an opinion on the Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control over financial reporting was
maintained in all material respects. Our audit included obtaining an understanding of internal
control over financial reporting, assessing the risk that a material weakness exists, and testing
and evaluating the design and operating effectiveness of internal control based on the assessed
risk. Our audit also included performing such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles. A
company’s internal control over financial reporting includes those policies and procedures that (1)
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (2) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of management and directors of the company;
and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the company’s assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate.
In our opinion, NVR, Inc. maintained, in all material respects, effective internal control over
financial reporting as of December 31, 2009, based on criteria established in
Internal Control -
Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway
Commission.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the consolidated balance sheets of NVR, Inc. as of December 31, 2009 and
2008, and the related consolidated statements of income, shareholders’ equity and cash flows for
each of the years in the three-year period ended December 31, 2009, and our report dated February
26, 2010 expressed an unqualified opinion on those consolidated financial statements.
KPMG LLP
McLean, Virginia
February 26, 2010
February 26, 2010
50
Table of Contents
NVR, Inc.
Consolidated Balance Sheets
(in thousands, except share and per share data)
Consolidated Balance Sheets
(in thousands, except share and per share data)
| December 31, | ||||||||
| 2009 | 2008 | |||||||
|
ASSETS
|
||||||||
|
|
||||||||
|
Homebuilding:
|
||||||||
|
Cash and cash equivalents
|
$ | 1,248,689 | $ | 1,146,426 | ||||
|
Marketable securities
|
219,535 | — | ||||||
|
Receivables
|
7,995 | 11,594 | ||||||
|
Inventory:
|
||||||||
|
Lots and housing units, covered under
sales agreements with customers
|
337,523 | 335,238 | ||||||
|
Unsold lots and housing units
|
73,673 | 57,639 | ||||||
|
Manufacturing materials and other
|
7,522 | 7,693 | ||||||
|
|
||||||||
|
|
418,718 | 400,570 | ||||||
|
|
||||||||
|
Contract land deposits, net
|
49,906 | 29,073 | ||||||
|
Consolidated assets not owned
|
70,430 | 114,930 | ||||||
|
Property, plant and equipment, net
|
20,215 | 25,658 | ||||||
|
Reorganization value in excess of amounts
allocable to identifiable assets, net
|
41,580 | 41,580 | ||||||
|
Deferred tax assets, net
|
200,340 | 223,393 | ||||||
|
Other assets
|
58,319 | 19,233 | ||||||
|
|
||||||||
|
|
2,335,727 | 2,012,457 | ||||||
|
|
||||||||
|
|
||||||||
|
Mortgage Banking:
|
||||||||
|
Cash and cash equivalents
|
1,461 | 1,217 | ||||||
|
Mortgage loans held for sale, net
|
40,097 | 72,488 | ||||||
|
Property and equipment, net
|
446 | 759 | ||||||
|
Reorganization value in excess of amounts
allocable to identifiable assets, net
|
7,347 | 7,347 | ||||||
|
Other assets
|
10,692 | 8,968 | ||||||
|
|
||||||||
|
|
60,043 | 90,779 | ||||||
|
|
||||||||
|
|
||||||||
|
Total assets
|
$ | 2,395,770 | $ | 2,103,236 | ||||
|
|
||||||||
(Continued)
See notes to consolidated financial statements.
51
Table of Contents
NVR, Inc.
Consolidated Balance Sheets (Continued)
(in thousands, except share and per share data)
Consolidated Balance Sheets (Continued)
(in thousands, except share and per share data)
| December 31, | ||||||||
| 2009 | 2008 | |||||||
|
LIABILITIES AND SHAREHOLDERS’ EQUITY
|
||||||||
|
|
||||||||
|
Homebuilding:
|
||||||||
|
Accounts payable
|
$ | 120,464 | $ | 137,285 | ||||
|
Accrued expenses and other liabilities
|
221,352 | 194,869 | ||||||
|
Liabilities related to consolidated assets not owned
|
65,915 | 109,439 | ||||||
|
Customer deposits
|
63,591 | 59,623 | ||||||
|
Other term debt
|
2,166 | 2,530 | ||||||
|
Senior notes
|
133,370 | 163,320 | ||||||
|
|
||||||||
|
|
606,858 | 667,066 | ||||||
|
|
||||||||
|
Mortgage Banking:
|
||||||||
|
Accounts payable and other liabilities
|
19,306 | 17,842 | ||||||
|
Notes payable
|
12,344 | 44,539 | ||||||
|
|
||||||||
|
|
31,650 | 62,381 | ||||||
|
|
||||||||
|
Total liabilities
|
638,508 | 729,447 | ||||||
|
|
||||||||
|
|
||||||||
|
Commitments and contingencies
|
||||||||
|
|
||||||||
|
Shareholders’ equity:
|
||||||||
|
Common stock, $0.01 par value;
|
||||||||
|
60,000,000 shares authorized; 20,559,671
and 20,561,187 shares issued as of December 31,
2009 and 2008, respectively
|
206 | 206 | ||||||
|
Additional paid-in-capital
|
830,531 | 722,265 | ||||||
|
Deferred compensation trust - 265,278 and 514,470
shares of NVR, Inc. common stock as of
December 31, 2009 and 2008, respectively
|
(40,799 | ) | (74,978 | ) | ||||
|
Deferred compensation liability
|
40,799 | 74,978 | ||||||
|
Retained earnings
|
3,823,067 | 3,630,887 | ||||||
|
Less treasury stock at cost — 14,609,560 and
15,028,335 shares as of December 31, 2009
and 2008, respectively
|
(2,896,542 | ) | (2,979,569 | ) | ||||
|
|
||||||||
|
Total shareholders’ equity
|
1,757,262 | 1,373,789 | ||||||
|
|
||||||||
|
Total liabilities and shareholders’ equity
|
$ | 2,395,770 | $ | 2,103,236 | ||||
|
|
||||||||
See notes to consolidated financial statements.
52
Table of Contents
NVR, Inc.
Consolidated Statements of Income
(in thousands, except per share data)
Consolidated Statements of Income
(in thousands, except per share data)
| Year Ended | Year Ended | Year Ended | ||||||||||
| December 31, 2009 | December 31, 2008 | December 31, 2007 | ||||||||||
|
Homebuilding:
|
||||||||||||
|
Revenues
|
$ | 2,683,467 | $ | 3,638,702 | $ | 5,048,187 | ||||||
|
Other income
|
8,697 | 16,386 | 21,118 | |||||||||
|
Cost of sales
|
(2,185,733 | ) | (3,181,010 | ) | (4,227,059 | ) | ||||||
|
Selling, general and administrative
|
(233,152 | ) | (308,739 | ) | (343,520 | ) | ||||||
|
|
||||||||||||
|
Operating income
|
273,279 | 165,339 | 498,726 | |||||||||
|
Interest expense
|
(10,196 | ) | (12,902 | ) | (13,150 | ) | ||||||
|
Goodwill and intangible asset impairment
|
— | (11,686 | ) | — | ||||||||
|
|
||||||||||||
|
Homebuilding income
|
263,083 | 140,751 | 485,576 | |||||||||
|
|
||||||||||||
|
|
||||||||||||
|
Mortgage Banking:
|
||||||||||||
|
Mortgage banking fees
|
60,381 | 54,337 | 81,155 | |||||||||
|
Interest income
|
2,979 | 3,955 | 4,900 | |||||||||
|
Other income
|
629 | 745 | 1,060 | |||||||||
|
General and administrative
|
(27,474 | ) | (31,579 | ) | (32,505 | ) | ||||||
|
Interest expense
|
(1,184 | ) | (754 | ) | (681 | ) | ||||||
|
|
||||||||||||
|
Mortgage banking income
|
35,331 | 26,704 | 53,929 | |||||||||
|
|
||||||||||||
|
|
||||||||||||
|
Income before taxes
|
298,414 | 167,455 | 539,505 | |||||||||
|
Income tax expense
|
(106,234 | ) | (66,563 | ) | (205,550 | ) | ||||||
|
|
||||||||||||
|
|
||||||||||||
|
Net income
|
$ | 192,180 | $ | 100,892 | $ | 333,955 | ||||||
|
|
||||||||||||
|
|
||||||||||||
|
Basic earnings per share
|
$ | 33.10 | $ | 18.76 | $ | 61.61 | ||||||
|
|
||||||||||||
|
|
||||||||||||
|
Diluted earnings per share
|
$ | 31.26 | $ | 17.04 | $ | 54.14 | ||||||
|
|
||||||||||||
|
|
||||||||||||
|
Basic weighted average
|
||||||||||||
|
shares outstanding
|
5,807 | 5,379 | 5,420 | |||||||||
|
|
||||||||||||
|
|
||||||||||||
|
Diluted weighted average
|
||||||||||||
|
shares outstanding
|
6,149 | 5,920 | 6,168 | |||||||||
|
|
||||||||||||
See notes to consolidated financial statements.
53
Table of Contents
NVR, Inc.
Consolidated Statements of Shareholders’ Equity
(in thousands)
Consolidated Statements of Shareholders’ Equity
(in thousands)
| Additional | Deferred | Deferred | ||||||||||||||||||||||||||
| Common | Paid-in | Retained | Treasury | Compensation | Compensation | |||||||||||||||||||||||
| Stock | Capital | Earnings | Stock | Trust | Liability | Total | ||||||||||||||||||||||
|
Balance, December 31, 2006
|
$ | 206 | $ | 585,438 | $ | 3,196,040 | $ | (2,629,610 | ) | $ | (80,491 | ) | $ | 80,491 | $ | 1,152,074 | ||||||||||||
|
|
||||||||||||||||||||||||||||
|
Net income
|
— | — | 333,955 | — | — | — | 333,955 | |||||||||||||||||||||
|
Deferred compensation
activity
|
— | — | — | — | 5,024 | (5,024 | ) | — | ||||||||||||||||||||
|
Purchase of common stock
for treasury
|
— | — | — | (507,472 | ) | (169 | ) | 169 | (507,472 | ) | ||||||||||||||||||
|
Stock-based compensation
|
— | 14,189 | — | — | — | — | 14,189 | |||||||||||||||||||||
|
Tax benefit from stock options
exercised and deferred
compensation distributions
|
— | 69,046 | — | — | — | — | 69,046 | |||||||||||||||||||||
|
Stock option activity
|
— | 67,583 | — | — | — | — | 67,583 | |||||||||||||||||||||
|
Treasury stock issued
upon option exercise
|
— | (72,625 | ) | — | 72,625 | — | — | — | ||||||||||||||||||||
|
|
||||||||||||||||||||||||||||
|
Balance, December 31, 2007
|
206 | 663,631 | 3,529,995 | (3,064,457 | ) | (75,636 | ) | 75,636 | 1,129,375 | |||||||||||||||||||
|
|
||||||||||||||||||||||||||||
|
Net income
|
— | — | 100,892 | — | — | — | 100,892 | |||||||||||||||||||||
|
Deferred compensation
activity
|
— | — | — | — | 786 | (786 | ) | — | ||||||||||||||||||||
|
Purchase of common stock
for treasury
|
— | — | — | — | (128 | ) | 128 | — | ||||||||||||||||||||
|
Stock-based compensation
|
— | 41,204 | — | — | — | — | 41,204 | |||||||||||||||||||||
|
Tax benefit from stock options
exercised and deferred
compensation distributions
|
— | 50,240 | — | — | — | — | 50,240 | |||||||||||||||||||||
|
Stock option activity
|
— | 52,078 | — | — | — | — | 52,078 | |||||||||||||||||||||
|
Treasury stock issued
upon option exercise
|
— | (84,888 | ) | — | 84,888 | — | — | — | ||||||||||||||||||||
|
|
||||||||||||||||||||||||||||
|
Balance, December 31, 2008
|
206 | 722,265 | 3,630,887 | (2,979,569 | ) | (74,978 | ) | 74,978 | 1,373,789 | |||||||||||||||||||
|
|
||||||||||||||||||||||||||||
|
Net income
|
— | — | 192,180 | — | — | — | 192,180 | |||||||||||||||||||||
|
Deferred compensation
activity
|
— | — | — | — | 34,179 | (34,179 | ) | — | ||||||||||||||||||||
|
Stock-based compensation
|
— | 46,302 | — | — | — | — | 46,302 | |||||||||||||||||||||
|
Tax benefit from stock options
exercised and deferred
compensation distributions
|
— | 66,448 | — | — | — | — | 66,448 | |||||||||||||||||||||
|
Stock option activity
|
— | 78,543 | — | — | — | — | 78,543 | |||||||||||||||||||||
|
Treasury stock issued
upon option exercise
|
— | (83,027 | ) | — | 83,027 | — | — | — | ||||||||||||||||||||
|
|
||||||||||||||||||||||||||||
|
Balance, December 31, 2009
|
$ | 206 | $ | 830,531 | $ | 3,823,067 | $ | (2,896,542 | ) | $ | (40,799 | ) | $ | 40,799 | $ | 1,757,262 | ||||||||||||
|
|
||||||||||||||||||||||||||||
See notes to consolidated financial statements
54
Table of Contents
NVR, Inc.
Consolidated Statements of Cash Flows
(in thousands)
Consolidated Statements of Cash Flows
(in thousands)
| Year Ended | Year Ended | Year Ended | ||||||||||
| December 31, 2009 | December 31, 2008 | December 31, 2007 | ||||||||||
|
Cash flows from operating activities:
|
||||||||||||
|
Net income
|
$ | 192,180 | $ | 100,892 | $ | 333,955 | ||||||
|
Adjustments to reconcile net income to net cash
provided by operating activities:
|
||||||||||||
|
Depreciation and amortization
|
9,713 | 13,641 | 17,036 | |||||||||
|
Excess income tax benefit from exercise of stock options
|
(66,448 | ) | (50,240 | ) | (69,046 | ) | ||||||
|
Stock option compensation expense
|
46,302 | 41,204 | 14,189 | |||||||||
|
Contract land deposit (recoveries) impairments
|
(6,464 | ) | 165,024 | 261,760 | ||||||||
|
Gain on sales of loans
|
(46,960 | ) | (38,921 | ) | (60,128 | ) | ||||||
|
Gain (loss) on sale of fixed assets
|
(358 | ) | 472 | 1,383 | ||||||||
|
Gain on extinguishment of debt
|
— | (251 | ) | — | ||||||||
|
Impairment of goodwill and intangible assets
|
— | 11,686 | — | |||||||||
|
Deferred tax expense (benefit)
|
21,905 | (12,048 | ) | (43,343 | ) | |||||||
|
Mortgage loans closed
|
(1,943,074 | ) | (2,046,575 | ) | (2,392,395 | ) | ||||||
|
Proceeds from sales of mortgage loans
|
2,018,151 | 2,115,607 | 2,515,973 | |||||||||
|
Principal payments on mortgage loans held for sale
|
— | 4,321 | 7,393 | |||||||||
|
Net change in assets and liabilities:
|
||||||||||||
|
(Increase) decrease in inventories
|
(18,148 | ) | 288,284 | 44,762 | ||||||||
|
(Increase) decrease in contract land deposits
|
(14,848 | ) | 29 | (31,893 | ) | |||||||
|
Decrease (increase) in receivables
|
3,682 | (1,016 | ) | 2,730 | ||||||||
|
Increase (decrease) in accounts payable, accrued
expenses and customer deposits
|
82,578 | (157,111 | ) | (39,351 | ) | |||||||
|
Other, net
|
(36,569 | ) | 27,363 | (4,259 | ) | |||||||
|
|
||||||||||||
|
Net cash provided by operating activities
|
241,642 | 462,361 | 558,766 | |||||||||
|
|
||||||||||||
|
|
||||||||||||
|
Cash flows from investing activities:
|
||||||||||||
|
Purchase of marketable securities
|
(858,362 | ) | — | — | ||||||||
|
Marketable securities maturing
|
638,827 | — | — | |||||||||
|
Purchase of property, plant and equipment
|
(3,044 | ) | (6,899 | ) | (10,545 | ) | ||||||
|
Proceeds from the sale of property, plant and equipment
|
962 | 1,401 | 1,230 | |||||||||
|
|
||||||||||||
|
Net cash used by investing activities
|
(221,617 | ) | (5,498 | ) | (9,315 | ) | ||||||
|
|
||||||||||||
|
|
||||||||||||
|
Cash flows from financing activities:
|
||||||||||||
|
Purchase of treasury stock
|
— | — | (507,472 | ) | ||||||||
|
Purchase of NVR common stock for deferred compensation plan
|
— | (128 | ) | (169 | ) | |||||||
|
Net repayments under notes payable and credit lines
|
(32,559 | ) | (39,214 | ) | (70,349 | ) | ||||||
|
Repurchase of Senior Notes
|
(29,950 | ) | (36,405 | ) | — | |||||||
|
Excess income tax benefit from exercise of stock options
|
66,448 | 50,240 | 69,046 | |||||||||
|
Exercise of stock options
|
78,543 | 52,078 | 67,583 | |||||||||
|
|
||||||||||||
|
Net cash provided (used) by financing activities
|
82,482 | 26,571 | (441,361 | ) | ||||||||
|
|
||||||||||||
|
Net increase in cash and cash equivalents
|
102,507 | 483,434 | 108,090 | |||||||||
|
Cash and cash equivalents, beginning of year
|
1,147,643 | 664,209 | 556,119 | |||||||||
|
|
||||||||||||
|
|
||||||||||||
|
Cash and cash equivalents, end of year
|
$ | 1,250,150 | $ | 1,147,643 | $ | 664,209 | ||||||
|
|
||||||||||||
|
|
||||||||||||
|
Supplemental disclosures of cash flow information:
|
||||||||||||
|
Interest paid during the year
|
$ | 10,010 | $ | 12,656 | $ | 12,744 | ||||||
|
|
||||||||||||
|
Income taxes paid during the year, net of refunds
|
$ | (28,807 | ) | $ | 65,128 | $ | 157,081 | |||||
|
|
||||||||||||
|
|
||||||||||||
|
Supplemental disclosures of non-cash activities:
|
||||||||||||
|
Change in net consolidated assets not owned
|
$ | (976 | ) | $ | (10,346 | ) | $ | (15,777 | ) | |||
|
|
||||||||||||
See notes to consolidated financial statements.
55
Table of Contents
NVR, Inc.
Notes to Consolidated Financial Statements
(dollars in thousands, except per share data)
Notes to Consolidated Financial Statements
(dollars in thousands, except per share data)
| 1. | Summary of Significant Accounting Policies | |
| Principles of Consolidation | ||
| The accompanying consolidated financial statements include the accounts of NVR, Inc. (“NVR” or the “Company”), its wholly owned subsidiaries, certain partially owned entities, and variable interest entities of which the Company has determined that it is the primary beneficiary. All significant intercompany transactions have been eliminated in consolidation. | ||
| Use of Estimates in the Preparation of Financial Statements | ||
| The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) 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 are believed to be reasonable under the facts and circumstances. Actual results could differ materially from those estimates made by management. | ||
| Cash and Cash Equivalents | ||
| Cash and cash equivalents include short-term investments with original maturities of three months or less. The homebuilding segment had restricted cash of $4,613 and $4,539 at December 31, 2009 and 2008, respectively, which relate to customer deposits for certain home sales and is recorded in “Other assets” in the accompanying balance sheets. | ||
| Marketable Securities | ||
| As of December 31, 2009 the Company held marketable securities totaling $219,535. These securities, which are debt securities issued by the U.S. Treasury and other U.S. government corporations and agencies, are classified by the Company as held-to-maturity, are measured at amortized cost and mature within one year. | ||
| 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. | ||
| Sold inventory is evaluated for impairment based on the contractual selling price compared to the total estimated cost to construct. Unsold inventory is evaluated for impairment by analyzing recent comparable sales prices within the applicable community compared to the costs incurred to date plus the expected costs to complete. Any calculated impairments are recorded immediately. |
56
Table of Contents
NVR, Inc.
Notes to Consolidated Financial Statements
(dollars in thousands, except per share data)
Notes to Consolidated Financial Statements
(dollars in thousands, except per share data)
| Contract Land Deposits | ||
| The Company purchases finished lots under fixed price purchase agreements that require deposits that may be forfeited if NVR fails 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. | ||
| NVR maintains an allowance for losses on contract land deposits that reflects the Company’s judgment of the present loss exposure in the existing contract land deposit portfolio at the end of the reporting period. To analyze contract land deposit impairments, NVR utilizes an ASC 450, Contingencies , loss contingency analysis that is conducted each quarter. In addition to considering market and economic conditions, NVR assesses contract land deposit impairments on a community-by-community basis pursuant to the purchase contract terms, analyzing, as applicable, current sales absorption levels, recent sales’ gross profit, the dollar differential between the contractual purchase price and the current market price for lots, a developer’s financial stability, a developer’s financial ability or willingness to reduce lot prices to current market prices, and the contract’s default status by either the Company or the developer along with an analysis of the expected outcome of any such default. | ||
| NVR’s analysis is focused on whether the Company can sell houses profitably in a particular community in the current market with which the Company is faced. Because the Company does not own the finished lots on which the Company has placed a contract land deposit, if the above analysis leads to a determination that the Company can’t sell homes profitably at the current contractual lot price, the Company then determine whether it will elect to default under the contract, forfeit the deposit and terminate the contract, or whether the Company will attempt to restructure the lot purchase contract, which may require it to forfeit the deposit to obtain contract concessions from a developer. The Company also assesses whether an impairment is present due to collectibility issues resulting from a developer’s non-performance because of financial or other conditions. | ||
| During the year ended December 31, 2009, the Company had a net pre-tax recovery of approximately $6,500 of contract land deposits previously considered to be uncollectible. During the years ended December 31, 2008 and 2007, the Company incurred pre-tax charges of approximately $165,000 and $261,800, respectively, related to the impairment of contract land deposits. These impairment charges were recorded in cost of sales on the accompanying consolidated statements of income. The contract land deposit asset on the accompanying consolidated balance sheets is shown net of an approximate $89,500 and $147,900 impairment valuation allowance at December 31, 2009 and 2008, respectively. | ||
| Property, Plant, and Equipment | ||
| Property, plant, and equipment are carried at cost less accumulated depreciation and amortization. Depreciation is based on the estimated useful lives of the assets using the straight-line method. Amortization of capital lease assets is included in depreciation expense. Model home furniture and fixtures are generally depreciated over a two-year period, office facilities and other equipment are depreciated over a period from three to ten years, manufacturing facilities are depreciated over periods of from five to forty years and property under capital leases is depreciated in a manner consistent with the Company’s depreciation policy for owned assets, or the lease-term if shorter. |
57
Table of Contents
NVR, Inc.
Notes to Consolidated Financial Statements
(dollars in thousands, except per share data)
Notes to Consolidated Financial Statements
(dollars in thousands, except per share data)
| Intangible Assets | ||
| Reorganization value in excess of identifiable assets (“excess reorganization value”) is an indefinite life intangible asset that was created upon NVR’s emergence from bankruptcy on September 30, 1993. Based on the allocation of the reorganization value, the portion of the reorganization value which was not attributed to specific tangible or intangible assets has been reported as excess reorganization value, which is treated similarly to goodwill. Excess reorganization value is not subject to amortization. Rather, excess reorganization value is subject to an impairment assessment on an annual basis or more frequently if changes in events or circumstances indicate that impairment may have occurred. Because excess reorganization value was based on the reorganization value of NVR’s entire enterprise upon bankruptcy emergence, the impairment assessment is conducted on an enterprise basis based on the comparison of NVR’s total equity compared to the market value of NVR’s outstanding publicly-traded common stock. The Company completed its annual assessment of impairment and management determined that there was no impairment of excess reorganization value. | ||
| Warranty/Product Liability Accruals | ||
| The Company establishes warranty and product liability reserves (“warranty reserve”) to provide for estimated future costs as a result of construction and product defects, product recalls and litigation incidental to NVR’s homebuilding business. Liability estimates are determined based on management’s 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. | ||
| Mortgage Loans Held for Sale, Derivatives and Hedging Activities | ||
| NVR originates several different loan products to its customers to finance the purchase of a home through its wholly-owned mortgage subsidiary. NVR sells all of the loans it originates into the secondary market typically within 30 days from origination. All of the loans that the Company originates are underwritten to the standards and specifications of the ultimate investor. Insofar as the Company underwrites its originated loans to those standards, the Company bears no increased concentration of credit risk from the issuance of loans, except in certain limited instances where early payment default occurs. The Company employs a quality control department to ensure that its underwriting controls are effectively operating, and further assesses the underwriting function as part of its assessment of internal controls over financial reporting. | ||
| Mortgage loans held for sale are recorded at fair value at closing in accordance with GAAP and thereafter are carried at the lower of cost or fair value until sold. | ||
| In the normal course of business, our 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 |
58
Table of Contents
NVR, Inc.
Notes to Consolidated Financial Statements
(dollars in thousands, except per share data)
Notes to Consolidated Financial Statements
(dollars in thousands, except per share data)
| borrowers, we enter 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, and, accordingly, are marked to fair value through earnings. At December 31, 2009, there were contractual commitments to extend credit to borrowers aggregating approximately $130,100, and open forward delivery sale contracts aggregating approximately $141,800. Please refer to Note 11 herein for a description of our fair value accounting calculation. | ||
| Earnings per Share | ||
| The following weighted average shares and share equivalents are used to calculate basic and diluted EPS for the years ended December 31, 2009, 2008 and 2007: |
| Year Ended | Year Ended | Year Ended | ||||||||||
| December 31, 2009 | December 31, 2008 | December 31, 2007 | ||||||||||
|
Weighted average number of
shares outstanding used to
calculate basic EPS
|
5,806,773 | 5,379,409 | 5,420,159 | |||||||||
|
|
||||||||||||
|
Dilutive securities:
|
||||||||||||
|
Stock options
|
341,996 | 540,876 | 747,636 | |||||||||
|
|
||||||||||||
|
|
||||||||||||
|
Weighted average number of
shares and share equivalents
outstanding used to calculate
diluted EPS
|
6,148,769 | 5,920,285 | 6,167,795 | |||||||||
|
|
||||||||||||
| The assumed proceeds used in the treasury method for calculating NVR’s diluted earnings per share includes the amount the employee must pay upon exercise, the amount of compensation cost attributed to future services and not yet recognized, and the amount of tax benefits that would be credited to additional paid-in capital assuming exercise of the option. The assumed amount credited to additional paid-in capital equals the tax benefit from assumed exercise after consideration of the intrinsic value upon assumed exercise less the actual stock-based compensation expense to be recognized in the income statement from 2006 and future periods. |
| Options issued under equity benefit plans to purchase 134,405; 316,747 and 57,277 shares of common stock were outstanding during the years ended December 31, 2009, 2008 and 2007, respectively, but were not included in the computation of diluted earnings per share because the effect would have been anti-dilutive. In addition, 402,372 performance-based options were outstanding during the year ended December 31, 2007, and pursuant to GAAP requirements were excluded from the computation of diluted earnings per share because the performance target had not been achieved. As of December 31, 2008 the performance target was not met and all 348,490 performance-based options outstanding expired unexercisable. |
| Revenues-Homebuilding Operations |
| NVR builds single-family detached homes, townhomes and condominium buildings, which generally are constructed on a pre-sold basis for the ultimate customer. In accordance with GAAP, revenues are recognized at the time the unit is settled and title passes to the customer, adequate cash payment has been received and there is no continuing involvement. In situations where the buyer’s financing is originated by NVRM and the buyer has not made an adequate initial or continuing investment as prescribed by GAAP, the profit on such settlement is deferred until the sale of the related loan to a third-party investor has been completed. |
59
Table of Contents
NVR, Inc.
Notes to Consolidated Financial Statements
(dollars in thousands, except per share data)
Notes to Consolidated Financial Statements
(dollars in thousands, except per share data)
| Mortgage Banking Fees | ||
| Mortgage banking fees include income earned by NVR’s mortgage banking operations for originating mortgage loans, servicing mortgage loans held on an interim basis, title fees, gains and losses on the sale of mortgage loans and mortgage servicing and other activities incidental to mortgage banking. Mortgage banking fees are generally recognized after the loan has been sold to an unaffiliated, third party investor. | ||
| Income Taxes | ||
| Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on the deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. | ||
| Financial Instruments | ||
| Except as otherwise noted here, NVR believes that insignificant differences exist between the carrying value and the fair value of its financial instruments. The estimated fair value of NVR’s 5% Senior Notes due 2010 as of December 31, 2009 and 2008 was $134,829 and $161,937, respectively. The estimated fair value is based on a quoted market price. The carrying value was $133,370 and $163,320 at December 31, 2009 and 2008, respectively. | ||
| Stock-Based Compensation | ||
| On January 1, 2006 (the “Effective Date”), the Company adopted Statement of Financial Accounting Standards (“SFAS”) 123R, Share-Based Payment , which revised SFAS 123, Accounting for Stock-Based Compensation , as codified in Accounting Standards Codification (“ASC”) 718, Compensation — Stock Compensation. Prior to fiscal year 2006, NVR followed the intrinsic value method in accounting for its stock-based employee compensation arrangements as defined by Accounting Principles Board Opinion (“APB”) No. 25, “Accounting for Stock Issued to Employees ” . | ||
| ASC 718 requires an entity to recognize an expense within its income statement for all share-based payment arrangements, which includes employee stock option plans. The expense is based on the grant-date fair value of the options granted, and is recognized ratably over the requisite service period. NVR adopted the standard under the modified prospective method, which applied to new awards and to awards modified, repurchased, or cancelled after the required Effective Date, as well as to the unvested portion of awards outstanding as of the required Effective Date. The Company’s stock option programs are accounted for as equity-classified awards. See Note 9 herein for further discussion of stock-based compensation plans. | ||
| Comprehensive Income | ||
| For the years ended December 31, 2009, 2008 and 2007, comprehensive income equaled net income; therefore, a separate statement of comprehensive income is not included in the accompanying Consolidated Financial Statements. |
60
Table of Contents
NVR, Inc.
Notes to Consolidated Financial Statements
(dollars in thousands, except per share data)
Notes to Consolidated Financial Statements
(dollars in thousands, except per share data)
| Recent Accounting Pronouncements | ||
| In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements — an amendment of ARB No. 51 as codified in ASC 810, Consolidation . ASC 810 provides guidance on accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. Specifically, this guidance requires the recognition of a noncontrolling interest as equity in the consolidated financial statements and separate from the parent’s 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, but deducted to arrive at income available to common shareholders. ASC 810 clarifies that changes in a parent’s 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. ASC 810 also includes expanded disclosure requirements regarding the interests of the parent and its noncontrolling interests. ASC 810 was effective for the Company beginning January 1, 2009. Its adoption did not have a material impact on the Company’s financial statements. | ||
| In February 2008, the FASB issued FASB Staff Position No. FAS 157-2 (“FSP No. 157-2”) Effective Date of FASB Statement No. 157 as codified in ASC 820, Fair Value Measurements and Disclosures , which delayed the effective date of SFAS No. 157 (codified in ASC 820) for non-financial assets and non-financial liabilities to fiscal years beginning after November 15, 2008. FSP No. 157-2 became effective for the Company beginning January 1, 2009. The adoption of FSP No. 157-2 did not have a material impact on the Company’s financial statements. | ||
| In April 2009, the FASB issued FASB Staff Positions No. FAS 107-1 and No. APB 28-1 (“FSP No. 107-1 and APB No. 28-1”), Interim Disclosures about Fair Value of Financial Instruments , as codified in ASC 825, Financial Instruments, which enhances the interim disclosures required for the fair value of financial instruments and requires companies to disclose the methods and assumptions used to estimate the fair value of financial instruments. FSP No. 107-1 and APB 28-1 were effective for the Company beginning April 1, 2009. The Company conformed its disclosures to the requirements of FSP No. 107-1 and APB No. 28-1. | ||
| In April 2009, the FASB issued FASB Staff Position No. FAS 157-4 (“FSP No. 157-4”), Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly, as codified in ASC 820, Fair Value Measurements and Disclosures . FSP No. 157-4 clarifies the methodology to be used to determine fair value when there is no active market or where the price inputs being used represent distressed sales. FSP No. 157-4 also reaffirms the objective of fair value measurement as stated in ASC 820, which is to reflect how much an asset would be sold for in an orderly transaction. FSP No. 157-4 was effective for the Company beginning April 1, 2009. The adoption of FSP No. 157-4 did not have a material impact on the Company’s financial statements. | ||
| In April 2009, the FASB issued FASB Staff Positions No. FAS 115-2 and No. FAS 124-2, (“FSP No. 115-2 and FSP No. 124-2”), Recognition and Presentation of Other-Than-Temporary Impairment of Certain Investments in Debt and Equity Securities , as codified in ASC 320, Investments-Debt and Equity. FSP No. 115-2 and FSP No. 124-2 changes the existing other-than-temporary impairment model for debt securities and expands and increases the frequency of disclosures for other-than-temporary impairments for debt and equity securities. It was effective for the Company beginning April 1, 2009. The adoption of FSP No. 115-2 and FSP No. 124-2 did not have a material impact on the Company’s financial statements. |
61
Table of Contents
NVR, Inc.
Notes to Consolidated Financial Statements
(dollars in thousands, except per share data)
Notes to Consolidated Financial Statements
(dollars in thousands, except per share data)
| In May 2009, the FASB issued SFAS No. 165, Subsequent Events, as codified in ASC 855, Subsequent Events , which establishes the accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or available to be issued. ASC 855 was effective for the Company beginning April 1, 2009. The Company has complied with the requirements of ASC 855, as amended by Accounting Standards Update 2010-09. | ||
| In June 2009, the FASB issued SFAS No. 166, Accounting for Transfers of Financial Assets , as codified in ASC 860, Transfers and Servicing , which changes the conditions for reporting a transfer of a portion of a financial asset as a sale and requires additional year-end and interim disclosures. ASC 860 is effective for fiscal years beginning after November 15, 2009, and its implementation of which are not expected to have a material impact on the Company’s financial statements. | ||
| In June 2009, the FASB issued SFAS No. 167, Amendments to FASB Interpretation No. 46(R) , as codified in ASC 810 through Accounting Standards Update 2009-17. This statement amends FASB Interpretation 46R related to the consolidation of variable interest entities (“VIEs”) and revises the approach to determining the primary beneficiary of a VIE to be more qualitative in nature and requires companies to more frequently reassess whether they must consolidate a VIE. The amendment to ASC 810 is effective for fiscal years beginning after November 15, 2009. The Company is evaluating the impact of the amendment and currently believes that upon adoption, the majority of development entities associated with its fixed price purchase agreements would no longer be required to be consolidated. | ||
| In July 2009, the FASB issued SFAS No. 168, The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles , which supersedes SFAS No. 162, The Hierarchy of Generally Accepted Accounting Principles , as codified in ASC 105, Generally Accepted Accounting Principles (“ASC 105”), which establishes the FASB Accounting Standards Codification (the “Codification”). The Codification is the sole source of authoritative U.S. generally accepted accounting principles recognized by the FASB. All other accounting literature not included in the Codification is nonauthoritative. The Codification was effective for interim and annual periods ending after September 15, 2009. | ||
| Reclassification | ||
| The presentation of certain prior period amounts has been reclassified to conform to 2009 presentation. | ||
| 2. | Segment Information, Nature of Operations, and Certain Concentrations |
NVR’s homebuilding operations primarily construct and sell single-family detached homes,
townhomes and condominium buildings under four trade names: Ryan Homes, NVHomes, Fox Ridge
Homes, and Rymarc Homes. The Ryan Homes, Fox Ridge Homes, and Rymarc Homes products are
marketed primarily to first-time homeowners and first-time move-up buyers. The Ryan Homes
product is
62
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NVR, Inc.
Notes to Consolidated Financial Statements
(dollars in thousands, except per share data)
Notes to Consolidated Financial Statements
(dollars in thousands, except per share data)
sold in twenty-three metropolitan areas located in Maryland, Virginia, West Virginia,
Pennsylvania, New York, North Carolina, South Carolina, Florida, Ohio, New Jersey, Delaware,
Indiana and Kentucky. The Fox Ridge Homes product is sold solely in the Nashville, TN
metropolitan area. The Rymarc Homes product is sold solely in the Columbia, SC metropolitan
area. The NVHomes product is sold in the Washington, D.C., Baltimore, MD, Philadelphia, PA
and Maryland Eastern Shore metropolitan areas, and is marketed primarily to move-up and
up-scale buyers. NVR derived approximately 48% of its 2009 homebuilding revenues in the
Washington, D.C. and Baltimore, MD metropolitan areas.
NVR’s mortgage banking segment is a regional mortgage banking operation. Substantially
all of the mortgage banking segment’s loan closing activity is for NVR’s homebuilding
customers. NVR’s mortgage banking business generates revenues primarily from origination
fees, gains on sales of loans, and title fees. A substantial portion of the Company’s
mortgage operations is conducted in the Washington, D.C. and Baltimore, MD metropolitan areas.
The following disclosure includes four homebuilding reportable segments that aggregate
geographically the Company’s 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, western Pennsylvania and Indiana
Homebuilding South East — North Carolina, South Carolina, Florida and Tennessee
Homebuilding profit before tax includes all revenues and income generated from the sale
of homes, less the cost of homes sold, selling, general and administrative expenses, and a
corporate capital allocation charge. The corporate capital allocation charge eliminates in
consolidation, is based on the segment’s 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 segment’s results are providing the desired rate of return after covering the
Company’s cost of capital. The Company records charges on contract land deposits when it is
determined that it is probable that recovery of the deposit is impaired. For segment
reporting purposes, impairments on contract land deposits are charged to the operating segment
upon the determination to terminate a finished lot purchase agreement with the developer, or
to restructure a lot purchase agreement resulting in the forfeiture of the deposit. Mortgage
banking profit before tax consists of revenues generated from mortgage financing, title
insurance and closing services, less the costs of such services and general and administrative
costs. Mortgage banking operations are not charged a capital allocation charge.
In addition to the corporate capital allocation and contract land deposit impairments
discussed above, the other reconciling items between segment profit and consolidated profit
before tax include unallocated corporate overhead (including all management incentive
compensation), stock option compensation expense, consolidation adjustments and external
corporate interest expense. NVR’s overhead functions, such as accounting, treasury, human
resources, etc., are centrally performed and the costs are not allocated to the Company’s
operating segments. Consolidation adjustments consist of such items necessary to convert the
reportable segments’ results, which are predominantly maintained on a cash basis, to a full
accrual basis for external financial statement presentation purposes, and are not allocated to
the Company’s 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 Company’s outstanding Senior Notes and working capital line
borrowings, and is not charged to the
operating segments because the charges are included in the corporate
capital allocation discussed above.
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NVR, Inc.
Notes to Consolidated Financial Statements
(dollars in thousands, except per share data)
Notes to Consolidated Financial Statements
(dollars in thousands, except per share data)
Following are tables presenting revenues, segment profit and segment assets for each
reportable segment, with reconciliations to the amounts reported for the consolidated
enterprise, where applicable:
| Year Ended December 31, | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
|
Revenues:
|
||||||||||||
|
Homebuilding Mid Atlantic
|
$ | 1,661,244 | $ | 2,161,764 | $ | 3,099,053 | ||||||
|
Homebuilding North East
|
254,654 | 347,142 | 433,631 | |||||||||
|
Homebuilding Mid East
|
505,431 | 659,649 | 860,139 | |||||||||
|
Homebuilding South East
|
262,138 | 470,147 | 655,364 | |||||||||
|
Mortgage Banking
|
60,381 | 54,337 | 81,155 | |||||||||
|
|
||||||||||||
|
Total Consolidated Revenues
|
$ | 2,743,848 | $ | 3,693,039 | $ | 5,129,342 | ||||||
|
|
||||||||||||
| Year Ended December 31, | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
|
Profit:
|
||||||||||||
|
Homebuilding Mid Atlantic
|
$ | 185,861 | $ | 103,690 | $ | 291,012 | ||||||
|
Homebuilding North East
|
19,572 | 13,182 | 11,176 | |||||||||
|
Homebuilding Mid East
|
38,012 | 39,643 | 78,547 | |||||||||
|
Homebuilding South East
|
7,384 | 7,904 | 87,701 | |||||||||
|
Mortgage Banking
|
38,138 | 29,227 | 54,576 | |||||||||
|
|
||||||||||||
|
Total Segment Profit
|
288,967 | 193,646 | 523,012 | |||||||||
|
|
||||||||||||
|
Contract land deposit recovery (impairments) (1)
|
42,939 | (41,134 | ) | (79,002 | ) | |||||||
|
Stock compensation expense (2)
|
(46,302 | ) | (41,204 | ) | (14,189 | ) | ||||||
|
Corporate capital allocation (3)
|
61,753 | 108,509 | 152,363 | |||||||||
|
Unallocated corporate overhead (4)
|
(44,103 | ) | (52,696 | ) | (58,990 | ) | ||||||
|
Consolidation adjustments and other (5)
|
4,970 | 24,437 | 28,846 | |||||||||
|
Impairment of goodwill and intangible assets (6)
|
— | (11,686 | ) | — | ||||||||
|
Corporate interest expense
|
(9,810 | ) | (12,417 | ) | (12,535 | ) | ||||||
|
|
||||||||||||
|
Reconciling items sub-total
|
9,447 | (26,191 | ) | 16,493 | ||||||||
|
|
||||||||||||
|
Consolidated Income before Taxes
|
$ | 298,414 | $ | 167,455 | $ | 539,505 | ||||||
|
|
||||||||||||
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NVR, Inc.
Notes to Consolidated Financial Statements
(dollars in thousands, except per share data)
Notes to Consolidated Financial Statements
(dollars in thousands, except per share data)
| Year Ended December 31, | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
|
Assets:
|
||||||||||||
|
Homebuilding Mid Atlantic
|
$ | 448,019 | $ | 403,439 | $ | 699,039 | ||||||
|
Homebuilding North East
|
54,132 | 53,732 | 95,026 | |||||||||
|
Homebuilding Mid East
|
94,225 | 82,976 | 117,722 | |||||||||
|
Homebuilding South East
|
37,663 | 53,890 | 106,627 | |||||||||
|
Mortgage Banking
|
52,696 | 83,432 | 119,183 | |||||||||
|
|
||||||||||||
|
Total Segment Assets
|
686,735 | 677,469 | 1,137,597 | |||||||||
|
|
||||||||||||
|
Consolidated assets not owned
|
70,430 | 114,930 | 180,206 | |||||||||
|
Cash
|
1,248,689 | 1,146,426 | 660,709 | |||||||||
|
Marketable securities
|
219,535 | — | — | |||||||||
|
Deferred taxes
|
200,340 | 223,393 | 211,808 | |||||||||
|
Intangible assets (7)
|
48,927 | 48,927 | 60,709 | |||||||||
|
Contract land deposit and LLCs reserve
|
(94,940 | ) | (155,858 | ) | (133,664 | ) | ||||||
|
Consolidation adjustments and other (8)
|
16,054 | 47,949 | 77,051 | |||||||||
|
|
||||||||||||
|
Reconciling items sub-total
|
1,709,035 | 1,425,767 | 1,056,819 | |||||||||
|
|
||||||||||||
|
Consolidated Assets
|
$ | 2,395,770 | $ | 2,103,236 | $ | 2,194,416 | ||||||
|
|
||||||||||||
| Year Ended December 31, | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
|
Interest Income
|
||||||||||||
|
Mortgage Banking
|
$ | 2,979 | $ | 3,955 | $ | 4,900 | ||||||
|
|
||||||||||||
|
Total Segment Interest Income
|
2,979 | 3,955 | 4,900 | |||||||||
|
Other unallocated interest income
|
5,407 | 10,909 | 14,855 | |||||||||
|
|
||||||||||||
|
Consolidated Interest Income
|
$ | 8,386 | $ | 14,864 | $ | 19,755 | ||||||
|
|
||||||||||||
| Year Ended December 31, | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
|
Interest Expense
|
||||||||||||
|
Homebuilding Mid Atlantic
|
$ | 41,130 | $ | 73,441 | $ | 106,538 | ||||||
|
Homebuilding North East
|
6,475 | 10,084 | 14,678 | |||||||||
|
Homebuilding Mid East
|
8,873 | 12,976 | 17,475 | |||||||||
|
Homebuilding South East
|
5,661 | 12,493 | 14,287 | |||||||||
|
Mortgage Banking
|
1,184 | 754 | 681 | |||||||||
|
|
||||||||||||
|
Total Segment Interest Expense
|
63,323 | 109,748 | 153,659 | |||||||||
|
Corporate capital allocation
|
(61,753 | ) | (108,509 | ) | (152,363 | ) | ||||||
|
Senior note and other interest
|
9,810 | 12,417 | 12,535 | |||||||||
|
|
||||||||||||
|
Consolidated Interest Expense
|
$ | 11,380 | $ | 13,656 | $ | 13,831 | ||||||
|
|
||||||||||||
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NVR, Inc.
Notes to Consolidated Financial Statements
(dollars in thousands, except per share data)
Notes to Consolidated Financial Statements
(dollars in thousands, except per share data)
| Year Ended December 31, | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
|
Depreciation and Amortization:
|
||||||||||||
|
Homebuilding Mid Atlantic
|
$ | 4,351 | $ | 7,005 | $ | 9,267 | ||||||
|
Homebuilding North East
|
612 | 974 | 1,582 | |||||||||
|
Homebuilding Mid East
|
1,233 | 1,626 | 2,186 | |||||||||
|
Homebuilding South East
|
1,163 | 1,715 | 1,457 | |||||||||
|
Mortgage Banking
|
357 | 395 | 368 | |||||||||
|
|
||||||||||||
|
Total Segment Depreciation
and Amortization
|
7,716 | 11,715 | 14,860 | |||||||||
|
Unallocated corporate
|
1,997 | 1,926 | 2,176 | |||||||||
|
|
||||||||||||
|
Consolidated Depreciation and Amortization
|
$ | 9,713 | $ | 13,641 | $ | 17,036 | ||||||
|
|
||||||||||||
| Year Ended December 31, | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
|
Expenditures for Property and Equipment:
|
||||||||||||
|
Homebuilding Mid Atlantic
|
$ | 1,511 | $ | 3,142 | $ | 5,785 | ||||||
|
Homebuilding North East
|
414 | 508 | 799 | |||||||||
|
Homebuilding Mid East
|
741 | 1,372 | 1,637 | |||||||||
|
Homebuilding South East
|
269 | 1,369 | 2,043 | |||||||||
|
Mortgage Banking
|
87 | 305 | 96 | |||||||||
|
|
||||||||||||
|
Total Segment Expenditures for
Property and Equipment
|
3,022 | 6,696 | 10,360 | |||||||||
|
Unallocated corporate
|
22 | 203 | 185 | |||||||||
|
|
||||||||||||
|
Consolidated Expenditures for
Property and Equipment
|
$ | 3,044 | $ | 6,899 | $ | 10,545 | ||||||
|
|
||||||||||||
| (1) | This item represents changes to the contract land deposit impairment reserve, which is not allocated to the reportable segments. During both 2009 and 2008, unallocated reserves decreased from the respective prior years as a result of charging previously reserved land impairments to the operating segments and to certain recoveries of deposits previously determined to be impaired. | |
| (2) | The increase in stock option expense in 2009 and 2008 compared to 2007 is primarily due to the reversal of stock-based compensation costs of approximately $31,500 in 2007 related to certain stock options subject to a performance metric. During 2007, the Company determined that it was improbable that it would meet the performance metric and accordingly reversed all performance-based option expense recorded through that period. | |
| (3) | This item represents the elimination of the corporate capital allocation charge included in the respective homebuilding reportable segments. The decrease in the corporate capital allocation charge from 2007 to 2008, and 2008 to 2009 is due to decreases in segment asset balances in each of the respective years, due to a decline in operating activity year over year. The corporate capital allocation charge is based on the segment’s monthly average asset balance, and is as follows for the years presented: |
| Year Ended December 31, | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
|
Homebuilding Mid Atlantic
|
$ | 40,765 | $ | 73,042 | $ | 106,032 | ||||||
|
Homebuilding North East
|
6,473 | 10,081 | 14,669 | |||||||||
|
Homebuilding Mid East
|
8,863 | 12,902 | 17,381 | |||||||||
|
Homebuilding South East
|
5,652 | 12,484 | 14,281 | |||||||||
|
|
||||||||||||
|
Total
|
$ | 61,753 | $ | 108,509 | $ | 152,363 | ||||||
|
|
||||||||||||
66
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NVR, Inc.
Notes to Consolidated Financial Statements
(dollars in thousands, except per share data)
Notes to Consolidated Financial Statements
(dollars in thousands, except per share data)
| (4) | The decreases in unallocated corporate overhead year over year are primarily driven by a reduction in personnel and other overhead costs as part of our focus to size our organization to meet current activity levels. | |
| (5) | The decrease in consolidation adjustments and other in 2009 from 2008 is primarily attributable to changes in the corporate consolidation entries based on production volumes year over year, as well as to a decrease in interest income earned related to lower interest rates in 2009 as compared to 2008. | |
| (6) | The 2008 impairment charge relates to the write-off of goodwill and indefinite life intangible assets related to the Company’s 2005 acquisition of Rymarc Homes and the goodwill related to the 1997 acquisition of Fox Ridge Homes. | |
| (7) | The decrease in intangible assets relates to the impairment charge discussed in (6) above. | |
| (8) | The decrease in 2009 from 2008 is primarily attributable to changes in the corporate consolidation entries based on production volumes year over year. The decrease in 2008 from 2007 is primarily attributable to the inclusion of a bulk purchase of finished lots made during 2007, of which approximately $29,200 had not yet been allocated to the reportable segments. At December 31, 2008, all but approximately $5,700 of this purchase was allocated to the reportable segments. |
3. Consolidation of Variable Interest Entities and Limited Liability Corporations
The primary beneficiary of a variable interest entity is required 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 entity’s expected losses, receives a majority of the
entity’s 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 entity’s net assets, exclusive of its variable interest, and expected
residual returns are the expected positive variability in the fair value of an entity’s net
assets, exclusive of its variable interests. As discussed below, NVR evaluates these
provisions as it relates to its 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 December 31, 2009, the Company
controlled approximately 46,300 lots with deposits in cash and letters of credit totaling
approximately $140,700 and $4,900, respectively. Included in the number of controlled lots
are approximately 10,800 lots for which the Company has recorded a contract land deposit
impairment reserve of approximately $89,500 as of December 31, 2009. As of December 31, 2008,
the Company controlled approximately 45,000 lots with deposits in cash and letters of credit
totaling approximately $178,000 and $5,000, respectively. As of December 31, 2008, the
Company had recorded a contract land deposit impairment reserve of approximately $147,900 for
approximately 17,000 of these lots.
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. NVR’s 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 liquidating damage provisions contained within
the purchase agreements. In other words, if NVR does not perform
under a purchase agreement, NVR loses only its deposit. 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
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Table of Contents
NVR, Inc.
Notes to Consolidated Financial Statements
(dollars in thousands, except per share data)
Notes to Consolidated Financial Statements
(dollars in thousands, except per share data)
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 limited basis, NVR also obtains finished lots using joint venture limited liability
corporations (“LLCs”). All LLCs are typically structured such that NVR is a non-controlling
member and are at risk only for the amount that the Company has invested. NVR is not a
borrower, guarantor or obligor on any of the LLCs debt. NVR enters into a standard fixed price
purchase agreement to purchase lots from these LLCs.
At December 31, 2009, NVR had an aggregate investment totaling approximately $25,000 in
ten separate LLCs. As of December 31, 2009, eight of these LLCs were non-performing and as a
result NVR had recorded an impairment reserve equal to the Company’s total investment of
approximately $3,000 in these LLCs. NVR does not expect to obtain any lots from these eight
LLCs in future periods. In the two performing LLCs, the Company’s aggregate investment totaled
$22,000 and the Company controlled approximately 760 lots through these LLCs. The Company’s
investment in LLCs is recorded in “Other assets” in the consolidated financial statements. At
December 31, 2009, NVR had additional funding commitments totaling $4 million to one of these
two performing LLCs. Also included in “Other assets” in the consolidated financial
statements is an acquisition and development loan note receivable that the Company purchased
for approximately $20,000 on which the Company is in the process of foreclosing on the
underlying real estate.
Forward contracts, such as the fixed price purchase agreements utilized by NVR to acquire
finished lot inventory, are deemed to be “variable interests”. Therefore, the development
entities with which NVR enters fixed price purchase agreements, including the LLCs, are
examined 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 NVR’s 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 entity’s 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 NVR’s 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 NVR’s evaluation
could produce widely different conclusions regarding whether NVR is or is not a development
entity’s 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-one of those development
entities with which the agreements and arrangements are held. As a result, at December 31,
2009, NVR has consolidated such development entities in the accompanying consolidated balance
sheet. Where NVR deemed itself to be the primary beneficiary of a development entity created
after December 31, 2003 and the development entity refused to provide financial statements,
NVR utilized estimation techniques to perform the consolidation. The effect of the
consolidation at December 31, 2009 was the inclusion on the balance sheet of $70,430 as
“Consolidated assets not owned,” with a corresponding inclusion of $65,915 as “Liabilities
related to consolidated assets not owned,” after elimination of intercompany items. Inclusive
in these totals were assets and liabilities of approximately $40,900 for twelve development
entities created after December 31, 2003 that did not provide financial statements.
At December 31, 2008, the Company evaluated all of its fixed price purchase agreements
and LLC arrangements and determined that it was the primary beneficiary of twenty-five of
those development entities with which the agreements and arrangements were held. As a result,
at December
68
Table of Contents
NVR, Inc.
Notes to Consolidated Financial Statements
(dollars in thousands, except per share data)
Notes to Consolidated Financial Statements
(dollars in thousands, except per share data)
31, 2008, NVR had consolidated such development entities in the accompanying condensed
consolidated balance sheet. The effect of the consolidation at December 31, 2008 was the
inclusion on the balance sheet of $114,930 as “Consolidated assets not owned,” with a
corresponding inclusion of $109,439 as
“Liabilities related to consolidated assets not owned,” after elimination of intercompany
items. Inclusive in these totals were assets and liabilities of approximately $42,000 for
eleven development entities created after December 31, 2003 that did not provide financial
statements.
69
Table of Contents
NVR, Inc.
Notes to Consolidated Financial Statements
(dollars in thousands, except per share data)
Notes to Consolidated Financial Statements
(dollars in thousands, except per share data)
Following is the consolidating schedule at December 31, 2009:
| NVR, Inc. | Consolidated | |||||||||||||||
| and | Entities Not | Consolidated | ||||||||||||||
| Subsidiaries | Owned | Eliminations | Total | |||||||||||||
|
ASSETS
|
||||||||||||||||
|
Homebuilding:
|
||||||||||||||||
|
Cash and cash equivalents
|
$ | 1,248,689 | $ | — | $ | — | $ | 1,248,689 | ||||||||
|
Marketable securities
|
219,535 | — | — | 219,535 | ||||||||||||
|
Receivables
|
7,995 | — | — | 7,995 | ||||||||||||
|
Homebuilding inventory
|
418,718 | — | — | 418,718 | ||||||||||||
|
Property, plant and equipment, net
|
20,215 | — | — | 20,215 | ||||||||||||
|
Reorganization value in excess of amount
allocable to identifiable assets, net
|
41,580 | — | — | 41,580 | ||||||||||||
|
Contract land deposits, net
|
51,184 | — | (1,278 | ) | 49,906 | |||||||||||
|
Other assets
|
261,896 | — | (3,237 | ) | 258,659 | |||||||||||
|
|
||||||||||||||||
|
|
2,269,812 | — | (4,515 | ) | 2,265,297 | |||||||||||
|
|
||||||||||||||||
|
|
||||||||||||||||
|
Mortgage banking assets:
|
60,043 | — | — | 60,043 | ||||||||||||
|
|
||||||||||||||||
|
Consolidated entities not owned:
|
||||||||||||||||
|
Land under development
|
— | 70,198 | — | 70,198 | ||||||||||||
|
Other assets
|
— | 232 | — | 232 | ||||||||||||
|
|
||||||||||||||||
|
|
— | 70,430 | — | 70,430 | ||||||||||||
|
|
||||||||||||||||
|
Total assets
|
$ | 2,329,855 | $ | 70,430 | $ | (4,515 | ) | $ | 2,395,770 | |||||||
|
|
||||||||||||||||
|
|
||||||||||||||||
|
LIABILITIES AND SHAREHOLDERS’ EQUITY
|
||||||||||||||||
|
Homebuilding:
|
||||||||||||||||
|
Accounts payable, accrued expenses
and other liabilities
|
$ | 341,816 | $ | — | $ | — | $ | 341,816 | ||||||||
|
Customer deposits
|
63,591 | — | — | 63,591 | ||||||||||||
|
Other term debt
|
2,166 | — | — | 2,166 | ||||||||||||
|
Senior notes
|
133,370 | — | — | 133,370 | ||||||||||||
|
|
||||||||||||||||
|
|
540,943 | — | — | 540,943 | ||||||||||||
|
|
||||||||||||||||
|
|
||||||||||||||||
|
Mortgage banking liabilities:
|
31,650 | — | — | 31,650 | ||||||||||||
|
|
||||||||||||||||
|
Consolidated entities not owned:
|
||||||||||||||||
|
Accounts payable, accrued expenses
and other liabilities
|
— | 9,438 | 4,474 | 13,912 | ||||||||||||
|
Debt
|
— | 52,003 | — | 52,003 | ||||||||||||
|
Contract land deposits
|
— | 5,188 | (5,188 | ) | — | |||||||||||
|
Advances from NVR, Inc.
|
— | 3,801 | (3,801 | ) | — | |||||||||||
|
|
||||||||||||||||
|
|
— | 70,430 | (4,515 | ) | 65,915 | |||||||||||
|
|
||||||||||||||||
|
Equity
|
1,757,262 | — | — | 1,757,262 | ||||||||||||
|
|
||||||||||||||||
|
|
||||||||||||||||
|
Total liabilities and shareholders’ equity
|
$ | 2,329,855 | $ | 70,430 | $ | (4,515 | ) | $ | 2,395,770 | |||||||
|
|
||||||||||||||||
70
Table of Contents
NVR, Inc.
Notes to Consolidated Financial Statements
(dollars in thousands, except per share data)
Notes to Consolidated Financial Statements
(dollars in thousands, except per share data)
Following is the consolidating schedule at December 31, 2008:
| NVR, Inc. | Consolidated | |||||||||||||||
| and | Entities Not | Consolidated | ||||||||||||||
| Subsidiaries | Owned | Eliminations | Total | |||||||||||||
|
ASSETS
|
||||||||||||||||
|
Homebuilding:
|
||||||||||||||||
|
Cash and cash equivalents
|
$ | 1,146,426 | $ | — | $ | — | $ | 1,146,426 | ||||||||
|
Receivables
|
11,594 | — | — | 11,594 | ||||||||||||
|
Homebuilding inventory
|
400,570 | — | — | 400,570 | ||||||||||||
|
Property, plant and equipment, net
|
25,658 | — | — | 25,658 | ||||||||||||
|
Reorganization value in excess of amount
allocable to identifiable assets, net
|
41,580 | — | — | 41,580 | ||||||||||||
|
Contract land deposits, net
|
29,872 | — | (799 | ) | 29,073 | |||||||||||
|
Other assets
|
247,318 | — | (4,692 | ) | 242,626 | |||||||||||
|
|
||||||||||||||||
|
|
1,903,018 | — | (5,491 | ) | 1,897,527 | |||||||||||
|
|
||||||||||||||||
|
|
||||||||||||||||
|
Mortgage banking assets:
|
90,779 | — | — | 90,779 | ||||||||||||
|
|
||||||||||||||||
|
Consolidated entities not owned:
|
||||||||||||||||
|
Land under development
|
— | 114,178 | — | 114,178 | ||||||||||||
|
Other assets
|
— | 752 | — | 752 | ||||||||||||
|
|
||||||||||||||||
|
|
— | 114,930 | — | 114,930 | ||||||||||||
|
|
||||||||||||||||
|
|
||||||||||||||||
|
Total assets
|
$ | 1,993,797 | $ | 114,930 | $ | (5,491 | ) | $ | 2,103,236 | |||||||
|
|
||||||||||||||||
|
|
||||||||||||||||
|
LIABILITIES AND SHAREHOLDERS’ EQUITY
|
||||||||||||||||
|
Homebuilding:
|
||||||||||||||||
|
Accounts payable, accrued expenses
and other liabilities
|
$ | 332,154 | $ | — | $ | — | $ | 332,154 | ||||||||
|
Customer deposits
|
59,623 | — | — | 59,623 | ||||||||||||
|
Other term debt
|
2,530 | — | — | 2,530 | ||||||||||||
|
Senior notes
|
163,320 | — | — | 163,320 | ||||||||||||
|
|
||||||||||||||||
|
|
557,627 | — | — | 557,627 | ||||||||||||
|
|
||||||||||||||||
|
|
||||||||||||||||
|
Mortgage banking liabilities:
|
62,381 | — | — | 62,381 | ||||||||||||
|
|
||||||||||||||||
|
Consolidated entities not owned:
|
||||||||||||||||
|
Accounts payable, accrued expenses
and other liabilities
|
— | 16,826 | 12,446 | 29,272 | ||||||||||||
|
Debt
|
— | 80,167 | — | 80,167 | ||||||||||||
|
Contract land deposits
|
— | 13,436 | (13,436 | ) | — | |||||||||||
|
Advances from NVR, Inc.
|
— | 4,501 | (4,501 | ) | — | |||||||||||
|
|
||||||||||||||||
|
|
— | 114,930 | (5,491 | ) | 109,439 | |||||||||||
|
|
||||||||||||||||
|
|
||||||||||||||||
|
Equity
|
1,373,789 | — | — | 1,373,789 | ||||||||||||
|
|
||||||||||||||||
|
Total liabilities and shareholders’ equity
|
$ | 1,993,797 | $ | 114,930 | $ | (5,491 | ) | $ | 2,103,236 | |||||||
|
|
||||||||||||||||
71
Table of Contents
NVR, Inc.
Notes to Consolidated Financial Statements
(dollars in thousands, except per share data)
Notes to Consolidated Financial Statements
(dollars in thousands, except per share data)
4. Related Party Transactions
During 2009, NVR entered into new lot option purchase agreements to purchase finished
building lots for a total purchase price of approximately $70,600 with Elm Street Development
(“Elm Street”), a company that is controlled by William Moran, a member of the NVR Board of
Directors (the “Board”). These transactions were approved by a majority of the independent
members of the Board. During 2009, 2008, and 2007, NVR purchased, at market prices, developed
lots from Elm Street totaling approximately $46,700, $38,000, and $37,000, respectively.
During 2009, NVR forfeited approximately $2,500 of deposits to restructure four lot option
purchase agreements to obtain reduced purchase prices for finished lots under the agreements.
These deposit forfeitures are included in the total contract land deposit write-offs discussed
previously in Note 1 herein. NVR expects to purchase the majority of the remaining lots under
contract at December 31, 2009 over the next four years for an aggregate purchase price of
approximately $89,800. NVR and Elm Street also entered into a joint venture arrangement in
2009 to acquire control of a parcel of raw ground that is estimated to yield at least 600
finished lots. NVR invested $8,000 in the joint venture, and has no obligation to contribute
any further capital into the entity (see further discussion of joint ventures in Note 3
herein).
5. Property, Plant and Equipment, net
| December 31, | ||||||||
| 2009 | 2008 | |||||||
|
Homebuilding:
|
||||||||
|
Office facilities and other
|
$ | 13,324 | $ | 13,908 | ||||
|
Model home furniture and fixtures
|
18,354 | 24,003 | ||||||
|
Manufacturing facilities
|
28,581 | 27,957 | ||||||
|
Property under capital leases
|
3,976 | 3,976 | ||||||
|
|
||||||||
|
|
64,235 | 69,844 | ||||||
|
Less: accumulated depreciation
|
(44,020 | ) | (44,186 | ) | ||||
|
|
||||||||
|
|
$ | 20,215 | $ | 25,658 | ||||
|
|
||||||||
|
Mortgage Banking:
|
||||||||
|
Office facilities and other
|
$ | 3,586 | $ | 3,817 | ||||
|
Less: accumulated depreciation
|
(3,140 | ) | (3,058 | ) | ||||
|
|
||||||||
|
|
$ | 446 | $ | 759 | ||||
|
|
||||||||
Certain property, plant and equipment listed above is collateral for certain debt of
NVR as more fully described in Note 6 herein.
72
Table of Contents
NVR, Inc.
Notes to Consolidated Financial Statements
(dollars in thousands, except per share data)
Notes to Consolidated Financial Statements
(dollars in thousands, except per share data)
6. Debt
| December 31, | ||||||||
| 2009 | 2008 | |||||||
|
Homebuilding:
|
||||||||
|
Working capital revolving credit (a)
|
$ | — | $ | — | ||||
|
|
||||||||
|
Other term debt:
|
||||||||
|
Capital lease obligations due in monthly
installments through 2016 (b)
|
$ | 2,166 | $ | 2,530 | ||||
|
|
||||||||
|
Senior notes (c)
|
$ | 133,370 | $ | 163,320 | ||||
|
|
||||||||
|
Mortgage Banking:
|
||||||||
|
Master repurchase agreement (d)
|
$ | 12,344 | $ | 44,539 | ||||
|
|
||||||||
| (a) | The Company, as borrower, has available an unsecured working capital revolving credit facility (the “Facility”). On August 4, 2009, NVR, as borrower, entered into an amendment to its $600,000 revolving credit agreement with the Lenders party thereto and the Bank of America, N.A., as Administrative Agent, (the “Amended Facility”) to reduce the total available borrowings under the Amended Facility to $300,000, to eliminate the accordion feature to increase the total commitments available and to amend or eliminate certain non-financial covenants. The Facility is generally available to fund working capital needs of NVR’s homebuilding segment. Up to $150,000 of the Facility is currently available for issuance in the form of letters of credit, of which $13,218 and $13,421 were outstanding at December 31, 2009 and 2008, respectively. 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. There were no borrowings under the Facility during 2009 and 2008. At December 31, 2009, there were no borrowing base limitations reducing the amount available to the Company for borrowings. |
The Facility contains various affirmative and negative covenants. The negative covenants
include among others, certain limitations on transactions involving the creation of
guarantees, sale of assets, acquisitions, mergers, investments and unsold inventory levels.
Additional covenants include (i) a minimum adjusted consolidated tangible net worth
requirement, (ii) a maximum leverage ratio requirement, and (iii) an interest coverage ratio
requirement. These covenants restrict the amount in which the Company would be able to pay in
dividends each year. The Company is also subject to borrowing base restrictions if the
Company’s senior debt rating falls below investment grade. At December 31, 2009 NVR was in
compliance with all covenants under the Facility and maintained an investment grade rating on
its senior debt.
| (b) | The capital lease obligations have fixed interest rates ranging from 13.1% to 14.1% and are collateralized by land, buildings and equipment with a net book value of approximately $866 and $1,052 at December 31, 2009 and 2008, respectively. |
The following schedule provides future minimum lease payments under all capital leases
together with the present value as of December 31, 2009:
73
Table of Contents
NVR, Inc.
Notes to Consolidated Financial Statements
(dollars in thousands, except per share data)
Notes to Consolidated Financial Statements
(dollars in thousands, except per share data)
| Year ending December 31, | ||||
|
2010
|
$ | 408 | ||
|
2011
|
645 | |||
|
2012
|
644 | |||
|
2013
|
644 | |||
|
2014
|
669 | |||
|
Thereafter
|
56 | |||
|
|
||||
|
|
3,066 | |||
|
Amount representing interest
|
(900 | ) | ||
|
|
||||
|
|
$ | 2,166 | ||
|
|
||||
| (c) | On June 17, 2003, NVR completed an offering, at par, for $200,000 of 5% Senior Notes due 2010 (the “Notes”) under a shelf registration statement filed in 1998 with the Securities and Exchange Commission (the “SEC”). The Notes mature on June 15, 2010 and bear interest at 5%, payable semi-annually in arrears on June 15 and December 15. The Notes are general unsecured obligations and rank equally in right of payment with all of NVR’s existing and future unsecured senior indebtedness and indebtedness under NVR’s existing credit facility. The Notes are senior in right of payment to any future subordinated indebtedness that NVR may incur. The Company may redeem the Notes, in whole or in part, at any time upon not less than 30 nor more than 60 days notice at a redemption price equal to the greater of (a) 100% of the principal amount of the Notes to be redeemed, or (b) the discounted present value of the remaining scheduled payments of the Notes to be redeemed, plus, in each case, accrued and unpaid interest. The indenture governing the Notes contains certain covenants which, among other items, restricts the Company’s ability to (i) create, incur, assume or guarantee any secured debt, (ii) enter into sale and leaseback transactions, and (iii) merge with or into other companies or sell all or substantially all of the Company’s assets. At December 31, 2009 NVR was in compliance with all covenants under the Notes. In December 2008, the Company repurchased $36,680 of the Notes on the open market at 99.25% of par, resulting in a pre-tax gain of approximately $251. In April 2009 and August 2009, the Company repurchased $27,950 and $2,000 of the Notes, respectively, on the open market at par, reducing the Notes balance at December 31, 2009 to $133,370. |
| On September 8, 2008, the Company filed a shelf registration statement (the “2008 Shelf Registration”) with the 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 the 2008 Shelf Registration does not constitute an offer of any securities for sale. |
| (d) | On August 5, 2009, NVRM renewed and amended its Master Repurchase Agreement dated August 5, 2008 with U.S. Bank National Association, as Agent and representative of itself as a Buyer, and the other Buyers thereto (the “Master Repurchase Agreement”) pursuant to a First Amendment to Master Repurchase Agreement with U.S. Bank National Association, as Agent and representative of itself as Buyer (“Agent”), and the other Buyers thereto (together with the Master Repurchase Agreement, the “Amended Repurchase Agreement”). The purpose of the Amended Repurchase Agreement is to finance the origination of mortgage loans by NVRM. The Amended Repurchase Agreement provides for loan purchases up to $100,000, subject to certain sublimits. In addition, the Amended 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 $125,000. The Amended Repurchase Agreement expires on August 3, 2010. |
Advances under the Amended Repurchase Agreement carry a Pricing Rate based on the Libor
Rate plus the Libor Margin, or at NVRM’s option, the Balance Funded Rate, as these terms are
defined in the Amended Repurchase Agreement. The average Pricing Rate on outstanding balances
at December 31,
74
Table of Contents
NVR, Inc.
Notes to Consolidated Financial Statements
(dollars in thousands, except per share data)
Notes to Consolidated Financial Statements
(dollars in thousands, except per share data)
2009 was 4.1%. The average Pricing Rate for amounts outstanding under the previous
Repurchase Agreement at December 31, 2008 was 1.9%.
At December 31, 2009, there was $12,344 outstanding under the Amended Repurchase
Agreement, which is included in Mortgage Banking “Notes payable” in the accompanying
consolidated financial sheets. Amounts outstanding under the Amended Repurchase Agreement are
collateralized by the Company’s mortgage loans held for sale, which are included in assets in
the December 31, 2009 balance sheet in the accompanying consolidated financial statements. As
of December 31, 2009, borrowing base limitations reduced the amount available for borrowing to
approximately $38,900. There are several restrictions on purchased loans, including that they
cannot be sold to others, they cannot be pledged to anyone other than the agent, and they
cannot support any other borrowing or repurchase agreement.
The Amended 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. Additional covenants include (i) a tangible net worth requirement,
(ii) a minimum liquidity requirement, (iii) a minimum tangible net worth ratio, (iv) a minimum
net income requirement, and (v) a maximum leverage ratio requirement. The Company was in
compliance with all covenants under the Amended Repurchase Agreement at December 31, 2009.
* * * * *
Maturities with respect to the Company’s debt as of December 31, 2009 are as follows:
| Year ending December 31, | ||||
|
2010
|
$ | 145,830 | ||
|
2011
|
402 | |||
|
2012
|
456 | |||
|
2013
|
520 | |||
|
2014
|
616 | |||
|
Thereafter
|
56 | |||
|
|
||||
|
Total
|
$ | 147,880 | ||
|
|
||||
The $145,830 maturing in 2010 includes $133,370 of Senior Notes maturing in June
2010 and $12,344 of borrowings under the Amended Repurchase Agreement.
7. Common Stock
There were 5,950,111 and 5,532,852 common shares outstanding at December 31, 2009 and
2008, respectively. As of December 31, 2009, NVR had reacquired a total of approximately
20,756,000 shares of NVR common stock at an aggregate cost of approximately $3,420,000 since
December 31, 1993. The Company did not repurchase any shares during 2009 or 2008.
Since 1999, the Company has issued shares from the treasury for all stock option
exercises. There have been approximately 6,147,000 common shares reissued from the treasury
in satisfaction of stock option exercises and other employee benefit obligations. The Company
issued 418,775; 426,751 and 404,815 such shares during 2009, 2008 and 2007, respectively.
75
Table of Contents
NVR, Inc.
Notes to Consolidated Financial Statements
(dollars in thousands, except per share data)
Notes to Consolidated Financial Statements
(dollars in thousands, except per share data)
8. Income Taxes
The provision for income taxes consists of the following:
| Year Ended | Year Ended | Year Ended | ||||||||||
| December 31, 2009 | December 31, 2008 | December 31, 2007 | ||||||||||
|
Current:
|
||||||||||||
|
Federal
|
$ | 69,911 | $ | 63,614 | $ | 189,907 | ||||||
|
State
|
8,556 | 9,785 | 36,231 | |||||||||
|
Deferred:
|
||||||||||||
|
Federal
|
23,474 | (5,702 | ) | (17,356 | ) | |||||||
|
State
|
4,293 | (1,134 | ) | (3,232 | ) | |||||||
|
|
||||||||||||
|
|
$ | 106,234 | $ | 66,563 | $ | 205,550 | ||||||
|
|
||||||||||||
In addition to amounts applicable to income before taxes, the following income tax
benefits were recorded in shareholders’ equity:
| Year Ended | Year Ended | Year Ended | ||||||||||
| December 31, 2009 | December 31, 2008 | December 31, 2007 | ||||||||||
|
Income tax benefits arising from
compensation expense for tax
purposes in excess of amounts
recognized for financial
statement purposes
|
$ | 66,448 | $ | 50,240 | $ | 69,046 | ||||||
|
|
||||||||||||
Deferred income taxes on NVR’s consolidated balance sheets are comprised of the
following:
| December 31, | ||||||||
| 2009 | 2008 | |||||||
|
Deferred tax assets:
|
||||||||
|
Other accrued expenses and
contract land deposit reserve
|
$ | 104,907 | $ | 130,338 | ||||
|
Deferred compensation
|
16,897 | 30,334 | ||||||
|
Stock option expense
|
43,149 | 32,809 | ||||||
|
Uniform capitalization
|
5,477 | 4,171 | ||||||
|
Unrecognized tax benefit
|
25,671 | 26,754 | ||||||
|
Other
|
10,480 | 8,366 | ||||||
|
|
||||||||
|
Total deferred tax assets
|
206,581 | 232,772 | ||||||
|
Less: deferred tax liabilities
|
531 | 4,810 | ||||||
|
|
||||||||
|
Net deferred tax position
|
$ | 206,050 | $ | 227,962 | ||||
|
|
||||||||
Deferred tax assets arise principally as a result of various accruals required for
financial reporting purposes, stock option expense and deferred compensation, which are not
currently deductible for tax return purposes.
Management believes that the Company will have sufficient available carry-backs and
future taxable income to make it more likely than not that the net deferred tax assets will be
realized. Federal taxable income is estimated to be $56,341 for the year ended December 31,
2009, and was $63,175 for the year ended December 31, 2008.
76
Table of Contents
NVR, Inc.
Notes to Consolidated Financial Statements
(dollars in thousands, except per share data)
Notes to Consolidated Financial Statements
(dollars in thousands, except per share data)
A reconciliation of income tax expense in the accompanying Consolidated Statements of
Income to the amount computed by applying the statutory Federal income tax rate of 35% to
income before taxes is as follows:
| Year Ended | Year Ended | Year Ended | ||||||||||
| December 31, 2009 | December 31, 2008 | December 31, 2007 | ||||||||||
|
Income taxes computed at the
Federal statutory rate
|
$ | 104,445 | $ | 58,609 | $ | 188,827 | ||||||
|
State income taxes, net of Federal
income tax benefit
|
7,467 | 6,004 | 23,086 | |||||||||
|
Other, net
|
(5,678 | ) | 1,950 | (6,363 | ) | |||||||
|
|
||||||||||||
|
|
$ | 106,234 | $ | 66,563 | $ | 205,550 | ||||||
|
|
||||||||||||
The Company’s effective tax rate in 2009, 2008 and 2007 was 35.60%, 39.75% and
38.1%, respectively. The lower effective tax rate in 2009 was due to the expiration of
certain tax reserves previously established, the amendment of certain prior year federal and
state income tax returns that the Company believes will result in tax refunds, and recent IRS
guidance allowing the Company to take a larger benefit under Internal Revenue Code Section
199, domestic manufacturing deduction. In addition, due to Mr. Schar relinquishing his
Executive Officer role with the Company in 2009, a tax benefit was generated related to
compensation expense recorded for certain outstanding option grants held by Mr. Schar that
were previously considered to be a permanent non-deductible tax difference. The higher
effective tax rate in 2008 was primarily due to the reduction in tax exempt interest income
and lower pre-tax income in 2008 compared to 2007.
The Company files a consolidated U.S. federal income tax return, as well as state and local
tax returns in all jurisdictions where the Company maintains operations. With few exceptions,
the Company is no longer subject to income tax examinations by tax authorities for years prior to
2006.
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as
follows:
| Year Ended | Year Ended | |||||||
| December 31, 2009 | December 31, 2008 | |||||||
|
Balance at beginning of year
|
$ | 53,339 | $ | 55,662 | ||||
|
Additions for tax positions for prior years
|
72 | — | ||||||
|
Additions based on tax positions related to the current year
|
2,769 | 3,469 | ||||||
|
Reductions for tax positions of prior years
|
(7,511 | ) | (3,940 | ) | ||||
|
Settlements
|
— | (1,852 | ) | |||||
|
|
||||||||
|
Balance at end of year
|
$ | 48,669 | $ | 53,339 | ||||
|
|
||||||||
If recognized, the total amount of unrecognized tax benefits that would affect the
effective tax rate (on a net basis) is $31,636.
The Company recognizes interest related to unrecognized tax benefits as a component of
income tax expense. For the years ended December 31, 2009, 2008 and 2007 the Company accrued
interest on unrecognized tax benefits in the amounts of $932, $5,150 and $4,452, respectively.
For the years ended December 31, 2009 and 2008, the Company had a total of $22,149 and
$21,217, respectively, of accrued interest on unrecognized tax benefits in its balance sheet.
Based on its historical experience in dealing
77
Table of Contents
NVR, Inc.
Notes to Consolidated Financial Statements
(dollars in thousands, except per share data)
Notes to Consolidated Financial Statements
(dollars in thousands, except per share data)
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.
The Company believes that within the next 12 months, it is reasonably possible that the
unrecognized tax benefits will be reduced by approximately $5,300 due to statute expiration in
various state jurisdictions. The Company is currently under audit by the states of New York,
Pennsylvania and Ohio.
9. Stock Option, Profit Sharing and Deferred Compensation Plans
Stock Option Plans
NVR’s stock option plans provide for the granting of non-qualified stock options to
purchase shares of NVR common stock (“Options”) to certain key employees and Board members of
the Company. The exercise price of Options granted is equal to the market value of the
Company’s common stock on the date of grant. Options are granted for a ten-year term, and
typically vest in separate tranches over periods of 3 to 9 years, depending upon the plan from
which the shares were granted. For Options granted prior to May 2005 and after November 2007,
vesting is predicated solely on continued employment over a long-term vesting schedule
(“service-only” Options). For Options granted between May 2005 and October 2007 under all
plans, option vesting was contingent first on the Company achieving an aggregate four-year
diluted earnings per share target (see discussion of the EPS Target below), and if that target
was met, then on continued employment over a period subsequent to the conclusion of the
performance period (“performance condition” Options). As of December 31, 2008 the EPS Target
was not met and all 348,490 performance condition Options outstanding expired unexercisable.
At December 31, 2009, there was an aggregate of 999,142 options outstanding, and an additional
134,022 options available to grant, under existing stock option plans.
The following is a summary description of each of the Company’s stock option plans for
any plan with options outstanding at December 31, 2009:
| • | During 1996, the Company’s shareholders approved the Board of Directors’ adoption of the Management Long-Term Stock Option Plan (the “1996 Option Plan”). There are 2,000,000 Options authorized under the Management Long Term Stock Option Plan. All Options were granted at an exercise price equal to the fair market value of the Company’s Shares on the date of grant. The Options expire 10 years after the dates upon which they were granted, and vest annually in one-third increments beginning on December 31, 2000, or later depending on the date of grant. | ||
| • | During 1999, the Company’s shareholders approved the Board of Directors’ adoption of the 1998 Management Long-Term Stock Option Plan (the “1998 Option Plan”). There are 1,000,000 Options authorized under the 1998 Option Plan. All Options were granted at an exercise price equal to the fair market value of the Company’s Shares on the date of grant. The Options expire 10 years after the dates upon which they were granted. Options granted under the 1998 Option Plan prior to 2003 vest annually in one-third increments beginning on December 31, 2003, or later depending on the date of grant, with vesting contingent upon continued employment. Options granted after 2002 generally vest in 25% increments beginning on December 31, 2006, or later depending on the date of grant. |
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NVR, Inc.
Notes to Consolidated Financial Statements
(dollars in thousands, except per share data)
Notes to Consolidated Financial Statements
(dollars in thousands, except per share data)
| • | During 1999, the Company’s shareholders approved the Board of Directors’ adoption of the 1998 Directors’ Long Term Stock Option Plan (the “1998 Directors’ Plan”). There were 150,000 Options to purchase shares of common stock authorized for grant to the Company’s outside directors under the 1998 Directors’ Plan. All Options are granted at an exercise price equal to the fair market value of the Company’s Shares on the date of grant. The Options were granted for a 10-year period and generally vest annually in twenty-five percent (25%) increments beginning on either December 31, 2002, December 31, 2006, or later as determined by the date of grant. | ||
| • | During 2000, the Board approved the 2000 Broadly-Based Stock Option Plan (the “2000 Plan”). The Company did not seek approval from its shareholders for the 2000 Plan. There are 2,000,000 Options authorized under the 2000 Plan. All Options are granted at an exercise price equal to the fair market value of the Company’s Shares on the date of grant. Grants under the 2000 Plan are available to both employees and members of the Board. The distribution of Options to key employees and members of the board, in aggregate, are limited to 50% or less of the total options authorized under the 2000 Plan. Options granted under the 2000 Plan expire 10 years from the date of grant, and generally vest annually in 25% increments beginning on December 31, 2006, or later depending on the date of grant. |
During 2009, the Company issued non-qualified stock options (“Management Options”) to
purchase 23,287 shares of its common stock under the 2000 Plan. The exercise price of each
Management Option granted was equal to the closing price of the Company’s 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. Of these Management Options, 20,813 will vest in three
equal annual installments beginning December 31, 2011 and 2,474 will vest in four equal annual
installments beginning December 31, 2012. All Management Options granted are subject to the
grantee’s continued employment.
During 2008, the Company issued Management Options to purchase 274,435 shares of its
common stock under the 2000 Plan. The exercise price of each Management Option granted was
equal to the closing price of the Company’s 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. The majority of these Management Options will vest fully on December 31, 2010,
subject to the grantee’s continued employment. The Company also issued non-qualified stock
options to purchase 15,949 shares of its common stock (“Director Options”) under the 1998
Directors’ Plan during the year ended December 31, 2008. The exercise price of each Director
Option granted was equal to the closing price of the Company’s 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 director’s continued Board service.
The following table provides additional information relative to NVR’s stock option plans
for the year ended December 31, 2009:
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NVR, Inc.
Notes to Consolidated Financial Statements
(dollars in thousands, except per share data)
Notes to Consolidated Financial Statements
(dollars in thousands, except per share data)
| Weighted | ||||||||||||||||
| Weighted | Average | |||||||||||||||
| Average | Remaining | Aggregate | ||||||||||||||
| Exercise | Contract Life | Intrinsic | ||||||||||||||
| Options | Price | (Years) | Value | |||||||||||||
|
Stock Options
|
||||||||||||||||
|
Outstanding at beginning of period
|
1,417,024 | $ | 296.41 | |||||||||||||
|
Granted
|
23,287 | 516.65 | ||||||||||||||
|
Exercised
|
(418,775 | ) | 189.02 | |||||||||||||
|
Forfeited
|
(19,627 | ) | 489.18 | |||||||||||||
|
Expired
|
(2,767 | ) | 544.26 | |||||||||||||
|
|
||||||||||||||||
|
Outstanding at end of period
|
999,142 | $ | 342.08 | 3.8 | $ | 368,314 | ||||||||||
|
|
||||||||||||||||
|
Exercisable at end of period
|
668,132 | $ | 259.80 | 2.0 | $ | 301,267 | ||||||||||
|
|
||||||||||||||||
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: the option’s 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 option’s expected term. NVR has concluded that its historical exercise experience
is the best estimate of future exercise patterns to determine an option’s expected term. To
estimate expected volatility, NVR analyzed the historic volatility of its common stock. The
fair value of the options granted were estimated on the grant date using the Black-Scholes
option-pricing model based on the following assumptions:
| 2009 | 2008 | 2007 | ||||||||||
|
Estimated option life
|
4.70 years | 3.95 years | 8.87 years | |||||||||
|
Risk free interest rate (range)
|
1.78% — 3.65 | % | 1.00% — 4.19 | % | 4.41% — 5.09 | % | ||||||
|
Expected volatility (range)
|
31.83% — 41.72 | % | 31.57% — 38.75 | % | 36.17% — 38.87 | % | ||||||
|
Expected dividend rate
|
0.00 | % | 0.00 | % | 0.00 | % | ||||||
|
Weighted average grant-date fair
value per share of options granted
|
$ | 187.10 | $ | 156.85 | $ | 351.10 | ||||||
Compensation cost for 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 is recognized within the
income statement in the same expense line as the cash compensation paid to the respective
employees. The Company is required to estimate forfeitures in calculating the expense related
to stock-based compensation. NVR has concluded that its historical forfeiture rate is the
best measure to estimate future forfeitures of granted stock options. The impact on
compensation costs due to changes in the expected forfeiture rate will be recognized in the
period that they become known. In 2009, 2008, and 2007, the Company recognized $46,302,
$41,204 and $14,189 in compensation costs related to stock options, respectively, and
approximately $18,000, $12,600 and $2,700 tax benefit related to stock option compensation
costs, respectively. The increase in compensation expense in 2009 and 2008 as compared to
2007 is attributable to the reversal in 2007 of approximately $31,500 in pre-tax stock-based
compensation recognized in 2007 and prior periods related to performance condition options.
In 2007, it was determined that the EPS target for performance condition options would not be
met and all expense previously recognized to the determination date related to the performance
condition options was reversed. As of December 31, 2008, all performance options outstanding
expired unexercisable.
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Table of Contents
NVR, Inc.
Notes to Consolidated Financial Statements
(dollars in thousands, except per share data)
Notes to Consolidated Financial Statements
(dollars in thousands, except per share data)
As of December 31, 2009, the total unrecognized compensation cost for outstanding
unvested
stock option awards equals approximately $28,600, net of estimated forfeitures, and the
weighted-average period over which the unrecognized compensation will be recorded is equal to
approximately 1.4 years.
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 of
treasury shares acquired. During the years ended December 31, 2009, 2008 and 2007, options to
purchase shares of the Company’s common stock of 418,775; 426,751 and 404,815 were exercised.
Information with respect to the exercised options is as follows:
| 2009 | 2008 | 2007 | ||||||||||
|
Aggregate exercise proceeds
|
$ | 79,157 | $ | 70,978 | $ | 67,583 | ||||||
|
Aggregate intrinsic value on exercise dates
|
$ | 135,652 | $ | 175,190 | $ | 218,255 | ||||||
The Company has elected the alternative transition method to establish the beginning
balance of the additional paid-in capital pool available to absorb any future write-offs of
deferred tax benefits associated with stock-based compensation.
Profit Sharing Plans
NVR has a trustee-administered, profit sharing retirement plan (the “Profit Sharing
Plan”) and an Employee Stock Ownership Plan (“ESOP”) covering substantially all employees.
The Profit Sharing Plan and the ESOP provide for annual discretionary contributions in amounts
as determined by the NVR Board of Directors. The combined plan contribution for the years
ended December 31, 2009, 2008 and 2007 was $6,447, $6,856 and $8,799, respectively. The ESOP
purchased approximately 9,400 and 17,700 shares of NVR common stock in the open market for the
2009 and 2008 plan year contributions, respectively, using cash contributions provided by the
Company. As of December 31, 2009, all shares held by the ESOP had been allocated to
participants’ accounts. The 2009 plan year contribution was funded and fully allocated to
participants in February 2010.
Deferred Compensation Plans
The Company has two deferred compensation plans (“Deferred Comp Plans”). The specific
purpose of the Deferred Comp Plans is to i) establish a vehicle whereby named executive
officers may defer the receipt of salary and bonus that otherwise would be nondeductible for
Company tax purposes into a period where the Company would realize a tax deduction for the
amounts paid, and ii) to enable certain of our employees who are subject to the Company’s
stock holding requirements to acquire shares of our common stock on a pre-tax basis in order
to more quickly meet, and maintain compliance with those stock holding requirements. Amounts
deferred into the Deferred Comp Plans are invested in NVR common stock, held in a rabbi trust
account, and are paid out in a fixed number of shares upon expiration of the deferral period.
The rabbi trust account held 265,278 and 514,470 shares of NVR common stock as of
December 31, 2009 and 2008, respectively. During 2009, 249,192 shares of NVR common stock
were issued from the rabbi trust related to deferred compensation for which the deferral
period ended. There were no shares of NVR common stock contributed to the rabbi trust in
2009. Shares held by the Deferred Comp Plan are treated as outstanding shares in the
Company’s earnings per share calculation for each of the years ended December 31, 2009, 2008
and 2007.
81
Table of Contents
NVR, Inc.
Notes to Consolidated Financial Statements
(dollars in thousands, except per share data)
Notes to Consolidated Financial Statements
(dollars in thousands, except per share data)
10. Commitments and Contingent Liabilities
NVR is committed under multiple non-cancelable operating leases involving office space,
model homes, manufacturing facilities, automobiles and equipment. Future minimum lease
payments under these operating leases as of December 31, 2009 are as follows:
| Year ended December 31, | ||||
|
2010
|
$ | 19,678 | ||
|
2011
|
13,004 | |||
|
2012
|
9,738 | |||
|
2013
|
7,310 | |||
|
2014
|
5,917 | |||
|
Thereafter
|
14,904 | |||
|
|
||||
|
|
70,551 | |||
|
Sublease income
|
(435 | ) | ||
|
|
||||
|
|
$ | 70,116 | ||
|
|
||||
Total rent expense incurred under operating leases was approximately $34,024,
$45,841 and $51,091 for the years ended December 31, 2009, 2008 and 2007, respectively.
NVR does not develop land. The Company typically purchases finished lots under fixed
price purchase agreements, which require deposits, which may be forfeited if the Company fails
to perform under the contract. The deposits are in the form of cash or letters of credit in
varying amounts and represent a percentage, typically ranging up to 10%, of the aggregate
purchase price of the finished lots. This lot acquisition strategy reduces the financial
requirements and risks associated with direct land ownership and land development. The
Company generally seeks to maintain control over a supply of lots believed to be suitable to
meet its five-year business plan. At December 31, 2009, assuming that contractual development
milestones are met, NVR is committed to placing additional forfeitable deposits with land
developers under existing lot option contracts of approximately $21,500. The Company also
has five specific performance contracts pursuant to which the Company is committed to
purchasing approximately twenty-nine finished lots at an aggregate purchase price of
approximately $3,500.
During the ordinary course of operating the mortgage banking and homebuilding businesses,
NVR is required to enter into bond or letter of credit arrangements with local municipalities,
government agencies, or land developers to collateralize its obligations under various
contracts. NVR had approximately $36,900 of contingent obligations under such agreements
(including $13,218 for letters of credit as described in Note 6(a) herein) as of December 31,
2009. NVR believes it will fulfill its obligations under the related contracts and does not
anticipate any material losses under these bonds or letters of credit.
The following table reflects the changes in the Company’s warranty reserve for the
following (see Note 1 herein for further discussion of warranty/product liability reserves):
| Year Ended | Year Ended | Year Ended | ||||||||||
| December 31, 2009 | December 31, 2008 | December 31, 2007 | ||||||||||
|
Warranty reserve, beginning of year
|
$ | 68,084 | $ | 70,284 | $ | 70,175 | ||||||
|
Provision
|
35,688 | 40,468 | 47,041 | |||||||||
|
Payments
|
(39,355 | ) | (42,668 | ) | (46,932 | ) | ||||||
|
|
||||||||||||
|
Warranty reserve, end of year
|
$ | 64,417 | $ | 68,084 | $ | 70,284 | ||||||
|
|
||||||||||||
82
Table of Contents
NVR, Inc.
Notes to Consolidated Financial Statements
(dollars in thousands, except per share data)
Notes to Consolidated Financial Statements
(dollars in thousands, except per share data)
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, while a number of individuals have filed consents
to join and assert federal claims in the New York action 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, New Jersey and North Carolina 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 DOL’s 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 DOL’s 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 consolidated balance
sheets.
NVR and its subsidiaries are also involved in various other litigation arising in the
ordinary course of business. In the opinion of management, and based on advice of legal
counsel, this litigation is not expected to have a material adverse effect on the financial
position or results of operations of NVR. Legal costs incurred in connection with outstanding
litigation are expensed as incurred.
11. Fair Value
Financial Instruments
Except as otherwise noted here, NVR believes that insignificant differences exist between
the carrying value and the fair value of its financial instruments. The estimated fair value
of NVR’s 5% Senior Notes due 2010 as of December 31, 2009 and 2008 was $134,829 and $161,937,
respectively. The estimated fair value is based on a quoted market price. The carrying value
was $133,370 and $163,320 at December 31, 2009 and 2008, respectively.
Derivative Instruments and Mortgage Loans Held for Sale
In the normal course of business, NVR’s 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
83
Table of Contents
NVR, Inc.
Notes to Consolidated Financial Statements
(dollars in thousands, except per share data)
Notes to Consolidated Financial Statements
(dollars in thousands, except per share data)
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 and, accordingly, are marked to fair value
through earnings. At December 31, 2009, there were contractual commitments to extend credit
to borrowers aggregating $130,061 and open forward delivery contracts aggregating $141,757.
GAAP assigns a fair value hierarchy to the inputs used to measure fair value. 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 Company’s
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
released premium upon sale. Thus, the value of the servicing rights, which averaged 148 basis
points of the loan amount as of December 31, 2009, is included in the fair value measurement and is
based upon contractual terms with investors and varies depending on the loan type. The Company
assumes an approximate 17% 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 Company’s 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 recorded at fair value when closed, and thereafter are
carried at the lower of cost or fair value until sold. The fair value of loans held-for-sale of
$40,097 included in the accompanying consolidated balance sheet has been reduced by $395 from the
aggregate principal balance of $40,492.
The undesignated derivative instruments are included in the accompanying consolidated balance
sheet as follows:
84
Table of Contents
NVR, Inc.
Notes to Consolidated Financial Statements
(dollars in thousands, except per share data)
Notes to Consolidated Financial Statements
(dollars in thousands, except per share data)
| Balance | Fair | |||||||
| Sheet | Value | |||||||
| Location | December 31, 2009 | |||||||
|
Derivative Assets:
|
||||||||
|
Forward Sales Contracts
|
NVRM — Other assets | $ | 2,445 | |||||
|
|
||||||||
|
|
||||||||
|
Derivative Liabilities:
|
||||||||
|
Rate Lock Commitments
|
NVRM — Accounts payable
and other liabilities |
$ | 707 | |||||
|
|
||||||||
The unrealized gain or loss from the change in the fair value measurements is included in
earnings as a component of mortgage banking fees in the accompanying consolidated statements of
income as follows:
| Assumed | Interest | Total Fair | ||||||||||||||||||||||
| Notional or | Gain (Loss) | Rate | Servicing | Security | Value | |||||||||||||||||||
| Principal | From Loan | Movement | Rights | Price | Adjustment | |||||||||||||||||||
| Amount | Sale | Effect | Value | Change | Gain/(Loss) | |||||||||||||||||||
|
Rate lock commitments
|
$ | 130,061 | $ | (563 | ) | $ | (1,756 | ) | $ | 1,612 | $ | — | $ | (707 | ) | |||||||||
|
Forward sales contracts
|
$ | 141,757 | — | — | — | 2,445 | 2,445 | |||||||||||||||||
|
Mortgages held for sale
|
$ | 40,492 | (225 | ) | (745 | ) | 575 | — | (395 | ) | ||||||||||||||
|
|
||||||||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Total Fair Value Measurement, December
31, 2009
|
(788 | ) | (2,501 | ) | 2,187 | 2,445 | 1,343 | |||||||||||||||||
|
|
||||||||||||||||||||||||
|
Less: Fair Value Measurement, December
31, 2008
|
(1,197 | ) | 2,021 | 1,825 | (1,743 | ) | 906 | |||||||||||||||||
|
|
||||||||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Total Fair Value Adjustment for the
period ended December 31, 2009
|
$ | 409 | $ | (4,522 | ) | $ | 362 | $ | 4,188 | $ | 437 | |||||||||||||
|
|
||||||||||||||||||||||||
The fair value measurement will be impacted in the future by the change in the value of
the servicing rights and the volume and product mix of the Company’s closed loans and locked loan
commitments.
12. Quarterly Results (unaudited)
The following table sets forth unaudited selected financial data and operating information on
a quarterly basis for the years ended December 31, 2009 and 2008.
85
Table of Contents
NVR, Inc.
Notes to Consolidated Financial Statements
(dollars in thousands, except per share data)
Notes to Consolidated Financial Statements
(dollars in thousands, except per share data)
| Year Ended December 31, 2009 | ||||||||||||||||
| 4th | 3rd | 2nd | 1st | |||||||||||||
| Quarter | Quarter | Quarter | Quarter | |||||||||||||
|
Revenues-homebuilding
operations
|
$ | 730,140 | $ | 792,510 | $ | 612,488 | $ | 548,329 | ||||||||
|
Gross profit — homebuilding
operations
|
$ | 137,919 | $ | 155,868 | $ | 118,248 | $ | 85,699 | ||||||||
|
Mortgage banking fees
|
$ | 15,662 | $ | 21,506 | $ | 12,943 | $ | 10,270 | ||||||||
|
Net income
|
$ | 60,639 | $ | 72,127 | $ | 41,426 | $ | 17,988 | ||||||||
|
Diluted earnings per share
|
$ | 9.61 | $ | 11.59 | $ | 6.79 | $ | 3.02 | ||||||||
|
Contracts for sale, net
of cancellations (units)
|
2,000 | 2,255 | 2,728 | 2,426 | ||||||||||||
|
Settlements (units)
|
2,550 | 2,671 | 2,048 | 1,773 | ||||||||||||
|
Backlog, end of period (units)
|
3,531 | 4,081 | 4,497 | 3,817 | ||||||||||||
|
Loans closed
|
$ | 542,147 | $ | 603,317 | $ | 487,618 | $ | 427,294 | ||||||||
| Year Ended December 31, 2008 | ||||||||||||||||
| 4th | 3rd | 2nd | 1st | |||||||||||||
| Quarter | Quarter | Quarter | Quarter | |||||||||||||
|
Revenues-homebuilding
operations
|
$ | 899,535 | $ | 928,265 | $ | 941,033 | $ | 869,869 | ||||||||
|
Gross profit — homebuilding
operations
|
$ | 23,756 | $ | 122,334 | $ | 168,664 | $ | 142,938 | ||||||||
|
Mortgage banking fees
|
$ | 10,639 | $ | 10,946 | $ | 14,690 | $ | 18,062 | ||||||||
|
Net (loss) income
|
$ | (30,457 | ) | $ | 36,551 | $ | 51,332 | $ | 43,466 | |||||||
|
Diluted (loss) earnings per share
|
$ | (5.54 | ) | $ | 6.12 | $ | 8.64 | $ | 7.42 | |||||||
|
Contracts for sale, net
of cancellations (units)
|
1,357 | 2,002 | 2,670 | 2,731 | ||||||||||||
|
Settlements (units)
|
2,776 | 2,750 | 2,750 | 2,465 | ||||||||||||
|
Backlog, end of period (units)
|
3,164 | 4,583 | 5,331 | 5,411 | ||||||||||||
|
Loans closed
|
$ | 623,623 | $ | 610,313 | $ | 593,867 | $ | 523,538 | ||||||||
86
TABLE OF CONTENTS
Part IprintItem 1. BusinessprintItem 1A. Risk FactorsprintItem 1B. Unresolved Staff CommentsprintItem 2. PropertiesprintItem 3. Legal ProceedingsprintItem 4. Submission Of Matters To A Vote Of Security HoldersprintPart IIprintItem 5. Market For Registrant S Common Equity, Related Stockholder Matters and Issuer Purchases Of Equity SecuritiesprintItem 6. Selected Financial DataprintItem 7. Management S Discussion and Analysis Of Financial Condition and Results Of OperationsprintItem 7A. Quantitative and Qualitative Disclosure About Market RiskprintItem 8. Financial Statements and Supplementary DataprintItem 9. Changes in and Disagreements with Accountants on Accounting and Financial DisclosureprintItem 9A. Controls and ProceduresprintItem 9B. Other InformationprintPart IIIprintItem 10. Directors, Executive Officers, and Corporate GovernanceprintItem 11. Executive CompensationprintItem 12. Security Ownership Of Certain Beneficial Owners and Management and Related Stockholder MattersprintItem 13. Certain Relationships and Related Transactions, and Director IndependenceprintItem 14. Principal Accountant Fees and ServicesprintPart IVprintItem 15. Exhibits and Financial Statement Schedulesprint