nvr-10q_20150630.htm

 

United States

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2015

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ____ to ____

Commission File Number: 1-12378

NVR, Inc.

(Exact name of registrant as specified in its charter)

 

 

Virginia

 

54-1394360

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

11700 Plaza America Drive, Suite 500

Reston, Virginia 20190

(703) 956-4000

(Address, including zip code, and telephone number, including area code, of registrant's principal executive offices)

(Not Applicable)

(Former name, former address, and former fiscal year if changed since last report)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes   No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, 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   No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

 

 

Accelerated filer

Non-accelerated filer

(Do not check if smaller reporting company)

 

Smaller reporting company

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No

As of July 27, 2015 there were 4,061,189 total shares of common stock outstanding.



NVR, Inc.

Form 10-Q

INDEX

 

 

 

 

 

Page

 

 

PART I

FINANCIAL INFORMATION

1

 

 

 

Item 1.

Condensed Consolidated Financial Statements

1

 

 

 

 

Condensed Consolidated Balance Sheets (unaudited)

1

 

 

 

 

Condensed Consolidated Statements of Income (unaudited)

2

 

 

 

 

Condensed Consolidated Statements of Cash Flows (unaudited)

3

 

 

 

 

Notes to Condensed Consolidated Financial Statements (unaudited)

4

 

 

 

Item 2.

Management's Discussion and Analysis of Financial Condition and Results of Operations

15

 

 

 

Item 3.

Quantitative and Qualitative Disclosure About Market Risk

30

 

 

 

Item 4.

Controls and Procedures

30

 

 

 

PART II

OTHER INFORMATION

31

 

 

 

Item 1.

Legal Proceedings

31

 

 

 

Item 1A.

Risk Factors

31

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

32

 

 

 

Item 6.

Exhibits

32

 

 

 

 

SIGNATURE

33

 

 

 

 

Exhibit Index

34

 


 

PART I. FINANCIAL INFORMATION

Item 1.Financial Statements

NVR, Inc.

Condensed Consolidated Balance Sheets

(in thousands, except share and per share data)

 

 

 

June 30, 2015

 

 

December 31, 2014

 

 

 

(unaudited)

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

 

Homebuilding:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

476,493

 

 

$

514,780

 

Receivables

 

 

15,987

 

 

 

10,021

 

Inventory:

 

 

 

 

 

 

 

 

Lots and housing units, covered under sales agreements with customers

 

 

943,970

 

 

 

690,955

 

Unsold lots and housing units

 

 

104,484

 

 

 

131,938

 

Land under development

 

 

25,554

 

 

 

33,689

 

Building materials and other

 

 

11,083

 

 

 

12,904

 

 

 

 

1,085,091

 

 

 

869,486

 

 

 

 

 

 

 

 

 

 

Assets related to consolidated variable interest entity

 

 

2,902

 

 

 

3,590

 

Contract land deposits, net

 

 

301,848

 

 

 

294,676

 

Property, plant and equipment, net

 

 

45,071

 

 

 

46,242

 

Reorganization value in excess of amounts allocable to identifiable assets, net

 

 

41,580

 

 

 

41,580

 

Goodwill and finite-lived intangible assets, net

 

 

4,673

 

 

 

5,364

 

Other assets

 

 

303,435

 

 

 

302,280

 

 

 

 

2,277,080

 

 

 

2,088,019

 

 

 

 

 

 

 

 

 

 

Mortgage Banking:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

 

19,238

 

 

 

30,158

 

Mortgage loans held for sale, net

 

 

265,418

 

 

 

205,664

 

Property and equipment, net

 

 

5,675

 

 

 

6,189

 

Reorganization value in excess of amounts allocable to identifiable assets, net

 

 

7,347

 

 

 

7,347

 

Other assets

 

 

21,477

 

 

 

13,958

 

 

 

 

319,155

 

 

 

263,316

 

Total assets

 

$

2,596,235

 

 

$

2,351,335

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS' EQUITY

 

 

 

 

 

 

 

 

Homebuilding:

 

 

 

 

 

 

 

 

Accounts payable

 

$

256,521

 

 

$

204,622

 

Accrued expenses and other liabilities

 

 

299,553

 

 

 

289,058

 

Liabilities related to consolidated variable interest entity

 

 

1,652

 

 

 

1,618

 

Non-recourse debt related to consolidated variable interest entity

 

 

 

 

 

64

 

Customer deposits

 

 

138,383

 

 

 

106,755

 

Senior notes

 

 

599,213

 

 

 

599,166

 

 

 

 

1,295,322

 

 

 

1,201,283

 

Mortgage Banking:

 

 

 

 

 

 

 

 

Accounts payable and other liabilities

 

 

26,032

 

 

 

25,797

 

 

 

 

26,032

 

 

 

25,797

 

Total liabilities

 

 

1,321,354

 

 

 

1,227,080

 

 

 

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shareholders' equity:

 

 

 

 

 

 

 

 

Common stock, $0.01 par value; 60,000,000 shares authorized; 20,555,330 shares issued as of

   both June 30, 2015 and December 31, 2014

 

 

206

 

 

 

206

 

Additional paid-in capital

 

 

1,389,725

 

 

 

1,325,495

 

Deferred compensation trust – 108,614 shares of NVR, Inc. common stock as of both

   June 30, 2015 and December 31, 2014

 

 

(17,333

)

 

 

(17,333

)

Deferred compensation liability

 

 

17,333

 

 

 

17,333

 

Retained earnings

 

 

5,019,640

 

 

 

4,887,187

 

Less treasury stock at cost – 16,486,160 and 16,506,229 shares as of June 30, 2015 and

  December 31, 2014, respectively

 

 

(5,134,690

)

 

 

(5,088,633

)

Total shareholders' equity

 

 

1,274,881

 

 

 

1,124,255

 

Total liabilities and shareholders' equity

 

$

2,596,235

 

 

$

2,351,335

 

 

See notes to condensed consolidated financial statements.

1


 

NVR, Inc.

Condensed Consolidated Statements of Income

(in thousands, except per share data)

(unaudited)

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

2015

 

 

2014

 

 

2015

 

 

2014

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Homebuilding:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

$

1,221,111

 

 

$

1,084,080

 

 

$

2,162,649

 

 

$

1,883,267

 

Other income

 

 

1,122

 

 

 

452

 

 

 

1,847

 

 

 

1,449

 

Cost of sales

 

 

(986,854

)

 

 

(882,778

)

 

 

(1,768,522

)

 

 

(1,537,930

)

Selling, general and administrative

 

 

(92,314

)

 

 

(93,583

)

 

 

(190,543

)

 

 

(184,215

)

Operating income

 

 

143,065

 

 

 

108,171

 

 

 

205,431

 

 

 

162,571

 

Interest expense

 

 

(5,817

)

 

 

(5,593

)

 

 

(11,599

)

 

 

(11,277

)

Homebuilding income

 

 

137,248

 

 

 

102,578

 

 

 

193,832

 

 

 

151,294

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage Banking:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage banking fees

 

 

22,522

 

 

 

17,974

 

 

 

38,733

 

 

 

30,097

 

Interest income

 

 

1,303

 

 

 

825

 

 

 

2,381

 

 

 

2,009

 

Other income

 

 

243

 

 

 

194

 

 

 

348

 

 

 

253

 

General and administrative

 

 

(12,493

)

 

 

(12,617

)

 

 

(23,972

)

 

 

(24,882

)

Interest expense

 

 

(139

)

 

 

(130

)

 

 

(275

)

 

 

(240

)

Mortgage banking income

 

 

11,436

 

 

 

6,246

 

 

 

17,215

 

 

 

7,237

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income before taxes

 

 

148,684

 

 

 

108,824

 

 

 

211,047

 

 

 

158,531

 

Income tax expense

 

 

(55,289

)

 

 

(40,646

)

 

 

(78,594

)

 

 

(66,504

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

93,395

 

 

$

68,178

 

 

$

132,453

 

 

$

92,027

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per share

 

$

22.97

 

 

$

15.68

 

 

$

32.61

 

 

$

20.88

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted earnings per share

 

$

21.91

 

 

$

15.17

 

 

$

31.17

 

 

$

20.19

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic weighted average shares outstanding

 

 

4,066

 

 

 

4,349

 

 

 

4,062

 

 

 

4,408

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted weighted average shares outstanding

 

 

4,262

 

 

 

4,495

 

 

 

4,249

 

 

 

4,557

 

 

See notes to condensed consolidated financial statements.

2


 

NVR, Inc.

Condensed Consolidated Statements of Cash Flows

(in thousands)

(unaudited)

 

 

 

Six Months Ended June 30,

 

 

 

2015

 

 

2014

 

 

 

 

 

 

 

 

 

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net income

 

$

132,453

 

 

$

92,027

 

Adjustments to reconcile net income to net cash used in operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

10,741

 

 

 

7,926

 

Excess income tax benefit from equity-based compensation

 

 

(9,899

)

 

 

(6,050

)

Equity-based compensation expense

 

 

26,303

 

 

 

26,641

 

Contract land deposit recoveries

 

 

(5,747

)

 

 

(3,655

)

Gain on sale of loans

 

 

(27,331

)

 

 

(20,505

)

Mortgage loans closed

 

 

(1,311,016

)

 

 

(1,010,249

)

Mortgage loans sold and principal payments on mortgage loans held for sale

 

 

1,273,413

 

 

 

1,072,897

 

Distribution of earnings from unconsolidated joint ventures

 

 

9,939

 

 

 

4,718

 

Net change in assets and liabilities:

 

 

 

 

 

 

 

 

Increase in inventory

 

 

(213,837

)

 

 

(212,502

)

Increase in contract land deposits

 

 

(1,425

)

 

 

(13,268

)

Increase in receivables

 

 

(6,948

)

 

 

(5,549

)

Increase in accounts payable and accrued expenses

 

 

66,521

 

 

 

33,972

 

Increase in customer deposits

 

 

31,628

 

 

 

27,298

 

Other, net

 

 

(15,204

)

 

 

(10,781

)

Net cash used in operating activities

 

 

(40,409

)

 

 

(17,080

)

 

 

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Investments in and advances to unconsolidated joint ventures

 

 

(1,245

)

 

 

 

Distribution of capital from unconsolidated joint ventures

 

 

10,561

 

 

 

8,282

 

Purchase of property, plant and equipment

 

 

(8,585

)

 

 

(20,805

)

Proceeds from the sale of property, plant and equipment

 

 

338

 

 

 

363

 

Net cash provided by (used in) investing activities

 

 

1,069

 

 

 

(12,160

)

 

 

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Purchase of treasury stock

 

 

(69,285

)

 

 

(347,448

)

Repayments under non-recourse debt related to consolidated

  variable interest entity and note payable

 

 

(64

)

 

 

(2,222

)

Distributions to partner in consolidated variable interest entity

 

 

(300

)

 

 

(281

)

Excess income tax benefit from equity-based compensation

 

 

9,899

 

 

 

6,050

 

Proceeds from the exercise of stock options

 

 

51,256

 

 

 

60,593

 

Net cash used in financing activities

 

 

(8,494

)

 

 

(283,308

)

 

 

 

 

 

 

 

 

 

Net decrease in cash and cash equivalents

 

 

(47,834

)

 

 

(312,548

)

Cash and cash equivalents, beginning of the period

 

 

545,419

 

 

 

866,253

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents, end of the period

 

$

497,585

 

 

$

553,705

 

 

 

 

 

 

 

 

 

 

Supplemental disclosures of cash flow information:

 

 

 

 

 

 

 

 

Interest paid during the period, net of interest capitalized

 

$

12,221

 

 

$

12,166

 

Income taxes paid during the period, net of refunds

 

$

52,781

 

 

$

63,128

 

 

See notes to condensed consolidated financial statements.

 

 

3


NVR, Inc.

Notes to Condensed Consolidated Financial Statements

(dollars and shares in thousands)

(unaudited)

 

1.

Basis of Presentation

The accompanying unaudited, condensed consolidated financial statements include the accounts of NVR, Inc. (“NVR” or the “Company”) and its subsidiaries and certain other entities in which the Company is deemed to be the primary beneficiary (see Notes 2 and 3 to the accompanying condensed consolidated financial statements).  Intercompany accounts and transactions have been eliminated in consolidation.  The statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Regulation S-X.  Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements.  Because the accompanying condensed consolidated financial statements do not include all of the information and footnotes required by GAAP, they should be read in conjunction with the financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014.  In the opinion of management, all adjustments (consisting only of normal recurring accruals except as otherwise noted herein) considered necessary for a fair presentation have been included.  Operating results for the three and six months ended June 30, 2015 are not necessarily indicative of the results that may be expected for the year ending December 31, 2015.

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes.  Actual results could differ from those estimates.  Certain prior year amounts in the condensed consolidated financial statements have been reclassified to conform to 2015 presentation.  Reclassifications did not impact net income, total assets or total liabilities, or statement of cash flow classifications.

For the three months and six months ended June 30, 2015 and 2014, comprehensive income equaled net income; therefore, a separate statement of comprehensive income is not included in the accompanying condensed consolidated financial statements.

 

 

2.

Variable Interest Entities

Fixed Price Purchase Agreements

NVR generally 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 agreements.  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.

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 liquidated damage provisions contained within the purchase agreements.  In other words, if NVR does not perform under a purchase agreement, NVR loses only its deposit.  None of the creditors of any of the development entities with which NVR enters fixed price purchase agreements have recourse to the general credit of NVR.  NVR generally does not have any specific performance obligations to purchase a certain number or any of the lots, nor does NVR guarantee completion of the development by the developer or guarantee any of the developers’ financial or other liabilities.

NVR is not involved in the design or creation of any of the development entities from which the Company purchases lots under fixed price purchase agreements.  The developer’s equity holders have the power to direct 100% of the operating activities of the development entity.  NVR has no voting rights in any of the development entities.  The sole purpose of the development entity’s activities is to generate positive cash flow returns for the equity holders.  Further, NVR does not share in any of the profit or loss generated by the project’s development.  The profits and losses are passed directly to the developer’s equity holders.

4


NVR, Inc.

Notes to Condensed Consolidated Financial Statements

(dollars and shares in thousands)

(unaudited)

 

The deposit placed by NVR pursuant to the fixed price purchase agreement is deemed to be a variable interest in the respective development entities.  Those development entities are deemed to be variable interest entities (“VIE”).  Therefore, the development entities with which NVR enters into fixed price purchase agreements, including the joint venture limited liability corporations discussed below, are evaluated for possible consolidation by NVR.  An enterprise must consolidate a VIE when that enterprise has a controlling financial interest in the VIE.  An enterprise is deemed to have a controlling financial interest if it has i) the power to direct the activities of a VIE that most significantly impact the entity’s economic performance, and ii) the obligation to absorb losses of the VIE that could be significant to the VIE or the rights to receive benefits from the VIE that could be significant to the VIE.

NVR believes the activities that most significantly impact a development entity’s economic performance are the operating activities of the entity.  Unless and until a development entity completes finished building lots through the development process to be able to sell, the process of which the development entity’s equity investors bear the full risk, the entity does not earn any revenues.  The operating development activities are managed solely by the development entity’s equity investors.

The development entities with which NVR contracts to buy finished lots typically select the respective projects, obtain the necessary zoning approvals, obtain the financing required with no support or guarantees from NVR, select who will purchase the finished lots and at what price, and manage the completion of the infrastructure improvements, all for the purpose of generating a cash flow return to the development entity’s equity holders and all independent of NVR.  The Company possesses no more than limited protective legal rights through the purchase agreement in the specific finished lots that it is purchasing, and NVR possesses no participative rights in the development entities.  Accordingly, NVR does not have the power to direct the activities of a developer that most significantly impact the developer’s economic performance.  For this reason, NVR has concluded that it is not the primary beneficiary of the development entities with which the Company enters into fixed price purchase agreements, and therefore, NVR does not consolidate any of these VIEs.

As of June 30, 2015, NVR controlled approximately 65,300 lots through fixed price purchase agreements with deposits in cash and letters of credit totaling $347,900 and $2,300, respectively.  As noted above, 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 liquidated damage provisions contained in the purchase agreements and, in very limited circumstances, specific performance obligations. In addition, NVR has certain properties under contract with land owners that are expected to yield approximately 6,400 lots, which are not included in the number of total lots controlled.  Some of these properties may require rezoning or other approvals to achieve the expected yield. These properties are controlled with deposits and letters of credit totaling approximately $3,200 and $1,300, respectively as of June 30, 2015, of which approximately $4,400 is refundable if NVR does not perform under the contract.  NVR generally expects to assign the raw land contracts to a land developer and simultaneously enter into a lot purchase agreement with the assignee if the project is determined to be feasible.

NVR’s total risk of loss related to contract land deposits as of June 30, 2015 and December 31, 2014 was as follows:

 

 

 

 

June 30, 2015

 

 

December 31, 2014

 

Contract land deposits

 

$

351,085

 

 

$

350,750

 

Loss reserve on contract land deposits

 

 

(49,237

)

 

 

(56,074

)

Contract land deposits, net

 

 

301,848

 

 

 

294,676

 

Contingent obligations in the form of letters of credit

 

 

3,630

 

 

 

4,674

 

Contingent specific performance obligations (1)

 

 

1,505

 

 

 

1,505

 

Total risk of loss

 

$

306,983

 

 

$

300,855

 

 

(1)

As of both June 30, 2015 and December 31, 2014, the Company was committed to purchase 10 finished lots under specific performance obligations.

 

 

 

5


NVR, Inc.

Notes to Condensed Consolidated Financial Statements

(dollars and shares in thousands)

(unaudited)

 

 

3.

Joint Ventures

On a limited basis, NVR also obtains finished lots using joint venture limited liability corporations (“JVs”). The JVs are typically structured such that NVR is a non-controlling member and is at risk only for the amount the Company has invested, or has committed to invest, in addition to any deposits placed under fixed price purchase agreements with the joint venture. NVR is not a borrower, guarantor or obligor on any debt of the JVs. The Company enters into standard fixed price purchase agreements to purchase lots from these JVs, and as a result has a variable interest in these JVs.

At June 30, 2015, the Company had an aggregate investment totaling approximately $68,500 in five JVs that are expected to produce approximately 8,300 finished lots, of which approximately 3,300 were not under contract with NVR. In addition, NVR had additional funding commitments totaling approximately $12,100 in the aggregate to three of the JVs at June 30, 2015. The Company has determined that it is not the primary beneficiary of four of the JVs because either NVR and the other JV partner share power or the other JV partner has the controlling financial interest. The aggregate investment in unconsolidated JVs was approximately $67,300 and $80,100 at June 30, 2015 and December 31, 2014, respectively, and is reported in the “Other assets” line item on the accompanying condensed consolidated balance sheets. For the remaining JV, NVR has concluded that it is the primary beneficiary because the Company has the controlling financial interest in the JV. The condensed balance sheets as of June 30, 2015 and December 31, 2014 of the consolidated JV were as follows:

 

 

 

 

June 30, 2015

 

 

December 31, 2014

 

Assets:

 

 

 

 

 

 

 

 

Cash

 

$

1,854

 

 

$

481

 

Restricted cash

 

 

 

 

 

160

 

Other assets

 

 

199

 

 

 

332

 

Land under development

 

 

849

 

 

 

2,617

 

Total assets

 

$

2,902

 

 

$

3,590

 

 

 

 

 

 

 

 

 

 

Liabilities and equity:

 

 

 

 

 

 

 

 

Debt

 

$

 

 

$

64

 

Accrued expenses

 

 

1,389

 

 

 

1,231

 

Equity

 

 

1,513

 

 

 

2,295

 

Total liabilities and equity

 

$

2,902

 

 

$

3,590

 

 

Distributions received from the unconsolidated JVs are allocated between return of capital and distributions of earnings based on the ratio of capital contributed by NVR to the total expected returns for the respective JVs, and are classified within the accompanying condensed consolidated statements of cash flows as cash flows from investing activities and operating activities, respectively.

 

4.

Land Under Development

On a limited basis, NVR directly acquires raw parcels of land already zoned for its intended use to develop into finished lots.  Land under development includes the land acquisition costs, direct improvement costs, capitalized interest where applicable, and real estate taxes.  As of June 30, 2015, NVR directly owned four separate raw parcels of land with a carrying value of $25,554 that it intends to develop into approximately 380 finished lots.  Of the total finished lots, approximately 90 lots are under contract to be sold to an unrelated party under lot purchase agreements.  During the three and six months ended June 30, 2015, the Company sold one and six lots, respectively, pursuant to these lot purchase agreements for an aggregate sales price of $259 and $1,535, respectively.  No lots were sold to unrelated parties during the first six months of 2014. The Company capitalizes interest costs to land under development during the active development of finished lots (see Note 5 for further discussion of capitalized interest). None of the raw parcels had any indicators of impairment as of June 30, 2015.  Based on market conditions, NVR may on a limited basis continue to directly acquire additional raw parcels to develop into finished lots.

 

6


NVR, Inc.

Notes to Condensed Consolidated Financial Statements

(dollars and shares in thousands)

(unaudited)

 

5.

Capitalized Interest

The Company capitalizes interest costs to land under development during the active development of finished lots.  In addition, the Company capitalizes interest costs to its joint venture investments while the investments are considered qualified assets pursuant to ASC 835-20, Interest.  Capitalized interest is transferred to sold or unsold inventory as the development of finished lots is completed, then charged to cost of sales upon the Company’s settlement of homes and the respective lots.  Interest incurred in excess of the interest capitalizable based on the level of qualified assets is expensed in the period incurred.  NVR’s interest costs incurred, capitalized, expensed and charged to cost of sales during the three and six months ended June 30, 2015 and 2014 was as follows:

 

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

2015

 

 

2014

 

 

2015

 

 

2014

 

Interest capitalized, beginning of period

 

$

4,271

 

 

$

3,618

 

 

$

4,072

 

 

$

3,294

 

Interest incurred

 

 

6,262

 

 

 

6,200

 

 

 

12,525

 

 

 

12,423

 

Interest charged to interest expense

 

 

(5,956

)

 

 

(5,723

)

 

 

(11,874

)

 

 

(11,517

)

Interest charged to cost of sales

 

 

(245

)

 

 

(285

)

 

 

(391

)

 

 

(390

)

Interest capitalized, end of period

 

$

4,332

 

 

$

3,810

 

 

$

4,332

 

 

$

3,810

 

 

 

6.

Earnings per Share

The following weighted average shares and share equivalents were used to calculate basic and diluted earnings per share for the three and six months ended June 30, 2015 and 2014:

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

2015

 

 

2014

 

 

2015

 

 

2014

 

Weighted average number of shares outstanding

  used to calculate basic EPS

 

 

4,066

 

 

 

4,349

 

 

 

4,062

 

 

 

4,408

 

Dilutive securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock options and restricted share units

 

 

196

 

 

 

146

 

 

 

187

 

 

 

149

 

Weighted average number of shares and share

  equivalents outstanding used to calculate diluted EPS

 

 

4,262

 

 

 

4,495

 

 

 

4,249

 

 

 

4,557

 

 

The following stock options and restricted share units issued under equity incentive plans were outstanding during the three and six months ended June 30, 2015 and 2014, but were not included in the computation of diluted earnings per share because the effect would have been anti-dilutive.

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

2015

 

 

2014

 

 

2015

 

 

2014

 

Anti-dilutive securities

 

 

37

 

 

 

753

 

 

 

41

 

 

 

753

 

 

 

7.

Excess Reorganization Value, Goodwill and Other Intangibles

Reorganization value in excess of identifiable assets (“excess reorganization value”) is an indefinite-lived 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 emergence from bankruptcy, the impairment assessment is conducted on an enterprise basis based on the comparison of NVR’s total equity to the market value of NVR’s outstanding publicly-traded common stock.  

7


NVR, Inc.

Notes to Condensed Consolidated Financial Statements

(dollars and shares in thousands)

(unaudited)

 

As of June 30, 2015, goodwill and net finite-lived intangible assets totaled $441 and $4,232, respectively.  The remaining finite-lived intangible assets are amortized on a straight-line basis over a weighted average life of four years.  Accumulated amortization as of June 30, 2015 was $4,546.  Amortization expense related to the finite-lived intangible assets was $346 and $691 for both the three and six months ended June 30, 2015 and 2014, respectively.

The Company completed the annual impairment assessment of the excess reorganization value and goodwill during the first quarter of 2015 and determined that there was no impairment.

 

 

8.

Shareholders’ Equity

A summary of changes in shareholders’ equity is presented below:

 

 

 

Common

Stock

 

 

Additional

Paid-In

Capital

 

 

Retained

Earnings

 

 

Treasury

Stock

 

 

Deferred

Compensation

Trust

 

 

Deferred

Compensation

Liability

 

 

Total

 

Balance, December 31, 2014

 

$

206

 

 

$

1,325,495

 

 

$

4,887,187

 

 

$

(5,088,633

)

 

$

(17,333

)

 

$

17,333

 

 

$

1,124,255

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

 

 

 

 

132,453

 

 

 

 

 

 

 

 

 

 

 

 

132,453

 

Purchase of common stock for treasury

 

 

 

 

 

 

 

 

 

 

 

(69,285

)

 

 

 

 

 

 

 

 

(69,285

)

Equity-based compensation

 

 

 

 

 

26,303

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

26,303

 

Tax benefit from equity benefit plan

  activity

 

 

 

 

 

9,899

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

9,899

 

Proceeds from stock options exercised

 

 

 

 

 

51,256

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

51,256

 

Treasury stock issued upon option

  exercise and restricted share vesting

 

 

 

 

 

(23,228

)

 

 

 

 

 

23,228

 

 

 

 

 

 

 

 

 

 

Balance, June 30, 2015

 

$

206

 

 

$

1,389,725

 

 

$

5,019,640

 

 

$

(5,134,690

)

 

$

(17,333

)

 

$

17,333

 

 

$

1,274,881

 

 

The Company repurchased 55 shares of its common stock during the six months ended June 30, 2015. The Company settles option exercises and vesting of restricted share units by issuing shares of treasury stock.  Approximately 75 shares were issued from the treasury account during the six months ended June 30, 2015 in settlement of option exercises and vesting of restricted share units.  Shares are relieved from the treasury account based on the weighted average cost basis of treasury shares acquired.

 

 

9.

Product Warranties

The Company establishes warranty and product liability reserves (“warranty reserve”) to provide for estimated future expenses 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 the Company’s general counsel and outside counsel retained to handle specific product liability cases.  The following table reflects the changes in the Company’s warranty reserve during the three and six months ended June 30, 2015 and 2014:

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

2015

 

 

2014

 

 

2015

 

 

2014

 

Warranty reserve, beginning of period

 

$

89,743

 

 

$

98,765

 

 

$

94,060

 

 

$

101,507

 

Provision

 

 

11,144

 

 

 

13,193

 

 

 

20,226

 

 

 

23,453

 

Payments

 

 

(15,013

)

 

 

(14,768

)

 

 

(28,412

)

 

 

(27,770

)

Warranty reserve, end of period

 

$

85,874

 

 

$

97,190

 

 

$

85,874

 

 

$

97,190

 

 

 

The warranty reserve provision for the three and six months ended June 30, 2014 included an additional charge of $3,000 and $3,975, respectively, related to the estimated cost of ongoing remediation of a previously disclosed water infiltration issue in a single community.  During the three month period ended June 30, 2015, approximately $1,300 of the estimated accrued remediation costs related to this issue were reversed as the repairs neared completion and actual expected costs became known.

8


NVR, Inc.

Notes to Condensed Consolidated Financial Statements

(dollars and shares in thousands)

(unaudited)

 

 

 

 

10.

Segment Disclosures

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:

 

Mid Atlantic:

 

Maryland, Virginia, West Virginia, Delaware and Washington, D.C.

North East:

 

New Jersey and Eastern Pennsylvania

Mid East:

 

New York, Ohio, Western Pennsylvania, Indiana and Illinois

South East:

 

North Carolina, South Carolina, Florida and Tennessee

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 is eliminated in consolidation and is based on the segment’s average net assets employed.  The corporate capital allocation charged to the operating segment allows the Chief Operating Decision Maker (“CODM”) to determine whether the operating segment’s results are providing the desired rate of return after covering the Company’s cost of capital.  In addition, certain assets, including goodwill and intangible assets and consolidation adjustments as discussed further below, are not allocated to the operating segments as those assets are neither included in the operating segment’s corporate capital allocation charge, nor in the CODM’s evaluation of the operating segment’s performance.  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 corporate 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), equity-based compensation expense, consolidation adjustments and external corporate interest expense.  NVR’s overhead functions, such as accounting, treasury and human resources, 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.  External corporate interest expense primarily consists of interest charges on the Company’s 3.95% Senior Notes due 2022 (the “Senior Notes”) and is not charged to the operating segments because the charges are included in the corporate capital allocation discussed above.

Following are tables presenting segment revenues, profit and assets, with reconciliations to the amounts reported for the consolidated enterprise, where applicable:

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

2015

 

 

2014

 

 

2015

 

 

2014

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Homebuilding Mid Atlantic

 

$

746,168

 

 

$

657,825

 

 

$

1,302,288

 

 

$

1,122,855

 

Homebuilding North East

 

 

114,375

 

 

 

92,438

 

 

 

197,368

 

 

 

171,230

 

Homebuilding Mid East

 

 

221,083

 

 

 

221,088

 

 

 

406,512

 

 

 

371,736

 

Homebuilding South East

 

 

139,485

 

 

 

112,729

 

 

 

256,481

 

 

 

217,446

 

Mortgage Banking

 

 

22,522

 

 

 

17,974

 

 

 

38,733

 

 

 

30,097

 

Total consolidated revenues

 

$

1,243,633

 

 

$

1,102,054

 

 

$

2,201,382

 

 

$

1,913,364

 

 

9


NVR, Inc.

Notes to Condensed Consolidated Financial Statements

(dollars and shares in thousands)

(unaudited)

 

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

2015

 

 

2014

 

 

2015

 

 

2014

 

Profit before taxes: