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 September 30, 2016
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 October 25, 2016 there were 3,790,395 total shares of common stock outstanding.
Form 10-Q
Table of Contents |
||
|
|
|
|
|
Page |
|
|
|
PART I |
1 |
|
|
|
|
1 |
||
|
|
|
|
1 |
|
|
|
|
|
2 |
|
|
|
|
|
3 |
|
|
|
|
|
Notes to Condensed Consolidated Financial Statements (unaudited) |
4 |
|
|
|
Item 2. |
Management's Discussion and Analysis of Financial Condition and Results of Operations |
16 |
|
|
|
Item 3. |
28 |
|
|
|
|
Item 4. |
28 |
|
|
|
|
PART II |
28 |
|
|
|
|
Item 1. |
28 |
|
|
|
|
Item 1A. |
28 |
|
|
|
|
Item 2. |
29 |
|
|
|
|
Item 6. |
30 |
|
|
|
|
|
31 |
|
|
|
|
|
32 |
NVR, Inc.
Condensed Consolidated Balance Sheets
(in thousands, except share and per share data)
(unaudited)
|
|
September 30, 2016 |
|
|
December 31, 2015 |
|
||
ASSETS |
|
|
|
|
|
|
|
|
Homebuilding: |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
249,728 |
|
|
$ |
397,522 |
|
Receivables |
|
|
13,921 |
|
|
|
11,482 |
|
Inventory: |
|
|
|
|
|
|
|
|
Lots and housing units, covered under sales agreements with customers |
|
|
1,107,919 |
|
|
|
785,982 |
|
Unsold lots and housing units |
|
|
134,626 |
|
|
|
147,832 |
|
Land under development |
|
|
62,327 |
|
|
|
60,611 |
|
Building materials and other |
|
|
11,858 |
|
|
|
12,101 |
|
|
|
|
1,316,730 |
|
|
|
1,006,526 |
|
|
|
|
|
|
|
|
|
|
Assets related to consolidated variable interest entity |
|
|
1,247 |
|
|
|
1,749 |
|
Contract land deposits, net |
|
|
377,496 |
|
|
|
343,295 |
|
Property, plant and equipment, net |
|
|
45,321 |
|
|
|
44,651 |
|
Reorganization value in excess of amounts allocable to identifiable assets, net |
|
|
41,580 |
|
|
|
41,580 |
|
Goodwill and finite-lived intangible assets, net |
|
|
2,945 |
|
|
|
3,982 |
|
Other assets |
|
|
280,245 |
|
|
|
281,381 |
|
|
|
|
2,329,213 |
|
|
|
2,132,168 |
|
|
|
|
|
|
|
|
|
|
Mortgage Banking: |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
|
11,490 |
|
|
|
26,804 |
|
Mortgage loans held for sale, net |
|
|
291,303 |
|
|
|
319,553 |
|
Property and equipment, net |
|
|
5,085 |
|
|
|
5,313 |
|
Reorganization value in excess of amounts allocable to identifiable assets, net |
|
|
7,347 |
|
|
|
7,347 |
|
Other assets |
|
|
18,778 |
|
|
|
20,533 |
|
|
|
|
334,003 |
|
|
|
379,550 |
|
Total assets |
|
$ |
2,663,216 |
|
|
$ |
2,511,718 |
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS' EQUITY |
|
|
|
|
|
|
|
|
Homebuilding: |
|
|
|
|
|
|
|
|
Accounts payable |
|
$ |
281,530 |
|
|
$ |
227,437 |
|
Accrued expenses and other liabilities |
|
|
309,939 |
|
|
|
304,922 |
|
Liabilities related to consolidated variable interest entity |
|
|
877 |
|
|
|
1,091 |
|
Customer deposits |
|
|
144,697 |
|
|
|
110,965 |
|
Senior notes |
|
|
596,303 |
|
|
|
595,847 |
|
|
|
|
1,333,346 |
|
|
|
1,240,262 |
|
Mortgage Banking: |
|
|
|
|
|
|
|
|
Accounts payable and other liabilities |
|
|
30,731 |
|
|
|
32,291 |
|
|
|
|
30,731 |
|
|
|
32,291 |
|
Total liabilities |
|
|
1,364,077 |
|
|
|
1,272,553 |
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders' equity: |
|
|
|
|
|
|
|
|
Common stock, $0.01 par value; 60,000,000 shares authorized; 20,555,330 shares issued as of both September 30, 2016 and December 31, 2015 |
|
|
206 |
|
|
|
206 |
|
Additional paid-in capital |
|
|
1,499,770 |
|
|
|
1,447,795 |
|
Deferred compensation trust – 108,635 and 108,614 shares of NVR, Inc. common stock as of September 30, 2016 and December 31, 2015, respectively |
|
|
(17,367 |
) |
|
|
(17,333 |
) |
Deferred compensation liability |
|
|
17,367 |
|
|
|
17,333 |
|
Retained earnings |
|
|
5,544,485 |
|
|
|
5,270,114 |
|
Less treasury stock at cost – 16,766,035 and 16,664,342 shares as of September 30, 2016 and December 31, 2015, respectively |
|
|
(5,745,322 |
) |
|
|
(5,478,950 |
) |
Total shareholders' equity |
|
|
1,299,139 |
|
|
|
1,239,165 |
|
Total liabilities and shareholders' equity |
|
$ |
2,663,216 |
|
|
$ |
2,511,718 |
|
See notes to condensed consolidated financial statements.
1
Condensed Consolidated Statements of Income
(in thousands, except per share data)
(unaudited)
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
||||||||||
|
|
2016 |
|
|
2015 |
|
|
2016 |
|
|
2015 |
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Homebuilding: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
1,507,451 |
|
|
$ |
1,374,467 |
|
|
$ |
3,990,696 |
|
|
$ |
3,537,116 |
|
Other income |
|
|
703 |
|
|
|
643 |
|
|
|
2,223 |
|
|
|
2,490 |
|
Cost of sales |
|
|
(1,242,292 |
) |
|
|
(1,111,672 |
) |
|
|
(3,294,421 |
) |
|
|
(2,880,194 |
) |
Selling, general and administrative |
|
|
(92,867 |
) |
|
|
(88,664 |
) |
|
|
(290,925 |
) |
|
|
(279,207 |
) |
Operating income |
|
|
172,995 |
|
|
|
174,774 |
|
|
|
407,573 |
|
|
|
380,205 |
|
Interest expense |
|
|
(5,338 |
) |
|
|
(5,900 |
) |
|
|
(14,734 |
) |
|
|
(17,499 |
) |
Homebuilding income |
|
|
167,657 |
|
|
|
168,874 |
|
|
|
392,839 |
|
|
|
362,706 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage Banking: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage banking fees |
|
|
30,118 |
|
|
|
27,884 |
|
|
|
79,082 |
|
|
|
66,617 |
|
Interest income |
|
|
2,000 |
|
|
|
1,972 |
|
|
|
5,111 |
|
|
|
4,353 |
|
Other income |
|
|
473 |
|
|
|
363 |
|
|
|
1,140 |
|
|
|
711 |
|
General and administrative |
|
|
(14,959 |
) |
|
|
(13,916 |
) |
|
|
(44,345 |
) |
|
|
(37,888 |
) |
Interest expense |
|
|
(286 |
) |
|
|
(181 |
) |
|
|
(792 |
) |
|
|
(456 |
) |
Mortgage banking income |
|
|
17,346 |
|
|
|
16,122 |
|
|
|
40,196 |
|
|
|
33,337 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before taxes |
|
|
185,003 |
|
|
|
184,996 |
|
|
|
433,035 |
|
|
|
396,043 |
|
Income tax expense |
|
|
(67,611 |
) |
|
|
(68,526 |
) |
|
|
(158,664 |
) |
|
|
(147,120 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
117,392 |
|
|
$ |
116,470 |
|
|
$ |
274,371 |
|
|
$ |
248,923 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share |
|
$ |
30.43 |
|
|
$ |
28.75 |
|
|
$ |
70.70 |
|
|
$ |
61.34 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share |
|
$ |
28.46 |
|
|
$ |
27.11 |
|
|
$ |
66.24 |
|
|
$ |
58.32 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic weighted average shares outstanding |
|
|
3,858 |
|
|
|
4,050 |
|
|
|
3,881 |
|
|
|
4,058 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted weighted average shares outstanding |
|
|
4,125 |
|
|
|
4,296 |
|
|
|
4,142 |
|
|
|
4,268 |
|
See notes to condensed consolidated financial statements.
2
Condensed Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
|
|
Nine Months Ended September 30, |
|
|||||
|
|
2016 |
|
|
2015 |
|
||
|
|
|
|
|
|
|
|
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
Net income |
|
$ |
274,371 |
|
|
$ |
248,923 |
|
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
16,591 |
|
|
|
16,182 |
|
Excess income tax benefit from equity-based compensation |
|
|
(10,949 |
) |
|
|
(14,465 |
) |
Equity-based compensation expense |
|
|
32,459 |
|
|
|
39,874 |
|
Contract land deposit recoveries, net |
|
|
(1,427 |
) |
|
|
(9,925 |
) |
Gain on sale of loans, net |
|
|
(59,386 |
) |
|
|
(48,243 |
) |
Mortgage loans closed |
|
|
(2,542,659 |
) |
|
|
(2,163,472 |
) |
Mortgage loans sold and principal payments on mortgage loans held for sale |
|
|
2,633,539 |
|
|
|
2,153,721 |
|
Distribution of earnings from unconsolidated joint ventures |
|
|
8,026 |
|
|
|
13,069 |
|
Net change in assets and liabilities: |
|
|
|
|
|
|
|
|
Increase in inventory |
|
|
(309,824 |
) |
|
|
(289,754 |
) |
Increase in contract land deposits |
|
|
(32,774 |
) |
|
|
(13,987 |
) |
(Increase) decrease in receivables |
|
|
(2,913 |
) |
|
|
12 |
|
Increase in accounts payable and accrued expenses |
|
|
59,736 |
|
|
|
78,935 |
|
Increase in customer deposits |
|
|
33,732 |
|
|
|
25,317 |
|
Other, net |
|
|
(7,034 |
) |
|
|
(20,605 |
) |
Net cash provided by operating activities |
|
|
91,488 |
|
|
|
15,582 |
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
Investments in and advances to unconsolidated joint ventures |
|
|
(653 |
) |
|
|
(1,552 |
) |
Distribution of capital from unconsolidated joint ventures |
|
|
9,162 |
|
|
|
13,931 |
|
Purchase of property, plant and equipment |
|
|
(16,513 |
) |
|
|
(13,468 |
) |
Proceeds from the sale of property, plant and equipment |
|
|
701 |
|
|
|
476 |
|
Net cash used in investing activities |
|
|
(7,303 |
) |
|
|
(613 |
) |
|
|
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
Purchase of treasury stock |
|
|
(291,743 |
) |
|
|
(263,446 |
) |
Repayments under non-recourse debt related to consolidated variable interest entity and note payable |
|
|
— |
|
|
|
(64 |
) |
Distributions to partner in consolidated variable interest entity |
|
|
(217 |
) |
|
|
(300 |
) |
Excess income tax benefit from equity-based compensation |
|
|
10,949 |
|
|
|
14,465 |
|
Proceeds from the exercise of stock options |
|
|
33,938 |
|
|
|
76,419 |
|
Net cash used in financing activities |
|
|
(247,073 |
) |
|
|
(172,926 |
) |
|
|
|
|
|
|
|
|
|
Net decrease in cash and cash equivalents |
|
|
(162,888 |
) |
|
|
(157,957 |
) |
Cash and cash equivalents, beginning of the period |
|
|
425,316 |
|
|
|
545,419 |
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of the period |
|
$ |
262,428 |
|
|
$ |
387,462 |
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of cash flow information: |
|
|
|
|
|
|
|
|
Interest paid during the period, net of interest capitalized |
|
$ |
20,899 |
|
|
$ |
24,313 |
|
Income taxes paid during the period, net of refunds |
|
$ |
148,117 |
|
|
$ |
123,841 |
|
See notes to condensed consolidated financial statements.
3
NVR, Inc.
Notes to Condensed Consolidated Financial Statements
(dollars and shares in thousands)
(unaudited)
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, 2015. In the opinion of management, all adjustments (consisting only of normal recurring accruals except as otherwise noted herein) considered necessary for a fair presentation have been included. Operating results for the three and nine months ended September 30, 2016 are not necessarily indicative of the results that may be expected for the year ending December 31, 2016.
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.
In 2016, the Company adopted Accounting Standards Update (“ASU”) 2015-03, Interest – Imputation of Interest, which requires that debt issuance costs be presented on the balance sheet as a direct deduction from the carrying amount of the related debt liability. The adoption of this standard resulted in the reclassification of the unamortized debt issuance costs related to the Company’s 3.95% Senior Notes due 2022 (the “Senior Notes”) from the homebuilding “Other assets” line item to the homebuilding “Senior notes” line item in the accompanying condensed consolidated balance sheets. See Note 12 for further discussion of the Company’s Senior Notes and the related unamortized debt issuance costs.
For the three and nine months ended September 30, 2016 and 2015, 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 Finished Lot Purchase Agreements (“Lot 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 Lot Purchase Agreements. The Lot Purchase Agreements require deposits that may be forfeited if NVR fails to perform under the Lot Purchase Agreements. The deposits required under the Lot 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 Lot 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 Lot Purchase Agreements is limited to the amount of the deposit pursuant to the liquidated damage provisions contained within the Lot Purchase Agreements. In other words, if NVR does not perform under a Lot Purchase Agreement, NVR loses only its deposit. None of the creditors of any of the development entities with which NVR enters Lot 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 the development entities from which the Company purchases lots under Lot 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
4
NVR, Inc.
Notes to Condensed Consolidated Financial Statements
(dollars and shares in thousands)
(unaudited)
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.
The deposit placed by NVR pursuant to the Lot 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 Lot 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 Lot 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 Lot Purchase Agreements, and therefore, NVR does not consolidate any of these VIEs.
As of September 30, 2016, NVR controlled approximately 72,300 lots under Lot Purchase Agreements with third parties through deposits in cash and letters of credit totaling approximately $399,700 and $2,000, respectively. As noted above, NVR’s sole legal obligation and economic loss for failure to perform under these Lot Purchase Agreements is limited to the amount of the deposit pursuant to the liquidated damage provisions contained in the Lot 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 10,900 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 in cash and letters of credit totaling approximately $16,600 and $350, respectively, as of September 30, 2016, of which approximately $2,300 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 September 30, 2016 and December 31, 2015 was as follows:
|
|
September 30, 2016 |
|
|
December 31, 2015 |
|
||
Contract land deposits |
|
$ |
416,313 |
|
|
$ |
385,534 |
|
Loss reserve on contract land deposits |
|
|
(38,817 |
) |
|
|
(42,239 |
) |
Contract land deposits, net |
|
|
377,496 |
|
|
|
343,295 |
|
Contingent obligations in the form of letters of credit |
|
|
2,310 |
|
|
|
3,302 |
|
Contingent specific performance obligations (1) |
|
|
1,505 |
|
|
|
1,505 |
|
Total risk of loss |
|
$ |
381,311 |
|
|
$ |
348,102 |
|
5
NVR, Inc.
Notes to Condensed Consolidated Financial Statements
(dollars and shares in thousands)
(unaudited)
|
(1) |
As of both September 30, 2016 and December 31, 2015, the Company was committed to purchase 10 finished lots under specific performance obligations. |
3. |
Joint Ventures |
On a limited basis, NVR 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 Lot Purchase Agreements with the joint venture. NVR is not a borrower, guarantor or obligor on any debt of the JVs, as applicable. The Company enters into Lot Purchase Agreements to purchase lots from these JVs, and as a result has a variable interest in these JVs.
At September 30, 2016, the Company had an aggregate investment totaling approximately $51,500 in six JVs that are expected to produce approximately 7,500 finished lots, of which approximately 4,200 lots were controlled by the Company and the remaining approximately 3,300 lots were either under contract with unrelated parties or not currently under contract. In addition, NVR had additional funding commitments totaling approximately $6,200 in the aggregate to three of the JVs at September 30, 2016. The Company has determined that it is not the primary beneficiary of five 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 $51,100 and $59,800 at September 30, 2016 and December 31, 2015, 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 September 30, 2016 and December 31, 2015 of the consolidated JV were as follows:
|
|
September 30, 2016 |
|
|
December 31, 2015 |
|
||
Assets: |
|
|
|
|
|
|
|
|
Cash |
|
$ |
1,210 |
|
|
$ |
990 |
|
Other assets |
|
|
37 |
|
|
|
379 |
|
Land under development |
|
|
— |
|
|
|
380 |
|
Total assets |
|
$ |
1,247 |
|
|
$ |
1,749 |
|
|
|
|
|
|
|
|
|
|
Liabilities and equity: |
|
|
|
|
|
|
|
|
Accrued expenses |
|
$ |
611 |
|
|
$ |
567 |
|
Equity |
|
|
636 |
|
|
|
1,182 |
|
Total liabilities and equity |
|
$ |
1,247 |
|
|
$ |
1,749 |
|
The Company recognizes income from the JVs as a reduction to the lot cost of the lots purchased from the respective JVs when the homes are settled and is based on the expected total profitability and the total number of lots expected to be produced by the respective JVs. 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 land parcels 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.
6
NVR, Inc.
Notes to Condensed Consolidated Financial Statements
(dollars and shares in thousands)
(unaudited)
As of September 30, 2016, NVR directly owned a total of four separate raw land parcels with a carrying value of $62,327 that are expected to produce approximately 800 finished lots. The Company also has additional funding commitments of approximately $13,700 under a joint development agreement related to one parcel, a portion of which the Company expects will be offset by development credits of approximately $7,300.
None of the raw parcels had any indicators of impairment as of September 30, 2016. Based on market conditions, NVR may on a limited basis continue to directly acquire additional raw parcels to develop into finished lots.
In February 2016, the Company purchased a land parcel which included both land under development and finished lots for approximately $150,000. In June 2016, the Company sold that land parcel to a developer for an amount which approximated NVR’s net investment in the property as of the sale date. In conjunction with the sale, the Company also entered into Lot Purchase Agreements with the developer for the option to purchase a portion of the finished lots expected to be developed from the parcel. Prior to the sale of the parcel, the Company sold 56 finished lots for approximately $16,800, which were under contract with unrelated parties.
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 Accounting Standards Codification 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 nine months ended September 30, 2016 and 2015 was as follows:
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
||||||||||
|
|
2016 |
|
|
2015 |
|
|
2016 |
|
|
2015 |
|
||||
Interest capitalized, beginning of period |
|
$ |
4,576 |
|
|
$ |
4,332 |
|
|
$ |
4,434 |
|
|
$ |
4,072 |
|
Interest incurred |
|
|
6,562 |
|
|
|
6,317 |
|
|
|
19,347 |
|
|
|
18,842 |
|
Interest charged to interest expense |
|
|
(5,624 |
) |
|
|
(6,081 |
) |
|
|
(15,526 |
) |
|
|
(17,955 |
) |
Interest charged to cost of sales |
|
|
(600 |
) |
|
|
(288 |
) |
|
|
(3,341 |
) |
|
|
(679 |
) |
Interest capitalized, end of period |
|
$ |
4,914 |
|
|
$ |
4,280 |
|
|
$ |
4,914 |
|
|
$ |
4,280 |
|
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 nine months ended September 30, 2016 and 2015:
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
||||||||||
|
|
2016 |
|
|
2015 |
|
|
2016 |
|
|
2015 |
|
||||
Weighted average number of shares outstanding used to calculate basic EPS |
|
|
3,858 |
|
|
|
4,050 |
|
|
|
3,881 |
|
|
|
4,058 |
|
Dilutive securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options and restricted share units |
|
|
267 |
|
|
|
246 |
|
|
|
261 |
|
|
|
210 |
|
Weighted average number of shares and share equivalents outstanding used to calculate diluted EPS |
|
|
4,125 |
|
|
|
4,296 |
|
|
|
4,142 |
|
|
|
4,268 |
|
The following stock options and restricted share units issued under equity incentive plans were outstanding during the three and nine months ended September 30, 2016 and 2015, but were not included in the computation of diluted earnings per share because the effect would have been anti-dilutive.
7
NVR, Inc.
Notes to Condensed Consolidated Financial Statements
(dollars and shares in thousands)
(unaudited)
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
||||||||||
|
|
2016 |
|
|
2015 |
|
|
2016 |
|
|
2015 |
|
||||
Anti-dilutive securities |
|
|
88 |
|
|
|
28 |
|
|
|
89 |
|
|
|
37 |
|
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.
As of September 30, 2016, goodwill and net finite-lived intangible assets totaled $441 and $2,504, respectively. The remaining finite-lived intangible assets are amortized on a straight-line basis over a weighted average life of three years. Accumulated amortization as of September 30, 2016 was $6,274. Amortization expense related to the finite-lived intangible assets was $346 and $1,037 for both the three and nine months ended September 30, 2016 and 2015, respectively.
The Company completed the annual impairment assessment of the excess reorganization value and goodwill during the first quarter of 2016 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, 2015 |
|
$ |
206 |
|
|
$ |
1,447,795 |
|
|
$ |
5,270,114 |
|
|
$ |
(5,478,950 |
) |
|
$ |
(17,333 |
) |
|
$ |
17,333 |
|
|
$ |
1,239,165 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
— |
|
|
|
— |
|
|
|
274,371 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
274,371 |
|
Deferred compensation activity |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(34 |
) |
|
|
34 |
|
|
|
— |
|
Purchase of common stock for treasury |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(291,743 |
) |
|
|
— |
|
|
|
— |
|
|
|
(291,743 |
) |
Equity-based compensation |
|
|
— |
|
|
|
32,459 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
32,459 |
|
Excess tax benefit from equity benefit plan activity |
|
|
— |
|
|
|
10,949 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
10,949 |
|
Proceeds from stock options exercised |
|
|
— |
|
|
|
33,938 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
33,938 |
|
Treasury stock issued upon option exercise and restricted share vesting |
|
|
— |
|
|
|
(25,371 |
) |
|
|
— |
|
|
|
25,371 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Balance, September 30, 2016 |
|
$ |
206 |
|
|
$ |
1,499,770 |
|
|
$ |
5,544,485 |
|
|
$ |
(5,745,322 |
) |
|
$ |
(17,367 |
) |
|
$ |
17,367 |
|
|
$ |
1,299,139 |
|
The Company repurchased 178 shares of its common stock during the nine months ended September 30, 2016. The Company settles stock option exercises and vesting of restricted share units by issuing shares of treasury stock. Approximately 77 shares were issued from the treasury account during the nine months ended September 30, 2016 in settlement of stock 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.
8
NVR, Inc.
Notes to Condensed Consolidated Financial Statements
(dollars and shares in thousands)
(unaudited)
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 nine months ended September 30, 2016 and 2015:
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
||||||||||
|
|
2016 |
|
|
2015 |
|
|
2016 |
|
|
2015 |
|
||||
Warranty reserve, beginning of period |
|
$ |
87,953 |
|
|
$ |
85,874 |
|
|
$ |
87,407 |
|
|
$ |
94,060 |
|
Provision |
|
|
11,622 |
|
|
|
12,674 |
|
|
|
33,331 |
|
|
|
32,899 |
|
Payments |
|
|
(11,551 |
) |
|
|
(12,617 |
) |
|
|
(32,714 |
) |
|
|
(41,028 |
) |
Warranty reserve, end of period |
|
$ |
88,024 |
|
|
$ |
85,931 |
|
|
$ |
88,024 |
|
|
$ |
85,931 |
|
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 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 Senior
9
NVR, Inc.
Notes to Condensed Consolidated Financial Statements
(dollars and shares in thousands)
(unaudited)
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 September 30, |
|
|
Nine Months Ended September 30, |
|
||||||||||
|
|
2016 |
|
|
2015 |
|
|
2016 |
|
|
2015 |
|
||||
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Homebuilding Mid Atlantic |
|
$ |
873,490 |
|
|
$ |
792,532 |
|
|
$ |
2,279,207 |
|
|
$ |
2,094,820 |
|
Homebuilding North East |
|
|
123,754 |
|
|
|
120,143 |
|
|
|
329,674 |
|
|
|
317,510 |
|
Homebuilding Mid East |
|
|
327,387 |
|
|
|
299,157 |
|
|
|
877,921 |
|
|
|
705,670 |
|
Homebuilding South East |
|
|
182,820 |
|
|
|
162,635 |
|
|
|
503,894 |
|
|
|
419,116 |
|
Mortgage Banking |
|
|
30,118 |
|
|
|
27,884 |
|
|
|
79,082 |
|
|
|
66,617 |
|
Total consolidated revenues |
|
$ |
1,537,569 |
|
|
$ |
1,402,351 |
|
|
$ |
4,069,778 |
|
|
$ |
3,603,733 |
|
|
|
Three |