NVR INC - Annual Report: 2006 (Form 10-K)
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, 2006
OR
o | 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
(703) 956-4000
Reston, Virginia 20190
(703) 956-4000
(Address, including zip code, and telephone number, including
area code, of registrants principal executive offices)
area code, of registrants principal executive offices)
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 | American 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 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 registrants 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, or a non-accelerated filer (as described in Exchange Act Rule 12b-2).
Large accelerated filer þ Accelerated filer o Non-accelerated filer 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,
2006, the last business day of the NVR Inc.s most recently completed second fiscal quarter,
was approximately $2.4 billion.
As of February 16, 2007 there were 5,677,792 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, 2007 are incorporated by reference into Part III of this report.
INDEX
Page | ||||||
PART I |
||||||
Item 1.
|
Business | 2 | ||||
Item 1A.
|
Risk Factors | 6 | ||||
Item 1B.
|
Unresolved Staff Comments | 9 | ||||
Item 2.
|
Properties | 10 | ||||
Item 3.
|
Legal Proceedings | 10 | ||||
Item 4.
|
Submission of Matters to a Vote of Security Holders | 10 | ||||
Executive Officers of the Registrant | 11 | |||||
PART II |
||||||
Item 5.
|
Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities | 11 | ||||
Item 6.
|
Selected Financial Data | 14 | ||||
Item 7.
|
Managements Discussion and Analysis of Financial Condition and Results of Operations | 15 | ||||
Item 7A.
|
Quantitative and Qualitative Disclosure About Market Risk | 32 | ||||
Item 8.
|
Financial Statements and Supplementary Data | 34 | ||||
Item 9.
|
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure | 34 | ||||
Item 9A.
|
Controls and Procedures | 34 | ||||
Item 9B.
|
Other Information | 34 | ||||
PART III |
||||||
Item 10.
|
Directors, Executive Officers, and Corporate Governance | 35 | ||||
Item 11.
|
Executive Compensation | 35 | ||||
Item 12.
|
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters | 35 | ||||
Item 13.
|
Certain Relationships and Related Transactions, and Director Independence | 36 | ||||
Item 14.
|
Principal Accountant Fees and Services | 36 | ||||
PART IV |
||||||
Item 15.
|
Exhibits and Financial Statement Schedules | 36 |
1
PART I
Item 1. | Business. |
General
NVR, Inc. (NVR) was formed in 1980 as NVHomes, Inc. NVRs primary business is the
construction and sale of single-family detached homes, townhomes and condominium buildings.
To fully serve our homebuilding customers, we also operate a mortgage banking business. NVR
conducts its homebuilding activities directly, except for Rymarc Homes, which is operated as a
wholly owned subsidiary, and its mortgage banking operations, which is 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 thirteen states, primarily in the eastern part of the United States,
approximately 37% of our home settlements in 2006 occurred in the Washington, D.C. and
Baltimore, MD metropolitan areas, which accounted for 52% of our 2006 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-one metropolitan areas located in Maryland, Virginia, West
Virginia, Pennsylvania, New York, North Carolina, South Carolina, Ohio, New Jersey, Delaware,
Michigan and Kentucky. 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, South Carolina
market. 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 2006, our average price of a unit settled was approximately $398,000.
We do not engage in the land development business. Instead, we acquire finished building lots
at market prices from various development entities 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.
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 do not guarantee specific performance 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 very limited basis, we also obtain finished lots using joint venture limited liability
corporations (LLCs). All LLCs are 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, 2006, we had an aggregate investment in twelve separate LLCs
totaling approximately $14 million, which controlled approximately 800 lots.
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
2
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 to the consolidated financial statements.
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 2006, the prices of our homes ranged from
approximately $90,000 to $2,600,000 and averaged approximately $398,000.
Markets
Our four reportable homebuilding segments operate in the following geographic regions:
Mid Atlantic:
|
Maryland, Virginia, West Virginia and Delaware | |
North East:
|
Eastern Pennsylvania and New Jersey | |
Mid East:
|
Kentucky, Michigan, New York, Ohio and western Pennsylvania | |
South East:
|
North Carolina, South Carolina, 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 Managements Discussion
and Analysis of Financial Condition and Results of Operations (see Item 7 of this report).
Backlog
Backlog totaled 6,388 units and approximately $2.6 billion at December 31, 2006 compared
to backlog of 8,310 units and approximately $3.7 billion at December 31, 2005. Our
cancellation rate was approximately 19% during 2006. During 2005 and 2004, our cancellation
rates were approximately 12% and 11%, respectively. We can provide no assurance that our
historical cancellation rate is indicative of the actual cancellation rate that may occur in
2007. 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 many 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 are not in the land development business. We 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.
3
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 also face competition from the home resale market. Our homebuilding
operations compete primarily on the basis of price, location, design, quality, service and
reputation. We historically 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 2006, NVRM closed approximately 12,200 loans with an aggregate
principal amount of approximately $3.9 billion.
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.
4
Competition and Market Factors
NVRMs 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
NVRMs mortgage loans in process that have not closed (Pipeline) at December 31, 2006
and 2005, had an aggregate principal balance of $1.6 billion and $2.1 billion, respectively.
Our cancellation rate was approximately 35% in 2006. During 2005 and 2004, our cancellation
rates were approximately 27% and 24%, respectively. We can provide no assurance that the
prior year cancellation rate is indicative of the actual cancellation rate that may occur in
2007. See Risk Factors in Item 1A.
Employees
At December 31, 2006, we employed 4,548 full-time persons, of whom 1,770 were officers
and management personnel, 290 were technical and construction personnel, 1,041 were sales
personnel, 642 were administrative personnel and 805 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 SECs website at http://www.sec.gov. You may also read and
copy any document we file at the SECs 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 the 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 and Policies and Procedures on Securityholder
Communications with the Board of Directors. 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 (of which there were none in 2006).
5
In addition, you may request a copy of the foregoing filings (excluding exhibits),
charters,
guidelines and codes, and any waivers or amendments to such codes which are applicable to our
executive officers, senior financial officers or directors, at no cost by writing to us at
NVR, Inc., 11700 Plaza America Drive, Suite 500, Reston, VA 20190, Attention: Investor
Relations Department or by telephoning us at (703) 956-4000.
Item 1A. | Risk Factors. |
Forward-Looking Statements
Some of the statements in this Form 10-K, as well as statements made by NVR, Inc. (NVR)
in periodic press releases or other public communications, constitute forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of 1995,
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934. Certain, but not necessarily all, of such forward-looking statements
can be identified by the use of forward-looking terminology, such as believes, expects,
may, will, should, or anticipates or the negative thereof or other comparable
terminology. All statements other than of historical facts are forward looking statements.
Forward looking statements contained in this document include those regarding market trends,
NVRs financial position, business strategy, 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; competition; the availability and cost of
land and other raw materials used by NVR in its homebuilding operations; shortages of labor;
weather related slow-downs; building moratoriums; governmental regulation; the ability of NVR
to integrate any acquired business; fluctuation and volatility of stock and other financial
markets; and other factors over which NVR has little or no control.
RISK FACTORS
Our business is affected by the risks generally incident to the residential construction
business, including, but not limited to:
| 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. |
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 and ability to service our debt obligations.
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 accounted for almost all of our mortgage banking business in
2006. The volume of our continuing
6
homebuilding operations therefore affects our mortgage banking
business.
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, 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.
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 and
ability to service our debt obligations.
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 37% of our home settlements
during 2006 occurred in the Washington, D.C. and Baltimore, MD metropolitan areas, which accounted
for 52% of our 2006 homebuilding revenues. Thus, we are dependent to a significant extent on the
economy and demand for housing in those areas.
Our inability to secure and control an adequate inventory of lots could adversely impact our
operations.
The results of our homebuilding operations are dependent upon our continuing ability to
control an adequate number of homebuilding lots in desirable locations. There can be no assurance
that an adequate supply of building lots will continue to be available to us on terms similar to
those available in the past, or that we will not be required to devote a greater amount of capital
to controlling building lots than we have historically. An insufficient supply of building lots in
one or more of our markets, an inability of our developers to deliver finished lots in a timely
fashion, or our inability to purchase or finance building lots on reasonable terms could have a
material adverse effect on our sales, profitability, stock performance and ability to service our
debt obligations.
If the market value of our inventory declines, our profit could decrease.
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. In the event of significant changes in economic or market
conditions, we may dispose of certain subdivision inventories on a bulk or other basis which may
result in a loss which could have a material adverse effect on our profitability, stock performance
and ability to service our debt obligations.
Our current indebtedness may impact our future operations and 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. If we are at any time
unsuccessful in obtaining sufficient capital to fund our planned homebuilding expenditures, we may
experience a substantial delay in the completion of any homes then under construction. Any delay
could result in cost increases and could have a material adverse effect on our sales,
profitability, stock performance, ability to service our debt obligations and future cash flows.
7
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 and ability to service our debt obligations.
Our mortgage banking operations are dependent on the availability, cost and other terms of
mortgage warehouse financing, 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.
Government regulations and environmental matters could negatively affect our operations.
We are subject to various local, state and federal statutes, ordinances, rules and regulations
concerning zoning, building design, construction and similar matters, including local regulations
that impose restrictive zoning and density requirements in order to limit the number of homes that
can eventually be built within the boundaries of a particular area. We have from time to time been
subject to, and may also be subject in the future to, periodic delays in our homebuilding projects
due to building moratoriums in the areas in which we operate. Changes in regulations that restrict
homebuilding activities in one or more of our principal markets could have a material adverse
effect on our sales, profitability, stock performance and ability to service our debt obligations.
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 and ability to service our debt obligations.
We are an approved seller/servicer of FNMA, GNMA, FHLMC, FHA and VA mortgage loans, and are
subject to all of those agencies rules and regulations. Any significant impairment of our
eligibility to sell/service these loans could have a material adverse impact on our mortgage
operations. In addition, we are subject to regulation at the state and federal level with respect
to specific origination, selling and servicing practices. Adverse changes in governmental
regulation may have a negative impact on our mortgage loan origination business.
We face competition in our housing and mortgage banking operations.
The homebuilding industry is highly competitive. We compete with numerous homebuilders of
varying size, ranging from local to national in scope, some of whom have greater financial
resources than we do. We face competition:
| 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. |
8
Our homebuilding operations compete primarily on the basis of price, location, design,
quality, service and reputation. Historically we have been one of the leading homebuilders in each
of the markets where we operate.
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 and ability to service our debt obligations.
A shortage of building materials or labor 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 and ability to service our debt obligations.
Product liability litigation and warranty claims may adversely impact our operations.
Construction defect and home warranty claims are common and can represent a substantial risk
for the homebuilding industry. The cost of insuring against construction defect and product
liability claims, as well as the claims themselves, can be high. In addition, insurance companies
limit coverage offered to protect against these claims. Further restrictions on coverage
available, or significant increases in premium costs or claims could have a material adverse effect
on our financial results.
Changes in tax laws or the interpretation of tax laws may negatively affect our operating results.
We believe that our recorded tax balances are adequate. However, it is not possible to
predict the effects of possible changes in the tax laws or changes in their interpretation and
whether they could have a material negative impact on our operating results.
Weather-related and other events beyond our control may adversely impact our operations.
Extreme weather or other events, such as hurricanes, tornadoes, earthquakes, forest
fires, floods, terrorist attacks or war, may affect our markets, our operations and our
profitability. These events may impact our physical facilities or those of our suppliers or
subcontractors, causing us material increases in costs, or delays in construction of homes,
which could have a material adverse effect upon our sales, profitability, stock performance
and ability to service our debt obligations.
Item 1B. | Unresolved Staff Comments. |
None.
9
Item 2. | Properties. |
Our corporate offices are located in Reston, Virginia, where we currently lease
approximately 61,000 square feet of office space. 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.
All of our manufacturing facilities are leased. Each of these leases contains various options
for extensions of the lease and for the purchase of the facility. The Portland lease expires
in 2009. The 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.
We also lease office space in multiple locations for homebuilding divisional offices and
mortgage banking and title services branches under leases expiring at various times through
2012, 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. (in thousands) |
We are involved in various claims and litigation arising principally in the ordinary
course of business. At this time, we are not involved in any legal proceedings that we
believe are likely to have a material adverse effect on our financial condition or results of
operations.
In 2006 and 2005, we received requests for information pursuant to Section 308(a) of the
Clean Water Act (the Act) from Regions 3 and 4 of the United States Environmental Protection
Agency (the EPA). The requests sought information regarding our storm water management
discharge practices in North Carolina, Pennsylvania, Maryland and Virginia during the
homebuilding construction process. We have either provided the EPA with information in
response to each of its requests, or are working with the EPA to provide the requested
information. Additionally, in 2005, the EPA notified us of alleged storm water management
violations under the Act at a homebuilding site in Pennsylvania, and that we may potentially
be subject to administrative fines of up to $157 for the alleged violations. We have
completed our building activity at the homebuilding site alleged to be in violation. We
cannot predict the outcome of the EPAs review of our storm water management practices.
Further, it is not known at this time whether the EPA will seek to take legal action or impose
penalties in connection with the alleged violation at the construction site in Pennsylvania.
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, 2006.
10
Executive Officers of the Registrant
Name | Age | Positions | ||||
Dwight C. Schar
|
65 | Chairman of the Board of NVR | ||||
William J. Inman
|
59 | President of NVRM | ||||
Paul C. Saville
|
51 | President and Chief Executive Officer of NVR | ||||
Dennis M. Seremet
|
51 | Vice President, Chief Financial Officer and Treasurer of NVR | ||||
Robert W. Henley
|
40 | Vice President and Controller of NVR |
Dwight C. 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.
William J. Inman has been President of NVRM since January 1992.
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.
Dennis M. Seremet was named Vice President, Chief Financial Officer and Treasurer of
NVR, effective July 1, 2005. Prior to July 1, 2005, Mr. Seremet had been Vice
President and Controller of NVR since April 1, 1995, and was named Senior Vice
President on January 1, 2005.
Robert W. Henley was named Vice President and Controller of NVR effective July 1, 2005.
Prior to July 1, 2005, Mr. Henley served as Manager of SEC Reporting from 1995 through
2000. In 2000, Mr. Henley was appointed to the position of Assistant Controller.
PART II
Item 5. | Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities. |
Our shares of common stock are listed and principally traded on the American Stock
Exchange. The following table sets forth the high and low closing prices per share for our
common stock for each fiscal quarter during the years ended December 31, 2006 and 2005:
HIGH | LOW | |||||||
Prices per Share: |
||||||||
2006: |
||||||||
First Quarter |
$ | 822.88 | $ | 706.50 | ||||
Second Quarter |
$ | 842.98 | $ | 486.00 | ||||
Third Quarter |
$ | 586.00 | $ | 394.00 | ||||
Fourth Quarter |
$ | 672.00 | $ | 517.00 | ||||
2005: |
||||||||
First Quarter |
$ | 808.00 | $ | 709.00 | ||||
Second Quarter |
$ | 810.00 | $ | 712.50 | ||||
Third Quarter |
$ | 938.00 | $ | 799.50 | ||||
Fourth Quarter |
$ | 886.00 | $ | 660.00 |
As of the close of business on February 16, 2007, there were 425 shareholders of
record.
We have never paid a cash dividend on our shares of common stock. Our bank indebtedness
11
contains certain restrictive covenants, which limit our ability to pay cash dividends on our
common stock.
See further discussion of the restrictive covenants in the Liquidity section of Part II, Item
7 of the Form 10-K.
We had one repurchase authorization outstanding during the quarter ended December 31,
2006. On June 23, 2006 (the June Authorization), we publicly announced the Board of
Directors approval for us to purchase up to an aggregate of $300 million of our common stock
in one or more open market and/or privately negotiated transactions under the authorization.
The June Authorization does not have an expiration date. The following table provides
information regarding common stock repurchases for the quarter ended December 31, 2006:
Maximum Number (or | ||||||||||||||||
Approximate Dollar | ||||||||||||||||
Total Number of | Value) of Shares | |||||||||||||||
Shares Purchased as | That May Yet Be | |||||||||||||||
Part of Publicly | Purchased Under the | |||||||||||||||
Total Number of | Average Price Paid | Announced Plans or | Plans or Programs | |||||||||||||
Period | Shares Purchased | per Share | Programs | (in thousands) | ||||||||||||
October 131, 2006 |
134,100 | $ | 542.32 | 134,100 | $ | 164,805 | ||||||||||
November 130, 2006 |
58,100 | $ | 534.46 | 58,100 | $ | 133,753 | ||||||||||
December 131, 2006 |
| $ | | | $ | 133,753 |
12
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, 2001 in comparison to the Dow/Home Construction Index and
the Dow Jones Industrial Index for that same period. The Dow/Home Construction Index includes NVR,
Inc., Pulte Homes, Inc., Beazer Homes USA, Inc., Ryland Group, Inc., Centex Corp., KB Home,
Champion Enterprises, Inc., Lennar Corp., DR Horton, Inc., MDC Holdings, Inc., Hovnanian
Enterprises, Inc., Standard Pacific Corp., Meritage Homes Corp., WCI Communities, Inc. and Toll
Brothers, Inc.
![(PERFORMANCE GRAPH)](https://www.sec.gov/Archives/edgar/data/0000906163/000095013307000704/w30408w3040801.gif)
(a) Assumes that $100 was invested in NVR stock and the indices on December 31, 2001.
13
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 extracted 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.
Year Ended December 31, | ||||||||||||||||||||
2006 | 2005 | 2004 | 2003 | 2002 | ||||||||||||||||
Consolidated Income Statement Data: |
||||||||||||||||||||
Homebuilding data: |
||||||||||||||||||||
Revenues |
$ | 6,036,236 | $ | 5,177,743 | $ | 4,247,503 | $ | 3,600,917 | $ | 3,060,671 | ||||||||||
Gross profit |
1,334,971 | 1,439,713 | 1,091,217 | 889,056 | 725,302 | |||||||||||||||
Mortgage Banking data: |
||||||||||||||||||||
Mortgage banking fees |
97,888 | 84,604 | 72,219 | 76,647 | 65,454 | |||||||||||||||
Interest income |
7,704 | 5,014 | 4,249 | 5,198 | 6,184 | |||||||||||||||
Interest expense |
2,805 | 1,759 | 1,088 | 1,293 | 1,870 | |||||||||||||||
Consolidated data: |
||||||||||||||||||||
Income from continuing
operations (1) |
$ | 587,412 | $ | 697,559 | $ | 523,204 | $ | 419,791 | $ | 331,470 | ||||||||||
Income from continuing
operations per diluted share (2) |
$ | 88.05 | $ | 89.61 | $ | 66.42 | $ | 48.39 | $ | 36.05 |
December 31, | ||||||||||||||||||||
2006 | 2005 | 2004 | 2003 | 2002 | ||||||||||||||||
Consolidated Balance Sheet Data: |
||||||||||||||||||||
Homebuilding inventory |
$ | 733,616 | $ | 793,975 | $ | 588,540 | $ | 523,773 | $ | 436,674 | ||||||||||
Contract land deposits, net |
402,170 | 517,241 | 362,990 | 268,463 | 217,960 | |||||||||||||||
Total assets |
2,473,808 | 2,237,669 | 1,755,998 | 1,347,136 | 1,169,019 | |||||||||||||||
Notes and loans payable |
356,632 | 463,141 | 213,803 | 257,859 | 259,160 | |||||||||||||||
Shareholders equity |
1,152,074 | 677,162 | 834,995 | 494,868 | 403,245 | |||||||||||||||
Cash dividends per share |
| | | | |
(1) | Effective January 1, 2006, we adopted Statement of Financial Accounting Standards 123(R), Share-Based Payment, pursuant to which we recognized $37,982 of stock-based compensation costs, net of tax, during 2006. The prior periods presented do not include any stock-based compensation expense. | |
(2) | For the years ended December 31, 2006, 2005, 2004, 2003 and 2002, income from continuing operations per diluted share was computed based on 6,671,571; 7,784,382; 7,876,869; 8,674,363; and 9,193,677 shares, respectively, which represents the weighted average number of shares and share equivalents outstanding for each year. |
14
Item 7. | Managements 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, 2006, 2005, and 2004
Overview
Business
Our primary business is the construction and sale of single-family detached homes, townhomes
and condominium buildings. To fully serve our homebuilding customers, we also operate a mortgage
banking and title services business. We primarily conduct our operations in mature
supply-constrained 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:
Mid Atlantic:
|
Maryland, Virginia, West Virginia and Delaware | |
North East:
|
Eastern Pennsylvania and New Jersey | |
Mid East:
|
Kentucky, Michigan, New York, Ohio and western Pennsylvania | |
South East:
|
North Carolina, South Carolina, and Tennessee |
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 are not active in the land development business, 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. Timely delivery of lots by our developers can be influenced by many factors, such as
the developers execution of improvements, weather-related impacts, and the length of time
necessary to obtain governmental approval of projects.
We acquire finished building lots at market prices from various development entities under
fixed price purchase agreements (purchase agreements). These purchase agreements require
deposits in the form of cash or letters of credit that may be forfeited if we fail to perform
under the purchase agreement. However, we believe that this lot acquisition strategy reduces
the financial requirements and risks associated with direct land ownership and development. As
of December 31, 2006, we controlled approximately 88,500 lots with deposits in cash and letters
of credit totaling approximately $484,000 and $14,000, respectively. We also controlled
approximately 800 lots through investments in joint venture limited liability corporations.
Consolidated revenues for 2006 increased 17% from 2005 driven primarily by our
homebuilding business producing 10% higher settlement volume and a 6% higher average
settlement price per unit in 2006. Consolidated net income and diluted earnings per share
decreased 16% and 2%, respectively, in 2006 from 2005. Net income and diluted earnings per
share were negatively impacted by pre-tax contract land deposit impairment charges of
approximately $174,000 in 2006.
Current Environment
The home sales environment in 2006 was characterized by an increase in the number of
existing and new homes available for sale and declining homebuyer confidence. As a result of
these market conditions, new orders for 2006 were down 10% from the prior year and we
experienced an increase in our cancellation rate to 19% in 2006 from 12% in 2005. Cancellation
rates were the highest in our Washington, D.C. region,
15
where they increased to 29% for the year ended 2006 from 14% in 2005, and for the fourth quarter increased
to 34% in 2006 from 18% in the fourth quarter of 2005. Additionally, prevailing market
conditions exerted downward pressure on selling prices, and in response, we increased incentives
to homebuyers and reduced prices in many of our markets. These pricing pressures led to a 7%
decrease in the average selling price for new orders in 2006 as compared to 2005. Average
selling prices for the six-month period ended December 31, 2006 were down 10% from the same
period in 2005. We are actively involved in implementing steps to address the currently
challenging homebuilding market. In certain communities, we are seeking concessions from our
developers to reduce lot purchase prices to current market values and/or to defer scheduled lot
purchases. In communities where we are unsuccessful in negotiating necessary concessions, we
may exit the community and forfeit our deposit. During 2006, we incurred contract land deposit
impairment charges of approximately $174,000 from such actual or expected terminations. In
2005, contract land deposit impairment charges totaled approximately $12,600. See Note 1 to the
consolidated financial statements included herein for additional information regarding contract
land deposits.
Homebuilding gross profit margins have been negatively impacted by the aforementioned lower
selling prices and contract land deposit impairment charges in 2006, reducing gross profit
margins to 22.1% in 2006 from 27.8% in 2005. We expect that the reduction in average selling
prices experienced in 2006 and the continuing uncertainty in many of the markets in which we
operate may further negatively impact gross profit margins in future periods.
During 2006 we reduced our staffing levels by approximately 16% to size our organization to
meet the current expected level of sales activity, and we consolidated certain of our
homebuilding profit centers. We will continue to assess our staffing levels and organizational
structure as conditions warrant.
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, | ||||||||||||
2006 | 2005 | 2004 | ||||||||||
Revenues |
$ | 6,036,236 | $ | 5,177,743 | $ | 4,247,503 | ||||||
Cost of sales |
$ | 4,701,265 | $ | 3,738,030 | $ | 3,156,286 | ||||||
Gross profit margin percentage |
22.1 | % | 27.8 | % | 25.7 | % | ||||||
Selling, general and administrative expenses |
$ | 432,319 | $ | 345,525 | $ | 260,795 | ||||||
Settlements (units) |
15,139 | 13,787 | 12,749 | |||||||||
Average settlement price |
$ | 398.2 | $ | 374.9 | $ | 332.2 | ||||||
New orders (units) |
13,217 | 14,653 | 13,231 | |||||||||
Average new order price |
$ | 377.4 | $ | 404.6 | $ | 364.1 | ||||||
Backlog (units) |
6,388 | 8,310 | 7,372 | |||||||||
Average backlog price |
$ | 412.4 | $ | 442.0 | $ | 394.2 |
Consolidated Homebuilding Revenues
Homebuilding revenues for 2006 increased 17% from 2005, primarily as a result of a 10%
increase in the number of homes settled and a 6% increase in the average settlement price.
Each of these increases was driven by a higher backlog at the beginning of 2006 as compared to
the beginning of 2005. Beginning backlog units and dollars were 13% and 26% higher,
respectively year over year. Additionally, these increases in settlements were experienced
year over year in each of our markets.
Homebuilding revenues for 2005 increased 22% from 2004, primarily as a result of a 13%
increase in the average settlement price and an 8% increase in the number of homes settled.
Each of these increases was driven by a higher backlog, both in dollars and units, at the
beginning of 2005 as compared to the beginning of 2004 due to the companys overall growth and
our ability to raise prices year over year during
16
a period of strong housing demand. We experienced increased home settlements year over year in each of our regions except Baltimore
where settlements declined slightly from the prior year. Settlements in the
Baltimore region were negatively affected by development delays throughout the first three
quarters of 2005. The Baltimore region was able to resolve several of these development
delays in the fourth quarter, and settlements for this region increased 24% in the fourth
quarter of 2005 as compared to the same period in 2004.
Consolidated Homebuilding New Orders
The number of new orders for 2006 decreased 10% from 2005, and the value of new orders
for 2006 decreased 16% to $4,988,137 from $5,928,815 in 2005. The decrease in new orders is
attributable to lower sales absorption per community resulting from a more competitive sales
environment in 2006 as compared to 2005. The average number of communities open during 2006
exceeded the number open during 2005 by 13%, while the average number of communities open
during the fourth quarter of 2006 of 551 was down 6% from the same period in 2005. The
decrease in the number of active communities in the fourth quarter is attributable to our
ongoing review of our lot option deposit contracts, as discussed above, and the subsequent
exiting from certain communities which were no longer profitable. In certain communities, we
are seeking concessions from our developers to reduce lot purchase prices to current market
values and/or to defer scheduled lot purchases. In communities where we are unsuccessful in
negotiating necessary concessions, we may exit the community and forfeit our deposit.
The number of new orders for 2005 increased 11% from 2004, and the value of new orders
for 2005 increased 23% to $5,928,815 from $4,817,780 in 2004. The increase in the number of
new orders was primarily attributable to an overall increase in the average number of active
communities to 522 in 2005 as compared to 450 in 2004. Strong new order growth was
experienced in each of our regions except the Washington, D.C. region, which remained relatively
flat with the prior year. Sales in the Washington, D.C. region were negatively impacted by
lower sales absorption during the second half of the year as compared to the same period in
2004 as a result of generally weaker market conditions within the region. The 23% increase in
the value of new orders was attributable to both the aforementioned increase in the number of
new orders and sustained housing demand year over year, which provided us the opportunity to
raise selling prices, resulting in an 11% increase in the average selling price in 2005 as
compared to 2004.
Consolidated Homebuilding Gross Profit
Homebuilding gross profit margins declined to 22.1% in 2006 from 27.8% in 2005. Gross
profit margins were negatively impacted by the aforementioned lower selling prices, contract
land deposit impairment charges in 2006, and higher lot and certain commodity costs, excluding
lumber. During 2006, we incurred contract land deposit impairment charges of approximately
$174,000. These impairments lowered gross profit margins by 288 basis points. In 2005,
contract land deposit impairment charges totaled approximately $12,600. The contract land
deposit write-downs in the fourth quarter of 2006 totaled approximately $60,000, compared to
$4,900 during the same period in 2005, contributing to the decline in the fourth quarter gross
profit margins to 19.0% in 2006 from 27.6% in the fourth quarter of 2005. We expect that due
to the reduction in average selling prices experienced in 2006 and the continuing uncertainty
in many of the markets in which we operate, gross profit margins may be further negatively
impacted in future periods.
The increase in gross profit margins of 210 basis points in 2005 from 2004 was primarily
attributable to an increase in average settlement prices year over year. These increases were
partially offset by higher land and certain commodity prices in 2005 as compared to 2004.
Many of the end product building supplies used in our construction operations were impacted by
higher, more volatile energy and petroleum costs, including: OSB sheathing; siding material;
PVC piping, paint; asphalt; shingles; cement; gypsum; steel; glass and insulation.
17
Consolidated Homebuilding Selling, General and Administrative (SG&A)
SG&A expense increased $86,794, or 25%, year over year and as a percentage of revenue
increased to 7.2% in 2006 from 6.7% in 2005. The increase in SG&A expense was primarily
attributable to the implementation of SFAS 123R in 2006, as a result of which, we recognized
approximately $53,000 in SG&A compensation costs related to outstanding stock options. We
incurred no compensation costs for outstanding stock options in 2005. Additionally, SG&A
costs were higher as a result of an approximate $29,500 increase in marketing costs
attributable to the aforementioned increase in the average number of active communities in
2006 as compared to 2005 and to increased marketing efforts required to compete in an
increasingly competitive market.
SG&A for 2005 increased $84,630, or 32% from 2004, and as a percentage of revenues,
increased to 6.7% in 2005 from 6.1% in 2004. The increase in SG&A costs was primarily
attributable to increases in personnel costs and selling and marketing costs of approximately
$43,400 and $26,500, respectively. Personnel costs increased primarily as a result of
increased wages and management incentive compensation due to increased staffing levels to
support our growth in 2005. As of December 31, 2005, SG&A staffing levels had increased
approximately 23% from December 31, 2004. The increase in selling and marketing costs were
attributable to an increase in advertising and selling support costs due to the aforementioned
increase in the average number of active communities year over year.
Consolidated Homebuilding Backlog
Backlog units and dollars were 6,388 and $2,634,720, respectively, at December 31, 2006
compared to backlog units of 8,310 and dollars of $3,673,221 at December 31, 2005. The decrease in
backlog units was due primarily to a 17% decrease in the number of new orders for the six-month
period ended December 31, 2006 as compared to the same period ended December 31, 2005, coupled with
a 10% increase in the number of homes settled in 2006 as compared to 2005. The 28% decrease in
backlog dollars was attributable to the 23% decrease in backlog units and a 10% decrease in the
average price of new orders for the six-month period ended December 31, 2006 as compared to the
same period in 2005.
Backlog units and dollars were 8,310 and $3,673,221, respectively, at December 31, 2005
compared to backlog units of 7,372 and dollars of $2,906,041 at December 31, 2004. The
increase in backlog units was due primarily to a 10% increase in the number of new orders for
the six-month period ended December 31, 2005 as compared to the same period ended December 31,
2004. The 26% increase in backlog dollars was attributable to the 13% increase in backlog
units and a 7% increase in the average price of new orders for the six-month period ended
December 31, 2005 as compared to the same period in 2004.
Reportable Homebuilding Segments
Homebuilding profit before tax includes all revenues and income generated from the sale
of homes, less the cost of homes sold, selling, general and administrative expenses, and a
corporate capital allocation charge. The corporate capital allocation charge eliminates in
consolidation, is based on the segments average net assets employed, and is charged using a
consistent methodology in the years presented. The corporate capital allocation charged to
the operating segment allows the Chief Operating Decision Maker to determine whether the
operating segments results are providing the desired rate of return after covering 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.
18
The following tables summarize homebuilding settlements, new orders, backlog and
operating activity by reportable segment for each of the last three years:
Year Ended December 31, | ||||||||||||
2006 | 2005 | 2004 | ||||||||||
Mid Atlantic: |
||||||||||||
Revenues |
$ | 3,825,960 | $ | 3,235,053 | $ | 2,623,308 | ||||||
Settlements (units) |
7,491 | 6,735 | 6,462 | |||||||||
Average settlement price |
$ | 510.4 | $ | 479.9 | $ | 405.3 | ||||||
New Orders (units) |
6,182 | 7,327 | 6,696 | |||||||||
Average new order price |
$ | 479.6 | $ | 526.9 | $ | 459.8 | ||||||
Backlog (units) |
3,665 | 4,974 | 4,382 | |||||||||
Average backlog price |
$ | 499.7 | $ | 541.0 | $ | 470.5 | ||||||
Gross profit margin |
$ | 979,362 | $ | 1,096,565 | $ | 795,491 | ||||||
Gross profit margin
percentage |
25.60 | % | 33.90 | % | 30.32 | % | ||||||
Segment profit |
$ | 687,904 | $ | 863,210 | $ | 623,040 | ||||||
North East: |
||||||||||||
Revenues |
$ | 657,338 | $ | 533,662 | $ | 466,206 | ||||||
Settlements (units) |
1,682 | 1,390 | 1,388 | |||||||||
Average settlement price |
$ | 390.7 | $ | 383.9 | $ | 335.9 | ||||||
New Orders (units) |
1,438 | 1,459 | 1,360 | |||||||||
Average new order price |
$ | 371.4 | $ | 400.1 | $ | 351.8 | ||||||
Backlog (units) |
540 | 784 | 715 | |||||||||
Average backlog price |
$ | 359.6 | $ | 404.7 | $ | 373.4 | ||||||
Gross profit margin |
$ | 120,531 | $ | 114,365 | $ | 98,291 | ||||||
Gross profit margin
percentage |
18.34 | % | 21.43 | % | 21.08 | % | ||||||
Segment profit |
$ | 64,246 | $ | 66,944 | $ | 64,130 | ||||||
Mid East: |
||||||||||||
Revenues |
$ | 965,626 | $ | 944,070 | $ | 793,976 | ||||||
Settlements (units) |
3,571 | 3,404 | 3,049 | |||||||||
Average settlement price |
$ | 268.8 | $ | 275.6 | $ | 258.1 | ||||||
New Orders (units) |
3,244 | 3,544 | 3,154 | |||||||||
Average new order price |
$ | 267.7 | $ | 274.2 | $ | 268.6 | ||||||
Backlog (units) |
1,274 | 1,601 | 1,461 | |||||||||
Average backlog price |
$ | 270.6 | $ | 271.5 | $ | 275.6 | ||||||
Gross profit margin |
$ | 160,494 | $ | 178,114 | $ | 153,197 | ||||||
Gross profit margin
percentage |
16.62 | % | 18.87 | % | 19.29 | % | ||||||
Segment profit |
$ | 69,911 | $ | 95,190 | $ | 87,272 | ||||||
South East: |
||||||||||||
Revenues |
$ | 587,312 | $ | 464,958 | $ | 364,013 | ||||||
Settlements (units) |
2,395 | 2,258 | 1,850 | |||||||||
Average settlement price |
$ | 245.2 | $ | 205.9 | $ | 196.6 | ||||||
New Orders (units) |
2,353 | 2,323 | 2,021 | |||||||||
Average new order price |
$ | 263.9 | $ | 220.6 | $ | 204.3 | ||||||
Backlog (units) |
909 | 951 | 814 | |||||||||
Average backlog price |
$ | 290.7 | $ | 242.4 | $ | 214.7 | ||||||
Gross profit margin |
$ | 129,127 | $ | 92,348 | $ | 70,314 | ||||||
Gross profit margin
percentage |
21.99 | % | 19.86 | % | 19.32 | % | ||||||
Segment profit |
$ | 79,948 | $ | 52,199 | $ | 36,958 |
19
Mid Atlantic
2006 versus 2005
The Mid Atlantic segment had an approximate $175,000 decrease in segment profit year over
year. Revenues increased 18% as a result of an 11% increase in the number of units settled and a
6% increase in the average settlement price. We experienced increased home settlements year over
year in each of the markets within the Mid Atlantic segment. Settlements were up 25% in the
Baltimore region from the prior year as several of the development delays experienced in 2005 were
resolved. The segments gross profit margin percentage declined in 2006 to 25.6% from 33.9% in
2005 as a result of the current market conditions which resulted in the write-off of $126,000 in
contract land deposits for the year and higher lot and certain other commodity costs. Segment
profits were also negatively impacted by an increase in SG&A expenses of approximately $34,300,
primarily as a result of a $27,200 increase in selling and marketing costs. The increase in
selling and marketing costs is attributable to a 15% increase in the average number of active
communities to 277 in 2006 from 240 in 2005 in addition to increased marketing efforts required to
compete in an increasingly competitive market. In addition, G&A personnel costs were higher by
$4,800 year over year.
Segment new orders were down 16% in 2006 from 2005 and the average selling price declined by
9%. New orders in the Washington, D.C. and Baltimore, MD regions declined 23% and 16%,
respectively. These declines were primarily the result of an increasingly competitive selling
environment driven by affordability issues, declining homebuyer confidence and higher levels of new
and existing home inventories. New orders within the segment were also negatively impacted by the
increase in cancellations. Cancellation rates for the Mid Atlantic segment increased to 23% in
2006 from 12% in 2005, with the highest cancellation rates occurring in the Washington, D.C. region
where the cancellation rates increased to 29% in 2006 from 14% in 2005. Backlog units and dollars
were down 26% and 32%, respectively, at December 31 2006 from the same period in 2005. The
decrease in backlog units was driven primarily by the aforementioned decrease in new orders,
coupled with the 11% increase in settlements year over year. The decrease in backlog dollars is
due primarily to the decrease in backlog units and additionally, to a 15% decrease in the average
selling price for new orders for the six-month period ended December 31, 2006 as compared to the
same period in 2005.
2005 versus 2004
The Mid Atlantic segment had an approximate $240,000 increase in segment profit year over
year. Revenues increased 23% as a result of a 4% increase in the number of units settled and
an 18% increase in the average settlement price. We experienced increased home settlements
year over year in each of our regions except Baltimore where settlements declined slightly
from the prior year. Settlements in the Baltimore region were negatively affected by
development delays throughout the first three quarters of 2005. The Baltimore region was able
to resolve several of these development delays in the fourth quarter, and settlements for this
region increased 24% in the fourth quarter of 2005 as compared to the same period in 2004.
The segments gross profit margin percentage grew to 33.9% in 2005 from 30.3% in 2004. The
gross profit margin increase was due to favorable market conditions generated from strong
housing demand within the segments markets during 2005, particularly in the Washington, D.C.
region. Segment profits were negatively affected by an approximate $34,000 increase in
selling, general and administrative costs due to a 24% increase in the number of communities
open for sale during 2005 as compared to 2004 and higher wage and other costs to support our
growth strategy. Backlog units and dollars were 14% and 31% higher, respectively, than the
2004 year, principally due to the comparative increases in new orders of 9% and average
selling price of 15%.
North East
2006 versus 2005
The North East segment had an approximate $2,700 decrease in segment profit year over year,
while
20
revenues for the same periods increased 23%, or approximately $123,700. Revenues increased
primarily as a
result of a 21% increase in the number of units settled. The segments gross profit margin
percentage decreased to 18.3% in 2006 from 21.4% in 2005. Segment gross profit margins were
negatively impacted by contract land deposit write-offs totaling approximately $10,000 in 2006,
higher lot and certain other commodity costs. Segment profits were also negatively impacted by an
approximate $3,100 increase in selling and marketing costs attributable to a 29% increase in the
average number of active communities open for sale during 2006 as compared to 2005. New orders
remained flat from the prior year, while the average selling price for new orders decreased 7% as a
result of a more competitive selling environment within the segment. Backlog units and dollars
declined 31% and 39%, respectively, as a result of the increase in homes settled, coupled with a
14% decline in new orders for the six-month period ended December 31, 2006 compared to the same
period in 2005.
2005 versus 2004
The North East segment had an approximate $3,000 increase in segment profit year over year.
Revenues increased 15% primarily as a result of a 14% increase in the average settlement price.
The segments gross profit margin percentage was essentially flat at 21.4% in 2005 from 21.1% in
2004. Segment profits were negatively affected by an approximate $5,200 increase in selling and
marketing costs due to an 18% increase in the number of communities open for sale during 2005 as
compared to 2004. Backlog units and dollars increased 10% and 19%, respectively. The unit
increase is primarily due to a 7% increase in the number of new orders in 2005 compared to 2004,
and the dollar increase is due to the unit increase and to a 14% increase in the average selling
price.
Mid East
2006 versus 2005
The Mid East segment had an approximate $25,300 decrease in segment profit year over year.
Revenues for the segment increased 2%, or approximately $21,600, due to a 5% increase in units
settled year over year. Segment gross profit margin percentage declined to 16.6% in 2006 from
18.9% in 2005. Gross profit margins were negatively impacted by an approximate $10,000 write-off
of contract land deposits in 2006. Segment profits were further negatively impacted by an increase
of approximately $7,300 in selling, general and administrative costs. Selling and marketing costs
increased approximately $3,400 in 2006 as a result of an 11% increase in the number of active
communities open for sale in 2006 as compared to 2005. General and administrative costs increased
primarily as a result of a $3,000 increase in wages year over year. New orders were down 9% for
the year. This decline coupled with the aforementioned increase in settlements year over year
resulted in a decrease in backlog units and dollars as of December 31, 2006 of 20% and 21%,
respectively, as compared to the same period in 2005.
2005 versus 2004
The Mid East segment had an approximate $8,000 increase in segment profit year over year.
Revenues increased 19% as a result of a 12% increase in the number of units settled and a 7%
increase in the average settlement price. The segments gross profit margin percentage was
essentially flat at 18.9% in 2005 from 19.3% in 2004. Segment profits were negatively affected by
an approximate $13,000 increase in selling, general and administrative costs due to a 13% increase
in the number of communities open for sale during 2005 as compared to 2004, and higher wages due to
increased staffing levels to support our growth strategy. Backlog units and dollars increased 10%
and 8%, respectively. The increases are primarily attributable to a 12% increase in the number of
new orders in 2005 compared to 2004.
21
South East
2006 versus 2005
The South East segment had an approximate $27,700 increase in segment profit year over year.
Revenues for the segment increased approximately $122,400, or 26%, as a result of a 19% increase in
the average settlement price and a 6% increase in the number of units settled. Gross profit margin
percentage for
the segment increased to 22.0% in 2006 from 19.9% in 2005. The improved profit margins
resulted primarily from favorable market conditions, which provided us the opportunity to increase
prices within each of our markets within the segment. Backlog units were down 4% year over year
due to the increase in the number of units settled coupled with a 3% decline in new orders for the
six-month period ended December 31, 2006 as compared to new orders for the same period of 2005.
Backlog dollars increased 15% as the 4% decline in backlog units was offset by a 19% increase in
the average sales price of new orders for the six-month period ended December 31, 2006 as compared
to the same period in 2005.
2005 versus 2004
The South East segment had an approximate $15,000 increase in segment profit year over year.
Revenues increased 28% as a result of a 22% increase in the number of units settled and a 5%
increase in the average settlement price. The segments gross profit margin percentage was 19.9%
in 2005 and 19.3% in 2004. The gross profit margin increase was due to favorable market conditions
that provided us the opportunity to increase prices in certain of the segments markets. Segment
profits were negatively affected by an approximate $5,300 increase in selling, general and
administrative costs due to higher wages from increased staffing levels to support our growth
strategy. Backlog units and dollars were 17% and 32% higher, respectively, than the 2004 year,
principally due to the comparative increases in new orders of 15% and average selling price of 8%.
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), consolidation adjustments and external
corporate interest expense. Our overhead functions, such as accounting, treasury, human
resources, land acquisition, etc., are centrally performed and the costs are not allocated to
the Companys operating segments. Consolidation adjustments consist of such items to convert
the reportable segments results, which are predominantly maintained on a cash basis, to a
full accrual basis for external financial statement presentation purposes, and are not
allocated to the Companys operating segments. External corporate interest expense is
primarily comprised of interest charges on the Companys outstanding senior notes and working
capital line borrowings, and are not charged to the operating segments because the charges are
included in the corporate capital allocation discussed above.
22
Year Ended December 31, | ||||||||||||
2006 | 2005 | 2004 | ||||||||||
Homebuilding Consolidated Gross Profit: |
||||||||||||
Homebuilding Mid Atlantic |
$ | 979,362 | $ | 1,096,565 | $ | 795,491 | ||||||
Homebuilding North East |
120,531 | 114,365 | 98,291 | |||||||||
Homebuilding Mid East |
160,494 | 178,114 | 153,197 | |||||||||
Homebuilding South East |
129,127 | 92,348 | 70,314 | |||||||||
Consolidation adjustments and other (1) |
(54,543 | ) | (41,679 | ) | (26,076 | ) | ||||||
Consolidated homebuilding gross profit |
$ | 1,334,971 | $ | 1,439,713 | $ | 1,091,217 | ||||||
Homebuilding Consolidated Profit Before Tax: |
||||||||||||
Homebuilding Mid Atlantic |
$ | 687,904 | $ | 863,210 | $ | 623,040 | ||||||
Homebuilding North East |
64,246 | 66,944 | 64,130 | |||||||||
Homebuilding Mid East |
69,911 | 95,190 | 87,272 | |||||||||
Homebuilding South East |
79,948 | 52,199 | 36,958 | |||||||||
Reconciling items: |
||||||||||||
Contract land deposit impairments |
(27,717 | ) | (9,950 | ) | (6,000 | ) | ||||||
Stock option expense (2) |
(54,514 | ) | | | ||||||||
Corporate capital allocation (3) |
184,908 | 149,247 | 110,769 | |||||||||
Unallocated corporate overhead (4) |
(86,363 | ) | (105,364 | ) | (80,635 | ) | ||||||
Consolidation adjustments and other |
(3,340 | ) | (11,670 | ) | (3,168 | ) | ||||||
Corporate interest expense |
(17,145 | ) | (13,126 | ) | (11,223 | ) | ||||||
Reconciling items sub-total |
(4,171 | ) | 9,137 | 9,743 | ||||||||
Homebuilding consolidated profit
before taxes |
$ | 897,838 | $ | 1,086,680 | $ | 821,143 | ||||||
(1) | The variances are due to contract land deposit impairments recorded at the corporate level and to the changes in operating activity year to year. | |
(2) | Increases are due to the adoption of SFAS 123R at January 1, 2006. | |
(3) | This item represents the elimination of the corporate capital allocation charge included in the respective homebuilding reportable segments. The increases in the corporate capital allocation charge are due to the higher segment asset balances during the respective years due to the increases in operating activity year to year. The corporate capital allocation charge is based on the segments monthly average asset balance, and is as follows for the years presented: |
Year Ended December 31, | ||||||||||||
2006 | 2005 | 2004 | ||||||||||
Homebuilding Mid Atlantic |
$ | 131,823 | $ | 101,794 | $ | 73,755 | ||||||
Homebuilding North East |
19,533 | 15,904 | 11,518 | |||||||||
Homebuilding Mid East |
21,235 | 21,126 | 16,698 | |||||||||
Homebuilding South East |
12,317 | 10,423 | 8,798 | |||||||||
Total |
$ | 184,908 | $ | 149,247 | $ | 110,769 | ||||||
(4) | The decrease in 2006 compared to 2005 is primarily attributable to lower management incentive compensation in 2006. The increase in 2005 compared to 2004 is primarily due to higher corporate personnel costs as a result of increased wages and management incentive compensation due to increased staffing levels to support our growth strategy. |
23
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 segments customer
base. Following is a table of financial and statistical data for the years ended December 31,
2006, 2005 and 2004:
2006 | 2005 | 2004 | ||||||||||
Loan closing volume: |
||||||||||||
Total principal |
$ | 3,918,206 | $ | 3,388,118 | $ | 2,716,630 | ||||||
Segment income: |
$ | 68,753 | $ | 57,739 | $ | 50,862 | ||||||
Capture rate: |
$ | 86 | % | 87 | % | 84 | % | |||||
Mortgage Banking Fees: |
||||||||||||
Net gain on sale of
loans |
$ | 72,700 | $ | 62,279 | $ | 52,858 | ||||||
Title services |
24,081 | 21,072 | 18,353 | |||||||||
Servicing fees |
1,107 | 1,253 | 1,008 | |||||||||
$ | 97,888 | $ | 84,604 | $ | 72,219 | |||||||
Loan closing volume for the year ended December 31, 2006 increased 16% from 2005. The 2006
increase was primarily attributable to a 7% increase in the average loan amount, and a year over
year 8% increase in the number of units closed. The increase in the average loan amount reflects
the aforementioned increase in the homebuilding segments average settlement prices. The unit
increase for the year ended December 31, 2006 reflects an increase in the number of settlements by
the homebuilding segment offset slightly by a 1% decrease in the percentage of loans closed for
NVRs homebuyers who obtain a mortgage to purchase the home (Capture Rate).
Segment income for the year ended December 31, 2006 increased approximately $11,000 from 2005.
The increase was primarily due to an increase in mortgage banking fees attributable to the
aforementioned increase in closed loan volume and the product mix shift towards fixed rate
mortgages. The increase to mortgage banking fees was net of an approximate $2,600 increase in
costs during 2006 related to the contractual repayment of loan sale income to investors for loans
that were paid in full within a set number of days following the sale of the loan.
Traditionally, fixed rate mortgages have been generally more profitable than adjustable rate
mortgages. In the second half of 2005, with the change in interest rates, the rate differential
between fixed rate and adjustable rate mortgages narrowed. As a result, we saw a shift to these
more profitable products, which remained favorable throughout 2006. We expect this favorable mix
to continue into 2007.
The increase to segment income was net of an approximate $3,800 increase in general and
administrative expense in 2006. This was partially attributable to an increase in salary expense
related to a 6% increase in the average employee count during the year and an 18% increase in
office costs related to an increase in the number of branch offices in 2006. The additional
staffing and branch offices were added to accommodate the planned increase in builder settlement
volume and to improve customer service. The increase in general and administrative expense in 2006
was also due to an approximate $2,800 increase to the loan loss reserve based on an anticipated
increase in mortgage repurchases based on contractual obligations to investors to repurchase sold
loans that go into default within a set period of time after the loan is sold.
Loan closing volume for the year ended December 31, 2005 increased 25% from 2004. The 2005
increase is primarily attributable to a 15% increase in the average loan amount, and a year over
year 9% increase in the number of units closed. The increase in the average loan amount reflects
the aforementioned increase in the homebuilding segments average selling prices. The unit
increase for the year ended December 31, 2005 reflects an increase in the number of settlements by
the homebuilding segment and a slight increase in the Capture Rate.
24
Segment income for the year ended December 31, 2005 increased approximately $6,900 from 2004.
The increase was primarily due to an increase in mortgage banking fees attributable to the
aforementioned increase in closed loan volume. This was net of an approximate $6,000 increase in
general and administrative expense during 2005. The increase in general and administrative expense
was primarily due to an increase in salaries and other personnel costs due to a 26% increase in the
total number of NVRM employees in 2005 versus 2004. The additional staffing was to position NVRM
for future growth and to increase capture rate.
Seasonality
Overall, we do not experience material seasonal fluctuations in sales, settlements or
loan closings.
Effective Tax Rate
Our consolidated effective tax rates were 39.0%, 39.0%, and 40.0% in 2006, 2005 and 2004,
respectively. The lower effective tax rates in 2006 and 2005 is primarily due to the
favorable tax impact of the new Internal Revenue Code Section 199 domestic manufacturing
deduction established by the American Jobs Creation Act of 2004.
In January 2007, the United States Congress began consideration of a bill that would
amend Section 162(m) of the Internal Revenue Code. The bill may change the
definition of covered employee as it pertains to distributions received from deferred
compensation plans after separation of service. If this bill is
passed in its current form and subsequently signed into law, we would be required to write-off
approximately $27,000 of deferred tax assets recorded on our consolidated balance sheet at
December 31, 2006. The write-off would occur in the period that the bill is passed. We can
provide no assurance on the outcome of this matter See Risk Factors in Item 1 A.
Recent Accounting Pronouncements Pending Adoption
In June 2006, the FASB issued FASB Interpretation No. 48, Accounting for Uncertainty in
Income Taxes (FIN 48). FIN 48 clarifies the accounting for uncertainty in income taxes
recognized in accordance with SFAS No. 109, Accounting for Income Taxes and prescribes a
recognition threshold and measurement attribute for the financial statement recognition and
measurement of tax positions taken or expected to be taken in a tax return. FIN 48 will be
effective for our fiscal year beginning January 1, 2007. We do not expect that the adoption of FIN
48 will have a material effect on our financial results.
In March 2006, the FASB issued SFAS No. 156, Accounting for Servicing of Financial Assets,
which provides an approach to simplify efforts to obtain hedge-like (offset) accounting by allowing
us the option to carry mortgage servicing rights at fair value. This new Statement amends SFAS No.
140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilitiesa replacement of FASB SFAS No. 125, with respect to the accounting for separately
recognized servicing assets and servicing liabilities. SFAS No. 156 is effective for all separately
recognized servicing assets and liabilities as of the beginning of an entitys fiscal year that
begins after September 15, 2006, with earlier adoption permitted in certain circumstances. Because
we do not retain the servicing rights when we sell our mortgage loans held for sale, the adoption
of SFAS No. 156 is not expected to have a material impact on our consolidated financial position,
results of operations or cash flows.
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (SFAS 157). SFAS
157 provides guidance for using fair value to measure assets and liabilities and expands
disclosures about fair value measurements. SFAS 157 will be effective for our fiscal year
beginning January 1, 2008. We are currently reviewing the effect SFAS 157 will have on our
financial statements upon adoption.
25
In November 2006, the FASB ratified EITF Issue No. 06-8, Applicability of
the Assessment of a Buyers
Continuing Investment Under FASB Statement No. 66, Accounting for Sales of Real Estate, for Sales
of Condominiums. EITF 06-8 states that the adequacy of the buyers continuing investment under
SFAS 66 should be assessed in determining whether to recognize profit under the
percentage-of-completion method on the sale of individual units in a condominium project. This
consensus could require that additional deposits be collected by developers of condominium projects
that wish to recognize profit during the construction period under the percentage-of-completion
method. EITF 06-8 is effective for us January 1, 2008. We do not expect that the adoption of EITF
06-8 will have a material impact on our financial statements.
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 and a short-term unsecured working capital revolving
credit facility (the Facility). During 2006, we increased the available borrowings under
the Facility to $600,000 from $400,000. The Facilitys available borrowings are 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) London Interbank Offering Rate
(LIBOR) plus applicable margin as defined within the Facility. The weighted-average
interest rate for the amounts outstanding under the Facility was 5.9% in 2006. Up to $150,000
of the Facility is currently available for issuance in the form of letters of credit, of which
$22,320 was outstanding at December 31, 2006. 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 land purchases. 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, 2006 we
were in compliance with all covenants under the Facility and there were no borrowing base
limitations reducing the amount available to us for borrowings. At December 31, 2006, we had
no direct borrowings outstanding under the Facility.
NVRs mortgage banking segment provides for its mortgage origination and other operating
activities using cash generated from operations as well as various short-term credit
facilities. NVRM has available an annually renewable mortgage warehouse facility (the
Revolving Credit Agreement) with an aggregate borrowing limit of $175,000. The Revolving
Credit Agreement is used to fund NVRMs mortgage origination activities, under which $153,552
was outstanding at December 31, 2006. As of December 31, 2006, there were no borrowing base
limitations reducing the amount available to NVRM for borrowing. The Revolving Credit
Agreement expires in August 2007. The interest rate under the Revolving Credit Agreement is
either: (i) LIBOR plus 1.0%, or (ii) 1.125% to the extent that NVRM provides compensating
balances. The weighted average interest rate for amounts outstanding under the Revolving
Credit Agreement was 5.0% during 2006. NVRMs mortgage warehouse facility limits the ability
of NVRM to transfer funds to NVR in the form of dividends, loans or advances. In addition,
NVRM is required to maintain a minimum net worth of $14,000.
On January 20, 1998, we filed a shelf registration statement with the Securities and
Exchange Commission (SEC) for the issuance of up to $400,000 of debt securities (the 1998
Shelf Registration). The 1998 Shelf Registration statement was declared effective on February
27, 1998 and provides that securities may be offered from time to time in one or more series, and
in the form of senior or subordinated debt.
On June 17, 2003, we completed an offering, at par, for $200,000 of 5% Senior Notes due 2010
(the Notes) under the 1998 Shelf Registration. The Notes mature on June 15, 2010 and bear
interest at 5%, payable semi-annually in arrears on June 15 and December 15, commencing on
December 15, 2003. The
26
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. Upon completion of the 2003 Notes
offering, we had $55,000 remaining available for issuance under the 1998 Shelf Registration.
On May 27, 2004, we filed a shelf registration statement (the 2004 Shelf Registration)
with the SEC to register up to $1,000,000 for future offer and sale of debt securities, common
shares, preferred shares, depositary shares representing preferred shares and warrants. The
SEC declared the 2004 Shelf Registration effective on June 15, 2004. NVR expects to use the
proceeds received from future offerings issued under the 2004 Shelf Registration and the 1998
Shelf Registration for general corporate purposes. This discussion of our 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 10(b)-18 of the Securities
and Exchange Act of 1934. The repurchase program assists us in accomplishing our primary
objective, creating increases in shareholder value. See Part II, Item 5 of the Form 10-K for
disclosure of amounts repurchased during the fourth quarter of 2006. For the year ended December
31, 2006, we repurchased approximately 481,000 shares of our common stock at an aggregate purchase
price of $287,064.
Cash Flows
As shown in the consolidated statement of cash flows for the year ended December 31,
2006, our operating activities provided cash of $682,963. Cash was provided primarily by
homebuilding operations and a reduction in our homebuilding inventories of approximately
$60,000 due to a reduction in the number of homes under construction at the end of 2006 as
compared to the same period in 2005. The presentation of operating cash flows was reduced by
approximately $96,000, 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. As required by SFAS 123R, which we adopted effective January 1, 2006, excess tax
benefits credited directly to additional-paid-in capital resulting from stock-based
compensation must be presented as an operating cash outflow and a financing cash inflow.
Net cash used for investing activities was $22,598 for the year ended December 31, 2006,
primarily as a result of approximately $23,000 in property and equipment purchases throughout
the period.
Net cash used for financing activities was $281,772 for the year ended December 31, 2006.
During the year ended December 31, 2006, we repurchased approximately 481,000 shares of our
common stock at an aggregate purchase price of approximately $287,000 under our ongoing common
stock repurchase program, discussed in the Equity Repurchases section above. We also reduced net
borrowings under the working capital and mortgage warehouse facilities by approximately $107,000.
The presentation of financing cash flows was favorably impacted by the realization of
approximately $96,000 in excess income tax benefits from the exercise of stock options, which
pursuant to SFAS 123R, must be reported as a financing cash inflow.
At December 31, 2006, the homebuilding segment had restricted cash of $3,464, which
relates to customer deposits on certain home sales.
27
We believe that cash generated from operations and borrowings available under our credit
facilities and the public debt markets 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.
Off Balance Sheet Arrangements
Lot Acquisition Strategy
We do not engage in the land development business. Instead, we acquire finished building lots
at market prices from various development entities 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 do not guarantee specific
performance under these purchase agreements.
At December 31, 2006, we controlled approximately 88,500 lots with an aggregate purchase price
of approximately $9,000,000, by making or committing to make deposits of approximately $632,000 in
the form of cash and letters of credit. Our entire risk of loss pertaining to the aggregate
$9,000,000 contractual commitment resulting from our non-performance under the contracts is limited
to the $498,000 deposit amount, plus the additional $134,000 deposits referred to below. Of the
$632,000 deposit total, approximately $484,000 in cash and approximately $14,000 in letters of
credit have been issued as of December 31, 2006 and subsequent to December 31, 2006, we will pay
$134,000 in additional deposits assuming that contractual development milestones are met by the
developers (see Contractual Obligations section below). Please refer to Note 3 to the consolidated
financial statements for a description of our lot acquisition strategy in relation to our
accounting under FIN 46R, 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
$35,985 of contingent obligations under such agreements as of December 31, 2006 (inclusive of the
$14,000 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 us. All mortgagors are evaluated for credit worthiness prior to the
extension of the commitment. 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 classified as derivatives. Both the rate lock commitments to borrowers and
the forward sale contracts to broker/dealers are undesignated derivatives, and, accordingly, are
marked to market through earnings. At December 31, 2006, there were contractual commitments to
extend credit to borrowers aggregating approximately $175,000, and open forward delivery sale
contracts aggregating approximately $338,000.
28
Contractual Obligations
Our fixed, non-cancelable obligations as of December 31, 2006, were as follows:
Payments due by period | ||||||||||||||||||||
Less than | 13 | 35 | More than | |||||||||||||||||
Total | 1 year | years | years | 5 years | ||||||||||||||||
Debt (a) |
$ | 388,552 | $ | 163,552 | $ | 20,000 | $ | 205,000 | $ | | ||||||||||
Capital leases (b) |
5,082 | 529 | 1,251 | 1,289 | 2,013 | |||||||||||||||
Operating leases (c) |
114,127 | 27,695 | 37,184 | 19,165 | 30,083 | |||||||||||||||
Purchase obligations (d) |
134,000 | * | * | * | * | |||||||||||||||
Executive officer employment
contracts (e) |
11,060 | 1,640 | 6,280 | 3,140 | | |||||||||||||||
Other long-term liabilities (f) |
42,787 | 37,920 | 4,867 | | | |||||||||||||||
Total |
$ | 695,608 | $ | 231,336 | $ | 69,582 | $ | 228,594 | $ | 32,096 | ||||||||||
(a) | Payments include interest payments due on the 5% Senior Notes due 2010. See Note 6 of the Notes to 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 of the Notes to the Consolidated Financial Statements for additional information regarding capital lease obligations. | |
(c) | See Note 10 of the Notes to 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. In addition to the $134,000 to be paid pursuant to the prior discussion, as of December 31, 2006, we had capitalized forfeitable deposits for fixed price purchase agreements with developers totaling approximately $484,000, and outstanding letters of credit of approximately $14,000. | |
(e) | We have entered into employment agreements with four 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 NVRs 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 officers 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, with the exception of our Executive Chairman whose salary is included in the above table at $0 for 2007 and $1,500 thereafter. 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, $2,742 of which is recorded in the Mortgage Banking accounts payable and other liabilities line item. |
29
Critical Accounting Policies
General
The preparation of financial statements in conformity with accounting principles generally
accepted in the United States of America requires us to make estimates and assumptions that affect
the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities
at the date of the financial statements, and the reported amounts of revenues and expenses during
the reporting periods. We continually evaluate the estimates we use to prepare the consolidated
financial statements, and update those estimates as necessary. In general, our estimates are based
on historical experience, on information from third party professionals, and other various
assumptions that are believed to be reasonable under the facts and circumstances. Actual results
could differ materially from those estimates made by management.
Variable Interest Entities
Revised Financial Interpretation No. 46 (FIN 46R), Consolidation of Variable Interest
Entities requires the primary beneficiary of a variable interest entity to consolidate that
entity on its financial statements. The primary beneficiary of a variable interest entity is the
party that absorbs a majority of the variable interest entitys expected losses, receives a
majority of the entitys expected residual returns, or both, as a result of ownership,
contractual, or other financial interests in the entity. Expected losses are the expected
negative variability in the fair value of an entitys net assets exclusive of its variable
interests, and expected residual returns are the expected positive variability in the fair value
of an entitys net assets, exclusive of its variable interests.
Forward contracts, such as the fixed price purchase agreements utilized by us to acquire
finished lot inventory, are deemed to be variable interests under FIN 46R. Therefore, the
development entities with which we enter fixed price purchase agreements are examined under FIN 46R
for possible consolidation by us, including certain joint venture limited liability corporations
(LLCs) utilized by us to acquire finished lots on a limited basis. We have developed a
methodology to determine whether we, or, conversely, the owner(s) of the applicable development
entity, are the primary beneficiary of a development entity. The methodology used to evaluate our
primary beneficiary status requires substantial management judgment and estimates. These judgments
and estimates involve assigning probabilities to various estimated cash flow possibilities relative
to the development entitys expected profits and losses and the cash flows associated with changes
in the fair value of finished lots under contract. Although we believe that our accounting policy
is designed to properly assess our primary beneficiary status relative to our involvement with the
development entities from which we acquire finished lots, changes to the probabilities and the cash
flow possibilities used in our evaluation could produce widely different conclusions regarding
whether we are or are not a development entitys primary beneficiary, possibly resulting in
additional, or fewer, development entities being consolidated on our financial statements.
Homebuilding Inventory
The carrying value of inventory is stated at the lower of cost or market value. Cost of lots
and completed and uncompleted housing units represent the accumulated actual cost of the units.
Field construction supervisors salaries and related direct overhead expenses are included in
inventory costs. Interest costs are not capitalized into inventory. Upon settlement, the cost of
the unit is expensed on a specific identification basis. Cost of manufacturing materials is
determined on a first-in, first-out basis. Recoverability and impairment, if any, is primarily
evaluated by analyzing sales of comparable assets. We believe that our accounting policy is
designed to properly assess the carrying value of homebuilding inventory.
Contract Land Deposits
We purchase finished lots under fixed price purchase agreements that require deposits that may
be forfeited if we fail to perform under the contract. The deposits are in the form of cash or
letters of credit in
30
varying amounts and represent a percentage of the aggregate purchase price of
the finished lots. We maintain an
allowance for losses on contract land deposits that we believe is sufficient to provide for losses
in the existing contract land deposit portfolio. The allowance reflects our judgment of the
present loss exposure at the end of the reporting period, considering market and economic
conditions, sales absorption and profitability within specific communities and terms of the various
contracts. Although we consider the allowance for losses on contract land deposits reflected on
the December 31, 2006 balance sheet to be adequate (see Note 1 to the consolidated financial
statements), there can be no assurance that this allowance will prove to be adequate over time to
cover losses due to unanticipated adverse changes in the economy or other events adversely
affecting specific markets or the homebuilding industry.
Intangible Assets
Reorganization value in excess of identifiable assets (excess reorganization value),
goodwill, and indefinite life intangible assets are not subject to amortization under Statement of
Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets (SFAS 142). Rather,
excess reorganization value, goodwill, and other intangible assets are subject to at least an
annual assessment for impairment by applying a fair-value based test. We continually evaluate
whether events and circumstances have occurred that indicate that the remaining value of excess
reorganization value, goodwill, and other intangible assets may not be recoverable. We completed
the annual assessment of impairment during the first quarter of 2006, and as of December 31, 2006,
we believe that excess reorganization value, goodwill, and other intangible assets were not
impaired. This conclusion is based on managements judgment, considering such factors as our
history of operating success, our well-recognized brand names, and the significant positions held
in the markets in which we operate. However, changes in strategy or adverse changes in market
conditions could impact this judgment and require an impairment loss to be recognized for the
amount that the carrying value of excess reorganization value, goodwill, and/or other intangible
assets exceeds their fair value.
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 other outside counsel
retained to handle specific product liability cases. Although we consider the warranty and product
liability accrual reflected on the December 31, 2006 balance sheet (see Note 10 to the consolidated
financial statements) to be adequate, there can be no assurance that this accrual will prove to be
adequate over time to cover losses due to increased costs for material and labor, the inability or
refusal of manufacturers or subcontractors to financially participate in corrective action,
unanticipated adverse legal settlements, or other unanticipated changes to the assumptions used to
estimate the warranty and product liability accrual.
Stock Option Expense
Beginning in 2006 with our adoption of SFAS 123R, we are required to recognize within our
income statement compensation costs related to our stock based compensation plans. The costs
recognized are based on the grant-date fair value. Compensation cost for service-only option
grants is recognized on a straight-line basis over the requisite service period for the entire
award (from the date of grant through the period of the last separately vesting portion of the
grant). Compensation cost for performance condition option grants is recognized on a
straight-line basis over the requisite service period for each separately vesting portion of the
award as if the award was, in substance, multiple awards (graded vesting attribution
method).
We calculate the fair value of our non-publicly traded, employee stock options using the
Black-Scholes option-pricing model. While the Black-Scholes model is a widely accepted method to
calculate the fair value of options, its results are dependent on input variables, two of which,
expected term and expected volatility, are significantly dependent on managements judgment. We
have concluded that our historical exercise experience is the best estimate of future exercise
patterns to determine an options expected term. To estimate expected
31
volatility, we analyze the
historic volatility of our common stock. Changes in managements judgment of the expected term and
the expected volatility could have a material effect on the grant-date fair value calculated and
expensed within the income statement. In addition, we are required to estimate future option
forfeitures when considering the amount of stock-based compensation costs to record. We have
concluded that our historical forfeiture rate is the best measure to estimate future forfeitures of
granted stock options. However, there can be no assurance that our future forfeiture rate will not
be materially higher or lower than our historical forfeiture rate, which would affect the aggregate
cumulative compensation expense recognized. Further, although we believe that the compensation
costs recognized during the year ended December 31, 2006 are representative of the ratable
amortization of the grant-date fair value of unvested options outstanding and expected to be
exercised, changes to the estimated input values such as expected term and expected volatility
could produce widely different fair values. See Notes 1 and 9 to the consolidated financial
statements included herein for additional information on our adoption of SFAS 123R.
Impact of Inflation, Changing Prices and Economic Conditions
See Risk Factors included in Item 1A herein.
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 is 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 either
sold through optional or mandatory forward delivery contracts into the secondary markets. All
of the mortgage banking segments 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 segments primary debt is a
variable-rate working capital revolving credit facility that currently provides for unsecured
borrowings up to $600,000, subject to certain borrowing base limitations. The Facility
expires in December 2010 and outstanding amounts bear interest at either (i) the prime rate or
(ii) LIBOR plus applicable margin as defined within the Facility. The weighted-average
interest rate for the amounts outstanding under the Facility was 5.9% in 2006.
NVRM generates operating liquidity primarily through the mortgage warehouse facility,
which had a borrowing limit of $175,000 at December 31, 2006. The mortgage warehouse facility
is used to fund its mortgage origination activities. The interest rate under the mortgage
warehouse facility is either: (i) LIBOR plus 1.0%, or (ii) 1.125% to the extent that NVRM
provides compensating balances. The weighted-average interest rate for amounts outstanding
under the mortgage warehouse facility was 5.0% during 2006.
The following table represents the contractual balances of our on-balance sheet financial
instruments in dollars at the expected maturity dates, as well as the fair values of those
on-balance sheet financial instruments at December 31, 2006. The expected maturity categories
take into consideration the actual and anticipated amortization of principal and does 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 and repurchase facilities are also
assumed to mature in the first year.
32
Maturities (000s)
Fair | ||||||||||||||||||||||||||||||||
2007 | 2008 | 2009 | 2010 | 2011 | Thereafter | Total | Value | |||||||||||||||||||||||||
Mortgage banking segment |
||||||||||||||||||||||||||||||||
Interest rate sensitive assets: |
||||||||||||||||||||||||||||||||
Mortgage loans held for sale |
$ | 178,360 | | | | | | $ | 178,360 | $ | 178,119 | |||||||||||||||||||||
Average interest rate |
6.6 | % | | | | | | 6.6 | % | |||||||||||||||||||||||
Interest rate sensitive liabilities: |
||||||||||||||||||||||||||||||||
Variable rate warehouse line of credit |
$ | 153,552 | | | | | | $ | 153,552 | $ | 153,552 | |||||||||||||||||||||
Average interest rate (a) |
4.9 | % | | | | | | 4.9 | % | |||||||||||||||||||||||
Other: |
||||||||||||||||||||||||||||||||
Forward trades of mortgage-backed
securities (b) |
$ | 450 | | | | | | $ | 450 | $ | 450 | |||||||||||||||||||||
Forward loan commitments (b) |
(125 | ) | | | | | | (125 | ) | (125 | ) | |||||||||||||||||||||
Homebuilding segment |
||||||||||||||||||||||||||||||||
Interest rate sensitive assets: |
||||||||||||||||||||||||||||||||
Interest-bearing deposits |
$ | 460,182 | | | | | | $ | 460,182 | $ | 460,182 | |||||||||||||||||||||
Average interest rate |
5.0 | % | | | | | | 5.0 | % | |||||||||||||||||||||||
Interest rate sensitive liabilities: |
||||||||||||||||||||||||||||||||
Fixed rate obligations (c) |
$ | 130 | $ | 245 | $ | 302 | $ | 200,353 | $ | 402 | $ | 1,648 | $ | 203,080 | $ | 198,400 | ||||||||||||||||
Average interest rate |
5.1 | % | 5.1 | % | 5.1 | % | 5.2 | % | 13.1 | % | 13.3 | % | 5.2 | % |
(a) | Average interest rate is net of credits received for compensating cash balances. | |
(b) | Represents the fair value recorded pursuant to SFAS 133. | |
(c) | The $200,353 maturing in 2010 includes $200,000 for NVRs 5% Senior Notes due June 2010. |
33
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, 2006 were effective to ensure 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 Commissions 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.
Managements 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, 2006. Our managements assessment
of the effectiveness of our internal control over financial reporting as of December 31, 2006
has been audited by KPMG LLP, an independent registered public accounting firm, as stated in
their report which is included herein.
Item 9B. | Other Information. |
None.
34
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, 2007. Reference is also
made regarding the executive officers of the registrant 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, 2007.
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, 2007.
Equity Compensation Plan Information
The table below sets forth information as of the end of our 2006 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 | ||||||||||||
Number of | remaining | |||||||||||
securities to | available for | |||||||||||
be issued | Weighted- | future issuance | ||||||||||
upon | average | under equity | ||||||||||
exercise of | exercise | compensation | ||||||||||
outstanding | price of | plans | ||||||||||
options, | outstanding | (excluding | ||||||||||
warrants | options, | securities | ||||||||||
and | warrants | reflected in the | ||||||||||
Plan category | rights | and rights | first column) | |||||||||
Equity compensation plans
approved by security
holders |
751,555 | $ | 475.51 | 207,695 | ||||||||
Equity compensation plans
not approved by security
holders |
1,930,963 | $ | 231.42 | 198,926 | ||||||||
Total |
2,682,518 | $ | 299.81 | 406,621 |
35
Equity compensation plans approved by our shareholders include the the NVR, Inc.
Management Long-Term Stock Option Plan; the NVR, Inc. 1998 Management Long-Term Stock Option
Plan; the 1998 Directors Long-Term Stock Option Plan; and the 2005 Stock Option Plan. Equity
compensation plans that have not been approved by our shareholders include the NVR, Inc. 1994
Management Equity Incentive Plan and the NVR, Inc. 2000 Broadly-Based Stock Option Plan. See
Note 9 of the Notes to Consolidated Financial Statements for a description of each of our
equity compensation plans.
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, 2007.
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, 2007.
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
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 2 to Amendment No. 1 to Form 8-A filed on June 14, 2004 and incorporated herein by reference. | |
3.2
|
Bylaws, as amended, of NVR, Inc. Filed as Exhibit 3.1 to Form 8-K filed on November 3, 2005 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 NVRs 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 NVRs Current Report on Form 8-K filed June 17, 2003 and incorporated herein by reference. |
36
Exhibit | ||
Number | Description | |
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 NVRs 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 NVRs Form 8-K filed on June 29, 2005 and incorporated herein by reference. | |
10.3*
|
Employment Agreement between NVR, Inc. and Dennis M. Seremet dated July 1, 2005. Filed as Exhibit 10.3 to NVRs 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 NVRs 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 NVRs Registration Statement on Form S-8 (No. 333-29241) filed June 13, 1997 and incorporated herein by reference. | |
10.6
|
Loan Agreement dated as of September 7, 1999 among NVR Mortgage Finance, Inc. (NVR Finance) and US Bank National Association, as Agent, and the other lenders party thereto. Filed as Exhibit 10.6 to NVRs Annual Report on Form 10-K for the year ended December 31, 1999 and incorporated herein by reference. | |
10.7*
|
Employee Stock Ownership Plan of NVR, Inc. Incorporated by reference to NVRs Annual Report on Form 10-K/A for the year ended December 31, 1994. | |
10.8*
|
NVR, Inc. 1994 Management Equity Incentive Plan. Filed as Exhibit to NVRs Annual Report filed on Form 10-K for the year ended December 31, 1994 and incorporated herein by reference. | |
10.9*
|
NVR, Inc. 1998 Management Long-Term Stock Option Plan. Filed as Exhibit 4 to NVRs Registration Statement on Form S-8 (No. 333-79951) filed June 4, 1999 and incorporated herein by reference. | |
10.10*
|
NVR, Inc. 1998 Directors Long-Term Stock Option Plan. Filed as Exhibit 4 to NVRs Registration Statement on Form S-8 (No. 333-79949) filed June 4, 1999 and incorporated herein by reference. | |
10.11*
|
The Form of Non-Qualified Stock Option Agreement under the 1998 Directors Long-Term Stock Option Plan. Filed as Exhibit 10.1 to NVRs Form 8-K filed on August 3, 2005 and incorporated herein by reference. | |
10.12*
|
NVR, Inc. Management Long-Term Stock Option Plan. Filed as Exhibit 99.3 to NVRs Registration Statement on Form S-8 (No. 333-04975) filed May 31, 1996 and incorporated herein by reference. |
37
Exhibit | ||
Number | Description | |
10.13*
|
NVR, Inc. Directors Long-Term Stock Option Plan. Filed as Exhibit 99.3 to NVRs Registration Statement on Form S-8 (No. 333-04989) filed May 31, 1996 and incorporated herein by reference. | |
10.14*
|
NVR, Inc. 2000 Broadly-Based Stock Option Plan. Filed as Exhibit 99.1 to NVRs Registration Statement on Form S-8 (No. 333-56732) filed March 8, 2001 and incorporated herein by reference. | |
10.15*
|
The NVR, Inc. 2005 Stock Option Plan. Filed as Exhibit 10.18 to NVRs Annual Report on Form 10-K for the year ended December 31, 2005 and incorporated herein by reference. | |
10.16*
|
The Form of Non-Qualified Stock Option Agreement under the 2005 Stock Option Plan. Filed as Exhibit 10.19 to NVRs Annual Report on Form 10-K for the year ended December 31, 2005 and incorporated herein by reference. | |
10.17*
|
NVR, Inc. High Performance Compensation Plan dated as of January 1, 1996. Filed as Exhibit 10.30 to NVRs Annual Report on Form 10-K for the year ended December 31, 1996 and incorporated herein by reference. | |
10.18*
|
NVR, Inc. High Performance Compensation Plan No. 2 dated as of January 1, 1999. Filed as Exhibit 10.31 to NVRs Annual Report filed on Form 10-K for the year ended December 31, 1999 and incorporated herein by reference. | |
10.19*
|
NVR, Inc. Nonqualified Deferred Compensation Plan. Filed as Exhibit 10.1 to NVRs Form 8-K filed on December 16, 2005 and incorporated herein by reference. | |
10.20
|
Second Amendment to Loan Agreement and Second Amendment to Pledge and Security Agreement dated September 1, 2000 between NVR Finance and U.S. Bank National Association, as agent, and other Lenders party thereto. Filed as Exhibit 10.36 to NVRs Annual Report on Form 10-K for the year ended December 31, 2000 and incorporated herein by reference. | |
10.21
|
Agreement to increase commitments under the NVR Mortgage Finance Warehouse Facility by and among NVR Finance, Comerica Bank, National City Bank of Kentucky, and U.S. Bank National Association dated as of September 28, 2001. Filed as Exhibit 10.22 to NVRs Annual Report on Form 10-K for the year ended December 31, 2001 and incorporated herein by reference. | |
10.22
|
Eighth Amendment to Loan Agreement dated as of August 15, 2002 between NVR Mortgage Finance, Inc. and U.S. Bank National Association, Guaranty Bank, Bank One, NA, Comerica Bank, National City Bank of Kentucky and JPMorgan Chase Bank. Filed as Exhibit 10.26 to NVRs Annual Report on Form 10-K for the period ended December 31, 2002 and incorporated herein by reference. | |
10.23
|
Ninth Amendment to Loan Agreement dated as of April 16, 2003 between NVR Mortgage Finance, Inc. and U.S. Bank National Association, Guaranty Bank, Bank One, NA, Comerica Bank, National City Bank of Kentucky and JPMorgan Chase Bank. Filed as Exhibit 10.28 to NVRs Annual Report on Form 10-K for the period ended December 31, 2003 and incorporated herein by reference. |
38
Exhibit | ||
Number | Description | |
10.24
|
Tenth Amendment to Loan Agreement dated as of August 28, 2003 between NVR Mortgage Finance, Inc. and U.S. Bank National Association, Guaranty Bank, Bank One, NA, Comerica Bank, National City Bank of Kentucky and JPMorgan Chase Bank. Filed as Exhibit 10.29 to NVRs Annual Report on Form 10-K for the period ended December 31, 2003 and incorporated herein by reference. | |
10.25
|
Eleventh Amendment to Loan Agreement dated as of August 26, 2004 between NVR Mortgage Finance, Inc. and U.S. Bank National Association, Guaranty Bank, Comerica Bank, National City Bank of Kentucky and JPMorgan Chase Bank. Filed as Exhibit 10.1 to NVRs Current Report on Form 8-K filed August 27, 2004 and incorporated herein by reference. | |
10.26
|
Thirteenth Amendment to Loan Agreement dated as of August 25, 2005 between NVR Mortgage Finance, Inc. and U.S. Bank National Association, Guaranty Bank, Comerica Bank, National City Bank of Kentucky and JPMorgan Chase Bank. Filed as Exhibit 10.1 to NVRs Form 8-K filed August 25, 2005 and incorporated herein by reference. | |
10.27
|
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 NVRs Form 8-K filed December 12, 2005 and incorporated herein by reference. | |
10.28*
|
Description of the Board of Directors compensation arrangement. Filed as Exhibit 10.27 to NVRs Annual Report on Form 10-K for the period ended December 31, 2004 and incorporated herein by reference. | |
10.29*
|
Amendment No. 1 to Employment Agreement between NVR, Inc. and Dwight C. Schar dated December 21, 2006. Filed as Exhibit 10.1 to NVRs Form 8-K filed December 22, 2006 and incorporated herein by reference. | |
10.30
|
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 NVRs Form 8-K filed August 24, 2006 and incorporated herein by reference. | |
10.31
|
Commitment and Acceptance dated March 27, 2006 increasing the commitment under its 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 NVRs Form 8-K filed March 30, 2006 and incorporated herein by reference. | |
10.32
|
Commitment and Acceptance dated August 16, 2006 increasing the commitment under its 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 NVRs Form 8-K filed August 17, 2006 and incorporated herein by reference. | |
10.33*
|
Summary of 2007 Named Executive Officer annual incentive compensation plan. Filed herewith. | |
21
|
NVR, Inc. Subsidiaries. Filed herewith. | |
23
|
Consent of KPMG LLP (Independent Registered Public Accounting Firm). Filed herewith. | |
39
Exhibit | ||
Number | Description | |
31.1
|
Certification of NVRs Chief Executive Officer pursuant to Rule 13a-14(a). Filed herewith. | |
31.2
|
Certification of NVRs Chief Financial Officer pursuant to Rule 13a-14(a). Filed herewith. | |
32
|
Certification of NVRs 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. |
40
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
|
Executive Chairman | February 21, 2007 | ||
/s/ C. Scott Bartlett, Jr.
|
Director | February 21, 2007 | ||
/s/ Robert C. Butler
|
Director | February 21, 2007 | ||
/s/ Timothy M. Donahue
|
Director | February 21, 2007 | ||
/s/ Manuel H. Johnson
|
Director | February 21, 2007 | ||
/s/ William A. Moran
|
Director | February 21, 2007 | ||
/s/ David A. Preiser
|
Director | February 21, 2007 | ||
/s/ George E. Slye
|
Director | February 21, 2007 | ||
/s/ John M. Toups
|
Director | February 21, 2007 | ||
/s/ Paul C. Saville
|
Principal Executive Officer | February 21, 2007 | ||
/s/ Dennis M. Seremet
|
Principal Financial Officer | February 21, 2007 | ||
/s/ Robert W. Henley
|
Principal Accounting Officer | February 21, 2007 | ||
41
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, 2006 and 2005, 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, 2006. These
consolidated financial statements are the responsibility of the Companys 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. and subsidiaries as of December 31, 2006 and
2005, and the results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 2006, in conformity with U.S. generally accepted accounting
principles.
As discussed in notes 1 and 9 to the consolidated financial statements, NVR, Inc. and subsidiaries
adopted the provisions of SFAS 123(R), Share-Based Payment, effective January 1, 2006.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the effectiveness of NVR, Inc. and subsidiaries internal control over
financial reporting as of December 31, 2006, based on criteria established in Internal
ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO), and our report dated February 21, 2007 expressed an unqualified opinion on
managements assessment of, and the effective operation of, internal control over financial
reporting.
KPMG LLP
McLean, Virginia
February 21, 2007
February 21, 2007
42
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders
NVR, Inc:
NVR, Inc:
We have audited managements assessment, included in the accompanying Managements Report on
Internal Control Over Financial Reporting, that NVR, Inc. and subsidiaries (the Company) maintained
effective internal control over financial reporting as of December 31, 2006, based on criteria
established in Internal ControlIntegrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). The Companys management is responsible for
maintaining effective internal control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting. Our responsibility is to express an
opinion on managements assessment and an opinion on the effectiveness of the Companys 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, evaluating managements assessment, testing and evaluating the
design and operating effectiveness of internal control, and performing such other procedures as we
considered necessary in the circumstances. We believe that our audit provides a reasonable basis
for our opinion.
A companys 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
companys 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 companys 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, managements assessment that NVR, Inc. and subsidiaries maintained effective
internal control over financial reporting as of December 31, 2006, is fairly stated, in all
material respects, based on criteria established in Internal ControlIntegrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Also, in our
opinion, NVR, Inc. and subsidiaries maintained, in all material respects, effective internal
control over financial reporting as of December 31, 2006, based on criteria established in Internal
ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO).
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. and subsidiaries as of December
31, 2006 and 2005, 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, 2006, and our report dated
February 21, 2007 expressed an unqualified opinion on those consolidated financial statements.
KPMG LLP
McLean, Virginia
February 21, 2007
February 21, 2007
43
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, | ||||||||
2006 | 2005 | |||||||
ASSETS |
||||||||
Homebuilding: |
||||||||
Cash and cash equivalents |
$ | 551,738 | $ | 170,090 | ||||
Receivables |
12,213 | 40,562 | ||||||
Inventory: |
||||||||
Lots and
housing
units,
covered under
sales agreements with customers |
667,100 | 723,657 | ||||||
Unsold lots
and housing
units |
58,248 | 60,419 | ||||||
Manufacturing
materials and
other |
8,268 | 9,899 | ||||||
733,616 | 793,975 | |||||||
Assets not owned,
consolidated
per FIN 46R |
276,419 | 275,306 | ||||||
Property, plant and
equipment, net |
40,430 | 31,096 | ||||||
Reorganization value in
excess of amounts
allocable to identifiable assets, net |
41,580 | 41,580 | ||||||
Goodwill and indefinite
life intangibles, net |
11,686 | 11,686 | ||||||
Definite life intangibles,
net |
250 | 375 | ||||||
Contract land deposits, net |
402,170 | 517,241 | ||||||
Deferred tax assets, net |
169,901 | 97,511 | ||||||
Other assets |
37,567 | 45,340 | ||||||
2,277,570 | 2,024,762 | |||||||
Mortgage Banking: |
||||||||
Cash and cash equivalents |
4,381 | 7,436 | ||||||
Mortgage loans held for
sale, net |
178,444 | 193,932 | ||||||
Property and equipment, net |
1,168 | 1,003 | ||||||
Reorganization value in
excess of amounts
allocable to identifiable assets, net |
7,347 | 7,347 | ||||||
Other assets |
4,898 | 3,189 | ||||||
196,238 | 212,907 | |||||||
Total assets |
$ | 2,473,808 | $ | 2,237,669 | ||||
(Continued)
See notes to consolidated financial statements.
44
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, | ||||||||
2006 | 2005 | |||||||
LIABILITIES AND SHAREHOLDERS EQUITY |
||||||||
Homebuilding: |
||||||||
Accounts payable |
$ | 273,936 | $ | 262,086 | ||||
Accrued expenses and other
liabilities |
225,178 | 276,702 | ||||||
Liabilities related to assets
not owned,
consolidated per FIN 46R |
244,805 | 215,284 | ||||||
Obligations under incentive plans |
40,045 | 60,555 | ||||||
Customer deposits |
165,354 | 256,837 | ||||||
Other term debt |
3,080 | 3,325 | ||||||
Senior notes |
200,000 | 200,000 | ||||||
Notes payable |
| 103,000 | ||||||
1,152,398 | 1,377,789 | |||||||
Mortgage Banking: |
||||||||
Accounts payable and other
liabilities |
15,784 | 25,902 | ||||||
Notes payable |
153,552 | 156,816 | ||||||
169,336 | 182,718 | |||||||
Total liabilities |
1,321,734 | 1,560,507 | ||||||
Commitments and contingencies |
||||||||
Shareholders equity: |
||||||||
Common stock, $0.01 par value;
60,000,000 shares authorized;
20,592,640 shares issued as of both
December 31, 2006 and 2005 |
206 | 206 | ||||||
Additional paid-in-capital |
585,438 | 473,886 | ||||||
Deferred compensation trust-
547,911
and 547,697 shares of NVR, Inc.
common stock as of December 31,
2006 and 2005, respectively |
(80,491 | ) | (76,303 | ) | ||||
Deferred compensation liability |
80,491 | 76,303 | ||||||
Retained earnings |
3,196,040 | 2,608,628 | ||||||
Less treasury stock at cost
15,075,113
and 14,964,482 shares as of
December 31, 2006 and
2005, respectively |
(2,629,610 | ) | (2,405,558 | ) | ||||
Total shareholders equity |
1,152,074 | 677,162 | ||||||
Total liabilities
and shareholders
equity |
$ | 2,473,808 | $ | 2,237,669 | ||||
See notes to consolidated financial statements.
45
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, 2006 | December 31, 2005 | December 31, 2004 | ||||||||||
Homebuilding: |
||||||||||||
Revenues |
$ | 6,036,236 | $ | 5,177,743 | $ | 4,247,503 | ||||||
Other income |
13,609 | 6,301 | 2,655 | |||||||||
Cost of sales |
(4,701,265 | ) | (3,738,030 | ) | (3,156,286 | ) | ||||||
Selling, general and administrative |
(432,319 | ) | (345,525 | ) | (260,795 | ) | ||||||
Operating income |
916,261 | 1,100,489 | 833,077 | |||||||||
Interest expense |
(18,423 | ) | (13,809 | ) | (11,934 | ) | ||||||
Homebuilding income |
897,838 | 1,086,680 | 821,143 | |||||||||
Mortgage Banking: |
||||||||||||
Mortgage banking fees |
97,888 | 84,604 | 72,219 | |||||||||
Interest income |
7,704 | 5,014 | 4,249 | |||||||||
Other income |
1,334 | 1,435 | 1,075 | |||||||||
General and administrative |
(38,988 | ) | (31,555 | ) | (25,593 | ) | ||||||
Interest expense |
(2,805 | ) | (1,759 | ) | (1,088 | ) | ||||||
Mortgage banking income |
65,133 | 57,739 | 50,862 | |||||||||
Income before taxes |
962,971 | 1,144,419 | 872,005 | |||||||||
Income tax expense |
(375,559 | ) | (446,860 | ) | (348,801 | ) | ||||||
Net income |
$ | 587,412 | $ | 697,559 | $ | 523,204 | ||||||
Basic earnings per share |
$ | 104.08 | $ | 110.36 | $ | 80.83 | ||||||
Diluted earnings per share |
$ | 88.05 | $ | 89.61 | $ | 66.42 | ||||||
Basic weighted average
shares outstanding |
5,644 | 6,321 | 6,473 | |||||||||
Diluted weighted average
shares outstanding |
6,672 | 7,784 | 7,877 | |||||||||
See notes to consolidated financial statements.
46
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, 2003 |
$ | 206 | $ | 335,346 | $ | 1,387,865 | $ | (1,228,549 | ) | $ | (64,725 | ) | $ | 64,725 | $ | 494,868 | ||||||||||||
Net income |
| | 523,204 | | | | 523,204 | |||||||||||||||||||||
Deferred compensation
activity |
| | | 12,490 | (11,641 | ) | 11,641 | 12,490 | ||||||||||||||||||||
Purchase of common stock
for treasury |
| | | (307,603 | ) | | | (307,603 | ) | |||||||||||||||||||
Performance share activity |
| 79 | | | | | 79 | |||||||||||||||||||||
Tax benefit from stock options
exercised and deferred
compensation distributions |
| 92,661 | | | | | 92,661 | |||||||||||||||||||||
Stock option activity |
| 19,296 | | | | | 19,296 | |||||||||||||||||||||
Treasury stock issued
upon option exercise |
| (40,677 | ) | | 40,677 | | | | ||||||||||||||||||||
Balance, December 31, 2004 |
206 | 406,705 | 1,911,069 | (1,482,985 | ) | (76,366 | ) | 76,366 | 834,995 | |||||||||||||||||||
Net income |
| | 697,559 | | | | 697,559 | |||||||||||||||||||||
Deferred compensation
activity |
| | | | 63 | (63 | ) | | ||||||||||||||||||||
Purchase of common stock
for treasury |
| | | (962,609 | ) | | | (962,609 | ) | |||||||||||||||||||
Tax benefit from stock options
exercised and deferred
compensation distributions |
| 94,460 | | | | | 94,460 | |||||||||||||||||||||
Stock option activity |
| 12,757 | | | | | 12,757 | |||||||||||||||||||||
Treasury stock issued
upon option exercise |
| (40,036 | ) | | 40,036 | | | | ||||||||||||||||||||
Balance, December 31, 2005 |
206 | 473,886 | 2,608,628 | (2,405,558 | ) | (76,303 | ) | 76,303 | 677,162 | |||||||||||||||||||
Net income |
| | 587,412 | | | | 587,412 | |||||||||||||||||||||
Deferred compensation
activity |
| | | | 441 | (441 | ) | | ||||||||||||||||||||
Purchase of common stock
for treasury |
| | | (287,064 | ) | (4,629 | ) | 4,629 | (287,064 | ) | ||||||||||||||||||
Stock-based compensation |
| 58,134 | | | | | 58,134 | |||||||||||||||||||||
Tax benefit from stock options
exercised and deferred
compensation distributions |
| 95,979 | | | | | 95,979 | |||||||||||||||||||||
Stock option activity |
| 20,451 | | | | | 20,451 | |||||||||||||||||||||
Treasury stock issued
upon option exercise |
| (63,012 | ) | | 63,012 | | | | ||||||||||||||||||||
Balance, December 31, 2006 |
$ | 206 | $ | 585,438 | $ | 3,196,040 | $ | (2,629,610 | ) | $ | (80,491 | ) | $ | 80,491 | $ | 1,152,074 | ||||||||||||
See notes to consolidated financial statements
47
NVR, Inc.
Consolidated Statements of Cash Flows
(in thousands)
Consolidated Statements of Cash Flows
(in thousands)
Year Ended | Year Ended | Year Ended | ||||||||||
December 31, 2006 | December 31, 2005 | December 31, 2004 | ||||||||||
Cash flows from operating activities: |
||||||||||||
Net income |
$ | 587,412 | $ | 697,559 | $ | 523,204 | ||||||
Adjustments to reconcile net income to net cash
provided by operating activities: |
||||||||||||
Depreciation and amortization |
14,158 | 10,690 | 8,858 | |||||||||
Excess income tax benefit from exercise of stock options |
(95,979 | ) | | | ||||||||
Stock option compensation expense |
58,134 | | | |||||||||
Contract land deposit impairments |
173,819 | 12,609 | 7,271 | |||||||||
Gain on sales of loans |
(72,700 | ) | (62,279 | ) | (52,858 | ) | ||||||
Gain (loss) on sale of fixed assets |
8 | (595 | ) | | ||||||||
Deferred tax (benefit) expense |
(74,539 | ) | (24,374 | ) | 1,249 | |||||||
Mortgage loans closed |
(2,595,158 | ) | (2,186,723 | ) | (1,961,867 | ) | ||||||
Proceeds from sales of mortgage loans |
2,658,879 | 2,176,475 | 1,962,184 | |||||||||
Principal payments on mortgage loans held for sale |
22,079 | 17,089 | 12,534 | |||||||||
Net change in assets and liabilities: |
||||||||||||
Decrease (increase) in inventories |
60,359 | (201,622 | ) | (64,767 | ) | |||||||
Increase in contract land deposits |
(31,000 | ) | (198,211 | ) | (119,951 | ) | ||||||
Decrease (increase) in receivables |
28,013 | (26,578 | ) | (2,524 | ) | |||||||
(Decrease) increase in accounts payable, accrued expenses
and customer deposits |
(38,518 | ) | 327,932 | 163,690 | ||||||||
(Decrease) increase in obligations under incentive plans |
(20,510 | ) | 2,781 | 2,300 | ||||||||
Other, net |
8,506 | (11,981 | ) | (2,861 | ) | |||||||
Net cash provided by operating activities |
682,963 | 532,772 | 476,462 | |||||||||
Cash flows from investing activities: |
||||||||||||
Purchase of property, plant and equipment |
(23,431 | ) | (18,670 | ) | (9,761 | ) | ||||||
Proceeds from sales of mortgage servicing rights |
| | 25 | |||||||||
Proceeds from the sale of property, plant and equipment |
833 | 4,038 | 783 | |||||||||
Acquisition, net of cash acquired |
| (7,465 | ) | | ||||||||
Net cash used by investing activities |
(22,598 | ) | (22,097 | ) | (8,953 | ) | ||||||
Cash flows from financing activities: |
||||||||||||
Purchase of treasury stock |
(287,064 | ) | (962,609 | ) | (307,603 | ) | ||||||
Purchase of NVR common stock for deferred
compensation plan |
(4,629 | ) | | | ||||||||
Net (repayments) borrowings under notes
payable and credit lines |
(106,509 | ) | 249,338 | (44,056 | ) | |||||||
Excess income tax benefit from exercise of stock options |
95,979 | | | |||||||||
Exercise of stock options |
20,451 | 12,757 | 19,296 | |||||||||
Net cash used by financing activities |
(281,772 | ) | (700,514 | ) | (332,363 | ) | ||||||
Net increase (decrease) in cash and cash equivalents |
378,593 | (189,839 | ) | 135,146 | ||||||||
Cash and cash equivalents, beginning of year |
177,526 | 367,365 | 232,219 | |||||||||
Cash and cash equivalents, end of year |
$ | 556,119 | $ | 177,526 | $ | 367,365 | ||||||
Supplemental disclosures of cash flow information: |
||||||||||||
Interest paid during the year |
$ | 21,000 | $ | 13,634 | $ | 12,490 | ||||||
Income taxes paid during the year, net of refunds |
$ | 430,773 | $ | 294,325 | $ | 275,563 | ||||||
Supplemental disclosures of non-cash activities: |
||||||||||||
Change in net assets not owned, consolidated per FIN 46R |
$ | (28,408 | ) | $ | 33,666 | $ | 25,620 | |||||
Tax benefit from stock-based compensation activity |
$ | 95,979 | $ | 94,460 | $ | 92,661 | ||||||
See notes to consolidated financial statements.
48
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 requires management to make
estimates and assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
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
$3,464 at December 31, 2006, and $5,135 at December 31, 2005, which relate to customer
deposits for certain home sales.
Homebuilding Inventory
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 thereof.
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 units is expensed on a specific identification basis. Cost
of manufacturing materials is determined on a first-in, first-out basis.
Recoverability and impairment, if any, is primarily evaluated by analyzing sales of
comparable assets.
Contract Land Deposits
NVR 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 purchase price of the finished lots. NVR maintains an allowance
for losses on contract land deposits that it believes is sufficient to provide for
losses in the existing contract land deposit portfolio. The allowance reflects
managements judgment of the present loss exposure at the end of the reporting period,
considering market and economic conditions, sales absorption and profitability within
specific communities and terms of the various contracts.
During the years ended December 31, 2006, 2005 and 2004, the Company incurred
pre-tax charges of approximately $174,000, $12,600 and $7,300, 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 a $59,636
and $31,919 impairment valuation allowance at December 31, 2006, and 2005,
respectively. The impairment valuation allowance in the 2005 consolidated balance
sheet and consolidated statement of cash flows has been reclassified to conform to the
2006 presentation.
49
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)
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 Companys
depreciation policy for owned assets.
Warranty/Product Liability Accruals
Warranty and product liability accruals are established to provide for
estimated future expenses as a result of construction and product defects, product
recalls and litigation incidental to NVRs business. Liability estimates are
determined based on management 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 the Companys General
Counsel and other outside counsel retained to handle specific product liability cases.
Intangible Assets
Statement of Financial Accounting Standards (SFAS) No. 142, Goodwill and Other
Intangible Assets, requires goodwill, indefinite life intangibles, and reorganization
value in excess of amounts allocable to identifiable assets (excess reorganization
value), which are no longer subject to amortization, to be tested for impairment on an
annual basis. The Company completed the annual assessment of impairment and determined
that there is no impairment of goodwill, indefinite life intangibles, or excess
reorganization value in the years ended December 31, 2006, 2005 and 2004.
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. Those loan products
include previously non-traditional loan products, such as interest-only loans, adjustable
interest rate loans, negative amortization loans and loans with relatively high
loan-to-value (LTV) ratios, with up to a one hundred percent LTV. 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, including non-traditional loan products, are
underwritten to the standards and specifications of the ultimate investor. In addition, a
substantial number of these previously nontraditional loans are underwritten and funded at
closing directly by 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 these non-traditional products, except in certain limited
instances where first payment early 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 closed at fair value, and thereafter are carried at
the lower of cost or market.
In the normal course of business, NVRs mortgage banking segment enters into
contractual commitments to extend credit to buyers of single-family homes with fixed
expiration dates. The
50
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)
commitments become effective when the borrowers lock-in a specified
interest rate within time frames established by NVR. All mortgagors are evaluated for
credit worthiness prior to the extension of the commitment. Market risk arises if interest
rates move adversely between the time of the lock-in of rates by the borrower and the sale date of the loan to a broker/dealer. To
mitigate the effect of the interest rate risk inherent in providing rate lock
commitments to borrowers, the Company enters into optional or mandatory delivery forward
sale contracts to sell whole loans and mortgage-backed securities to broker/dealers. The
forward sale contracts lock in an interest rate and price for the sale of loans similar to
the specific rate lock commitments classified as derivatives. Both the rate lock
commitments to borrowers and the forward sale contracts to broker/dealers are undesignated
derivatives and, accordingly, are marked to market through earnings. NVR does not engage in
speculative or trading derivative activities. At December 31, 2006, there were contractual
commitments to extend credit to borrowers aggregating approximately $175,000, and open
forward delivery sale contracts aggregating approximately $338,000.
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, 2006, 2005 and 2004:
Year Ended | Year Ended | Year Ended | ||||||||||
December 31, 2006 | December 31, 2005 | December 31, 2004 | ||||||||||
Weighted average number of
shares outstanding used to
calculate basic EPS |
5,644,068 | 6,320,852 | 6,472,607 | |||||||||
Dilutive securities: |
||||||||||||
Stock options |
1,027,503 | 1,463,530 | 1,404,262 | |||||||||
Weighted average number of
shares and share equivalents
outstanding used to calculate
diluted EPS |
6,671,571 | 7,784,382 | 7,876,869 | |||||||||
Options issued under equity benefit plans to purchase 149,978, 4,250, and
37,827 shares of common stock were outstanding during the years ended December 31,
2006, 2005 and 2004, respectively, but were not included in the computation of diluted
earnings per share because the effect would have been anti-dilutive. In addition, the
368,740 options outstanding under the 2005 Stock Option Plan, 9,055 options outstanding
under the 1998 Directors Long-Term Stock Option Plan, 14,423 options outstanding under
the 1998 Management Long-Term Stock Option Plan, and 45,660 options outstanding under
the 2000 Broadly-Based Stock Option Plan are considered performance-based compensation,
and accordingly, have been excluded from the computation of diluted earnings per share
because the performance target has not been achieved as of December 31, 2006, pursuant
to the requirements of SFAS 128, Earnings Per Share.
Revenues-Homebuilding Operations
NVR builds single-family detached homes, townhomes and condominium buildings,
which generally are produced on a pre-sold basis for the ultimate customer. In
accordance with SFAS No. 66, Accounting for Sales of Real Estate, 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 continued involvement. In situations
where the buyers financing is originated by NVRM and the buyer has not made an
adequate initial or continuing investment as prescribed by SFAS No. 66, the profit on
such settlement is deferred until the sale of the related loan to a third-party
investor has been completed.
51
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 NVRs mortgage banking
subsidiaries 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 NVRs 5% Senior Notes due 2010 as of December 31, 2006 and 2005
was $195,320 and $196,340, respectively. The estimated fair value is based on a quoted
market price. The carrying value was $200,000 at December 31, 2006 and 2005.
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 (see Note 9). Prior to fiscal year 2006
and the adoption of SFAS 123R, 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.
SFAS 123R 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 SFAS 123R under the
modified prospective method. Under the modified prospective method, SFAS 123R applies
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 Companys stock option programs are accounted for as
equity awards.
Because NVR adopted SFAS 123R using the modified prospective basis, the prior
periods have not been restated. The following table sets forth the effect on net
income and basic and diluted earnings per share as if the Company had applied the fair
value recognition provisions for its stock-based compensation arrangements for years
ended December 31, 2005 and 2004:
52
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, | ||||||||
2005 | 2004 | |||||||
Net income, as reported |
$ | 697,559 | $ | 523,204 | ||||
Deduct: Total stock-based employee
compensation expense determined under
fair value-based method for all awards,
net of related tax effects |
(31,893 | ) | (23,411 | ) | ||||
Pro forma net income |
$ | 665,666 | $ | 499,793 | ||||
Earnings per share: |
||||||||
Basicas reported |
$ | 110.36 | $ | 80.83 | ||||
Basicpro forma |
$ | 105.31 | $ | 77.22 | ||||
Dilutedas reported |
$ | 89.61 | $ | 66.42 | ||||
Dilutedpro forma |
$ | 86.67 | $ | 64.44 | ||||
Comprehensive Income
For the years ended December 31, 2006, 2005 and 2004, comprehensive income equaled
net income; therefore, a separate statement of comprehensive income is not included in
the accompanying financial statements.
Recent Accounting Pronouncements
In June 2006, the FASB issued FASB Interpretation No. 48, Accounting for Uncertainty in
Income Taxes (FIN 48). FIN 48 clarifies the accounting for uncertainty in income taxes
recognized in accordance with SFAS No. 109, Accounting for Income Taxes and prescribes a
recognition threshold and measurement attribute for the financial statement recognition and
measurement of tax positions taken or expected to be taken in a tax return. FIN 48 will be
effective for the Companys fiscal year beginning January 1, 2007. The Company does not
expect that the adoption of FIN 48 will have a material effect on its financial results.
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (SFAS 157).
SFAS 157 provides guidance for using fair value to measure assets and liabilities and expands
disclosures about fair value measurements. SFAS 157 will be effective for the Companys
fiscal year beginning January 1, 2008. The Company is currently reviewing the effect SFAS 157
will have on its financial statements upon adoption.
In March 2006, the FASB issued SFAS No. 156, Accounting for Servicing of Financial
Assets, which provides an approach to simplify efforts to obtain hedge-like (offset)
accounting by allowing the Company the option to carry mortgage servicing rights at fair
value. This new Statement amends SFAS No. 140, Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilitiesa replacement of FASB SFAS No. 125, with
respect to the accounting for separately recognized servicing assets and servicing
liabilities. SFAS No. 156 is effective for all separately recognized servicing assets and
liabilities as of the beginning of an entitys fiscal year that begins after September 15,
2006, with earlier adoption permitted in certain circumstances. Because the Company does not
retain the servicing rights when it sells its mortgage loans held for sale, the adoption of
SFAS No. 156 is not expected to have a material impact on the Companys consolidated financial
position, results of operations or cash flows.
In September 2006, the FASB issued SFAS No. 158, Employers Accounting for Defined
Benefit Pension and Other Postretirement Plans, and amendment of FASB Statements No. 87, 88,
106,
53
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)
and 132(R) (SFAS 158). SFAS 158 requires the Company to (a) recognize in its statement
of financial position the overfunded or underfunded status of a defined postretirement plan
measured as the difference between the fair value of plan assets and the benefit obligation, (b)
recognize as a component of other comprehensive income, net of tax, the actuarial gains and
losses and the prior service costs and credits that arise during the period, (c) measure
defined benefit plan assets and defined benefit plan obligations as of the date of the
Companys statement of financial position, and (d) disclose additional information about
certain effects on net periodic service costs and credits. SFAS 158 is effective for the
Company effective December 31, 2006. SFAS 158 also requires measurement of plan assets and
benefit obligations at the fiscal year end effective December 31, 2008. The adoption of
SFAS 158 did not have a material effect on the Companys consolidated financial position,
results of operations or cash flows.
In September 2006, the Securities and Exchange Commission (SEC) Staff issued Staff
Accounting Bulletin (SAB) No. 108, Considering the Effects of Prior Year Misstatements when
Quantifying Misstatements in Current Year Financial Statements, which addresses how the
effects of prior year uncorrected financial statement misstatements should be considered in
current year financial statements. The SAB requires registrants to quantify misstatements
using both balance sheet and income statement approaches and to evaluate whether either
approach results in quantifying an error that is material in light of relative quantitative
and qualitative factors. The requirements of SAB No. 108 are effective for annual financial
statements covering the first fiscal year ending after November 15, 2006. The adoption of
SAB No. 108 did not have a material impact on the Companys consolidated financial position,
results of operations or cash flows.
On November 29, 2006, the FASB ratified EITF Issue No. 06-8,
Applicability of the Assessment of a Buyers Continuing Investment Under FASB Statement No.
66, Accounting for Sales of Real Estate, for Sales of Condominiums. EITF 06-8 states that
the adequacy of the buyers continuing investment under SFAS 66 should be assessed in
determining whether to recognize profit under the percentage-of-completion method on the
sale of individual units in a condominium project. This consensus could require that
additional deposits be collected by developers of condominium projects that wish to
recognize profit during the construction period under the percentage-of-completion method.
EITF 06-8 is effective for the Company effective January 1, 2008. The Company does not
expect that the adoption of EITF 06-8 will have a material impact on its financial
statements.
2. | Segment Information, Nature of Operations, and Certain Concentrations |
NVRs homebuilding operations primarily construct and sell single-family detached homes,
townhomes and condominium buildings under four tradenames: 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 sold in twenty-one metropolitan areas located in Maryland, Virginia, West Virginia,
Pennsylvania, New York, North Carolina, South Carolina, Ohio, New Jersey, Delaware, Michigan
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 52% of its 2006 homebuilding revenues in the Washington, D.C. and
Baltimore, MD metropolitan areas.
NVRs mortgage banking segment is a regional mortgage banking operation. Substantially all of
the mortgage banking segments loan closing activity is for NVRs homebuilding customers. NVRs
mortgage banking business generates revenues primarily from origination fees, gains on sales of
loans, and title fees. A substantial portion of the Companys mortgage operations is conducted in
the Washington, D.C. and
54
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)
Baltimore, MD metropolitan areas.
Consistent with the principles and objectives of SFAS 131, the Companys following
footnote disclosure includes four homebuilding reportable segments that aggregate
geographically the Companys homebuilding operating segments, and the mortgage banking
operations presented as a single reportable segment. The homebuilding reportable segments are
comprised of operating divisions in the following geographic areas:
Homebuilding Mid Atlantic Virginia, West Virginia, Maryland, and Delaware
Homebuilding North East Eastern Pennsylvania and New Jersey
Homebuilding Mid East Kentucky, Michigan, New York, Ohio and western Pennsylvania
Homebuilding South East North Carolina, South Carolina and Tennessee
Homebuilding profit before tax includes all revenues and income generated from the sale of
homes, less the cost of homes sold, selling, general and administrative expenses, and a corporate
capital allocation charge. The corporate capital allocation charge eliminates in consolidation, is
based on the segments average net assets employed, and is charged using a consistent methodology
in the years presented. The corporate capital allocation charged to the operating segment allows
the Chief Operating Decision Maker to determine whether the operating segments results are
providing the desired rate of return after covering the Companys cost of capital. The Company
records charges on contract land deposits when it is determined that it is probable that recovery
of the deposit is impaired. For segment reporting purposes, impairments on contract land deposits
are charged to the operating segment upon the determination to terminate a finished lot purchase
agreement with the developer. 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), consolidation adjustments and external corporate interest expense. NVRs
overhead functions, such as accounting, treasury, human resources, land acquisition, etc., are
centrally performed and the costs are not allocated to the Companys operating segments.
Consolidation adjustments consist of such items necessary to convert the reportable segments
results, which are predominantly maintained on a cash basis, to a full accrual basis for
external financial statement presentation purposes, and are not allocated to the Companys
operating segments. External corporate interest expense is primarily comprised of interest
charges on the Companys outstanding Senior Notes and working capital line borrowings, and are
not charged to the operating segments because the charges are included in the corporate
capital allocation discussed above.
Following are tables presenting revenues, interest income, interest expense, depreciation
and amortization, segment profit and segment assets for each reportable segment, with
reconciliations to the amounts reported for the consolidated enterprise, where applicable:
55
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, | ||||||||||||
2006 | 2005 | 2004 | ||||||||||
Revenues: |
||||||||||||
Homebuilding Mid Atlantic |
$ | 3,825,960 | $ | 3,235,053 | $ | 2,623,308 | ||||||
Homebuilding North East |
657,338 | 533,662 | 466,206 | |||||||||
Homebuilding Mid East |
965,626 | 944,070 | 793,976 | |||||||||
Homebuilding South East |
587,312 | 464,958 | 364,013 | |||||||||
Mortgage Banking |
97,888 | 84,604 | 72,219 | |||||||||
Total Consolidated Revenues |
$ | 6,134,124 | $ | 5,262,347 | $ | 4,319,722 | ||||||
Year Ended December 31, | ||||||||||||
2006 | 2005 | 2004 | ||||||||||
Profit: |
||||||||||||
Homebuilding Mid Atlantic |
$ | 687,904 | $ | 863,210 | $ | 623,040 | ||||||
Homebuilding North East |
64,246 | 66,944 | 64,130 | |||||||||
Homebuilding Mid East |
69,911 | 95,190 | 87,272 | |||||||||
Homebuilding South East |
79,948 | 52,199 | 36,958 | |||||||||
Mortgage Banking |
68,753 | 57,739 | 50,862 | |||||||||
Total Segment Profit |
970,762 | 1,135,282 | 862,262 | |||||||||
Contract land deposit impairments |
(27,717 | ) | (9,950 | ) | (6,000 | ) | ||||||
Stock compensation expense |
(58,134 | ) | | | ||||||||
Corporate capital allocation |
184,908 | 149,247 | 110,769 | |||||||||
Unallocated corporate overhead |
(86,363 | ) | (105,364 | ) | (80,635 | ) | ||||||
Consolidation adjustments and other |
(3,340 | ) | (11,670 | ) | (3,168 | ) | ||||||
Corporate interest expense |
(17,145 | ) | (13,126 | ) | (11,223 | ) | ||||||
Reconciling items sub-total |
(7,791 | ) | 9,137 | 9,743 | ||||||||
Consolidated Income before Taxes |
$ | 962,971 | $ | 1,144,419 | $ | 872,005 | ||||||
Year Ended December 31, | ||||||||||||
2006 | 2005 | 2004 | ||||||||||
Assets: |
||||||||||||
Homebuilding Mid Atlantic |
$ | 873,260 | $ | 1,045,229 | $ | 720,554 | ||||||
Homebuilding North East |
117,192 | 148,563 | 107,707 | |||||||||
Homebuilding Mid East |
137,113 | 147,249 | 129,783 | |||||||||
Homebuilding South East |
115,937 | 90,820 | 69,974 | |||||||||
Mortgage Banking |
188,891 | 205,560 | 147,652 | |||||||||
Total Segment Assets |
1,432,393 | 1,637,421 | 1,175,670 | |||||||||
Assets not owned, consolidated per Fin 46R |
276,419 | 275,306 | 89,924 | |||||||||
Cash |
551,738 | 170,090 | 362,458 | |||||||||
Deferred taxes |
169,901 | 97,511 | 73,191 | |||||||||
Intangible assets |
60,863 | 60,988 | 55,306 | |||||||||
Consolidation adjustments and other |
(17,506 | ) | (3,647 | ) | (551 | ) | ||||||
Reconciling items sub-total |
1,041,415 | 600,248 | 580,328 | |||||||||
Consolidated Assets |
$ | 2,473,808 | $ | 2,237,669 | $ | 1,755,998 | ||||||
Year Ended December 31, | ||||||||||||
2006 | 2005 | 2004 | ||||||||||
Interest Income |
||||||||||||
Mortgage Banking |
$ | 7,704 | $ | 5,014 | $ | 4,249 | ||||||
Total Segment Interest Income |
7,704 | 5,014 | 4,249 | |||||||||
Other unallocated interest income |
2,639 | 2,471 | 1,151 | |||||||||
Consolidated Interest Income |
$ | 10,343 | $ | 7,485 | $ | 5,400 | ||||||
56
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, | ||||||||||||
2006 | 2005 | 2004 | ||||||||||
Interest Expense |
||||||||||||
Homebuilding Mid Atlantic |
$ | 132,394 | $ | 102,256 | $ | 74,293 | ||||||
Homebuilding North East |
19,605 | 15,925 | 11,518 | |||||||||
Homebuilding Mid East |
21,863 | 21,312 | 16,865 | |||||||||
Homebuilding South East |
12,324 | 10,437 | 8,804 | |||||||||
Mortgage Banking |
2,805 | 1,759 | 1,088 | |||||||||
Total Segment Interest Expense |
188,991 | 151,689 | 112,568 | |||||||||
Corporate capital allocation |
(184,908 | ) | (149,247 | ) | (110,769 | ) | ||||||
Senior note and other interest |
17,145 | 13,126 | 11,223 | |||||||||
Consolidated Interest Expense |
$ | 21,228 | $ | 15,568 | $ | 13,022 | ||||||
Year Ended December 31, | ||||||||||||
2006 | 2005 | 2004 | ||||||||||
Depreciation and Amortization: |
||||||||||||
Homebuilding Mid Atlantic |
$ | 7,410 | $ | 4,795 | $ | 4,051 | ||||||
Homebuilding North East |
1,300 | 700 | 729 | |||||||||
Homebuilding Mid East |
2,192 | 2,117 | 1,832 | |||||||||
Homebuilding South East |
1,027 | 999 | 876 | |||||||||
Mortgage Banking |
436 | 553 | 467 | |||||||||
Total Segment Depreciation
and Amortization |
12,365 | 9,164 | 7,955 | |||||||||
Unallocated corporate |
1,793 | 1,526 | 903 | |||||||||
Consolidated Depreciation and Amortization |
$ | 14,158 | $ | 10,690 | $ | 8,858 | ||||||
Year Ended December 31, | ||||||||||||
2006 | 2005 | 2004 | ||||||||||
Expenditures for Property and Equipment: |
||||||||||||
Homebuilding Mid Atlantic |
$ | 13,355 | $ | 10,938 | $ | 4,768 | ||||||
Homebuilding North East |
2,545 | 1,719 | 836 | |||||||||
Homebuilding Mid East |
3,483 | 2,065 | 2,412 | |||||||||
Homebuilding South East |
2,311 | 808 | 1,144 | |||||||||
Mortgage Banking |
612 | 448 | 513 | |||||||||
Total Segment Expenditures for
Property and Equipment |
22,306 | 15,978 | 9,673 | |||||||||
Unallocated corporate |
1,125 | 2,692 | 88 | |||||||||
Consolidated Expenditures for
Property and Equipment |
$ | 23,431 | $ | 18,670 | $ | 9,761 | ||||||
3. | Consolidation of Variable Interest Entities |
Revised Interpretation No. 46 (FIN 46R), Consolidation of Variable Interest Entities
requires the primary beneficiary of a variable interest entity to consolidate that entity on its
financial statements. The primary beneficiary of a variable interest entity is the party that
absorbs a majority of the variable interest entitys expected losses, receives a majority of the
entitys expected residual returns, or both, as a result of ownership, contractual, or other
financial interests in the entity. Expected losses are the expected negative variability in the
fair value of an entitys net assets, exclusive of its variable interests, and expected residual
returns are the expected positive variability in the fair value of an entitys net assets,
exclusive of its variable interests. As discussed below, NVR evaluates the provisions of FIN 46R
as it relates to NVRs finished lot acquisition strategy.
NVR does not engage in the land development business. Instead, the Company typically
acquires
finished building lots at market prices from various development entities under fixed price
purchase
57
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)
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, 2006, the Company controlled
approximately 88,500 lots with deposits in cash and letters of credit totaling approximately
$484,000 and $14,000, respectively. As of December 31, 2005, the Company controlled approximately
105,000 lots with deposits in cash and letters of credit totaling approximately $600,000 and
$17,000, respectively.
This lot acquisition strategy reduces the financial requirements and risks associated with
direct land ownership and land development. NVR may, at its option, choose for any reason and at
any time not to perform under these purchase agreements by delivering notice of its intent not to
acquire the finished lots under contract. NVRs sole legal obligation and economic loss for
failure to perform under these purchase agreements is limited to the amount of the deposit pursuant
to the liquidating damage provisions contained within the purchase agreements. In other words, if
NVR does not perform under a purchase agreement, NVR loses its deposit. NVR does not have any
financial or specific performance guarantees, or completion obligations, under these purchase
agreements. None of the creditors of any of the development entities with which NVR enters fixed
price purchase agreements have recourse to the general credit of NVR. Except as described below,
NVR also does not share in an allocation of either the profit earned or loss incurred by any of
these entities with which NVR enters fixed price purchase agreements.
On a very limited basis, NVR also obtains finished lots using joint venture limited liability
corporations (LLCs). All LLCs are structured such that NVR is a non-controlling member and is
at risk only for the amount invested. 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, 2006, NVR had an aggregate investment in twelve separate LLCs totaling
approximately $14,000, which controlled approximately 800 lots. At December 31, 2005, NVR had an
aggregate investment in thirteen separate LLCs totaling approximately $15,000, which controlled
approximately 1,000 lots. NVR recognizes its share of the earnings of the LLCs as a reduction of
the cost basis of the lots at the time that the lot and related home is settled with an external
customer. During the years ended December 31, 2006, 2005 and 2004, NVR reduced cost of sales by
approximately $280, $287, and $369, respectively, which represented NVRs share of the earnings of
the LLCs.
Forward contracts, such as the fixed price purchase agreements utilized by NVR to acquire
finished lot inventory, are deemed to be variable interests under FIN 46R. Therefore, the
development entities with which NVR enters fixed price purchase agreements, including the LLCs,
are examined under FIN 46R for possible consolidation by NVR. NVR has developed a methodology to
determine whether it, or conversely, the owner(s) of the applicable development entity is the
primary beneficiary of a development entity. The methodology used to evaluate NVRs primary
beneficiary status requires substantial management judgment and estimation. These judgments and
estimates involve assigning probabilities to various estimated cash flow possibilities relative to
the development entitys expected profits and losses and the cash flows associated with changes in
the fair value of finished lots under contract. Although management believes that its accounting
policy is designed to properly assess NVRs primary beneficiary status relative to its involvement
with the development entities from which NVR acquires finished lots, changes to the probabilities
and the cash flow possibilities used in NVRs evaluation could produce widely different conclusions
regarding whether NVR is or is not a development entitys primary beneficiary.
The Company has evaluated all of its fixed price purchase agreements and LLC arrangements and
has determined that it is the primary beneficiary of twenty-eight of those development entities
with which the agreements and arrangements are held. As a result, at December 31, 2006, 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
58
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)
refused to provide financial statements, NVR utilized estimation techniques to perform the
consolidation. The effect of the consolidation under FIN 46R at December 31, 2006 was the
inclusion on the balance sheet of $276,419 as Assets not owned, consolidated per FIN 46R with a
corresponding inclusion of $244,805 as Liabilities related to assets not owned, consolidated per
FIN 46R, after elimination of intercompany items. Inclusive in these totals were assets of
approximately $23,000 and liabilities of approximately $18,000 estimated for four development
entities created after December 31, 2003 that did not provide financial statements.
At December 31, 2005, under FIN 46R, the Company evaluated all of its fixed price purchase
agreements and LLC arrangements and determined that it was the primary beneficiary of thirty-five
of those development entities with which the agreements and arrangements were held. As a result,
at December 31, 2005, NVR had consolidated such development entities in the accompanying
consolidated balance sheet. Of the thirty-five development entities, ten entities refused to
provide financial statements, and NVR utilized estimation techniques to perform the consolidation.
The effect of the consolidation under FIN 46R at December 31, 2005 was the inclusion on the balance
sheet of $275,306 as Assets not owned, consolidated per FIN 46R with a corresponding inclusion of
$215,284 as Liabilities related to assets not owned, consolidated per FIN 46R, after elimination of
intercompany items. Inclusive in these totals were assets of approximately $39,000 and liabilities
of approximately $34,000 for ten development entities created after December 31, 2003 that did not
provide financial statements.
59
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, 2006:
NVR, Inc. | ||||||||||||||||
and | FIN 46R | Consolidated | ||||||||||||||
Subsidiaries | Entities | Eliminations | Total | |||||||||||||
ASSETS |
||||||||||||||||
Homebuilding: |
||||||||||||||||
Cash and cash equivalents |
$ | 551,738 | $ | | $ | | $ | 551,738 | ||||||||
Receivables |
12,213 | | | 12,213 | ||||||||||||
Homebuilding inventory |
733,616 | | | 733,616 | ||||||||||||
Property, plant and equipment, net |
40,430 | | | 40,430 | ||||||||||||
Reorganization value in excess of amount
allocable to identifiable assets, net |
41,580 | | | 41,580 | ||||||||||||
Goodwill and intangibles, net |
11,936 | | | 11,936 | ||||||||||||
Contract land deposits |
424,792 | | (22,622 | ) | 402,170 | |||||||||||
Other assets |
216,460 | | (8,992 | ) | 207,468 | |||||||||||
2,032,765 | | (31,614 | ) | 2,001,151 | ||||||||||||
Mortgage banking assets: |
196,238 | | | 196,238 | ||||||||||||
FIN 46R Entities: |
||||||||||||||||
Land under development |
| 271,197 | | 271,197 | ||||||||||||
Other assets |
| 5,222 | | 5,222 | ||||||||||||
| 276,419 | | 276,419 | |||||||||||||
Total assets |
$ | 2,229,003 | $ | 276,419 | $ | (31,614 | ) | $ | 2,473,808 | |||||||
LIABILITIES AND SHAREHOLDERS EQUITY |
||||||||||||||||
Homebuilding: |
||||||||||||||||
Accounts payable, accrued expenses
and other liabilities |
$ | 539,159 | $ | | $ | | $ | 539,159 | ||||||||
Customer deposits |
165,354 | | | 165,354 | ||||||||||||
Other term debt |
3,080 | | | 3,080 | ||||||||||||
Senior notes |
200,000 | | | 200,000 | ||||||||||||
907,593 | | | 907,593 | |||||||||||||
Mortgage banking liabilities: |
169,336 | | | 169,336 | ||||||||||||
FIN 46R Entities: |
||||||||||||||||
Accounts payable, accrued expenses
and other liabilities |
| 13,926 | | 13,926 | ||||||||||||
Debt |
| 163,974 | | 163,974 | ||||||||||||
Contract land deposits |
| 46,723 | (22,622 | ) | 24,101 | |||||||||||
Advances from NVR, Inc. |
| 8,029 | (8,029 | ) | | |||||||||||
Minority interest |
| | 42,804 | 42,804 | ||||||||||||
| 232,652 | 12,153 | 244,805 | |||||||||||||
Equity |
1,152,074 | 43,767 | (43,767 | ) | 1,152,074 | |||||||||||
Total liabilities and shareholders
equity |
$ | 2,229,003 | $ | 276,419 | $ | (31,614 | ) | $ | 2,473,808 | |||||||
60
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, 2005:
NVR, Inc. | ||||||||||||||||
and | FIN 46R | Consolidated | ||||||||||||||
Subsidiaries | Entities | Eliminations | Total | |||||||||||||
ASSETS |
||||||||||||||||
Homebuilding: |
||||||||||||||||
Cash and cash equivalents |
$ | 170,090 | $ | | $ | | $ | 170,090 | ||||||||
Receivables |
40,562 | | | 40,562 | ||||||||||||
Homebuilding inventory |
793,975 | | | 793,975 | ||||||||||||
Property, plant and equipment, net |
31,096 | | | 31,096 | ||||||||||||
Reorganization value in excess of amount
allocable to identifiable assets, net |
41,580 | | | 41,580 | ||||||||||||
Goodwill and intangibles, net |
12,061 | | | 12,061 | ||||||||||||
Contract land deposits |
567,611 | | (50,370 | ) | 517,241 | |||||||||||
Other assets |
152,503 | | (9,652 | ) | 142,851 | |||||||||||
1,809,478 | | (60,022 | ) | 1,749,456 | ||||||||||||
Mortgage banking assets: |
212,907 | | | 212,907 | ||||||||||||
FIN 46R Entities: |
||||||||||||||||
Land under development |
| 260,676 | | 260,676 | ||||||||||||
Other assets |
| 14,630 | | 14,630 | ||||||||||||
| 275,306 | | 275,306 | |||||||||||||
Total assets |
$ | 2,022,385 | $ | 275,306 | $ | (60,022 | ) | $ | 2,237,669 | |||||||
LIABILITIES AND SHAREHOLDERS EQUITY |
||||||||||||||||
Homebuilding: |
||||||||||||||||
Accounts payable, accrued expenses
and other liabilities |
$ | 599,343 | $ | | $ | | $ | 599,343 | ||||||||
Customer deposits |
256,837 | | | 256,837 | ||||||||||||
Other term debt |
3,325 | | | 3,325 | ||||||||||||
Senior notes |
200,000 | | | 200,000 | ||||||||||||
Notes Payable |
103,000 | | | 103,000 | ||||||||||||
1,162,505 | | | 1,162,505 | |||||||||||||
Mortgage banking liabilities: |
182,718 | | | 182,718 | ||||||||||||
FIN 46R Entities: |
||||||||||||||||
Accounts payable, accrued expenses
and other liabilities |
| 7,880 | (53 | ) | 7,827 | |||||||||||
Debt |
| 153,337 | | 153,337 | ||||||||||||
Contract land deposits |
| 50,370 | (50,370 | ) | | |||||||||||
Advances from NVR, Inc. |
| 8,891 | (8,891 | ) | | |||||||||||
Minority interest |
| | 54,120 | 54,120 | ||||||||||||
| 220,478 | (5,194 | ) | 215,284 | ||||||||||||
Equity |
677,162 | 54,828 | (54,828 | ) | 677,162 | |||||||||||
Total liabilities and shareholders
equity |
$ | 2,022,385 | $ | 275,306 | $ | (60,022 | ) | $ | 2,237,669 | |||||||
61
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)
Under FIN 46R, an enterprise with an interest in a variable interest entity or potential
variable interest entity created before December 31, 2003, is not required to apply FIN 46R to that
entity if the enterprise, after making an exhaustive effort, is unable to obtain the information
necessary to perform the accounting required to consolidate the variable interest entity for which
it is determined to be the primary beneficiary. At December 31, 2006 NVR has been unable to obtain
the information necessary to perform the accounting required to consolidate eight separate
development entities created before December 31, 2003 for which NVR determined it was the primary
beneficiary. NVR has made, or has committed to make, aggregate deposits, totaling $9,328 to these
eight separate development entities, with a total aggregate purchase price for the finished lots of
approximately $80,000. The aggregate deposit made or committed to being made is NVRs maximum
exposure to loss. As noted above, because NVR does not have any contractual or ownership interests
in the development entities with which it contracts to buy finished lots (other than the limited
use of the LLCs as discussed above), NVR does not have the ability to compel these development
entities to provide financial or other data. Because NVR has no ownership rights in any of these
eight development entities, the consolidation of such entities has no impact on NVRs net income or
earnings per share for the years ended December 31, 2006, 2005 and 2004. Aggregate activity with
respect to the eight development entities is included in the following table:
December 31, | ||||||||||||
2006 | 2005 | 2004 | ||||||||||
Finished lots purchased dollars |
$ | 15,697 | $ | 5,114 | $ | 3,303 | ||||||
Finished lots purchased units |
109 | 58 | 50 |
4. | Related Party Transactions |
During 2006, 2005, and 2004, NVR purchased, at market prices, developed lots from Elm
Street Development, a company that is controlled by a member of the NVR Board of Directors
(the Board). These transactions were approved by a majority of the independent members of
the Board. Purchases from Elm Street Development totaled approximately $50,000, $29,000, and
$8,200 during 2006, 2005 and 2004, respectively. NVR expects to purchase the majority of the
remaining lots under contract at December 31, 2006 over the next three years for an aggregate
purchase price of approximately $85,000.
5. | Property, Plant and Equipment, net |
December 31, | ||||||||
2006 | 2005 | |||||||
Homebuilding: |
||||||||
Office facilities and other |
$ | 14,592 | $ | 11,416 | ||||
Model home furniture and fixtures |
32,731 | 23,385 | ||||||
Manufacturing facilities |
24,889 | 21,944 | ||||||
Property under capital leases |
4,005 | 4,005 | ||||||
76,217 | 60,750 | |||||||
Less: accumulated depreciation |
(35,787 | ) | (29,654 | ) | ||||
$ | 40,430 | $ | 31,096 | |||||
Mortgage Banking: |
||||||||
Office facilities and other |
$ | 3,843 | $ | 3,382 | ||||
Less: accumulated depreciation |
(2,675 | ) | (2,379 | ) | ||||
$ | 1,168 | $ | 1,003 | |||||
Certain property, plant and equipment listed above is collateral for certain debt of
NVR as more fully described in Note 6.
62
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, | ||||||||
2006 | 2005 | |||||||
Homebuilding: |
||||||||
Working capital revolving credit (a) |
$ | | $ | 103,000 | ||||
Other term debt: |
||||||||
Capital lease obligations due in monthly
installments through 2016 (b) |
$ | 3,080 | $ | 3,325 | ||||
Senior notes (c) |
$ | 200,000 | $ | 200,000 | ||||
Mortgage Banking: |
||||||||
Mortgage warehouse revolving credit (d) |
$ | 153,552 | $ | 156,816 | ||||
(a) The Company, as borrower, has available an unsecured working capital revolving credit
facility (the Facility). During 2006, the Company increased the available borrowings under
the Facility to $600,000 from $400,000. The Facilitys available borrowings are subject to
certain borrowing base limitations. The Facility is generally available to fund working
capital needs of NVRs homebuilding segment. Up to $150,000 of the Facility is currently
available for issuance in the form of letters of credit, of which $22,320 and $26,412 were
outstanding at December 31, 2006 and 2005, 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. The
weighted-average interest rate for the amounts outstanding under the Facility was 5.9% during
both 2006 and 2005. At December 31, 2006, 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 land purchases. 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 Companys senior debt
rating falls below investment grade. At December 31, 2006 NVR was in compliance with all
covenants under the Facility.
(b) The capital lease obligations have fixed interest rates ranging from 5.1% to 13.0% and are
collateralized by land, buildings and equipment with a net book value of approximately $1,424
and $1,655 at December 31, 2006 and 2005, respectively.
The following schedule provides future minimum lease payments under all capital leases
together with the present value as of December 31, 2006:
Years ending December 31, | ||||
2007 |
$ | 529 | ||
2008 |
614 | |||
2009 |
637 | |||
2010 |
645 | |||
2011 |
645 | |||
Thereafter |
2,013 | |||
5,083 | ||||
Amount representing interest |
(2,003 | ) | ||
$ | 3,080 | |||
63
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)
(c) On January 20, 1998, the Company filed a shelf registration statement with the
Securities and Exchange Commission for the issuance of up to $400,000 of the Companys debt
securities (the 1998 Shelf Registration). The 1998 Shelf Registration statement was
declared effective on February 27, 1998 and provides that securities may be offered from time
to time in one or more series, and in the form of senior or subordinated debt.
On June 17, 2003, NVR completed an offering, at par, for $200,000 of 5% Senior Notes due
2010 (the Notes) under the 1998 Shelf Registration. The Notes mature on June 15, 2010 and
bear interest at 5%, payable semi-annually in arrears on June 15 and December 15, commencing on
December 15, 2003. The Notes are general unsecured obligations and rank equally in right of
payment with all of NVRs existing and future unsecured senior indebtedness and indebtedness
under NVRs 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 has, among other
items, limitations on the incurrence of secured debt, restrictions on sale and leaseback
transactions, and conditions related to mergers and/or the sale of assets. Upon completion of
the 2003 Notes offering, we had $55,000 remaining available for issuance under the 1998 Shelf
Registration.
On May 27, 2004, NVR filed a shelf registration statement with the SEC to register up to
$1,000,000 for future offer and sale of debt securities, common shares, preferred shares,
depositary shares representing preferred shares and warrants (the 2004 Shelf Registration).
The SEC declared the 2004 Shelf Registration effective on June 15, 2004. NVR expects to use
the proceeds received from future offerings issued under the 2004 Shelf Registration for
general corporate purposes. As of December 31, 2006, no amounts have been issued under the
2004 Shelf Registration. This discussion of the 2004 Shelf Registration and the 1998 Shelf
Registration does not constitute an offer of any securities for sale.
(d) The mortgage warehouse facility (Mortgage Warehouse Revolving Credit) of NVR Mortgage
Finance, Inc. (NVRM) currently has a borrowing limit of $175,000 at December 31, 2006. The
Revolving Credit Agreement is used to fund its mortgage origination activities. The interest
rate under the Mortgage Warehouse Revolving Credit agreement is either: (i) LIBOR plus 1.0%,
or (ii) 1.125% to the extent that NVRM provides compensating balances. The weighted-average
interest rates for amounts outstanding under the Mortgage Warehouse Revolving Credit facility
were 5.0% and 4.4% during 2006 and 2005, respectively. The average interest rate for amounts
outstanding at December 31, 2006 was 4.8%. Mortgage loans collateralize the Mortgage
Warehouse Revolving Credit borrowings. The Mortgage Warehouse Revolving Credit facility is
annually renewable and currently expires in August 2007.
The Mortgage Warehouse Revolving Credit agreement includes, among other items, covenants
restricting NVRM from incurring additional borrowings and making intercompany dividends and
tax payments. In addition, NVRM is required to maintain a minimum net worth of $14,000. As
of December 31, 2006, there were no borrowing base limitations reducing the amount available
to NVRM for borrowing. The Company was in compliance with all covenants under the Mortgage
Warehouse Revolving Credit agreement at December 31, 2006.
64
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)
Maturities with respect to all notes payable, revolving and repurchase credit facilities,
other term debt, and the Notes as of December 31, 2006 are as follows:
Years ending December 31, | ||||
2007 |
$ | 153,682 | ||
2008 |
245 | |||
2009 |
302 | |||
2010 |
200,353 | |||
2011 |
402 | |||
Thereafter |
1,648 | |||
Total |
$ | 356,632 | ||
The $153,682 maturing in 2007 includes $153,552 of borrowings under the Mortgage
Warehouse Revolving Credit facility. The $200,353 maturing during 2010 includes $200,000 of
Senior Notes maturing in June 2010.
7. | Common Stock |
There were 5,517,527 and 5,628,158 common shares outstanding at December 31, 2006 and
2005, respectively. As of December 31, 2006, NVR had reacquired a total of approximately
19,971,000 shares of NVR common stock at an aggregate cost of approximately $2,912,000 since
December 31, 1993. The Company repurchased 481,141; 1,269,050 and 674,694 shares at an
aggregate purchase price of approximately $287,064, $962,609, and $307,603 during 2006, 2005
and 2004, respectively.
There have been approximately 4,886,000 common shares reissued from the treasury in
satisfaction of employee benefit obligations and stock option exercises. Since 1999, the
Company issues shares from the treasury for all stock option exercises. The Company issued
370,510, 318,199 and 464,520 such shares during 2006, 2005 and 2004, respectively.
8. | Income Taxes |
The provision for income taxes consists of the following:
Year Ended | Year Ended | Year Ended | ||||||||||
December 31, 2006 | December 31, 2005 | December 31, 2004 | ||||||||||
Current: |
||||||||||||
Federal |
$ | 373,866 | $ | 386,712 | $ | 288,069 | ||||||
State |
74,691 | 81,288 | 61,503 | |||||||||
Deferred: |
||||||||||||
Federal |
(61,294 | ) | (17,669 | ) | (632 | ) | ||||||
State |
(11,704 | ) | (3,471 | ) | (139 | ) | ||||||
$ | 375,559 | $ | 446,860 | $ | 348,801 | |||||||
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, 2006 | December 31, 2005 | December 31, 2004 | ||||||||||
Income tax benefits arising from
compensation expense for tax
purposes in excess of amounts
recognized for financial
statement purposes |
$ | 95,979 | $ | 94,460 | $ | 92,661 | ||||||
65
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)
Deferred income taxes on NVRs consolidated balance sheets are comprised of the following:
December 31, | ||||||||
2006 | 2005 | |||||||
Deferred tax assets: |
||||||||
Other accrued expenses and
contract land deposit reserve |
$ | 105,350 | $ | 52,384 | ||||
Deferred compensation |
32,331 | 30,916 | ||||||
Stock option expense |
18,194 | | ||||||
Uniform capitalization |
11,307 | 12,377 | ||||||
Other |
8,426 | 5,665 | ||||||
Total deferred tax assets |
175,608 | 101,342 | ||||||
Less: deferred tax liabilities |
3,049 | 3,322 | ||||||
Net deferred tax position |
$ | 172,559 | $ | 98,020 | ||||
Deferred tax assets arise principally as a result of various accruals required for
financial reporting purposes and deferred compensation, which are not currently deductible for
tax return purposes. In January 2007, the United States Congress began consideration of a
bill that would amend Section 162(m) of the Internal Revenue Code. The bill may change
the definition of covered employee as it pertains to distributions received from
deferred compensation plans after separation of service. If this bill is passed in its current form and subsequently signed
into law, the Company would be required to write-off approximately $27,000 of deferred tax
assets recorded on its consolidated balance sheet at December 31, 2006. The write-off would
occur in the period that the bill is passed. The Company can provide no assurance on the
outcome of this matter.
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 was approximately $839,375 and $879,708 for the years ended
December 31, 2006 and 2005.
A reconciliation of income tax expense in the accompanying 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, 2006 | December 31, 2005 | December 31, 2004 | ||||||||||
Income taxes computed at the
Federal statutory rate |
$ | 337,040 | $ | 400,547 | $ | 305,202 | ||||||
State income taxes, net of Federal
income tax benefit |
43,491 | 53,501 | 42,521 | |||||||||
Other, net |
(4,972 | ) | (7,188 | ) | 1,078 | |||||||
$ | 375,559 | $ | 446,860 | $ | 348,801 | |||||||
The Companys effective tax rate in 2006, 2005 and 2004 was 39.0%, 39.0% and 40.0%,
respectively. The lower effective tax rates in 2006 and 2005 is primarily due to the
favorable tax impact of the new Internal Revenue Code Section 199 domestic manufacturing
deduction established by the American Jobs Creation Act of 2004.
66
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)
9. | Stock Option, Profit Sharing and Deferred Compensation Plans |
Stock Option Plans
NVRs stock option plans provide for the granting of stock options to certain key
employees and Board members of the Company to purchase shares of common stock. The exercise
price of options granted is equal to the market value of the Companys common stock on the
date of grant. Options are granted for a ten-year term, and vest in separate tranches over
periods of 6 to 9 years, depending upon the plan from which the shares were granted. For
options granted prior to May 2005, vesting was predicated solely on continued employment over
a long-term vesting schedule (service-only options). For options granted in May 2005 and
thereafter, option vesting is contingent first on the Company achieving an aggregate four-year
diluted earnings per share target, and if that target is met, then on continued employment
over a five year period subsequent to the conclusion of the performance period (performance
condition options). At December 31, 2006, there is an aggregate of 2,682,518 options
outstanding, and an additional 406,621 options available to grant, under existing stock option
plans.
The following is a summary description of each of the Companys stock option plans for
any plan with options outstanding at December 31, 2006:
| Under the 1994 Management Incentive Plan (the 1994 Incentive Plan), executive officers and other employees of the Company were eligible to receive stock options (the 1994 NVR Share Options) and performance shares (the 1994 Performance Shares). There were 48,195 1994 NVR Share Options and 1,124,929 1994 Performance Shares authorized for grant under the 1994 Incentive Plan. All 1994 NVR Share Options were granted at an exercise price equal to the fair market value of the Companys Shares on the date of grant. The 1994 NVR Share Options expire 10 years after the dates upon which they were granted, and were fully vested as of December 31, 1999. All 1,124,929 1994 Performance Shares had been granted to employees and were vested as of December 31, 1999. | ||
| During 1996, the Companys shareholders approved the Board of Directors adoption of the Management Long-Term Stock Option Plan (the 1996 Option Plan). There are 2,000,000 non-qualified stock options (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 Companys 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, with vesting contingent upon continued employment. | ||
| During 1999, the Companys 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 non-qualified stock options (Options) authorized under the 1998 Option Plan. All Options were granted at an exercise price equal to the fair market value of the Companys 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, with vesting contingent upon continued employment. Additionally, all Options granted after July 2005 are subject to a performance target based on growth in earnings per share as discussed in further detail in the 2005 Stock |
67
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)
Option Plan below.
| During 1999, the Companys 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 (Options) to purchase shares of common stock authorized for grant to the Companys outside directors under the 1998 Directors Plan. All Options are granted at an exercise price equal to the fair market value of the Companys Shares on the date of grant. The Options were granted for a 10-year period and vest annually in twenty-five percent (25%) increments beginning on either December 31, 2002 or December 31, 2006 (or later), as determined by the date of grant. Options granted after June 2005 are subject to a performance target based on growth in earnings per share as discussed in further detail in the 2005 Stock Option Plan below. If the performance target is satisfied, these Options will become exercisable as to twenty-five percent of the underlying shares on each of December 31, 2010, 2011, 2012 and 2013, respectively, based on continued service by the director. | ||
| 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 non-qualified stock options (Options) authorized under the 2000 Plan. All Options are granted at an exercise price equal to the fair market value of the Companys 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 will 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, with vesting contingent upon continued employment. Additionally, all Options granted after July 2005 are subject to a performance target based on growth in earnings per share as discussed in further detail in the 2005 Stock Option Plan below. | ||
| During 2005, the Companys shareholders approved the Board of Directors adoption of the 2005 Stock Option Plan (The 2005 Plan). There are 500,000 non-qualified stock options (Options) authorized under the 2005 Plan. All Options under the Plan will be granted at the fair market value underlying the Shares at the date of grant and are subject to two vesting conditions. The first vesting condition requires that the Company satisfy a performance target based on growth in earnings per share (EPS Target) as of December 31, 2008. The EPS Target has been set at a level that reflects a growth rate in diluted earnings per share of ten percent per year for four years, based on NVRs 2004 diluted earnings per share of $66.42. The aggregate EPS Target is $339.00 per share, the measurement of which is based on the sum of the actual diluted earnings per share results for the four annual periods ending December 31, 2005 through 2008. All Options granted will be cancelled if the EPS Target is not met. Secondly, if the EPS Target is met, Options will vest in 25% annual increments beginning December 31, 2010, or later, depending on the date of grant and based on continued employment. |
68
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)
The following table provides additional information relative to NVRs stock option plans:
Year Ended December 31, 2006 | ||||||||||||||||
Weighted | ||||||||||||||||
Weighted | Average | |||||||||||||||
Average | Remaining | Aggregate | ||||||||||||||
Exercise | Contract Life | Intrinsic | ||||||||||||||
Options | Price | (Years) | Value | |||||||||||||
Stock Options |
||||||||||||||||
Outstanding at beginning of period |
3,085,019 | $ | 265.05 | |||||||||||||
Granted |
63,038 | 651.11 | ||||||||||||||
Exercised |
370,510 | 55.20 | ||||||||||||||
Forfeited or expired |
95,029 | 358.20 | ||||||||||||||
Outstanding at end of period |
2,682,518 | $ | 299.81 | 5.18 | $ | 925,978 | ||||||||||
Exercisable at end of period |
703,879 | $ | 149.55 | 3.76 | $ | 348,737 | ||||||||||
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 options exercise price; the price of
the underlying stock on the date of grant; the estimated dividend yield; a risk-free interest
rate; the estimated option term; and the expected volatility. For the risk-free interest rate,
the Company uses a U.S. Treasury Strip due in a number of years equal to the options expected
term. NVR has concluded that its historical exercise experience is the best estimate of future
exercise patterns to determine an options expected term. To estimate expected volatility, NVR
analyzed the historic volatility of its common stock. The fair value of the options granted were
estimated on the grant date using the Black-Scholes option-pricing model based on the following
assumptions:
2006 | 2005 | 2004 | ||||||||||
Estimated option life |
8.72 years | 8.82 years | 10 years | |||||||||
Risk free interest rate (range) |
4.46% 5.24 | % | 3.84 | % | 4.68 | % | ||||||
Expected volatility (range) |
32.01% 34.00 | % | 34.15 | % | 39.06 | % | ||||||
Expected dividend rate |
0.00 | % | 0.00 | % | 0.00 | % | ||||||
Weighted average grant-date fair
value per share of options granted |
$331.73 | $ | 370.03 | $ | 289.81 |
Compensation cost for service-only option grants is recognized on a straight-line
basis over the requisite service period for the entire award (from the date of grant through
the period of the last separately vesting portion of the grant). Compensation cost for
performance condition option grants is recognized on a straight-line basis over the
requisite service period for each vesting tranche of the award as if the award was, in
substance, multiple awards (graded vesting attribution method). Of the 2,682,518 options
outstanding at December 31, 2006, 2,244,640 vest solely based on a service condition, and
437,878 vest based on a combined performance and service condition. Compensation cost is
recognized within the income statement in the same expense line as the cash compensation paid
to the respective employees. SFAS 123R also requires the Company 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.
69
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)
The effect of adopting SFAS 123R on the year ended December 31, 2006 is as follows:
December 31, 2006 | ||||
Total pre-tax stock-based compensation |
$ | 58,134 | ||
Total stock-based compensation, net of tax |
37,982 | |||
Effect on basic earnings per share |
6.73 | |||
Effect on diluted earnings per share |
5.69 |
As of December 31, 2006, the total unrecognized compensation cost for outstanding
unvested stock option awards equals approximately $232,000, net of estimated forfeitures, and
the weighted-average period over which the unrecognized compensation will be recorded is equal
to approximately 4.85 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, 2006, 2005 and 2004, options to
purchase shares of the Companys common stock of 370,510, 318,199 and 464,520 were exercised.
Information with respect to the exercised options is as follows:
2006 | 2005 | 2004 | ||||||||||
Aggregate exercise proceeds |
$ | 20,451 | $ | 16,726 | $ | 19,296 | ||||||
Aggregate intrinsic value on exercise dates |
$ | 241,693 | $ | 232,725 | $ | 228,622 |
The Company has elected the alternative transition method pursuant to FASB Staff
Position SFAS 123R-3 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 Board). The combined plan contribution for
the years ended December 31, 2006, 2005 and 2004 was $13,535, $15,370 and $12,488,
respectively. The ESOP purchased approximately 18,000 shares of NVR common stock in the open
market for each of the 2006 and 2005 plan year contributions, respectively, using cash
contributions provided by the Company. As of December 31, 2006, all shares held by the ESOP
have been allocated to participants accounts. The 2006 plan year contribution was funded and
fully allocated to participants in February 2007.
Deferred Compensation Plans
The Company has two deferred compensation plans (Deferred Comp Plan). The specific
purpose of the Deferred Comp Plan 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 Companys
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 Plan 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.
70
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)
The rabbi trust account held 547,911 and 547,697 shares of NVR common stock as of
December 31, 2006 and 2005, respectively. During 2006, 6,326 shares of NVR common stock were
issued from the rabbi trust related to deferred compensation for which the deferral period
ended. There were 6,540 shares of NVR common stock contributed to the rabbi trust in 2006.
Shares held by the Deferred Comp Plan are treated as outstanding shares in the Companys
earnings per share calculation for each of the years ended December 31, 2006, 2005 and 2004.
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, 2006 are as follows:
Years ended December 31, | ||||
2007 |
$ | 27,695 | ||
2008 |
20,898 | |||
2009 |
16,286 | |||
2010 |
11,494 | |||
2011 |
7,671 | |||
Thereafter |
30,083 | |||
$ | 114,127 | |||
Total rent expense incurred under operating leases was approximately $49,506,
$39,033 and $30,223 for the years ended December 31, 2006, 2005 and 2004, respectively.
NVR is not in the land development business. The Company 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, 2006,
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 $134,000.
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 $36,000 (including $22,320 for letters of
credit as described in Note 6(a) herein) of contingent obligations under such agreements as
of December 31, 2006. 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 Companys 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, 2006 | December 31, 2005 | December 31, 2004 | ||||||||||
Warranty reserve, beginning of year |
$ | 60,112 | $ | 42,319 | $ | 35,324 | ||||||
Provision |
57,222 | 62,598 | 38,178 | |||||||||
Payments |
(47,159 | ) | (44,805 | ) | (31,183 | ) | ||||||
Warranty reserve, end of year |
$ | 70,175 | $ | 60,112 | $ | 42,319 | ||||||
71
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 and its subsidiaries are also involved in litigation arising from the normal
course of business. In the opinion of management, and based on advice of legal counsel,
this litigation is not expected to have any material adverse effect on the financial
position or results of operations of NVR.
In 2006 and 2005, NVR received requests for information pursuant to Section 308(a) of the
Clean Water Act (the Act) from Regions 3 and 4 of the United States Environmental Protection
Agency (the EPA). The requests sought information regarding the Companys storm water
management discharge practices in North Carolina, Pennsylvania, Maryland and Virginia during
the homebuilding construction process. NVR has either provided the EPA with information in response to each of its
requests, or is working with the EPA to provide the requested information. Additionally, in
2005, the EPA notified the Company of alleged storm water management violations under the Act
at a homebuilding site in Pennsylvania, and that the Company may potentially be subject to
administrative fines of up to $157 for the alleged violations. The Company has completed its
building activity at the homebuilding site alleged to be in violation. NVR cannot predict the
outcome of the EPAs review of our storm water management practices. Further, it is not known
at this time whether the EPA will seek to take legal action or impose penalties in connection
with the alleged violation at the construction site in Pennsylvania.
11. | Acquisition |
During January 2005, NVR acquired substantially all of the assets of Marc Homebuilders,
Inc. (Marc), a homebuilder in Columbia, South Carolina for $7,600 in cash. Marc settled
approximately 230 homes during 2004 under the Rymarc trade name, generating approximately
$27,000 in revenue. The Company has recorded in the consolidated balance sheet certain
indefinite and definite life intangible assets in an amount equal to the excess of the
purchase price over the fair value of the net assets acquired. In 2005, certain post-closing
performance benchmarks were met and an additional payment of $1,500 was paid to Marc and was
recorded as an increase to goodwill at December 31, 2005.
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, 2006 and 2005.
Year Ended December 31, 2006 | ||||||||||||||||
1st | 2nd | 3rd | 4th | |||||||||||||
Quarter | Quarter | Quarter | Quarter | |||||||||||||
Revenues-homebuilding
operations |
$ | 1,183,742 | $ | 1,722,797 | $ | 1,528,964 | $ | 1,600,733 | ||||||||
Gross profit homebuilding
operations |
$ | 322,703 | $ | 418,614 | $ | 290,293 | $ | 303,361 | ||||||||
Mortgage banking fees |
$ | 20,913 | $ | 26,131 | $ | 24,447 | $ | 26,397 | ||||||||
Net income |
$ | 132,560 | $ | 190,352 | $ | 129,333 | $ | 135,167 | ||||||||
Diluted earnings per share |
$ | 19.48 | $ | 28.08 | $ | 19.63 | $ | 20.86 | ||||||||
Contracts for sale, net
of cancellations (units) |
3,633 | 4,204 | 2,378 | 3,002 | ||||||||||||
Settlements (units) |
2,986 | 4,297 | 3,854 | 4,002 | ||||||||||||
Backlog, end of period (units) |
8,957 | 8,864 | 7,388 | 6,388 | ||||||||||||
Loans closed |
$ | 736,782 | $ | 1,123,461 | $ | 986,677 | $ | 1,071,286 |
72
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, 2005 | ||||||||||||||||
1st | 2nd | 3rd | 4th | |||||||||||||
Quarter | Quarter | Quarter | Quarter | |||||||||||||
Revenues-homebuilding
operations |
$ | 939,252 | $ | 1,257,248 | $ | 1,350,465 | $ | 1,630,778 | ||||||||
Gross profit homebuilding
operations |
$ | 259,705 | $ | 349,964 | $ | 380,028 | $ | 450,016 | ||||||||
Mortgage banking fees |
$ | 14,180 | $ | 20,441 | $ | 22,557 | $ | 27,426 | ||||||||
Net income |
$ | 117,930 | $ | 167,649 | $ | 189,443 | $ | 222,537 | ||||||||
Diluted earnings per share |
$ | 14.38 | $ | 21.42 | $ | 24.33 | $ | 30.29 | ||||||||
Contracts for sale, net
of cancellations (units) |
3,312 | 4,829 | 2,897 | 3,615 | ||||||||||||
Settlements (units) |
2,615 | 3,416 | 3,576 | 4,180 | ||||||||||||
Backlog, end of period (units) |
8,141 | 9,554 | 8,875 | 8,310 | ||||||||||||
Loans closed |
$ | 614,492 | $ | 857,821 | $ | 867,864 | $ | 1,047,941 |
73